Weekly Recap & Outlook – 07.22.11

Tower Private Advisors


  • Earnings
  • Debt ceiling
  • Europe

Capital Markets Recap

Top Stories

There are three big areas that are preoccupying investors, and depending on the market’s mood, any one of them can predominate. Together they comprise the proverbial Wall of Worry, and markets climbed that wall this week.

  1. Earnings
  2. Debt ceiling
  3. Europe troubles

Regarding the first one, as of today 24.3% of the companies in the S & P 500 have reported Q2 earnings results. The average year-over-year earnings growth has been 18.50%, and 82.8% of the earnings results have beaten analyst estimates. The Materials sector has been the biggest EPS gainer, with average growth of 73.1%, while the biggest postive surprises have come from the Information Technology sector. Another 36.6% of companies will report next week, after which they begin to trail off.

Here were some notable earnings releases for the week:

  • Caterpillar – first earnings miss since Q3 2008
  • Ebay – modest earnings beat
  • Apple – exceeded analyst estimates by 32.8% – stock yawns, up 2.7%
  • Microsoft – big, 19.8% beat – stock yawns, up 1.3%
  • Intel – 6.7% beat
  • Nucor – takes the prize for best growth 224.1% – stock yawns, up 2.1% – trails Q1 YoY growth rate of 400%

Regarding the second one, my way of looking at this is pretty simplistic, which shouldn’t surprise you.

  1. One-year Credit Default Swaps imply a mathematical probability of 1% that the U.S. defaults.
  2. On the other hand, the price of 6-month default protection (the CDS spread) has increased by 99.6% since May 17, 2011.
  3. ‘Running out of hands here, but Treasury yields haven’t budged. Since May 17, yields have fallen like this: 2-year -0.13%; 5-year -0.28%; 10-year -0.15%; 30-year +0.03%

As usual, Congress could be accused of any number of transgressions, any of which can surely be described by a variety of bodily functions. In stark contrast, surely, stand the five largest groups of U.S. Treasury debt holders: China, Japan, UK, Brazil, and OPEC. Together, they own 63.4% of Treasuries. Arguably, they are in charge of determining yields on all Treasury debt, and they–again, almost by definition–stand to lose the most. Judging by the non-movement of Treasury yields, they’re not the least bit concerned. On the other hand, clearly, a default would catch them off guard. That leads me to make this bold statement: we will not fail to service our debt in a timely fashion; i.e. no default on Treasuries.

If, however, you’re wondering when the stuff hits the fan in the U.S., you might think about 2014. That’s when Credit Default Swaps start to get relatively expensive for U.S. debt protection, as you can see below.

Regarding the third one, it’s difficult to determine, from headlines and the like, if Europe is making any real progress on the swine problem it has. More politely, the PIIGs can be referred to as “Peripheral Europe.” Perhaps the best ways to judge what’s really happening is to look at the European equity indexes, above, and at, again, Credit Default Swap pricing. Here’s that score, based on the change from last Friday, in 1-year CDS.

  • Portugal -19.1%
  • Italy – 18.8%
  • Greece -16.59%
  • Spain -12.4%

Putting the two (CDSs + equity indexes) together, my simple thinking tells me the Europeans have moved closer to a solution–one that the market likes, at least.

This Week

Housing related indicators dominated this week’s economic releasese. Monday’s release of the National Association of Home Builders Housing Market Index, a measure of builder sentiment, rose from 13 to 15, flummoxing the economists who, as a group, had expected a reading of 14. Sure, it was better than expected, but as a rough approximation for the percentage of home builders who are happy, 15% isn’t much different from 13%. Housing Starts and Building Permits–excuse the hyperbole–blasted higher. The former logged in at 629,000, whereas economists had expected 575,000–jussssstttt a bit outside–and the previous reading was 560,000; building permits–the precursor to starts–came in at 595,000, versus expectations of 624,000 and a prior release of 612,000. Despite the gushing of the pretty ladies on financial television, both series resemble a bad EKG reading. I watched enough Emergency! to know that if, Roy, Johnny, and Dr. Kelly don’t get to work quick, the patient’s in trouble. Existing Home Sales, however, fell in June, while economists expected an increase. Finally, the broadest measure of home prices, the Home Price Index, rose by 0.4% (economists had expected 0.1%), which was half the 0.8% gain in May. The Mortgage Bankers Association released its Mortgage Applications index, which rose by 15.5% last week. It should be no surprise, though, to knwo that the increase was all in the Refinance Application portion, rather than in the Purchase Application, which looks moribund.

Inital Jobless Claims bounced back up this week, but they remain in the downtrend that began in 2009. The Leading Economic Indicators were slightly better than expected, but far below May levels. Finally, the Philly Fed index increased, although it’s just barely in expansion territory.

Next Week

Key indicators to watch

  • Durable Goods Orders (Wednesday) – June
  • Federal Reserve Beige Book (Wednesday)
  • Initial Jobless Claims (Thursday) – weekly
  • Gross Domestic Product (Friday) – Q2, first release
  • University of Michigan Consumer Confidence (Friday) – final July

Regional indicators

  • Dallas Fed Manufacturing Activity index (Monday) – July
  • Richmond Fed Manufacturing index (Tuesday) – July
  • Chicago Purchasing Managers index (Friday) – July
  • NAPM – Milwaukee (Friday) – July

Housing indicators

  • CaseShiller Home Price Index (Tuesday) – May
  • New Home Sales (Tuesday) – June
  • Pending Home Sales (Thursday) – June

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

p.s. I’m also the father of these two innocent-looking fellows, affectionately known as Bob and Al Qaeda, terrorists.


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