Commentary for the week ending 10-29-10

The week was relatively quiet, with the markets bouncing around but ending mostly unchanged. At the Friday close, the Dow fell just 0.1%, the S&P 500 returned nothing, 0.0%, but the Nasdaq had a nice week, up 1.1%. Most commodities were higher, with oil up 1.8% and gold higher by 3.8%. Friday marked the last trading day of October, as well, and the markets had another nice month. The Dow rose 3.0%, the S&P was up 3.7%, and the Nasdaq beat them both at 5.9%.

Source: MSN Moneycentral

There was little to get excited about on Wall Street this week because investors are looking to a very important week next week. There are the elections on Tuesday, followed by an important Federal Reserve meeting on Wednesday, which we will discuss in detail later. Still, there were a few important events on which we would like to comment on.

On Monday, the government sold another round of bonds, this time Treasury Inflation Protected Securities (commonly referred to as TIPS). While there is nothing special about that, it is important to note that for the first time in history, those bonds were sold with a negative yield (which means you earn less than nothing). These investments will only pay off if inflation rises.

That shows us the demand for inflation protection is so strong and the expectation for future inflation is very high. We and other investors believe future quantitative easing programs (stimulus) will stoke future inflation, so protection is certainly necessary.

On Friday, we received rather weak GDP numbers. While the rate grew to 2.0% from 1.7% last quarter, most investors were looking for a rise of at least 2.1%. Additionally, most of the gain came from restocking current inventories, which is not usually a long term item. It also showed that government spending increased by 8.8% (down from 9.1% last quarter), which is also something we don’t like to see. Unfortunately, these numbers tell us that the U.S. economy remains weak and still pretty fragile at this point.


Next Week

As we mentioned above, next week will be very important, possibly one of the most important weeks of the year.

First, we have the election on Tuesday, which should favor the Republican party. It is almost certain that they will gain control of the House, while the Senate remains in question, and the market has priced these results in. It will be nice to get some more business friendly principles in Washington and hopefully change or slow the country’s current direction.

The most important day for the markets will be Wednesday and the Fed meeting. Here the Fed will announce its plans for the next round of quantitative easing (stimulus). The market is pricing in a big number from the Fed (at least $500 billion to over $1 trillion) and we believe the recent market run reflects that. If the announcement comes in lower than that, we will certainly see a sell off.

Our take is that the Fed will hedge its bets. We think they will announce a relatively small number for initial stimulus, but then indicate that it will provide ongoing stimulus as warranted by market conditions. At best this is just a guess, but it seems to fits with the current modus operandi of this group.

We will certainly see a movement in the markets if there are any surprises from these events, but it is important to note what news the market is responding to. A strong move on Wednesday would not necessarily be due to the election results from the previous day.

We will also receive several economic data reports on productivity, employment, and personal income, as well as many more corporate earnings reports. There are many items that can move the markets next week, so we will certainly be busy.


Where are we investing now?

Again, little change here. There will be plenty of data to move the markets next week, so it will be important to pay close attention to what it tells us. Unless we deduct otherwise from the Fed announcement, we believe the markets will close the year higher from here, so we would look to add to positions in the event of a pullback. The fundamentals of the economy are weak, but we believe the Fed will do everything in its power to send the stock market higher, whether we want them to or not. Also, investment professionals who have missed this rally due to a conservative portfolio positioning will look to participate in the rally, which will also send the market higher.

Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us.

If we were to increase our investments, 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.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak 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 (with certain sectors in China) are areas we favor.

Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.

Commentary for the week ending 10-22-10

It was a rocky week on Wall Street, but ultimately ended in the third straight week of gains for the markets. For the week, both the Dow and the S&P 500 returned 0.6% while the Nasdaq was higher by 0.4%. Uncertainties about the U.S. dollar policy lead to losses in most commodities, with oil off just 0.3% and gold lower by 3.4%.

Source: MSN Moneycentral

As you can see in the chart above, the markets had a lot of movement this week. A large drop on Tuesday was attributed to a surprise interest rate increase out of China. This is an attempt to slow down the growth of the currently red-hot country.

Several stock-specific stories also contributed to the Tuesday drop. An announcement of a lawsuit against Bank of America by several institutional investors and (most importantly) The Federal Reserve of New York sent the entire banking sector lower. The lawsuit is in regards to the foreclosure paperwork fiasco that has made recent headlines.

Earnings results from Apple and IBM also impacted the market to the downside. Earnings were decent, but left investors wanting more. These stocks have had terrific runs recently and may have gotten a bit ahead of themselves.

