Commentary for the week ending 7-23-10

More corporate earnings were released this week and were reasonably decent, spurring a rise in the market. For the week, the Dow rose 3.2%, the S&P gained 3.5%, and the Nasdaq topped the both at 4.2%. There was little change in gold, while oil gained more than 3%.

Source: MSN Moneycentral

As you can see in the chart above, it was a fairly volatile week on Wall Street. The latest batch of earnings beat expectations and revenues were mostly good, providing the backdrop that sent the markets higher. These companies really don’t look that bad, particularly ones with overseas operations. It was a pleasant surprise to us and encouraging sign for the future.

The market dropped sharply on Wednesday, however, when the Fed chairman Ben Bernanke called the outlook of the U.S. economy “unusually uncertain.” Obviously this statement worried investors since economic data had been so weak and worries about the future linger. He reiterated the Fed’s commitment to easy monetary policies that are intended to stimulate the economy. Additionally, further steps can be taken if warranted. In our view, these policies have done little to help the economy to this point and we are unsure what effect they will have in the future.

More disappointing economic data came in this week, as well. Housing remains incredibly weak and we believe it has further to go. Leading economic indicators fell slightly, and there was an increase in weekly unemployment.

It is quite a contrast between these poor economic reports and solid corporate earnings. Companies have become very streamlined while still meeting demand and we don’t see them cutting any more at current demand levels. We worry, though, that the weak economy will affect that demand and force more cost cuts. On the other hand, if economic conditions improve, it will certainly mark a bottom in the market and stock prices will rise.

Next Week

Earnings season rolls on next week with a new batch of releases. Like before, we won’t be watching just the earnings, but their revenues, as well.

Several economic reports will also be released, so it will be another busy week. The most important data comes in on Friday with the release of the second quarter GDP. It is anticipated to come in slightly below last quarter and any surprises will impact the market.

Where are we investing now?

With the economic picture continuing to be weak, we remain cautious despite encouraging reports from businesses. Like we said last week, companies with a large overseas presence (especially Asia) have shown impressive growth. We can find some cheap stocks at current price levels which may be worth acquiring if the timing is right.

Our big-picture outlook still remains the same, as we are optimistic through the end of the year. Low interest rates and the remaining stimulus will push the markets higher. The higher interest rates down the road, 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 focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. 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, and we are beginning to see the weakness now. 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 7-16-10

Earnings week started out with a bang, only to fall sharply on Friday. At the close, the Dow lost 0.98%, the S&P dropped 1.20%, and the Nasdaq fell 0.79%. Gold dropped to the lowest levels in two months, while oil was relatively unchanged.

Source: MSN Moneycentral

This week started out strong with early corporate earnings reports showing solid growth. The market shot upwards and expectations for the remaining reports were high. There was even talk of how the worst was behind us and markets will only be higher from here.

Unfortunately the rally did not last. Later reports showed a rise in earnings, yet their revenue was flat or lower (As we discussed last week, revenue is what is actually received from the products or services sold). The reduction in costs looks to be the main source of earnings growth, not the demand for these products or services.

Adding to the negative mood, economic reports continued to paint a bleak picture of the U.S. economy. Consumer sentiment dropped to the lowest level in a year. Retail sales have dropped and manufacturing is lower. Mortgage applications are at the lowest level in a decade and unemployment remains weak.

Theses negative stories and the poor corporate revenue growth were too much for the market on Friday as it fell 2.5%.

To a lesser degree, we believe the final passage of the financial regulation bill contributed to the Friday drop, also. The Wall Street Journal had an article on Brian Moynihan, the new CEO at Bank America, as he addressed the impact it will have on his bank. He cited a cost of over $4 billion a year, plus a one-time charge of nearly $10 billion. With this sour outlook for the future, the financial sector was hit the hardest on Friday. Bank of America was down 9%.

As we have said in the past, bank customers will bear the brunt of this new regulation. The banks will simply pass these costs on to their customers in the form of more and higher fees. This bill adds many more regulations and costs to these businesses, but really solves nothing.

