Tech Earnings Power Market Gains

Charles Schwab: On the Market

Posted: 10/27/2017 4:15 PM EDT

Tech Earnings Power Market Gains

 

U.S. equities finished out the week higher, as technology issues jumped on a number of favorable earnings reports, including Google's parent Alphabet and Dow members Microsoft and Intel. Meanwhile, the consumer discretionary sector got a boost from Amazon's strong report. Treasury yields were lower, with Fed leadership uncertainty overshadowing favorable reads on Q3 GDP and consumer sentiment. Crude oil and gold prices were higher, and the U.S. dollar added to its recent run. 

The Dow Jones Industrial Average (DJIA) rose 33 points (0.1%) to 23,434, the S&P 500 Index increased 21 points (0.8%) to 2,581, while the Nasdaq Composite soared 145 points (2.2%) to 6,701. In moderate-to-heavy volume, 892 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.26 to $53.90 per barrel and wholesale gasoline gained $0.02 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price rose $5.98 to $1,272.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.87. Markets were nicely higher for the week, as the DJIA increased 0.5%, the S&P 500 Index gained 0.2% and the Nasdaq Composite advanced 1.1%.

Amazon.com Inc. (AMZN $1,101) reported Q3 earnings-per-share (EPS) of $0.52, well above the $0.07 FactSet estimate, as revenues rose 34.0% year-over-year (y/y) to $43.7 billion, topping the expected $41.6 billion. The results included the contribution from its recent acquisition of Whole Foods. AMZN issued Q4 revenue guidance with a midpoint below expectations. Shares rallied.

Google parent Alphabet Inc. (GOOGL $1,034) posted Q3 EPS of $9.57, exceeding the projected $8.35, with revenues excluding traffic acquisition costs (TAC) growing 21.9% y/y to $22.3 billion, north of the forecasted $21.9 billion. Shares were decisively higher.

Dow member Microsoft Corp. (MSFT $84) announced fiscal Q1 earnings of $0.84 per share, versus the expected $0.71, as revenues rose 12.0% y/y to $24.5 billion, above the projected $23.5 billion. Shares were solidly higher.

Dow component Intel Corp. (INTC $44) reported Q3 EPS of $0.94, or $1.01 ex-items, compared to the forecasted $0.80, with revenues rising 2.0% y/y to $16.1 billion, topping the expected $15.7 billion. INTC issued Q4 guidance that bested estimates, while it raised its full-year outlook. INTC moved solidly higher.

With the flurry of key earnings reports from the tech sector, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the group in his latest, Schwab Sector Views: Technology Trick or Treat?. Brad notes that the technology sector’s strong run could continue, with improving global growth prospects and continued high consumer confidence providing support. But risks for the sector have risen and investors should be careful not to get overly concentrated in the tech sector.

Dow member Merck & Co. Inc. (MRK $58) posted a Q3 loss of $0.02 per share, or a profit of $1.11 per share ex-items, compared to the estimated $1.03, as revenues declined 2.0% y/y to $10.3 billion, below the forecasted $10.5 billion. MRK increased its full-year guidance. Shares of MRK came under heavy pressure.

Dow component Exxon Mobil Corp. (XOM $84) announced Q3 EPS of $0.93, north of the expected $0.86, on revenues of $66.2 billion, versus the projected $62.8 billion. Shares are ticked higher.

Dow member Chevron Corp. (CVX $114) achieved Q3 earnings of $1.03 per share, while excluding one-time items reflecting asset sales and write offs, EPS was $0.85, but it is unclear if it is comparable to the anticipated $0.98. Revenues were $36.2 billion, versus the forecasted $34.5 billion. Shares were lower.

First read on Q3 GDP tops forecasts, consumer sentiment remains at 13-year high

The first look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 3.0%, after the unrevised 3.1% expansion in Q2, and above the 2.6% growth forecasted by Bloomberg. Personal consumption gained 2.4%, topping forecasts of a 2.1% rise and following the unadjusted 3.3% increase recorded in Q2.

Private inventory investment, nonresidential fixed investment, exports and federal government spending joined personal consumption to contribute to the stronger-than-expected growth, and more than offset negative contributions from residential fixed investment, as well as state and local government spending.

On inflation, the GDP Price Index came in at a 2.2% rise, well above expectations of a 1.7% gain and the unrevised 1.0% increase seen in Q2, while the core PCE Index, which excludes food and energy, moved 1.3% higher, matching expectations, and following the unadjusted 0.9% advance in Q2.

The GDP report suggests that business capital spending (capex) continues to gain steam and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle, that an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker. She adds that the pick-up in capex is a relatively new bright spot for the U.S. economy; and in 2018 it will likely be a shining characteristic of the latter innings of an economic expansion.

