Savvy Investors Need To Remain Highly Attuned To The Volatility

Ashley Page, Wealth Consultant Picture08/07/12: Let’s take a “look ahead” at a few items that we will be tracking carefully. These are just a few opinions. Expect markets to continue to be “whipsawed”s that we have, and as with life, nothing is certain about them.

  1. First of all, here’s a “week-at-a-glance” view of what’s coming up over the next four market days.

    Beginning today, The Federal Reserve reports on June consumer credit and GOP candidates face off in a Missouri Senate primary to determine who will challenge Democrat Claire McCaskill. Beyond today, the market has a “quieter” data week, skipping to Thursday when the U.S. posts metrics on the balance of international trade for June and jobless claims come out for the most recent week. The week concludes Friday with the Treasury reporting on the federal government’s budget deficit for July.

    What does this mean for investors?

    There is not much “data driving” this week on markets, as Europe begins a month long vacation and “market moving” numbers in the United States are in short supply. The most “exciting” market news for the week is that this is a busy few days for IPOs, both in the U.S. and internationally. This is the most pronounced week for IPOs since Facebook earlier in the summer, with six companies due to carry out public listings hoping to raise a collective $1.1 billion.

  2. This is the one year anniversary of the S&P downgrade.

    It’s hard to believe that it’s already been a year since the world was collectively “wringing its hands” over this and market volatility was all over the place. As we all remember, S&P cut the U.S.’s AAA rating to AA. Since then, Treasury prices have soared as U.S. debt has become a safe haven anyway. 10-year bonds were yielding 1.575% late Friday versus 2.4% prior to the downgrade. The S&P 500 closed at 1,390.99, up from 1345.02 on July 22, 2011.Financial Market Outlook

    What does this mean for investors?

    That there is nothing like a little “euro dysfunction” over the past year to power right through a U.S. downgrade. Our CEO, Greg Powell, often states that the “U.S. is the best house in a bad neighborhood,” and global investors have reacted in exactly that way. In essence, “politics have become the markets” over the past 12 months and savvy investors need to remain highly attuned to the volatility that this will continue to create.

  3. The recent “flare up” of relations between Italy and Germany is an example of the deep “execution problem” facing Europe.

    German-Italian relations have sunk to a new low after Mario Monti warned that the Bundestag control over EU debt policies could cause “disintegration” of the whole project. Italy is having increasing problems accessing international capital at favorable rates despite good progress at reforms, primarily because a “euro risk premium” is being “baked in” by investors. Simply put, Monti feels that Merkel and Germany at large should be more help in backing the ECB’s role to get this euro risk premium down. Germany, on the other hand, seems to take the view that “more austerity” from Italy will solve the problem. Monti is also facing increasing political difficulty in getting reforms through the Italian legislature because of the lack of a “relief valve” that the Germans to a large degree control.

    What does this mean for investors?

    European leaders can “hand stack” and say what they will to calm international markets, but just below the surface lurks basic disagreements on philosophy and execution. It appears to us that market volatility emanating from Europe will continue for an extended period unless a more centralized political union takes hold with the bond buying “fire power” to make a real difference. Expect markets to continue to be “whipsawed” to some degree until this happens.

  4. A recent Federal Reserve survey on bank lending displays some interesting credit dynamics.

    Nearly three in five U.S. banks surveyed by the Federal Reserve this summer state that demand for loans to buy homes is growing as the housing market stabilizes and mortgage rates have fallen to new lows. Further, business lending requests are up from small, medium and large corporate borrowers. However, bank credit standards have not relaxed, so the potential “lending impact” on the economy is not as great. Among all loan officers surveyed, 93% said standards for approving mortgages to borrowers with strong credit were unchanged from the prior quarter and 95% said that standards were unchanged for firms with less than $50 million in annual sales.

    What does this mean for investors?

    This is another “hangover” from 2008 that investors are still having to deal with. The overall de-leveraging that occurred during that year really caused banks to tighten lending standards and keep them there. Even though certain dynamics such as the housing market are beginning to improve, tight bank credit is restricting the positive “flow through” that the economy could be getting. We certainly seem to have a more pronounced “credit divide” in the country between those that did not have their borrowing abilities wiped out in 2008 and those that did. Tight bank lending standards are just not allowing the later to “get back in the game” at all.

  5. That wraps it up. If you have any questions, please call me at (205) 989-3498 or email me here.

    Ashley Page
    Senior Vice President
    Wealth Consultant

    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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