Faith Based Investing

Market volume has been light with little in the news cycle, yet stocks have put together modest gains for much of August. This past week we saw conflicting comments from the Fed and no new solutions in Europe.

The Quantitative Easing Dance Continues

Will the Fed take action of not?  They keep dancing around the issue.  On Wednesday, the Fed seemed ready to take significant action to prop up the economy as released in their minutes:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Then just a day later, St. Louis Fed chief James Bullard told CNBC:

“I do think that the minutes are a bit stale, because we have some data since then that has been somewhat stronger,” This seemed to indicate the Fed is putting the brakes on any new stimulus as Bullard currently opposes new bond buys.  In light of the uncertainty, “will they or won’t they take action” stocks lost ground.  Yet a rise in the euro (reaching a seven-week high) along with good gains in gold and commodity prices, QE3 could still be on its way soon.

The Looming Fiscal Cliff of 2013 Is Back on Investor’s Radar

• · The deficit shrinks to about $641 billion in fiscal year 2013 (or 4.0% of GDP), almost $500 billion less than the shortfall in 2012.
• · The fiscal tightening leads to a recession.

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WEEKLY MARKET WRAP 8-17-12

CPI FLAT FOR A SECOND CONSECUTIVE MONTH

In July, the federal Consumer Price Index showed no overall advance. That was the case in June as well, and that might just bolster the case for easing at the Federal Reserve. Consumer prices rose only 1.4% annually, the smallest increase since the November 2010 index. Core CPI (minus food and energy costs) rose 0.1% last month. As for wholesale prices, they rose 0.3% in July – the largest jump in five months, even as wholesale gas prices slipped 3.1%.

RETAIL SALES IMPRESS

American retail purchases soared 0.8% in July after a (downwardly revised) 0.7% retreat in June. It was a real sea change – the first positive month for the category since March. The monthly increase in retail gasoline sales was just 0.5%, which had little effect on the overall gain.

Housing starts DIP; permits hit  4-YEAR peak

U.S. builders broke ground on 1.1% fewer projects in July. The good news: permits for new construction hit a pace of 812,000, a high unseen since August 2008.

CONSUMERS ARE FEELING A BIT BETTER

Economists polled by MarketWatch expected a dip in August’s initial University of Michigan consumer sentiment index. Instead, it rose 1.3% to 73.6 – the best reading since May. The index’s gauge of current economic conditions improved to 87.6 in August from 82.7 in July.

THE SUMMER RALLY ROLLS ON

Feeling slightly bullish? You aren’t alone. The Dow and S&P 500 have now advanced for six straight weeks, and the CBOE VIX (the “fear index”) closed at 13.47 Friday, its lowest mark in five years. The numbers for the week: DJIA, +0.51% to 13,275.20; S&P 500, +0.87% to 1,418.16; NASDAQ, +1.84% to 3,076.59. Gold lost 0.21% on the COMEX for the week while oil soared 3.38% on the NYMEX. Gold settled Friday at $1,619.40, oil at $96.01.

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Doom and Gloom?

Everywhere we turn, the news has been gloomy. From the threat of a global recession to the struggling job market, and don’t forget the Eurozone crisis. Yet looking at the major averages year to date, the markets do not seem to be panicking. In fact many of the averages are having quite the good year. Though the rallies have been dull with very low volume, we are still close to multi-year highs on the Dow, Nasdaq, and S&P 500.

Let’s take a look at some key economic and market activity from this past week:

Jobs, Jobs – Where Art Thou Jobs?
The closely watched nonfarm payrolls rose from June’s 64,000 to 163,000 in July at least temporarily alleviating recession concerns. However these lackluster results still leave QE3 on the table. The Fed has keyed in on the unemployment rate, which is ticking back up again and stands at 8.3%. Another concern here is that the most recent ISM survey suggests the labor market will continue to be weak. This means the August labor reports will carry additional weight as the Fed becomes more critical of any further weakness.

