Mid-Year Letter To Clients {Part I}

We will be posting our mid-year letter to clients the rest of this week.  This letter was originally published on July 23, 2012.  Today we publish part I.

Stocks have reacted so similar to last year that I was tempted to simply resend last summer’s letter with your mid-year portfolio summaries and you could be forgiven if you felt as if you had seen this play before. After roaring out of the gates at the beginning of this year, equities stagnated in April and then began a nearly 10% decline as European debt fears came back to the forefront and just as evidence began to appear of an American economic slowdown.   Stocks as measured by the S&P 500 advanced a little more than 8% through June 30^th.  International markets had a much harder time of it.  Most foreign indices either were flat or negative in the same period.   The average stock advanced a little over 6% while stock leadership narrowed.  According to Goldman Sachs, 20 companies {22% of market capitalization} have accounted for 55% of 2012’s year to date return on the S&P 500.*

Stocks have spent the last year gyrating between “risk on” and “risk off” cycles as sentiment has trended between optimistic assessments of US expansion contrasted against global struggles with job creation and excessive debt.  Europe is currently the epicenter of the debt crisis with the focus on those countries within the European Union {EU} that have been unable or unwilling to get their fiscal houses in order. German insistence on austerity has roiled nations such as Spain, Italy and particularly Greece who desperately need stimulus and growth in order to align their economies with their current debt levels. Concern have grown since the spring that economies in emerging markets such as India, Brazil and most importantly China have experienced slower growth and in some cases recessionary pressures.

The US may be thought of as the best house in a bad neighborhood, but our own economic growth has been anemic, as has our record of job creation.  Recent evidence has suggested that growth here is also slowing.  Our political environment is toxic. The recent Supreme Court decision regarding the President's healthcare legislation has likely further polarized a deeply divided electorate and a budget crisis potentially looms come yearend.  Against this backdrop it should perhaps surprise no one that the S&P 500 is essentially flat during the last 12 months, returning less than one percent. 

Stock market trading patterns show an eerie similarity to last year.  Should this pattern continue then we could expect a rather steep selloff starting sometime here at the end of July, lasting through August and perhaps into September.  Likely catalysts for such a decline would be further financial disruption in the EU, evidence that United States economy is slowing more than currently anticipated, events generated from our presidential election or a foreign crisis.  The market may be following last year’s script but the problem I have with this scenario is that these issues are too well known by investors and most negative outcomes have likely been built into current prices, hence the high amount of defensiveness in many professional money manager’s portfolios and the almost record low sentiment for stocks among the investment public.  Still we cannot ignore the possibility that markets could take a turn for the worse so we have the defensive pages of our game plan, nearby.

There are many positive developments that I think bode well for stock prices down the road. Central banks around the world have unleashed a torrent of policies aimed at stimulating economies and at the same time making risk assets such as stocks more attractive. “Don’t fight the Fed” is one of the oldest maxims on Wall Street. Investors are holding trillions of dollars in bond funds and money market accounts earning less than 1%. Eventually that money is likely to look for higher returns and that should make risk assets such as stocks look attractive.  Societies need technological advances in order to continue economic growth.  We are seeing these advances in fields as diverse as energy where new technologies for oil and natural gas extraction are lowering the cost of energy, putting a dent in our dependence on foreign energy sources and creating jobs. There has been a quiet revolution in miniaturization that spans industries as diverse as medicine, aeronautics/defense {drones}, communications {your smartphone} and computing {your tablet}.  US corporations are collectively in their strongest positions in years with strong cash flows and record earnings.

Stocks today are as unloved as an asset class now as any time in my career.  A high degree of negativity has resulted in a drastic valuation compression down to levels usually seen heading into a foreign crisis or at the beginning a recession.  Syria and Iran to the contrary, there is no evidence that we are on the cusp of conflict similar to the Iraq or Afghanistan. Economic data shows that while US growth has slowed down since the spring the evidence is not currently supportive of a recession.

