Photo courtesy of ArtsQuest

My wife Jo Anne and I attended a great concert at the SteelStacks. We loved the performer, Marc Cohn, and we were totally impressed by the MusicFest Café venue. We had dinner with wine during the concert – I give high marks for both. The sound system is top shelf – a rating bestowed by an independent sound expert I happened to meet there. All this was topped off by the impressive background of the accent-lighted Bethlehem Steel blast furnaces. And, what amazes me more than anything else is that this facility is right here in Bethlehem, Pa – my home. For more information go to: www.steelstacks.org

Last week, negative developments far outpaced those considered to be positive. And, stock prices dropped as a result. Here is a succinct summation of last week’s events:

Positives:

1) Three very successful Treasury auctions with longer term maturities in particular drawing buyers, reflecting no concern of not getting interest payments
2) Initial Claims fall to just above 400k, lowest since April
3) Headline PPI and CPI moderate on decline in energy prices
4) China’s Q2 GDP, Industrial Production and Retail Sales all surprise to upside- points toward a soft landing

Negatives:

1) June Retail Sales mediocre
2) Core PPI and CPI surprise to upside, makes monetary policy that much more difficult
3) Trade Deficit jumps to highest since Oct ’08, trims Q2 GDP by up to .4%
4) Refi’s fall to 10 week low, low interest rates losing its influence
5) Bernanke whips market around with QE3 talk followed by ‘not now’
6) Univ of Mich confidence drops sharply to lowest since Mar ’09
7) IP less than expected, continued drag from auto’s
8) NFIB small biz index falls to lowest since Sept ’10
9) Debt of Italy, Spain, Greece, Ireland and Portugal continue lower with yields jumping and CDS much wider, Greece moving closer to being forced into a default (would actually be good long term)
10) China CPI rises 6.4% y/o/y, most since June ’08.

The vacillating U.S. stock market turned negative last week, pulling back 2.1% as investors worried anew about the sprawling debt crises on both sides of the Atlantic. But this downward lurch could have an upside.

With credit agencies threatening to slash Uncle Sam’s debt rating, and traders shunning government bonds from Ireland to Italy, investors have been selling into stock-market rallies with renewed zeal. The Standard & Poor’s 500 closed more than 1% below its intraday high in each session last week from Monday through Thursday, a buckling streak not seen since a similar nine-day spell in March 2009 that immediately preceded this bull market. Such persistent determination to sell into strength eventually exhausts the selling pressure, and in 14 such prior instances, the stock market has gone on to average gains of 4.3% a month later and 11.7% after six months, notes Bespoke Investment Group.

But any progress likely will be choppy. The drama queens in Congress debating our debt ceiling will milk the limelight for all it’s worth, and won’t reach any deal before the 11th hour. But they know full well the consequences of even a momentary default on our ability to borrow at hospitable rates.

It also helps that market sentiment is noncommittal, even pessimistic. A crowd bracing for—all together, now—”a soft patch” lowers short-term expectations for the second-quarter results that companies are starting to report, even if they could prove bearish in the longer run when the consensus starts to demand evidence of a reaccelerating economy. Analysts also have been revising estimates lower for 11 straight weeks, creating what Paul Hickey of Bespoke calls “a crisis of confidence among analysts.” Meanwhile, the Chinese economy grew by a stronger-than-expected 9.5% in the latest quarter, although runaway pork prices pushed core inflation in June 6.5% higher than a year ago. The Shanghai Composite Index has rebounded for four straight weeks.

Will second-quarter profits give the U.S. market a lift? Wall Street expects Standard & Poor’ 500 companies’ earnings to grow 11.8% from a year ago. In the past three quarters, companies have surpassed estimates by a median 4%, so anything less than 3% could spell trouble, notes Lance Stonecypher, Ned Davis Research’s senior sector strategist. But he is siding with the bulls in the short term, even as longer-term concerns have him watching for signs of a bull-market peak.
So far, companies’ earnings reports have been mixed. Alcoa’s (ticker: AA) second-quarter profit more than doubled, but merely met analysts’ lowered forecasts. Yet Google (GOOG), flagged here positively three weeks ago when shares were near 475, pushed above 600 as revenue rose 36% and net income surged 37%. It closed the week at 597.62.

