Please note: With both Christmas and New Year’s falling on a weekend this year, there will be no weekly commentary for the next two weeks. We will be back the first week of the year. Have a great holiday season.Coming off two weeks of decent gains, the markets had a rather poor showing. For the week, the Dow lost 2.6%, the S&P sank 2.8%, and the Nasdaq fared the worst, off 3.5%. The losses extended to the commodity sector, which also had a rough week. A drop in gold prices was a big story as it lost 6.8% and closed the week just below $1,600 an ounce. Oil also sold off, down almost 6% to $93.53 a barrel, which is good news for gas prices. Tired of hearing about Europe yet? We are too, but it was again a major factor behind the market moves this week. If you remember back to the previous week, there was a key agreement between the European countries that was intended to strengthen their commitment to the Union and address their debt issues. At the time, the markets popped higher on the news. When given time to sink in over the weekend, many investors realized their accord accomplished little. It didn’t address how the debt problems would be resolved, nor did it provide a bigger bailout fund or create Euro bonds. These were items many investors were hoping to see. The markets sold off as a result, with the Euro falling sharply against the dollar. Since it doesn’t look like a solution to the Euro debt problem will happen anytime soon, there has been a pressure on the European Central Bank (or ECB, which is similar to our Fed) to do more to help. Investors and politicians would like to see the ECB purchase more bonds, which will lower borrowing costs for the countries. As we said last week, the ECB has refused to do so even as the pressure increases, claiming they are not allowed to help finance governments. The lack of action by the ECB also worried investors and pressured the markets lower. If they were to step in and buy bonds (or further lower interest rates, which is likely if they see a chance of deflation), there is little doubt the stock market would pop higher. We saw that here in the US when the Fed announced its bond buying stimulus programs - the markets soared. However, that high from the stimulus eventually wore off as the program wound down, leaving us back to where we started from, only further in debt and with higher inflation. We feel the ECB is right not to increase their purchases, although this is an unpopular opinion in the market these days. Yes, countries can borrow at lower rates, but that doesn’t address the fundamental problems facing these countries. They have too much debt and you don’t fix that by adding even more debt. Back here in the US, the Fed made news this week as they announced they were keeping interest rates at these historically low levels, which wasn’t a surprise. There was a rumor that the Fed would announce another stimulus program, but that never materialized. That surprised many (we aren’t sure why, since it was extremely unlikely) and the markets sold off sharply. With the prospect of a Fed and ECB not printing more money at the moment, the dollar strengthened. This was a major factor behind the move in the commodity market this week. Gold was the headline grabber as it sold off sharply, reaching the mid-$1,500’s an ounce at one point. While the dollar story was a factor, there were other reasons for the drop in gold, too. With the end of the year approaching, many investors are locking in gains and selling out to raise cash and reduce risk. Economic data this week was mixed, with retail sales in November showing a slight gain, but at a lower level than previous months. Industrial production was also lower, but some regional manufacturing reports showed decent gains. Also, initial jobless claims showed a dramatic improvement, falling to just 366,000, far below the 400k number it had been hanging around for months.We also received data on inflation, which showed very little change. As we often point out, we disagree with the methodology used in these metrics since they don’t capture the true level of inflation. According to shadowstats.com, if we were to measure inflation the same way it was measured in 1990, the rate would stand at about 7%. If we were to measure it using 1980 metrics, inflation would be closer to 11%! The inflation picture looks a lot different if thought about that way. Next WeekNext week will probably have lighter volume for obvious reasons, but we will continue to get some economic data. There will be several reports on housing, as well as durable goods, leading economic indicators, as well as a revision to the third quarter GDP number. Corporate earnings releases will be rather light. Investment StrategyStill no changes here. We remain cautious due to the highly volatile nature of this market. If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is very high at the moment. We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Debt problems and continuous bailouts around the world should be favorable to commodities like gold in the long term. After the losses this week, a good buying opportunity could present itself. TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations. This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
It was another decent showing for the markets this week. Through the close Friday, the Dow was higher by 1.4%, the S&P was up 0.9%, and the Nasdaq returned 0.8%. Both gold and oil were off this week, with a -2.0% return for the former and -1.5% for the latter.
Source: MSN Moneycentral
No surprise, news out of Europe was a major factor for our markets this week. Every day there was news moving the markets, especially late in the afternoon.
Investors were anxious over a summit among European leaders to hammer out a solution to their debt problems. It was even described as a “make or break” week for the Euro by some, since the possibility of a breakup of the currency was increasing.
In the end, the European countries did come to an agreement that appears to unify these countries. They agreed to a limit on budget deficits and details on bailout funds.
While this sounds good in theory, the possibility of these new rules being dismissed at the first sign of trouble is likely, since covenants in current agreements are ignored or not enforced.
The UK was a loud, lone voice against these actions, which they rightfully described as a loss of sovereignty. To enforce rules of this treaty, a European court would force sanctions against the countries. Other requirements, like a universal policy on tax rates or tax on financial transactions, were also derided since the financial industry is such a large part of the British economy.