As Wednesday rolled around, it seemed like all was forgotten. Encouraging earnings results from several big name stocks improved outlook and the aforementioned sectors rose higher.

By the end of the week, over 80% of the earnings releases had beat their estimates. The economy remains weak, but businesses continue to do relatively well in this environment. The market has risen substantially in recent weeks, and we believe these solid earnings results have largely been priced into the market and may not have more room to run.

We are seeing concerns over macro factors like the actions of the Fed and underlying economic conditions having more of an influence than corporate earnings at this time. After the recent run in the markets, investors are beginning to get nervous and the markets are becoming jittery. This tends to happen when markets reverse course. Obviously we have no idea where the market will go, but will be carefully watching to see how these “jitters” play out.

It is interesting to note that the days the market rose are the same days that the Fed injected money into the system (through the Permanent Open Market Operations - POMO - which we have discussed in the past). In fact, most days these operations occur see a higher stock market, if not a temporary jolt higher, depending on how many billions were injected. The Fed actually pulled money out of the system on Thursday and you can see where the market pulled back. This makes us worry that the market is being supported solely by these POMO operations.

Next Week

We will start with this weekend, as the G-20 meeting of financial officials gets underway. There will be debates on exchange rate and currency fluctuations and it will be interesting to see if any agreements are reached and what impact that will have on the dollar (and therefore, commodities). New banking regulations will also be discussed, so bank stocks will certainly be affected by the outcomes, if any agreements are reached.

Next week will certainly be busy as we head into the peak of earnings season. It will also be an important week for economic reports as housing data and durable goods orders will be announced. We will cap the week off on Friday with the third quarter GDP report. There looks to be plenty of information to impact the markets next week.

Where are we investing now?

Little change here. With this jittery market, a correction could be in the works. We believe the markets will close the year higher from here, though, so we would look to add to positions in the event of a pullback. The fundamentals of the economy are weak, but we believe the Fed will do everything in its power to send the stock market higher. Also, investment professionals who have missed this rally due to a conservative portfolio positioning will look to participate in the rally, which will also send the market higher.

Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. Corporate insiders continue to sell their own stock, as well, at a pace of 2,000 for every one buying. To us, that is another red flag.

If we were to increase our investments, 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.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak 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 (with certain sectors in China) are areas we favor.

Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.

Commentary for the week ending 10-15-10

The markets continued their climb higher this week. At the Friday close, the Dow rose 0.5%, the S&P 500 was higher by 1.0%, and the Nasdaq had popped higher by 2.8%. The weak dollar story continues as most commodities were higher, including a 2.0% rise in gold with a new record high set this week. Oil dropped 1.7%, but remains above the $80.00 level.

Source: MSN Moneycentral

Without a doubt, the Federal Reserve has been the story of the week. Basically, anything that moved in the market was in response or in anticipation of activity from the Fed. Fed chief Ben Bernanke spoke this week and made it all but certain that a second round of quantitative easing (a fancy term for printing boatloads of money and pumping it into the market) was in the works. Stocks and commodities rose, since QE2 is designed to pump up the price of assets, while the value of the dollar continued to drop.

The Fed believes this new stimulus will solve the high unemployment, depressed real estate values, and a perceived deflationary scenario. In order to create inflation and demand for products, they are injecting liquidity into the markets to push stock prices higher and yields on bonds lower. The low yields are designed to stimulate lending since a low yield means consumers can borrow at a low rate (we already have historically low mortgage rates). A cheap dollar is also a result, as it makes our exports more appealing since they will be cheaper to foreign purchasers.

The problem is, we don’t believe it will work and will open a giant can of worms. The first round of stimulus failed to produce anything, so we wonder what a second round would accomplish. We believe the best results will come if nothing is done at all. That’s right, if the free market is allowed to run its course, we will be much better off.

Why won’t it work? First, they see it very important to prop up the housing sector, since it was the housing sector that has led us out of past recessions. Understandably, it is also a major concern of the millions whose homes have lost their value. Unfortunately, these historically low mortgage rates have done little to spur buyer’s interest (not to mention the distractions from this mortgage fiasco). Additionally, home values are probably still too high (in many areas, at least). Propping us this sector will do nothing until the market is able to find the bottom on its own - without government interference.

Next, this weak dollar will create plenty of headaches here in the U.S. The prices of commodities have been on a tear and are positioned to go even higher. This means things you buy will cost more. Gas prices will rise. Food costs are already rising. Corn prices have soared in the last several weeks. Cotton is at the highest price since the Civil War. How anyone can think the benefits of a weak dollar offset costs such as these is beyond us.

