Week in Brief: July 10

August 5, 2015

Heading into last Sunday, we felt that Greece would likely pass its austerity referendum, and markets would laze around the beach for a couple days in anticipation of Q2 earnings season.
Greek voters rejected the bailout package like Hakeem Olajuwon once did midrange jumpers. Batting that thing into the twelfth row and shouting, "Get that weak stuff outta here!" Of course, markets were apoplectic. Not helping was the fact that Chinese equity markets had also come off the rails. Leading the government to do what all centrally run governments do and summarily intervene. Be those governments of the communist variety as in China, or the alleged capitalist and democratic variety, as in our own.
Also notable? Computer malfunctions causing the NYSE to close for four and a half hours on Wednesday. Which made for saucy headlines, but was more of a nonstarter.
Still anyone's guess as to when the Fed raises interest rates. Chairwoman Yellen speaks to Congress this week. A semi-annual responsibility. We don't expect any fireworks this week. And you need only read Fed expert Tim Duy's most recent piece to get up to speed. Which includes this snippet:
"The US economy is an island of mediocre tranquility in the midst of the stormy sea of the global economy. Tranquil enough to keep the Fed eyeing its first rate hike despite the surrounding storm, but sufficiently mediocre that they feel no reason to rush into that hike. As such, the Fed will remain on the sidelines until the forecast points toward sunnier skies. Uncertainty from Greece and China are likely raising the bar on the domestic conditions that would justify a rate hike."