The final October University of Michigan Consumer Sentiment Index (chart) was revised lower to 100.7, matching forecasts, from the preliminary level of 101.1. The index was up solidly versus September's level of 95.1 and sits at a level not seen since January 2004. Compared to last month, the expectations and current conditions components of the survey both improved decisively. The 1-year inflation outlook fell to 2.4% from September's 2.7% rate, and the 5-10 year forecast remained at 2.5%.

Treasuries were higher as the data was met with Fed leadership speculation, as the yield on the 2-year note dropped 3 basis points (bps) to 1.60%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 2.42% and 2.93%, respectively.

The U.S dollar continues to climb, bolstered by global economic and earnings optimism, along with the euro's extended drop following yesterday monetary policy decision by the European Central Bank and relative optimism of U.S. tax reform as it appears to be nudging down the long road to fruition.
Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick, discuss tax reform in the video, Where Does Tax Reform Stand?, while Chief Fixed Income Strategist, Kathy Jones delivers the video with Randy about Should a Change in Fed Leadership Matter to Investors?.

Europe mixed on data and Spanish political turmoil, Asia higher

European equity markets finished mixed, with global earnings optimism rising in the wake of the host of upbeat results from U.S. tech sector heavyweights. Also, a positive global economic backdrop was bolstered by the stronger-than-expected U.S. Q3 GDP growth. The euro added to yesterday's drop that came courtesy of the European Central Bank's monetary policy decision to cut and extend its stimulus measures, which appeared to foster a dovish takeaway. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market, and talks with Randy Frederick in the video about Is An Optimistic Outlook for Global Equities Warranted?. The British pound also saw some pressure as Brexit uncertainty lingered, while bond yields in the region traded mixed. Spanish stocks fell amid ramped up political uncertainty as tensions with Catalonia remain elevated, with the Catalan parliament declaring independence from Spain.

Stocks in Asia finished mostly higher following the flood of upbeat earnings reports out of the U.S. tech sector after yesterday's close, while the markets continued to digest the dovish takeaway from the European Central Bank's monetary policy decision to trim and extend its stimulus measures. Japanese equities rallied to extend their recent run to highs not seen since 1996, with the yen losing ground and a report showing the nation's consumer price inflation rose in September. Improved global earnings sentiment helped lift mainland stocks in China and Hong Kong, while those traded in South Korea also gained solid ground. However, markets in Australia declined amid flared-up political uncertainty after Prime Minister Turnbull lost his parliamentary majority, and securities in India finished flat. Schwab's Liz Ann Sonders discusses with Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

Stocks grind out another positive week

Stocks managed to squeak out a seventh-straight weekly gain, with upbeat Q3 GDP, durable goods, new home sales, and business activity reports preserving global economic optimism, though action was choppy as a ramped-up earnings season fostered mixed responses. The technology sector was a standout winner, buoying the markets amid a glut of positive earnings reports from heavyweights in the group, while telecommunications and healthcare issues fell solidly, bogged down by AT&T Inc's (T $34) results and guidance from Celgene Corp. (CELG $97). Energy stocks dipped as Dow member Chevron's results appeared to fail to live up to lofty expectations for the sector and offset the continued climb in crude oil prices. With earnings season more than half way done, of the 273 S&P 500 companies that have reported, 68% have topped revenue forecasts and 79% have bested profit projections, per data compiled by Bloomberg. Treasury yields climbed to support financials amid the improved economic sentiment, which also helped the U.S. dollar extend a rally, along with the euro tumbling in the wake of a seemingly dovish takeaway from the European Central Bank's monetary policy decision.

Next week, earnings season will remain robust, but a fully-loaded economic calendar will likely go a long way in shaping market direction, headlined by the midweek Federal Open Market Committee (FOMC) monetary policy decision, the ISM Manufacturing and non-Manufacturing Indexes, monthly auto sales, and the nonfarm payroll report. Other releases that deserve a mention include: personal income and spending, Consumer Confidence, Q3 nonfarm productivity and labor costs, the trade balance, and factory orders.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, along with new records being set by stocks, investor sentiment measures are showing widespread optimism; yet households’ exposure to equities is not at an extreme. We believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency. Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair could cause an uptick in volatility. Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

International reports due out next week to keep an eye on include: Australia—trade balance, building approvals and retail sales. China—Manufacturing and non-Manufacturing PMIs. India—Manufacturing and Services PMIs. Japan—retail sales, household spending, industrial production, and the Bank of Japan monetary policy decision. Eurozone—Q3 GDP and consumer price inflation, along with German unemployment change. U.K.—Bank of England monetary policy decision.

