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Pulled Back In!

Richard Croft
July 15, 2013
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Just when we thought we were out, the US Federal Reserve (Fed) pulls us back in!

The markets were already turning the corner, as traders were starting to focus on real economic fundamentals rather than liquidity enhancements; what I have referred to in past blogs as visibility. Then, just as the markets were adapting to this “new norm” (i.e. slow sustainable economic growth), the Fed intervenes with clarifications from none other than Chairman Ben Bernanke that tapering was not on the front burner, and the Fed had no immediate plans to rein in their bond buying program.

That sent global stocks soaring with one of the best weekly performances. Critical to this discussion is a recognition that last weeks’ response to Bernanke’s comments marks a shift away from economic fundamentals and back onto the Fed. Rather than digesting major earnings reports, investors will likely focus on the Fed’s semi-annual testimony to Congress on monetary policy, which begins on Wednesday.

That same day, the Fed will release its beige book, which provides anecdotal information on current economic conditions in different parts of the country. We suspect the market will spend most of its time dissecting the tone of Mr. Bernanke’s testimony and the nuanced commentary from the beige book rather than the substance embedded in the earnings numbers. That’s unfortunate because Canadian industrial and financial stocks market has been on a tear since the June 24 lows which, at the bottom, translated into a minor 5% correction.

To maintain upside momentum, the market will need the support of better than expected earnings. Among the broader market, financials will be the most likely sector to beat estimates and lead to the upside. Not surprisingly, this is also the sector where analysts have been talking down expectations, which is why the better than expected numbers from J.P. Morgan Chase and Wells Fargo on Friday were a pleasant surprise. Look at buying calls on the iShares Capped Financial Index Fund (TSX: XFN).

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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