July 27 Update

Investors finished the week relatively bullish as most major indices ended the week higher. This bullish sentiment was supported by better than expected earnings, reports showing better than anticipated U.S. economic data and hopes for a stronger response to the debt crisis in Europe.

As of yesterday, 72% of companies that reported earnings beat Wall Street expectations. This seems to be a recurring theme over the past few earnings seasons. Analysts continue to overestimate the negative ramifications the European debt crisis is having on these companies’ profits and these companies have been extraordinarily efficient at cost cutting and repositioning strategies. Meanwhile a few highlights from this past week include:

-Pepsi beat expectations and announced that the current U.S. drought should not affect their raw material input prices this year as they already hedged their commodity input costs with forward contracts.

-Apple missed expectations for only the second time since 2003. Sales of Apple’s iPhone were less than expected as most consumers delayed their purchase of the iPhone in anticipation of a newer iPhone 5 model projected to hit stores sometime this fall. Some analyst project Apple to sell over 50 million new iPhones in the 4th quarter.

– Caterpillar beat analyst expectations and raised their projected full-year profit forecast. CAT stated in their earnings announcement that developed countries are replacing their aging machinery inventory and that U.S. construction spending is increasing.

The U.S. economy grew at a 1.5% annualized rate in the 2nd quarter, which is slightly better than expected but still down from a 2% rate in the first three months of the year. Although this report was slightly better than the anticipated 1.4% annualized rate, growth still remains lackluster as the softening job market continues to curb consumer spending. The report below shows that durable goods orders rose in June and last week’s unemployment claims fell. Housing remains a key component in restoring consumer confidence in the U.S. economy and June housing reports suggest that the housing market is beginning to show signs of life. With just over 100 days before the November elections, the uncertainty surrounding who will be our next president may also be deterring consumers and businesses from making large purchases.

On Thursday, European Central Bank President Mario Draghi stated that the ECB will do “whatever it takes” to preserve the Euro, including purchasing sovereign nation bonds. German Chancellor Merkel and French President Hollande instilled further confidence in a joint statement saying that they are “committed to do everything it takes to protect the Eurozone”. These comments pushed Spanish and Italian yields sharply lower and investors cheered these comments sending markets higher. This rhetoric surrounding the ECB’s proposal to buy sovereign bonds is a giant step in the right direction for Europe assuming the ECB is prepared to do what they say they will do. We will continue to monitor these developments as they unfold.

Enjoy the weekend. Let’s hope we get some rain soon.

Jim