*Long ETFs related to the S&P 500 in client and personal accounts. 
*Source:  Factset and Goldman Sachs Global ECS Research as of July 20, 2012. 

On Bonds.

A great post regarding bond funds over at the Big Picture.  Everybody should read this link: The Basics of Owning Bonds.

A couple of quotes from the article:

"Buyers of the 10-year Treasury are agreeing to lend Uncle Sam money for a decade and receive a piddling interest payment of 1.5 percent. That is barely above inflation in the depressed environment, where price rises have been modest. It is reasonable to expect higher inflation in the future, but when that will finally hit is anyone’s guess."


"Bond ETFs/Indexes: If you cannot afford a ladder, consider bond index ETFs."


"Bond funds have different risks from bonds: If you buy a quality bond and hold it to maturity, you will get your money back. Sure, a Treasury can move up and down, but held until maturity it will pay back its investment. Not so with all bond funds. If markets go topsy-turvy and a bond fund faces redemptions, they sell what they can, sometimes at a loss. Hence, it is another risk factor that you simply do not have in bonds themselves or bond index ETFs."


"Owning a yield portfolio is a way to obtain higher income but with appreciably more risk. Proceed with caution."


"Anyway go read the whole thing.  I've linked it again here if you don't want to go back to the top of the page."

VGK {Part II}

And just like that the calvary comes to the rescue.


"U.S. stock futures  rose, indicating the Standard & Poor’s 500 Index will snap a four-day drop, as jobless claims fell, durable-goods orders climbed and European Central Bank PresidentMario Draghi pledged to defend the euro." {Bloomberg}


VGK is up 3% as of this writing.


Go figure.


*Long VGK in client and personal accounts.

Something To Ponder

The chart pictured above is the Vanguard MSCI Europe ETF {VGK} it is basically a large cap European stock fund.  Its top positions are according to Morningstar  Nestle, HSBC, British Petroleum, Vodafone and Novartis.  Again according to  Morningstar the fund sports about a 4.5% dividend yield at these prices.  For the record I'm long this for client accounts and have been wrong as it is lower than where I've purchased it in the past year or so.  

Here's something I've been pondering a bit lately.  Now everything we've heard out of Europe in the past few years is all gloom and doom.  Indeed the news recently has been about as glum from the "Old World" as it could be short of war.  VGK took a big hit last year about this time.  But since then it has traded basically in the range I've outlined in the chart above.  So my question is {to which I don't really have an answer} WHY IS THIS NOT LOWER?

Now maybe the answer is that VGK is populated by companies with a strong global presence and like US companies have been able to manage their way through extraordinary times.  Or maybe the answer is that VGK is going lower soon if the EU implodes.  It is at the bottom of its trading range and  sporting overbought ratings by our analysis so perhaps this past year has been the calm before the storm.

But the fact remains that VGK has had multiple opportunities to trade lower since last summer when it collapsed and each time it's found its footing and rallied.  Now look I have no idea where the next 5-10% is in this index and I would not be adding to positions in it right now either.  But I'll put it back on the watch list just in case against all hope the folks over the pond get their financial wits together and against all likelihood put something together in the next few months.  Events are rapidly getting away from them the longer they dither.

In the meantime there is that 4.5% dividend.

"Just sayin".

*Long VGK in client and personal accounts.  Nothing here should be construed as a recommendation to buy any above mentioned security or construed as personal finical advise.  

Premarks {07.25.12}

Things that are getting my attention this morning before the market opens.  {Futures indicate stocks will will be higher by the way}.

Europe:  With region after region in Spain and Italy now pressing their national governments for money and these countries forced to borrow at very high rates relative to the rest of the world and with Greece being forced to admit it can't get it's house in order, it strikes me that the EU is truely now in its endgame.  They will either fix it and become a much more integrated national union or it will break into a northern and southern block or it will go away.  My gut says they fix it but the cultural divide between the north and south over there may be too much at the end of the day.  

Cultural divide between north and south?  Where have I heard that before?  

Apple Computer {AAPL} shocked the world yesterday with a big earnings miss.  What does that mean?  Is that company specific due to an expected new upgrade for the iPhone 5 in the fall or does it reflect slowing international economies.  AAPL sold a record 17 million tablets in the quarter, adding to my thesis that the tablet is replacing the laptop and probably the desktop at a much faster rate than most currently acknowledge.  It also helps my thesis that the tablet is only in the 2nd inning of what it will look like in 10 years and is a game changer in many different industries.

Earnings season has been so far a disappointment with many more companies lowering guidance for the rest of the year.  Street estimates have come down accordingly with the consensus now on the S&P 500 for between 102-104 now for 2012.  Does that mean my 103.75 number is too high.  Will have to think about this in the next few weeks.  Even at the low end of the range of these S&P 500 estimates  stocks are cheap trading a bit over 13 times this year's earnings.  Earnings yield is 7.6%.  That of course assumes these numbers can be met.

Polls continue to show that President Obama holds a slim lead over Republican challenger Mitt Romney.  These numbers change day to day depending on and how the polls are conducted.  But at the state level where the electoral college is fought the President continues to hold the upper hand.  He is leading in virtually every state he needs to hold in order to get reelected.  In particular I pay attention to   Colorado {Obama leads by three percentage points}, Ohio {Obama by four}, Florida{Obama by one}, Iowa {Obama by one} and Wisconsin {Obama by seven}.  Data from realclearpolitics.com. Obama may lose a couple of these, Colorado, Iowa and Florida are the most likely candidates.  But the way the rest of the states work right now, Romney needs to run the table in these battlegrounds and I don't think he can do it.   

*Long ETFs related to the S&P 500 in client and personal accounts.  AAPL is a component of several ETFS we own for clients and in personal accounts.

an tSionna {07.24.12}

Stocks just seem stuck in a trading range now and we seem mired right in the middle of the range!  Consensus earnings estimates have now come down to my level of 103.75 as the range is roughly now 102-104 per share on S&P 500 stocks.  Still makes a mid 1400 number doable on the S&P 500 by year end but we're going to need to see a pick-up in the 2nd half to get to the higher end of that estimate.  Will digest this in the next couple of weeks as earnings season winds down.

*Long ETFs related to the S&P 500 in client and personal accounts. 

Premarks: It's All About Europe {Again!}

Once again our markets take their cue from both Europe and China.  Possible slowing growth in China and the EU debt crisis have taken center stage sending US futures lower by about 1%.  Of course it doesn't help that markets were short term overbought and hitting a point where they were vulnerable to a correction.  That being said it definitely looks like Europe has taken a turn for the worse over the weekend.  This is from the German magazine Der Spiegel:  

Greece has fallen behind with its budget cuts and is asking lenders for more time to meet the conditions of the 130 billion euro aid package. But that would require fresh help of up to 50 billion euros, SPIEGEL has learned. Neither Berlin nor the IMF are prepared to make that money available.  {Link here}.

It always seems like late summer is when the next crisis blows up.  We last discussed this along with market volatility here.  Stocks will open down now and will probably have at least a couple of days weakness.  We'll just have to see where stabilization comes in.  Stocks are still cheap on longer term valuation so that should provide a floor at some point.  There is a pretty good level of support for the S&P 500 around 1320-1325 which is about 3% below where we trade right now.  Not saying we'll get there but that's where logically one would expect stocks to try and stage some kind of rally.

*Long ETFs related to the S&P 500 in client and personal accounts.