The Fed also indicated this week that they are targeting an inflation rate of 2.0%. Inflation is seen as more beneficial to the economy than the deflation they believe we are seeing. We received the Consumer Price Index (a gauge of inflation) numbers this week, and they were relatively low at just 0.1%.

However, we also received the Producer Price Index (another gauge of inflation) and it showed a substantial gain of 0.4% last month and 4.0% in the past year. This is very important. First, it shows that there is inflation. But this inflation is seen by the companies who make the products you consume. They are not willing to pass these higher costs on to consumers in this weak economic environment. Using the record high in cotton from above, it costs more to make an article of clothing, but the store will probably not raise their prices to reflect that. That means companies are less profitable, which will result in lower stock prices.

We believe we are living in a period that will have dramatic effects on the future. These actions by the Fed are very substantial and will produce many unseen consequences. Once inflation gets started, it is very difficult to control or contain, and it could be dramatic. Also, bubbles usually are a result from artificially low interest rates (i.e. - the latest housing bubble). Could there be bubbles now forming in stocks (especially emerging markets), bonds, and commodities? Prices have certainly risen substantially in response to the Fed actions, but only time will tell, although the potential is there.

Next Week

For a change, there won’t be many economic reports next week. We will get some industrial numbers, as well as housing starts and leading economic indicators.

Next week will again be Fed overload, as many more Fed presidents will be making speeches which will be carefully followed. We will be looking for any further indicators on future Fed actions and QE2. Regardless of what is said, it will certainly have an impact on the markets.

Finally, corporate earnings releases kicks into high gear this week. Many banks will release earnings, and they are expected to be much lower than last quarter. On the other hand, many tech companies will release their numbers (most notably Apple on Monday), and earnings are expected to be solid. These mixed results have been the trend so far, as we saw great earnings from Google last week, but poor earnings from GE.

Where are we investing now?

Don’t fight the Fed. As wrong as we think they might be, it is our job to make money no matter the circumstances. We still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. Also, after 2,400 corporate insiders were selling for every one buying last week, that ratio dropped to 1,200-1 this week, which is still horrible and gives us cause for concern.

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.

Commodities remain a longer term favorite, as mentioned above, as inflation will also impact prices to the upside along with the weak 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 (with certain sectors in China) are areas we favor.

Commentary for the week ending 10-8-10

It was a solid showing for the markets this week. At the Friday close, the Dow rose 1.6%, the S&P 500 climbed 1.7%, and the Nasdaq had a more rocky road, but was still higher by 1.3%. The weak dollar continues to fuel the commodity rally, with oil up 1.3% and gold up 2.14% notching further records along the way.

Source: MSN Moneycentral

A large loss on Monday was followed by a pop higher Tuesday when it became increasingly evident that the Federal Reserve will step in with a second round of quantitative easing. That means purchasing even more Treasury bonds in order to keep yields low, which keeps borrowing rates for consumers low. They will also continue with their POMO operations which is essentially them pumping money into the stock market to push stocks prices higher. This method has been largely responsible for the most recent rise in the market. At any rate, this quantitative easing will only happen if the economic outlook worsens, which is why the markets have been cheering bad news.

We received the monthly unemployment report on Friday, which showed a loss of 95,000 jobs. So we are back to the bad-news-is-good-news scenario, where the markets rallied and investors became even more confident in further stimulus. On the plus side, the report did show a gain of 64,000 private sector jobs, but this was lower than the 75,000 that was estimated. A broader measure of unemployment, the U-6 report, showed even greater job losses and the unemployment number rose to 17.1%.

Third quarter earnings began rolling in this week and were not that bad. The Dow component, Alcoa, is one of the key early releases and analysts like to look at their numbers to get a sense of what the remaining earnings reports will look like. The results out of Alcoa were mixed, with profit falling, but the volume of sales rose. Their shares were higher on the day, though, as their numbers were better than expected. We believe this will be the theme for earnings season - decent growth and solid earnings - and the markets will respond higher.

A troubling report caught our eye again this week. After last weeks report that 1,400 insiders were selling for every one buying, this week that number increased to 2,300-1. Again, this is not always the best strategy to follow, but it is hard to argue against numbers that daunting. It certainly makes us cautious when considering investment opportunities.

Even though the markets are looking stronger, it really feels like we are living in bizarre times. The reliable, free market, capitalist system we have had in the past is becoming just that, a thing of the past. The fact that a bank won’t foreclose on a home that is months and even years behind in payments - and is congratulated for it - is troubling. When the government floods the economy with trillions of dollars in stimulus, it is troubling. When the Fed becomes the second largest holder of US debt behind China (essentially just printing money), it is troubling. And when bad economic news and a cloudy future sends the markets higher, it is troubling.

