Commentary for the week ending 8-27-10

The markets trended lower all week, but erased much of the losses with a pop higher Friday. At the close, the Dow lost 0.6%, the S&P 500 fell 0.7%, and the Nasdaq dropped 1.2%. Both oil and gold rose slightly higher this week.

Source: MSN Moneycentral

Poor economic reports set the tone early in the week and the markets sold off sharply, with the Dow crossing below the psychologically important 10,000 level. The most alarming report came from the housing sector, which showed a record 27% drop in existing home sales for July. We figured it would be bad, but this was much lower than expected.

The mood changed on Friday however, with the release of the revised second quarter GDP and comments from the Fed.

First, GDP was revised lower, to 1.6% from the original 2.4% number. The market was expecting a figure of 1.4%, so the 1.6% was a nice surprise. The problem is, a GDP of 1.6% is a horrible number. We feel the market is being very short-sighted here, as this was not good news. We have gone from 5% in the fourth quarter of last year, to 3.7% in the first, to now 1.6%, so the trend is definitely lower.

This report was followed by news that the Fed will be proactive in further monetary easing to help the economy recover. The markets cheered this news, as well, for it meant further stimulus. We believe the Fed will continue to purchase Treasury bonds, for this will keep interest rates low, which means borrowing costs will be low.

They are trying their hardest to get people borrowing again, so they will buy more “stuff”. The problem is, consumers are deleveraging, or paying off their debt. In fact, the savings rate has been steadily rising. That is why these low rates have not had an effect so far and we believe they will not have an effect in the future.

Until a more business friendly attitude is adopted by Washington, we believe the markets will continue to languish. Therefore, further stimulus would be futile. Even more worrisome, these policies are trading a short term gain for long term pain. Keep in mind we have spent hundreds of billions in stimulus, and have very little to show for it. All this borrowing must be paid back eventually.

Next Week

Next week will be loaded with economic reports and corporate earnings. In our view, the most important information comes on Friday with the release of August unemployment numbers. These numbers look weak, so it will be interesting to see the markets reaction.

For corporate earnings, it looks primarily like retail companies releasing their data. We will also find out how the important back-to-school season fared this year. These numbers look weak, as well.

Where are we investing now?

Even with this weak economic picture, we are modestly optimistic through the end of the year. These 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 (unfortunately this has not been the case recently).

Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, but it is currently benefiting from a flight to safety. 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 8-20-10

This week saw a large gain and subsequent large loss in the markets, producing mixed results among the major indices. For the week, the Dow lost 0.9% and the S&P 500 fell 0.7%, while the Nasdaq was higher by 0.3%. Oil continued to fall and gold continued its rise, up 1.0% this week.

Source: MSN Moneycentral

Merger activity picked up this week, which is typically a positive sign for the stock market. On Tuesday, it was announced that BHP Billiton was looking to acquire the fertilizer maker, Potash, for a significant premium over their current stock price. The news drove Potash Corp’s stock price higher by nearly 35% and the market shot higher, as well.

What was interesting was the comments coming directly from those companies. BHP felt the stock was significantly undervalued, so it made the bid. Potash felt that the bid, even at that high level, was too low. That tells us that these companies think their current stock prices are too low, so for investors like us, it would be a good time to buy stocks in general. Remember, buy low.

Putting a damper on this enthusiasm, new economic reports continue to disappoint. Weekly initial unemployment numbers showed that 500,000 people filed claims last week. Manufacturing data looks extremely weak, too. Despite the good news coming from individual companies, the poor economy has the attention of investors. This is clearly evident in the market performance this week.

Actually, investors are more concerned about the policies coming out of Washington than anything else. Until a business-friendly agenda is adopted, businesses will not look to expand, job losses will rise, and investors will continue to pull money out of stocks.

Next Week

Economic and earnings data will be relatively light next week. We will get some housing info and GDP revisions, though, and both look weak.

The Treasury will again be issuing over $100 billion in bonds next week, and we will see if investors still have an appetite for U.S. debt. We believe the sale will go great, as always, since the Fed will step in and pick up any slack. Yes, one government agency will purchase these bonds from another government agency.

