Weekly Update-July 8, 2012

By: Michael Vodicka

“If you had a friend who was deeply in debt and simply refused to cut a crippling spending habit, would you continue to lend to them and pile on more debt as some sort of meaningful solution?”

After a very strong June, stocks are once again showing signs of weakness. The first problem is of course the Euro zone, where the temporary sugar high from last week’s European summit is quickly wearing off. At the time, a lot of fancy ideas and big promises we’re made by the politicians and central bankers with their plan to create a plan to fix the Euro zone. In fact, I read an article this morning that said there have been a total of 21 European summits since 2008, with every single one completely failing and the Euro zone never in worse shape that right now.

So once again, it’s now time for reality to set in. Which means actually creating some kind of coherent and comprehensive strategy and then actually executing it

Needless to say, both ends remain more than elusive, considering we are going on 2.5 years of day-to-day madness out of the Euro zone. And the very concept of fixing a debt problem with more debt is ridiculous. If you had a friend who was deeply in debt and simply refused to cut a crippling spending habit, would you continue to lend to them and pile on more debt as some sort of meaningful solution? Of course not. But that’s what’s going on in the Euro zone. Hey, some more debt will fix all these debt problems, what a brilliant idea!

And of course, no one wants to talk about spending or cutting spending because too many people are addicted to governmental deficit spending and cushy entitlements. Like Greek retirement at age 55. God forbid Greeks wouldn’t be able to retire at age 55 and live off the government for 30 years. Because it is a God given right in Greece to retire young and spend the last 30 years of your life soaking up rays on a beach.

Ya, the Euro zone is a total joke and the politicians controlling the action over there are so far beyond clueless its hard to even comprehend. More debt to fix a debt problem? Maybe I’m just a cynical son of a gun, but I’ve just never heard of more booze helping a drunk sober up.

But other than the absurdity of the Euro zone, the facts are in and the global economy has already begun slowing down. Globally and domestically we are entering a recession. All the data confirms this, including the dismal jobs report from Friday that fell well short of expectations.

So once again, the market hangs its hat on the politicians and central bankers artificially stimulating the market with more debt, stimulus measures, deficit spending and an endless string of bailout packages.

Because the fact of the matter is that we’ve already entered a new stage of the economy where the action is controlled by the government and has almost nothing to do with the free market or effective allocation of capital.

So even though earnings season starts this week, as always, the only thing that matters is the Fed and the politicians. And since both are omni potent, I’m sure we’ll all be just fine with people who think more debt can fix a debt problem engineering the future of the economy.

Updates:

With the NASDAQ leading the way lower on the week, tech stocks were on the ropes. That weighed on Check Point Software Systems (CHKP), with the maker of security software down 5% on the week. This stock has been pummeled since May, falling from $64 to $46 for a 30% decline. In the meantime, earnings and estimates haven’t budged one bit. So even though that downward movement has been tough, this is still a top name out of technology with plenty of up side.

CPFL Energy (CPL), the Brazilian electric utility with a solid 6.5% dividend was also weak, falling 4.5% on the week. Emerging market and small cap stocks are the most sensitive in a weak market. That has CPL down from $32 in April to a recent low just above $23. The 52-week low is just above $21, so in spite of the nice dividend, shares have been under pressure as the market avoids risk.

And finally, to end on a high note, McDonald’s Corp (MCD) beat the market with a 1.25% gain. MCD was the best performing Dow stock last year, adding more than 30% in 2011. But after topping off above $100, shares got a little over extended, and pulled back to the $90 level. Shares appear to have stabilized in this area, setting the stage for another leg higher as investors chase a stable brand in a volatile market.

That’s all for this week, but until next time, here is a very simple but great analysis of the never-ending European debt cycle. Enjoy!

The European Debt Cycle: Hope, Relief and as Always, Disappointment

Your Investment Partner,

Mike

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.