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Market Update 7/12 - Mid Year Reflection Point

|Includes:CXO, Las Vegas Sands Corp. (LVS), PXD, SAN, WLL

By the time the 2nd quarter was complete 2014 was in the process of being transformed from a flat year for risk assets and a strong year for fixed income into a much more encouraging year for the former and perhaps less so for bonds. Indeed if the SPX index were to simply replicate its first 6+% half performance the full year return would be very close to that of 2010 (12.78%) and 2012 (13.41%), both of which went into the history books as 'good years.' Of course first halves are not always predictive of second halves.

Case in point, 2011's gain of 5.01% in its first two quarters was entirely wiped out by what followed, with most participants grateful that after collapsing in the summer and early fall the SPX index clawed its way back to close the year exactly where it started at 1257.6.

With regards to the rest of 2014 my sense remains that the bull market is very much intact, but we are approaching S & P 2000 and are within range of the old Nasdaq closing high of 4,696. Given this recent upward move those levels could prove formidable to 'take out" on THIS attempt. Also of note, we are entering a seasonally weak period for equities in Aug & Sept.

In the context of a secular bull market at some point in time those levels will be taken out .. but perhaps not before the markets self correct. Whether that will come with prices taking a dip or simply consolidating over a period of time --no one can say for sure..

The bears are ready to pounce (the recent sentiment I discovered here on SA is proof of that )on any sniff of lower equity prices, they will say "I told u so" and raise the victory flag , & load up on the short side. That is of course assuming they have the funds to do that after all of the failed attempts to call the TOP from S & P 1600 -

After a while, they will in fact find that the plane is simply refueling .. and once again will be taken to the woodshed. I do not believe we have seen the 'Highs" in the S & P ..

Admittedly that last statement was much easier to make @ S & P 1550 and on up the ladder to the present level. I will also remind all that every one of those calls was met with plenty of "push back" and total non belief from the naysayers. Its the same today, MAYBE a bit less vocal but nonetheless the same, as "they" believe, "they" have the "odds" in their favor after such an exponential advance.. The market simply doesn't work that way ..

Here is another common theme that is in vogue now from the negative naybobs:

Why take the risk for the last few percent, when a reversal is imminent from the data. I heard that same argument VERY strongly @ S & P 1800 - now we are at S & P 1967 and its louder. I block out people that have that view,because there are so many things wrong with that view. How do 'they" know that the upside is limited? Many proclaimed the market overvalued and overbought @ S & P 1550 , precisely the exact time I highlighted and maintained the "breakout' from a 13 year base pattern that would take the S & P higher, much higher.

Many have been calling for a stock market correction since November 2012. Where has that gotten anyone that has followed that ill advice? The S&P 500 is up over 45% since then. The common theme lately is also calling for cash positions and looking to short again now. What if the S&P goes from the current 1967 level to 2100?

Anticipating a "turn" is a fools game. I have repeatedly maintained that an investor can be prepared and when the market turns act quickly just as easily. The bulls will 'give it all back" cry is garbage , plain and simple. It's the first sentence in the "frustrated Bears" theme song... and it's to be ignored..

In the meantime a highlight or two for this week:

  • Another accelerating-growth signal - The Fed's early June flow of funds report found combined credit (bank and non-bank) to small businesses grew at a 3.8% year-over-year rate in the first quarter, easily exceeding the nominal growth rate for the first time since the 2008 crisis. Previous crossovers like this one have only occurred in 1984, 1996 and 2004 and were followed by fast GDP growth.
  • Capex - With jobs picking up and housing appearing to turn, a ramp-up in capital spending would be the next big catalyst for the accelerating growth thesis. This year has finally seen a break in the fiscal and policy uncertainty that caused a near 25% collapse in business investment in the aftermath of the global financial crisis and the largest recession in modern memory. This suggests a capex boom may be just around the corner, Bank of America says. Adding to this view is Duke's latest survey of CFOs, which showed expectations for their own companies' capital spending on the rise in Q2.

Looking back at the last few months here is a summary of economic data points highlighted here in this blog All of the regional Federal Reserve indices have bounced sharply from their winter troughs, collectively indicating that conditions for manufacturers have improved in recent months.

  • Empire manufacturing index Bottomed at 4.48 in February and rose to a two-year high of 19.3 in June.
  • Philadelphia Fed manufacturing index Surged to a surprisingly strong 17.8 in June, its highest reading since October 2013, up sharply from its February trough reading of a negative 6.3.
  • Richmond Fed manufacturing index Reported a sharp gain to 7 in May, up from a negative 6 in February, although it has since slipped to 3 in June.
  • Kansas City Fed manufacturing index Rose to 10 in May, up from 4 in February, although it fell to 6 in June.
  • Milwaukee purchasing manager's index Bounced from 48.6 in February to 63.5 in May, before easing back to 60.6 in June.
  • Chicago purchasing manager's index Leapt from 55.9 in March to 65.5 in May-its highest reading since October 2013-before sliding back down to 62.6 in June.
  • Dallas Fed manufacturing index Soared to 11.4 in June, up from 0.3 in February.

Manufacturing, which accounts for roughly 12% of overall U.S. economic activity, has begun to turn the corner, with improving auto sales, the ISM survey, capacity utilization and durable- and capital-goods orders and shipments, among other metrics. As a result we should expect both 2nd quarter and 2nd half GDP bounces from the dismal -2.9% first Q level. That should firm up end-market demand both here and abroad for manufactured goods & that could easily spark a much-needed inventory re-stocking cycle, Perhaps building towards last year's third-quarter inventory peak of $115.7 billion, which is nearly triple current inventory levels.

All eyes will be on Earnings this week as the major banks start the first full week of reports. Alcoa (NYSE:AA) & Wells Fargo (NYSE:WFC) started off earnings season with good results.. It would be nice to see that become a trend in the next few weeks..

I am focused on a few names in the energy sector that have come down a bit from their highs.. old favorites (NYSE:CXO) (NYSE:PXD) (NYSE:WLL) , and a new name (NYSE:AR) ---more weakness in these stocks, and it may be time to be back in those names. (NYSE:LVS) is also down in the lower end of it trading range and sports a 2.7% yield. A solid LT investment.

For those looking for a yield play - Take a look at (NYSE:SAN) , it fell with the hysteria over the Portugal bank headlines this past week , but it has nothing to do with that situation at all. Under $10 its yield is 6.4% ...

My views on the second half and what lies ahead in the next 12 months with various scenarios can be found in my next blog post report on "Where we are and Where we may be headed".

Best of Luck to all ....

Disclosure: The author is long LVS, SAN.

Additional disclosure: I am long numerous equity positions - all of which can be seen here on my Instablog."It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision.