Q2-10 Update

In April, the stock market reached its highest level since the financial crisis of 2008. Then volatility returned. A debt crisis in Europe started in Greece and spread. At issue is the ability of countries with exorbitant debt levels to fund obligations. Around the same time it appeared that China was attempting to slow its super-high growth economy which could remove a key global growth component. Then there was the “flash crash” when the stock market plunged in just a few minutes raising concerns about the day-to-day workings of the US equity market. The response was a flight to investments perceived as safe. By the end of the second quarter the S&P 500 had decreased by 11.9% and wiped out a small gain in the first quarter. Stocks are down 7.6% for the year.

Corporate earnings have not disappointed. Companies have been able to steadily improve the bottom line since the lows of 2008. Operating earnings on the S&P 500 should come in at $80+ for 2010. 15 X $80 make the case for 1,200 on the S&P 500. Alternatives like cash and bonds offer historically low yields so equities seem to have good value. Year over year comparisons get more difficult and expectations are higher compared to last year. It becomes more challenging for earnings to surprise to the upside.

Gross domestic product growth turned positive in the third quarter 2009 after a year of negative readings. The first quarter of 2010 showed an increase of 2.7%. The remainder of 2010 is expected to show low growth.

Commodities declined in general in the second quarter. Crude oil closed down about 9.7% at $75.63 per barrel. Gold was up 11.9% to $1,245.50 per ounce. Gold was able to rise steadily as the global economic outlook turned. Gold is sought to preserve wealth in volatile markets and declining paper currencies. May and June were prime months for gold investments amid the volatility and European currency declines. Also commodities are generally priced in U.S. dollars which increased in value over other currencies in the second quarter.

Home prices nationwide have shown some appreciation from last year but are still down significantly from the peak of 2006. Extended tax credits for first time home buyers expired on April 30th so it would not be a surprise to see the number of homes sold as well as the selling prices fall a bit from here.

The unemployment rate came in at 9.5% in June. There has been a small amount of private sector hiring. Government payrolls were temporarily impacted by census hiring. Weak job market expectations remain.

The Federal Reserve maintained the 0.00% to 0.25% range for federal funds. Despite continuing dismal prospects for fixed rate investments, the move to lower risk drove the yield on the 10 year treasury down to less than 3%. The Fed is still not concerned about inflation. High unemployment and idle capacity do not put much upward pressure on prices. Core consumer prices continue to rise at a historically low rate around 2%. Even though there is very little inflation officially, continued large deficits may play a prominent role in the future.

Equities all over the world also moved lower in the 2nd quarter. Excluding the U.S., stocks were down 12.7% on the Dow Jones Global Index. Developed European equities were down across the board (U.K. -13%) as were the commodity focused emerging markets like Brazil (-13%). Japan was down 15% and China was down 6.2%. The International Monetary Fund’s World Economic Outlook predicts a 4%+ rate of growth worldwide through 2011. Emerging and developing economies like China are expected to exhibit nearly double digit growth while Europe should come in only slightly positive. The IMF expects the US economy to grow at nearly 3%.

Please let us know if you would like additional information on any of the above.

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