The European Central Bank (or ECB, which is the European version of our Fed) also stepped forward with policies to help the debt crisis. They announced a reduction in interest rates, as well as the discount rate at which banks borrow at. However, the ECB was criticized for not doing more and the markets sank on that realization.
As we have been writing the past several weeks, the ECB is under pressure to buy bonds of various countries to force their interest rates lower, making it cheaper for them to borrow. It is essentially money printing, similar to what the Fed has done here in the US. The ECB has been doing this to a small degree, but continue to refuse to do more.
In a refreshing comment, the new head of the ECB, Mario Draghi, stated that they are prohibited from financing individual governments. Judging by his statement, further action from the ECB here appears unlikely.
To work around this, many are trying to use the IMF (International Monetary Fund) as a vehicle to do what the ECB won’t. Sine the US is required to pay 17% of the IMF commitments, which means US taxpayers will be paying for a European bailout.
Data here in the US this week showed that we continue to have growth, albeit at a slow pace. Weekly initial jobless claims had been hovering at 400,000 level for months, yet turned in a 381k number this week, showing an improvement in the labor picture. Consumer sentiment also showed a nice improvement over the prior report. On the other hand, data on the service sector showed weakness.
Next Week
The level of economic data picks up next week, as we will get info on retail sales and inflation with the CPI and PPI. There will be earnings from several companies, as well, including some big names like Best Buy, FedEx, and Rite Aid.
We will also see how this agreement in Europe plays out. If the past several weeks are any indication, there is bound to be some news from this region that will impact the market.
Investment Strategy
No change here. While the gains of the previous two weeks were encouraging, caution is warranted due to the highly volatile nature of this market.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is very high at the moment.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Debt problems and continuous bailouts around the world should be favorable to commodities like gold in the long term.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
The markets had a terrific week, posting the highest gains in nearly two years and the Dow had the second biggest point gain ever. For the week, the Dow rose 7.0%, the S&P climbed 7.4%, and the Nasdaq soared higher by 7.6%. Dollar weakness led to gains in many commodities, with gold rising 3.6% for the week. Oil hovered around the $100 per barrel mark much of the week, closing at $100.96 for a 4.3% gain.
Source: MSN Moneycentral
Europe was again dominating the headlines this week. The big news came on Wednesday as the Federal Reserve announced a plan in conjunction with other central banks around the world to make it cheaper for Europe to get US dollars. The news sent the markets soaring as the Dow rose nearly 500 points for a 4.2% gain.
Basically, the plan reduces swap rates for borrowing US dollars. Without all the industry jargon, it just means that the Fed made it cheaper and easier for foreign countries, specifically Europe, to borrow our currency.
Banks in Europe own US debt through items like bonds and mortgages, so they have a need for US dollars. In an emergency, they will need to hold US dollars to cover the debts or be forced to sell those assets, which would drive up yields and make borrowing more expensive in here in the US. This move by the Fed was a step to prevent that from happening.
Alone, this action is of modest importance and wouldn’t normally warrant such a response in the markets. The fact that it was coordinated with other central banks around the globe made it more impressive. It was also a reminder that the Fed is here to save the day. Still, it seemed like quite an overreaction in the markets, so the rebound could have been helped by a bounce-back after selling off the last two weeks.
While making it easier to get US dollars sounds nice, it also weakens our currency. On the news, we saw the dollar drop in value while commodity prices rose.
Also, it does little to solve the fundamental problems of Europe. They have far too much debt and spending and this does nothing to help. Actually, it promotes more debt.
A question many have been asking is “Why now?” Is there something - or could there be something - bad happening that justifies a world-wide emergency response? Some have speculated that a European bank was close to failure and this action was needed to prevent that. Even though the market rallied, many are seeing more questions than answers.
Having far less impact on the markets, the other news to come out of Europe this week was a plan to provide more loans and funding to European countries.
To this point, bond yields have been rising in these countries as worries increase, making it more expensive to borrow. There have been calls for the European Central Bank (the ECB; is similar to our Fed) to buy up bonds to push yields lower (like the Fed does here), which is essentially just printing money. They have been doing this to a small degree, but many officials are calling for more. A major dissenter of this is Germany, who is against more lending to these countries.
To work around the ECB and Germany, the IMF (International Monetary Fund) may step in to provide funding. They would provide assets to bail out countries and push borrowing costs lower.
In our eyes, the problem is that the US provides over 17% of the funding for the IMF, meaning we would be contributing to the bailout of Europe. Additionally, we aren’t even sure if this is what the IMF was designed for. Not to mention the fact that these bailouts need to stop for needed fundamental reform to take place.
Getting back to the US, there was an excitement in the beginning of the week over Black Friday shopping results. Sales on that day rose by 6.6% over last year, so many are predicting a better shopping season which would help retail companies.
We are very cautious of that view and would prefer to see how the season plays out. With more customers clamoring for the sales on Black Friday, it could mean they are being more frugal and will therefore be spending less money this year. There may have been more shoppers in the stores, but those stores aren’t making much of a profit selling items on sale.
