July 2010 – Market Commentary

July posted a mostly stagnant round of economic reports including GDP estimates of a 2.4% annualized rate for the second quarter (although Q1 results were revised up a full point to 3.7%), showing that the US economy has cooled off over the last few months .  As we hoped, corporate earnings reports were almost all positive and most increased guidance for the upcoming quarter.  Unfortunately, few corporations posted any substantial increase in top line sales growth.

After quickly climbing from 2% in ’07 to over 7% in a short 18 months, personal savings had dropped to below 6% by the end of 2009.  That trend has started to reverse again as savings climbed back up to 6.4% in June.  Rampant fears about coming inflation due to massive government stimulus have given way to new fears of potential deflation.  As the battle wages on between consumer spending and corporate profits, the US continues to steadily push forward for a healthy economic growth rate.

Economic News
The US is lagging in job creation behind other major economies that have a manageable debt burden and healthy banking systems.  Office space vacancies and delinquent commercial loans remain stubbornly high.  New construction on single family homes remains very slow with the albatross of high inventories.  The Commerce Department posted the second lowest annualized rate of new home sales since 1963 as consumers with concerns about the job market remain hesitant to buy.

Business spending, as measured by wholesale and factory inventories, and nondefense capital goods orders, continues to rise and is a positive sign amid indications of a slowdown in economic activity.  The amount of goods on hand compared with sales (inventory-to-sales ratio) were just 1.24 times sales, up only slightly from the record low of 1.23 they hit in April, suggesting business will continue to slowly rebuild stock levels in the coming months.

China has passed the US in energy consumption to become the world’s biggest consumer after years of double digit growth.  As China rapidly expands its clout as an industrial giant, they continue to buy up natural resources and oil; it is potentially reshaping the oil and natural resource market in its wake.

Regulatory News
The Senate passed the financial overhaul bill and the President signed it into law last month in the biggest expansion of government power over banking and markets since the Great Depression.  The debate continues over the details surrounding the more muscular regulatory framework that extends from ATM cards to Wall Street traders.

Corporate News
With 70% of companies in the S&P 500 having reporting earnings through Thursday July 29, second quarter earnings are running 42% higher than a year ago, including Intel, Caterpillar, Amazon, Microsoft, Ford, and McDonalds.  Goldman Sachs was one of a few companies that performed poorly as they posted an 82% decline in profit.  This was a result of its settlement with the SEC, a new U.K. tax on bank bonuses, and a wrong-way bet on the stock market’s volatility.

Market News
US equities had their best month in a year, with the Dow up 7.1% in July, as encouraging corporate numbers helped investors push the market back near positive territory for the year.  At the same time evidence of a slowdown in economic activity remains ever-present, as steel prices have begun declining after holding steady the last few months, another sign that consumers remain uneasy at the thought of large ticket purchases.

The flood of money being plowed into the bond market has given companies a constant source of funds as companies with “junk” credit ratings have taken advantage of the record low interest rates.  July was the busiest on record, companies continue to sell new bonds to improve their balance sheet or reissue older vintages at lower rates to reduce their interest expense.

China has significantly increased its purchases of Japanese debt in an attempt to diversify its foreign currency reserves.  China has bought $6.17B of bonds in the first four months of the year, more than double the record amount previously set in 2005.

Index Performance – July
US Large Cap Stock (S&P 500) +7.01%
International Stock (FTSE AW ex US) +9.12%
US Broad Bonds (BarCap Aggregate) +1.07%
US Government Bond (Barclay’s Govt) +0.68%
Cash (ML 3Month T-Bill) +0.02%


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