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The Sandy Spring Way

Move over European debt headlines, corporate earnings have something to say.

April 23rd, 2012 | By Beau Mercer

Even though troubles are brewing again across the pond in Europe, corporate earnings season in the U.S. is stealing the spotlight. Why? According to CNBC, more than 100 companies in the S&P 500 have reported earnings and 8 out of 10 have delivered better than expected results – and that’s grabbed investors’ attention.

Each quarter, publically traded companies update investors on how their businesses fared over the previous three months. And, according to the updates we’re seeing, business is still looking okay. The news helped push the S&P 500 higher by 0.6 percent on the week.

Now, like all statistics, there’s more than one way to interpret the earnings numbers. While 8 out of 10 companies have beaten expectations, the “expectation” was pretty low. In fact, earnings increased only 3.7 percent from the year ago quarter, according to Zacks. For the remaining S&P 500 companies that are set to report, Zacks expects those companies to report slightly negative earnings growth compared to the year ago quarter.

Over in Europe, Spain and Italy saw the borrowing rate increase on their government debt, which suggests their debt problem is far from over. And, the International Monetary Fund released a report that stated the obvious – if the European debt crisis can’t be contained, it would negatively impact global economic growth in a severe way.

At the moment, the U.S. markets seem fixated on corporate earnings and have put the European problem on the back burner. But, in this interconnected world, problems overseas may eventually find their way to our shores.

Data as of 04/20/12 1-Week YTD 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks)

0.6%

9.6%

3.1%

18.3%

-1.5%

2.2%

DJ Global ex US (Foreign Stocks)

0.9

8.4

-13.6

13.2

-5.2

4.9

10-year Treasury Note (Yield Only)

2.0

N/A

3.4

2.8

4.7

5.2

Gold (per ounce)

-1.5

4.3

9.4

23.2

18.9

18.4

DJ-UBS Commodity Index

-0.9

-1.8

-20.0

8.0

-4.3

3.4

DJ Equity All REIT TR Index

2.8

11.1

10.3

36.0

-0.3

10.4

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHEN $1 TRILLION ISN’T ENOUGH…

Earlier this year the European Central Bank (ECB), Europe’s equivalent of our U.S. Federal Reserve, responded to the fear surrounding the European debt crisis by offering unlimited three-year loans with a 1.0 percent interest rate to European banks. According to The Wall Street Journal, at least 800 banks across Europe responded to this offer by borrowing over $1.3 trillion. As planned, the banks then took a good portion of that money and bought government securities that paid a higher interest rate. It sounds like a great deal to the banks – borrow money at a 1.0 percent rate then turn around and buy government securities that pay a much higher rate and pocket the difference.

The primary objective of this emergency lending was to indirectly allocate money to European governments who are heavily indebted. The ECB thought that making cheap money available would help lower interest rates in these troubled countries and “buy” them more time to work out their economic problems.

How’s it working?

Initially, interest rates in troubled countries dropped dramatically as banks bought the high-yielding government securities and fears of a collapse eased. Unfortunately, The Wall Street Journal says many of the banks who borrowed money from ECB may have already exhausted most of those funds – leaving little money left to keep pushing interest rates down. As a result of this fear, interest rates are rising again, particularly in Spain and Italy, and, like a leak in a dike, it’s hard to stop a rise once it gets going.

Will the ECB step in again and help European banks and governments avoid a Greek-style default? It’s too early to tell, but either way, we’ll be closely watching this tug-o-war between positive corporate earnings in the U.S. and negative headlines out of Europe.

Stay tuned…

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