August 1, 2013 Update

DJIA:15,500 S&P 500:1,686 NASDAQ:3,626 Gold:$1,324 Oil:$106.66 EURO:$1.32 YEN:98.69

Watch out, it's August...

As June and July have come and gone, the days remaining to enjoy the summer are numbered. In Western culture, the summer months have traditionally been when most people take vacations. The majority of European offices are closed and Americans take the most vacation days. August is the last chance for families to go away before the children return to school. In France, the government enforces the law that every employee receive a minimum of five weeks of paid vacation (on top of 22 holidays), most of this time is taken this month. The only player in the global financial system that does not take a vacation is the market itself, who has experienced a rather turbulent season over the past few years. August 2006 was when Barron’s magazine first warned its readers about a crisis in the housing market. August 2007 was when the credit crunch in the US was publicly discovered. August 7, 2007 was when BNP Paribas stopped hedge funds from withdrawing due to the dangerous “complete evaporation of liquidity.” August 2008 was when the British economy reached a 60-year low, a consequence of the systemic risk that came with the Eurozone’s deadly debt accumulation. August of 2009 continued to wobble the capital markets as the great recession worried investors. Fast forward to August 2011, when S&P downgraded the credit rating of the United States, stripping it of its AAA crown. Before the explosion of the housing bubble, August had generally been a time of low volume and horizontal growth. However, it seems as though markets have been more susceptible to macro events in August than it has ever been before; and to be honest, I don’t think this is coincidental. In August the markets use to not be as active simply because there are fewer players, which leaves less liquidity as people close positions before venturing away. And because senior management is absent most in August, junior people with less experience are left to manage positions and take their risks; which always has the potential to be disastrous, even if only temporarily. Over the past few years, August has been rather eventful and I do not believe this month will be an exception. Despite the Federal Reserve’s finding that 93% of investors are expecting the Fed to cut back on its asset purchasing program before 2014, I doubt this risk is completely priced into the equity market. Economists are adjusting their outlooks and making them more negative, while active investors are becoming more bullish about the state of the global economy as the emerging markets are slowing down. The US is growing at one of the slowest paces in its history, the reason Q2 GDP came in better-than-expected was because of the adjustments made after Q1’s disappointment. The city that was once the capital of manual labor has filed for bankruptcy and could possibly default of its debt due to outstanding pension liabilities; a problem nearly every state is facing. Plus, the political risks that face the barely united Eurozone do not seem to be improving. The system is unbalanced, especially as the Fed continues to pump liquidity into the markets. Thanks to Bernanke, it seems to me that equities are overbought and fixed income is underperforming. I think the markets will correct before the summer ends; before I return to school in September. In recent history August has been a turbulent time, and no one can predict what additional tail risk events could keep the market company as investors travel over the next 31 days.

Domestic News

• Market Update Futures are trading higher after yesterday’s hints that taper may not begin in September and react to China’s better-than-expected data. 
• Initial jobless claims will be released at 8:30, and is expected to slightly increase to345,000 from 343,000.
• The ISM will report at 10:00, and the data reported is expected to show an increase in activity for factories if the index rises to the expected 52% from last month’s 50.9%
• Auto sales for July will be released and are expected to report an annual rate of 15.8mm for July, which is a slight decrease from June’s 15.9mm; creating market risks for GM and Ford. 

International Updates

Asia

• Market Update  Markets are up in reaction to the rise in China’s manufacturing PMI for July.  

Europe

• Market Update Markets are showing solid gains across the board after upbeat news abroad. 
• British manufacturing grew at its fastest rate in over two years 

Corporate

• Procter & Gamble (PG) is estimated to report a revenue of $20.54B and an EPS of $0.77 per share.