Lastly, we received news on the labor picture this week. Over the past month, the economy added 120,000 jobs, less than the 150,000 many expected. Catching headlines, though, was the drop in unemployment rate from 9.0% to 8.6%. It has been about three years since the rate had been that low.
While the low unemployment rate sounds good, the drop came from a large decrease in the labor force (the formula to calculate the unemployment rate is unemployed workers / total labor force). When the labor force is lower, it makes the rate deceptively lower. If we were to use the size of the labor force at the beginning of the recession, our unemployment rate would be around 12%. So although it is improving, the employment picture is still not very rosy.
Next Week
Next week will be light in terms of economic and earnings releases. We will get information on factory orders, international trade, and consumer sentiment.
Europe is always good for a surprise or two, so news out of that region wouldn’t be unexpected. Euro country leaders will be having meetings to work out a path forward, so Europe could again be in the headlines.
Investment Strategy
The gains of this week were encouraging. It was a reminder that the Fed is around to provide assistance should conditions deteriorate. As you probably know by now, we disagree with much of the Fed’s money-printing and stimulus policies, but by no means would we fight them. Our job is to make money in any market condition and will go along with what the market gives us.
Though we have done some buying in the two weeks prior to this and did well this week, caution is warranted due to the highly volatile nature of this market environment.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. For the first time in years, this week China reduced interest rates to boost the economy, a sign that growth is slowing. However, debt problems and continuous bailouts around the world should help elevate commodities like gold in the long term.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Please note: There will be no market commentary next week due to the Thanksgiving holiday.
It was a rough week for the markets. The Dow fell 2.9%, the S&P was off 3.8%, and the Nasdaq fared the worst, down 4.0%. Gold also sold off, down 3.5%. Oil climbed above $102 a barrel at one point this week, only to sell off and close the week down 1.6% to $97.41 a barrel. Brent crude closed at $107.
Source: MSN Moneycentral
The markets had a tough week, but the news flow seemed much quieter than in previous weeks. Europe was still a factor, but the headlines were not as dramatic as they had been.
We heard from the new Prime Minister of Italy, Mario Monti, as he announced major cuts to reduce their debt. He is looking to cut 300,000 public sector jobs, lower government employee salaries, and raise the retirement age, amongst many other new cuts. We see this as a step in the right direction. However, many believe that these cuts will have a hard time getting implemented.
Tax increases have also been, or will be, implemented to raise revenue for governments to pay off debts. As we saw in the Eurozone GDP released this week, growth is slowing or contracting. Higher taxes in the region will only slow growth further. A reduction in spending is the only true solution, but the likelihood of that occurring appears slim.
The debt problems in these Euro countries remain very serious and are spreading. After Greece and Italy, bond yields have risen to new highs in Spain, reaching 6.4% this week (remember, that 7% yield is looked at by many as the “point of no return”). Other countries in the region that we had yet to hear from, like Austria and Finland, are also seeing a rise in bond yields, meaning the risk of default is growing.
Several countries are asking the ECB (European Central Bank) to step in and buy bonds to keep yields lower (similar to what the Fed does here in the US). The ECB has been buying a small amount, but not at the levels many countries would like. The solution is not to keep adding more debt to fix a debt problem. Unfortunately, even leaders here in the US, like President Obama and Treasury Secretary Geithner, are pushing for more ECB intervention.
We doubt Euro leaders should be looking to us for a solution as our debt level crossed the $15 trillion mark this week. In President Obama’s term alone, we have added $4.4 trillion in debt, an increase of over 40%.
We strongly believe that our debts will have severe consequences in the future. How far out? You guess is as good as ours. Unless the debt is addressed and spending is reduced, we are very negative on the long term.
A good way to get the debt under control is possible through the ‘supercommittee’ now in Congress. We are sure you know by now, they have until next Wednesday to find a way to cut $1.2 trillion from the budget over the next ten years. Reports at this time show the likelihood of that occurring is slim.
The holdup appears to be coming from the left with their desire to raise tax rates. We heard one member say that the “wealthy must pay their fair share and sacrifice like the rest of us.” That’s funny, since the top 1% pays 40% of the Federal income taxes and top 49% pays 100%. We have a more progressive tax structure than even far-left countries in Europe. Frankly, we are glad a tax increase is unlikely.
Regrettably, if the agreement is not reached, cuts would occur automatically. While we would like to see spending cuts take place, as someone with a family member currently fighting overseas, those cuts are disproportionately large for the military compared to the other cuts (Shameless plug: Remember, our services are free for all active duty military and half price for retired). It will be interesting to see how this plays out. If we can’t even cut $1.2 trillion over 10 years, we don’t see much hope in addressing our massive debt problems for the future.
As for economic releases this week, the markets viewed the data favorably. Retail sales were higher and initial jobless claims were again lower. Inflation levels in the PPI and CPI showed a decrease, largely due to a decrease in energy prices.
