Weekly Market Commentary July 4, 2011

Posted by Capital Formation Group, on Wednesday, July 13th, 2011

One day there will be an end to Euro-centric crisis news, but until then…

  • Credit default swaps – a hazy term for insurance purchased against debt defaults – for Greek, Portuguese and Irish debt have had a few record days in upward price moves.  Greek 2-year government debt yields 26.8%, with Portuguese and Irish 2-years not far behind at 16.2% and 14.4%.  Compare German 2-year debt priced at 1.6% and we believe it’s clear the market thinks a sovereign debt default is imminent, regardless of well-crafted political statements to the contrary.
  • As rating agencies move to downgrade Portugal’s credit rating, ECB President Jean-Claude Trichet has re-affirmed Portuguese access to emergency funds, suspending normal rating agency loan requirements.  This is a delicate balancing act; the ECB realizes downgrades will spark a sell-off and support from the Central Bank will become an absolute necessity to prevent an all-out panic in the affected countries.  On the other hand, we believe downgrades and ballooning yields will be the catalyst that forces the inevitable default and restructuring required in these countries.  The ECB’s job is to manage the process with transparency and clear signals to investors.
  • The People’s Bank of China (China’s Fed) raised benchmark lending and deposit interest rates +0.25%, the 3rd rate hike this year.  Most analysts feel the hike was in response to accelerating inflation in June.  The hope continues to be the Chinese are nearing the end of this tightening cycle, at least for the calendar year, and what they’ve done won’t significantly impair growth in the world’s 2nd largest economy.
  • President Obama and House and Senate leaders continue their dangerous game of national debt limit chicken, with perhaps a glimmer of hope for a near-term deal as they discuss limiting tax loopholes with offset tax cuts.  Staring at the nuclear outcome of default, both sides have begun to consider questions without easy answers:  Does the U.S. constitution allow the Executive branch to ignore Congress and unilaterally raise the debt limit?  Can the U.S. Treasury prioritize payments, defaulting on some payments but making others?  It is our opinion that U.S. 2-year debt, at 0.80%, certainly is not priced for a default, and shorter-term rates haven’t budged.  The market seems to believe Congress won’t stare Mr. Obama down.
  • Copper, a key forward-looking industrial commodity, seems to be firming in price in the low-to-mid $4 range.  With rumors of dwindling Chinese stockpiles, putting in a price floor in copper is considered a positive sign for global infrastructure and manufacturing.
  • 4th of July week is, as always, a low volume/high vacation week with many traders away and waiting to check in on Friday’s Change in Nonfarm Payrolls report, waiting to see how it measures up to the consensus projection of 105k jobs added.
  • Despite all the news designed to depress investors, the S&P 500 dropped a mere 1.8% in June; these are cautious times and we were slow to invest new cash over the last month, but clearly the markets have absorbed a steady diet of troubling news with almost disturbing calm.
  • Book of the Week:  Point Dume by Katie Arnoldi.  I moved from Malibu to Boston over a decade ago (still trying to explain that to myself), but this is a good “fictional” read of the town as a microcosm of Southern California culture that I remember so fondly.

**Pricing and statistical information obtained from Bloomberg LP, July 1-8, 2011.

Jason Morad
Chief Investment Officer

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Investment advisory services offered through Capital Formation Group, Inc., an SEC Registered Investment Advisor.  Securities offered through ValMark Securities Inc, member FINRA SIPC, 130 Springside Drive Suite 300 Akron, OH 44333-2431* 1-800-765-5201.  Capital Formation Group, Inc. and John Williams are separate entities from ValMark Securities Inc.

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