Tower Private Advisors
- FDIC Insurance Coverage
- Bernanke talks, market tanks
- Debt Overhang: Economics 101 in Magic Marker
- Popping water balloon
- __flation Update
- Rally to resistance
- European bank stress tests
- Deteriorating housing data
Capital markets Recap (as of 3:20)
I’ve included, below, an update of an S & P 500 chart I put up last Friday. The dashed line at 1,100 remains resistance for stocks. We’re going to finish the day very close to that level, although as I type at 3:38 I wouldn’t be surprised to see us finish slightly below 1,100. This week’s action was constructive in that we spent several days with give-and-take between last Friday’s range before making a run at 1,100. Like a hammer hitting the same spot on a piece of wood, the resistance will eventually give way. The pessimism around stocks is high enough that next week could be that week, but I wouldn’t bet lunch money on it.
Earnings are ostensibly the biggest news stories of the week. This week saw 126 of the S & P 500 (technically 497) report earnings. 84.9% reported positive earnings surprises; 18 reported earnings disappointments. In all, 149 companies (30%) have reported. 84.5% of the reports have been [positive] earnings surprises; 14.8% have been earnings disappointments; 1 company met estimates exactly. All sectors but Telecom reported year-over-year earnings growth. The best performance has come from the Consumer Discretionary sector (+210%), followed by Financials (+197%) and Materials (+100%).
I am running out time as I work from bottom to top of this dispatch, but here’s a thumbnail of some high-profile earnings releases.
- Ford – $2.6 billion profit
- McDonald’s – good profits on frozen drink sales
- Microsoft – biggest increase in sales in two years
- Amazon – missed estimates. Stock opened up $15.07 lower but managed to close the gap to -$2.88
- American Express – good results
- Financials – most look good on an improved credit environment
- Apple – satisfied Wall Street with a stand out quarter
- IBM – missed estimates
For the next quarter expectations are highest for Financials (+53.24%), Industrials (+42.5%), Materials (+41.2%). They’re lowest for Telecom (-0.47%), Utilities (+3.9%), Consumer Staples (+6.1%), and Health Care (+6.2%).
In the next week 164 companies will report earnings, with the largest being from the Industrials (26) and Finance (25) sectors. After that, things begin to tail off.
What has obscured earnings data over the past week have been–in my opinion, at least–two things: Chairman Bernanke‘s testimony to Congress and the stress tests at the major European banks. With the former, before he had testified, there had been some speculation that the Fed might stop paying interest on bank reserves held with it. That would be a stimulative measure intended to send banks looking for higher returns amongst, where else, making loans. Unfortunately, while the Chairman spun a tale of woe about the economy he spent very little time talking about specific steps the Fed could/would take. Click here for the market’s response.
With regard to the latter, there was apparently a leak yesterday that the stress test results had come back to show a healthy patient. In fact, after the market had closed it came out that the stress tests were going to be relatively stress free. Essentially, the stress tests were to have subjected the European banks to stimulated disastrous conditions–much like the U.S. did with its banks early last year. The U.S. tests were so arduous that they considered a worst case scenario of–yikes!–10% unemployment. What the European stress tests did, however, was only look at the banks’ portfolios of tradeable securities and not those held to maturity. And why not? If the securities are held to maturity one gets the face value back, unless you happen to hold the next Lehman Brothers or General Motors bond. What that produced was a list of mostly “healthy” banks (quotation marks were necessary) with a couple of sacrificial-lamb banks that are already on life support. In contrast to the $30-40 billion estimate of capital needed, the result was a paltry $3.3 billion. According to Miller Tabak, Greece alone was anticipated, in private estimates, to need $10 billion itself. In short, the European stress tests were a sham and should leave markets with little confidence in the European banking system. In fact, equity index futures were off by a fair amount this morning once the initial news hit.
Bill Miller, the famed manager of Legg Mason’s Value Trust fund, said this week that,
U.S. large capitalization stocks represent a once in a lifetime opportunity, in my opinion, to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was one-year old then, but did not have sufficient sentience or capital to invest.”
Week’s data was focused on housing, which continues to deteriorate.
Most of the data this week was focused on housing. Here’s a quick summary of the releases. I’ve colored the consensus estimate and the prior release: green if better than; red if worse than.
- NAHB Housing Market Index (i.e. builder sentiment) – 14 (expected 16; prior 17)
- Housing Starts – 549,000 (expected 577M; prior 593M)
- Building Permits – 586,000 (expected 575M; prior 574M)
- House Price Index – 0.5% (expected -0.3%; prior 0.8%)
- Existing Home Sales – 5.37 mil (expected 5.10 mil.; prior 5.66 mil.)
That’s four greens and six reds. It’s a pretty simplistic way of viewing the data, but with four of five red in the prior category we can say that the data have deteriorated over the past month or so. Three of five in the expected category are green, suggesting that the data were better than the economists expected. I’d give more weight to the first category and chalk up a deterioration in housing.
The Leading Economic Indicators (-0.2%) were significantly weaker than the prior reading (+0.5%) but better than expected (-0.3%). The so-called Co/Lag index fell by 0.1%. It’s a ratio of the Coincident indicators compared to the Lagging indicators. Its year-over-year level is 5.5%, and that’s the best pace since 1983, according to one of our services.
A whole slew of stuff comes next week
Key indicators to watch
- New Homes Sales (June) – Monday
- Case-Shiller Home Price Index (May) – Monday
- Federal Reserve’s Beige Book (5 of 8 released in 2010) – Wednesday
- Durable Goods Orders (June) – Wednesday
- Initial Jobless Claims (weekly) – Thursday
- Gross Domestic Product et al (Q2) – Friday
- University of Michigan Consumer Confidence (July final) – Friday – given recent deterioration and general confusion over leading nature of the survey this should be an important one to watch.
Regional surveys (all for month of July)
- Dallas Federal Reserve Manufacturing Activity – Monday
- Chicago Purchasing Managers index – Friday
- ISM – Milwaukee – Friday
Graig P. Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors