Commentary for the week ending 11-19-10

Please note: Due to the Thanksgiving holiday next week, there will be no market commentary next weekend. Thank you.

A lot of movement this week, but ultimately the markets ended unchanged. For the week, the Dow gained 0.1% and both the S&P and Nasdaq returned nothing, 0.0%. Most commodities sold off, with oil down 4.0% and gold off 1.0%.

Source: MSN Moneycentral

As you can see in the chart above, the markets sold off strongly early in the week with several factors contributing to the drop. Last week we talked about China taking steps to slow down their red-hot economy, and those concerns carried over into this week. Also, worries about the Euro-zone were reignited with news of Ireland needing a bailout.

By Wednesday, all was forgotten and the markets popped higher. Ireland announced it was very likely to take the bailout they were resisting, which calmed the Euro fears (we won’t waste time discussing this, but Ireland is the complete opposite of Greece and we would have preferred them not take the bailout).

We did not see it reported anywhere, but we believe the CPI and PPI announcements had a lot to do with the Wednesday rally, too.

The producer price index (PPI) and consumer price index (CPI) were released on Tuesday and Wednesday, respectively. Both came in much lower than expected, which means there is little inflation in the economy. This is important because fighting deflation was a main reason for the Fed’s QE2 announcement. The Fed is injecting the $600 billion in the economy to spur inflation, which these reports show is needed. QE2 was a major reason the market has risen the past couple months, and any talk about cancelling it was likely thwarted by these CPI and PPI reports.

Like many of these statistics, however, there is always the possibility of manipulation. Any person living in the real world can tell you that things cost more. The recent record gain in commodities supports that. These statistics showing no inflation certainly makes us wonder.

Lastly, one of the biggest stories of the week was the initial public offering for General Motors. It was probably the most hyped IPO we have seen and the story dominated the airwaves this week. The initial price was set at $33 and it shot higher once the market opened. As the week progressed, the shares slowly trended lower, almost back to that $33.00 level. The price probably would have gone even lower if it were not for a stipulation that the underwriting banks must purchase more shares at $33 to keep it from going lower.

Frankly, we feel sorry for the original shareholders who lost everything, as well as the bondholders who got shafted in an illegal process that favored the unions. We will never purchase a GM product due to this fiasco and would not shed any tears if the stock dropped lower.


Next Week

A much lighter week next week due to the Thanksgiving holiday on Thursday. The market is open on Friday, but most people just take that day off, as well. Volume will be light next week, so we won’t read much into whatever happens on Wall Street.

Still, next week we will be getting some corporate earnings, notably from Deere, HP, and Tiffany. There will be the updated GDP number, as well as some housing and durable goods data.


Where are we investing now?

Little change here. There was a lot of volatility in the market this week, which typically happens when trends reverse. Still, we believe the market will close the year higher from here, but are certainly more cautious.

Headwinds like uncertainty over future tax hikes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently still optimistic on stocks), that the tide usually changes.

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 got hit hard this week, but will still 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 11-12-10

The markets reversed course this week after a strong showing in the previous week. At the close, both the Dow and S&P lost 2.2% while the Nasdaq fell 2.4%. Commodities climbed early in the week but sold off hard late, resulting in both oil and gold down 2.3%.

Source: MSN Moneycentral

This week was quite a reversal from the seemingly unstoppable bull market last week. Actually, it turned out to be the worst week for the markets in nearly three months. There were several factors that contributed to the drop that we will touch on.

First, this is looking like a case of “buy the rumor, sell the news”. In the run-up to the Fed announcement, the markets gain nearly 20% in anticipation of further quantitative easing. Since that pop higher on the announcement, markets have trended lower.

Also, several news items impacted the markets this week. Earnings out of the tech giant, Cisco, were decent this quarter, but they gave a more sober outlook for future earnings. This spooked the markets and the tech sector lead the way lower.

China announced concerns about inflation in their country and indicated they will take steps to keep it in check. This means raising interest rates and slowing down their economy. Since China has been a major driver of global growth, a slowdown there will slow the global economy as well.

This China news had a major impact on the commodity sector. A lack of demand from China will increase supply, so prices will be lower. On Friday alone, oil fell 3.3%, gold dropped 2.7%, and sugar had a record drop of over 11%. Many agriculture commodities were off over 5%. We aren’t sure where commodities will go from here in the near term, but are fairly confident they will be higher over the long term. Further dips could provide nice buying opportunities.

Finally, the fallout over the Fed decision has become global and very vocal. While we have concerns here about drops in the Fed micromanaging the economy, foreign countries complain about the decline in the value of the dollar. It has a significant impact on global trade, and it severely hurts major exporters like Germany, Brazil, and the Asian region. It seems like the only ones happy with the Fed decision are ivory-tower economists and the US government. We don’t think this will end well.


Next Week

A lot going on next week. There are several economic reports released, including retail sales, housing data, CPI, PPI, and leading economic indicators. There are many corporate earnings announcements to follow, too, including Lowes, Home Depot, Wal-Mart, and Target, to name a few.

Many Fed officials will be speaking, as well, and it will be interesting to see what they have to say about the recent Fed decision on quantitative easing.

An interesting event that has absolutely no impact on us will be taking place next week, with the GM IPO. It will be their first stock offering since re-emerging from bankruptcy. It is expected to be priced well below its intrinsic value, so anyone who can get in on this IPO will essentially be guaranteed a nice return. Only the biggest investment firms will get access to this IPO, and unfortunately that is not us - yet. Anyway, after shafting bond holders last year and illegally giving unions a large ownership stake, we just assume stay away from GM. And just in spite, we certainly will not be purchasing any GM products for the foreseeable future.


Where are we investing now?

Well this sell-off changes things a little. We still believe the market will close the year higher from here, but are certainly more cautious. One poor week does not make a trend, but further pullbacks could see us buying more stock. It is important to note the record insider selling this week, which has reached an all-time high. This large amount of insider selling makes us worry, but is not always a negative indicator. It is just something to add to our caution.

Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently still optimistic on stocks), that the tide usually changes.

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 11-5-10

An event-filled week fueled a large rally for the markets and commodities this week, leading to a new two-year high in the Dow. At the Friday close, the Dow was higher by 2.9%, the S&P 500 climbed 3.6%, and the Nasdaq also returned 2.9%. Commodities soared this week, with oil reaching a new two-year high and closing up nearly 7%. Gold reached new all time highs and was up 3%.

Source: MSN Moneycentral

What a week it was. We will start with the elections and the historic shift of power in Washington. A large Republican victory has shifted the balance of power and gridlock will likely ensue. Judging by the last two years, we do not see this as a bad thing. In fact, compromises may already be happening as President Obama has opened the door to maintaining the tax rates set in place by the Bush administration. This is certainly a good start.

The most important event for the markets came on Wednesday with the Fed announcement on further quantitative easing (QE2). Over the coming months, the Fed will inject roughly $75 million a month into the economy with the total reaching about $600 billion.

This is in line with what the market was anticipating. You can see in the chart above the market reaction early Wednesday afternoon as it bounced about, but ultimately headed higher. After investors had the night to digest the information, the market shot higher on Thursday in anticipation of hundreds of billions flooding the market. In our opinion, this will be good for the markets in the short term, but will have severe and dramatic implications for the long run.

Basically the Fed is printing $600 billion out of thin air (in addition to the $1+ trillion it has already printed). The goal is to keep interest rates low and raise asset prices (the stock market). In their view, if people see the stock market going up and reaching new highs, they will feel more confident. With 401k’s and IRA’s climbing higher, people begin to feel wealthy again. Thus, it creates a new sense of optimism that spurs consumer spending and hiring by businesses…and then flowers bloom and rainbows fill the sky.

See, that will not happen. Santa Claus can’t drop a magic bag of money into the economy and make everything better. There will be consequences. This policy severely weakens the dollar and raises the price of virtually everything a person purchases. See, the weaker dollar means commodities will cost more, and it has already begun. The following are articles taken from the Wall Street Journal the day after the Fed announcement (all charts are from the Wall Street Journal, as well):

Food Sellers Grit Teeth, Raise Prices

• Prices of staples including milk, beef, coffee, cocoa, and sugar have risen sharply in recent months. And food makers and retailers…have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.

Unable to Stretch Further, Apparel Makers Raise Prices

• Shoppers will have to pay more for clothing next year as skyrocketing cotton prices force companies to take their chances with price increases even as consumer demand remains sluggish.

Sugar Prices Hit 30-Year Highs

• Raw-sugar futures have surged to 30-year peaks and look set to break higher as mounting concern over faltering supplies lends fresh impetus to the market.

Oil Tops $86 –Oil Hits 6-month high

• Crude-oil futures shot higher on the back of a weaker dollar following the Federal Reserve's decision to inject $600 billion into the U.S. economy.

We see this as just an example of what the future holds for the U.S. The Fed clearly indicated that it would like for inflation to pick up, since deflation is apparently their only worry. As any consumer can attest, inflation is here. Items cost more to purchase. The problem is that the Fed uses the consumer price index (CPI) as a gauge of inflation, but strips out the food and energy prices (this is referred to as the core CPI. Headline CPI includes food and energy)! This method has never made any sense to us, but then again, neither do economists.

It is funny to note that after the Fed announcement, Fed chief Ben Bernanke headed down to Jacksonville (where we are located). He made a speech and took questions from students at Jacksonville University, where the author of this commentary’s brother attended school. Unfortunately he graduated several years ago, otherwise we certainly would have liked to have seen this event, and maybe even posed a question or two!

Anyway, at the end of the week, the stock market closed at a new two-year high. The unemployment report released on Friday came in much higher than expected and reassured the market that the economy is improving. All-in-all, the economy is improving, corporate earnings are decent, and it makes us question the need for further stimulus at this time.

On a final note, we are disappointed by what the stock market has become, especially after this week. It used to be about finding companies and observing fundamentals and earnings in order to make a profit. Now, government agencies can dump massive amounts of money into the market to manipulate it to suit their own agenda. We are not sure when sanity will return to the market, but we don’t see it happening anytime soon.


Next Week

It will be a significantly less hectic week next week, especially after last week. There will be several big corporate earnings releases that have the potential to move the market.

We will also get information on our trade balance and import prices, as well as consumer confidence numbers.


Where are we investing now?

Still little change here. The Fed announcement practically guaranteed a higher market close for the year. We would like to see a pullback to add to our positions, but we are not sure if that will even happen. Other investment professionals who have been underweight the market will also try adding to their positions, 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. We can’t forget, that when everyone seems to be on one side of the trade (currently optimistic on stocks), that the tide usually changes.

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.