July 22, 2011: Market Update

Jul 22, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

One Week and Counting

We had some good news this week in the form of corporate earnings announcements.  The market reacted positively as many companies beat analysts’ expectations.  That’s not to say all companies are doing well, but those that are were duly rewarded.  Yet despite the good numbers, the budget impasse remains a hurdle as politicians strategize over how best to fix our nation’s debt problem.

Eleven days.  That’s how much time is left before the August 2nd deadline.  Yet, regardless of the multitude of meetings and hours of negotiations, it looks like our elected representatives aren’t any closer to finding middle ground.  Putting further pressure on the situation, the rating agencies issued a new warning this week adding that unless deficit reduction was significant, simply increasing the debt ceiling wouldn’t be enough to stave off a credit downgrade.  The question remains, which party will blink first?  Will President Obama concede to significant cuts to Social Security and Medicare without simultaneously increasing tax revenue or will the GOP agree to raise the debt ceiling without significant spending cuts?  Talks are scheduled to continue throughout the weekend and by the end of next week we’ll have a deal.  Hopefully, it will be enough to satisfy the rating agencies and the market.

Surprisingly, or perhaps not so surprisingly, Greece is still in the news.  You’ll remember that Greece was on the verge of default a few weeks ago.  The IMF, much like a loan shark, demanded steep concessions before it was willing to loan Greece enough money to pay its monthly debt obligations.  However, that didn’t resolve the underlying problem.  It only prevented a default in the near-term.  Since then, France and Germany have taken the lead in trying to craft a solution that would put Greece on more stable footing.  To this end, it looks like they have reached a compromise.  The proposed solution includes a plan for private-sector participation in an involuntary exchange of current debt for new debt at a lower interest rate for a longer term.  The exchange implies a 20% loss for banks and other holders of Greek debt.  In exchange for this, the EU will backstop any further losses with the bulk of the burden placed on European banks, as well as, French and German taxpayers.  While wildly unpopular, the framework for a long-term solution appears to be taking shape.

In company news, we’re seeing some great performances.  Apple once again reported earnings and revenues that beat even the most optimistic expectations.  It doesn’t appear much can stop this juggernaut in the near-term.  With $76 billion in cash on its books, the only question is what are they going to buy?  At the current growth rate, it is estimated that Apple will overtake Exxon Mobil as the world’s largest market cap company by the end of this year.  IBM wowed the street too, even though corporate tech spending appears to be slowing.  Novartis, Coca Cola, Qualcomm and McDonalds are all doing great.  Even the old stalwarts like AT&T and Union Pacific surprised analysts.  The only weakness we’ve seen so far has been in the industrial sector where expectations were perhaps too high.  Industrials, such as Ingersoll-Rand and Caterpillar, are facing some headwinds with rising commodity prices and a slightly weaker global market.  All-in-all, we’re very pleased with how the second quarter is shaping up and look forward to the continuation of earnings announcements next week.

For the story of the week, we have a riveting story about gold.  In 2003, Joan Langbord, discovered a treasure in her family safe-deposit box.  Her father had been a coin dealer during the Great Depression and had somehow acquired ten Double Eagle gold coins dated 1933.  To her surprise one coin, exactly like the ones in her possession, had sold at a Sotheby’s auction for $7.6 million.  She calculated her family was now worth in excess of $80 million.  However, as a requirement to put the coins up for auction, she had to have them authenticated.  Who better than the U.S. Mint?  Here’s where it gets interesting.  It turns out that the 1933 Double Eagle was minted but never released and later melted back into bars.  Mint officials confirmed the coins were legitimate – and among the rarest – then confiscated what they said was U.S. property.  The case in now in Federal Court where the government claims the coins must have been obtained illegally.  Easy come, easy go.

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