By now, our regular readers are likely aware that we believe inflation is far higher than these metrics show. Just last week, the American Farm Bureau reported that prices for an average Thanksgiving meal rose 13% from last year. Sadly, prices for the things people buy continue to rise, adding pressure to already tight pocketbooks.
Next Week
Activity will be light next week as the markets are closed Thursday for Thanksgiving. The market is open on Friday, but like many of you, many people will be taking the day off.
Through the week, we will get info on housing, durable goods, personal income and spending, and a revision to last quarters GDP. The volume of company earnings will also be light.
The debt supercommittee will be a major story as investors look for any signs of agreement. While it doesn’t look likely, a this point the impact on the markets is uncertain.
Europe will again be something to watch as problems have been spreading to other countries. Should a significant story develop, it could affect our markets more. When there is a smaller volume of trades, market moving news tends to move the markets more than they normally would.
Investment Strategy
Still no change here. We are still cautious due to the questions surrounding the Euro zone.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Debt problems and continuous bailouts around the world should help elevate gold prices in the long term.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
It was another week with Europe dominating the headlines. The Dow rose 1.4%, the S&P climbed 0.9%, and the Nasdaq returned -0.3%. Gold continued to bounce around but settled near the $1,800 an ounce level, up 1.8% for the week. Sparked by concerns of a nuclear Iran, oil popped higher by 5.0% to $99 per barrel.
Source: MSN Moneycentral
The markets rose nicely every day this week except for one, and unfortunately that day was a doozy. The markets recovered nicely late in the week, though, to eventually move back into positive territory.
Again this week, the market was driven by big changes taking place in Europe with a change in leadership in both Greece and Italy. We opened the week with news that the Greek Prime Minister was stepping down and a new government would be formed.
Catching us by surprise, Italy, the 3rd largest economy in the Euro, also grabbed headlines as their financial condition weakened. Bond yields in the country continued to rise, meaning it would cost them more to borrow money. Italian Prime Minister Berlusconi was also in jeopardy of losing his position after nearly 20 years of service.
We figured the uncertainty created by these stories would send the markets lower, but they climbed higher Monday and Tuesday. It wasn’t until Wednesday that the worries came to a head.
Bond yields rose above 7% in Italy, a level many refer to as “the point of no return.” The chance of default becomes very high, even if meaningful steps are taken to remedy the problem. This was the yield level that lead to bailouts in other Euro countries like Ireland, Portugal, and Greece. A bailout in Italy is more problematic, since they are much larger than any of these other countries and the costs would be enormous.
Investors were spooked by the news, with banks taking the brunt of the hit due to their potential exposure to Europe. By the end of the day, the Dow had fallen 3.2%, the 6th biggest drop for the year.
Conditions moderated for the remainder of the week and the markets climbed back higher, eventually erasing the Wednesday losses. Italy announced plans to boost growth and cut their debt and the markets gave the plan a thumbs up.
The leadership picture in both Greece and Italy improved, as well. The new Prime Minister in Greece, Lucas Papademos, has a economics background with a PhD in Economics from MIT. The likely new leader of Italy, Mario Monti, also has an economics background. Since the problems facing these countries are economic in nature, their background makes them decent fits - for the time being, at least.
Back at home, we saw an improvement in employment that helped push the markets higher. Initial jobless claims have been hovering around the 400,000 level for weeks, but dropped to 390,000 this week. Though still troublingly high, it is a welcomed improvement. Consumer confidence levels showed a gain this week, as well.
Next Week
Next week will be another busy one. Corporate earnings will be lighter, but there will be many economic data releases. We will info on housing, retail sales, productivity, and leading indicators. We will also get inflation data with the PPI and CPI releases.
Europe will also be a focus due to all the changes that occurred this week. The markets seemed to like the changes, but there are many questions that remain unanswered. The volatility will likely continue into next week.
As we approach November 23rd, the Congressional supercommitee will become more of a focus. The lack of a compromise will likely be seen as a negative. They need to cut $1.2 trillion over the next ten years, which, if you average it out, would be $120 billion a year. The fact that it is difficult to agree to just $120 a year is troubling, since massive amounts of cuts will be needed in the future.
Investment Strategy
Again, no change here. We are still cautious due to the questions surrounding Italy, Greece, and the rest of the Euro zone.
Corporate earnings have been good, with over 80% of companies beating their estimates according to Factset. Normally that would help the markets, but as we have mentioned, Europe has been the market driver. When everything goes up or down together, it makes stock picking almost a futile effort.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities and were encouraged by their recent strong performance. A slowdown in China, who has been a major driver of commodity prices, has us worried in the longer term, though.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Once again, news out of Europe was the driving factor for the markets this week. Through the Friday close, the Dow fell 2.0%, the S&P was off 2.5%, and the Nasdaq sank 1.9%. Gold bounced around but ended the week up just 0.5%. Oil continued its climb, up 1.0% to $94 a barrel.
