The past week was one filled with news and events both in the marketplace and out of it. One big news item that started the week was the NCAA sanctions on Penn State. I have a lot to say about the whole affair but I will leave those comments for emails and conversations among friends and supporters. On the positive side for the week, the Olympics kicked off in London with a bang. You know there is actually an Olympics effect in the economy that is not good because consumers are sitting in front of their TVs watching instead of being productive and spending. So, if you are stationed in front of the TV, order out for some food and buy something online. Help the economy!
Question: How do you calm fears in the financial markets and resolve to fix debt and growth problems without really doing anything?
Answer: You indirectly promise to print money.
ECB president, Mario Draghi took a page from the Fed's playbook and quelled fears in the markets and started a huge 2-day rally by coming out in support of the Euro by stating that he would do whatever it takes to save the Euro. He also added "Believe me, it will work". Most market pundits assume that this means printing money to resume large-scale purchases of Italian and Spanish bonds to lower their borrowing costs among other things.
As we enter August it is worth noting that the month has become sort of a crisis month in years past. Remember last summer the market started its swoon when the US credit rating got downgraded. So, perhaps central bankers are trying to stave off the late summer struggles of the market by front-running the market with supportive comments now. The US fed's FOMC meeting is this Tuesday and Wednesday, while the ECB holds its meeting Thursday. We should listen closely to what comes out of those meetings.
Earnings reports for companies so far have been a mixed bag but there is one certainty that is being relayed to the market, Q3 and Q4 will be tough. Facebook's first report was a major disappointment. Even Apple faltered with a rare miss of estimates, causing a selloff in shares and hurting the market tone early in the week. With about 300 companies reporting so far, 2/3 have actually beaten expectations and another 13% have matched according to S&P Capital IQ. Remember though that consensus numbers came down through the quarter. Although profits so far are up 5.4% overall, they have decelerated the last several quarters and Revenues have actually declined .6%. So again, companies are doing it thru cost-cutting and belt-tightening. Also note that of the 103 companies that have given forward guidance, negative projections hold a 2.5 to 1 advantage. As a matter of fact, The WSJ is reporting that Q3 earnings by S&P 500 companies are expected to shrink for the first time in 10 quarters. Declining profits will cause companies to rethink capital expenditure budgets and may lead to another round of layoffs. Not what the economy needs right now.
Another major issue for companies is the strength of the US dollar which is cutting into US companies' profits after translation and hurting exports. The dollar rose 5% against the Euro in the 2nd quarter alone and companies can't cut costs or raise prices fast enough to offset this. On the positive side, companies that operate overseas can benefit as its dollar costs decline and they also receive greater buying power for supplies and potential acquisitions.
At the risk of being too verbose, I will cut it off here today. Let me try to give a few potential positives among all the negatives in the marketplace. Perhaps putting a floor on the market some positives include
- continuing lower interest rates (sharply lower in the past month),
- aggressive global central bank stimulative monetary action,
- lower energy and commodity prices,
- and a stable to improving housing market in the US.
Granted it is not a lot but it is something to build off. I won't recite the growing wall of worry as I'm sure you are all aware of the multitude of issues. But it seems that barring an unforeseen macro geo-political event, maybe the market can get through the rest of the summer by staying in its trading range of 1300 to 1400. Right now we are near the top of the range so be careful going long the market as August rolls in and everyone heads off to vacation.
Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtained from ForzaInvestment.com
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