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Summer Blues for Economy and Markets!

Recent economic indicators have clearly shown that economy is going thru soft patch and markets are following economy. This is almost exact replica of last year when it went thru similar phase during summer months. There are various reasons for this soft patch:

  • Impact of disruption in supply-chain due to 3/11 Japan Earthquake
  • European debt problem in general and Greece's issues in particular
  • Continued impasse in Washington regarding how to handle US's raising of debt limit which is causing rating companies to put USA on possible downgrade path
  • Continued slowness in hiring - May month's employment report was much worse than expected with unemployment rate inching up to 9.1%
  • Upcoming end of Fed's QE II
Now the question is - are these temporary or more bad news is yet to come ? Have markets priced all bad news ? Is DOW heading below 12000 and S&P towards 1250 ?

We will have to find out answers to these questions in Jun and it would most likely depend on how corporate profits are holding up in Q2. Despite all issues mentioned above, corporate profits held up very well in Q1. If this trend continued in Q2, it may give some baseline for markets to hold up at current levels. If companies start pre-announcing earnings warnings in next 4 weeks, watch out for bottom to fall out with DOW heading towards 11500.

Finally DOE's rules for for-profit education companies are out. The rules were diluted compared to what markets were expecting and this gave a big boost to shares of these companies with COCO/EDMC/APOL to gain from 10-30%. Now that uncertainty is lifted, one would see shares of these companies gaining over next 12 months - some of them have potential to give returns of over 50%.

While Arab Spring is still continuing, recent news from India on this front is not so good especially when government is cracking down on Ramdev Baba and its supporters to break their fast (against corruption).  

Every week a new republican either declares his/her intention to run for president or drop out of race. When is Republican Party going to offer some credible candidate for 2012 election ? Any of you want to run for President ?  There is slot available as Republican candidate.

Have a good weekend !

/Shyam

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