07/09/12: Let’s take a quick “look ahead” at a few items that we will be tracking carefully during the week. These are just a few opinions that we have, and as with life, nothing is certain about them.
- First of all, here’s a “week-at-a-glance” view of what’s coming up over the next five days. Beginning today, the Federal Reserve releases figures on May consumer credit and ECB head Mario Draghi addresses the EU Parliament. On Tuesday, The National Federation of Independent Businesses (NFIB) publishes its small-business-optimism index. Wednesday brings data on U.S. international and wholesale trade for May and The Federal Reserve Open market committee releases minutes from its most recent June 20th meeting. On Thursday, The Labor Department reports on import and export prices and on weekly initial jobless claims. Also on Thursday, the U.S. Treasury releases its budget report for June. The market week ends Friday with The University of Michigan providing consumer sentiment data and the most recent producer price index will be released.
What does this mean for investors? Tuesday’s NFIB report will be very interesting, as the largest employment generator by far in the United States is small business. To our way of thinking, this is a superb “man on the street” barometer as to how the business community views markets for the rest of the year.
- Are upcoming earnings reports going to be the next investor shock? Companies begin reporting second-quarter earnings this week. Already, 42 companies have warned investors that profits will be lower than initially expected, primarily based in slowing worldwide demand, particularly emanating from Europe. Companies are now being hit on several fronts. In addition to the fact that demand is down, the U.S. dollar has jumped against the euro and other currencies, reducing profits from international sales. As far as sales go inside the U.S., it has been difficult in a slower economy to make price increases “stick.” Overall, company earnings announcements have been the worst since the fourth quarter of 2008.
What does this mean for investors? As far as current markets are concerned, U.S. corporate earnings have been one of the few “bright spots” that have occurred in the past few quarters. Increasing nervousness about those earnings will increasingly undermine investor confidence, much like happened last summer with the combination of European troubles and the debt ceiling debate. This has a way of really “whipsawing” markets around.
- We are now beginning to get much more political discussion surrounding extension of the Bush-era tax cuts. Already “staring down” the barrel of a tough unemployment number, the possible $50 billion cut to the Pentagon’s budget and its corresponding impact on defense employment is looming ever larger. So, it comes as no real surprise that President Obama will reportedly propose today a one-year extension of the Bush-era tax cuts for families earning below $250,000 a year, a move that might soften the impact of the “fiscal cliff” on January 1st. That still leaves a gap with Republicans, who want to extend the cuts forever, and even with some senior Democrats, who want to include those earning under $1 million annually.
What does this mean for investors? Businesses, particularly those that are dependent on defense contracting, seem to really be “locking up” currently. Until American business gets better clarity on how the “fiscal cliff” will play out, they are understandably holding off on plans for new hiring. Like most political solutions, our concern on this issues is that the politicians will only “solve it” after significant damage is done. If you want recent case precedent for that, just look to the debt ceiling debate last August.
- Hopefully, additional progress will come this week in the European banking arena. Senior euro-zone finance officials seem to be moving toward creating an agency with the necessary power to police the 17-nation currency bloc’s largest financial institutions. The establishment of a single authority with uniform banking rules is seen by Germany and other strong economies as an essential condition before they will consider sharing resources with other euro-zone countries. Discussions appear to be coalescing around the idea of creating an agency under the European Central Bank (ECB) that would be charged with the sole supervision of the top 25 or so largest banks. Smaller euro-zone banks would remain under the control of national regulators, but these in turn would also “report in” to the euro-zone supervisor.
What does this mean for investors? This is just another necessary step along the “long road” to stabilizing the situation in Europe, which we view as far from over in its impact on markets. Expect Europe to remain a “key ingredient” in the “volatility soup” that comprises the current state of markets.
If you would like to talk with me about your personal investments and financial strategy, please email me here or call me at (205) 989-3498.
Senior Vice President
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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