Smidiríní

Fourth aircraft carrier heads to the Middle East. Quietly we've been moving a lot of fire power to the Middle East.{Zerohedge.com/}

TheStreet.com: Why you must have an asset allocation strategy.   "According to an analysis by Dalbar, the average investor earned 2.1% over the twenty year period ended Dec. 31, 2011. How did this compare to other asset classes?  To make it very simple, the S&P 500 returned 7.8%, while the Barclays Capital US Aggregate Bond Index returned 6.5% over the same time period. A 50/50 blend of these two asset classes would have yielded a nominal annualized return of 7.2%. Wait, it gets even worse.  After including inflation, the average investor got a negative real return. Inflation (CPI) grew at an annualized rate of 2.5% during the period. So the average investors' net real return was -0.4%. The average investor is not very good at capturing the market return of a simple balanced portfolio, never mind outperforming it."  My note:  This is the reason most investors need help.  They for the most part are simply incapable of dealing with market volatility on their own.

Businessinsider.com: Here are your new Obamacare taxes!  {It's a lot more than has been advertised!}

Bloombergbusinessweek.com: Is housing back from the dead?

aei-ideas.org: The President is in more trouble than you think.   {Maybe but the President still leads in the majority of the Battleground states he needs in order to win in November, although that lead is shrinking in places like Florida.}

And for what it's worth, it finally rained here at Global HQ last night!

*Long ETFs related to the S&P 500 in client and personal accounts.

The Deutsche Mark

The Deutsche Mark was taken out of circulation over a decade ago but it's still legal tender in Germany in the sense that it can be used as a currency to buy goods and it can still be exchanged by the German government for Euros at a rate of one Euro for 1.95583 marks.  Because of this, according to the Wall Street Journal, Germans still have quite a few Marks stashed away.  How many you ask?  Here's what the Journal reports:

"As defunct currencies go, 'die gute alte D-mark,' or 'the good old D-mark,' as it is still affectionately called, is far from dead. Germans officially traded in the currency for euro bills and coins on Jan. 1, 2002, and the mark immediately ceased to be legal tender. But 13.2 billion marks—worth €6.75 billion ($8.3 billion)—remain tucked in mattresses, old prayer books, coat pockets or otherwise in circulation, according to the Bundesbank, more lucre than the euro bloc's 16 other ex-currencies combined." 

That's a lot of currency locked away in shoe boxes.  It also speaks to the economic prowess of Germany versus some of its neighbors and illustrates in its own way the average German's  reluctance to bail out the rest of the Euro-zone.  


And speaking of the rest of Europe, "According to the latest poll, 61% of Germans reject giving Greece and other bailed out countries more time to solve their problems. They’ve had enough of the broken promises. They’ve become so bitter about the whole process that, according to another poll, 58% of Germans want their Deutsche Mark back, up from 39% in 2010."  Link to this here.

Link:  Wall Street Journal: Who Needs the Euro When You Can Pay With Deutsche Marks

Ritholtz on Investing Via Politics

Barry Ritholtz over at The Big Picture has some interesting comments on letting one's political philosophy get in the way of investing:"

"{W} we were having dinner onboard with a table of HNW investors. One of the women at the table went off, spouting nonstop about politics and the upcoming election. She had missed a 109% rally in equities due to her politics, and was convinced that if her candidate won, all would be right in the world.

Sure it would.

What she really needed to do was see the slides 16, 17, 18 and 19 in that presentation about mixing politics and investing (alas, she chose to miss it). The slides shows how Democrats and Republicans alike who invest based on how they vote miss enormous opportunities. They under-perform so badly you would think they were a Day Trader circa 2001.....

All of which is to say I indulged my confirmation bias and enjoyed Mike Santoli’s column this weekend (Less Than Meets the Ear) a great deal. Mike points out in the quote above that neither candidate is likely to make any wholesale changes to any major policy, and that your tax rates are likely to be higher regardless of the election outcome. I agree.

One last point worth making: Too many observers Confusing Cause & Effect when analyzing politics and markets. When the economy is doing well and profits are expanding, stocks tend to do well also. These conditions work to the incumbent’s advantage. When the economy does poorly and earnings suffer, it works to the challenger’s advantage. There are some issues with timing and lags, but that is the general relationship.

