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Strategic Insights

Volume 4, Edition 26 | July 13 – 17, 2015

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Fundamentally Speaking

fundamentals

U.S. stocks were sharply higher this week as the story shifted (finally!) from Greece to corporate fundamentals just as earnings season kicked into high gear.

Market Review

Contributed by Alan Leist, III

U.S. stocks were sharply higher this week as the story shifted (finally!) from Greece to corporate fundamentals just as earnings season kicked into high gear.

Enough Said: Despite multiple stops and starts filled with enough drama for a Greek tragedy, a deal was reached to put this episode of an ongoing saga to rest.

  • With rampant skepticism in the Eurozone, another weekend summit (see below) and riots in Greece, the deal remains shaky but the near-term risk to investors has been taken off the table.

Onward and Upward: 6+ years into a bull market marked by extraordinary monetary stimulus and rising valuations, a refocus on corporate results is upon us.

  • The Fed is shifting policy (slowly) as the economy tries to stand on its own. In that world, robust earnings growth is needed to justify current (and higher) prices.
  • The fall in oil and a strong dollar are among the factors that have lowered the bar this season. But, as the market proved this week, low bars are easy to clear!

Stock Spotlight

Contributed by Doug Walters

As a follow-up to our June 20th edition of Insights, we take a 2nd look at China and ask if the most recent GDP report provides an accurate assessment of their economy.

Is That Good or Bad? The GDP growth numbers from China for Q2 of 2015 took investors and economists alike by surprise. (7% growth vs. estimates of 6.8%).

  • A dramatic rise in brokerage activity in a feverish market fueled the upside surprise. Does that represent good quality growth? We think not.
  • Investors, however, took the strong numbers on face value and sold-off stocks (counterintuitively) fearing that officials might turn off the stimulus spigot.

Are You Strong Enough? The GDP numbers coming out of China are even more suspect than usual.

  • In the absence of reliable figures, investors have tried using measures such as freight rates and electricity output to ‘guess’timate real growth.
  • Analysts from Citi Group who used similar measures feel that the economy is growing at a rate closer to 5%.
  •  Keep an eye on Dr. Copper for hints of real strength.

Our Take: Going into the report, economists had projected a slowdown across different sectors of the economy.

  • This makes sense. Most of the sectors within China’s economy have yet to respond to stimulus measures.
  • Given the quality of the GDP numbers, it may be a while before the government turns off the spigot.
  • Like the rest of the world, China’s speculators may once again take solace in the fact that their government will stand behind their investment dollars…for now.

Looking Ahead to Next Week

Contributed by Aaron Evans

Working for the Weekend:  EU and Greek leaders will converge once again Sunday to review the latest bailout & repayment deal that Greece has brought to the table.

  • Dire straits followed last week’s referendum vote by the Greek people. However the current proposal seems much more in line with creditor (ECB / IMF) demands.

On the Hill:  Federal Reserve Chair Janet Yellen will give her bi-annual testimony to committees from both Houses of Congress next week.

  • Given the recent international volatility, Yellen will likely reiterate that a gradual rate hike is on the horizon, while maintaining flexibility in terms of timing.

Earnings Bonanza! With the market once again focusing on fundamentals (see above),  we are in for a treat next week as about one quarter of the S&P 500 reports.

  • Strategic holdings Apple, IBM, Boeing and Coca-Cola are among the big names set to report.
  • Keep an eye out to see if tech’s winning streak carries over into other sectors of the market.

Investment Strategy Update

Contributed by Max Berkovich , David Lemire

STRATEGIC Asset Allocation

Macro to Micro…for now: Greece and China came off the boil this week. Subsequently, attention turned to the new earnings season and diverging monetary policies.

Grudging Gains: Earnings growth is there but just not as fast as hoped for. Same too for the overall economy. Strong U.S. markets with a relief rally assist from Europe have boosted equity allocations this month.

Dollar Dilemma: Somewhat lost in the Greece dominated headlines is the fact that the ECB continues to buy bonds, while the Fed signaled once again that lift off is imminent. The dollar bulls and euro bears are getting set to resume trading.

STRATEGIC Growth

Ogle the Google: Financials had an outstanding week but Technology led the way as investors stopped their search for outstanding results.

  • Google (GOOG, GOOGL) reported a strong quarter, with paid clicks rising 7% for the quarter and 18% year over year.  Most of the enthusiasm emanated from the new CFO’s comments on cost controls in segments of the business and a 10% allocation to “big new ideas” elsewhere.

STRATEGIC Equity Income

Some Intel-ligence: Earnings from financials boosted the strategy, but tech was also a leader. Energy and Materials were laggards. In stock specific news…

  • Intel (INTC) reported a consensus topping quarter with guidance also above estimates. Analysts quickly attributed the beat to a lower tax rate, which is a low quality beat. Focus then zeroed in on a delay in a new CPU platform.

 

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