July Market Commentary from Tom Crow

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Commentary and market review for July follows.

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JULY MARKET COMMENTARY

By Tom Crow
August 6, 2010

		Gain (Loss) by Period
Index	Month End	Month	Most Recent Quarter	Year-to-Date	Trailing Twelve Months
Dow Industrials	10,466	6.0%	(4.9%)	0.4%	14.1%
S&P 500	1,102	5.8%	(7.2%)	(1.2%)	11.6%
Nasdaq	2,255	5.6%	(8.4%)	(0.6%)	14.0%

All three indices finished July in the plus column. Unfortunately, the one-month gains were not sufficient to overcome losses from the two previous months. With seven months of this year gone, the indices are just above where they started in January.

Second-quarter earnings reports, and year-over-year comparisons were positive for the most part, but many companies are pulling back on guidance for the remainder of the year. Companies and individuals who have cash are holding onto it, not hiring and not spending. If this is a recovery, it is a very weak one. The indices were looking like they might make a run at the April highs, but reaction to today's jobs report probably ended the current, short-term rally.

July's employment numbers were a huge disappointment to analysts who had anticipated an increase of 100,000 jobs. Private sector payrolls rose by 71,000 in July, but that was not enough to offset 143,000 temporary census workers' jobs that came to an end. There are still 196,000 temporary census workers on the payroll and those jobs will come to an end soon. Net jobs lost were 131,000. May and June were also revised lower by a total of 34,000.

A bit more detail by sector...Retail added only 6,700 jobs. Other service providers shed 164,000. Manufacturing jobs increased by 36,000, mostly in the auto sector, but several auto makers did not shut down their factories in July to re-tool for next year's models. The seasonal adjustment for that anticipates jobs lost that weren't lost this year, so we can expect more downward revisions next month.

The household survey reported 159,000 jobs lost in July, along with a 24,000 decline in unemployment and a reduction in the workforce of 181,000, which held the unemployment rate steady. The alternative measure of unemployment which includes discouraged workers and those forced to work part-time held steady at 16.5%.

Better-than-expected manufacturing and construction spending numbers Monday morning brought out the bulls, who pushed the Dow and the S&P up over 2%. I really don't enjoy being a wet blanket month after month, but those better than expected numbers were only "good" because they were less-negative than expected. Net construction spending numbers appeared strong on the surface, but breaking them down we saw that private construction spending actually declined. Only public (government) construction was up. Government spending in support of part-time construction work is a small and temporary economic band aid at best. It shrinks, rather than grows the economy.

Durable goods orders (airplanes, electronics, machinery and other long-lasting manufactured products) fell 1% in June, which was the largest drop since August 2009. Analysts expected a 1% rise. Consequently, inventories rose 0.9% for the sixth straight monthly gain. Full shelves in stores and warehouses won't do much to strengthen a struggling manufacturing industry.

Late Friday, July 23rd, the White House released its "Mid-Session Budget Review" several hours later than expected. You may draw your own conclusions as to why. This year's budget deficit will be $1.47 trillion, or 10% of the entire U.S. economy. Next year's will be $1.42 trillion. Their revised budget estimates never have deficit spending below $700 billion and will saddle our children with $18.5 trillion in debt by 2020.

Stop and think for a minute about the opportunity costs associated with over $18 trillion in debt. Pre-recession federal spending totaled $24,000 per household. The president's budget will push that to $36,000 per household by 2020 (adjusted for inflation.) Using the same growth estimates, if the government simply stopped the excess spending and returned to pre-recession spending levels, the budget could be balanced by 2012 with no tax increases. How many things will our children and grandchildren be unable to do because of our irresponsible use of debt and deficit spending?

Apparently fiscal responsibility is not the route the president and his advisors will take. They want to close the gap between what government spends and what it takes in by raising taxes some $3 trillion. Treasury Secretary Geithner was on TV the weekend following the mid-session review's release saying $3 trillion in new taxes would have no effect on economic growth. Geithner advising on taxes? I'm just going to let that one go.

Federal Reserve Chair Ben Bernanke joined Warren Buffet and Donald Trump in calling for the extension of the Bush tax cuts. Congress did not act on the issue before heading out of town for the August recess. Come mid-September when they slink back into D.C., the entire House and 1/3 of the Senate will be staring down the barrel of mid-term elections at a time when their public approval ratings have never been lower. The only talk on the issue I've heard is that House and Senate leadership is considering the extension the tax cuts for all BUT the wealthiest Americans despite overwhelming, historical evidence that "soak-the-rich" tax policies NEVER result in increased tax revenues.

Seriously folks, when the wealthy, including Senator John Kerry, find themselves facing higher tax bills, they actively try to avoid them. They hire professionals, defer income, create partnerships and LLCs and put off expenses, which hurts everyone else down the economic food chain. In the past, tax-the-rich policies have resulted in decreased tax revenues and lower GDP.

What does all this mean for the markets, and your investments? More uncertainty, more volatility, more risk and fewer opportunities. This is not an environment in which consumers and corporations are quick to rush out and spend money as evidences by the Conference Board's consumer confidence readings for July, which fell back to February's level of 50.4. Higher taxes on income and capital gains will slow investment activity and drive prices down.

A real recovery, if and when it comes, may come from an unlikely place this time...big business. Large companies have spent the past two years cleaning up their balance sheets, refinancing debt and hoarding cash. Local, state and federal governments either have no resources or will run out soon. Small companies for the most part largely rely on cyclical industries and still have little or no access to credit despite what the politicians say.

Higher taxes and continued high unemployment, and underemployment rates will not help. The only positive piece of the current economic puzzle is low interest rates, which the Fed will be under considerable pressure to maintain or risk skyrocketing interest payments. We may find small pockets of opportunity for growth here and there, but for the most part we'll be moving towards stability and safety and away from risk.

I heard a Spanish economist from BBVA Compass Bank a couple of weeks ago put it best. I'll have to paraphrase, but basically he acknowledged that capitalism is not fair. It does not result in an equitable distribution of riches, but it is the only system that results in any growth, and the only system that provides any hope to individuals who choose to take risk and/or work hard to improve their economic standing. All socialist and communist policies do is ensure equal distribution of economic misery to all...except the ruling class who force the working class, at the point of a gun if necessary, to do as they say and not as they do.

This seems an obvious place to remind everyone of Michelle Obama's passionate speech from a few weeks back in which she encouraged Americans to vacation on the Gulf of Mexico and help out the folks and states hurt by the oil spill. I guess I can understand why Ms. Obama didn't include in her speech her vacation plans. She went to a $2,500/room/night luxury hotel in southern Spain along with 40 friends and 70 secret-service agents ...at taxpayer expense.

I could go on, but that's more than enough sunshine for now. I'm sure there will be plenty of exciting, new material upon which I'll be able to opine next month.