DIMENSIONS OF A SOFT PATCH, From David Kelly, Chief Market Strategist, JPMorgan Funds Like a road crew repairing potholes, analysts this week will be trying to measure the length and depth of the economic “soft patch” currently afflicting the U.S. economy.   Economic data should show signs of deflation in three key inflation reports, although this will mostly reflect lower gasoline prices in the month of June.  Retail Sales, due out on Wednesday, could show a further decline, reflecting weak light vehicle sales and lower gasoline prices and only a modest gain in chain-store sales.   Jobless Claims may have fallen quite sharply in the latest week as the seasonal factors expect shutdowns in GM automotive operations, which generally didn’t occur this year. Meanwhile, Industrial Production should look soft, apart from a further gain in utility output due to unusually hot June weather.  Consumer Sentiment, due out on Friday, may show a slight relapse from its June reading although psychologically, the “soft patch” is more recognised in Wall Street than on Main Street where the public didn’t really notice a recovery in the first place.   This will also be the kick-off week of the second quarter earnings season. Twenty-three S&P500 firms are expected to report their numbers, including Alcoa, CSX, Google, Intel, Bank of America, JPMorgan Chase, General Electric, and Yum Brands.  Combined these firms should provide a good overview of the state of the industrial, technology, financial and consumer sectors.   At the start of the earnings season, according to Standard and Poors, analysts expect operating earnings of $19.68 for the second quarter, up from $19.38 for Q1.  Based on recent quarters, it is reasonable to expect companies to beat this $19.68 target.  It is also predictable that commentators will ignore this good news and focus on company “guidance” for the rest of the year and 2011.   Fundamentally, this is a silly exercise.  While some companies could reveal some near-term company-specific information in their guidance, their general view (beyond a quarter or two) should be no more revealing than that of economists in general, bring us back to an assessment of the “soft patch”.    As of right now, economic data suggest that the “soft patch” could be relatively shallow and temporary, allowing corporate fortunes to improve along with those of the economy overall.  If this is the case, then S&P500 operating earnings, which are once again moving above $20 per quarter, should justify a significantly higher level for the index than the 1078 reached last Friday, at the end of what was a very good week.   KEEP LOOKING UP, from Jeffrey Saut, chief investment strategist, Raymond James

Depressions, and recessions, are even more difficult to predict than the stock market. Yet, most economists agree the recession ended around this time last year. Currently, the question du jour is whether the economy is going to slip back into recession; aka . . . the dreaded double-dip. At present, while the economy has hit a “soft spot,” the odds of a sliding into recession are indeed low.

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