Financial Review

Slow Motion Domino

Sinclair Noe — November 10, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 27 = 17,758
SPX + 3 = 2081
NAS – 12 = 5083
10 YR YLD – .02 = 2.32%
OIL + .22 = 44.09
GOLD – 2.50 = 1090.40
SILV – .14 = 14.54

Crude prices are set for a slow recovery, according to the latest report from the International Energy Agency, which warned against the deep investment cutbacks in the industry. In its World Energy Outlook, the IEA’s central scenario for oil prices forecast that the market would rebalance at around $50 to $80 per barrel in 2020, (a not very precise guess) “with further increases in price thereafter.” It also predicted that collectively, the U.S., EU and Japan would see their oil demand drop by around 10 million barrels a day by 2040.

Oil production from the Bakken and Eagle Ford shale plays in the U.S. has been falling since March. Total oil output from seven major U.S. shale regions is expected to fall by 118,000 barrels a day to about 4.95 million barrels a day in December. There is no evidence at current prices that rig drilling activity will recover any time this year, so we can expect ever lower production every month well into 2016. That doesn’t mean a quick increase in prices, in part because Iranian oil is expected to come online as sanctions are lifted, and also production increases are expected in other parts of the world.

The National Federation of Independent Business said its Small Business Optimism Index was steady at 96.1 last month, with hiring stagnant even as more owners expected higher sales and more planned to make capital outlays.

Americans are borrowing big again. The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record, up $28.9 billion in September, besting the previous high-water mark set in November 2001, not inflation adjusted. The surge wasn’t driven by mortgage lending, but by an ongoing rise in non-revolving credit—essentially car and student loans, which surged by more than $22 billion to $2.57 trillion.

Revolving debt—mainly credit-card debt—also increased, by $6.7 billion to $925 billion. This new found proclivity to jump into debt points to a busy holiday shopping season. It might also explain why the Fed is ready to take away the punch bowl at the next FOMC meeting.

Greece can’t persuade creditors to release bailout funds. Greece is due $2.2 billion from its bailout as well as $11 billion already set aside for the country’s banks, which are still struggling from capital controls. Though the Greek government has met many of the conditions attached to the bailout, it still needs to push through some financial reforms. Disputes remain on a new foreclosure law which would likely put more and lower priced homes on the foreclosure block, the Value Added Tax on private education, and pricing of non-generic medications, as well as on the timing and pace of pension reform.

Athens needs the money to continue to meet day-to-day expenses such as salaries, but there is not the same sense of urgency as there was in the summer because a sizeable injection of funds was made in September and there are no major debt repayments due. The delay is, however, preventing Greece from moving on to discussions around a restructuring of its debt pile to make it more sustainable. This was demanded by Tsipras at previous negotiations and is a precondition of the International Monetary Fund officially joining the bailout.

Meanwhile, the anti-austerity movement finally spilled over to Portugal. Anti-austerity lawmakers have forced Portugal’s new center-right government to resign by rejecting its policy proposals. The prime minister had been held up as a model proponent of the belt-tightening prescriptions pushed by European Union officials in Brussels, international creditors and countries like Germany. Portuguese voters weren’t buying it.

The new government has promised to unwind parts of the austerity program. The left-wing parties have pledged to cut some taxes and reverse public-sector wage cuts and to suspend Portugal’s privatization program. The political turmoil in Portugal is being closely watched elsewhere in Europe as a bellwether of political trends and an indicator of whether even countries that had been models of austerity prescriptions are now experiencing fatigue with the belt-tightening nearly seven years after the onset of Europe’s debt and euro crisis.

And the next domino might be the pro-austerity government of Portugal’s neighbor – Spain. Prime Minister Mariano Rajoy faces elections on Dec. 20, and polls so far show that his conservative Popular Party may lose what has been an ironclad majority in Parliament, with the potential to leave the Spanish in a similar position to the Portuguese. The government in Spain is not very stable right now. Yesterday, Catalonia voted to secede from Spain by 2017. Catalonia, the triangular region in northeastern Spain, already has its own language and traditions. Now it’s well on its way to becoming its very own country. The region contains Barcelona, Spain’s second-largest city and more than 7 million people; Catalonia also makes up more than 20 percent of the country’s economy.

A federal appeals court has rejected President Obama’s effort to move forward with a series of executive actions he announced last year seeking to give quasi-legal status and work permits to millions of undocumented immigrants. The 2-1 ruling from the New Orleans-based 5th Circuit is a defeat for the Obama administration, but one that may have come just in the nick of time to give the Supreme Court the chance to revive Obama’s attempt to make it easier for many immigrants who entered the U.S. illegally to live and work here.

