Weekly Recap & Outlook – 07.09.10

Tower Private Advisors

Below

  • Summer rally underway
  • Mixed economics, but Jobless Claims poised to improve

Prior posts

Capital Markets Recap

Too many bears swung the pendulum too far over the past two weeks, and we appear to be in the midst of a good summer rally.  Not the least of the bearish omens was the much-ballyhooed Death Cross, where the 50-day moving average crossed below the 200-day moving average, supposedly heralding horrendous returns.  Not so far.

Turns out that about 3/4 of the time, equity returns are positive six months following such an occurence.  As usual, what gained notoriety for the phenomenon was its most recent performance–one of many rules on my office wall:  “big, vivid, easy to recall events are less likely than you think they are”.  We’re pretty good at that, remembering only the most recent occurences.  And, indeed, they did produce horrendous results, as the chart below might recall.

Three of four of our key research services remain bullish on equities–although one eponymous services reduceds its bullishness.  The missing fourth is–by their own admission–late on catching turns in markets, focusing instead on riding big trends.  The services have, however, made changes to their sector and asset class allocations.  One consistent theme is a bullish bias toward Emerging Markets.  We’ve been heavy in emerging markets equities for a while now, and in the last week we chose to add an allocation to emerging markets debt.

Other Investment Ideas

  • With Treasury yields plumbing new depths (a sign in our lobby informs visitors that our mortgage rate is 4.125%–click here to send an e-mail to one of our mortgage folks for more information) inflation is not a consideration.  It will be, and when Treasury Inflation Protected Securities (TIPS)  begin to reflect that–not yet, but heading there–it’ll be time to buy those.
  • Gold is in the midst of a sell-off.   Don’t ask why, you wouldn’t understand.  In addition, it’s making lower lows and lower highs, the signs of a downward trend.  Eventually, it’ll be time to buy more–if only for a trade–but my guess is that price is around $1,150 (today’s close $1,211.60).  On GLD look for $111 – 113.

Top Stories

  • Google saw its Chinese license renewed.  In response its shares rallied smartly, up 10% in five days.  We like GOOG for its cloud-computing (i.e. applications in the ether, not on the desktop) exposure.
  • Berkshire Hathaway “may have $800 million writedown on asset declines.”
  • Big call option trade on the Finance sector SPDR (273,000 calls traded today) suggests someone’s banking on a rally in the finance sector.
  • The G-7 includes the following countries:  Canada, France, Germany, Italy, Japan, United Kingdom, and United States.  Only one has managed–and just this week–to recoup all of the jobs lost in the recent global recession, and it’s the most recent addition to the list, Canada
  • The Treasury Department released its Semi-Annual Report on International Economic and Exchange Rate PoliciesOf particular interest to Congress is the section on China. Again, the Treasury Department stopped short of calling China a currency manipulator, instead applauding its moves toward a floating currency, which steps have included removing the country’s peg to the dollar.  That did nothing to assuage the public servants in the Legislative Branch–such luminaries as Chuck Shumer, who, never having had passing grades in Econ 101, still wants to slap a 27.5% tariff on Chinese goods.  Uh, Fort Wayne to Chuck:  it’s our own fault; we buy the stuff.  Make the Chinese mad and they might just dump a few billion Treasuries.  We’d be wise to remember that, were it not for the Chinese recycling its U.S. dollars into Treasuries, our interest rates would be far higher.  The only reason they’re not is because the dollar is a reserve currency.  Be careful what you wish for, Chuckie, this currency stuff isn’t Child’s Play.
  • Due to generous discounting, U. S. Retail Sales rose at their quickest pace in four years, according to Bloomberg.
  • BP CEO Tony Hayward is jetting around the globe, ostensibly trying to enlist the support of various nations, in forms ranging from direct investment to joint ventures to business as usual–chances are good he’s dropping off his resume–pardon me, at that level it’s probably a Curriculum Vitae.  This sounds an awfully lot like Lehman Brothers trying to raise capital from soveriegn wealth funds, and that sends chills down one’s spine.  And yet, the stock is up north of 22% in a week.

This Week

There wasn’t much going on in the land of economics this week.  The ISM Non-Manufacturing report was weaker than expected, suggesting the service sector is growing at a slower pace.  Initial Jobless Claims fell by 21,000 to come closer to penetrating the lower bound of the triangle that’s formed in the series.  If it were a stock, we’d say the triangle represents a consolidation phase and the “stock” would continue in the former direction, which is to say, in this case, lower.

Consumer Credit continued to decline, as it has been doing since late 2008.  On a five-year chart it does indeed look like a sign of some new-found frugality, but a longer-term chart confirms that, at best, it’s a start on the right track. 

Next Week

In contrast to this week, next week is loaded with releases.

Key indicators to watch

  • Producer Price Index (June) – Thursday – the fear du jour is deflation, so watchers will key in on these two series.
  • Consumer Price Index (June) - Friday
  • Retail Sales (weekly) – Wednesday – increasing chatter is being heard around the consumer, looking for signs of weakening in spending
  • July 14 FOMC Minutes – Wednesday
  • Initial Jobless Claims (weekly) – Thursday

Lesser indicators

  • NFIB Small Business Optimism (June) – Tuesday
  • Empire State Manufacturing index (July) – Thursday
  • Capacity Utilization & Industrial Production (June) – Thursday
  • Philly Fed index (July) – Thursday
  • University of Michigan Consumer Confidence (preliminary July) – Friday

Questionable

  • The American Grandstand Congress will hold hearings on Federal Reserve nominees to the Board of Governors:  Janet Yellen (San Francisco Fed President) as Vice Chair, and Peter Diamond and Sarah Bloom Raskin as plain ol’ governors.  Their views as expressed in the hearing could give some clues as to where monetary policy might be heading.

Graig P. Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

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