Financial Professionals


Choke Up On The Bat


The S&P 500 Index aggressively declined 2.88% on Friday, July 16, quickly dropping the monthly gain for the Index to 3.315% (Fig.1 below).

In particular, Friday's trading in Goldman Sachs (GS) was rather disappointing, given the overtly bullish news after the close on Thursday . The SEC settlement is a win for all. Keep in mind that GS reports earnings early Tuesday morning. The expectations for those earnings are very low, so an upside surprise just might reverse Friday's lousy GS price action.

Beyond GS's absence of follow through price action, investors are concerned with bank earnings. Loan loss provisions did decline further but looking forward, "earnings growth potential" seems absent. The yield curve is flattening modestly; further credit improvement will be challenged by stagnant unemployment. If you read the "Hurricane and Housing" blog from earlier this month, the financial sector appears to be tracking the technology sector circa 2001. However, excluding financials, earnings to-date this quarter support very strong corporate balance sheets. That continues to suggest favoring investment and speculative grade corporate bonds, especially with 10 year Treasury yields (Fig 2. below) back below 3%.

Looking ahead to the week of July 19, 129 S&P 500 Index companies will report earnings, maybe none bigger than GS. After the July 16 selloff, market technicians will use July 7th's trading range as a great point of reference for the Index. Maintaining closing prices above 1050 will be important.

As the baseball season of frustration continues to play out, it appears that market participants are choking up on their swing slightly to make sure they make contact. I suggest that quality themes, healthy balance sheets, and exposure to the emerging market consumer provide the best chance for hitting a few singles. This is not a time to swing for the fences.

S&P 500 Index July 1, 2010 - July 16, 2010 (Fig.1)



Source: Bloomberg


US 10 YEAR TREASURY YIELDS JULY 20, 2009 - JULY 16, 2010 (Fig 2.)


Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.