Sunday, July 25, 2010

Volatility - Get use to it!

During the past two weeks, one hundred forty-eight of S&P 500 companies reported quarterly results. One hundred fifteen of these companies delivered positive results with total year over year revenue from this group increasing by approximately 9%. Additionally, on Friday, General Electric Company (US: GE) unexpectedly increased its quarterly dividend in a sign of confidence about its future.

MY TAKE: Given the rally off the July lows, recent stability in the price of copper and a potentially improving tone in Asia; if several US economic data releases scheduled for this week support an improving view, we may have hit bottom. Until then, both bulls and bears have plenty of data to support their market perspective.

For European banks – skepticism will continue

As expected, European banks published results of the banking stress test on Friday. Ninety-one banks were tested and seven failed.

MY TAKE: Prior to publishing the results, investors were skeptical of the testing process. Given that 1) only a small number of banks failed, 2) the tests identified a potential capital short fall of only 3.5 billion Euros, 3) some banks performed the tests on their own and 4) some banks did not release details of the impact of a potential sovereign debt default; investors will likely remain skeptical of this process.

The certainty of an “unusually uncertain” environment

During testimony to the U.S. Congress last week, Federal Reserve Chairman Ben Bernanke noted that the outlook for the economy is “unusually uncertain.” In Germany, the Ifo institute reported a significant increase in business confidence for June. In the UK, the Office for National Statistics said its preliminary estimate for gross domestic product was an increase of 1.1% for the second quarter. At the same time, a closely followed index (because of its “better than most” ability to identify potential US recessions) from the Economic Cycle Research Institute (ECRI) had its Weekly Leading Index (WLI) decline for the seventh consecutive week to -10.5.

MY TAKE: It is unlikely the number of crosscurrents confronting investors will decline in the near term. Consumer and business sentiment continue to be on a roller coaster ride as concerns about potential government spending cuts, tax increases and managing sovereign debt issues persist.