Markets:
For the week of August 15, 2011 through Thursday, August 18, 2011
- Standard & Poor’s 500 Index: -3.24%
- Dow Jones Industrial Average: -2.47%
- NASDAQ Composite: -5.09%
The European Union is struggling to overcome the debt crisis from the PIIGS countries. Financial institutions are scrambling to limit their exposure to European government debt and the European Central Bank is taking steps to shore up the weaker nations. Gross domestic product growth has slowed in Europe as well as in the United States, signaling that the world economy may be slowing down.
We do not feel that a double-dip recession is beginning. Second quarter earnings remain strong for S&P 500 companies and economic indicators are picking up a little. The battle over the U.S .budget will continue in a few weeks when Congress returns from vacation. We feel that strong leadership is needed to tackle the deficit and reign in our debt, as well as get the economy and country back on a strong, sustainable path.
Despite the turmoil in the market, we feel that many stocks are undervalued because of panic selling. We see this as a chance to enter the market at a low price point and reap large gains over the long term.
European Financial Turmoil
- Fears rose in Europe this week over speculation that the European Union is strained by serious debt issues.
- The euro members with the strongest economies, France and Germany, will not be able to prop up the entire region for an extended period of time.
- Meetings took place between France and Germany this week in order to address problems facing the EU.
- They recommend all EU nations pass balanced budget rules in their respective constitutions.
- Unfortunately, GDP stagnated during the second quarter in Europe and was reported at an annualized rate of 0.7%.
- German growth was 0.1%, while French growth was stagnant.
- Time will tell if the EU survives in its present form.
European Banks
- European banks have large exposure of European government debt in their holdings in the form of government bonds.
- European banks that operate branches in the United States borrow money from the Federal Reserve.
- If the banks fail in Europe, the FDIC could be responsible for insuring some of their obligations.
- U.S. banks also may have some exposure to European debt.
- Shares of financial institutions were down this week.
Political Climate
- The President and Congress are currently on vacation until after Labor Day.
- Looming on their horizon is bipartisan super committee tasked with cutting $1.5 trillion by November 23 from the federal budget.
- We feel that entitlements will have to be cut and taxes will need to increase in the near future as a part of the deal.
- Major spending cuts are necessary across the board in order to rein in deficit spending.
Broad Economics
- Industrial Production
- Industrial output rose 0.9% in July to start the third quarter mostly lead by auto manufacturing with a 5.2% increase in production.
- Excluding autos, manufacturing activity rose 0.3% as a result of high inventory from weak sales data.
- Factory utilization rose to 77.6%, as well.
- Consumer Price Index
- Consumer prices jumped up 0.5% in July to start the third quarter.
- Energy and food prices lead the increase; however this month, crude has fallen under the $90 a barrel price, which should alleviate some inflationary pressure.
- Consumer Sentiment
- We feel that consumer sentiment is making the market behave irrationally.
- The majority of companies in the S&P 500 have beaten earnings estimates for the second quarter.
- Many sit on large piles of cash because of regulatory uncertainty.
- Gold reached an all-time high again this week.
- However, manufacturing demand for gold has decreased 17%.
- We feel that the downside risk for gold is exceptionally more than potential short- term gains.
- If you do hold gold, we feel that it should represent no more than 5% of your portfolio.
Earnings and Company News
- The S&P 500 companies performed strong in the second quarter with earnings up 11.8%.
- 71% of companies have beaten earnings estimates.
- However, revisions are being made for the rest of the year as signs point to the economic growth slowing.
- We expect earnings to slow a little, but will not be surprised if the S&P 500 companies earn $100 per share this year.
- Hewlett-Packard (NYSE: HPQ)
- Hewlett-Packard announced this week that it would sell off its computer division and will not continue making tablets.
- They will keep their printer, storage and software businesses.
Interest Rates
- The two-year Treasury rate was down to 0.18%, hovering around all-time low levels.
- The five-year Treasury rate fell 0.09% to a new all-time low of 0.87%.
- The 10-year Treasury rate dipped to 2.10%, just .05% above the all time low.
- The 30-year Treasury fell for the sixth straight week. It dropped 23 basis points to 3.50%.