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The Week Ahead - August 16-20

08/15/2010

The capital markets head into the final three weeks of August with light volume, abundant pessimism, and maximum frustration.

This past week, the equity market retreated (Fig 1.1) from its best levels since June 21, placing bulls on the defensive heading into the week of August 16.

Fig 1.1 - S&P 500 Index 4/1/10 to 8/13/10

Source:  Bloomberg

The love affair with fixed income continues to blossom, as ownership of government and corporate debt is currently the desired investment.  Certainly, the leverage is in the fixed income market which should prevent the equity market from an aggressive Fall 2008-style sell-off.  Conversely, capital flows into equities will remain tepid until investors initiate a reallocation away from fixed income into equities. Currently, the catalysts for that dynamic market shift remain absent.

Let's take a look at the U.S. Treasury market for some perspective:

         
US   2YR 8-7-09  1.2977%   12-31-09  1.1354% 6-30-10  0.6014%  8-13-10  0.5285% 
US   5YR     8-7-09  2.8181%   12-31-09  2.6788% 6-30-10  1.7733% 8-13-10  1.4516%
US 10YR    8-7-09  3.8502% 12-31-09  3.8368% 6-30-10  2.9311%    8-13-10  2.6716%
US 30YR   8-7-09  4.6045% 12-31-09  4.6411%  6-30-10  3.8885% 8-13-10  3.8538%

The corporate bond market remains healthy and attractive. I encourage readers to review the "Corporate Bonds Still in Play" blog post from July 8. The six reasons that an investment in corporate bonds is still warranted remain concrete.

FOR THE WEEK AHEAD, HERE IS WHAT I AM WATCHING - AUGUST 16-20

1. Did PIMCO set the tone?

Friday August 13th's revelation that Bill Gross cut his U.S. Government debt share from 63% to 54% and raised his emerging market debt from 10% to a record 11% will open the dialogue. More importantly, let's see if others follow and reduce their U.S. Government debt exposure. This week, the U.S. auctions $30 billion in 6 month T-bills, $30 billion in 3 month T-bills and $31 billion in 4 week T-bills. On Tuesday, Freddie Mac will sell $1.5 billion in 3 month bills and $1.5 billion in 6 month bills.

2. Economic Data

This week's economic data schedule is relatively light.

 Tuesday      Expect a modest increase (consensus +0.2%) in the Producer Price Index.
 Wednesday  The consensus estimate for Housing Starts is a small increase (560,000 annual rate) from
 last month's 549,000 eight month low.
 Wednesday  Industrial Production could be the most important data point this week. Expect a modest increase
 of 0.5%; last month's figure was 0.1%.
 Thursday   Initial Jobless Claims rose last week to 484,000. This week, the consensus calls for the figure to
 remain uncomfortably high - between 460,000 & 475,000.

3. GM IPO

After last week's quarterly profit report of $1.3 billion and CEO shuffle, expect further guidance this week on the timing and size of a GM New York Stock Exchange re-listing.  The U.S. Treasury currently owns 61% of GM for its $50 billion bailout. The remaining unpaid balance is $43.3 billion. Expect the paperwork for the IPO to be filed this week. I would be amazed if the IPO did not commence prior to the November elections; incumbents will need to spin the IPO into some positive campaign rhetoric. 

4. SUN AND SURF

The Baseball Season of Frustration trudges along. Our commentary, released in January, 2010, was "It's the Tortoise, Not the Hare in 2010."   I suggest a quick reread while enjoying the sun and surf during the remaining three weeks before Labor Day.
 

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.