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VOL. 127 | NO. 144 | Wednesday, July 25, 2012

Mark Sorgenfrei

Focus Shifts Back to the US

By Mark Sorgenfrei Jr.

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After China’s deluge of economic information took the spotlight last week, investors this week shifted their gaze back to the United States for a couple of big ticket items.

First, Federal Reserve Chairman Ben Bernanke made his way to the place that is held in high esteem by the American public: Capitol Hill. He provided his semi-annual testimony to the legislators on Tuesday and Wednesday.

In his testimony, Bernanke reiterated that the economy has pulled back, although he noted that there are pockets of improvement, such as the housing sector (which this week saw solid homebuilder sentiment index readings, robust new home start figures and disappointing existing home sales data). Bernanke left the door open to further action, saying that, “We are looking for ways to address the weakness in the economy should more action be needed.” He also acknowledged that if the employment picture does not improve, “obviously, we have to consider additional steps.”

Bernanke then tossed out some possible Fed moves, including further expansion of its own balance sheet and the extension of the timeframe for ultra low interest rates. Continued easing always carries the risk of stoking inflation, but with inflation levels still hovering around a very comfortable 2 percent, the immediate inflation impediment appears to be non-existent.

Even the possibility of central bank intervention, both domestically and abroad, continues to be an effective counterpunch in this punch/counterpunch market. European and Asian central banks have taken recent easing steps, while the Fed has extended Operation Twist. Is there more in the arsenal? Based on Bernanke’s testimony this week, the answer does appear to be yes, if conditions warrant.

Second, investors focused on one of the most fundamental aspects of investing – company earnings. Nearly 20 percent of the S&P 500 companies have now reported second quarter earnings, and approximately two-thirds of those have exceeded (albeit lowered) expectations. Clearing a lower hurdle is still better than crashing into it, as this quarter’s earnings are being closely scrutinized in the face of the European crisis and Asian slowdown.

With their global footprint, technology companies could be severely impacted by global economic deceleration. However, tech stocks have been performance leaders this week as companies such as Google, IBM, eBay and Qualcomm all beat expectations. Intel also exceeded expectations, although the chip maker did acknowledge that the weak global economy is hurting growth. These days, though, as Apple goes, so goes the tech sector.

If my visit to the local Apple store this week is any barometer of the company’s current state, expect Apple to once again have the pedal to the metal. As of July 12, Standard & Poor’s estimated that second quarter S&P 500 operating earnings will be $24.94 (a 3 percent increase from first quarter and minimally ahead of Q2 2011 earnings), with full year 2012 operating earnings estimates still at a robust $103. Yes, 80 percent of the index is still left to report, but so far, so good.

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.

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