Commentary for the week ending 9-24-10

A solid showing on Friday pushed the markets to their fourth straight weekly gain. At the close, the Dow rose 2.4%, the S&P 500 gained 2.1%, and the Nasdaq was higher by 2.8%. Oil climbed 2.1% and gold continued on its tear, up 1.6% to another record high.

Source: MSN Moneycentral

There was a lot going on this week that we would like to get to. Starting from the very beginning, Monday morning, it was announced that the US exited its recession in June of last year (surprise!). The news set a positive tone for the day and the markets rose. Frankly, no one believes that the recession is over, which is evident by the still weak economic data. Many investors did note that the timing was rather suspicious, as Washington politicians begin to head home to brace for a rough election season and needed this info for their benefit.

Tuesday marked the announcement from the Federal Reserve on the interest rate and their take on the strength of the economy. It was no surprise that they are keeping interest rates at a record low, but they also indicated that they see no inflation in the near future. That info, along with a statement that they are "prepared to provide additional accommodation if needed to support the economic recovery" gave us good insight into future Fed actions. It signaled that they were set to provide further quantitative easing, which, in their view, is intended to stimulate the economy.

A major effect from this quantitative easing will be a weaker dollar, and therefore higher commodity prices. You can already see it happening, as the dollar has been selling off, while commodity prices are rising.

This week marked another record high for gold, as it crossed the $1,300 level at one point. Other metals like silver, platinum, and copper are at or near new highs, as well. But this phenomenon isn’t limited to just the metals.

In the chart on the right provided by the Wall Street Journal, you can see how the price of cotton is at new highs. We are also seeing new highs in wheat, corn, sugar, coffee, and beef, just to name a few. While supply issues have contributed to the rise, the impact of a weak dollar cannot be overlooked.

This goes back to what we were talking about last week - things you buy will cost more (inflation), while things you own are worth less (deflation). We believe this is a terrible scenario for the US economy and will be a burden on the stock market.

Finally we get to Friday and the strong market rise. Lackluster reports on housing and durable goods orders were released in the morning, so we don’t see that as the contributing factor. We believe an appearance by a prominent hedge fund manager (David Tepper of Appaloosa Management) on CNBC helped send the markets higher. It was before the bell, and you can see the impact it had on the Friday open in the chart above.

He believes that the support coming from the Fed will provide a backdrop to send the markets higher. Part of the quantitative easing will be to purchase securities so stock prices will rise. Basically, the Fed will try their hardest to not let stock prices fall (similar to what they are doing with housing prices). It may not be good in the long run, but might as well take advantage of what the Fed is doing and make some money off it.

Next Week

A bit lighter next week in terms of economic releases, and we will be watching data on consumer confidence and personal income and spending.

Of particular note, the US House Chamber will possibly be voting on a bill next week to add tariffs to Chinese imports. It is believed that they have artificially kept the value of their currency low to make their exports to us more appealing (although we are trying to do the same thing). The announcement will likely mark the beginnings of a trade war with China and will be a negative in the long run.

Where are we investing now?

We somewhat agree with David Tepper (as mentioned above) and believe the Fed will do everything in its power to send the stock market higher. We would wait for a pullback first, as we believe there is still plenty of bad news coming before the Fed steps in (although they have quietly been rather active up to this point).

The likely weaker dollar provides opportunities to invest in commodities, although we would also wait for a pullback before venturing into this area. Gold and precious metals have been an exciting story this year and we are pleased with the results.

We still see poor economic conditions hampering the economy, though, so we remain cautious. The potential higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate is a negative for the longer term, no matter how much Fed tries to send prices higher.

In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. 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. We are finally starting to see this position go our way as bond yields have risen recently.

Commodities remain a longer term favorite, as mentioned above, as inflation will also impact prices to the upside. 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 9-17-10

The markets continued their upward trend this week. At the Friday close, the Dow rose 1.4%, the S&P 500 gained 1.5%, and the Nasdaq topped them both at 3.3%. Oil fell 3.7%, while gold hit a record high and silver reached 30-year highs.

Source: MSN Moneycentral

This was the third straight week of gains for the markets. Solid earnings from tech stocks provided momentum and economic data was mixed, but not disappointing. All-in-all, it was a pretty decent week, but the volume of trades remains stubbornly low. These market gains still show little conviction, but the wind is clearly at its back.

A record high price in gold was the story of the week on Wall Street. The rise is clearly due to concerns over government policies, both here and abroad. Investors see a weak economy with massive debts. This causes a worry over further quantitative easing from the Fed in an attempt to stimulate the market, with their rhetoric indicating that this is likely. European countries are also facing a similar fate, which added fuel to the gold fire this week.

The constant government intervention in the economy will weaken the dollar while being a boon to a true store of wealth, gold. Other precious metals like silver are affected to the upside, too. Unless we see something from governments worldwide to change our view, we really like this sector for the long term.

Also this week, we received inflation information in the forms of the Consumer and Producer Price Indices (CPI and PPI), which came in flat. What we find interesting, though, is a dichotomy between inflation and deflation. We are seeing things that people buy, like food and energy, costing more. On the other hand, things people own, like homes, are worth less. This trade off will likely result in little movement in net inflation or deflation. However, it is a terrible situation to be in, since products cost more, but people are worth less.

