Friends
As we return this Monday, stocks seem to continue to want to move higher. At the close the S&P was slightly higher. Still, traders continue to be concerned with valuation and the fact that we have not had any sizable retracement in prices in quite a while. As earnings season winds down, we note that over 70% of the S&P 500’s earnings have been a positive surprise. That number is almost identical when we look at positive revenue surprises. On the negative side, it is clear that commodity prices are driving the input cost of consumer companies and squeezing their margins. The question will be which companies can pass on those costs and maintain decent margins and which companies cannot.
The situation in Egypt came to a head at the end of last week, which seemed to calm oil prices a bit and settle the stock market as well (although the stock market never seemed too upset about the whole situation). We know that global macro issues will continue to provide headwinds that stocks will have to face for the foreseeable future. Whether it’s the continuing debt concerns in Europe, growth in China and the emerging nations, or the continuing unrest in the Middle East, global issues are likely to keep traders and investors on their toes.
Expert after expert continue to debate municipal bond concerns, where opinions range from hedge fund managers sensing a buying opportunity (trying to take advantage of the displacement in the market place mainly caused by individuals selling), to some analysts calling for a rash of defaults. We looked at some quality municipal yields last week and found that at the 5 year maturity level, municipal bonds are trading at nearly the same yield as 5 year Treasury bonds. Of course, the municipals are tax-free making them more attractive to buyers in higher tax brackets. We are monitoring the situation which is twofold. The first issue is credit worthiness and the ability of the States and municipalities to pay back their loans, and the second is the potential for interest rates to rise in the future which would damage the price of longer maturities. As with most bonds we hold, we prefer to stay in the highest quality and shorter maturities.
We will watch the plethora of economic news this week, including retail sales and inflation numbers and then report to you on Friday as usual. We will also take a look at technical support and resistance levels on the S&P 500 at the time. It will be interesting to see if the market can continue to frustrate those looking for a pullback and plow ahead.
Have a nice week everyone.
