How Uncertainty Affects the Market and the European Economy – The Guide Rock Capital Market Commentary – FT038

Robert Burns, father of fourteen and writer of Auld Lang Syne, once said, “There is no such uncertainty as a sure thing.” Was he ever right!

Here are a few sure things:

· The Federal Reserve intends to reduce economic stimulus by tapering quantitative easing (QE).

· Federal Reserve Chairman Ben Bernanke plans to retire.

· Gross Domestic Product (GDP) growth was positive in Europe during the second quarter.

Here are some of the uncertainties which may arise from them:

· When will QE begin to end? How will changes in the program affect world economies and markets?

· Who will be the new Fed chairman? What policies will be pursued?

· Was the second quarter a turning point for the Euro area economy? Is Europe moving out of recession?

How has uncertainty affected things? Well, it has left U.S. Treasuries a whole lot less popular than they once were. China and Japan reduced their holdings of U.S. Treasuries by about $40 billion recently. According to Reuters, a Chinese economist said the sale of Treasuries could be attributed to expectations that bond yields will rise and prices will fall as QE ends. In the same article, a Japanese policymaker said expectations about changing Fed policies created market volatility that forced some Asian central banks to defend their currencies and that led to the sale of Treasuries. In total, about $67 billion of foreign investment money was pulled out of Treasuries in June.

Uncertainty didn’t do much for American stocks, either. At the end of last week, most major U.S. stock markets had moved lower.

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

IS IT THE BEGINNING OF THE END? MAYBE… Last Tuesday, Eurostat, which provides statistical information on the European Union (EU), announced that its flash estimate showed positive economic growth (up 0.3 percent) for the Euro area for the second quarter. Media outlets embraced the news with tremendous enthusiasm and some informed the world that Europe was, once again, on its feet.

· Euro Zone Emerges from Recession – The Wall Street Journal

· Euro Zone Exits Longest Recession in Over 40 Years – CNBC

· Germany, France Haul Euro Zone Out of Recession – Reuters

While it’s possible the second quarter will prove to be a turning point for Europe’s economy, the headlines were a bit rash. Perhaps the blog, written by Ollie Rehn, European Commissioner for Economic and Monetary Affairs, should have been read before crafting their headlines. Rehn wrote:

“Add today’s quarterly GDP figures to other recent positive survey data and you will find reasonable evidence suggesting the European economy is gradually gaining momentum… I hope there will be no premature, self-congratulatory statements suggesting “the crisis is over.” For we all know that there are still substantial obstacles to overcome: the growth figures remain low and the tentative signs of growth are still fragile; the averages hide important differences between Member States… So there is still a very long way to go before we reach our ultimate goal of a sustainable growth model that delivers more jobs.”

Officially, the end of the Euro area recession will be determined by the Centre for Economic Policy Research (CEPR). This organization is similar to the National Bureau for Economic Research (NBER) in the United States. In both regions, business cycle dating is a tricky business. The CEPR assesses GDP and other factors, such as the components of output and labor market data when determining the start and end dates for recessions and expansions. One of the biggest hazards to cycle dating is data revision so you can be sure the CEPR will be paying attention when Eurostat issues revised second quarter numbers in early September.

Weekly Focus – Think About It

“True friendship is a plant of slow growth, and must undergo and withstand the shocks of adversity, before it is entitled to the appellation.”

—George Washington, President of the United States

Best regards,

ANDREW HUNT CFP®
President of Guide Rock Capital Management, Inc.

402.938.6016
1001 Gallup Drive
Omaha, NE 68102
Communication | Woo | Achiever | Ideation | Relator

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* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

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