Economic & Market Update: July 27, 2009

“Equity Markets on a Tear”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Leading Indicators:      0.7% – third consecutive increase with 7 positive components

Existing Home Sales:4.89M – sales up 8.9% since January bottom

Michigan Sentiment:     66.0 – future outlook dampens consumers mood

Stocks:                              979 – positive earnings surprises drive equities higher

10-year T Bonds:       3.66% – weakness as $115 billion coming to market this week

Oil:                                    $68 – optimism on the economy pushes crude prices up

Dollar/Euro:                  $1.42 – slight depreciation as trading volumes relatively light

Economics This Week:

Date      Item                                                Est.                     Comment

7/27      New Home Sales:            352K             New sales tentatively recovering

7/28      Consumer Confidence:  48.7              Labor market weighs on confidence

7/28      Home Price Index:     -17.8% YoY      Rate of decline slows further

7/29      Durable Orders:               -0.5%           Pullback after slowing in production

7/31      Advance GDP:                  -1.5%        Inventory cuts lead to most of slowing

Earnings Improvement Drives Markets Higher

The equity freight train continued to chug along this week, pushing the Dow Jones Industrial Average (DJIA) to a close above 9,000 for the first time since early January and propelling the S&P 500 Index higher by another 4.1%. 

Markets opened the week with positive news regarding CIT Group.  It was reported that the embattled small business lender was able to secure $3 billion in emergency financing.  The possibility of an eventual bankruptcy still exists but the bridge loan should at least give the company time to find an amenable solution. 

Earnings were the highlight of the week as 142 companies from the S&P 500 Index reported.  Surprises were decidedly to the upside – 111 companies exceeded estimates, 10 were in-line and 21 disappointed.  Most of the outperformance was due to extreme cost-cutting measures as evidenced by the fact that 72 companies disappointed on the revenue front and 102 saw revenues decline on a year-over-year basis. 

The trend of cash accumulation, which was popular throughout the credit crisis, finally appears to be reversing course.  As global equity markets surged from their early March lows, investors tentatively began moving off the sidelines and into riskier assets.  The Investment Company Institute (ICI) weekly survey of money market mutual fund assets discovered that assets in cash vehicles are gradually decreasing following a surge in 2008.  Attractive equity valuations coupled with a desire to not be the last person left in cash is forcing many investors to embrace the equity bandwagon.  Despite this recent drawdown in cash, however, there is still nearly $3.7 trillion parked in retail and institutional money market funds (through July 22nd), which may help sustain the ongoing rally in equity markets.

Source: Bloomberg

Bernanke Speaks, the World Listens

Federal Reserve Chairman Bernanke spoke in front of the House Financial Services Committee this past week.  Bernanke provided an optimistic outlook for the future while signaling that the Fed expects to hold rates low for an extended period.  He noted improvement in the financial markets but was quick to acknowledge that the outlook is uncertain given a rising unemployment rate, weakening consumer demand and a lack of credit. 

Regarding the much debated exit strategy, Bernanke said that policy tightening would only occur once the economy is well into a recovery, labor markets show signs of improvement and deflationary concerns have eased.  Any tightening would potentially be achieved by increasing the interest rate paid on reserves, reverse repo transactions, sales of long-term assets and allowing the Treasury to sell bills for the Fed.  Bernanke made it very clear that the Fed is staying ahead of the inflation conundrum with as many options as possible.

Green Shoots Taking Root?

Saturday’s edition of The Wall Street Journal alluded to the fact that there may, in fact, be a degree of improvement occurring in the average American’s credit problems.  An analysis of 7.5 million Equifax credit files, conducted by Economy.com, found that the number of households that were 30 to 60 days behind on their consumer loan payments fell by 1.1 million on a seasonally-adjusted basis, through June 30th.  Most of the decline was attributable to a fall in credit card delinquencies. 

The percentage of credit cards 30 days past due fell to 0.87%, while the number of mortgages past due fell to 2.31%.  At this point it remains unclear whether this is a temporary respite or the beginning of a long-term easing of Americans credit problems.     

Source: Wall Street Journal

The Week Ahead

Following a week that was light on economic data, this week will bring data that provides a broad perspective of the state of the economy – from housing to consumer sentiment to the much anticipated 2nd quarter GDP figure. 

On Monday and Tuesday, President Obama will hold bilateral talks with Chinese President Hu Jintao aimed at “addressing the challenges and opportunities that both countries face on a wide range of bilateral, regional and global areas of immediate and long-term strategic and economic interests.”  No doubt we will once again hear about the US dollar’s reserve currency status.

Not to be forgotten, earnings season is still upon us.  Just shy of 150 companies from the S&P 500 Index will report this coming week, with prominent names including Exxon Mobil, Verizon, Honeywell and Walt Disney.  The recent strength of the equity rally will likely ease even if earnings continue to be stronger than expected.

Lastly, keep an eye on the Treasury.  The government is set to auction $115 billion in 2-, 5-, and 7- year bonds, as well as longer dated Treasury Inflation-Protected Securities.  There will be an additional $90 billion of short-term bills auctioned.  The market was receptive to similarly large auctions in June, but weak demand from our overseas counterparts could send yields higher. 

Quotable:         “… Politicians generally value power over strict intellectual consistency, which leads a president’s supporters to nod sagely at their leader’s creative flexibility and drives his opponents to sputter furiously about their nemesis’s hypocrisy.”  Jon Meacham, author of “American Lion”, a political biography of Andrew Jackson

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