The usual tail-wagging-the-dog suspect gets this relationship precisely backwards . . ."

Link:  The Dangers of Investing Via Politics

Earnings So Far

We've noted in the past week or so how estimates for US companies have been coming down in response to both a slowing economy here and abroad.  Now we're beginning to see the meat on the bones of this as the corporate earnings season has started out poorly.  So far at least no matter how much estimates have been trimmed it looks like there is further to go. According to Bespoke Investment Group, "companies that have reported since earnings season began on Monday have disappointed big time.....{So far} just ONE company has beaten estimates of the sixteen that have reported, while TWELVE have missed.  And the price action in response to these earnings has been equally as bad......{T}he average one-day change for these stocks on their report days has been -5.45%."

If one were inclined to try and make a silk purse out of a sow's ear regarding the punk earnings so far this quarter, Bespoke offers this up.  "It should be noted that last earnings season started out extremely positive, with nearly every company beating estimates.  As the season progressed, the beat rate dropped and dropped, and the season ended up being very weak.  The bulls are hoping the opposite occurs this time around." 

Link:  Bespoke: A Tough Start to Earnings Season

On Corn

You're starting to hear reports about how the dry weather in the central US is beginning to impact the corn crop this year.  In fact the the USDA just cut its estimates of corn production by 12% to 12.97 million bushels.  Bloomberg reports that analysts had been looking for about 13.5 million bushels.  All of this is going to give us headlines over the next couple of days about the rising prices of food in the next year or so..... 

Maybe.....

The US is a big country, impossibly huge for most of us to understand as the maps we look at have no true scale that helps us appreciate its size.  A lot can happen to that crop in the next 30 days or so that can make these estimates look silly.  Even if nothing happens the government can make sure more crop is available for food sourcing by cutting the mandated ethanol requirement in many types of gasoline.  

Then there's this about the production of corn courtesy of Professor Mark Perry's blog which is called "Carpe Diem":

After remaining flat between 1866 and 1939 at about 26 bushels per acre, corn yields started increasing dramatically in the 1940s due to the introduction of hybrid seeds, and the widespread use of nitrogen fertilizers and herbicides (source).  By 2009, average corn yields had increased by more than six times to a record high 165 bushels per acre, before falling to 153 bushels per acre last year, and an estimated 148.1 bushels per acre for 2011.    

Corn facts from the Corn Farmers Coalition:1. Farmers today grow five times as much corn as they did in the 1930s – on 20 percent less land. That is 13 million acres or 20,000 square miles, twice the size of Massachusetts. The yield per acre has skyrocketed from 24 bushels in 1931 to 154 now, or a six-fold gain. 

2. The national average of 153 bushels produced on each acre in 2010 was nearly 20 percent larger than the average yield in 2002 – and plant breeding experts estimate yields may jump 40 percent before 2020 and, perhaps, hit a national average of 300 bushels per acre by 2030.

3. America’s corn farmers are by far the most productive in the world, growing 20% more corn per acre than any other nation."


For what it's worth de-tasseling corn is one of the worst jobs you can ever do.  Trust me on this!


Link:  Corn Yields

Why These Bankruptcies Matter

California cities starting what seems to be a string of bankruptcies.  I think these are important because I've always said that the final act of the Great Recession would be the right sizing of all forms of government {although I fail to see how that is going to happen to the Feds in Washington as their seems to be nothing to stop them from simply printing money until the presses fail}.  Here's a post from Zero Hedge that speaks my mind in much better form than I can do.

"Meredith Whitney made her doomsday prediction. Then nothing. Nothing. Then lots of glib muni expert pundits gloating because the Fed, the ECB, the BOJ, the BOE, the SNB, and of course, the central bank of Kenya, had managed to delay the inevitable by a year. Then some more nothing. Then suddenly Stockton, Mammoth Lakes, and now San Bernardino all file in the span of 2 weeks.

