It’s earnings season once again, and though only a quarter of the Russell 1000 has reported so far, the news is just north of positive. All signs indicate that the market has dusted itself off and is back to its cheerful self after a ho-hum first quarter, which was negatively affected by harsh winter weather.

In the chart below, you can see that 73 percent of the companies that have reported as of this writing exceed their earnings per share (EPS) beat rate. The beat rate, as you might know, is the rate at which companies surpass market analysts’ published estimates. The revenue beat rate, meanwhile, sits at 67 percent, a positive surprise above the long-term median of 63 percent.

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Included in these figures are a few of the top-performing companies that we own in our All American Equity (GBTFX) and Holmes Macros Trends Funds (MEGAX), such as Facebook, Apple and Biogen. We’ll discuss these companies later.
So to what do we attribute these welcome tidings?  

Two notable indicators are the significant drop in initial unemployment claims and the jump in U.S. and global consumer confidence.

Americans are heading back to work.

According to last week’s data reports, initial unemployment claims fell to their lowest level since 2006, before the Great Recession brought the country to its knees.

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Couple this news with the constructive U.S. jobs report, and we’re looking at a return to pre-recession labor-market strength. The U.S. Bureau of Labor Statistics reported that 288,000 nonfarm payroll positions were added in June alone, bringing the country’s unemployment rate to a five-year low of 6.1 percent. Data for July is expected next Friday.

Feeling good about letting go of their dough.

Another sign that the economy promises a strong continued recovery is the modest boost in domestic and global consumer confidence levels.

Information and insights company Nielsen announced that its global confidence index has inched up an overall 1 point to close at 97, the highest it’s been since 2007. A 100 mark indicates exceptionally strong consumer optimism.

According to Nielsen, the U.S. jumped 4 points from the previous year to close at 104 points, making it come in at 8th place worldwide. India leads all other nations at 128 points, possibly attributable to the recent election of its new prime minister, Narendra Modi. At 48 points, Portugal trails the pack.
As you can see in the chart below, there’s a 17 percent increase from the same time a year ago in American respondents who feel that now is a good time to spend their money on necessary and discretionary goods and services.

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The results of the Michigan Consumer Sentiment Index echo the buoyancy of the domestic economy. At 81.3, the index is finally stabilizing at pre-recession levels.

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Facebook had a robust second quarter, reporting revenue of $2.91 billion, an increase of 61 percent from the same time last year. More than $2.6 billion was derived from advertising alone. Mobile advertising specifically represented about 62 percent of advertising revenue, indicating that an increasingly greater number of users are moving away from traditional portals such as desktops and laptops.

The second quarter, in fact, has seen a 7.3 percent increase from the first quarter of mobile daily Facebook users, from 609 million to 654 million.

“We had a good second quarter,” founder and CEO Mark Zuckerberg said. “Our community has continued to grow, and we see a lot of opportunity ahead as we connect the rest of the world.”


The tech giant reported that its quarterly profits rose 12 percent to $7.75 billion, bolstered by its iPhone and Mac sales. Anticipation of an improved, next-generation iPhone, expected to arrive in late September, as well as the tentatively-named iTime smart watch, have also excited consumers both domestically and internationally.

In China, the world’s largest mobile market, Apple products unexpectedly outperformed Samsung, the popular South Korean smartphone maker.

“China, honestly, was surprising to us,” Apple CEO Tim Cook said. “We thought it would be strong, but it went well past what we thought. The unit growth was really off the charts across the board.”

Apple’s exceptional performance contrasts dramatically with retail leader Amazon’s reports. Its soon-to-be-released Fire Phone, a competitor to the iPhone, has cost the company a staggering pile of money to design and produce, and yet it has received lukewarm reviews from tech experts and bloggers.


Partially as a result of the Fire Phone’s ill receipt, Amazon has posted its most disappointing quarterly loss since 2012. The company, in fact, forecast that its operating losses this quarter will fall within the $410 to $810 million range.


The Cambridge, Massachusetts-based biotechnology company Biogen, a leader in developing treatments for neurological and autoimmune disorders such as multiple sclerosis (MS), reported revenue of $2.4 billion, a 40 percent increase from this time a year ago.

