Market Commentary

Perhaps the only concrete statement to make
June 15, 2010

Perhaps the only concrete statement to make investors are confused about the direction of the economy and the markets.  Stock plunge and bonds surge on one day, then reverse the next in the mirror image of each other.  A recent survey by the economic consulting firm of Ried Thunberg suggests more than two thirds of investment managers are less certain of their strategies than they were at the early part of the year. 

I ask how much of this uncertainty is a function of the volatility associated by the pervasive use of algorithmic or flash trading utilizing quantitative analysis in making investment decisions.  Recent studies (Bloomberg, Dow Jones) state approximately 72% of the volume is the result of these mathematical trading strategies.

Are the largest Wall Street firms killing its ultimate customer because of this trading strategy?  Based upon casual observations the retail public is perhaps now believing Wall Street is rigged, exhausted by the volatility as it reminds all of the events that occurred during the fall 2008/winter 2009.

Ultimately economic activity dictates stock direction.  It always has and it always will.  It is never different just different people.

My macro economic outlook has been more optimistic than many predicated upon the simple guise if the environment continued to deteriorate governments would fail and societies would fall.  The financial system was pushed to the brink, survived and any uptick will appear huge.

I reiterate my long held view economic activity will continue to surprise on the upside.  Earnings—a major component of capital purchasing decisions—are still accelerating.  As per Bloomberg analysts have now increased their average 2010 earnings growth forecasts for the S & P 500 to 32% from 26% at the end of March. The S & P is now trading at 13.4x earnings estimates for the next 12 months, the lowest level since March 2009.

Approximately half of the $787 billion stimulus has yet to be spent. The recent Fed Beige Book stated economic activity has improved across all 12 Federal Reserve districts during the past six weeks, the first such occurrence that all districts reporting an increase in activity since June 2007.

While I too find the volatility disconcerting I believe the underlying fundamentals are improving hence giving me greater confidence that the S & P can post a 10%-12% annual gain.

What will occur today?  Equities were volatile again yesterday ending ultimately lower by 20 points as Greece was again downgraded.  I must write however credit downgrades are historically a lagging indicator, equivalent to the fire truck arriving at the barn after it has burnt to the ground.  Consumer confidence and the NAHB Housing Market Index are released.

Last night the foreign markets were up.  London was up 0.38%, Paris up 0.64% and Frankfurt up 0.50%.  Japan was up 0.09% and Hang Sang up 0.05%.

The Dow should open moderately higher on speculation that the global economy is weathering Europe’s debt crisis. The 10-year is off 3/32 to yield 3.26%.