The Dow Jones Industrial Average snapped a two-week gain and finished last week down 1.4% to 12,480. The Nasdaq Composite Index ended its three-week winning run and dropped 2.5% to 2790, while the Russell 2000 fell 2.8% to 829 (Source: Barrons Online).

Last week, US Stocks and Foreign Stocks decreased. Bonds increased.  During the last 12 months, U.S. STOCKS outperformed BONDS. 

Returns through 7-15-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.3	3.7	4.5	6.6	6.6	5.7
US Stocks-Standard & Poor’s 500	-2.3	2.7	16.0	.8	-1.8	.9
Foreign Stocks- MS EAFE Developed Countries	-2.7	.2	14.6	– 3.6	-1.0	3.1

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

It gives me great pleasure to announce that Valley National Financial Advisors has once again been voted “Best Financial Planner” by the readers of Lehigh Valley Magazine in the annual “Best Of The Valley” contest. This is the second year in a row that Valley National has received this recognition, for which we are truly and deeply honored. Valley National Financial Advisors first opened its doors in 1985, and since then we have had the privilege of serving clients in the Lehigh Valley and beyond. Those clients are the most important part of the Valley National family. On behalf of all of us at the Bethlehem, Phillipsburg, Johnstown and Manhattan offices – I offer everyone my sincerest of thanks. Your support and your dedication to us is the reason we love what we do. Our team looks forward to continuing this exceptional service for many, many years to come.

Thank you for your vote of confidence and support in helping Valley National Financial Advisors achieve this important professional milestone.

We are halfway through the year, and what a ride it has been. Today I will share my thoughts on what the next six months could look like, and endeavor to keep it short and simple.




We Should Be OK, Except…

The economy should be in Muddle Through range (around 2% growth), absent any shocks. For instance, last Thursday, we had the June ISM number, which was stronger than most analysts expected, at 55.3. Of the 18 industries surveyed, only 12 reported growth.

But Muddle Through is not going to allow us to really cut into the unemployment problem. We need at least 3% growth and most economists think we need to see 3.5% to result in some real strong jobs numbers for several months in a row. That just doesn’t seem to be in the cards.

What I mean by Muddle Through not being enough to really cut into unemployment is that GDP seems to be slowing rather than picking up. The correlation between employment and growth is not encouraging. And if you look at the NFIB (National Federation of Independent Businesses) data, small businesses are not really back in the hiring game, and that is where the action needs to happen. We will see a new survey this week, but I doubt we will see a major jump in expectations.

Several months ago, I wrote a rather lengthy article in The Weekly Commentary about why unemployment would be a problem until at least the middle of the decade. When you lose 8 million jobs, with about 2-3 million of those jobs permanently gone, it is tough to dig out of the hole. We can’t look to housing construction to be the driving force that it once was for another 3-4 years, and commercial construction is falling.

I was talking to a friend recently who is an officer in a local bank. He pointed out that while the government wants banks to lend, the regulators (including the Fed) are critical of banks which make real estate development loans without very large equity components. All too frequently, banks want 50% loan-to-value of very-reduced valuations. This is not the environment that makes real estate moguls want to part with their cash. Nor does it bode well for construction jobs.

The Economic Cycle Research Institute points out that their leading index is simply signaling a weakening economy but does not signal a recession. But, the recent trend is disconcertingly downward and must be watched (Source, in part: The Big Picture).

“If you can’t excel with talent, triumph with effort.”

– Dave Weinbaum

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®. This week, Laurie will discuss:

“Contemporary Issues in Financial Planning.”

