Last week, the stock market reversed three and a half days of declines as European Central Bank President Mario Draghi suggested the central bank may be ready to answer calls to ease monetary conditions in the euro zone. He spoke as risks to the financial system intensified and concerns spiked ahead of elections in Greece on Sunday. That rise was buoyed by speculation of coordinated action by major world central banks to maintain financial stability, regardless of the outcome of the Greek election. The leaders of the central banks understandably are concerned that political parties vowing to tear up the harsh economic terms that the European Union (EU) and International Monetary Fund would win the election in Greece and seek to reject conditions of a bailout for the near-bankrupt state. If the bailout deal unravels, a risk exists that Greece could be driven into default and out of the EU. If Greece leaves the EU, the move would undermine the euro currency and pressure the larger economies in the euro zone, namely Italy, Spain and Germany. In other words, it would make an already difficult situation — the current euro zone recession — that much worse.
In short, there was ample uncertainty heading into this past weekend and, as tends to be the case in a situation like this, the news that world banks stand ready to act sounds increasingly like a “buy the rumor, sell the news” situation. While the stock market is acting as if the central banks will act, what if there is no need for the banks to respond? What if their response is less than the market expects? If either of those two scenarios is the case, then the stock market could quickly give back recent gains. As always, the devil is in the details. We need to watch the events in Greece unfold to know what likely will happen next in the markets.
While most, if not all, eyes last Friday were focused on Greece, we would be remiss if we lost sight of the fact that the domestic economy continues to slow. Last Friday, we learned that manufacturing output contracted in May for the second time in three months and New York state factory activity plunged in June to the lowest level seen since November 2011. This data confirms that the domestic economy continues to slow.
Despite the market turmoil, a good investor is a proactive one. With that perspective in mind, each week I offer the latest confirming data points for my Great 8 PowerTrends — the more confirmation we have of these long-term drivers, the better we can sleep at night, no matter what the current market environment may be. Here are several such data points from the past week:
- The Rise and Fall of the Middle Class – Released last Monday, A.T. Kearney’s Global Consumer Institute’s 2012 Global Retail Development Index ranks the top 30 developing countries for global retail expansion. Brazil, which topped the list for the second year in a row, was followed by Chile, China, Uruguay and India. With regard to the Guilty Pleasure aspect of this PowerTrend, Altria Group Inc. (MO), the maker of Marlboro and L&M cigarettes, last week announced it will initiate a six-cent per-pack price increase across all of the tobacco producer’s brands effective June 18. This situation marks the first price increase in 2012, which follows two price increases in 2011 and bodes well for better margins, given the inelastic nature of cigarettes.
- Cashless Consumption – Forget your debit card? Soon, withdrawals by smartphone may become routine, if they can overcome security issues that continue to plague mobile banking apps. Royal Bank of Scotland and NatWest are developing mobile banking apps so customers can withdraw money from ATMs using their smartphones instead of debit cards.
- Better, Smarter America – We are quickly approaching July 1 when the interest rate on taxpayer-subsidized Stafford student loans will double — from 3.4% to 6.8%. While one would think this should be relatively easy to fix by freezing rates for a period of time, this issue has become a political one, in part, because this is an election year and all sides are looking to court the young vote. With a weak job market, increasing duration of those unemployed and a growing mismatch between worker skill sets and those needed by the private sector, a rate increase would add to a confluence of troubles that already are hammering college students.
- Safety & Security – Symantec Chief Executive Enrique Salem told the Reuters Media and Technology Summit in New York that his company was working with the U.S. military, other government agencies and universities to help develop new programs to train security professionals. Salem warned, “We don’t have enough security professionals and that’s a big issue. What I would tell you is it’s going to be a bigger issue from a national security perspective than people realize.”
- Always On, Always Connected – Expectations of strong demand for media tablets in the second half of 2012 have led IDC to increase its forecast for the worldwide market to 107.4 million units for the year, compared with its previous forecast of 106.1 million units. In the latest forecast update of the Worldwide Quarterly Media Tablet and eReader Tracker, IDC also revised upward its 2013 forecast number from 137.4 million units to 142.8 million units. And by 2016, worldwide shipments should reach 222.1 million units.
- Scarce Resources – Each week, the Energy Information Administration (EIA) publishes its weekly inventory survey and investors dissect this information for cues on oil supply and demand in the United States. Last month, inventories were at their highest level since 1990, amid persistently weak demand and sluggish economic growth. Last week, however, the EIA’s latest survey found oil inventories fell by 200,000 barrels. Falling gas prices stimulated demand to its highest level since August. Also last week, at an OPEC news briefing, OPEC Secretary-General Abdullah al-Badrimembers said the group will reduce its output to adhere to its 30 million barrels per day ceiling and the effects should be seen in July. The combination of rising oil demand, while output declines, is likely to drive oil and gas prices higher as we exit the summer months.
Each week, subscribers of PowerTrend Profits get more of these confirming signs, as well as how we can profit from them through select PowerTrend investments that offer favorable, if not compelling, risk-to-reward ratios in their respective shares.
I’ll share more analysis with you next week.
Editor, PowerTrend Brief
P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.
The flow of economic data will slow as it normally does mid-month and company earnings reports will slow to a trickle with just two weeks left in the current quarter. But make no mistake, next week — particularly early in the week — could be a trying time for the stock market due to the outcome of the Greek elections. Also this week, there is a G20 Summit in Mexico over June 18-19 and the Fed’s Federal Open Market Committee meets June 19-20. Given that slate of policy-related meetings, the combined outcome is one that the market will be watching closely, as will we. Aside from that, here’s what else I’ll be keeping tabs on this week:
Monday, June 18
NAHB Housing Market Index (June)
Tuesday, June 19
Housing Starts (May)
Building Permits (May)
Adobe Systems Inc. (ADBE)
FedEx Corp. (FDX)
Wednesday, June 20
MBA Mortgage Index (Weekly)
Federal Open Market Committee Interest Rate Decision
Bed Bath & Beyond (BBBY)
Goodrich Corp. (GR)
Red Hat Inc. (RHT)
Sonic Corp. (SONC)
Thursday, June 21
Initial & Continuing Jobless Claims (Weekly)
Existing Home Sales (May)
Philadelphia Fed’s Business Outlook Index (June)
Leading Indicators (May)
Carmax Inc. (KMX)
ConAgra Foods (CAG)
Oracle Corp. (ORCL)
Rite Aid Corp. (RAD)