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July 26, 2010
Summer Doldrums
It seems like the summer of 2010 has expressed a different story each week when it comes
to the economy and the financial markets.
Some weeks it’s optimism, other’s its pessimism. Some weeks it’s hope, the next
fear…some weeks inflationary then the next deflationary.
But at the end of it all, the gyrations only continue to add to one prevailing emotion: angst.
The main point is these markets have been volatile, but that doesn’t mean investors have to
take the bait. Investors need to focus beyond a week, or a month or even a year, and take
advantage of pullbacks. The fundamental story is getting better. The news out of Europe is
improving. The bank stress test, believe it a farce or not, went “OK”. Business confidence
in Germany is running at a 3-year high in July. The UK GDP numbers beat expectations, as
did their retail sales. The BP oil spill news is better.
At some point, the huge $15 trillion US economy can reverse course and turn on the jets.
It’s true, we are into the second half of 2010 and markets are still treading water, but an
optimist would say it’s not going down. Given all the news from March to June (BP oil spill,
Greece & the rest of Europe, lawsuits, etc.), most investors would have bet we’d be down.
So far this quarter, 80% of S&P 500 companies that reported beat earnings expectations.
That’s a good thing.
Inflation seems benign, which means interest rates should stay historically low for some
time, that’s a good thing.
The biggest question to try to get all that cash off the sidelines is whether the White House
will continue its perceived anti-business crusade and dig deeper with its goal of limiting
corporate profits and the redistribution of wealth. It goes against the American dream that
hard work, thrift, risk taking and smarts should be punished.
To grow any nation, new wealth must be created, and with that comes jobs and
opportunities. Such opportunities can’t happen without the flow of money/capital and
increased confidence. That capital flow is being stifled by endless rhetoric and increased
rules and regulations. Healthcare reform, financial reform, and cap and trade are going to
be very expensive for business, both large and small. According to Deal Logic in the US,
last week there were no asset-backed deals in the entire USA, the first time in 2010 that
this has happened. Before last week (and new Financial Reg.) there was an average of four
deals per week raising $1.8 billion. This is what gets the economy moving, not
unemployment cheques.
The markets are in limbo. It has been frustrating. There was a moot response to the Euro
banks stress test. Not sure if it’s being ignored or just dismissive (only 7 of 91 banks
failed).
Trading volume all summer has been extremely light.
I suspect more of the same for the next 4-6 weeks and if the Republicans can make
significant gains in the US mid term elections in November, creating some grid lock, we
could see a decent year end rally.
Stay Tuned
Vito Finucci
Vice President & Director
Private Client Division
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