Commentary for the week ending 5-28-10

Another volatile week on Wall Street saw the major indices close relatively unchanged. For the week, the Dow lost 0.6%, the S&P rose 0.2%, and the Nasdaq was higher by 1.3%. Friday also marked the end of the month, which turned out to be the worst May performance since 1962. The Dow closed lower by 8.2%, the S&P dropped 8.6%, and the Nasdaq fell by 8.7%. Oil dropped by 14% in May, one of the few bright spots in an otherwise awful month.

Source: MSN Moneycentral

With the poor performance of the prior week, it was encouraging to see markets hold their levels and not continue further downward. While it is too early to tell if we have seen a bottom, the stabilization of this week was certainly a positive indicator. This high level of volatility means the market can turn on a dime, so we remain cautious. However, if volatility moderates and the markets can hold these levels, we will resume buying as bargains can be found. For the time being, we are content sitting safely on the sidelines.

In a continuation from last week, global macroeconomic issues were the driving factor of the market. Concerns over the European debt problems still linger, as Spain was downgraded by the Fitch ratings agency. This action was not all that surprising, yet the market sold off rather strongly on the news. Actions from North Korea worried the markets this week, as well, as they add another wrinkle to global stability. Time will tell how this will play out, but it should be closely followed as their actions and tight relationship with China can impact global markets.

Here in the U.S., corporate earnings are still solid and economic reports this week were modest, although signs still point to a growing economy. Personal income, durable goods, and consumer confidence all rose during the month, while weekly unemployment claims fell. However, consumer spending (which is needed for growth) and real estate showed weakness.

Next Week

With a holiday-shortened week, we will be closely watching the market to see if it can continue to hold these levels. Any surprises out of Europe will certainly send markets lower. Several economic reports will be released next week, but the most important report comes on Friday as the unemployment rate is released. Little change is expected, but we will be closely following the results.

Where are we investing now?

Despite the recent market losses, last week gave us more confidence in a market rebound. We remain on the sideline at this time, but will be reentering the market if conditions are right. Our outlook still remains the same, as we are still optimistic through the end of the year since the easy money and stimulative measures will help push the markets higher. Additionally, the lower oil prices this month (although higher this week) equals lower gas prices at the pump, an obvious benefit for consumers. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we are focusing on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time. Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently since the drop in the Euro has strengthened the dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 5-21-10

Concerns over European debt and new domestic banking regulations helped send markets significantly lower for the week. At the close on Friday, the Dow lost 4.0%, the S&P dropped 4.2%, and the Nasdaq was lower by 5.0%. Gold sold off from its highs last week and oil was down 2.2% to close right at the $70 per barrel level.

Source: MSN Moneycentral

“What is going on with the market? Will it keep going lower?”

We heard these questions many times this week. The answer is, we don’t know. No one does. The Dow has risen over 60% since its lows back in March of 2009, and we were due for a correction at some point (A correction is officially defined as a drop of 10%, a milestone we passed this week). So will the market keep heading down? The momentum is certainly lower, but there is no telling how long it will last. Value investing is in our nature, so we are always on the lookout for a stock that is “on sale.” However, the market is just too volatile right now and we are comfortable waiting on the sidelines for a little more stability. A brave investor could pick up some potential bargains now, but there is little sense in us trying to “catch a falling knife,” as they like to call it.

As mentioned above, several factors contributed to the sell-off this week. The European debt story just won’t go away and will likely be around for some time. Also, the senate passed a financial regulation bill which we will discuss later. A story on CNBC this week caught our attention, as we feel it may explain some of the recent volatility. Hedge funds have been loading up on liquid assets in recent months and are now looking to “de-risk.” Liquid assets are things like S&P 500 stocks, and loading up on these stocks contributed to their rise in price. The new buzz word amongst hedge funds is “de-risk” (we heard it many, many times in their interviews), so when they de-risk, they sell those liquid assets, which causes the prices to fall. They also sell assets which have reached new highs, like gold and other commodities (whose prices have also dropped this week). These hedge funds are only a small part of the market, but it still may have added to the rise in volatility we have seen.