Source: MSN Moneycentral
This week we continued to receive decent corporate earnings, but it didn’t matter. Europe stole the spotlight yet again.
After the Greek debt rescue package (bailout) was approved in the previous week, we thought it would be weeks or possibly months before Euro problems resurfaced. We were looking forward to a break from Europe dominating the headlines. Unfortunately, it only took a couple days for the cracks to appear.
On Monday, Greek Prime Minister George Papandreou announced that the debt deal they agreed to with the other EU leaders was being put to vote for the Greek people. As the numerous protests have shown us, though, that agreement is very unpopular in Greece. The uncertainty of that vote frightened the markets and sent them lower.
If the people voted for the referendum, then the deal would move forward and the unpopular (with the Greek people) austerity measures would be implemented. If voted down, it would open up a slew of new problems. It may even result in a Greek exit from the Euro.
By Thursday, though, it was announced that the referendum would not occur and the markets moved higher on the news.
Adding to the Greek drama, this weekend we learned that Papandreou survived a confidence vote. However, it appears that this government will be dissolved and a new one will be formed. Unfortunately it looks like the Euro headlines won’t be disappearing anytime soon.
These Euro problems are important because they are having more of an effect on our markets than ever before. RBC Capital Markets ran the numbers and the correlation between the S&P 500 and Euro currency rate over the last month stands at 0.9 (a correlation of 1.0 means their movements are perfectly correlated. A -1 correlation is the exact opposite). A correlation this high hasn’t occurred since 1997. When we get good news out of Europe, the market goes up and vice versa. Little else has mattered.
Having a measurably smaller impact on our markets, the Fed was in the news again this week. No surprise, they announced that they would keep interest rates at these historically low levels. However, they seemed to move even closer to new monetary easing or stimulus.
They see economic conditions improving slightly from here, but at a much lower level than they previously thought. While that sour outlook was concerning, many traders were encouraged that a new stimulus would result from slower growth. More stimulus would give the markets another sugar buzz, but as we saw with the previous stimulus, those problems would still remain.
On the economic data front, we received the employment report for the month of October. In a period when food stamp usage climbed to another record high, the US added 80,000 jobs and the unemployment rate fell to 9.0% from 9.1%. There were just over 100,000 jobs added in the private sector and a loss in government jobs (a trend we like to see).
While any gain in jobs is welcomed, the pace of new job growth is still very slow. The unemployment U-6 number, which measures the underemployed, still hovers above 16%. This level of employment is still a concern for us.
Next Week
Next week will be much quieter in terms of earnings and economic data. We’ve gotten over the bulk of corporate earnings and the pace is beginning to slow. However, many Fed presidents will be speaking, so it will be interesting to hear what they have to say and they have a potential to move the market.
Also, it is likely that the drama in Europe will continue next week. We can only imagine how much uncertainty will be created by the formation of a new Greek government.
Investment Strategy
No change here. We are still cautious due to the questions surrounding Greece and the Euro zone.
Corporate earnings have been good, with over 80% of companies beating their estimates according to Factset. Normally that would help the markets, but as we have mentioned, Europe has been the market driver. When everything goes up or down together, it makes stock picking almost a futile effort.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities and were encouraged by their recent strong performance. A slowdown in China, who has been a major driver of commodity prices, has us worried in the longer term, though.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
An agreement reached in Europe this week helped push the markets higher. The Dow rose 3.6% and the S&P and Nasdaq both returned 3.8%. Commodities were up this week and unfortunately for gas prices, oil rose 6.8% to $93 per barrel. Gold also popped higher by 6.8%, returning to the mid-$1,700’s an ounce.
Source: MSN Moneycentral
It was another good week for the market, making it a great month, too. So far for October, the Dow is up over 12%. If it can keep up this pace, it will be the best October performance in almost 25 years.
The gains this week were driven higher primarily by activity in Europe. An agreement on their debt problem was reached this week and is considered the biggest agreement reached so far.
The deal is, the holders of Greek debt will take a “haircut” of 50% (meaning investors lose 50%), but this is supposed to be voluntary. Next, European banks will have to hold more capital in reserves as a cushion. Lastly, the European bailout fund (formally, the European Financial Stability Fund, or EFSF) has been upped to $1.4 trillion (essentially printing $1.4 trillion to cover debts). China may even be a part of this fund. The EFSF provides a guarantee on debt for European countries.
The market rallied higher on the news of this agreement. While it is a resolution, it leaves a lot of questions unanswered. The markets seemed so hungry for good news out of Europe, though, that any questions have been postponed for another day.
One problem that is already rearing its head is an encouragement of fiscal irresponsibility. Other countries with similar debt problems see that Greece got these favorable deals by being bad, essentially. Therefore, it would be in their benefit to do the same.
Only a couple days after the announcement, Ireland came forward to see what kind of a deal they can get. Allow us to go on a tangent for a second, but Ireland is an interesting situation, actually.