• SAN BERNARDINO, CALIFORNIA, WEIGHING CHAPTER 9 BANKRUPTCY - BBG
• SAN BERNARDINO COUNCIL TO DISCUSS ACTION, SPOKESWOMAN SAYS - BBG
• SAN BERNARDINO SPOKESWOMAN GWENDOLYN WATERS SPOKE IN INTERVIEW - BBG

There is a reason marginal events are oh so very important: because as Greece showed, and now one after another broke California municipalities are dropping like flies, one the precedent is there, the easiest thing to do is to just hit Print on that Chapter X petition. After all everyone else is doing it, and remember: he who files first, files best.'''

Link:  Zero Hedge: Bankruptcy

PreMarks: {07.11.12}

Pre-markets indicate a higher open.  The reasonings offered up this AM seems to be a combination of further positive news on the bailout of Spanish banks and a few more solid seeming economic reports.  I think the real reason is that after four down days stocks are oversold enough short term to rally.  Speaking of data, it continues to show a global economy that has hit a rough patch.  Whether this is similar to the past couple of years when the economy has shown a slack period in the summer or the beginning of something else is still to be determined.  

Market estimates continue to come towards our 103.75 S&P 500 earnings number and that has not helped stocks in this period.  At that level of earnings and with stocks trading around 1340 stocks are still attractive as long as we don't see further deterioration in corporate profits.  

The great de-leveraging in this country continues.  While individuals continue to pare their own personal balance sheets, governments at all levels continue to do so as well.  San Bernadino becomes the third California city to declare bankruptcy.  Look for this trend to continue as a way for cities {maybe states?} try to work their way out of stifling pension and worker obligations.   

More after the market opens......

*Long ETFs related to the S&P 500 in client and personal accounts.

an tSionna {07.10.12}

Evidence of money flows point to a market stuck in neutral for the time being.

*Long ETFs related to the S&P 500 in client and personal accounts.

ETFs vs Mutual Funds

Barry Ritholtz over at The Big Picture blog has been running a series on top ten investment errors.  Barry does a pretty good job in explaining each of his points.  I may come back to this in the future but I did want to highlight that he gives very solid analysis for choosing ETFs over mutual funds.  

"Today, we are going to look at something that relates back to several of our earlier bullet points on fees and active management relative to investor structures.

Mutual Fund vs ETFs: The average mutual fund charges far more than the average ETF does. Whenever possible, I recommend substituting a low cost ETF over the more expensive Mutual fund.

The fund industry seems to have figured this out. Some have put out ultra-low cost mutual funds that typically mimic broad indexes. Others have ETF-ified their existing mutual funds, converting them into Exchange Traded Funds. Over the next decade, it would not surprise me to see nearly half of the existing mutual fund offerings morph into ETFs.

The bias against mutuals over ETFs is in the many ways that mutual funds can tag you with hidden costs, taxes, 12b-1 fees, and expenses. With ETFs, you pretty much get what you pay for.

Do note however: Even within the ETF universe, there are a wide range of internal fees. These expenses come off of the top of your investment performance, so it pays to watch them closely.

Reducing your costs is a surefire way to improve long term results. Consider what ETFs you can substitute instead of mutual funds."

Below I've also listed what Ritholtz believes are the 10 principle errors investors make. 

Top 10 Investor Errors

1. High Fees Are A Drag on Returns

2. Reaching for Yield

3. You (and your Behavior) Are Your Own Worst Enemy

4. Asset Allocation Matters More than Stock Picking

5. Passive vs Active Management

6. Mutual Fund vs ETFs

7. Not Understanding the Long Cycle

8. Cognitive Errors

9. Confusing Past Performance With Future Potential

10. When Paying Fees, Get What You Pay For

Link:  Top 10 Errors, Picking Mutual Funds Over ETFs

Smidiríní

The iPad edition while out on the road. I know I said I'd not post today but found a few stories of interest. Because I'm doing this from my iPad, the links look different as the host of my blog isn't really compatible with my machine.

http://finance.yahoo.com/blogs/daily-ticker/taxes-going-pay-pay-obamacare-145413745.html. Here are the new taxes you're going to pay for Obamacare. 

