The Nitty Gritty Details
Earnings and housing data are helping markets today. Strong earnings from a number of blue chip companies are lifting U.S. stocks, helping to offset ongoing concerns about the U.S. debt ceiling debate and European debt crisis. Surprisingly strong housing starts are also helping the tone. European markets rose on the mostly upbeat earnings news as well as hopes that a summit later this week will help produce viable long-term solutions to the debt crisis. Asian markets were mixed, with Japan lower and Hong Kong higher. Commodities are trading broadly higher, led by crude, copper and agriculture, while precious metals are near unchanged as riskier assets attract buying interest.
Looking back at Monday, European debt and U.S. debt ceiling jitters drove investors into safe-haven assets and out of equities, although the broad averages did finish well above session lows. The bearish tone early reflected the lack of progress in Washington as well as disappointment that the European bank stress test results were not more stringent, failing to provide a catalyst for credible, lasting solutions. All 10 S&P sectors finished lower, but Technology and Energy held up well with modest losses of less than one half percent on some positive earnings news. Financials, which continued to struggle in losing 1.4% Monday, are the only sector in the red this year, with a loss of 7.5%. Gold continued to attract its fair share of safe-haven bids, rising for the tenth straight session to eclipse the $1,600 mark. Meanwhile, oil fell on growth concerns in line with other risk assets.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down
1. State revenues continue to improve. The Rockefeller Institute of Local Government reported that state revenues improved by 9.3% during the first quarter of 2011. Revenue gains were broad based with 48 states reporting gains, 21 of them by double-digit margins. The report marks the fifth consecutive quarter of revenue gains. The Institute also reported that preliminary revenues for April and May are up 12% versus the same two months in 2010. Although state revenue gains have been impressive, revenues at the local municipality level have lagged the pace of the state level, but are still modestly positive.
2. Municipal bonds are facing a new issuance test. Almost $10 billion in new municipal issuance is expected to come to market this week, providing a test of investor demand. Individual investor demand has slowly improved with ICI reporting the ninth consecutive week of inflows into municipal bond mutual funds. July and August are two of the strongest months for municipal bond performance and, along with the improved tone, should help the market absorb the new supply. Early signs point to new deals receiving good demand so far. As far as municipal defaults for the year are concerned, they are on pace to finish the year well below last year’s total. Further, defaults continue to be concentrated among the most speculative of issuers with 72% of defaulted issuers coming from the housing sector and 83% of all defaulted issuers being non-rated.
3. Currency is providing a big profit boost. The latest batch of earnings results reflect a near double-digit currency benefit in the second quarter for some of the multi-nationals that have reported results, a big reason companies are hitting their earnings targets. The benefit is helping technology and consumer products companies offset demand weakness. Financials are struggling to please investors, lacking sufficient offsets to a very challenging environment.
4. Weekly chain-store sales are showing a resilient consumer. Weekly chain–store sales, the narrowest (but most timely) measure of consumer spending posted their sixth week-over-week gain in the past eight weeks, and remain at an all-time high. Sales are up 4.5% from a year ago, which is above the growth rate for weekly retail sales seen in the mid-2000’s expansion. The transition month between summer sales and back to school, July is not a terribly important month for retailers.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
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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