Reliance Investment Management

Stock Markets across the globe exploded higher on Friday as the European Union unexpectedly announced a new plan for providing financing to Spanish Banks along with providing a framework for an eventual banking union that could provide more stimulus in the future.

The S&P 500 rallied 2.5%  on the European News on Friday and closed at 1,362 for the week ending June 29, 2012.  The net gain for the week was 2.1%.

(Click on Image of Chart for a Bigger Picture)

As you can see, the S&P 500 has rallied to the exact same level as it highs two weeks ago.  It was this level that the index has had recent difficulty in progressing higher.

On the Economic Front – reports this week were again disappointing across the board, continuing the recent trend.     Some highlights are:

1. Consumer Confidence reported at 62 – the lowest level of the year.
2. The Chicago Fed National Activity Index reported at -.45 – the lowest level of 2011.
3. Analysts have  reduced 2nd quarter earnings estimates for companies at the fastest rate since 2008.

Unemployment continues to be the most challenging economic problem facing the USA.  The USA is not alone though as much of Europe are facing unemployment levels that are 50% higher.  Recently, Unemployment claims have started to trend higher again  – reversing the  promising start to the year when Unemployment claims were coming in lower each week .  See Chart below.

(Click on Image of Chart for a Bigger Picture)

For the first time in several years – Housing is providing positive economic news.  The Case-Shiller prices index is reporting an increase in house prices from regions across the country.  Additionally, the home building companies are talking much more optimistically on their conference calls when discussing traffic in their new home communities and on closing sales.

We would like to note that this improvement in housing is coming off of very low levels and that even with the improving housing market – the current levels of new home activity are still much lower than the historical normal levels as the chart below  demonstrates:

(Click on Image of Chart for a Bigger Picture)

Forecast for the Next Week

We continue to note that the fundamental economic conditions are deteriorating.  This week, both Ford & Nike reported their sales and profits would be lower than expected in the second quarter.  Both companies state that the primary cause of the lower sales are the economic slowdown in Europe and  Asia.  Both Companies do state that they expect their North America sales to come in as expected.  This continues a trend we have been reporting to our readers of a USA economy that continues to act better than most of the world economies.  However, as we have also reported earlier – All World Economies and Stock Markets are correlated – we think that the USA economy and markets will not escape a global slowdown.

We believe  it is a good idea for Readers to use this strength in the markets to raise cash as the market heads higher this week towards the 1,380 zone.  Right now the S&P 500 is within 4.5% of it’s highest level (1,422)  from the 2009 lows of 666.  Because of the deterioration of the economic fundamentals while the markets are near their multi-year highs, we recommend raising cash in an amount of 10% – 25% of a portfolio value that will be available to put to work at a more strategic time in the future.