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Its blockbuster medication Tecifidera, used to defend against relapsing MS, has generated a jaw-dropping $700 million in 2014 alone-$585 million domestically, $115 overseas. Other runaway Biogen products include Avonex and Tysabri.

Looking forward to a stronger third quarter.

Good news such as this has been a long time coming.

Although many economic experts and pundits hesitate to admit that the U.S. economy has recovered to pre-recession levels, the second quarter has presented the most convincing signals thus far that we're closer than ever. A greater number of Americans are finding quality employment. Initial unemployment claims are tapering off. Consumer confidence is growing year after year. And with powerful American companies such as Facebook, Apple and Biogen leading the charge, the U.S. has a bright future in store.


Index Summary

  • Major market indices finished mixed this week.  The Dow Jones Industrial Average fell 0.82 percent. The S&P 500 Stock Index edged ahead 0.01 percent, while the Nasdaq Composite gained 0.39 percent. The Russell 2000 small capitalization index fell 0.60 percent this week.
  • The Hang Seng Composite rose 3.17 percent; Taiwan fell 0.47 percent and the KOSPI advanced 0.71 percent.
  • The 10-year Treasury bond yield fell one basis point to 2.47 percent.

Domestic Equity Market

The S&P 500 Index finished virtually flat for the week, with surprisingly muted volatility during a big earnings week. Energy stocks led the way with technology and health care not far behind, while consumer discretion, industrials and traditionally interest rate sensitive areas underperformed.

S&P Economic Sectors
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  • The energy sector rose by more than 80 basis points as the oil service names posted strong earnings results and pushed the group higher. Cameron International, FMC Technologies and Halliburton were among the leaders this week. All three companies reported earnings that were well received by the market. 
  • The technology sector was strong with Facebook the most high profile winner, rising nearly 10 percent as mobile monetization continues to gain traction. Verisign, Yahoo and Apple were also among the best performers for the week.
  • Intuitive Surgical was the best performer in the S&P 500 this week, rising by 21.37 percent. While earnings results for the quarter were favorable, investors appear to believe the company is hitting an inflection point and moving past some of the issues that had slowed sales and earnings in recent quarters as total procedure growth of 9 percent on a year-over-year basis was very encouraging.


  • The consumer discretion sector was the worst performer this week. Housing-related stocks were under pressure after a very weak new homes sales report. DR Horton fell by more than 9 percent and PulteGroup fell by nearly four percent. was the worst performer in the sector, falling 10 percent, as the company’s financial results significantly disappointed the market as the company spent aggressively to grow the business and is likely to continue to do so as the company posted a loss for the quarter and is expected to break even next quarter.  
  • The industrials sector also underperformed this week. Numerous defense and aerospace companies were among the worst performers, including Precision Castparts, Rockwell Collins and Boeing. All three companies reported earnings this week.
  • Xilinx was the worst performer in the S&P 500 this week, falling by more than 13 percent. The company reported earnings this week and reported worse than expected revenues for the quarter and cut third quarter guidance as product inventory levels in China for the ongoing wireless infrastructure build-out remain too high.


  • We remain right in the middle of earnings season and the market has generally been receptive to positive results. Key companies reporting next week include Pfizer, Amgen, American Express, MasterCard and Procter & Gamble.
  • Earnings of oil service companies with offshore exposure have generally been well received. National Oilwell Varco reports on Tuesday and is a name to watch.
  • The path of least resistance for the market appears higher as this “classic” bull market phase of grinding higher with low volatility remains intact for now.


  • Volatility has been remarkably low and this bull market has been an abnormally smooth ride. This calmness won’t last forever, with late summer and early fall traditionally having been more volatile periods.   
  • At almost 18 times trailing earnings, the S&P 500 is not “cheap.” Valuation may be a headwind for future market gains.
  • Geopolitical tensions are on the rise with the downing of a civilian jetliner in Ukraine, a ground war in Gaza and more Russian sanctions. The market has been able to shrug off these events, so far, but an escalation could be the catalyst for a long awaited correction. 
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A Blog by Frank Holmes, C.E.O. and Chief Investment Officer

The Economy and Bond Market

Treasury yields were mixed again this week as the short end of the yield curve rose a few basis points while the long end of the curve declined. The 10-year Treasury yield fell again this week inching closer to 52-week lows. Geopolitical factors drove yields lower last week and mixed economic data didn’t change the picture this week. June new home sales came in well below estimates, totaling just 406,000 (annualized), down 8.1 percent from May. To make matters worse, May’s data was revised significantly lower than originally reported, so June’s data looks really poor. Housing sales should be hitting their stride this time of year and the fact that they appear stuck in the mud implies that yields will stay lower for longer than many currently believe.    