The debt problems in Ireland resulted from different circumstances than other European countries. They don’t have the large, expensive welfare state. Similar to the US, they had a massive housing bubble that popped. The government then stepped in to prop up the banks that were holding all that bad debt. This resulted in massive losses that taxpayers were on the hook for. They then took a bailout of about $113 billion.
As a condition of the bailout, the EU wanted Ireland to raise tax rates and increase government spending as a form of stimulus (similar to what Washington wants to do here). Ireland actually did just the opposite. They kept their tax rates low and cut government spending and workers. To this point, Ireland is actually recovering relatively well.
Back on subject, Ireland saw the deal Greece got and expressed a desire to get their interest rates reduced. There is an incentive to show as poor of an economic picture as possible in order to do this. Will it work? We’re not sure. However, this bailout will result in the inevitable moral hazard, where countries have no incentive to behave responsibly.
Also, with the 50% haircut to the Greek debtholders, there is little incentive for investors to buy the bonds of other troubled Euro countries. Why would they want to risk a 50% loss? We see bond yields rising in Europe, meaning it will be harder for those countries to borrow funds. That $1.4 trillion bailout fund could mitigate the rise, but the degree to which is uncertain.
Back here in the US, we had some data that also helped the market. Corporate earnings still are coming in at a decent level. Roughly every three out of four companies are beating earnings estimates.
We also got some good economic data this week. Third quarter GDP rose by 2.5%. This was roughly in line with estimates but is higher than recent quarterly GDP numbers. It is interesting to note that consumer spending rose considerably while at the same time, people are more pessimistic about the economy. Usually if people are pessimistic, spending is lower. Either way, the news also helped the market rise this week.
Next Week
Like the past couple weeks, next week will again be busy. Corporate earnings will still come in at a good pace. For economic data, we will get info on manufacturing. With the month ending next week, we will also get information on the employment level through October. It’s hard to believe it is almost November!
The Fed will also be releasing their statement on interest rate levels. It is widely believed that they will keep rates at these historic lows. More importantly, though, investors will be watching for any changes in Fed policy.
Investment Strategy
As we mentioned above, the markets cheered the news out of Europe this week. But there are many questions that remain unanswered, so we have little doubt that Euro problems will resurface. It may be weeks or months, but we would be cautious here.
With these interventions and money printing, gold and precious metals benefited. Gold has now risen to the mid-$1,700’s an ounce. We did some buying in the $1,600’s but would be hesitant to add any more at higher levels from here.
Corporate earnings have been decent so far and future results are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities and were encouraged by their recent strong performance. A slowdown in China, who has been a major driver of commodity prices, has us worried in the longer term, though.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
It was another volatile week for the markets and the results were mixed. The Dow rose 1.4% and the S&P was up 1.1%, however the Nasdaq was lower by 1.1%. Oil was up slightly, 0.5%, and is slowly inching back to $90 per barrel. Gold was off 2.8% and remains stuck in the mid $1,600’s an ounce range. 
Source: MSN Moneycentral
There was nothing major behind the moves this week. As usual, we had news out of Europe, both good and bad, pushing the markets either direction. The week opened on Euro worries and the market moved lower. On Tuesday, however, the markets rallied higher when it was announced that the European rescue (bailout) package had been increased to 2 trillion Euros (roughly $2.7 trillion), a massive number. One official refuted the story, but did acknowledge that they were negotiating the size of this bailout. As the week progressed, it was more of the same - even more negative and positive stories out of Europe. It is almost futile to report on them, as the drama never seems to end. Corporate earnings started coming in at a steady pace this week, with almost 70% of companies beating estimates. Banks were a major focus as Citi and Bank of America reported earnings that weren’t too bad. However, others like Wells Fargo and Goldman were rather poor. Still, with almost 3 out of 4 companies beating estimates, earnings season has gotten off to a pretty good start. Also contributing to the good performance this week, it was reported that the Fed is again looking to do more stimulus, although not immediately. The focus now is on the housing market as they look to bring down mortgage rates. As you probably know, we have had problems with the various stimulus interventions in the past and this is no exception. Since historically low mortgage rates haven’t done the trick so far, we aren’t sure what even further rate reductions will accomplish. The only way for the housing market to come back is to let it bottom first. That means getting out of the way. Unfortunately, all these interventions are only prolonging the problem. This week we also received data on inflation. The Consumer Price Index (or CPI; the price level consumers pay for goods and services) came in line with estimates, rising 0.3% in the last month and 3.9% over the last year. However, The Producer Price Index (or PPI; is the price level for producers of that good or service) soared. In the past month, the price level rose by 0.8%, making it up nearly 7% over the past year. This is very troubling. To this point, we haven’t seen much of these price increases passed along to us as consumers (as you can see by the lag in CPI compared to PPI). However, eventually they will have no choice but to pass the costs along. Additionally, these price increases at the producer level will cut into their earnings. Next WeekNext week will again be a busy one. We will continue to get corporate earnings at a steady pace. Economic data will also be important as we get the 3rd quarter GDP number. We will also get info on consumer confidence, durable goods, personal income and spending, and data on home sales. Europe will also be important as European leaders meet this weekend to work out a game plan for their debt and banking problems. Results from this meeting could affect the tone of the markets for the week. Investment StrategyNo change here. Even with the gains this week, we remain cautious. The markets were again helped by an absence of major news this week and worry that developments out of Europe will disappoint again. Corporate earnings have been decent so far and future results are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets. We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street. If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities, even after their recent poor performance. Further money printing around the globe will also help gold and silver and we may be reaching a bottom for these precious metals. TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this is beginning to be a good time to be short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations. This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Great returns for the markets this week. The Dow rose 541 points and 4.9%, the S&P returned 6.0%, and the Nasdaq turned in a remarkable 7.6% gain. Treasury bonds sold off, so yields rose. Gold also had a nice week, up 2.9%. Oil continues to climb, up 4.6%, so oil is nearly 10% higher over the last two weeks. Unfortunately, those cheaper prices at the pump may not last much longer.
