Think it’s Hot? It’s Hotter Behind Closed Doors In DC

sun7/22/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

Early market gains were erased this morning after a major U.S. equipment manufacturer missed Wall Street targets, sending the stock down over 5% ahead of the open.  However, some well received results from several other well-known blue chips are providing some support.  Meanwhile, the latest Greece rescue package is buoying sentiment overseas, as European markets are poised for their fourth straight positive session.  The Nikkei and Hang Seng closed solidly higher in response to the Europe news and U.S. gains.  Gold, silver and copper are all higher, while crude is down marginally near $99 and agriculture commodities are mixed.

Looking back at Thursday, progress occurred on both sides of the pond.  The challenges are certainly different, as was the amount of progress, but the market applauded the latest developments out of Washington and the euro zone yesterday, sending stocks sharply higher.  In Washington, progress is more vague but is reportedly occurring, while clearly the euro zone took a step forward with its latest rescue package.  A better-than-expected Philly Fed report also helped the tone, while the latest batch of earnings and slight increase in jobless claims had little influence.  The “beaten down” Financials topped the sector rankings with a 2.5% jump, helped by strong results from a key industry player, while some mixed results weighed on Technology, which managed only a 0.5% advance.

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:

  • Is it typical that Congress waits until the last minute to raise the debt ceiling? Since 2000, the debt ceiling has been raised 10 times, most recently in early 2010.  Other than the increases in 2005, 2006 and 2007, the debt ceiling increases in President Bush’s first term (2001-2005) and later in his term (’08) and early in President Obama’s term have been contentious and finalized more or less at the last minute.
  • Are there any “disincentives” in the Greece deal to prevent banks from making the same mistake in the future? No one can legislate good decision making.  Interestingly enough, banks make what turn about to be a rash of bad loans every 10 years.  The key is to limit the leverage to those loans and require adequate reserves to avoid a financial crisis.  Steps have been taken in the US to limit bank leverage and limits are being applied elsewhere.
  • Europe’s bailout fund, the EFSF, is getting a change to “increase the flexibility” and allow it to act as a EuroTARP by buying debt in the secondary markets. With Greece being charged about 37% to borrow for two years, a second aid package is planned that could tip it into a selective technical default for a few days in exchange for cutting interest rates on loans to Greece, Portugal and Ireland to about 3.5% and could double the repayment time to at least 15 years.  Rating agencies are likely to label this a default as debt is exchanged for longer maturities and banks will likely take manageable write downs in response.
  • The economic and policy calendar heats up next week. In the United States, the Fed’s Beige Book (a qualitative assessment of economic and business conditions in each of the 12 Fed districts) and the Q2 GDP report will get the most media attention, but regional manufacturing reports for July, the June durable goods report and jobless claims could be “market movers.”  It’s a quiet week in China (July PMI due on 7/31), but there are a number of key reports on Japan’s economy (industrial production, retail sales, construction) in June on tap next week that will help markets gauge the pace of the recovery from the earthquake and tsunami.

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
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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