Cremasco News
Market Commentary - August 11, 2011
I had a small chuckle while opening the office door this morning. As I picked up the Globe & Mail the headline "Leaders Race to Contain Crisis" stared back at me. It was one of those moments when your brain goes into hyper drive and what seems like an impossible number of thoughts occur at the same time. My chuckle came when I realized our "leaders" were acting more like my kids who left a school project assigned 3 weeks ago to the night before it was due and are now scrambling to complete it.
The European crisis is the most peculiar as the measures now being utilized in an attempt to contain the mounting sovereign debt issues, are essentially the ones proposed in February. If they had been implemented at that time it is likely the ultimate cost would be far less than it will be today. Certainly the strain of uncertainty would have been diminished reducing the real economic impact.
There is little difference in the US, where the debt ceiling debate stressed the system (or at least our nerves) prior to the last minute deal. This was largely viewed as political posturing, but the reality would equally weigh the significant ideological gap of how to address US debt and growth between the ruling parties.
At an address earlier this year in New York City, Canadian Finance Minister Jim Flaherty openly challenged global leaders to act proactively to reduce as I call it dithering damage. The last two weeks have proven his remarks to be spot on!
The problems at hand are not new and to some degree are now removed from corporate success. Mature economies such as the US are growing very slow, while emerging economies are fighting the effects of rapid growth, the most significant being inflation. Corporations abroad have very strong balance sheets with the extreme example being Apple who have almost 80 billion dollars in cash. Not bad for a toy/gadget company! Despite the last two quarters of almost no growth in the US, corporate earnings are likely to set an all-time record for this quarter. How is this possible? Well one view would be corporations learned the value of a strong balance sheet and cost controls in the 2000-2002 tech implosion and market collapse. They now protect these virtues as the holy grail of profitability, which is a significant contributor to why companies are not hiring. Maybe governments could learn something from them!
Yet this does not matter to stocks as sentiment is so poor fundamentals are not relevant with the sting of the 2008 losses so fresh in our memories. During the past few weeks as strong earnings and favourable corporate guidance have been reported the political and sovereign debt issues have overwhelmed corporate achievements. While at the same time debt instruments, which are at the root of the problem have climbed in value. This is referred to as safe haven buying, and that it is, but the previous reference that this is a flight to quality is far more suspect now that US debt has been downgraded.
This is an emotionally charged time and for whatever reason the 4th summer of the last 5 we have experienced a significant market correction. The traditional matrix of economic activity and corporate success are distorted by government actions and policy changes. Though we cannot suggest when this negative sentiment/environment will run it's course, or what the impetus will be for it to turn, we are as always open to discussions and portfolio reviews at all times and look forward to further communication.
