Techs Fool, Banks Drool, Speculation Rules – July 20, 2012

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Techs Fool, Banks Drool, Speculation Rules

Lo and behold, Spain is back on the injured list.  Yields on its sovereign (10-year) debt spiked to a record high of 7.22% last night over concern that its rescue package will fall short of stemming its crisis.  After larger than expected “regional” bond redemptions, Spain was forced yet again to reduce its GDP growth forecast, extending its recession well into next year. This did not come as welcome news to stock bulls, who with the QE wind at their backs were found bidding up stocks this week on earnings reports of fairly low quality (See the box scores).

On that note, Wall Street’s five biggest banks reported the worst start to a year since 2008. JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion four years ago.  Low interest rates, we surmise, have been a blessing for borrowers, but the bane of lenders recently.

Tech companies are showing only marginal weakness thus far, with the majority of firms winning at “beat the number.”   Yet beneath the headlines, problems are brewing.  Applied Materials, the chip equipment maker, reduced its entire 2012 forecast. Google (GOOG) posted decent numbers, favorably skewed by its recent acquisition of Motorola’s mobile equipment division.  Microsoft met expectations, but saw its earnings decline YoY even as revenues grew.  Intel posted earnings that were flat in light of the fact that a good portion of its product still sits unsold on shelves at retailers.  IBM defied all logic once again, reporting yet another stellar quarter of earnings growth (13.5% YoY) on markedly lower revenue.  Incidentally, IBM’s revenues have declined by $1 billion while its earnings, oddly enough, have grown by over 75% since 2008.  Qualcomm (QCOM) saw decent demand for its chips as consumers in emerging markets were found upgrading to smart-phones.

Not much respite was found in US economic data released this week.  US retail sales fell 0.5%, while industrial production rose in June, adding of course to already record highs in business inventories.  Jobless claims appear to be back on the rise again, nearing the dreaded 400,000 level (actual 386,000), and existing home sales unexpectedly fell by 5.4% into June – although housing starts surprised to the upside.

On the whole, it seems that the deterioration witnessed in the economic data since January is now beginning to manifest itself in corporate earnings, which has made it difficult for stocks to breach their May highs (Dow: 13,338, S&P: 1422, Nasdaq: 3134).  With Bernanke’s “blank QE check” nearly written in stone in the backdrop, stock bulls have been emboldened on every selloff thus far – keeping indexes out of technical danger.  However, the longer that story plays on, and the more the markets “price in” their expectations, the more likely it will be that the impact of additional QE will largely muted – as has been the case overseas.

Best regards,

David Burgess
VP Investment Management
MWM LLLP

2014-10-02T18:38:05+00:00