For a long time it had seemed to me that life was about to begin - real life. But there was always some obstacle in the way, something to be gotten through first, some unfinished business, time still to be served, a debt to be paid. Then life would begin. At last it dawned on me that these obstacles were my life.” —Alfred D. Souza

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Hindsight
Major market indices were higher last week. The DJIA gained 3.24%, the S&P 500 rose 3.55%, and the Nasdaq added 4.15%. Growth stocks outperformed value stocks. And the small cap index jumped 6.60%. The 10-Treasury yield added 6 basis points on the week, closing at 3.00%.
While tail feathers continue to ruffle with each economic data release, we believe that the probability of a double-dip recession is low. We have four primary reasons for this opinion.
First of all, these double dips are rare. According to the National Bureau of Economic Research, we’ve had one double-dip recession over the last eighty years. One. Over the last 150 years? Three.
Secondly, corporate profits are rising—up 52% during the first quarter, with analysts forecasting a 34% increase in the second quarter.
Third, Alan Greenspan says it won’t happen… Alright, Greenspan has said a lot, not all prescient. But Warren Buffett agrees, stating that “There’s no doubt in my mind, we’re coming back.”
Fourth, one of the best recession indicators, the Treasury spread (the difference in yields between 90-day Treasury bills and 10-year Treasury bonds) is steepening, a strong indicator of economic growth.
Famed hedge fund manager Barton Biggs agrees. “Economic data around the world in the last 10 days to two weeks has turned more positive. It has exceeded forecasts almost without exception. The odds of the world slumping into a significant slowdown has diminished.”
Biggs sold half his equity holdings at the start of July, but has recently placed 75% of his holding back into long equity positions, Bloomberg reports. Biggs has accepted risk back into his portfolio because he feels the time is right.
Now, Big John at the office water cooler may not agree with us. Or with Buffett, or even Biggs. But I’m willing to bet against him. Stay tuned…
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Economically Speaking
-Sales of new homes beat forecasts in June following an unprecedented collapse in June, possibly signaling that the worst of the post-tax credit slump is over, Bloomberg reports. That said, increasing foreclosures continue to swell the number of unsold existing homes, putting pressure on prices and keeping buyers on the sidelines with unemployment hovering near 10%.
-Global growth may average 3.25% as opposed to 3.5% in the next 3-5 years, less than the 4.7% pace of the previous 5 years leading up to the 2008 downturn, says economist Stephen Roach of Morgan Stanley Asia.
-Initial jobless claims jumped 37,000 to 464,000, with the four-week moving average climbing by 1,250, as well.
-Weekly wages failed to keep up with the pace of inflation over the last year, with weekly earnings increasing 0.8%, and the CPI adding 1.8%.
-Results from the stress tests of 91 European banks were released Friday, with all but seven of the banks passing the test. This exceeded expectations, but was met with some skepticism.
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Equity Markets Review
-Caterpillar reported strong 2Q sales and profits on added demand.
-UPS reported a 1Q rise of 90% in earnings and revenue growth of 13%.
-Ford reported 13% 2Q earnings increase and pre-tax profits of $1.9B.
-FedEx Corp. boosted profit forecasts for the quarter and full year, exceeding analyst estimates. The company pointed to growth in Asian marketplaces.
-BP appears to be replacing embattled CEO Tony Hayward with a possible American successor.
-3M posted a 43% rise in 2Q earnings.
-Apple blew by analyst estimates, posting a 78% surge in profit.
-Goldman Sachs missed analyst estimates as trading revenue fell 36 percent from 1Q.
-Morgan Stanley beat street estimates as trading revenue surpassed that of all five of its biggest competitors, with EPS hitting $1.09 per share.
-Wells Fargo & Co. reported better-than-expected 2Q earnings.
-Coca-Cola Co. reported a 16% increase in 2Q profits thanks to aggressive marketing during the World Cup.