Obama’s latest round of executive actions has been on hold since February, and delay in the issuance of the appeals court’s ruling was raising doubt about whether the Supreme Court would have an opportunity to resolve the case in time to allow Obama to move forward with the programs before leaving office. The release of the 5th Circuit decision Monday appears to allow the Supreme Court enough time to take up the dispute this term, if the justices choose to wade into the issue. A favorable Supreme Court ruling would permit the administration to implement the executive actions next summer.

Obama’s actions announced last November expanded eligibility for a program the president set up in 2012 to allow immigrants who entered the U.S. illegally as children to get “deferred action” status and be eligible to work legally. The new effort also included a new initiative to grant the same status to illegal immigrants who are the parents of U.S. citizens or green-card holders. Up to 5 million people were estimated to be eligible for the revised Deferred Action for Childhood Arrivals and new Deferred Action for Parents of Americans programs, although it was unknown how many would decide to apply.

Zinc traded near a five-year low, copper has dropped to its lowest since August 26 and nickel fell to its lowest in two months as miners remain under pressure. BHP Billiton has seen nearly 13 percent of its share value erased in the last four sessions following a dam burst at its Brazilian joint-venture that resulted in at least three confirmed dead and another 25 people missing.

Chipotle could reopen locations in Washington state and Oregon as soon as Wednesday after a batch of tests found no E. coli bacteria in food samples. Investigations do not always identify a specific food source as the culprit, because contaminated food is at times consumed before the samples are collected. All of Chipotle’s 43 outlets in those areas, which appear to have sickened over 40 people, have been closed since Oct. 31.

Fast-food and other low-wage workers will walk off the job today in 270 cities and towns across the country as part of a push for a nationwide $15 minimum wage. Fast-food employees will be joined by workers from other industries that typically pay low hourly wages.

Colorado will vote next year on establishing a universal, “single-payer” healthcare system after supporters secured enough signatures to get the measure on the ballot. Under the plan, known as ColoradoCare, the government would provide universal health insurance in the place of private insurance companies. It comes with a $25 billion price tag, to be paid for with a new 10 percent payroll tax.

Valeant tried to stop the bleeding with a conference call this morning. The drug maker has lost two-thirds of its value since August amid questions about its accounting and business practices. Valeant Pharmaceuticals said in its business update that disruption in its dermatology business, from the recent controversies surrounding its Philidor specialty pharmacy subsidiary, would be significant in the short term. Valeant shares continued dropping today.

Four people have been charged in a broad hacking scheme that targeted JPMorgan Chase and other financial institutions between 2012 and 2015. The indictment described 12 victims, which were mostly financial services companies, but also included a financial news organization and software development firms. The US Attorney’s Office said the scheme involved the “largest theft of customer data from a US financial institution in history.”

The hackers stole the personal information of over 100 million customers across the companies. The hackers used information and data collected from JPMorgan and the other companies to manipulate stocks. They bought small amounts of companies’ shares, then used stolen email addresses to inform investors to buy into those stocks.

FINANCIAL REVIEW

Anti-Austerity Gets Wind in Sails

Sinclair Noe — February 2, 2015

Podcast: Play in new window | Download (Duration: 12:46 — 5.8MB)

DOW + 196 = 17,361
SPX + 25 = 2020
NAS + 41 = 4676
10 YR YLD – .01 = 1.67%
OIL + 1.59 = 49.83
GOLD – 9.30 = 1274.80
SILV – .05 = 17.28

Americans cut spending in December by the largest amount since 2009; we knew spending on energy would be lower but consumers did not rush out and spend the money. Household savings from lower energy costs, were partly offset in December by higher spending on drugs, health care and housing. These expenses continue to eat up a large portion of American incomes. Incomes posted another solid gain and falling inflation is allowing Americans to get more bang for their buck. Personal spending fell a seasonally adjusted 0.3% last month. Personal income, meanwhile, rose 0.3%. Since income growth outpaced spending, the amount of money individuals save jumped to 4.9% from 4.3% to mark the highest level since midsummer.

The Commerce Department reports construction spending rose 0.4% in December to a seasonally adjusted annual rate $982.1 billion, led by public spending. Private-construction spending rose 0.1% in December, with a 0.3% increase for residential projects and a 0.2% decline for nonresidential projects. Meanwhile, public-construction spending rose 1.1% in December.
The ISM Manufacturing Report for January dropped from 55.1 to 53.5. Any reading above 50 indicates the manufacturing sector is expanding, just not as fast.

Germany’s Angela Merkel ruled out a debt writedown for Greece on Saturday, while an ECB policymaker threatened to cut off funding to Greek banks if Athens doesn’t agree to renew its bailout package. Europe’s bailout program for Greece, part of a €240B rescue package also involving the IMF, expires on Feb. 28. Greece has hired the investment company Lazard to advise on restructuring its debt, and has refused to deal with the “troika” which is pushing for continued austerity.