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  • Consumer prices remain well under control, rising 0.3 percent in June and 2.1 percent year-over-year. This is right in line with the Fed’s preferred range of inflation and continues to give the Fed plenty of room to maneuver.
  • Initial jobless claims fell to the lowest levels since 2006, hitting 284,000 last week.
  • Recently, more attention is being paid to China’s purchasing of U.S. Treasuries, which through May totaled $107.2 billion. As the Fed is winding down its purchases, China has been ramping up, somewhat offsetting the Fed’s taper and possibly contributing to the depressed yield levels even as economic information has been more upbeat.


  • New home sales were unexpectedly very weak, which raises red flags on the true strength of the economy.
  • Brazil’s growth forecasts were cut for the eighth week in a row and economic growth expectations for 2014 have now dipped below 1 percent.
  • The high-yield market has been under pressure recently with $2.5 billion in fund outflows this week, which comes on the back of $1.9 billion last week. There has been talk of a bubble in that part of the market and, while isolated at this point, could spill over into other parts of the market. 


  • Geopolitical tensions are on the rise with the downing of a civilian jetliner in Ukraine, a ground war in Gaza and more Russian sanctions. Bonds could benefit from a flight to safety in this environment which is largely what occurred over the past couple of weeks. 
  • Next week is action packed with top-tier economic data. ISM manufacturing, second quarter GDP and unemployment are all reported next week. All will be closely watched and each one could be a market mover.
  • With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields is likely down.


  • The economy has some positive momentum and appears poised to continue to build on that as we move solidly into summer. With the European Central Bank (ECB) and Bank of Japan taking the global lead in easy monetary policy, the Fed may transition to a tighter policy sooner than many expect.
  • While there is a lot of significant economic data out next week, keep an eye on nonfarm payrolls on Friday. If the employment report positively surprises, bonds will likely sell off.  
  • St. Louis Fed President James Bullard stated the economy is “closer to normal” than many realize and that the Fed could raise interest rates as soon as the first quarter of 2015.



Gold Market

For the week, spot gold closed at $1,307.49, down $3.61 per ounce, or 0.27 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 0.57 percent. The U.S. Trade-Weighted Dollar Index rose 0.64 percent for the week.

Date Event Survey Actual Prior
July 22 U.S. June CPI 2.1% 2.1% 2.1%
July 23 HSBC China July Manufacturing PMI - Preliminary 51.0 52.0 51.7
July 24 Hong Kong June Gold Exports to China - 41.0mt 52.3mt
July 25 U.S. June Durable Goods Orders 0.5% 0.7% -0.9%
July 30 U.S. Second Quarter GDP 3.0% - -2.9%
July 30 U.S. July FOMC Rate Decision 0.25% - 0.25%
Aug 1 U.S. July ISM Manufacturing 56.0 - 55.3
Aug 1 U.S. July Change in Non-Farm Payrolls 231K - 288K


  • China’s manufacturing activity expanded at the fastest pace in 18 months in July as new orders surged. The HSBC PMI reading rose to 52.0 from June’s 50.7, in the latest indication that the economy is picking up as government stimulus measures kick in. The increase in industrial activity should translate in higher earnings, and propel a new wave of gold consumption in the world’s biggest gold market.
  • Investors are buying metals from zinc to aluminum at the fastest pace since 2009, betting demand gains will tighten supply. The buying has been made evident by fresh money coming into exchange traded funds backed by metals. Hedge funds are the most bullish on copper in at least eight years, after betting on prices to drop earlier in the year. Zinc, aluminum, and platinum group metals have also seen incremental buying, in what is turning into a very exciting second half for metals.
  • Staying within the broader metals space, zinc prices have climbed to more than two-year highs as falling inventories, together with expectations of reduced mine supplies, spurred investors to stock up ahead of a shortage. One of the biggest beneficiaries has been Trevali Mining, a silver-lead-zinc producer whose zinc-heavy production expansion has sent its shares to new 52-week highs.



