Top Gun FP Client Note: Unusually Uncertain

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ByGreg Feirman Reading Time: 8 minutes
TOP GUN STRATEGY SESSION WITH CHARLES KIRK OF THE KIRK REPORT, FRI AUGUST 6 AT 12PM EST: Click here to participate in the strategy session.
 
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The economic outlook remains unusually uncertain.
 
Two weeks ago, Fed Chairman Ben Bernanke gave his semiannual testimony before Congress on monetary policy.  The phrase everybody latched onto was “unusually uncertain”.  The S&P tanked 20 points in the aftermath of this comment.
 
Nevertheless, financial markets worldwide put in a notable rally in July.  The S&P tacked on 71 points or 6.9%.  Volume was quite light with NYSE composite average volume of only 4.6 billion shares a day – 13% below the daily average for the first half of the year.  Copper also put in a solid move from the high-$2 to the mid-$3 range.
 
One big catalyst for the rally was the recovery of financial markets in Europe.  European stock markets in general outperformed the S&P.  The Euro rallied from the low $1.20s to the low $1.30s.  Spreads on European sovereign debt such as Greece, Portugal and Spain all narrowed compared to Germany.  Credit default swap prices also eased for these countries (see “Rays Of Optimism Shine On Europe”, The Wall Street Journal, July 28, C1).
 
Also supporting financial markets, 2nd quarter earnings have met or even exceeded high expectations.
 
Even so, we remain in the middle of a wide trading range established by the April high around 1220 and the July low around 1020. 
 
Yesterday’s (Monday) surge pushed us up toward the June highs on the S&P around 1130.  If we could break those to the upside that would be something.  Alternatively, failure here could establish a double top around 1130 creating a subsumed trading range between 1020 and 1130.
 
Feeding into the malaise is speculation about deflation.  Last Thursday, St. Louis Fed President James Bullard raised the possibility of a Japanese style deflation and recommended more quantitative easing as the cure.  The Wall Street Journal wrote an article yesterday about a few big investors who are forecasting deflation, most prominently Bill Gross of PIMCO (“Big Investors Fear Deflation: Bill Gross Among Those Bracing For Possible Decline In Prices: ‘It’s Happening'”, Gregory Zuckerman, The Wall Street Journal, August 2, C1). 
 
Providing support for their contention, consumer goods giant Procter & Gamble (PG), maker of such famous brands as Tide, Crest and Gillette, reported a 1% drop in prices for the quarter ended June 30 compared to the year ago period.  They also reported a 1% drop in prices for the quarter ended March 31.
 
Corresponding to the financial and economic stagnation are increasing signs of political division and conflict:
  • The Obama Administration filed a lawsuit to stop the implementation of Arizona’s law to control illegal immigration.
  • The Los Angeles Times reported that the City Manager of Bell, CA was receiving an annual salary of almost $800,000 a year creating a firestorm (“Is A City Manager Worth $800,000?”, The Los Angeles Times, July 15).
  • John Kerry came under fire for buying and docking his new $7 million yacht, Isabel, in Rhode Island, avoiding Massachusetts 6.25% sales tax and 1% annual excise tax on yachts, while supporting the expiration of the Bush tax cuts for the wealthy.  Rhode Island repealed its Boat Sales And Use Tax in 1993 making it a haven for yacht owners (“Sen. John Kerry Skips Town On Sails Tax”, The Boston Herald, July 23).
  • Democratic Representatives Charlie Rangel and Maxine Waters have made the front pages in recent days for ethical investigations (“Ethical Woes For Democrat Hopes For November”, August 2, The Wall Street Journal, A1 and “In House Ethics Battles, A Partywide Threat”, The New York Times, August 2, A1).  Rangel is being investigated for money he raised from companies for an educational institution that bears his name.  Waters is being investigated for her role in steering $12 million in TARP funds to black owned OneUnited Bank in which she owned stock and her husband served on the board (“How Representative Maxine Waters Used Her Influence To Secure TARP Money For A Connected Bank”), Top Gun FP, March 13, 2009).
In an Op-Ed in today’s New York Times titled “Welcome To The Recovery”, Treasury Secretary Tim Geithner claimed that we are on our way to recovery and credited the Obama Administration’s policies:
The economic rescue package that President Obama put in place was essential to turning the economy around.  The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy.
Does anybody believe him?  Consider me a cynic.  All in all, it feels like neither a bull market or a bear market but a blah market.

TOP GUN STRATEGY SESSION WITH CHARLES KIRK OF THE KIRK REPORT, FRI AUGUST 6 AT 12PM EST: Click here to participate in the strategy session.
 
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113

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