President Barack Obama has suggested that Greece will not be able to recover from its economic crisis unless there is a let up in austerity policies. “You cannot keep on squeezing countries that are in the midst of depression,” when CNN’s Fareed Zakaria asked him about the case of Greece. “At some point, there has to be a growth strategy in order to pay off their debts and eliminate some of their deficits.

Greek Finance Minister Yanis Varoufakis was in London today trying to win support for a writedown. Britain’s finance minister, George Osborne said Greece needs to act responsibly but that the Eurozone also has to come up with a better plan for jobs and growth. Osborne called the stand-off the “greatest risk to the global economy.”

Think about that for a moment. The Greek bailout package is €240B, and Greece would certainly pay most of that, even if they get a break. Without some sort of break, Greece might well default on everything. So the greater risk seems to be doing nothing to help the Greeks. But there is another risk.

Hundreds of thousands of people marched through Madrid Saturday in a show of strength by a fledgling leftist party, as it becomes the latest European political organization to gain widespread support for its anti-austerity stance. Podemos (‘We Can’) supporters from across Spain converged on Madrid in what was the party’s largest rally to date, as it hopes to emulate the success of Greece’s Syriza party in the Spanish general election later this year. The political party was just formed one year ago, and they are now favorites to win the election.

The anti-austerity movement is catching some wind in its sails, and with good reason; austerity does not work. Spanish unemployment is holding around 25%. Half of Spain’s unemployed no longer receive benefits, while 33 of the 35 biggest companies avoid tax through subsidiaries in tax havens. Half a million children have been plunged into poverty since 2009, but the wealth of Spain’s super-rich has increased by 67%in the past 5 years. To avoid the wrath of a fractious population the government has cracked down on the right to assemble. That did not stop hundreds of thousands of protestors over the weekend.

President Obama presented the White House budget today. At the heart of the budget is what the president calls “middle-class economics”; plans to help middle-income earners afford necessities such as education and child care and bolster their skills, and to pour federal money into building roads and bridges. To pay for such initiatives Obama has outlined a nearly $1 trillion of tax proposals that would hit the wealthy and large financial institutions over the next decade.

The budget foresees a $474 billion deficit, which is 2.5 percent of U.S. gross domestic product. The proposal includes a corporate tax overhaul, plus a 6-year, $478 billion plan to build and improve transit, roads, and bridges – paid for by imposing a one-time tax of 14% on an estimated $2.1 trillion in overseas accounts held by US corporations. The president is proposing to add $38 billion for the military and $37 billion for domestic programs under Congress’s discretion; essentially restoring the cuts made by the 2011 budget deal known as sequestration. Obama called those cuts “mindless austerity.”

The White House is assuming that inflation-adjusted economic growth will rise from 2.2 percent in 2014 to a robust 3.1 percent this year and 3 percent in 2016, and that unemployment will continue to fall, to 5.4 percent this year from the current 5.6 percent, to 5.1 percent in 2016 and to 4.9 percent in 2017 and 2018. Those assumptions would mean that the current record-breaking expansion of private sector jobs would continue well into the future.

It’s important to note that this budget is the president’s proposal—a blueprint – given to Congress to be fought over or blatantly ignored; it’s not law. So, this is first-and-foremost a political document used to outline the president’s vision and define his terms of engagement with Congress. And there are a few things Republicans should like, such as more military spending, a highway trust fund, and corporate tax reform, but the devil is in the details. Most of these measures, to use the language of the moment, will likely be “dead on arrival,” given that both the House and Senate are now under Republican control.

The chairman of the Federal Communications Commission this week is widely expected to propose regulating Internet service like a public utility to ensure so-called net neutrality, or an open Internet. It is expected that the proposal will reclassify high-speed Internet service as a telecommunications service, instead of an information service, under Title II of the Communications Act. The change would give the commission strong legal authority to ensure that no content is blocked and no so-called pay-to-play fast lanes exist. He may also suggest putting wireless data services under Title II and adding regulations for companies that manage the backbone of the Internet. However, it would likely be regulation without specific pricing control. The proposal is expected to be submitted to the agency’s commissioners by Thursday.

About 3,800 employees represented by the United Steelworkers union went on strike at plants accounting for 10% of U.S. refining capacity for a second day, after failing to agree on new labor contracts. Union workers are on strike for a second day at nine U.S. refineries and chemical plants as they seek a new national contract with oil companies covering laborers at 63 plants. The walkouts targeted plants with a combined 10 percent of U.S. refining capacity, although the plants remain open for now.

