First, stocks are going nowhere. Yes, they are making lots of headlines, up one day, down the next, but so far 2010 has been pretty much of a yawn. Stocks had a hot July (didn't everybody?) up 7%, but year-to-date the market is flat, returning zilch. (Not so for long-term Treasury bonds, which have returned more than 14% so far this year as the world cherished safety.)
Second, corporate earnings are way, way up. As Zacks Investment Research reports, 66% of companies have now reported their second quarter earnings, and income is up 44% over last year's second quarter. What's more, most companies are beating analysts' earnings estimates (250 beat estimates and 54 disappointed) and sales estimates. Investors don't seem to care. Zacks notes that "there seems to be an asymmetrical response in the market. Firms are not being rewarded if they post a positive surprise, but are punished severely if they disappoint."
Third, oil prices are inching back up. There was talk that prices were headed down into the upper $60s due to the slow global recovery, but this reversal—oil is now above $80— is a signal that global demand may be a bit stronger than traders had expected. Of course, the latest lurch to $82 is largely the result of a weakening dollar so oil could give up some ground if the dollar rallies.
Fourth, consumer spending is also going nowhere, but the flip side of that, the personal savings rate, is moving higher and reached 6.4% in June, the highest since June of 2009. As you raise your glass at tonight's BBQ, confidently say, "Let us now toast the Paradox of Thrift!", thank all for deleveraging, then duck.
Fifth: The Euro crisis is not over, it's just in a new phase. Greece will soon (Aug 30) hear from the IMF whether it has successfully complied with the IMF's adjustment plan. If Greece does not get a passing grade it will not receive money from the IMF and the EU. The morning line from High Frequency Economics says that the market is not optimistic: "Note that the markets are not pricing Greek bonds as if the national debt crisis has been solved. Four [year notes] still demand 11.1% yields to attract buyers, and ten [year notes] demand 10.2%. The problems are still there, they are just out of sight." If Euro crisis re-emerges, refer back to Fact #3 as the dollar will likely rally.
THURSDAY UPDATE: The HFE team notes that the IMF has just published a report on its website noting that its team in Athens, in conjunction with European Commission and the European Central bank central bank, has determined that Greece has met its reform commitments for the first half of 2010, and so will receive billion of dollars in aid. Remarkably, HFE notes, "yields on Greek Government bonds did not decline on this announcement."
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