Laurie will take your calls on this subject and other financial planning topics at 610-758-8810. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org

OK! I am coming out of the closet. I have kept a closely guarded secret for over 15 years: I AM A PITTSBURGH PIRATE FAN!! I am thrilled to see their recent success. For those who do not follow baseball closely – the Pirates have been the worst team in Major League Baseball during the last 18 years. What a terrible losing streak ending with a total meltdown last year when they finished with the worst record in all of baseball. This year, a new manager, a new philosophy AND pitching gives this team a chance. I am not the only one saying this: the last 4 home games have been complete sellouts (The first time ever for the 11 year old PNC Park). Not bad for a team with a total team payroll that is a fraction of the Yankees or the Phillies. Pittsburgh has the fever and it’s not even football season.

Hoping that the slowing U.S. economy will reaccelerate this fall, the U.S. stock market bounced back from its recent correction with a rousing 5.6% rally last week to register its best week in two years.

The buying spree was egged on by improving—though hardly inspiring—economic cues. Greece’s parliament approved an austerity plan and persuaded German banks to permit a rollover of its debt, which prevented Europe’s volatile mess from worsening, for now. Reality also began to outshine our shrinking expectations: An index measuring Midwest manufacturing activity rebounded to 61.1 in June from 56.6 in May, while Nike (ticker: NKE) padded its market cap by $5 billion, or 13%, last week after it surprised investors with stronger-than-expected quarterly sales and profits.

Most of all, the surge pointed to the market’s pent-up buying impulse. Before last week, stocks had absorbed seven losses in eight weeks, yet Wall Street rarely wavered from its consensus view of this economic soft patch as a passing—and ultimately buyable—phase. From their late-April peak, stocks took more than six weeks to decline 7.2%, but just a third of that time to bounce back almost 6% since mid-June.

It helps, of course, that the drag from Japan’s disaster will eventually pass, and that oil has eased 17% from its 2011 high. Corn futures corrected 10% Thursday after the Agriculture Department reported especially exuberant crop planting in June. These might help slow inflation and ease the strain on consumers, all while the U.S. central bank remains supportive and China nears the end of its credit-tightening campaign.

But after last week’s rally, the posse of stocks straining above their 50-day averages has swiftly swollen to nearly 60% from 16% just two weeks ago. Greece has momentarily reduced its interest burden, but not the heft of its outstanding loans, and worries linger about Portugal, Ireland, Italy and Spain. The European Central Bank also is expected to raise interest rates this week, which risks choking off the continent’s already frail recovery.

On Friday, stocks kicked off July with a 1.4% gain as investors cheered a rebound of the ISM manufacturing index to 55.3 in June following a sharp decline to 53.5 in May. But more than half the increase was due to rising inventories, new orders barely ticked up to 51.6 from 51, and export orders shrank enough to raise the unwelcome specter of China’s waning appetite.

The Dow Jones Industrial Average ended the week up 648 to 12,583, and the 5.4% gain was its biggest since July 2009. The Dow Jones Transportation Average climbed to an all-time high, adding 6.4% last week to stretch its three-week run to 9.6%. The Standard & Poor’s 500 rallied for five straight days to reach 1340, with last week’s 71-point gain its biggest since March 2009. The Nasdaq Composite Index jumped 163, or 6.2%, to 2816, while the Russell 2000 added 42, or 5.3%, to 840. Other risk assets also jumped, with crude oil climbing 4.2% for its first gain in five weeks, but copper fell 4.7%.

The rally helped narrow June’s losses to 1.2% for the Dow, 1.8% for the S&P 500, 2.2% for the Nasdaq and 2.5% for the Russell. The Dow finished the second quarter up 0.8%, its eighth gain in nine quarters, but the S&P ended a three-quarter run and pulled back 0.4%. The Nasdaq and the Russell also absorbed small quarterly losses of 0.3%, and 1.9%, respectively (Source: Barrons Online).