Exxon Mobil’s quarterly profit fell 21% as weak oil prices took a toll, but earnings topped Wall Street expectations due to tax benefits and a favorable arbitration ruling; revenue missed the mark. Profit in the fourth quarter fell to $6.5 billion, or $1.56 per share, from $8.3 billion, or $1.91 per share in the same quarter a year earlier. Exxon also said it will reduce its share buyback program in the first quarter by more than half to $1 billion.

RadioShack is preparing to shut down the chain in a bankruptcy deal that would see half the stores taken over by Sprint. The rest of the stores would close down. Sprint and RadioShack have also had talks about co-branding the stores. Standard General, a hedge fund and the largest investor in RadioShack, was in talks to serve as the lead bidder at a bankruptcy auction. It is also possible that another bidder could yet emerge to buy RadioShack and continue operating the 94-year-old chain.

Apple announced it will spend about $2 billion to build a new data center in Mesa, Arizona. It will be housed in buildings formerly used by GT Advanced Technologies, which went bankrupt last year after failing to supply sapphire display covers for the iPhone 6. The project will supply 300 to 500 temporary construction jobs and 150 permanent jobs, and the data center will be powered entirely by renewable energy. Apple also will invest to build and finance solar projects, which will produce enough energy to power more than 14,500 Arizona homes. Apple told Bloomberg it will be a “command center for our global networks.”

Investing through the summer fog of 2012

The economy continued to throw off mixed signals for the month of July, whipsawing traders and making investors even more squeamish and paranoid about where to tuck their wealth.

Added to this seesaw of economic data from everything from July's consumer confidence of 65.9, up from a revised 62.7; the July Chicago PMI of 53.7 up from 52.9.

The May S&P Case-Shiller HPI 20-city M/M rose 0.9%, however, the Yr/Yr fell 0.7%. The June New Home Sales figure fell to 350k from a revised up 382,000. The M/M Pending Home Sales Index for June dropped -1.4% from a revised downward 5.4% increase.

The Richmond Fed Manufacturing Index for July fell from -3 to -17. Conversely, the Empire State Manufacturing Survey, Kansas City Fed Manufacturing Index, Philadelphia Fed Survey all improved from the previous month.

The Dallas Fed Manufacturing Survey, consisting of a Business Activity Index and Production Index, found both indexes falling.

The knowledge that short-term markets are driven first by news headlines and central bank policies rather than primarily macro and macroeconomic data forces a perverse reaction onto the market in this unfamiliar climate we find our capital in.

Deteriorating economic statistics brings hope, by some, of additional stimulus measures from the Feds. Today, August 1, the Feds may shed some light onto their contingency plans, if there are any plans, for supporting a decaying economy between now and the November elections.

If Quantitative Easing III (QE III) or some variation of yield repression doesn't materialize from the Feds, markets will have an excuse to move lower, decaying as well.

Secondly, European Central Bank President, Mario Draghi, kicked off last Thursday's stock market rally by stating that he will do whatever it takes to save the Euro. A quick recap; in theory, generally, saving the Euro and the EU requires capping rising Spanish and Italian debt yields by the ECB agreeing to purchase their sovereign debt.

Because of inflationary fears, many German politicians, including Chancellor Angela Merkel's coalition government, vigorously oppose this action and similar bailout schemes. Two days ago, Monday, Treasury Secretary Timothy Geithner met with German Finance Minister Wolfgang Schaeuble and Mario Draghi, reaffirming their commitment in solving this crisis.

On Thursday, the European Central Bank will hold another policy meeting to find common ground. If the meeting fails to produce the proper response in the eyes of the market, this too will reverse last week's rally and send the market lower.

A third item that will send stocks lower in August, extending the S&P 500 incarceration in the current trading range between 1,099 and 1,419, if the realization sinks in of the draconian effects of federal budget automatic sequestration.

When austerity begins appearing in budgeting decisions in government, and workers begin preparing for possible layoffs and downsizing by reducing personal spending, and when businesses relying on government contracts to purchase their goods and services recalculate their cash flow and revenue, GDP will decline.

The May 2012, G.19 Federal Reserve Statistical Release, dated July 9th, shows "consumer credit increased at an annual rate of 8 percent in May. Revolving credit increased at an annual rate of 11-1/4 percent, while non-revolving credit increased at an annual rate of 6-1/2 percent." It's hard to imagine this type of credit activity continuing in the third and fourth quarters of 2012.

Our anemic economy grew 1.5% in the second quarter, down from 2.0% in the first quarter, with major help from consumer credit. Subtracting significant credit in the third and fourth quarters will exacerbate any weakness.

Individual savings rates were reported up 4.3%, annualized, in the first three months of this year, starving an already malnourished economy of vital disposable income. The minuscule interest currently being paid on savings is also problematic for an economy in need of greater money supply velocity.

