Market Commentary

Stocks advanced again on Friday
July 26, 2010

Stocks advanced again on Friday on economic and earning optimism.  Equities received a further catalyst as the European bank stress test was the expected non event and from several high profile merger rumors.

I would like to briefly discuss the latter.  As noted many times, as per the Federal Reserve at the conclusion of the first quarter cash represented a record 11% of non financial S & P 500 balance sheets.  [Circa 1952]  The absolute dollar amount is astronomical…$1.9 trillion and has probably surpassed $2 trillion given the strength of second quarter earnings.  Two years ago cash was around $800 billion.

Historically cash balances decline during a recession.  To state the incredible obvious this recession is far from the norm.  Fear is still intense given the events of fall 2008/winter 2009 where all were concerned about surviving, thus today all are hesitant to hire, eking out all possible productivity gains  These huge productivity gains amplified by massive cost costing produced great earnings that is generating huge cash balances. What impact will these massive cash balances have upon the economy? 

Historically merger activity increases as cash balances/stock prices rise.  Were Friday’s rumors of several high profile mergers a harbinger of things to come?  Can a case be made that some of this cash will be spent following November hoping for a more conciliatory or business friendly government? 

Prevailing wisdom is suggesting there will be a change in House leadership and perhaps also a change in Senate leadership.  Wow!  If one thought this would be prevailing wisdom four months ago, that person would have then been regarded as a “fringe” thinker.

What will occur this week?  Second quarter profits have been great.  As per Bloomberg 85% of the 149 S & P 500 companies that have reported earnings have exceeded forecasts by 23%. Seventy percent of firms have exceeded revenues estimates by an average of 4%. Will the trend continue this week?

The economic calendar is also heavy.  Several regional manufacturing and housing indices are released, so is consumer confidence, durable goods, Beige Book and second quarter GDP.

Has the prevailing wisdom regarding the strength of the economy/market changed yet again, a change in sentiment equivalent to the tectonic changes that has occurred politically?

Valuations are compelling.  Productivity is great.  Earnings have been stellar.   Cash is ample.  I think the odds are around 50%.

Last night the foreign markets were mixed. London was down 0.07%, Paris down 0.2% and Frankfurt down 0.22%.  Japan was up 0.77% and Hang Sang up 0.12%.

The Dow should open nominally lower on profit taking and economic concerns. The 10-year is up 3/32 to yield 2.98%.