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 1899-12-30 09:49:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment 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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