Despite the media generated debt ceiling hysteria, capital markets are looking beyond any tortuous political 'resolution' toward a 'reprice' based on rapidly improving fundamentals and a very positive earnings season. Equity markets have even seemed to discount President BH Obama's desire not to allow the half of Americans who pay no taxes to bear the burden of the other half who aren't paying their fair share! The great debate of : 'more taxes vs less spending' has morphed into a mindless 'less filling vs tastes great' dialogue.
Thursday's announcement of a final 'potential' Greek resolution is now turning the financials market attention from the macro issues (debt) to micro matters (earnings/growth). The bold freshly minted $US148b/108b Euro package extends maturities at 'AAA' interest rates for an effectively bankrupt country. Effectively a precedence has been set for further Euro debt restructurings The itchy trigger finger of Moody's has lowered Greece's rating a notch above default but without the usual histrionics or hysteria.
A huge debt can has been kicked a lot further down the Grecian hodos. Yields for all distressed Euro jurisdictions quickly collapsed and Spanish regulators are breathing a huge sigh of relief. World equity markets are now looking past debt issues including the consternation coming out of Washington and the infamous gun slingling 'Gang of Six.' Neither US political party wants to be responsible for a Moody's rating downgrade. Expect a 'face saving' shorter term compromise. The critical drivers of interest rates, growth, and earnings appear to be the dominant theme for the remainder of the fiscal year. European woes and US debt wrangling notwithstanding, equities continue to show significant resilience with the MSCI AC World index returning an impressive 3.4% this month. A move into new recovery DJIA and S&P highs appears likely before temperatures return to double digit levels.
In the US, 25% of corporations have reported so far with 75% beating estimates. US corporate activity is firing on all cylinders. Earnings for the S&P companies look to break above $US1 and are sitting on piles of under utilized capital. The DJIA, S&P, and Nasdaq rallied 1.68%, 2.08%, and 2.00% respectively for the week. The NASDAQ sits impressively at 10+ year high territory. Weekly charts are on the threshold of breaking into new recovery highs in the short term. Global demand for US assets rose $US23.6b in the month of May, housing starts reported 5 month highs in June, and the Philly Fed Manufacturing index rose to 3.2% from minus 7.7% the month earlier. Earnings are expanding at a 17% pace with 91 out of 120 companies soundly beating expectations. Profit margins are expanding dramatically with revenues up 10% vs 17% for net operating income. These are ideal and optimal conditions for equity out performance and significant P/E expansion.
In commodities, broad based strength is reflected in a rapidly improving CRB Index. Gold and Silver continue to hold recent high levels. Gold maybe vulnerable in the short term based on an inevitable US debt deal despite the new all time highs currently being registered. Short term indicators are reading over bot but not yet over extended. A concern about a CME margin 'surprise' also exists. I maintain my long term target of $US1,750/oz for Gold and $US60/oz for Silver. Continued South American copper supply disruptions bolsters a longer term price structure above the very profitable $US4/lb level. Crude oil is testing the high $US90/bl level above short and longer term moving average resistance. Any significant supply disruption could potentially result in significantly higher prices. Do not rule out a retest of last April's $US110/bl level before the driving season ends. US Treasury bonds continue to consolidate with 10 year money yielding a paltry 3.02% despite 'unstimulated' debt challenges. A move below the end of June lows would be worrisome and should be watched closely. The possibility of a higher interest rate restructure has moved to the highly likely category. The Agra sector is set to report another strong season with prices in the higher end of their ranges on a weekly basis. Key crop reports are set to announce the effect which the hot weather has had on nation wide supplies and yields.
In Canada, the TSX closed 1.62% higher on the week and is only a handful of points higher year to date. The energy and materials group showed the best improving relative strength this week. Reported inflation levels dropped with core CPI showing it's biggest monthly decline since April 2003 on a seasonally adjusted basis - a whopping 2.5 standard deviation move. Foreign investors continue to be attracted to Canadian bond issues allowing an easy financing of a growing federal deficit. Half of recent bond purchases have been for federal government bonds with the balance being a mix of corporate and provincial offerings. The Bank of Canada kept rates at the historically low rate of 1% with a possible increase as soon as September. A Canadian Dollar move to $US1.10 appears likely sooner than later. China's biggest offshore oil producer (Cnooc) agreed to purchase the beleaguered oil sands assets of Opti Canada for $US2.1b and also pledge to purchase more energy assets globally. RIM's market share struggle continues with the news of an 11% employee layoff and an executive restructuring. A glimmer of positive news for RIM was the 'exclusive' approval of their playbook by the US government. Many key TSX senior gold issues report next week and should set the tone for a positive upgrades and revaluations. The TSX index has rallied about 50% since the March 2011 top of 14,300. The TSX sits at a key resistance level of 13,500 and any move above implies a re challenge of those yearly highs.
In closing, the post sovereign debt crises environment looks quite positive and promising from my perch despite my concerns of higher short term lending rates. Equity and capital markets are quickly refocusing on what they care about the most: revenues, earnings, and dividends. Key financial institutions are flush with unemployed capital and many investment funds are braced for downside disaster - the key combination for a further price gains and potential P/E expansion. Many key US corporations are lean, mean, and well positioned for improving economic conditions. Very little (if any) froth or excess has been built into large cap valuations. I would not rule out a retest of the DJIA 14,000 frenzy high during the memorable over leveraged 2006-07 era before this recovery is over!
Either that, or the heat and humidity is finally getting to me!
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