Recent trends in corporate profits have shown robust recovery, reflecting a remarkable turnaround. This rebound comes after a particularly challenging period for corporate America, suggesting that the peak might already be behind us. While this doesn’t necessarily signal impending difficulties for corporate profits, the recent landscape was exceptionally favorable for the stock market. If we are transitioning to a less ideal scenario, significant changes in sentiment are likely. The critical question remains whether the public’s expectations have been adequately and appropriately adjusted.
Zero-coupon Treasuries with maturities exceeding 20 years have been reported as the leading investment this year, achieving a return of 21% as of July 22. So what can we expect for the second half of the year? Is another strong performance from zero-coupon bonds in the cards? The likelihood appears low—though it’s not out of the question, is it?
The situation is more intricate than it seems. As highlighted in today’s Wall Street Journal, “After examining over ten years of deflation in Japan, economists have gradually come to realize they do not fully understand its mechanisms.”
►VIX, volatility and ETFs/ETNs:
According to the Vix and More blog: “While I was away for a few days, Barclays boldly introduced a new VIX ETN. This product stands out as the first inverse VIX ETN to enter the market, officially named Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN, with the ticker symbol XXV.”
Today’s New York Times features a story on Italian automaker Fiat and its initiatives to enhance worker productivity. One particularly notable photo depicts a Fiat employee sporting a T-shirt that may not inspire hope regarding productivity improvements—featuring the hammer and sickle, a universal emblem of communism. The article also includes a quote from a factory worker expressing concern that the push for increased productivity might impose “American-style standards” on Italian workers. The worker adds, “Too much work is going to kill our workers.” Indeed, the challenges are universal in scope.
A worker of the world unites
In response to yesterday’s post regarding the trendless pattern in new jobless claims, a reader remarked that I had not considered enough historical context for this data series, which might lead to overly pessimistic interpretations.
Well, that didn’t take long. Today’s weekly update on new jobless claims dispelled any hopes that recent declines in this series were indicative of a new positive trend in the labor market. In fact, just last week, the numbers were encouraging enough to prompt the question: Is the dip real? Today’s data provides an initial response—not necessarily the final word, but thus far the indications are disheartening.
Fed Chairman Bernanke’s recent Senate testimony presented minimal encouragement regarding any impending bold initiatives from the central bank to counter recent indications of renewed deflationary pressures. As reported by Bloomberg News, “the Fed chief spent a significant portion of his prepared remarks discussing how the Fed plans to eventually phase out its unparalleled credit expansion.”
Misery enjoys company; however, returns for major asset classes have shown resilience this month, unaffected by recent economic concerns. If anything, the discussions surrounding deflation and the possibility of a double-dip recession have fueled optimism among bulls in July. With the exception of TIPS, asset prices have risen across the board, and significantly for most broad asset categories.
The forecast for inflation within the 10-year Treasury market declined last week, and similar trends seem likely to continue today. The yield spread between conventional and inflation-indexed 10-year Treasuries dropped to 1.71% on Friday, a decrease of 10 basis points from the previous week and significantly below the late-April peak of 2.45%. The ongoing debate about deflation risks is anticipated to take center stage this week, likely leading to increased buying of Treasuries.
