J.L. Davis Weekly Update 6/20/2011

Quote of the Week:
"When one admits that nothing is certain one must, I think, also add that some things are more nearly certain than others"
Bertrand Russell

What exactly in this life, with all due respect to death and taxes, is certain? In our experience, very little. However, when we look critically at all things financial, we are seeing trends we like. And some good news.

As we prepared for the week, we noticed a few snippets of really good news that many of our media friends may have overlooked in the past few days:

• The actual profits of the companies in the S&P 500 during the 2nd quarter 2011 (i.e., the 3 months of April-May-June) are projected to be +27% higher than they were during the 2nd quarter 2010. (Source: CNBC)
• According to the US Bureau of Economic Analysis, real gross domestic product (GDP) increased in 48 states and the District of Columbia, in 2010.
• Is it a trend? According to the Mortgage Bankers Association, at the end of 2009, 10% of mortgages had at least 1-payment past due and another 5% of: mortgages were in the foreclosure process. At the end of 2010, 9% of mortgages had at least 1-payment past due and another 5% of mortgages were in the foreclosure process. As of the end of the 1st quarter 2011 (3/31/11), 8% of mortgages had at least 1-payment past due and another 4% of mortgages were in the foreclosure process.
• The US Labor Department reported that unemployment rates have fallen significantly below the national average in 25 states. A whopping 43 states have witnessed a decline in their unemployment rates.

In a nutshell, we continue to see positive developments. Recoveries are by nature uneven, but in the U.S. and the world, economies have recovered from recession exactly 100% of the time, historically. Is that certainty?

It may be as close as it gets!**


The Markets

The Dow had trouble deciding which side of 12,000 it wanted to be on, but finally ended the volatile week just above that level, joining the S&P 500 in halting the recent six-week losing streak. The small caps of the Russell 2000 also managed to eke out a gain, but the Nasdaq continued to suffer, though the pace of losses slowed from the previous two weeks. Mounting concern about Greece not only hurt the Global Dow but prompted investors to keep the yield on the 10-year Treasury under 3%.


Last Week's Headlines

• As European leaders continued to argue over whether and how to let bondholders such as banks take a hit over Greece's debt problems, Greek workers took to the streets to protest the latest round of governmental austerity measures, and the prime minister announced a cabinet reshuffling. Standard & Poor's once again downgraded the country's bonds, this time to CCC (indicating a significant likelihood of default), and the cost of insuring Greek debt via credit default swaps hit a new record.

• Consumer inflation rose 0.2% in May, the Bureau of Labor Statistics said. That pushed the annual inflation rate for the last year to 3.6%, though without volatile food and energy costs, it was 1.5%. Meanwhile, inflation at the wholesale level rose 0.2% for the month, the lowest increase since last July. That put the annual wholesale inflation rate at 7.3%, the largest year-over-year gain since September 2008. The cost of raw materials fell 4.1% during the month.

• Retail and food sales fell 0.2% in May, providing fresh evidence that the economy may be slowing. Though sales were up 7.7% from a year ago, it was the first monthly decline in almost a year, according to the Department of Commerce. Automobiles, which have been hurt by supply-chain problems and were down 2.9%, were responsible for the bulk of the decline. Non-auto sales were up 0.3%, though gas prices accounted for part of that increase.

• For the sixth time this year, the People's Bank of China--the equivalent of the Federal Reserve--raised the reserve requirements for banks. The move is part of an effort to contain inflation that is running at 5.5% a year there, according to Beijing's National Bureau of Statistics.

• The Federal Reserve said industrial production would have risen 0.6% in May if not for auto supply-chain problems, which kept the number to 0.1%. However, both the Fed's Empire State and Philadelphia-region gauges of manufacturing activity turned negative for the first time since late last year.

• Housing starts were up 3.5% in May, though that's still 3.4% below last year, according to the Commerce Department. Building permits, an indicator of future construction, rose 8.7% for the month and were up 5.2% from last May. And according to RealtyTrac, the number of foreclosures hit its lowest level in more than three years. However, the reasons for the decline weren't good news. New lender-owned homes being put on the market continued to exceed the number sold, and the high level of unsold homes has caused banks to simply postpone foreclosures.

• The Conference Board's index of leading economic indicators resumed an upward trend in May with a 0.8% increase. The strongest numbers were seen in the interest rate spread, consumer expectations, and housing permits.


Eye on the Week Ahead

Investors will continue to try to figure out whether Greece's predicament will be resolved by bailouts, debt restructuring, austerity measures, or some combination. They also will pore over the Fed's statement after its Wednesday meeting, just a week before QE2 is scheduled to dock.


Key dates and data releases: home resales (6/21); Federal Reserve Open Market (FOMC) committee announcement (6/22); new home sales (6/23); final Q1 gross domestic product (GDP), durable goods orders, corporate profits (6/24).


Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Forefield Inc. Copyright 2011