- Sales of Amazon's Kindle e-reader have tripled since the company lowered its price last month to $189 from $259, with CEO Jeff Bezos saying growth had "reached a tipping point" despite competition from devices like the iPad, the Sony Reader and the Nook. Amazon also noted that over the last three months, it has sold more e-books than hard covers, which is "astonishing when you consider that we’ve been selling hardcover books for 15 years, and Kindle books for 33 months." It's still too early to tell whether e-books are cannibalizing the huge and crucial market for paperback sales.
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Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week’s Returns:
Information Technology... 3.72%
Materials... 7.09
Consumer Staples... 2.37
Utilities... 2.63
Consumer Discretionary... 5.02
Financials... 3.17
S&P 500... 3.55
Industrials... 7.16
Healthcare... (0.67)
Telecommunications... 3.86
Energy... 4.02
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Sports, Culture & Politics
-Kang Kek Ieu, the top torturer and jailer of the Khmer Rouge, was sentenced to 30 years in prison for overseeing the torture of more than 12,000 inmates at the regime’s Tuol Sleng prison.
- China will impose limits on foreign investors' participation in its index futures market to no more than 10 percent of their investment quotas, the China Securities Journal reported on July 20, according to Reuters.
- Ben Bernanke roiled markets last week, calling the economic outlook "unusually uncertain," and said the Fed is prepared to take more policy actions as needed, but isn't ready "to take any specific steps in the near term." He also noted that current policy is "already quite stimulative" and available options "are not going to be conventional options." Possible courses of action include lowering the interest on reserves rate, changing the language in the FOMC outlook, or using balance sheet tweaks. Bernanke sees "moderate" economic growth despite a "somewhat weaker outlook" and low inflation with significant time needed to restore jobs.
-Obama signed the financial reform bill last week, saying "it is designed to make sure that everyone follows the same set of rules, so that firms compete on price and quality, not tricks and traps." The bill's far-reaching effects are already being felt.
- The Iranian Foreign Ministry said on July 20 that talks with U.S. officials are not possible because of new sanctions imposed on Tehran, anti-Iranian resolutions and current behavior against Iranian nationals, IRNA reported, citing a ministry spokesman.
- Some elements of the Pakistani government, particularly its intelligence establishment, know where Osama bin Laden is hiding in the country, U.S. Secretary of State Hillary Clinton said July 20, the Times of India reported. Clinton urged Pakistani leaders to combat all non-governmental armed forces within the country. Help from Islamabad has led the United States to many senior al Qaeda members, Clinton added.
- The government said BP may continue to keep the Gulf well capped after determining that the escape of methane gas is “inconsequential" and a seep two miles away isn't connected to the well. National Incident Commander Thad Allen also noted that pressure inside the well is slowly rising, which is a positive sign that BP won't need to reopen it. However, even if the flow is permanently stanched next month, as planned, the oil spill could cost the region 17,000 jobs and around $1.2B in lost economic growth by year-end.
- British Prime Minister David Cameron met with U.S. President Barack Obama at the White House, Haaretz reported July 20. Cameron said he agreed with Obama's position that Iran must give up its nuclear program and resume negotiations with the international community. He also said that he will cooperate with U.S. congressional hearings regarding the release of the Lockerbie bomber but does not support a British inquiry to determine if BP influenced the decision to release him, DPA reported. Cameron also added that he understands U.S. anger at BP for the Gulf oil spill.
- The commander of U.S. forces in Iraq, Gen. Ray Odierno, said Iran funds, trains and provides weapons and ammunition to Shiite extremist groups in Iraq who attempt to attack U.S. bases, AFP reported July 21. Odierno said Iran has shifted its agenda in Iraq to focus primarily on three groups: Ketaib Hezbollah, Asaib Ahl al-Haq (League of the Righteous), and the Promised Day Brigade. He said it is difficult to draw direct connections between the Iranian government and the extremist groups, but that many the groups' members live in Iran and get training and weapons from Iran.
The weekend’s top-five box office performers as reported by Variety were:
1) Inception, Warner Bros., $43,505,000
2) Salt, Sony Pictures, $36,500,000
3) Despicable Me, Universal, $24,120,000
4) Sorcerer's Apprentice, Disney, $9,685,000
5) Toy Story 3, Disney-Pixar, $9,030,000