Review Meetings:

We have completed our group review meetings for this quarter. For those of you that were not able to make one of our scheduled times, please feel free to call and set up your private Mid-Year review, either in person or by phone, at your earliest convenience. We have several dates and times available over the coming weeks ahead. We can provide you with the details as to what transpired during the second quarter, why it happened, and the specifics of our strategy and outlook moving forward.

The Markets:

Lack of fireworks from Bernanke reassures

Fed Chairman Ben Bernanke’s PR campaign to reassure markets and an earnings season that, so far, is coming in slightly ahead of expectations helped most of the major market indices finish the week higher.

First let’s look at Bernanke. Fed policy and an apparent misinterpretation of what the Fed is trying to accomplish pushed up bond yields (prices lower) and stymied the stock market’s advance in May and June. Gold and Silver prices also increased for the week.

Although Bernanke had stressed any reduction in the Fed’s $85 billion in monthly bond purchases was dependent on how the economy performed, investors dumped bonds anyway, pushing up the yield on the benchmark 10-year Treasury by over a full percentage point from the early May low of 1.66% to 2.73% by July 5th (U.S. Treasury Dept). Today, the yield has come down to the 2.47% range. ( The average 30 year mortgage rate has dropped back to 4.35% from last week’s 4.48%. ( This comes after the 30 year rate hit 4.73% on July 5th. (Mortgage News Daily)

Quick reminder—The Fed’s bond buys, popularly called quantitative easing or QE, are designed to put downward pressure on longer-term interest rates. The goal—encourage more consumer spending and business investment, boost the housing market, inflate asset prices such as stocks and housing (in theory wealthier consumers feel better and are more likely to spend), and spur hiring. Only then would the Fed like to “normalize” interest rates, providing savers with more acceptable returns.

Bernanke reassured markets with more dovish comments on July 10 (Bloomberg), and he continued down that path in his testimony before two Congressional committees last week.

Before we continue, let’s be clear, Bernanke did not back away from any tapering talk. In fact he reiterated recent themes, as he expects a reduction in bond buys later in the year with and end to QE in the middle of next year IF Fed economic forecasts unfold as expected (testimony – Monetary Policy Report). The very important word here is “IF”.

But there was more of an emphasis on scenarios that might delay any tapering, and he repeated that he expects the fed funds rate to remain near zero for a “considerable time after the asset purchase program (QE) ends and the economic recovery strengthens (testimony – Monetary Policy Report).”

Bottom line – Bernanke fine-tuned his message. QE can’t go on forever, and he’s trying to prepare investors for the day when bond buys are cut back and eventually come to an end. Judging from recent reaction in equities and bonds, the markets may finally be getting it.

Earnings season – so far, not too bad-but not revenue driven

A deluge of profit reports are set to hit in the next couple of weeks (, which will give us a good idea of how companies are managing their bottom lines.

It’s still early, but so far most firms are surpassing a low hurdle, which is supporting equities. Despite several high-profile profit disappointments in the tech sector last week (Wall Street Journal), 65% of the 91 S&P 500 companies have topped analysts’ profit forecasts, which is two percentage points above the long-term average (Thomson Reuters). But as we’ve seen in recent quarters, companies are struggling to hit revenue targets against the backdrop of slow growth in the U.S. and uncertainty around the globe. It appears “profits” now are more dependent on continued cost cutting than due to increased revenues, and reducing operating expenses can only go so far as to help improve profits.

We hope you all are having a great summer so far. It’s hard to believe July is almost over, and soon we will see schools start once again, and our summer quickly behind us. Please call if you have any questions or if we can be of further service in any way. We appreciate the privilege of serving you and look forward to working together in the years to come.

God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.

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