An economically weakened Europe and a weakening China will inadvertently push the US economy over the edge unless smaller emerging markets can somehow re-accelerate the global economy while avoiding the developed nations' debt contagion.

The final culprit with the motive and opportunity to assassinate the economy is stagflation. As 2012 futures' prices on corn, oats, soy beans, and wheat reached multiyear highs, 1,300 counties spread over 29 Midwest states have been declared natural disaster areas by the USDA.

In the 1970's, President Richard M. Nixon imposed wage and price controls in an attempt to snuff out stagflation and inflation. President Gerald Ford attempted to talk down inflation with a Whip Inflation Now (WIN) campaign, complete with WIN buttons. Inflation ran rampant throughout the 1970's until a new Sheriff rode into town in 1979.

The newly appointed Federal Reserve Board Chairman, "Tall" Paul Volcker, ended inflation by jacking up short-term interest rates to 22%. Although, lifting interest rates to nosebleed levels induced at the time the deepest recession since the Great Depression, inflation did not return.

Another smart decision made by the government at the time was issuing callable long-dated treasury bonds and zero coupon bonds to minimize interest expense. This morning, Treasury announced it is investigating issuing floating rate notes; while interest rates are lower than they have been in the past 100 years. I'm puzzled by such a decision.

This earnings' season, restaurants such as McDonalds (MCD), Chipotle (CMG), Buffalo Wild Wings (BWLD), have admitted to struggles with cost inputs, missing earnings estimates, and are now lowering guidance for upcoming quarters. Food suppliers like Hormel Foods Corporation (HRL), Tyson Foods, Inc. (TSN), and Smithfield Foods, Inc. (SFD) are experiencing these headwinds, as well.

Brent Crude oil is priced north of $100 dollars a barrel. Members of OPEC require the price of oil to stay north on $80 dollars a barrel to maintain political stability at home. That price level is in conflict with jump-starting the global economy that is continuing to deleverage from the previous decade.

Regardless, if the price of oil should rise or fall short-term, the global economy will be petroleum-based for decades to come. Therefore, an essential building block for any inflation defensive portfolio requires an integrated oil company such as Exxon Mobile (XOM) or Chevron (CVX).

One final thought; although, we have experienced deflation in many things since 2008, technology, of course, real estate and virtually any asset requiring financing, and the cost of capital itself, this economic period will end, too. And once more, we will again face and fight inflation.

Unappreciated is the two-stage intermediate step between deflation and inflation – stagflation. Ben Bernanke has spent years and trillions of dollars attempting to re-inflate asset prices. One day he will succeed. At that point, Stage One, the rising cost of living, or cost-push inflation kicks in, whereby, too few dollars are available for rising prices.

Stage two of the stagflation equation is flat wages and personal income. Whether one draws a paycheck from a job or clip coupons from investments, purchasing power begins contracting, not growing.

This reality of less disposable income relative to prices, combined with an aging population and extended life expectancy is a recipe for structural economic arrested development until we surrender to full-blown inflation in future years.

Politicians will feel obligated to rectify the former condition and then, the more radical and dangerous phase of inflation occurs, demand-pull, leading to too many cheapened dollars chasing too few goods.

Confidence or the lack thereof, in a nation's currency, is the thin line straddling inflation and hyperinflation.

And, it is here, that your portfolio of hard assets such as gold and silver, agricultural commodities providing food security, natural resources such as land, timber, water, energy, selective adjustable rate debt, and very selective stocks, will pay off for the patient, long-term, investor during inflationary times.

SPY Gains of the XXX Olympiad

The stock market has given us over the past six weeks all the thrills of a summertime Six Flag amusement park ride. This serrated performance of risk on/risk off greed and fear rests upon the painful to watch unraveling of the European Monetary Union (EMU).

Now headlining the limited engagement of sovereign surrender of the old country to Germany is Spain. From CNBC, Wednesday night, Moody's Investors Service cut its rating on Spanish government debt by three notches on Wednesday from A-3 to Baa-3. Moody's rating puts it one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook.

Egan-Jones also cut Spain's sovereign rating to "CCC+" from "B," pushing the country's debt deep into speculative territory.  The rating cut, Egan-Jones's fifth for Spain this year, carries a "negative" outlook.

Fitch Ratings cut Spain's rating by three notches on June 7 to BBB, one notch above Moody's, and put a negative outlook on the credit

The current bearish market metronome to Europe’s impotence and incompetence, Spain’s insolvency and other countries soon to follow, is neither surprising, or, heretofore, improbable. Yet, angst-filled investors remain invested.