Scores of new government regulations and interventions, both here and abroad, are also causing investors to worry. The financial regulation bill passed the Senate this week and is being described as the biggest overhaul to the financial industry since the Great Depression. Wonderful. Aside from the fact that Wall Street is not the culprit in the recent downturn in the economy, this bill does nothing to prevent another credit crisis from happening. However, it succeeds in forming new government bureaucracies and increasing fees. These costs will be borne by the consumer who will find less credit available to them due to new regulations on banks. Maybe a little less credit would be good, since lax lending practices contributed to the recent meltdown, however, less credit for businesses would cause serious problems.

In a recession, it is important to reduce burdens on the public to help spur new investment, production, and consumption for the economy to recover. Presently, nothing coming out of governments worldwide will help, and it keeps getting worse. The financial regulation bill is just one example. Recently, Australia announced a plan for a new 40% tax on mining companies (in addition to the taxes they currently pay). Brazil, China, India, and Congo have also announced similar plans. This will ultimately result in higher costs to consumers and hurt mining companies and their employees.

Quietly announced this week, the U.S. government plans to dramatically increase taxes on oil companies (the current 8 cent per barrel tax will be raised to 32 cents) for two reasons. One is to pay for the oil spill in the gulf (which will sound good to the public, except they already have a fund for this, plus, BP has announced they will cover these costs). The other is to pay for unemployment benefits. It is bad enough that they raised taxes on our businesses here in Florida (amongst other states) to pay for these extended benefits, but now they will take advantage of the unfortunate oil spill to pay for their overspending. Raising taxes on businesses will prevent them from hiring new employees, as we can see from the stubbornly high unemployment rate.

In addition to the volumes tax hikes proposed by the Federal government (we will spare you from discussing them in detail), virtually every state and local government has proposed a new tax or “fees” in order to pay for their spending. We are going in the wrong direction and an already tapped out consumer can’t afford these new burdens.

We don’t often discuss government policies here, but these new burdens will ultimately hurt consumers and businesses, resulting in a lower stock market. The U.S. economy has fared well to this point and businesses are returning to profitability. The headwinds in the economy keep accumulating and it would be unfortunate to see a reversal in the growth we have achieved.

Next Week

Along with the news coming out of Europe, more corporate earnings and economic reports will have an impact on the market next week. For the economic reports, we will be following the home sale numbers, consumer confidence, durable goods, and personally income and spending releases.

Where are we investing now?

The recent drop in the market is tempting us to add to stock positions, but we will remain on the sideline for the time being. The volatility is troubling and we are looking for a bit more stability. Our outlook still remains the same, as we are still optimistic through the end of the year since the easy money and stimulative measures will help push the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we are focusing on higher-quality and multi-national stocks, but some smaller, value-style stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time. Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently with recent drop in the Euro. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding China, and now Australia) are areas we favor.

Commentary for the week ending 5-14-10

Volatility is still high in the stock market as the major indices closed the week higher, despite the Dow closing lower in seven of the last nine trading days. At the close on Friday, the Dow rose 2.3%, the S&P gained 2.2%, and the Nasdaq was higher by 3.6%. Gold hit a new high this week, while oil dropped to a three month low.

Source: MSN Moneycentral

After taking a beating last week, the market shot higher Monday on news of a rescue package for the troubled European economies. The announcement of $1 trillion in aid was welcomed news since images of Greek riots had markets jittery after last week. The aid will come from a combination of European Union and International Monetary Fund contributions. Unfortunately, the U.S. is on the hook for over $60 billion, since we are the largest contributor to the IMF.

We had a hard time believing that throwing $1 trillion at the debt problems will solve anything. A debt problem simply cannot be solved by adding more debt. Tough, fundamental changes must be enacted to fix their ballooning deficit issues. To their credit, several countries have taken small steps to bring their debt under control. Time will tell if those measures were the correct remedy. For now, though, this aid package is nothing but a quick-fix that ultimately puts off the hard decisions until a later date.