Next Week

It looks to be another busy week next week, although not as busy as last week. We will receive several reports on housing, but also the leading economic indicators and durable goods info. There will be several large corporate earnings releases we will be watching, like General Mills, AutoZone, Nike, and several housing companies.

Next week will also be the Fed meeting and their interest rate announcement. It is believed that rates will be held at the current record low, but we will be watching their language to determine any future policy changes.

Where are we investing now?

Currently, we see little change in our strategy amid this currently rising market. As we mentioned last week, there has been little to get us excited, but new bottoms often occur when things are darkest. Gold and precious metals have been an exciting story this year and we are pleased with the results. We would not buy any more at these high levels, but we would buy on the dips.

We still see poor economic conditions hampering the economy, though, so we remain cautious. The potential 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. We are finally starting to see this position go our way as bond yields have risen 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 9-10-10

It was another positive one for the markets, albeit slightly, during a holiday-shortened week. At the close, the Dow gained 0.1%, the S&P 500 gained 0.5%, and the Nasdaq climbed 0.4%. Gold sold off slightly, but still remains near all-time highs. Oil rose higher rather sharply, up 2.5%, mainly due to a pipeline shutdown that will limit supply to the US.

Source: MSN Moneycentral

The markets continued to show life this week, although there was little economic data to provide momentum. It looked like no bad news was good news this week. The volume of trades remains light, so we are not seeing a conviction in the rally that we would like to see. Investors continued to pull money out of stocks and into the percieved safety of bonds and money market funds.

The lack of investors in the stock market is a concern for us. There are events like the “flash crash” that contributed to a distrust which is sending investors to the sidelines. Another event this week, however, makes us distrust the markets even more.

On Thursday, weekly unemployment numbers were released and came in much better than expected. The markets rallied on the news. What wasn’t reported, though, was that nine states estimated their numbers. The state offices were closed on Monday for Labor Day when these numbers were due, although this problem never happened in the past.

There has always been a distrust of government numbers to a small degree, but a blatant distortion such as this is unacceptable. It is beginning to feel like the game is rigged and it is not surprising that investors are reluctant to invest in the market. If you want to humorously look at the bright side, the government is rigging numbers to the upside, so we suppose that is bullish (positive) for the market.

Next Week

Coming off a quiet week last week, next week will be full of economic data. There will be retail and industrial data, import info, and the Consumer and Producer Price Indexes releases. A few companies will be releasing earnings, including some big names like Best Buy and FedEx. It looks like there will be plenty of info to move the market next week.

Where are we investing now?

With another positive week for the markets, it will be interesting to see if this was a turning point, marking a new uptrend. There has been little to get us excited, but new bottoms often occur when things are darkest. We still see poor economic conditions hampering the economy, though, so we remain cautious. The potential 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. We are finally starting to see this position go our way as bond yields have risen 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 9-3-10

The markets started out September on a strong note. At the Friday close, the Dow gained 2.9%, the S&P 500 climbed 3.8%, and the Nasdaq rose 3.7%. Oil fell 0.76%, while gold is back up near its record highs. Following in gold’s footsteps, the new hot commodities, silver and copper, have also shown impressive gains this week.

Source: MSN Moneycentral

Before discussing the gains of this week, it is important to comment on the end of August last Tuesday. The monthly numbers were pretty awful, with the Dow off 4.3%. This marked the worst August in nine years. Investors have been scared by a month full of poor economic reports, so the drop is not all that unexpected.

In a complete reversal from that gloomy August, September 1^st opened with a bang, as the Dow was up 2.5%. A morning report on manufacturing showed surprising strength, but that alone was not enough to push the markets that high. We believe a lot of big investors were making new positions for the month, which sent the markets higher. With the volume of trades as light as it has been, it is not difficult to push the markets with some big trades.

Continuing this good mood, the unemployment report came in much better than expected on Friday. The report showed a loss of 54,000 jobs, but the bulk of that was Census workers. Private sector jobs rose by 67,000. It does sound odd that Wall Street can be happy about more job losses, but the market had priced in large losses, which is why the market responded to the upside.

While the employment gains were impressive, we are not completely sold on the improving employment picture. This is primarily due to most of the job increases coming in the health and education sectors. These service sector jobs are hardly contributors to economic growth.

Also, the current 9.6% unemployment rate falls short of measuring the true unemployment for various reasons we won’t bore you with at this time. A better metric, underemployment, currently stands at 16.7%, up from 16.5% the previous month. Keep in mind, in order to keep up with the new entrants to the marketplace, hiring needs to grow by at least 100,000 per month. The employment picture may have improved last month, but we are not sold on this being the beginning of a long term trend.

Next Week

Even with Labor Day shortening the week, economic reports look light. There will be some corporate earnings releases from retail companies, however. We don’t see these as having much impact on the markets. All-in-all, it should be a quiet week for these macro factors.

Where are we investing now?

It will be interesting to see if the markets continue their climb from last week. If so, it could mark a new upward trend in the market. We still see poor economic conditions hampering the economy, so we remain cautious. The potential 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.