Market Update — July 12, 2012

Here are some of the stats and thoughts that I found interesting while reading on Wednesday…

We need to accept muddling through for the foreseeable future.  St. Louis Fed President Bullard gave an interesting speech on Tuesday.  He argued that “while growth is certainly desirable, increased government spending today followed by higher future taxes is not likely to produce more rapid growth. I will conclude that the most likely way forward continues to be a long period of debt paydown and sluggish growth, both in Europe and the U.S., and that the most pressing policy issue is to accept this path and prevent any additional problems from developing as we press ahead.”

It’s like a yo-yo.  Spain’s ten-year bond is down to 6.55% and Italy’s is down to 5.80%.  A couple of days ago, Spain’s yield was above 7%.

Higher sales tax.  Spain is discussing raising their value-added tax from 18% to 21%.  In addition, they are discussing salary cuts of 7% for central government employees.

When times get tough, lets lower the bar.  Spain’s deficit was 8.9% of GDP last year.  They are expecting a 1.7% contraction of GDP this year.  The euro-zone ministers agreed to relax their budget deficit target for this year from 5.3% to 6.3%.

If you pay me, I’ll let you loan me money.  France joined Germany and the Netherlands in selling short-term securities with negative yields.  This is the first time this happened in France.

I thought Brazil was the center of growth!  Brazil’s central bank was expected to cut rates late Wednesday for the eighth consecutive time to a record low of 8%.  Brazil is expected to have growth of somewhere around 2% this year.  At the start of the year, Brazil was expected to have 4.5% growth.  In 2010, Brazil grew 7.5%.

Losing streak continues.  The Dow Jones Industrial Average dropped on Wednesday – the fifth consecutive drop.

Poor earnings don’t help.  Analysts currently expect second-quarter earnings growth for S&P 500 companies to come in at a negative 2.1% rate. That would mark the worst growth rate since the second quarter of 2009.

Winners and losers.  Only three sectors — industrials, tech and consumer staples — are expected to see earnings expand.  Materials and energy lead the laggards, as both sectors are forecasted to report earnings growth slowed by 12% and 11%, respectively.

Expectations dropped over time.  Last July, analysts were expecting this earnings season’s growth rate would come in at 14%. That estimate dropped to about 8% by October, nearly 4% at the beginning of year and 1.7% by April.

Overall, money flowed into mutual funds, but it was out of equities and into bonds.  For the week ended July 3, equity funds had estimated outflows of $2.84 billion, compared with prior-week outflows of $1.11 billion. U.S. equity funds fell by $3.14 billion while foreign equity funds increased by $300 million.

Gimme some of those 3% taxable yields.  Bond funds had total inflows of $3.38 billion, down from prior-week inflows of $4.32 billion. Investors added $2.51 billion to taxable funds and added $870 million to municipal funds.

Hedge my bets.  For hybrid funds, which can invest in both stocks and fixed-income assets, investors poured in $1.13 billion, compared with $18 million in the prior week.

Bill Gross does his Dr. Doom impression.  Bill Gross said that Fed policies are having progressively less impact and he predicted that our unemployment rate will be higher in a year (than the current 8.2%).

It’s not the PACs that we should be watching.  PACs must disclose donors, but tax-exempt organizations do not need to do the same.  As a result, companies are giving money to tax-exempt organizations that advertise.  During the 2010 midterm elections, tax-exempt groups outspent super PACs by a 3-to-2 margin.  This money tends to favor Republicans more than Democrats.

I’m pretty sure that we already know where everyone stands.  The House voted Wednesday to repeal President Barack Obama’s health law.  The vote was 244-185, largely along party lines (five Democrats joined Republicans).  This was at least the 31^st time that the House had voted to repeal all or part of the Affordable Care Act.

“I didn’t get the degree, but I got the debt.”  Student loan borrowers who graduated from college had a 3.7% default rate in 2009.  Student loan borrowers who didn’t complete college had a 16.7% default rate.

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