As the week went on and investors had time to digest the news, it became clear that they were less enthusiastic about the rescue package, just like we were. The Euro fell to an 18 month low against the dollar. Gold rose significantly to new highs, which tends to happen when there are concerns about paper (fiat) money. Additionally, the markets sold off rather strongly on Thursday and Friday. The European debt issue may be with us for some time, so we are bracing for a more volatile market in the coming days and weeks.

Many positive economic stories were overlooked this week as Europe dominated the airwaves. Industrial production continues to grow, exports continue to rise, and retail sales came in higher than expected. All signs point to a recovery, but at this point, the market may have already priced this good news in.

Next Week

More corporate earnings are on tap for next week, with Walmart likely being the headline story. Several important economic reports are also due for release: Producer Price Index (PPI), Consumer Price Index (CPI), housing starts, and leading economic indicators. The minutes from the last Fed meeting will be released on Wednesday and it will be interesting to see if there was any discussion on raising interest rates.

Where are we investing now?

The market continues to be volatile, but this volatility also presents opportunity. Blindly buying on the dips might not be wise here, but opportunities have been presenting themselves and we look to capitalize on this. As we have said in past reports, we are optimistic through the end of 2010 since the easy money and stimulative measures will help push the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we are focusing on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time. Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently with record drop in the Euro. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 5-7-10

Despite a beautiful week here at the TPC Sawgrass for The Players golf tournament, it was a downright awful week on Wall Street as stocks sold off sharply and volatility increased. At the close on Friday, the Dow dropped 5.7%, the S&P lost 6.4%, and the Nasdaq plunged by 8.0%. Gold rose to a new high for the year, while oil dropped back to the mid-70’s level.

Source: MSN Moneycentral

Odds are you have already heard about the record drop in the market on Thursday. Stocks had been trending lower all week, but the selling intensified that afternoon. In a matter of minutes, the Dow plunged several hundred points, putting it down nearly 1,000 points for the day and just below the 10,000 level. Many stocks were down 30 or 40%, while some even fell to just one penny. It was certainly a nervous, but also exciting, moment for us. Within a few minutes, stocks recovered and rose substantially, as you can see in the chart above.

So what happened? Markets were already nervous as images of the Greek riots reached the U.S. Investors are worried that the debt problems with Greece will spread to other European countries, and in this modern global economy, it will affect the United States. As these riot images were shown, selling intensified and the market dropped. Some believe the catalyst was a trader accidentally hitting the ‘B’ button instead of ‘M’ for million when entering a sell order. This triggered panic selling and computers programmed to sell at certain levels were firing rapid sell orders. All this pushed the markets sharply lower.

This explanation makes sense, but we still have reservations. A typo between the ‘M’ and ‘B’ buttons would certainly be rare, but not completely unheard of. Still, this is the first time it happened? And it took down the entire market? Again, we, nor investigators, know what the main culprit was, or if there even was a culprit. Hopefully our market system is not so fragile that a simple mistake could bring it down like we saw Thursday.

As mentioned earlier, the drop was an exciting event for us, too. By our nature, Bluefin tends to have a value-investing theme, meaning we like to buy stocks when their prices are lower and showing signs of future growth. A week like last week gives us more opportunities to find and buy undervalued stocks. We don’t know what the market will do in the future, but having a long term focus and buying stocks at low levels is usually a recipe for outperformance.

Despite the negative mood on the Street at the moment, we received several encouraging economic reports that continue to show strength in the economy. Manufacturing continues to strengthen. Employment increased by 290,000 last month, with Census workers comprising a smaller portion of that than we anticipated.

Additionally, banks appear to be loosening lending standards, so business lending should be rising in the future. However, we believe that this may be the catalyst to higher inflation. Since the credit crisis ended, banks have been steadily increasing their excess reserves, aided by the easy money policies of the government. As money was being printed at record levels, the money supply has remained relatively flat. This excess money has been going to the banks, plugging up the losses from bad loans and building excess reserves. Once the bank begins lending these reserves out (and considering the money multiplier), the money supply will jump and inflation will ultimately rear its head.

