July 22, 2013 Update

DJIA:15,544 S&P 500:1,692 NASDAQ:3,588 Gold:$1,318 Oil:$108.52 EURO:$1.32 YEN:99.97

Why You Haven’t Gone Away in May

From 2010 to 2012, the economy and the equity market have been robust in Q1 but then suffered corrections soon afterward. “Sell in May and go away” has become the staple portfolio management theory nearly every investor traded by because of the patterned seasonal slowdown. As the market reached record highs in Q2 and Q3 of 2013, it has became clear that the investment rhyme may no longer have the lucrative ring it once carried. Clearly this time it’s different, but why has it changed? It has been estimated that only 25% of the money the Federal Reserve prints as part of its asset purchasing program goes into the real economy, leaving the remaining 75% of $85B monthly bond purchases to get pumped right back into financial assets; driving the recent bull market. It has long been believed that an increase in assets triggers a rise in consumption since investors feel wealthier when they’re worth more. However, this has not been the case over the past few quarters. In fact, real final sales in Q3 2012 were 2.4%, then in Q4 2012 they were 1.9%, and were 1.5% in Q1 of 2013. I think this downward trend is the evidence portraying the financial insecurity of retail consumers, despite the slight increase in 2013 Q2. Tax increases and flat labor costs are not helping lift the burden off of the mid-income consumer market. But if people aren’t spending, then why have earnings (on a whole) not been nearly as disappointing as the real final sales trend? In Q1 of 2013, 70% of the S&P’s 500 stocks came in higher-than-expected. Of the companies that reported better-than-expected earnings, roughly 40% had disappointing revenues. I think corporate top lines, like the eqiity market, have become artifally inflated from QE. The sharp growth the equity market has experienced since January 2013 has led economists and analysts to become more optimistic regarding the recovery of the US economy. I think the upbeat recent data is just a result of the 25% of QE that is driving economic growth, not due to actual improvements. It seems to me that most investors are surprised by the strength of the markets. And because of the extraordinary relationship that exists between mankind and the dollar, people are placing faith in Bernanke and believe that his tapering plan will not negatively affect their financial assets. But what happens when the liquidity the Fed has been providing starts to dry up and the market begins to lose the 75% of the $85B monthly asset purchases it has rallied from? Will “sell in may and go away” come back? Or will a much more servere investment rhyme start ringing? I think it is important to know where the monthly $85B river has been flowing, and not to place a blind faith that the market and the global financial system will be left unaffected once tapering beings.  

Domestic News

• Market Update Futures are up ahead of a fresh round of corporate earnings and home-sales data.
• Existing-home sales data will be released at 10:00, and is expected to have risen by 1.9% in June to a seasonally adjusted rate of 5.28MM. 

International Updates

Asia

• Market Update Japanese stocks closed higher after the Liberal Democratic Party’s coalition won the majority vote. 

Europe

• Market Update The Stoxx Europe 600 index reached a new seven-week high. 

Corporate

• Netflix (NFLX) Q2 earnings will be out after the bell, and as expected to have risen to $0.40 from $0.11 last year. Revenue is forecast to have risen 20.6% to $1.07B. 
• Crocs (CROX) has been downgraded to Hold by Wedbush’s Cronnia Freedman who is skeptical of the upcoming earnings release. I do not know anyone who wears the shoes.