In other words, no hikes yet.
Q2 earnings seasons truly begins this week. There remains considerable focus on whether year-over-year earnings comparisons will be lower. A weak economy has taken its toll on profits. A strong dollar has hurt corporation's export capacity and profits margins. And profit margins are extended and possibly due for a reversion to normalcy.
More specifically, recent sentiment based upon net revisions shows that analysts may be getting cold feet. Yet, let's not forget that for four straight quarters, not to mention 12 of the last 13, net revisions were negative heading into earnings periods. Yet, actual earnings were pretty decent. In fact, Q1 earnings season saw extremely negative revisions but S&P 500 earnings (ex-energy) grew 11 percent. And while the "net earnings spread" - representing negative earnings revisions for the upcoming period - is 13 percent, we anticipate another solid earnings season (ex-energy) for Q2.
Though analyst sentiment is not nearly as negative heading into this earnings season as it had been for the previous two, the revisions spread remains in the negative double-digit percentages. But, we view this as a contrarian indicator, which portends bullishly for the S&P 500 over these next six weeks. In the end, we continue to believe that the next few months will be a grind as equity earnings catch up to valuations. Yet, year-over-year and quarterly earnings comparisons become more favorable moving forward.
Economically, Georg Vrba's unemployment rate recession indicator  sees no signs of recession signals on the horizon (here). And New Deal Democrat, with his must-read high-frequency indicators (here), proffers his mid-year update (here). He concludes with the following:
"While not every long leading indicator is making new highs, and in particular corporate profits have stalled, the other indicators solidly suggest that this economic expansion will last at least through the 2nd quarter of 2016."
Year to date, the S&P 500 sits at slightly better than flat. Though telecom, consumer discretionary and healthcare have posted five-, eight- and 11-percent returns, respectively. From an asset class perspective, small cap growth has led the way. Up over 10-percent year to date.
Bottom line? It appears that our five year Greek drama has an opportunity to stage its final scene. Though we believe this play is far from over. Markets have really been provided an opportunity to crater these last few weeks. They did not. Low earnings expectations could lead to upside surprises. Though, summer months tend to be rather benign. Don't give into the pessimism. Especially should the Greece gods turn fierce, yet again. Remember this: Wall Street cares little for anyone but itself. Which, for now, should be good news for equity investors.
Short term, bulls have the upper hand and will steer the S&P 500 back to the top of the current trading channel. Roughly, 2120. Once there, bulls and bears will wage yet another existential battle for market supremacy. With bulls trying to steer equities into the next upper-bound range of the trend line. While bears will do everything they can to drag markets, kicking and screaming, to lower depths.
Though the trend line points higher in the short and mid-term, there will be volatility sandwiched in between like the cream between two Oreo wafers. July has a reputation for fireworks. Though most years returns have been positive. Moreover, the S&P 500 recently completed a head-and-shoulders technical pattern. Which confers that, possibly, the market could stoop to the 1,990 to 2,000 range before this "sideways correction" ends. Sometime between here and October.
Till then, maintain portfolio balance. And keep your trailing stops locked in.
The Good
Alcoa's revenues reflected economic strength... Job turnover shows increasing activity and confidence in job markets... ISM services signaled a solid expansion... rail traffic improved last week... Fed commentary was generally dovish... The EU, IMF and Greece appeared to have agreed upon a tenuous accord on Sunday...
The Bad
Negative earnings revisions outnumber positive shifts by 4-1... Commodity prices moved significantly lower... Initial jobless claims were worse than expected...
The Ugly
Isn't technology supposed to make our lives easier? Well, these technology "glitches" certainly don't paint that picture. United Airlines experiences a painful and costly delay. The NYSE halts trading for half a day. The WSJ website went down. And the U.S. Office of Personal Management finally admits the full extent of the information breach and its ineffective response. And the FBI admits that the background check system should have prevented the Charleston shooter from buying a gun.
Again, much of this underscoring the idea that technological oversight and regulation? Not the government's strong suit.
Fixed Income-tastrophe
Sarah Max's cover story in Barron's, Bye-Bye Bond Funds, is worth the read. Loaded with excellent advice, especially for average investors. How do you reduce the volatility of a stock portfolio, when bonds have become risky? Key points follow:
-Quoting Robert Johnson, CEO of the American College of Financial Services -- "If you lock in bonds at these levels, you're locking in a purchasing-power loss."
"Not long ago, the notion of a no-bond portfolio would have seemed crazy. But what's really crazy, says Johnson and many of his peers, is clinging to the conventional wisdom. "What are bonds supposed to do? They're supposed to preserve wealth, provide periodic cash flow, and hopefully some price appreciation," he says. At the moment, however, they aren't offering much in the way of income, and there is a real possibility that investors could lose money."
-Investors should consider individual bonds rather than bond funds. You can choose to hold a bond to maturity. The fund manager may not, or may not have a choice in the face of redemptions.
"That exit may be already starting. In the first five months of the year, investors put more than $75 billion into taxable and municipal-bond funds, according to Lipper. But in June, the trend turned, with investors withdrawing a net $17 billion. If that presages a bigger exit, bond funds could fall sharply."
-Asset allocation is an individual matter
"There was a time when bonds could do it all-provide stability, income, and capital appreciation. Those days are over. Now, investors need to pick their focus. And that focus should be determined by an investor's need, rather than a hackneyed asset-allocation plan that decrees 55-year-olds dump 55% of their assets into bonds.
But even if the conventional wisdom no longer holds true, the advice is very much the same as it ever was: Know thyself as an investor, and construct a plan that suits your timeline and temperament."
The article and companion pieces are worth the price of this week's issue. If someone's not looking into this for you, they should be prior to the beginning of interest rate hikes.
Two Powerful Reasons for Keeping a Journal
Many of the most successful performers within any endeavor keep a log of their activities, successes, failures and plans. If you don't already, you should. This is why.
Greece's Painful, Humiliating Agreement
Amid intense pressures from multiple parties, Greek PM Alexis Tsipras bowed and agreed to a deal that could form the basis of a multi-billion-euro-bailout. Greece's third in five years. Story.
Why Investing is Complicated; How to Make it Simpler
Investing is equal parts math, history and psychology. Many would-be investors are intimidated by all three. Though, they don't always need be. Here's why.
Calvin Coolidge on Tax Breaks
Silent Cal, America's 30th president, has much to teach us. He had a pristine record of public civility. And believed that lower taxes could bring the government additional revenue. Including from the wealthy. And he was likely right. Article.
Investors Connect the Dots at their Own Peril
The growing globalization of financial markets has placed extraordinary amounts of intelligence at the finger tips of traders, pundits and investors. You'd think this would have improved their batting averages. Actually, it's only increased the noise. Story.
The President's Deafening Silence on Kathryn Steinle's Killing.
While having been very vocal on the tragic, controversial deaths of other young Americans, President Obama has been discernibly quiet on the murder of Katheryn Steinle. Why? Article.
Weekly Results
Major markets finished mixed last week. The DJIA rose 0.17%, the S&P 500 lost 0.01%, and the Nasdaq dropped 0.23%. Small cap stocks gained 0.30%. And the 10-year Treasury bond yield rose 2 basis points to 2.40%. Gold lost $4.78 per ounce, or 0.41%.
Check out JP Morgan's weekly recap here.

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