Last week was a difficult week for the markets as any portfolio rebalancing ahead of the quarter close was knocked around on European rumors, weak economic data, and a confusing Supreme Court ruling concerning Obamacare. For the week, the Dow (NYSEARCA:DIA), S&P 500 (NYSEARCA:SPY), and the NASDAQ (NASDAQ:QQQ) finished in the black helped by a strong Friday rally.
The week started with the Greek Finance Minister, Vassillis Rapanos, resigning due to health reasons and stories floating concerning government staffing levels in opposition to the latest agreement. This was quickly overshadowed by the request for a bailout by Cyprus whose banking system is suffering in the wake of the Greek bond write down. Similar to Austria, certain Cypriot banks had heavy exposure to Greek bonds and the write down destroyed their capital base.
Weak economic data continued to spill out as the Kansas City Fed confirmed the Philly Fed and New York Fed numbers put out last week indicating a weak manufacturing sector. PMI data and Consumer Confidence both came in below expectations indicating further weakness in the US economy. Revised 1st quarter GDP came in at 1.9% a weak number which does not bode well for the 2nd quarter number given the weak economic reports that have come out regarding retail sales, manufacturing, and unemployment.
The ruling on Obamacare served to confuse the markets on Thursday. Particularly confusing is the impassioned debate over the Supreme Court allowing the tax for not having health insurance. The biggest head scratcher may be the legacy being created by Chief Justice John Roberts in the wake of the Citizens United and Obamacare votes. Both rulings have forever changed the landscape of the US economy and political process.
The EU continued down a path towards significant problems in the future as information emanating from the latest summit was released to the press. $120 billion dollars was committed towards growth programs, pooling a number of initiatives already on the books of many countries.
EU leaders also committed to establishing a new regulatory body to oversee the banks in hopes that by over regulating the banking sector they will help solve their sovereign problems. Even worse was a relaxation of collateral requirements regarding new low interest loans to banks. Acceptable minimum ratings have been lowered as well from A to BBB and the types of acceptable loans for use as collateral have been expanded.
The EU surprised everyone by renouncing seniority on its Spanish banking debt ending borrowing costs lower in a sign of admission that the LTRO program has caused more problems than intended.
Weakness continues to persist in the global economy as evidenced by the economic numbers coming out for May and June. The rally that I have been talking about should carry the markets through earnings season. However, investors need to pay close attention to the details and not the headline number as many earnings estimates have been lowered to the floor. A number of large cap stocks have warned about slowing sales and earnings in recent weeks including Federated (NYSE:FII), McDonald's (NYSE:MCD), and Dell (NASDAQ:DELL).
Investors looking for value and growth may be hard pressed during this earnings season as economic growth continues to slow. Just because a stock is beaten down to single digit P/E levels does not necessarily rate itself a buy due to being a value play. There is the concept of a value trap where a stock is beaten down to extreme levels for a good reason and can get cheaper if the outlook is not good.
Investors need to remember the concept of a value trap when they parse through earnings reports looking for value. Many people thought Nokia (NYSE:NOK) was a great contrarian value play until the last 20%+ drop.
Disclosure: I am short the broader market through a leveraged ETF.