THURSDAY JULY 29, 2010
Still tough sledding ahead.
The markets have staged an nice rally in July, fueled by a smashingly successful 2nd quarter earnings season. The double dip fears have diminished and the end of the world contagion scenarios have all but disappeared. But it is probably too early to sound the all clear signal.
The question for investors is how the market will react after the daily dose of good earnings reports goes away, which will be sometime in the next week or two. Then the market's focus will return to the economic numbers. And, the numbers have been a little soft of late, persistently so in the employment area. Also weighing on the economy will be the fading of the myriad stimulus programs that hit the economy in the last year. Cash for Clunkers... refrigerators...used golf clubs, the first time home buyer tax credit, etc. Given the heated political environment and the soon to begin election season, it is unlikely that any large. additional stimulus will make it out of Washington. On the other hand, interest rates are incredibly low and will help.
So, the question becomes one of sustainability, even at the modest growth levels of today. Investors should anticipate volatility as the market swings on the latest economic statistics.
POSTED AT 08:32 AM
MONDAY JULY 26, 2010
Fading Double Dip Fears.
UPS announces strong earnings and increases it second half forecast. Federal Express does the same. The major global container ship companies are scheduled to receive a record amount of new vessels this month and are returning idled ships into service to meet demand.
Does this sound like a double dip? After all, these companies move "things." Someone is making a lot of things if they are shipping them! If the economy was heading for another recession, would these companies be producing great earnings? Maybe, as the earnings reports are backward looking. But would the companies be upping their forecasts for the second half, particularly in our hyper litigious environment, if they had even an inkling of doubt about the second half? I doubt it.
The Dow is up 8.29% in the month of July. The equity market doubts it. The question is: When will the bond market begin to doubt it? A 3% yield on the 10 year Treasury only makes sense in a double dip scenario.
POSTED AT 04:48 PM
FRIDAY JULY 23, 2010
Everyone passes...I'm shocked!
The European Union has completed its stress test of the union's banking system. And lo and behold, just about every bank passed. What is this, Harvard?! Only 7 of 91 banks tested failed the test. One has to question the veracity of these tests when the banks that we know were in dire straights pass. But let's be clear, this does not mean the 7 banks are failing today. It means they would fail under certain stress scenarios. And, interestingly, the scenario in which the bank's fail is related to a sovereign debt default. So, the country that is giving the test fails a bank because the country's debt has failed!
The results of the test show the failing banks with an aggregate capital shortfall of 3.5 billion Euros. While any number measured in billions is large, in the total scheme of global finance, 3.5 billion Euros is a pittance. It should be easy for the private markets to raise this capital. In the unlikely event that the private market can't, then the governments surely can (think $787 billion stimulus or $400 billion TARP in the states).
Seriously, while the veracity of the test will be questioned, this will mark the end of another uncertainty for the markets. The European economy is still likely to slog along for some time, but the notion of a European economic collapse is folly.
POSTED AT 12:06 PM
THURSDAY JULY 22, 2010
The trend continues
The earnings parade continues to be impressive. Today, Caterpillar, 3M, UPS and Union Pacific all announced earnings that were better than expected. All of these companies are fairly sensitive to economic activity. This is further evidence that the double dip crowd has it wrong. Both CAT and UPS increased their forecasts for the next year. The trend continues for well managed companies.
POSTED AT 04:10 PM
WEDNESDAY JULY 21, 2010
Tumbling Walls
I must admit that I thought that the markets would be faring better given the news of the last few weeks. Yes, the economic numbers have shown some softness, but many of the major walls of uncertainty are tumbling down.
Congress has finally gotten around to passing the Financial Regulation Reform (FINREG). For better or worse, the market now knows what the final reforms will look like. I believe FINREG is a bad bill. It is poorly structured, will do little to prevent and may exacerbate the "too big to fail" problem, and will most certainly limit the availability of credit and raise the cost of that credit. Nonetheless, the bill could have been a lot worse and the markets can now adjust. The uncertainty of FINREG is over.
Meanwhile, over in Europe, the fear of a Greek contagion seems to be diminishing by the minute. Several Spanish banks have been able to issue bonds in the market at reasonable prices, stabilizing the banks and significantly reducing the worst fears of contagion. The fear mongers projections of the euro going to par with the dollar have proved to be over the top. The Euro has stabilized at 120+ vs. the dollar and now trades at 128. Is all well in Europe? Of course not, and economic growth will be hard to find in the near term. However, the likelihood of a economic meltdown in Europe has diminished mightily. Another wall of uncertainty falls.
The fear of inflation, one that I have shared on this blog and continue to worry about, has not materialized, at least not yet. The notion that inflation would force the Fed to raise interest rates and potentially squelch the economic recovery, or worse, force a double dip, just hasn't happened yet. Therefore, interest rates in the U.S. have fallen throughout the year and are now at extremely attractive levels. The 10 year Treasury yields less than 3%!
Finally, the uncertainty of the 2nd quarter earnings season is behind us. The earnings reports have been terrific. The market seems to me to be playing the revenue news a little to cute. Yes, it would be nice to see better revenue growth. But this earnings season has been far from the bust many had feared.
The markets will continue to fret every economic stat and every earnings report. But as the walls of uncertainty tumble around us, the double dip recession fears are dissipating. I think the markets could be doing better.
POSTED AT 09:49 AM
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KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES
Ken is a Senior Vice President and the Director of Investment Management Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.
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