Next Week

We continue with earnings season next week. A third of the Dow stocks and one-fifth of the S&P 500 stocks will be reporting, so it will be a very busy week. Like before, we will be watching for revenue growth, not just earnings growth.

Thankfully there will be few economic reports to worry over in addition to all the earnings reports. We will get info on housing and leading economic indicators, and that’s about it. Both reports are expected to be lower.

Where are we investing now?

Despite the relatively decent corporate earnings, we remain cautious due to the negative overall economic picture. We have noticed the companies with a large overseas presence (especially Asia) have shown impressive growth. Companies who are predominantly domestic have been underperforming. It shows the weakness of the U.S. economy, but also shows that there is strength in other parts of the world.

With all the cost cutting, companies will be well positioned when growth does return. Until then, it will be a tough road. Some values can be found, but we are not in any rush to buy them at this point.

Our big-picture outlook still remains the same, as we are optimistic through the end of the year. Low interest rates and the remaining stimulus will push the markets higher. The higher interest rates down the road, 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 focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. 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, and we are beginning to see the weakness now. 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 7-9-10

The markets recorded their best returns of the year during this holiday-shortened week. At the Friday close, the Dow climbed 5.3%, the S&P popped 5.4%, and the Nasdaq rose 5.0%. Oil also had a big week, rising 5.5%, so gas prices will be higher at the pump. Gold recorded minor gains, although still off nearly 4% from its record high.

Source: MSN Moneycentral

It was quite an impressive week on Wall Street and we can’t point to exactly what caused the rise. Probably a combination of many little things contributed to the gains. Economic data was light; however, a few releases like retail sales and employment showed modest improvement. A lack of bad news certainly helped the mood on the street.

Being a holiday week, volume was very light, which usually results in more volatility in the market. That means the gains or losses become larger than they otherwise would be.

Short covering also contributed to the market rise. Traders who are betting the stock or the market will go down are considered “short”. In order to protect themselves from a rising market, they must repurchase those stocks. This pushes prices higher.

We think the largest contributor to the gains was an optimistic outlook for corporate earnings due to be released next week. Investors anticipate solid earnings from companies, and with the recent market pullback, now is a good time to get in before stocks (hopefully) head higher.

While we were pleased with the gains of the week, we are not reading much into it. As mentioned earlier, volume was light. If there was a higher volume of trades, it would show us a conviction in the rally. To make matters worse, investors pulled a considerable amount of money out of stock funds last week, while money market funds (which return practically nothing) saw significant inflows, followed by bond funds and foreign stock funds. This data makes us question the quality of the recent market gains.

Next Week

Next week will be a very busy and important one. Quarterly earnings season begins and over 20 stocks on the S&P 500, amongst numerous others, will have released their earnings. They will be compared to earnings of a year ago, when the economy was very weak, so earnings will undoubtedly be much higher. Accordingly, expectations are high. If they are not met or exceeded, we will likely see a sell-off.

While we agree that earnings will be high, we want to see a nice rise in revenue, not just earnings. See, revenue (what is actually received from the products or services they sell) can be flat, but if their costs are lower, earnings will be higher. So the company may not have increased sales, but if they lay off workers, for example, their costs are lower and their earnings are higher. A gain in revenue would indicate an improvement in sales and the economy, so that is what we are watching for.

In addition to corporate earnings, there are several economic reports we will be watching. Retail sales, business inventories, industrial production, and most importantly, producer price index (PPI), and consumer price index (CPI) will round out the week. These reports won’t impact the market as much as earnings, but will be important to follow, nonetheless.

Where are we investing now?

We will be closely watching earnings reports this week to get a gauge on the strength of the economy. Value investors who like to buy stocks trading at a “discount” (which we generally agree with) have been busy buying stocks recently. Until the employment picture clears up, we remain cautious. Still, a simple ladder of corporate bonds and bond funds looks like the least-scary investment.

Our big-picture outlook still remains the same, as we are optimistic through the end of the year. Low interest rates and stimulus funds will push the markets higher. The higher interest rates down the road, 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 focused 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.