Forza Italia! "Complimenti" to the Italian national team for advancing to the Euro Cup semis with a hard-fought win over England. Although I'm really not much of a soccer fan, I do like to follow the namesake team of Forza Investment Advisory at major Cup events. Both squads showed a never-quit attitude and Italia finally won it in a penalty kick shootout. Perhaps the EU governments can take a cue from all these hard-fought games and adopt some of the determination that the athletes show to construct a plan for fiscal unity at the upcoming summit (yes, yet another one) this week. I've always been a firm believer that companies and even governments can learn a lot from how teammates work with each other to achieve their goal. As they say, there's no "I" in team. (Of course, the old comeback line is that there is no "we" in team either.)
Anyway, on to the real world and its problems. Where to start? At the beginning of last week the markets rallied on hopes of good news coming from the Fed during the Tues/Wed Federal Reserve meetings. The optimism faded and the selloff came Thursday after no big news came other than the Fed extending "Operation Twist" to year-end. You may recall that "Twist" is where the Fed buys LT debt and replaces it with short-term debt of less than 3 years. It's not hard to see why the market and investors were not enthused with the announcement. A "Twist" may be great in your martini but it really hasn't done much for the economy based on the recent results. Sure, it has artificially kept borrowing rates low, but if a paltry 2% economic growth is the benefit of operation twist, then we obviously need something more. And, frankly, it is not up to the Fed to continue to try to rescue this economy. The Fed also signaled that QE3 (next round of quantitative monetary easing) is still in his bag of tricks if things get worse but they are not ready to use it yet. Maybe this is Ben Bernanke's way of tossing the ball back onto the court of the politicians for some fiscal policy.
Speaking of which, where the heck is our government? Where is a coordinated fiscal policy where both our political parties put aside their egos and differences and do what is right for the people? Oh yea, it is an election year so nobody wants to let their grand plan out of the bag yet. Republicans and Democrats must work together. Yes, it's a pipe-dream, but what else is going to start us on a road to recovery? Since our current President took office it seems like both parties are further apart on issues than they've ever been. So much for governing from the middle. Macro and Geo-political events continue to dominate the news and will continue to do so for quite some time. Moody's downgraded 15 Global banks on Thursday after the close. It was so expected that the markets actually rallied Friday since the news was now out of the way. China released manufacturing data that for the second month in a row is showing a contraction in activity. Commodity prices are getting creamed largely because of the fear of a hard landing in China. Oil is down almost 25% since the end of April which is actually a good thing for the US economy. The UBS-Commodity index is down 17.5% this year and the Reuters CRB index is off 18.8%. Many people are starting to talk about re-inflating the economy to get things moving. This is going to be a big week for news-flow.
I mentioned another EU Summit. I just heard that it will be the 14th summit. The other 13 worked so well, why not have another one!? At some point Germany will come around and they will start discussing fiscal unity and long-term solutions. It will take place on June 27/28 and leaders from four countries this past weekend already announced an endorsement to a plan for spending $160 billion to spur economic growth. A good start but a lot more is needed and this summit is not likely to deliver much more. (The European markets are selling off today already.) Also, on July 5th the European ECB meets to discuss rate policy. The market is expecting a rate cut so if that does not occur be prepared for another possible selloff. Finally, the Supreme Court ruling on Obamacare is due this week. This will be a very interesting decision for many reasons (that I will not get into). I don't know how market-moving it will be but it certainly can affect Healthcare stocks.
So again, what to do with stocks in this environment? There is still so much noise out there that it is impossible to make a firm move into equities. As for international equities, why try to be the hero? Going against asset allocation and diversification guidelines, I see no reason to have much, if any, international equity exposure in the near-term. This is a party I'd rather be late to. We are ending the quarter and heading into July, a month that historically has been one of, if not the worst, months for stock performance. I continue to suggest holding more cash than normal. You may not get much return but you will at least preserve capital. It seems like given all the uncertainty that US Treasury bonds will hold their value, but for me the risk/reward is not worth it unless you are a trader. I would not sell bonds but I'd be careful on new positions in the long end. Currently, with the 10-year bond at about 1.6%, equities clearly seem to hold a greater long-term opportunity. I want to get bullish on equities and I am for the long haul. But as a former investment colleague of mine used to say "the long-term is nothing more than a series of short-terms." And right now we need to get through the short-term first before becoming fully invested for the long-term. I continue to look for quality companies paying dividends greater than 2% that get caught-up in the selling. To me, owning these companies as core positions for the long haul establishes a good base from which to build.
The Federal Reserve announced they would extend "Operation Twist" until the end of the year citing weakening economic growth. They also said they will do whatever is necessary to help the economy while lowering their estimate for GDP growth to 1.9% to 2.4%.
Housing starts fell 4.8% in May to 708,000 units at an annual rate, below the 722,000 rate the consensus expected. Despite the decline in May, starts are up 28.5% versus a year ago. Single-family units rose 3.2% but MF units dropped 21.3%. New building permits rose 7.9% in May to a 780,000 annual rate, coming in well above the consensus expected pace of 730,000. Compared to a year ago, permits for single-unit homes are up 19.9% while permits for multi-family units are up 34.9%.
Existing home sales fell 1.5% in May to an annual rate of 4.55 million units; basically matching the consensus expected 4.57 million units. Sales are up 9.6% versus a year ago.
The Philadelphia Fed index fell to -16.6 in June from -5.8 in May. Some view this dip as a recession sign. This is a bad sign for manufacturing activity. New claims for unemployment insurance dipped 2,000 last week to 387,000 while continuing claims were unchanged at 3.30 million. These figures suggest tepid payroll growth in June: 45,000 nonfarm and 55,000 private.
Bob Centrella, CFA,is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtainedfrom www.ForzaInvestment.com
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