The Relief at the Pump was Short-lived
Gasoline prices are rising rapidly again. After bottoming at $3.35, the price of a gallon of regular gasoline has increased for five- straight weeks, including a nearly 14-cent rise to $3.64 last week. As the consumer is now spending more and more on gas, this leaves less in the budget for more discretionary items. It is estimated the average consumer is spending 10% of his budget on fuel costs.

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All Talk, No Action!

This week in Europe, the European Central bank kept talking about action but failed to implement any new policies to fix the lingering debt crisis.  Meanwhile the U.S. economy continues to weaken while the Fed maintains its position on the sidelines.

All Eyes Still On Europe

Looking at Europe, we had  a major confidence boost last week when the ECB suggested that eurozone bankers were ready to lend support to Spain and Italy with bond purchases.  However this week, the optimism quickly faded as no new steps were taken.

The ECB met this week to discuss the Euro concerns and stability.  They indicated they may purchase bonds, but there with no follow-through, no and no specifics, investors got spooked. German opposition to ECB’s plans is quite strong saying the ECB’s intended policy is “problematic” and “not the most sensible” instrument for overcoming the debt crisis.  ECB bond buys won’t get to the root of what is ailing the Eurozone. This strategy will not provide any long-term fix for banking problems in Spain or the debt crisis in Italy or Greece. Politicians have failed to understand how severe this debt crisis has become and the European bond markets are reacting accordingly.

Spanish bond yields have been soaring and reaching a new level of crisis (above 7%).  If Spain needs a bailout, Italy could be the next domino to fall.  If the ECB does not step in as a last stand lender, the Eurozone could break up sooner rather than later. As progress continues to grind to a halt in Europe, a major shift in policy is needed to avoid the constant up and down yo-yoing we have come to expect.

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Beating Low Hurdles

The Eurozone woes were back in the picture this week as the European Central Bank was forced into action. Investors remain caution and the flight to safety is in motion. U.S. earnings reports continue to trickle in with a common theme:

• Earnings are beating low expectation goals
• Sales are soft across the board

Housing continues to pick up as builders gain confidence, but new home sales and the economy at large are moving at a snail’s pace.  Could this force more Fed action?

Is the Risk-on Trade Back in Play?

Earnings have been mixed thus far into the 2^nd quarter reports with soft revenues and cautious outlooks.  The global economy appears to be stuck in the mud.  Yet remarks from the president of the European Central Bank on Thursday sparked a massive rally.  As the ECB remains committed to do whatever it takes to preserve the euro, investors felt more confident and snatched up equities and took on more risk.

We continue to see the battle between risk on (aggressive investments) and risk off (more conservative investments) depending on the headline of the day.  To me, it’s more lip service from the ECB: all talk, little action! At the end of the day what has been to address the debt woes in Italy, Spain, and Greece?  What actions have been taken to stabilize Spain’s banking system?  There are far too many questions and not enough answers.

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Weekly Wrap Up July 20, 2012

Europe finally took a backseat this week, as investors keyed in on Ben Bernanke’s testimony before Congress. The Fed chief didn’t offer any new insight about the economy or QE3, but company earnings reports gave investors more info to chew on.  Second quarter earnings season is now in session. We’ve been seeing flags of caution from many of the blue chip bellwether stocks.

All eyes on Bernanke

Fed chief Ben Bernanke continued to be frustrated by the lack of economic progress, especially with unemployment. He sees further job weakness going forward as the U.S. recovery has been hampered by:

• Tight credit conditions
• Uncertainty with the fiscal cliff of 2013 looming
• The European markets and economy remain under significant stress and could unravel at any moment
• Business spending “appears to have decelerated” and surveys “suggest further weakness ahead.”

Bernanke expects the economy to “pick up very gradually” and the Fed’s is prepared to take action.  However, no hints were left that the Fed might be ready to pull the trigger on QE3 at the end of the month.

• Bernanke expressed deep concern about the economy, reviving talk the Fed would eventually embark on new stimulus.
• I believe Bernanke is waiting for a catastrophic event such as a full-blown European crisis before embarking on another round of easing.  Especially when they have been able to keep the stock market propped up simply by speaking to the public.

