From Bad to Ugly

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From Bad to Ugly

If last week was bad then this week was just plain ugly. After a string of disappointing economic reports and uncertainty over the debt ceiling hit the market, the averages fell to their worst performance since the fall of 2008.

The catalyst is more of what has been going on for the last few months. Slower growth and political uncertainty surrounding the US and Euro zone.

One the economic front, Q2 GDP came in at a paltry 1.3% last Friday. That is incredibly weak coming out of the deep recession we just had and well below post-recovery averages.

We also saw disappointing reports in services and manufacturing, each showing their third consecutive monthly decline.

And when you add in uncertainty over the financial conditions of the US and Euro Zone, accounting for $30 trillion of global GDP, it’s says a lot about how the market is repricing risk right now.

But let’s not get too gloomy here, let’s keep at least a few things in mind.

There is a highly unusual disconnect going on between the economy and the stock market right now. Everybody knows that the economy, which is GDP, unemployment and inflation, isn’t very good. But that hasn’t prevented the private sector from digging its heels in and pushing the S&P500 back to peak earnings from 2007. Companies are as profitable as they’ve ever been, and they have tons of cash on the balance sheet. The private sector is strong and healthy.

It’s also important to consider the massive gains the market has pumped out over the last 2.5 years, with the Dow and S&P500 more than doubling from the bottom of 2009. Even though some individual names have been hit harder than others over the last week, the averages are still only trading 10% off their recent high from April. A pull back and profit taking at the top are normal stages of a market and economic cycle.

So even though stocks took a hit and traded lower this week, it’s important to remember there are still plenty of reasons to be optimistic and invest in the long-term trend of global economic growth.

Looking forward, we’ll be hearing from the Fed this week, with Ben Bernanke scheduled to speak at a conference on Tuesday. Speculation ran high last week as the market crashed that the head of the Central Bank would use this as an opportunity to announce a new round of stimulus. The market already knows the Fed is prepared to move, so it will be interesting to see if the recent 10% decline in stocks and a string of weak economic data is enough to trip its wire.

Updates:

The stand out performer of the week was Double Gold (DGP), gaining 4.3% as investors shifted into safety assets. There has been all kinds of speculation about gold being in a bubble or overvalued. But with the Dollar and Euro both on the ropes and looking ever weak, the Street continues to view gold as a way to hedge itself against currency devaluations.

With crude trading lower and breaking below $90 a barrel, energy stocks were under pressure.

It showed up in Baker Hughes (BHI) and Cimarex Energy Corp. (XEC), both falling into the red as the market moved away from higher-growth areas. Cimarex was also affected by its Q2 earnings report, in which production came in slightly below expectations and the company announced a $100 to $200 million increase in capital spending. It wasn’t exactly music to the market’s ears, but overall this is still a very good company that operates in a growth industry and controls a very limited resource. The ride is a bit bumpy right now, but energy resources continue to be scarce, so let’s look for the long-term trend to provide support.

McDonald’s Corp (MCD) was once again a leader in the weak market, falling just 1.7% on the week for another strong out performance. MCD might not be the most glamorous stock in the world, but it is proving to be a seriously versatile player that provides tons of diversity. When the market was strong, it outperformed on the upside as investors bet on its growth in emerging markets. But now, with stocks looking weak, MCD is outperforming again as investors view the company’s strong global brand as a bastion of safety. So even though MCD might not be the hottest number on the Street, it’s a very versatile stock with the experience and versatility to perform in all kinds of different markets.

Speaking of earnings reports, CF Industry Holdings (CF), our favorite fertilizer stock, reported really good Q2 results on Thursday, with earnings coming in well ahead of expectations. The story remains the same; food and agricultural resources remain under pressure due to increased demand and limited supply. That is fueling the growth of companies that provide products and services to the industry. Looking forward, CF says it doesn’t see any near-term cyclical slow down in its business, so for the time being it’s all hands on deck.

And finally, a quick nod to Apple, Inc (AAPL), outpacing the market with a 4.2% decline. Apple is another stock that investors view as being both defensive and growth oriented, so that has helped buoy the tech juggernaut in the weak market.

It was a tough week in the market. But if it’s any consolation, no one lost more money than the world’s richest man, Carlos Slim, off by about $6.7 billion on the S&P500’s 7.2% decline. Let’s stay optimistic and look for strong earnings to support the market.

Carlos Slim Down $6.7 Billion on Week

Your Investment Partner,

Mike

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