  • China gold imports from Hong Kong fell for a fourth month in June amid weaker demand from retailers. The data supports statements from the China Gold Association saying domestic gold demand fell 19 percent in the first half of the year as investors bought fewer bars and coins. Similarly, jewelry demand in China fell 24 percent in the second quarter, according to Chow Tai Fook. The weakness has been attributed to a slowing economy, together with the unwinding of shadow financing deals following fraud investigations. Buying is expected to increase as the government continues its monetary easing program, which has propelled industrial activity back into expansionary territory as of late.
  • Curbs on gold imports are likely to remain in place according to Indian Finance Minister Arun Jaitley. The Indian government has announced it is inclined to continue with the measure as a means of controlling the widening current account deficit. The impact on the absolute level of gold imports has been properly documented; however, new data shows that India’s wealthy have been buying real estate as a means of protecting their real wealth from the devaluation risks of paper money. Recently though, gold buying has increased sharply, partly as a result of the crackdown on gold smuggling, which has served to evidence how tight the market is, and how relentless the Indian demand for gold is.
  • Another writedown has been flagged for Newcrest Mining’s Lihir mine in Papua New Guinea, the product of a $9 billion takeover that is considered one the worst ever executed. Australia’s largest gold producer has lost almost three-quarters of its market value since buying the Lihir gold mine in 2010, adding a 6 percent drop this week. The mine accounts for roughly 55 percent of the company’s book value but contributes little to no cash flow or profitability.


  • Dundee Precious Metals gathered a lot of talk this week. Further to our mention last week, more positive support for the company’s recently refurbished Tsumeb Smelter has been hitting the wires. The highlight were news by Codelco, the world’s largest copper producer responsible for nearly 10 percent of global output, issuing a warning that its copper deliveries for the remainder of the year would suffer a sizeable reduction due to its roasters and smelters being unable to treat the high arsenic concentrate produced as of late. The Tsumeb smelter is one of two or three smelters in the world capable of treating this type of concentrate, which highlights the importance and strategic value of this asset going forward.
  • Comstock Mining announced its second quarter results this week, highlighting the potential upside for the stock in the second half of the year. Despite the company’s posting of an expected net loss, the company has reached a run rate of 40,000 gold equivalent ounces per year, a level that should allow it to turn a profit toward the end of the year. In addition, the company announced it had been successful at mining through overburden, leading to significantly lower strip ratios going forward. Comstock is one of the new generation of smaller, high grade mines, with high insider ownership; these miners tend to outperform peers where management doesn’t have much skin in the game.
  • After three years of comprehensive environmental and technical studies and analyses, the U.S. Army Corps of Engineers released the Final Environmental Impact Statement (FEIS) for Haile gold project owned by Romarco Minerals. The FEIS included no material changes to the proposed project, which is positive since the EPA originally gave the Draft EIS a favorably high and rarely awarded EC-2 rating. As a result of this news, BMO capital markets upgraded Romarco to “speculative outperform” from “market perform”, with a target price of $1.30 a share.


  • The cost of borrowing gold for short selling dropped to a 13-month low in London, indicating greater availability of gold for loan. A greater availability of gold for loan suggests lower short term demand for physical metal out of Asia, but also increases the likelihood of short sellers and speculators to increase their bets against gold.
  • America’s dependence on foreign minerals is a choice, according to Rep. Doug Lamborn, R-Colorado, chairman of the House Subcommittee on Energy and Resources. Lamborn attacked the Obama administration for supporting pre-emptive vetoes on critical mineral projects, even those that haven’t been proposed. The U.S. is in dire need of a policy that protects pro-mining interests and protects their rights to due process as established by the National Environmental Policy Act, which unfortunately appears unlikely over the next several years.
  • After a $2.6 billion government fine forced it to take its biggest quarterly loss since 2008, Credit Suisse has announced it is leaving the commodities trading business. However, Credit Suisse stated it may keep parts of the business, such as precious metals, an area in which the bank faces serious conflicts of interest as it continue to influence prices and sentiment through its research and coverage.

