Last week was tough on the banks. Each day the House and Senate negotiators would meet to discuss what obstacles they could place in the way of banks to prevent the next cataclysmic failure. As they put forth roadblocks, investors waited. Basically, we know that the rules will change, but the committee was under the gun to get a plan together before Obama left for his meeting at the G-20 over the weekend. They needed to agree on the strongest possible language for this draft proposal. In short, what was proposed should be the “worst case scenario”. Between now and the final vote, the language might get softened, but probably won’t become more restrictive. All the banking industry wants is to know the rules of the game. If they know the rules, they’ll know how to navigate going forward to maximize profits and minimize risk, or at least minimize exposure to regulation. As for Congress, they’re trying to achieve the impossible. They need the banking system, but they want a banking system they can shape and mold into the banking system they know it could someday be. Congress is an ever-changing target in this love-hate relationship. The big banks and brokers probably haven’t even begun to lobby for the language changes yet. You couldn’t fight against a plan that hadn’t been written. Like all those from Mars, the goal is to fix the problem. As for investors, they now see the bottom and feel that the worst has been discounted. To put it in chart terms, the S & P Financial SPDR, XLF, panicked in early June, sending the index to a low of 13.70. This was the lowest reading since the February low. Some optimism over the economy and heavy handed Republican rhetoric sent the XLF to kiss its 200-day moving average at 15. The middle of that range is at 14.35, right about where the XLF dipped prior to the release of the final version. By the time the market closed, investors were confident that they had seen their darkest day, and the index rallied 2.7% to close at 14.63. We still need to breakout above 15 to be short-term bullish, but the pattern is setting up nicely. It’s not that increased regulation and scrutiny by Congress is desirable, but the extent to which Venus obstructs Mars is now a known commodity, it is a positive.
Investors did not change their outlook on the economy on Friday. They were just as negative as the day before and are bracing for more negative news in the consumer discretionary sector. What earnings we did see that are ahead of the companies that report on a calendar basis are indicating a corporate view that reflects a very pessimistic outlook for the third quarter. The pendulum swung into the bears’ camp the week before last, sending last week down by 4% on the S & P. However, the range over the past month has been 1040 to 1130. We finished the week square in the middle of that range. What we’ve been seeing is the market brace for earnings that match estimates, but an outlook that reflect caution. That is built into the market at this level. When earnings start to be reported in two weeks, we’ll see how well we fare. Right now, investors, economists, politicians, and those walking down Main Street are bracing for bad news. That said, the University of Michigan Consumer Sentiment Survey rose to 76.0 from 73.6, a two year high. Hmmmm.
BP PLC BP (-6.0%) may get a reprieve from Friday’s beating. Tropical Storm Alex had been expected to turn into a hurricane over the weekend and veer toward the area of the Deep Horizon well. The ships currently collecting oil and the rigs working on drilling an intercept well were going to be removed from the area. That was the plan on Friday. Fortunately, it looks as though the storm is not going to move that far East and BP should be able to continue operations to intercept the leak. This should be a huge relief, although the increasing costs to BP are hammering the stock on a daily basis.
The G-20 made progress on an agreement for deficit and debt reduction. The ECB president said it was “encouraging”. The proposal would cut the deficits of the G-20 in half by 2013. Part of the proposal is a global tax on banks and financial transactions to help pay the costs associated with the crisis. Obviously, those that are not in financial trouble are heavily against the proposal. It’s not hard to see that if a pool of capital is set aside to aid in the winding down of firms that fail, then it will be viewed as a “bailout” fund or the funds will get raided by some other government spending plan once the pool is large enough. (i. e. see Social Security and Medicare)
There are actually some important economic reports due out this week. Personal Income and Spending figures will give us a sense of whether or not spending is still slightly positive (exp. +0.1%), although it is not expected to keep pace with incomes (exp. +0.5%). Don’t get freaked out about the decline in Construction Spending (exp. -1.0%), as it reflects the post-stimulus drop that we’ve already seen in the housing numbers. The first of the two most important reports for the week will be the June ISM Index on manufacturing. Expectations are for a reading of 59.0%, down from 59.7%. This is still an exceptionally strong number above 50%. The other market-moving number will be the jobs report, skewed by the quarter million temporary workers that will start getting laid off. This is where the ADP projection on Wednesday might give real guidance. The estimate for the estimate on private sector jobs is for ADP to anticipated 63,000. The current consensus for private sector jobs is 123,000. There is room for disappointment in these numbers and may keep the consolidation under wraps this week.
