Markets in a Nutshell

July 11, 2010 Issue  

Stocks had their best week in a year with the Dow up 5.3%, the S&P 500 up 5.4% and the Nasdaq 5.0%. The week’s gains cut year to date losses to 2.2% for the Dow, 3.3% for the S&P, and 3.2% for the Nasdaq. Oil was up last week and is down 4.1% for the year. Gold, which has fallen $50 an ounce over the past two weeks is still up 10.4% in 2010.

 Profits for corporate America are expected to look good for the 2nd quarter (earnings reports come rolling in starting next week). Investors Business Daily (7/12/10) writes that earnings for S&P 500 companies are expected to be up 27% from last year. The big gainers should be Materials firms (ie Steel, Chemicals) up an est. 91%, Energy (ie Oil) up 72% and Technology (up 57%). Laggards should be Utilities (down 5.3%), and Telecommunications (down 1.9%). Read on..

Profits (and profit growth) have been called “the mother’s milk of stocks” and indeed the better the profit picture the more likely stocks provide gains for investors. While some analysts are calling for record profits next year (consensus says $96 a share for the S&P 500), others believe profit growth will halt as  the federal govt “stimulus” runs out. We are in the camp that the rosiest prognostications are too rosy and the most pessimistic predictions too pessimistic. Slow growth (but growth) below average are the more likely scenario for the U.S. economy as consumer spending (which makes up 70% of the U.S. economy) remains tepid and lower than normal.

Have you been watching Greece? It has been interesting and a cautionary tale of what happens when you try to take away govt. provided entitlements to deal with debt. Greece is essentially an insolvent country (and would default on their debts without the continued loans they get from other European countries in order to pay their bills) having borrowed large sums of money in the past 10 years to fund all kinds of govt. programs. So they are in a situation now where if they wish the country to continue to function economically the govt needs to cut back on benefits given to Greek citizens. Read on..

Last week the Greek govt passed a number of “austerity” measures among them raising the retirement age to 65 (yeah, it was 60) and cutting pensions by 7%. The result of the govt. measures was the 6th strike this year by greek workers (and protests, marches, etc). This is why in the U.S. programs such as Social Security will still be around decades from now. Higher taxes (look for a national sales tax) will be the way to deal with the ballooning costs of govt. programs (hey, who will voluntarily give up their govt. benefits?).