Next Week

Next week we continue to receive corporate earnings and several economic releases that could impact the market. Inventories, import prices, retail sales, and industrial production are some of the reports we will be receiving. Despite the macro events currently in focus, any surprises here would certainly impact the market.

Where are we investing now?

Markets are clearly trending lower and we won’t pretend to know how long it will last. As stocks become cheaper, they become more attractive to us and we will step in and buy. As we have said in past reports, we are optimistic through the end of 2010 since the easy money and stimulative measures will help push the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we are focusing on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time. Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, despite its recent rise. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 4-30-10

It was a rocky week on Wall Street, ultimately resulting in the worst performance since January. At the close on Friday, the Dow fell by 1.8% to just above the 11,000 level, the S&P dropped 2.5%, and the Nasdaq lost 2.7%. Friday also marked the end of the month, with the Dow 1.4% higher, the S&P gained 1.5%, and the Nasdaq rose 2.6% during April.

Source: MSN Moneycentral

On Tuesday, the Dow dropped over 100 points as the financial problems of Greece made headlines-again. Unfortunately this story won’t go away. It appears that they will need as much as $150 billion in a bailout. Initially, it was thought that the European Union would be the ones supplying the rescue funds for this. It is looking more likely that it will be a combination of the EU and the International Monetary Fund (IMF) who supply the funds. Unfortunately, the US is the largest contributor to the IMF (currently around 20%), so US taxpayers will be financing the Greek bailout. As outrageous as this seems, it may only be the beginning. Several other countries in the EU are facing similar problems and may soon come looking for a handout, even as we adopt more European-style policies that may put us in the same position.

Goldman Sachs remained in the headlines this week as the CEO and other directors were grilled by members of Congress on the alleged improper disclosure of a financial deal. Friday, it was announced that the SEC will be pursuing criminal charges in the matter. We don’t believe that the case has any merit and will likely be settled out of court; however, it was enough to shake investor’s confidence. The Dow lost 160 points Friday as investors decided to take some gains off the table after the news.

On a positive note, this week we got a positive reading on consumer confidence, household purchases rose, and GDP increased by 3.2%. Corporate earnings continued to come in positive this week, though not all met analyst expectations. Nonetheless, it shows that conditions are improving for US businesses.

Next Week

Next week we continue to receive corporate earnings. Several economic reports are forecasted for release, including personal income and spending, manufacturing sector statistics, and productivity numbers. The big report will come on Friday with the release in the April unemployment numbers. Rates are expected to remain unchanged.

Next week also marks one of our favorite times of the year. As many of you know, our office is located at the entrance to the TPC Sawgrass, home of the Players Championship. Practice rounds begin on Monday and we will be attending several of the days. However, we will be in the office every day next week, though our hours will vary from day-to-day. We will continue to monitor the market, even though we may not be in the office, and any phone calls not immediately answered will be returned that same day. We try to minimize any inconvenience for our clients during this exciting time of the year and hope you understand.

Where are we investing now?

It has been quite some time since we had the indices close lower for the week, and frankly, we have been looking for a pullback for longer than we would like. It is a healthy function of the markets, especially since it has risen in a virtual straight line upwards since early February. We will be closely watching the behavior of the market next week. If we see strength returning, we might buy into it. Still, we remain cautious and understand that the market was due for a correction.

We are optimistic through the end of 2010, however, and believe the easy money and stimulative measures currently in place will help push the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term. Additionally, the homebuyer tax credit (finally) expired on Friday, and we are interested to see how the free market will impact home prices.

In equities, we are focusing on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. Commodities remain a longer term favorite and we believe that government policies will weaken the dollar over time, despite its recent rise. TIPs continue to be important as we expect inflation to increase in the future, though there is little or no inflation at this time. U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase in the future. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.