A stable, reliable economy with a strong currency and established rule of law were ingredients to America’s greatness. Businesses were created and drawn here due to this favorable climate. As uncertainty creeps in, businesses and investors are fleeing the US economy and establishing operations abroad, where stable, fiscally-responsible countries are capitalizing. This phenomenon is clearly evident as merging markets have been booming largely due to this fact. We hate to sound apocalyptic, but currently, better investment opportunities can be found overseas.

Next Week

Activity will begin picking up next week as earnings season kicks into gear. Similar to last quarter, we want to see revenues rise, not just earnings (cutting expenses can boost earnings, but means little. Increased revenue means increasing sales).

For economic data, we will be receiving the CPI and PPI, as well as the trade balance and retail sales.

Where are we investing now?

It has been a good run for the markets and we do believe it will be higher through the end of the year. Not because the economy is stronger, but because of another round of stimulus and investment managers trying to make some gains before the year ends. There is still a considerable weakness in the economy, though, and we would wait for a pullback before making any considerable positions. There are many headwinds, too, like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, which continues to worry us.

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.

Commodities remain a longer term favorite, as mentioned above, as inflation will also impact prices to the upside along with the weak 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 10-1-10

The markets ended their winning streak this week as the major indices were slightly lower. For the week, the Dow fell 0.3%, the S&P 500 was lower by 0.2%, and the Nasdaq was off 0.4%. Commodities continue to soar due to a weak dollar, with oil closing above the $80 level and gold notching further record highs.

Source: MSN Moneycentral

This week also marked the end of the month and third quarter. Historically, September is a tough month for the markets, but this year was different. With a gain of about 8%, the Dow had its best September since 1939. Sentiment was extremely negative in August, so many investors (including us) were preparing for another rough month in September, only to be wrong. This just serves as a reminder that the market typically does the opposite of what most people think it will do.

Despite these gains, the volume of trades remains very light. Sentiment is improving, yet investors continue to pull money out of stocks. To make matters worse, corporate insiders continue to sell their own company stock. This week, for every one insider buying, roughly 1400 were selling (a 1400-1 ratio). Following insiders is not always a foolproof strategy, but an indicator investors should consider.

Commodities continued on their tear this week. In the chart on the right provided by the Wall Street Journal, you can easily see the run commodities have been on (the DJ-UBS Commodity Index is a composite of different commodity sectors) We are seeing the inverse relationship between commodities and the dollar really pick up (as the dollar falls, commodity prices climbs). With the Fed telegraphing a weaker dollar in the future, it is possible for commodities to continue this climb.

The rationale behind a weaker dollar is it is intended to promote US exports. Since the dollar is worth less, other countries will find our goods cheaper and subsequently purchase them. This causes a problem, though, that we are already beginning to see. Other countries want their exports cheaper, as well, so they will try to weaken their currency. This turns into a race to the bottom and fuels a trade war. Several countries have already started down this road of a weaker currency. Japan, most notably, but also Taiwan, South Korea, Thailand, Peru, Brazil, Columbia, and much of Latin America.

The US is becoming more protectionist over a perceived weak Chinese currency, and we are seeing similar rhetoric around the globe. Major exporters like Brazil are complaining that these cheap currency interventions are unfair (even as they try to weaken their currency). We are becoming increasingly concerned a global trade war will occur, and we will ultimately all be the losers.

Next Week

Next week will be a busy one as we will be receiving data from September and the third quarter. Of particular interest is the unemployment rate release on Friday. We would like to see an improvement to convince us that a recovery is indeed underway.

Third quarter corporate earnings releases will begin next week, as well, so there will be plenty of info to move the markets.

On a different note, we are interested in the IMF/World Bank meeting next week in Washington. With all the currency concerns around the globe, it will be interesting to see the rhetoric that comes out of this conference.

Where are we investing now?

Similar to September, October is fearful month for the markets. However, the recent rise makes us more confident in a rise through the end of the year. See, professional investors have largely not participated in the recent rise and are underperforming their benchmarks. In an effort to “catch up”, they will be more aggressive in purchasing securities and stock prices will rise accordingly. Combine this with the Fed pumping up stocks, and you have a recipe for a market rise.

There is still a considerable weakness in the economy, though, and we would wait for a pullback before making any considerable positions. There are many headwinds, too, like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, which continues to worry us.

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.