July Edition of “The Market Radar”

The “Market Radar” is the section below my “Current Sector Outlook” on the left hand side of the front page where I list the current headwinds/tailwinds that I believe are affecting financial markets.

A few changes this month, most notably a slowdown in economic growth. On the bright side corporations are indeed investing. All we need is job growth to have the recovery continue.

—————————————————————————–


Now

Headwinds

Stimulus Withdrawal (+1)
• Stimulus withdrawal has now taken center stage at subpar manufacturing reports and weakening consumption growth have called into question the veracity and foundation of the recovery. Underwhelming leading indicators and macroeconomic trends have meant that despite better-than-expected earnings reports, we haven’t seen new market highs.

State and Local Gov’t Budget Squeeze (+1)
• As states grapple to close their budgets, taxes are being raised, furloughs are being issued, and employees are getting canned, all negatives for the recovery. The nation’s largest state, California, is in a fiscal emergency. Other states are facing the same issues.

Greece/Europe Sovereign Debt Contagion(-2)
• The stress tests have done their job it seems. Confidence is returning, spreads have been narrowing, the euro has been rising, and better economic numbers have lowered this headwind quite a bit.

China/US Currency Confrontation (No Change)
• We haven’t seen any negative announcements from this front for a while, however, senators are antsy and have promised action in the next three months if China does not take steps to strengthen its currency. Stay tuned …

Iran/Israel (No Change)
• In a word: bubbling (see here and here)

Tailwinds—

Business Investment (+1)
• Companies are investing in equipment as per the latest GDP report. Strong balance sheets at the corporate level will ensure that if growth does indeed come from consumption, companies will be quick to continue capex.

Manufacturing Strength (-1)
• Recent manufacturing reports have been uninspiring and suggests that the sector’s growth has peaked. We need to see consumer strength come through so that manufacturing can follow at this point. In order to see the consumer strength and we need to see substantial job creation now.

Consumer Strength (No Change)
• Recent consumer trends have stabilized, however, they haven’t taken a leg higher yet.

Job Creation (+1)
• The jobs picture remains muddled. Conflicting reports point to a slowly improving job market.

Low Interest Rates (New Addition)
• See note at bottom.

Events—

Mid-Term Elections
• No Comment

Bush Tax Cuts
• See Below

+++++++++++++

Was

Headwinds—

Greece/Europe Sovereign Debt Contagion

Stimulus Withdrawal

State and Local Gov’t Budget Squeeze

China/US Currency Confrontation

Iran/Israel

Tailwinds—

Manufacturing Strength

Business Investment

Consumer Strength

Job Creation

———————–

Additions

Low Interest Rates
• Interest rates have been creeping lower over the past two months as risk aversion has set in and treasury bond yields have fallen. The 10 year yield has now soundly broken under 3%, while the 30 year yield has been challenging the 4% level. These lower yields have translated into lower interest rates and thus has been a tailwind for the housing market. These low rates have also led to a surge in refinance activity which has helped in opening up more disposable income for households.

Bush Tax Cuts
• This is quickly picking up steam as the nation is divided between extending the tax cuts or letting them expire. Whatever happens here will have profound effects on our economy for years to come.

Subtractions

None
• N/A

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