What I’m Watching This Week – 23 July 2012

Sideways…I didn’t see the movie

We are in earnings season and I expected that a decent amount of companies would be beating forecast, momentum would be building from that and the markets would be moving positive.  That’s what I said last Monday, by week’s end the EU zombies sent financial markets running away from risk, panic-stricken, towards the U.S., only to find our own zombies with corporate revenues being missed across a number of sectors,  negative retail sales, and increases in monthly unemployment claims.   Yikes!!  The US, Asia and Europe are mired in the view that growth is slowing everywhere.  Data doesn’t suggest any sort of global recession, but growth across the board just isn’t picking up any momentum.  We’re moving sideways with violent and jarring dips and rises.   The illness of indecision is spreading weakness in the global economy and therefore into volatility in parts of the markets.

Except for the Russell 2000, U.S. equity indexes posted slight gains last week, Middle East unrest sent oil prices surging; bolting energy stocks skyward, while the financials kicked you in the shins as you digested the earnings reports from the big banks.  Global markets were mixed; The 12 major indexes split evenly between winners and losers.

The 5 year Treasury note closed under 60 basis points, the 10 year at 1.46%, and the 30 year under 2.55%.   European debt yields have gone negative on German, Dutch and Finnish paper. Emerging market bonds also continue to see demand.  Fixed income is the place to be as bond prices continue to soar and yields move lower.  U.S. bond holders are smiling right about now.

Oil has been moving ahead with the U.S. dollar, which is unusual, and natural gas is setting year to date highs.  Fundamentally nothing has changed materially, ignoring of course the Iranian saber-rattling and the drought conditions in some states.  It’s become rather difficult to decipher commodities and if the current rally has legs.  The U.S. dollar index remains dominant as the aforementioned EU debt crisis continues to create mayhem.  The Euro closed under $1.22, the Sterling went to $1.57 and the commodity currencies, the Aussie Dollar and Canadian Loonie, rose against the greenback.

The second quarter numbers we’re seeing, earnings are generally in line but they also display significant weakness in revenues.  It would seem that economic contraction is not out of the question.  At this point, the economic data isn’t indicating an out-an-out shift towards contraction, but a series of events could lead towards an end of summer period of trouble.   There are plenty of catalysts for concern, Europe and a military confrontation with Iran being the 800-pound gorilla in the room.  Let’s not forget our effervescent but ineffectual congress and the looming fiscal cliff.   I remain optimistic, however I suggest remaining conservative in a defensive posture and light on risk.   I’m optimistic.

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