Energy and Natural Resources Market



  • With China’s Purchasing Managers Index (PMI) coming in higher than expected and new forms of economic stimulus underway, copper is making a comeback. Copper futures rose the most in three weeks as prices are expected to increase due to stronger demand from China. Furthermore, according the London Metal Exchange, copper inventories continued to slump to the lowest level since August 2008. The combined increase in demand and decrease in supply create high prospects for copper prices moving forward. Lundin Mining gained 3.5 percent this week.
  • Base metals are back in the spotlight. Base metal exchange-traded funds (ETFs) in the U.S. attracted new money this year that amounted to 18 percent of their market capitalization. The recent success of base metals is due to improvements in global manufacturing and increases in auto and home sales. Since the end of March, nickel and zinc have jumped 20 percent and 19 percent, respectively, while copper, lead and aluminum have made significant gains as well.
  • Data from the World Steel Association showed that global crude steel production rose 3.1 percent in June from a year ago. Producers have ratcheted up output in response to an improving economic outlook. Driven by China crude steel, output hit 137 million tonnes in June, nearing the record seen in March.


  • Ecopetrol and Pacific Rubiales decided to bring an end the STAR pilot, a thermal enhanced oil recovery project that is said to have reserve-doubling or tripling potential. The news comes as a disappointment.
  • Lower prices, rising competition from natural gas, and tighter regulations have severely weakened coal companies’ viability, pushing many to the brink of insolvency. The recent fracking boom has flooded the market with a cheap alternative energy source. As such, the electric-power sector is expected to use 3 percent less coal next year, which will only serve to further depress coal prices.
  • Chinese gold imports continue to fall. For the fourth straight month, imports from Hong Kong have dropped amid declining demand from retailers. Gold demand from China fell 19 percent in the first six months of the year as fewer purchases of bars and coins were made. Net imports totaled 36.4 metric tons, down from 52.3 tons in May and 100.9 tons a year ago.


  • China is set to cancel tax protection for 78 imported steel products. The move, effective July 31, seeks to trim overcapacity and create a fair market according to the China Iron & Steel Association. So far, the steel products being affected by the tax protection are hot rolled sheet, cold rolled sheet, narrow strip, wire rod, section steel and electrical steel.
  • Freeport-McMoRan has expressed its willingness to accept a hike in royalty payments to the Indonesian government, among other concessions, in exchange for being allowed to restart exports. The world’s third largest copper mine has been unable to supply global markets since the dispute began. The memorandum of understanding, which would also require Freeport to help develop a smelter and pay new export taxes, may be signed imminently.
  • The recent tragedy in Ukraine and unresolved conflict between Israel and Gaza have propped up gold as investors fear escalating geopolitical conflicts. Continued talks of new Russian sanctions and little to no diplomatic progress between Palestine and Israel reveal that the recent global geopolitical threats are still very real. The uncertainty surrounding these events will only serve to maintain gold’s attractiveness as a safe haven.


  • Despite its fantastic recent rally, zinc is set to stall. Contracts in Shanghai, which are at a record import discount, signal weak demand and too much supply in China. The discount between zinc’s price on the Shanghai Futures Exchange and the delivery price of imported metal on July 11 was the largest seen since February 2010.
  • Government policies aimed at reducing CO2 emissions will result in declining coal production moving forward, according to a Standard & Poor’s report. Coal prices, which are already suffering from competition from cheap natural gas, will be further depressed as a result of increased regulation.
  • Proponents of Colorado’s initiatives 88 and 89, which would ban fracking, confirmed that they have collected more than the state’s required 86,105 signatures. Although a Boulder County judge has negated the ban on the grounds that it is incompatible with state law, the initiatives remain a very real threat to oil and gas companies.


Emerging Markets


  • Hong Kong was the best-performing country in Asia this week, driven by better than expected flash China Purchasing Managers’ Index, State Council’s indication to lower funding cost for the real economy, and assorted evidence of home mortgage policy loosening in support of the property sector. 
  • Financials was the best-performing sector in emerging markets this week, led by Chinese property developers, banks and insurers on the back of pro-growth government policies including the re-launch of mortgage-backed securities, discounting of mortgage rates in top-tier cities, and more anecdotal relaxation in home-purchase restrictions in various locations.
  • Recent data released by the Central Bank of Greece on deposits and outstanding loans show substantial improvement in liquidity conditions for Greek banks. Strong trends in deposits continue, especially from corporate accounts, and reflect the improving macroeconomic performance. More importantly, loan growth appears to have troughed in June, as banks posted the first monthly increase of outstanding balances since 2010. The data supports the view presented last week that showed banks’ relative performance has not yet reflected the sector’s improving fundamentals.


