J.L. Davis Weekly Market Update 7/25/2011

Quote of the Week

“History doesn’t repeat itself but does rhyme” Attributed to Mark Twain/Quote by Robert Columbo

Lee and I are ever optimistic as you all know. We always look to gain perspective out of current events, leading to an understanding that helps us and our clients sleep better at night. Due to current events and client questions surrounding the debt ceiling debate, and its effect on everyone's wealth management plans, some perspective is in order. Here goes:

“The outward sign of the change is an economy that stubbornly refuses to recover from the recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining. At a time economic forum last week, forecasters predicted that U.S. growth would amount to only 1.8% this year and 2.6% for next, about half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression." —TIME, September 28th, 1992.

and how about:

“The combatants generally treated the partial closing of the Government as just an inconvenience, both to civil servants (who have been promised that their lost pay will later be made good) and to the public, which will find for example, that passports will generally not be issued, tourist attractions like the Statue of Liberty will be closed and garbage collection in Washington will be halted if the shutdown occurs. The political stakes are huge. The intensity of the name-calling and the partisan gamesmanship displayed on all sides reflected a shared sense that today's issues are a prelude to a much bigger battle that will be fought when the Republicans manage to send their budget-balancing legislation to the White House. That bill, which both sides label revolutionary, would dramatically scale back the role of the Federal Government in American life, and each side sees firmness now as required for credibility then. However that clash comes out, the whole issue of budget-balancing will almost surely weigh heavily in next year's Presidential campaign.”- NEW YORK TIMES, November 14th, 1995

It is important to consider that these articles were written virtually on the eve of the most robust bull market in American history. And, just prior to meaningful budget reform by 1998. To give some contrast between today and yesteryear, our budget deficit in 1995 was only 2.21% of GDP vs. 10.91% of GDP today. While today’s number is bigger than 1995 it is also important to consider US budget deficits are slated to come down to 3.23% of GDP by 2015 according to the Fiscal Year 2012 US Budget. This does not include debt held by the public, which we think will garner meaningful reform and progress over the next few years.
(source- http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/tables.pdf)

The great companies of America and the world currently have more cash on their balance sheets than any time in history and seem to be awaiting clear guidance on corporate tax rates, US budget reform and the like to put that cash to work. Lee and I happen to think that is a very good sign. In addition, there are the outsized corporate earnings reports, acquisitions and stock buybacks from these great companies quarter after quarter since early 2010. We also think it’s a good thing there is tension on the purse strings in Washington. Focus on these budget issues should lead to a middle road and perhaps a much better outlook for America’s balance sheet in years to come. In the meantime, we expect continued volatility and, most importantly, we stress strict adherence to your financial plan, with consistent investment over time.

And now for the markets...


The Markets

Despite the arm-wrestling both here and abroad over deficits and debt, investors clearly had no problems with risk aversion last week. The Dow saw its best day of the year on Tuesday, gaining more than 200 points, and followed it up on Thursday with a 152-point gain. With investors apparently willing to assume that U.S. lawmakers will reach an agreement on the debt ceiling by the August 2 deadline, the small-cap Russell 2000 and the NASDAQ bested their large-cap brethren. Relief over an agreement on Greek assistance helped the Global Dow recoup the previous week's losses.


Last Week's Headlines

• Heated debate: Despite reassurances all around that lawmakers would not allow the United States to default, the path to raising the U.S. debt limit continued to be elusive. The primary points of contention continued to be how long any increase should be designed to last, and the proportion of spending cuts versus revenue increases. Talks between the White House and House Majority Leader John Boehner over a package that would cut $3 trillion to $4 trillion from the deficit over 10 years broke down Friday. However, congressional leaders continued to explore various stopgap plans that would allow the August 2 deadline to be met.
• Meanwhile, anxieties about sovereign debt overseas eased a bit after European leaders agreed to a second bailout for Greece that they hope will keep the contagion from spreading. According to the agreement, bondholders will exchange their Greek bonds for ones with later maturity dates and possibly lower interest rates--a move that credit agencies have suggested in the past might be considered a "selective default." The European Union's bailout fund and the International Monetary Fund (IMF) will lend an additional €109 billion. The ability of the bailout fund to buy sovereign debt also will be expanded, and guarantees of backing for the bonds would enable the European Central Bank to accept troubled bonds as collateral.
• Housing starts were up 14.6% in June, according to the Department of Commerce. That's almost 17% higher than last June's number. Multifamily buildings showed the most improvement.
• Sales of existing homes fell 0.8% in June. According to the National Association of Realtors®, it was the third straight monthly decline.
• The global uncertainty helped the price of gold briefly top $1,600 for the first time. Oil prices turned back toward $100 a barrel, but the International Energy Agency did not release additional emergency stockpiles.


Eye on the Week Ahead

With the European debt crisis back on simmer, investor sentiment may reflect the week's stream of headlines. Progress or lack thereof on resolution of the U.S. debt ceiling dilemma is likely to eclipse earnings reports and the first look at second-quarter economic growth.

Key dates and data releases: new home sales (7/26); durable goods orders (7/27); pending home sales (7/28); labor costs, initial estimate of gross domestic product (GDP) for Q2 (7/29).



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