J.L. Davis Weekly Market Update 7/18/2011

Quote of the Week

"I believe every human has a finite number of heartbeats. I don't intend to waste any of mine." Neil Armstrong

Most of us who are old enough remember the immortal words, "Challenger, go at throttle up." We remember in vivid detail the next few minutes as the milky white contrails of the rocket suddenly turned fiery red and yellow, exploded, and trailed off in multiple directions. Those words, along with "obviously a major malfunction..." were the words of Richard O. "Dick" Covey, the ground team's astronaut in charge of communications that fateful day when all aboard, including teacher Christa McAuliffe, perished.

This past weekend, Kathy and I were invited to play golf at Sanctuary (the top rated private course in Colorado... stunningly beautiful). We had the opportunity to meet and take pictures with Commander Covey. He recently retired from his work at NASA, and among other things, now serves on Sanctuary's board. I found him shy, completely unassuming, and a consummate gentleman.

Dick is quite an American. Eagle Scout. Graduate of the Air Force Academy. Masters at Purdue. Flew 339 combat missions during his two tours of duty in Southeast Asia. A test pilot, with over 5700 hours in 30 types of aircraft. Oh, yes, and flew 4 space shuttle missions, including the one that immediately followed Challenger. What courage. What skill. Did I mention that he and his team repaired the Hubble telescope? A fine father and husband too, I'm told.

I am convinced that as long as our country produces people like Richard Covey (and it always has) our future is in good hands. It was an honor to meet him and learn his inspiring story.

Now for the markets....**

The Markets

Despite the wrangling over the deficit and its connection to the debt ceiling, Treasury securities held up well; prices even rose slightly as investors sought refuge from anxieties over Europe's financing problems, particularly Italy's. However, domestic equities gave up some of the previous two weeks' gains as uncertainty led some investors to book profits.

Last Week's Headlines

• With roughly two weeks left until August 2 and Congress unable to agree on a path to raising the debt ceiling, both Moody's and Standard & Poor's placed the United States on review for possible downgrade of its credit rating. Both cited the risk of at least a short-lived default, as did a Chinese rating agency. Meanwhile, Senate Minority Leader Mitch McConnell proposed fail-safe legislation that would permit President Obama to raise the debt ceiling by up to $2.4 trillion in three stages.
• Concerns over the financing needs of the European Union's third largest economy sent yields on Italy's sovereign bonds soaring, increasing the cost of borrowing when the country already faces a budget deficit. Meanwhile, Moody's downgraded Ireland's debt to junk status. Finally, eight European banks failed the stress tests designed to show whether they have enough capital to withstand financial shocks.
• Hurt by high oil prices in June, the U.S. trade deficit rose to its highest level since October 2008. According to the Bureau of Economic Analysis, the gap between imports and exports hit $50.2 billion, an increase of more than 15% from April. Declines in exports of consumer goods and industrial materials were responsible along with more imports of industrial materials and capital goods.
• Prices at the consumer level fell in June for the first time in a year, though a decline in gas prices was chiefly responsible. The Bureau of Labor Statistics said prices other than food and energy rose 0.3%, putting the inflation rate over the past 12 months at 3.6%. Meanwhile, wholesale inflation also fell 0.4% in June for a 12-month inflation rate of 7%.
• Helped by worries about European debt and U.S. political wrangling over the debt ceiling, gold has bounced back from its $50-an-ounce slump of late June to hit a new record every day last week, ending at roughly $1,590.

• Federal Reserve Chairman Ben Bernanke seemed to leave the door open to the possibility of further quantitative easing. However, he also said the Fed is expecting economic recovery to pick up and that QE3 is only one of several options for easing financial conditions if necessary.

Eye on the Week Ahead
Absent something unexpected, debt questions here and abroad will likely trump most other issues as earnings season continues. Key dates and data releases: housing starts (7/19); home resales (7/20).




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 30 widely 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