Still, a summertime rally will climb this particular wall-of-worry, albeit in a saw tooth pattern, if only because so few people believe that it can or should. Only a fortnight ago, we stared into the abyss having received freshly humbling economic reports on real estate and non-farm payroll. This doom and gloom was sandwiched in-between periods of misplaced optimism about the outcome of Europe’s banking crisis and future global growth.

Treasury rates made their final approach and landed into the history books, June 1,  reaching 1.45% on the 10-year and 2.51% on the 30-year, exceeding all-time lows reached in the fourth quarter of 2008.

Gold and silver has finally awaken from their $1,500 range-bound sleep with explosive upside moves, also June 1, coinciding with revisions of two previous months’ worth of punk GDP growth and a terrible realization that a new Fed punchbowl is nearby while the Presidential hopeful, former Massachusetts governor Mitt Romney chances for capturing the White house in November are brighter than ever.

Only in these perverted times will bad news make the stock market happy. Although in testimony before congress, Fed Chairman Ben Bernanke downplayed any urgency in enacting Quantitative Easing III (QE III), and was instructed by a member of congress to take the punchbowl away; you can be sure that it will remain. Since, without QE III, many politicians and many portfolio managers alike fear for their careers; and the economy, too.

The remaining June milestones to watch include the Greece’s Parliamentary (Snap) election to elect parties that the (EMU) will approve of and vice versa; keeping the dream of higher asset prices and no bank loses alive. It’s being reported that $1 billion dollars daily is being withdrawn from Greek banks prior to Sunday, June 17^th election.

France’s Legislative Second Round election will to determine if the Socialists will take control of their government. Both countries’ elections occur on the same day.

On June 19th, the Federal Open Market Committee (FOMC) two-day meeting begins. Opinion is split as to whether or not an announcement regarding QE III will be made. The usual monthly data sets throughout the rest of June should experience an elevated sensitivity because the current atmosphere of presidential politics supercharges all things economic.

So, why will there be a summer stock market rally? Be patience, we’re getting there.

Over the past two years, knowledgeable talking heads informed us that Greek and Portugal fiscal catastrophes are manageable, however, if the banking crisis infects Spain, then, its economy is just too large to save and the ballgame for developed nations and emerging markets is over. Well, that time has come. Spain officially asked for a €100 billion bailout.

I’m sure you have heard that the rescue structure is the Ireland model. The double quote below, the first from Gluskin Sheff of David Rosenberg, and the second from the blog site Zerohedge commenting on Rosenberg’s comment succinctly summarizes the folly of rescue:

Rosenberg - When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% - it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.

Zerohedge - As we have pointed out vociferously over the past few days, even though the assistance is being earmarked for the banks, the Spanish government assumes the responsibility and so this once 'low national debt' sovereign is following in Ireland's footsteps as its debt/GDP takes a 10pt jump to 89% (based on the government's data) and much higher in reality (when guarantees and contingencies are accounted for).

If the too big to contain (TBTC) outstanding bad debt equation about the EMU was true two years ago, it’s no lees true, today.

Taken all together, this is a continuation of the crisis and fallout from 2008. Greece is in a depression. Europe will soon enter a depression. Eventually, the entire world will sink into an economic depression; another economic depression in a long line of collapses throughout history. But, somehow, we will survive. We always do. There will be new winners and new losers in the 21st century.

Back to this summers’ rally. The S&P 500 Index 52 week range is 1,074.77 - 1,422.38. The close on June 13^th was 1,314.88. Its 6-month high was 1419.04 and low was 1205.535, a ten handle move on the index before Labor Day is not unreasonable. The stock market is as much a psychological and emotional occurrence as any endeavor imaginable.

On a technical basis, the market is near the middle of its 180-day trading range. The market is nearer to an oversold condition than an overbought one. The market can ignore reality (bad news) for weeks, sometimes months, at a time. This summer’s rally may take out the year’s highs but will be the last opportunity for money managers to enhance long returns in 2012.

When the stars and stripes are waived this summer in London at the Games of the XXX Olympiad, beginning July, 27^th, lasting thru August 12^th, and gold, silver, and bronze medals for individual effort and achievement are collected by young men and women on behalf of our republic, we will lay down our various political blood sports, for a brief moment, and swell with national pride.

Is a summer rally guaranteed because the nations of the world are watching their fellow countrymen represent and excel in their sport of passion, as a payoff for years of dedication through their blood, sweat, and tears, while also inspiring the next generation to compete and succeed? No.

But, show me anything that makes sense in a de-levering world of microscopic interest rates, austerity programs that allegedly spurs economic growth, notional derivative contract values several times over of total global wealth today, an insolvent global banking system that extends and pretends the day of reckoning, or a financial world that believes somehow, someway, helicopter Ben will save the day.

We all need to believe in something.