A story from Zerohedge this week shows that the Fed already owns $777 billion in US debt, making them the third largest debt-holder, behind China and Japan. Basically this is a giant scam and the long-term effects will be extremely damaging. Currently, there is little concern, since it will likely take several years to appear. At that point, though, we believe a severe inflation spike will be the result.

Where are we investing now?

Again, little change here. Like before, earnings continued to be decent and revenues are satisfactory. Companies with a large overseas presence (especially Asia) have shown especially solid growth. The overall economy is weak, though, and that is what investors are focusing on at this time.

Our big-picture outlook remains the same, as we are modestly 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. Unfortunately this has not been the case recently.

Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, but it is currently benefiting from a flight to safety. 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 8-13-10

It was a rough week on Wall Street as the major indices sold off sharply and re-entered the red for the year. At the Friday close, the Dow lost 3.3%, the S&P 500 fell 3.8%, and the Nasdaq fared the worst with a -5.0% return. Oil fell considerably (-6.6%) on the negative economic outlook, while gold rose slightly higher.

Source: MSN Moneycentral

A lingering concern about a weak US economy was the main contributor to the drop this week. Comments from the Fed only added to these concerns and precipitated the sell-off. According to them, the recovery will be “more modest than forecast” and they are committed to easy-money policies that are intended to stimulate the economy. Investors were hoping the worst was over, but these comments only reignited the fear.

One of the Fed presidents, Thomas Hoenig, expressed worries that these record low interest rates will be in place too long (he has mentioned this many times over the past several months). Constantly tinkering with the economy does not allow market forces to operate properly.

Interest rates were too low for too long nearly a decade ago, which fueled the housing bubble we are still trying to recover from. As Hoenig said, we are at risk of creating a boom-and-bust cyclical economy. We agree, and believe that the economy will not improve until government gets out of the way.

Corporate earnings releases are down to a trickle now, but still remain decent. As earning season comes to an end, the results were solid in our view. Although cost cutting was the primary contributor, revenue growth was satisfactory. Going forward, the lack of positive earnings news means the weak economy will be in focus and we worry it will impact the markets to the downside.

The consumer price index was released on Friday, showing a slight gain. Over the past year, the CPI has risen 1.2%. Although small, this gain shows signs of inflation, not deflation.

Recently, economists have become very concerned over deflation, as these effects are supposedly more detrimental to the economy than inflation. Goods are cheaper for consumers, but results in losses to businesses. We don’t see deflation entering the picture, however. There are many components to the CPI, but any trip to the grocery store or gas pump, as well as other everyday purchases, will tell you inflation is prevailing and it is supported by these CPI numbers.

Next Week

Next week looks relatively quiet in terms of both economic and corporate earnings releases. We will get housing information, as well as the Producer Price Index and leading economic indicators, but they will have limited impact on the markets.

Several large companies like Wal-Mart, Target, and Home Depot will release earnings, but we believe these, too, will have limited impact.

Where are we investing now?

Little change here. Like before, earnings continued to be decent and revenues are satisfactory. Companies with a large overseas presence (especially Asia) have shown especially solid growth. The overall economy is weak, though, and that gives us cause for concern.

Our big-picture outlook 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, but it is currently benefiting fro a flight to safety. 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 8-6-10

Another bumpy week in the markets, ultimately resulting in modest gains for the major indices. At the close, both the Dow and S&P rose 1.8% while the Nasdaq gained 1.5% (a jump higher at the open Monday severely distorted our chart this week). Oil continues to hover around the high level of $80 and gold has been trending higher - up 2% this week.

Source: MSN Moneycentral

As earnings season winds down, the corporate earnings releases still look decent. Revenue growth has been satisfactory; however, cost cutting has been the biggest contributor to those earnings gains. Still, solid earnings contributed to the nearly 10% run the markets have seen since the July lows. Going forward, the lack of these positive reports fueling market gains have make us very cautious for the future.