Source: MSN Moneycentral
There wasn’t much news behind the big move this week. The markets opened with a solid gain on Monday that was attributed to positive news out of Europe that set a positive tone for the week.
There was a report over the weekend that the German and French leaders, Merkel and Sarkozy, will present a package to resolve budget and banking problems in the Eurozone by November. Many traders laughed this off as a “plan for a plan,” which is exactly what it was. As ridiculous as it sounded, the markets soared on the news.
Short covering is also being attributed to the market rise this week. Without getting too technical, shorting a stock is when you bet the stock will go lower. Short covering is when investors buy back the shares they are short of. Reports showed that short positions decreased recently, so traders have been buying back stock to cover their shorts. This activity helps push the market higher, especially if the volume is large enough.
Corporate earnings for the third quarter began trickling in this week. We started with a disappointing report from the aluminum producer Alcoa, whose earnings weren’t as high as many expected. Due to their reliance on commodities, many worried that it could spell trouble for other commodity related companies.
Google was another company releasing earnings and they had a terrific report. Like Alcoa was an indicator for commodity stocks, Google was looked at as a guide for other technology stocks, resulting in nice gains for that sector. It is worth noting that their costs have been rising, but not enough to cause concern at this time.
The other big company releasing earnings this week was JP Morgan. Earnings were very poor. Even worse, portions of their accounting relied on the gimmicky “mark to model” method to account for bad assets like loans.
Mark to market is the accounting method we prefer to see, since assets reflect what they are currently worth in the market. Makes sense, right? Mark to model means they value those assets at whatever their models say they are worth, and you can bet they are valued higher than what they are really worth.
If JP Morgan can’t even turn a profit using accounting gimmicks, things can’t be good. Other bank stocks sold off on these poor reports.
Economic data was light this week and what we did receive was mixed. Retail sales came in much higher than expected. On the other hand, consumer sentiment has declined from its already low level. If anything, it shows that people are worried, but continue to spend.
Next Week
Next week will be very busy. Corporate earnings releases pick up significantly next week, far more companies than we will even begin to list here. Also, the volume of economic data will be high. The most important item we will be watching is the Producer and Consumer Price Indexes (PPI & CPI). Economists are predicting a decline in inflation largely since commodities have sold off. Inflation has unexpectedly popped higher in places like China and Europe, so a miss to the highside here is a possibility.
Investment Strategy
As we have been discussing the past couple weeks, the markets have had large moves on a daily basis, but have been stuck in a fairly narrow range, as you can see in the chart on the right. The gains on Friday pushed the market to the top end of the range. We will see if they continue higher from here or if it will move lower off this ceiling.
Even with the gains this week, we remain cautious. The markets were helped by an absence of news this week and worry that developments out of Europe will disappoint again. A “plan for a plan” sounds nice, but we know their plans only involve bailouts and money printing, nothing that has any real reforms.
Corporate earnings may help as their numbers are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets.
We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities, even after their recent poor performance. Further money printing around the globe will also help gold and silver and we may have reached a bottom for these precious metals.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this is beginning to be a good time to be short again. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
This week we received some much needed gains as volatility remained high. The Dow rose 1.7%, the S&P was up 2.1%, and the Nasdaq climbed 2.6%. Gold was up slightly, 0.9%, as prices linger in the mid-$1,600 an ounce level. Oil popped higher, up 4.8% to $83 a barrel.
Source: MSN Moneycentral
The week opened on a sour note with the markets moving sharply lower. On Tuesday, we officially entered bear market territory, which is defined as a 20% drop from the most recent peak to trough. That didn’t last long, though, as the markets popped sharply higher late that same day.
Even with all the volatility, we continue to trade in a narrow range, as you can see in the 3-month chart on the right. After a peak in the beginning of September, you can also see the markets have been making lower highs and lower lows. This downtrend gives us some concern.
