June 29 Update

Hello everyone,

“Crisis Fatigue”

Once again markets remained fixated on Europe as EU leaders met for their 18th summit on Thursday. As investors we have “crisis fatigue” as the media continues to heave one crisis after another at us. Since the Lehman incident in 2008 to the Japanese tsunami, fear of China’s hard-landing, fear that Greece will leave the Euro and now fear of a European banking collapse, it is not surprising that many investors are starting to lose confidence which has led to emotional selling in the markets.

After 13 ½ hours of negotiations, European leaders agreed on short-term measures to recapitalize European lenders directly with bailout funds late Thursday afternoon. Prior to this announcement, expectations for this 18th summit were relatively gloomy and investors applauded this short-term injection sending financial markets higher today. Meanwhile, Germany’s Chancellor Angela Merkel maintains her position of pushing for more oversight and joint liability and still rejects the notion of a common euro bond. Merkel stated in an address to Germany’s lower-house lawmakers on Wednesday, “There can only be joint liability when adequate oversight is ensured” further demonstrating the fundamental disconnect between EU politicians.

Meanwhile, we could get some clarity on a number of issues by year’s end. U.S. politicians will eventually be forced to address the impending “fiscal cliff”. Additionally, “bond vigilantes” will force the EU to make significant headway soon by driving borrowing costs to unsustainable levels for many EU nations as Europe continues to “kick the proverbial can down the road”.

Reactions to the Supreme Court’s ruling to uphold the Patient Protection and Affordable Care Act commonly referred to as “ObamaCare” yesterday in one of the Court’s most touted rulings in recent years have been mixed. Regardless of your political affiliations it’s our opinion that this ruling will have little effect on financial markets in the short term as markets have most likely already priced in this legislation. The full ramifications of this legislation have yet to be realized and depending on the November elections they are probably too ambiguous to predict at this point. From a financial markets perspective the ruling from the Supreme Court really just adds another layer of uncertainty to an already dysfunctional Washington.

This was a relatively slow week for domestic macroeconomic indicators as initial jobless claims from last week were slightly unchanged and remain at an elevated 4-week average level. On a positive note, consumer sentiment unexpectedly increased as the national average price of gasoline decreased over $0.50 from its high earlier in the year. Consumer spending remained unchanged in May and personal incomes unexpectedly rose 0.2%. Next Friday, we will get the official jobs report for the month of June, which will be a determining factor for additional monetary stimulus from the Fed.

Enjoy the weekend and try to stay cool!

Jim