UBS lowers its year end estimates for the market to 103.50 and year end price target to 1375. Wall Street is coming back down to something closer to my end of year earnings estimates. Stocks are still cheap even it that level. http://www.ritholtz.com/blog/2012/07/the-occasional-yin-and-yang-of-research/. (from the Big Picture blog) 

S&P 500 is up a whole 2% on a price basis over the past 12 months. Dividends add about another 2% to that number. 

http://politicalticker.blogs.cnn.com/2012/07/02/cnn-poll-health-care-ruling-has-not-impacted-race-for-white-house-so-far/. (CNN article that suggests Romney is currently ahead of President Obama in key battleground states) but see also http://www.realclearpolitics.com/?state=nwa (real clear politics which shows the President ahead in nearly every individual state poll). I still believe that it is the President's election to lose and his fate will be sealed by voter's perception of the economy around Labor Day. 

*Long ETFs related to the S&P 500 in client and personal accounts.

Premarks: After Friday's Rally

Greetings from Rhode Island! This is where I've taken refuge from the draught and heat that's plaguing the Midwest so far this summer. The iPad is a truly remarkable creature in that I can literally do most of the things on it 1000 miles away from the office that I would do if I was sitting in my command chair back at Global HQ. Since most of Chicago's western suburbs are still without power from storms that cracked our area yesterday, it's better to be out here than back in the office. The tablet computer and in particular the iPad is a game changer and we are only in about inning two of that transformation. Basically though the device lets one go about one's business from nearly anyplace on the planet and on days like today I'm grateful for that. A few thoughts on Friday's rally and some observations from the trip out East. 

Friday's rally had all the trappings of a bear gore. The environment had become so toxically negative that any little event had the potential for an outsized market gain. Of course the little event I'm referring to was the fact that the Germans seemed to blink regarding austerity measures in the EU. European papers have wasted no time in pitting German Chancellor Angela Merkel and by extension the Germans as the ultimate losers. We'll see about that. Ultimately it's those same Germans who will have to write the checks that are propping up all those same peripheral countries that are delighting in Germany's so called about face. The devil's often in the details and bailing out the rest of the continent is no more popular today with Heidi and Fritz than it was a week ago. 

Regarding my prediction on healthcare last week that the Supreme Court would throw out the individual mandate and keep the rest, I'll declare partial victory. The individual mandate was denied as a valid extension of Congressional power under the commerce clause but it was retained as a valid measure of Congress' ability to tax. The rest was kept. Conservatives are fuming at the result but I think that over time they will see that they were handed a much more significant victory than is first suggested. Hospital stocks soared on the news last week.

More chatter over the weekend that corporate profits are facing headwinds from Europe and from our own economic slowdown. I'll simply at this point say again that we're using 103.75 for S&P 500 earnings this year and based on that number stocks are still cheap. the fact that we've hit a bit of an economic dog patch is not exactly an unknown development right now. Despite all the volatility and angst since the spring, the S&P 500 still managed to gain nearly 8% in the first six months of 2012.

While I think stocks are cheap I still can't shake the feeling that we are going to have at least one more downdraft this year. Too much is being thrown at markets right now and we'll have the election to contend with as we get closer to the fall. If stocks stick to that script then we're going to see a topping process over the course of the next month followed by a downward thrust into late summer/early fall. No law says we have to go this route but it would be in keeping with every year since 2008 with the exception of 2009. We'll have our defensive pages nearby just in case this starts to occur. I'll reiterate that irrespective of what the next few months holds we are still of the opinion that stocks are cheap longer term.

 I mentioned on Friday last week that I would post today and Thursday this week. I will still hold to that schedule unless events warrant a break in. In the meantime happy 4th of July! 

*Long ETFs related to the S&P 500 in client and personal accounts.