Weekly Update – 7/11/2014

Macro Outlook

The export from Portugal this week was not nearly as smooth and sweet as its typical libation. News that Banco Esprito Santo, the 5th largest lender in Portugal, might face losses on loans to its founding family’s related companies resparked Euro-area bank concerns. Spanish bank Banco Popular called off a planned bond offering and Greece placed only half its targeted bond issuance. All things considered, the equity market response more broadly was mute. To add to the geopolitical issues, violence between Israel and Gaza escalated with rockets launched on both sides and sadly lost lives. Reports indicate a massing of troops of up to 20,000 soldiers within Israel preparing for a possible ground incursion to cease the deadly attacks. Again, the equity market showed apathy. Volumes have remained light, which is consistent with the summer season but still somewhat unnerving in the grander scheme given the gravity of issues that have come up.

Earnings season in the US kicked off with the traditional first announcement from aluminum producer Alcoa (ticker AA). Browsing AA’s earnings release, we thought their commentary was bullish – especially for the US but for other regions as well. Management specifically cited strength in overall global aluminum demand that is above consensus, but they are also seeing strong demand in autos and large aircraft orders as well (indirectly speaks to demand from consumers). The stock is up 50% YTD setting a very high bar heading into this earnings print. The price of the stock increased another 6% post-print – that is impressive. Lastly, a week or two ago, Intel raised guidance citing strength in PC corporate demand. If these two are any indication, earnings season could be a strong one – perhaps above already high expectations. Hopefully it will be enough to maintain valuation multiples which have discounted solid earnings growth this year. Another sector to monitor closely is the consumer. Earnings were disappointing in Q1 with weather and other factors to blame. The market will need to see solid earnings prints from the consumer sector – especially the low to mid-end consumer like WalMart and Target. High-end consumption has been strong all along so I think more of the same is sufficient for that sub-sector.

The opinions expressed herein are those of Edge Capital Partners (“Edge”) and the report is not meant as legal, tax or financial advice. The projections or other information generated by this report regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.  You should consult your own professional advisors as to the legal, tax, or other matters relevant to the suitability of potential investments. The external data presented in this report have been obtained from independent sources (as noted) and are believed to be accurate, but no independent verification has been made and accuracy is not guaranteed.