  • Dubai was the worst-performing emerging market for the week, falling a little over 5 percent following comments by the Saudi Arabian financial markets regulator, which said foreigners would be allowed to invest in listed shares during the first half of 2015. The move has been attributed to the government’s aim to diversify the economy away from hydrocarbons. The opening of the Saudi market to foreigners is expected to divert demand away from Dubai and Qatar, as the market offers greater liquidity, as well as a broader diversity of sectors.
  • Indonesia was the worst-performing country in Southeast Asia markets this week.  Although market-favorite Joko Widodo was declared official winner of the presidential election, uncertainties remain over voting irregularities, coalition politics and cabinet selection.  Investors took profits ahead of the week-long holiday. 
  • The health care sector underperformed the emerging market complex for the week, led lower by a number of Indian pharmaceuticals following the introduction of a domestic policy seeking to bring price controls to a number of cardiovascular and diabetes drugs. The provision allows the entire market to be governed by price controls, thus risking long-term profitability of domestic-focused pharmaceutical companies.


  • Greece is offering a buying opportunity in the wake of the recent correction, says Morgan Stanley. According to the bank’s strategists, there are five reasons that support their buy call: (1) Greek equities are oversold relative to emerging markets to the tune of  1.1 standard deviations; (2) Greece is a leveraged play on the eurozone recovery; (3) periphery bond markets, especially Greece, have shown resiliency and remain a pillar of the banking recovery; (4) recent eurozone economic data just ticked higher; and (5) economic data in Greece has continued to improve in recent months despite the correction in equities.
  • Russia’s pain is somebody else’s gain. Emerging market currencies from South Africa’s rand to Turkey’s lira and Indonesia’s rupiah are benefiting from the crisis in Ukraine as investors move funds out of Russia and into other high-yielding currencies. The buying has been particularly positive for the Turkish lira, and Turkey as a whole. Investors are betting on Turkish central bank governor Erdem Basci to continue with interest rate cuts aimed at boosting the local economy. Year-to-date, the Turkish market is the best performing index among major countries, led by exporters and a rebound in banking stocks. 

Internet of Things Promises Growth for Taiwanese Technology Complex
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  • Market expectations have surged recently in China for further easing of monetary conditions in the country, including a benchmark interest rate cut for the first time since 2012, to counter a property downturn and achieve the GDP target for the full year.  Historically, interest-rate sensitive and high-beta cyclical sectors benefited most from monetary policy easing, including property, financials and materials

Gazprom Enjoying Premium Differential to European Gas
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  • The primary victim of the Malaysian Airlines flight 17 atrocity is the Netherlands, the one country that can single-handedly sanction the Russian economy to quite significant effect. According to trade statistics, the Netherlands is Russia’s main export destination representing 13 percent of all Russian exports. In addition, Dutch investors are the second-largest source of foreign direct investment into the Russian economy, or the largest if you consider Cyprus’ role as an offshore safe house for Russian oligarchs’ assets. 

Gazprom Enjoying Premium Differential to European Gas
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Gazprom Enjoying Premium Differential to European Gas
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  • The downside risks for the Russian economy, and its stock market, are too large to ignore. This week, Norway’s sovereign wealth fund, the world’s biggest, announced it is reassessing its investments into the country to reflect the changing geopolitical climate. At the end of 2013 the fund held a substantial $3.6 billion in stocks and $4 billion in corporate and government bonds in Russia. In addition, an arbitration court in The Hague will rule next week on a $103 billion damages claim against Russia by the owners of Yukos Oil, Russia’s largest oil producer which was confiscated by Putin a decade ago. A favorable ruling on the claim would leave Russian property abroad at risk of seizure, including assets of Rosneft, thus affecting Russia’s ability to acquire foreign currency.
  • More than six months after the Second-Child Policy was approved in China, eligible couples have been slow to embrace looser restrictions, based on provincial statistics.  The growth prospect of China’s mass consumer sector such as infant foods and diapers has significantly diminished due to structural migration to e-commerce and rising competition to name brands. 

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