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Economic Update for the Week of 7/27/2012

In major economic news on Thursday 7/26/2012, President Draghi of the ECB (European Central Bank) makes the promise to do anything necessary to support the Euro and markets around the world rallied sharply. What this should tell the world is how bad the situation in Europe is yet everyone gets excited as a drug addict would if they were told they would get all the fixes they need. The assumption is that the ECB will purchase bonds from struggling countries such as Spain and Portugal however the push-back will come from Germany which has stated that they are against the bond buying. Just like the previous stimuli we've already seen, this will probably be short lived as the world markets realize how bad things are. This large promise however may have a bit more lasting effect than previous stimulus in Europe, say a couple of weeks maybe, but will ultimately be short lived in my estimation.

Just before President Draghi's statement, Spanish bonds spiked up to 7.7%. This is a clear indicator of the problem and the only reason Spain remains solvent is the promise of bailout. If the ECB doesn't start buying Spanish bonds soon, the yields will most likely spike again and they'll be right back to where they started; in trouble!

Bank deposits in Greece have fallen 35%. This tells us that the financial system in Greece is getting closer and closer to collapse as funds continue to leave the country. As bank deposits decline, the bank can no longer keep the level of leans it has and will have to sell off assets. This is a downward spiral. We haven't heard the last of Greece yet.

As companies report quarterly earnings, some we should take notice of such as UPS who reported a slowdown. This means less shipments which indicates less consumption as does the earnings slowdown for Starbucks. People are beginning to spend less money and it shows up in discretionary areas such as coffee and online purchases. The economy is clearly slowing down and it happens slowly however I think we will see acceleration of this slowdown towards the end of the year before the media really takes notice and we get official reports of recession.

US GDP falls to 1.5% for the 2nd Quarter down from a revised 2% rate in the 1st quarter. The economy appears to be growing but at a slower pace. The economic indicators have been pointing to slowdown and we are seeing such in the GDP numbers. I don't think we're too far away from recession or more government stimulus.

US home prices moved higher but then new home sales dropped and the number of contracts for sale dropped to the lowest on record. Unfortunately there are still millions of foreclosed homes waiting to hit the market and will keep the market depressed for a long time.

Overall the data is weak, has been weakening, and I think will continue to weaken. We may see a nice rally in the financial markets as it is common to see a rally just before the decline. Volatility is rising and volume is decreasing which is not a good sign for a sustained rally. We could see a test to the April highs of around 13,200 on the Dow which could be a double peak not unlike what we saw before the market peaked in 2007 from July to October. We'll just have to see. In the meantime it is better to be safe than sorry.

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