The unemployment report was released on Friday and left us disappointed. The numbers were weaker than expected, although they showed a gain of over 70,000 private sector jobs. Additionally, the previous month’s job numbers were revised significantly downwards. On its release, the markets dropped over 1%, yet rebounded late in the day. As you can see in the chart provided by the Wall Street Journal, gains have been trending lower and are well below what they should be at this point in a recovery (the light red bar is the private sector jobs, the dark red includes government sector).

With this poor economic picture, investors have been pouring money into relatively safer bonds. Yields on Treasury bonds are at historic lows and are projected to trend lower. This tells us that investors are pessimistic on the future and would rather purchase bonds that return practically nothing, rather than take possible losses in the stock market. It is another negative indicator to us and makes us cautious for the future.

Next Week

Corporate earnings begin to taper off next week and will likely have little impact on the market. We will receive more economic reports, but they too will have little impact. The Consumer Price Index will be released on Friday and it will be interesting to see if inflation or deflation is prevailing.

An important event comes on Tuesday with the Fed Reserve decision on interest rates. It is widely expected to keep rates at this historic low, but we will be watching to see if they may implement any new easing policies. There are rumors that this is a possibility and we are not sure what effect it will have on the market. Guesses are that that they will again purchase mortgages in an attempt to support the housing market. We believe these policies only prolong the inevitable cleansing process that is necessary for markets to function properly.

Where are we investing now?

Like last week, earnings continued to be impressive and revenues are decent. Companies with a large overseas presence (especially Asia) have shown especially solid growth. The overall economy is weak, though, and that gives us cause for concern.

Our big-picture outlook 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 7-30-10

A lot of movement in the markets this week, only to end relatively unchanged. At the close, the Dow gained 0.4%, the S&P 500 was slightly negative at -0.1%, and the Nasdaq lost 0.7%. Friday also marked the last trading day of July, which turned out to be the best month in a year for the market. The Dow rose an impressive 7.1% while the S&P and Nasdaq both recorded gains of 6.9%. Oil also rose considerably this month at 4.4% and gold was off 5.1%, although it has been trending higher in recent days.

Source: MSN Moneycentral

Corporate earnings continued to pour in this week and look relatively decent. So far, earnings are nearly twice as high as they were a year ago, with over 70% of the S&P 500 companies reporting. Revenues, which we have constantly harped on, appear decent, as well. These positive reports have certainly been a factor in the strong July returns.

Despite this rising market, the volume of trades has been well below average. In fact, stock mutual funds have had massive outflows while bond funds have seen even bigger inflows. This tells us that fewer investors have participated in the market rise, showing us a lack of conviction in this rally, adding to our cautious outlook.

A concern is that as these earnings reports wind down, the market will go back to worrying about the poor economic reports. Case in point is the GDP number released on Friday. It was slightly lower than expected and much lower than last quarter, causing investors to worry.

Of the 2.4% reported GDP growth, 0.6% came from real estate sales which were artificially higher due to the homebuyer tax credit. The sales portion of the GDP is extremely weak. The report did show that businesses are spending considerable amounts on software and equipment, though. While this investment is technically a good sign, it does make us worry. As businesses rely more on technology, there won’t be a need to hire as many new workers. It may mean a bigger bottom line for the business, but the trend will have a negative impact on the overall economy (that said, we do like technology stocks).

Frankly, at this point in a recovery, GDP should be much, much higher (recoveries from previous recessions averaged around 6% GDP growth). As you can see in the chart provided by the Wall Street Journal, GDP is trending lower. Economists even predict a negative GDP by the end of this year. As growth continues to contract, it wouldn’t be hard to imagine the market going lower, as well.

Next Week

Similar to last week, we continue with earnings season next week. As we have said ad nauseum 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 July unemployment rate. We are looking at an increase in unemployment, especially due to fewer Census workers. The unemployment rate is a metric we pay close attention to and would love to see an improvement here.

Where are we investing now?

Earnings continue to be impressive and revenues are decent. Like we said last week, companies with a large overseas presence (especially Asia) have shown impressive growth. The overall economy is weak, though. If we see an improvement in unemployment, we will be more encouraged than we are now.

Our big-picture outlook 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.