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WEEKLY MARKET WRAP-UP
The economy remains sluggish as the Fed remains on the sidelines. Investors are bracing for what could be a very disappointing earnings season. Sluggish growth has investors hoping for a lifeline from the Fed, but the latest minutes from the Fed offered few concrete signs that a new burst of liquidity might be forthcoming. That’s not a recipe for an upbeat equity market. Europe is continues to haunt the markets with Spain the major point of concern as they are drowning in debt.

That’s really weak!
In the U.S. this week we saw a whole slew of weak preannouncements including:
• Advanced Micro Devices (AMD) reduced its Q2 revenue forecast, noting softer-than-expected sales in China and Europe as well as a weaker consumer buying environment.
• Applied Materials (AMAT) cut its 2012 business outlook due to weaker-than-expected near- term demand in its semiconductor equipment business.
• Negative EPS preannouncements from S&P 500 firms. Negative EPS announcements have topped positive preannouncements by a ratio of 3.6—the weakest since Q3 2001.

Where are the jobs?
The Fed announced this week that job growth is its top priority. Nonfarm payroll growth fell below 100K for three straight months. With so much uncertainty heading into the fall elections and the fiscal cliff of 2013 on the horizon, companies are not in a hiring mood.

Could we see Fed action on the way?
Ben Bernanke last month said, “We’ll continue to monitor the economy and see how things evolve. And if—again, we’re looking primarily at the labor market in this respect—if we’re not seeing a sustained improvement in the labor market, that would require additional action.” Three straight months of job creation shy of 100,000 would seem to fit the Fed chief’s requirement for more action. Stocks didn’t receive much encouragement form the Fed this week with a lack of clarity in the Fed minutes. With no concrete signs of QE3 ahead, stocks were stuck in the mud!

The Mighty Shrinking Trade Gap…It’s only an illusion!
The trade gap shrunk from $50.6 billion in April to $48.7 billion in May as exports increased and imports decreased. However, keep in mind, exports are still in a downward trend as overseas weakness persists. Export and manufacturing growth are two areas that have been bright spots in an overall sluggish recovery but they both continue to slow. New sectors need to kick up the growth in order to fill in the gap.

Small Business Blues
Small-business optimism receded to its lowest level since October of 2011. NFIB Small Business Optimism Index fell 3 points to 91.4. Labor market indicators, spending plans for capital equipment, and inventories took a beating, accounting for about 40% of the decline. As confidence continues to dwindle, hiring slows.

Another Illusion? Four-year Low in Weekly Jobless Claims
Weekly jobless claims dropped 26,000 to 350,000. Is this truly an improvement in the job market? It’s very doubtful! Strong auto demand may be reducing the layoffs and the timing of temporary shutdowns can prevent capturing seasonal effects. The 4th of July Holiday last week may have also distorted the data.

Danger in Spain
The June EU summit optimism has quickly faded with the Spanish 10-year bond briefly jumping above 7% (a dangerous level). EU talk that direct loans to banks would have to be guaranteed by the government hurt confidence. As EU plan details get rolled out, sentiment seems to retreat. The announcement of new austerity measures designed to meet deficit targets pushed yields lower, for the moment. Patchwork repairs in Europe have helped investor optimism for a week or two, but fixing sovereign debt issues and weak economic growth must be addressed in order to settle investor nerves.

Euro Hits Two-Year Low
The Euro was below $1.22 this week after the ECB’s rate cut last week and talk of more cuts. This has lead to less demand for the Euro. As the Euro gets weaker, the dollar continues to gain strength which will provide a headwind for earnings at multinational firms.

Stay Defensive!
At Faith-Based Investor we continue to seek out quality dividend paying companies paying at least a 3 to 4% dividend to outpace inflation. We continue to look for opportunities in our favorite defensive sectors – telecom, utilities, health care, and consumer staples. It’s better to be safe than sorry right now!

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weekly market wrap 7-13-12

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