Last week was tough on the banks. Each day the House and Senate negotiators would meet to discuss what obstacles they could place in the way of banks to prevent the next cataclysmic failure. As they put forth roadblocks, investors waited. Basically, we know that the rules will change, but the committee was under the gun to get a plan together before Obama left for his meeting at the G-20 over the weekend. They needed to agree on the strongest possible language for this draft proposal. In short, what was proposed should be the “worst case scenario”. Between now and the final vote, the language might get softened, but probably won’t become more restrictive. All the banking industry wants is to know the rules of the game. If they know the rules, they’ll know how to navigate going forward to maximize profits and minimize risk, or at least minimize exposure to regulation. As for Congress, they’re trying to achieve the impossible. They need the banking system, but they want a banking system they can shape and mold into the banking system they know it could someday be. Congress is an ever-changing target in this love-hate relationship. The big banks and brokers probably haven’t even begun to lobby for the language changes yet. You couldn’t fight against a plan that hadn’t been written. Like all those from Mars, the goal is to fix the problem. As for investors, they now see the bottom and feel that the worst has been discounted. To put it in chart terms, the S & P Financial SPDR, XLF, panicked in early June, sending the index to a low of 13.70. This was the lowest reading since the February low. Some optimism over the economy and heavy handed Republican rhetoric sent the XLF to kiss its 200-day moving average at 15. The middle of that range is at 14.35, right about where the XLF dipped prior to the release of the final version. By the time the market closed, investors were confident that they had seen their darkest day, and the index rallied 2.7% to close at 14.63. We still need to breakout above 15 to be short-term bullish, but the pattern is setting up nicely. It’s not that increased regulation and scrutiny by Congress is desirable, but the extent to which Venus obstructs Mars is now a known commodity, it is a positive.
Investors did not change their outlook on the economy on Friday. They were just as negative as the day before and are bracing for more negative news in the consumer discretionary sector. What earnings we did see that are ahead of the companies that report on a calendar basis are indicating a corporate view that reflects a very pessimistic outlook for the third quarter. The pendulum swung into the bears’ camp the week before last, sending last week down by 4% on the S & P. However, the range over the past month has been 1040 to 1130. We finished the week square in the middle of that range. What we’ve been seeing is the market brace for earnings that match estimates, but an outlook that reflect caution. That is built into the market at this level. When earnings start to be reported in two weeks, we’ll see how well we fare. Right now, investors, economists, politicians, and those walking down Main Street are bracing for bad news. That said, the University of Michigan Consumer Sentiment Survey rose to 76.0 from 73.6, a two year high. Hmmmm.
BP PLC BP (-6.0%) may get a reprieve from Friday’s beating. Tropical Storm Alex had been expected to turn into a hurricane over the weekend and veer toward the area of the Deep Horizon well. The ships currently collecting oil and the rigs working on drilling an intercept well were going to be removed from the area. That was the plan on Friday. Fortunately, it looks as though the storm is not going to move that far East and BP should be able to continue operations to intercept the leak. This should be a huge relief, although the increasing costs to BP are hammering the stock on a daily basis.
The G-20 made progress on an agreement for deficit and debt reduction. The ECB president said it was “encouraging”. The proposal would cut the deficits of the G-20 in half by 2013. Part of the proposal is a global tax on banks and financial transactions to help pay the costs associated with the crisis. Obviously, those that are not in financial trouble are heavily against the proposal. It’s not hard to see that if a pool of capital is set aside to aid in the winding down of firms that fail, then it will be viewed as a “bailout” fund or the funds will get raided by some other government spending plan once the pool is large enough. (i. e. see Social Security and Medicare)
There are actually some important economic reports due out this week. Personal Income and Spending figures will give us a sense of whether or not spending is still slightly positive (exp. +0.1%), although it is not expected to keep pace with incomes (exp. +0.5%). Don’t get freaked out about the decline in Construction Spending (exp. -1.0%), as it reflects the post-stimulus drop that we’ve already seen in the housing numbers. The first of the two most important reports for the week will be the June ISM Index on manufacturing. Expectations are for a reading of 59.0%, down from 59.7%. This is still an exceptionally strong number above 50%. The other market-moving number will be the jobs report, skewed by the quarter million temporary workers that will start getting laid off. This is where the ADP projection on Wednesday might give real guidance. The estimate for the estimate on private sector jobs is for ADP to anticipated 63,000. The current consensus for private sector jobs is 123,000. There is room for disappointment in these numbers and may keep the consolidation under wraps this week.