JULY 2010 NEWSLETTER

This month we find ourselves in the quarterly tug-of-war between earnings reports and economic indicators. Earnings have, for the most part, been seen as positive and have helped to bolster a market index rally following the 4th of July holiday. These should be taken with a grain of salt. Keep in mind two things. The first is that earnings are most certainly a “lagging indicator.” They are representative of something that happened in the past. Past performance, as they say in our industry, is not indicative of future results.

The other thing to keep in mind is that analysts set the bar for what a companies expected earnings should be. For example, in the 3 weeks prior to earnings being released, analysts adjusted Alcoa’s expected figure down from 17 cents per share to 12 cents. When Alcoa announced 2nd quarter earnings of 13 cents per share…did they really beat expectations? Yet this news is enough to drive the markets up and cause investors to discount the economic indicators which continue to point to a slowdown in the near future.

The first-time home buyer’s credit expired in April of this year. May’s new home sales figure came in 40% lower then April’s. This was the worst new home sales number since 1963. By the end of last month, unpaid bills in Illinois exceeded 5 billion. Most of California’s 240,000 state employees could see their salaries temporarily cut to the federal minimum wage. Minnesota has announced they are delaying tax refunds. Overall, state tax revenues fell 12% from September 2008 to 2009. (Howard Penny and Daryl Jones – Hedgeye Early Look 6/25/10 and 7/15/10). The Economic Cycle Research Institute’s weekly Leading Index is coming back down and now matches the levels seen after the recent recessions of 2008-9 and 2001-3. (http://www.businesscycle.com/resources/)

The most important figure on the horizon is the release of 2nd quarter GDP growth on July 27th. The first quarter of 2010 had a GDP number of 2.7%, down from 5.6% in the fourth quarter of 2009. If we see a number (substantially) below 2.7% for the 2nd quarter, it will further confirm that the stimulus-bolstered recovery is slowing. (Dent Forecast – July 2010).

Until Next Month,

Your Advisors at Dominion Wealth