As for the events of the week, it was again all about Europe. The sour note that opened the week was a worry over European banks and negative news from Greece. It was announced that Greece would not meet their deficit targets this year. However, they are taking steps to lay off more public workers and further raise taxes. The reduction of public workers is probably a wise step, but we have our reservations on increases in taxes. Economic growth is already being choked off and additional tax burdens don’t help.
Pulling stocks out of bear market territory on Tuesday was a rumor of a new plan by European leaders to save any potential failing banks. The markets are so hungry for good news that even rumors like this were enough to move the Dow almost 380 points.
That optimistic news out of Europe set the mood for the remainder of the week.
Back here at home, we received some positive economic reports. In the month of September, the U.S. added just over 100,000 jobs while the unemployment rate held steady at 9.1%. The private sector added 137k while the public sector lost 34k, a positive statistic. Past month employment numbers were also revised higher.
This was very welcomed news, but keep in mind it is still lower than numbers we saw earlier in the year. Additionally, 45,000 jobs were added this month as striking Verizon workers were added back onto the payroll (they were subtracted in the previous month, so the net effect is zero).
Manufacturing reports showed a higher than expected gain, but remains at a very low level of growth. The service sector is also slowly growing, but at a level below what many expected.
Lastly, ‘Operation Twist’ was officially underway this week as the Fed bought billions in longer term bonds. Remember, this latest Fed program is designed to lower long term rates to spur borrowing and lending. On the date of purchase, bonds yields did drop. The widely followed 10-year bond saw its yields drop to around 1.7%. As the week progressed, yields slowly rose and the 10-year closed out the week above 2%. Yields are currently at historic lows and we aren’t sure how much further they can fall from here, regardless of how much money is spent.
Next Week
Next week is the unofficial beginning of quarterly corporate earnings season. Dow member and aluminum producer Alcoa will release its earnings on Thursday. Having a rough couple of months and recently trading below $10 a share, we will see if that sell-off was justified. The drop in metal prices may have cut into their bottom line and could be an indicator for other commodity related stocks.
We will also get earnings from notable companies like Pepsi, JPMorgan, and Google. Economic data will be light as we get retail sales info and business inventory levels.
Investment Strategy
Again, little change as we remain cautious here. The market gain this week was welcomed, but we aren’t sure if it is sustainable. Euro problems just won’t go away and our economy remains weak. With the markets being driven largely by these macro events and the whims of politicians, it is a difficult investing environment.
The coming weeks will be interesting as we receive corporate earnings results. Past numbers have been decent and are expected to be similar this quarter. The bar is still set high, so any disappointments will likely affect the markets lower.
We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street.
When looking for current investment opportunities, some quality companies can be found at cheap prices. However, it is easy for them to become even cheaper in this environment so caution is still warranted.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities, even after their recent poor performance. Further money printing around the globe will also help gold and silver, but we aren’t sure if this is the time to get in yet.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. Steps must been taken to hedge here. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Another volatile week yielded mixed results for the markets. The Dow closed the week up 1.3% but S&P was slightly lower, down 0.4%, and the Nasdaq returned -2.7%. Both gold and oil were off slightly, down 1.1% and 0.8%, respectively. Friday also marked the end of the quarter, which turned out to be the worst quarterly performance since early 2009. The Dow fell 12%, the S&P was off 14%, and the Nasdaq down 13%. 
Source: MSN Moneycentral
Although the Dow was up this week, it still remains a frustrating investing environment. High levels of volatility from the large swings in the market make decision making far more difficult. Even though the daily swings have been large, the market remains stuck in a relatively narrow range, as you can see in the chart on the right. There was little news behind the market moves this week. A large reason for the early week gains could be attributed to end-of-quarter window dressing by portfolio managers. In an attempt to make their holdings and performance look better, many managers sell their loosing stocks and buy better performing ones. This drives up stock prices and therefore the markets in general. Europe was also a factor behind the market moves. As plans come together for another bailout program, the markets rallied on the news. Further austerity measures (mostly tax hikes) have been undertaken in Greece, meeting a requirement that opens them up to further aid. Giving the markets some concern, though, each one of countries in the Euro zone must approve the additional bailout measures. There were concerns that countries like Germany would vote against it, since it is unpopular with their citizens (which is understandable since these responsible countries must pay for the irresponsible ones). At any rate, Germany agreed to vote for the bailouts and it looks like the other Euro countries will, as well. Like we have said many times before, we strongly believe these measures will not work. Significant increases in taxes will do nothing but choke off growth and the downward spiral will continue lower. Unfortunately these steps will ensure that the Euro problems will persist and continue to impact our markets. A big story this week was not something usually discussed, copper. The metal is sometimes called “Dr. Copper” since it is a good predictor of economic health. Over the past month, copper sold off around 25%, worrying many investors (including us, since we do hold some copper). The sell-off has many concerned about another dip back into recession. Contributing to the decline in copper demand, China, a primary consumer of raw materials, continued to show weakness. Data from that country shows further declines in manufacturing. Also, the CDS levels (which are generally seen as a measurement of risk) in China rose substantially, showing that many investors are concerned about the health of China. Here in the U.S., economic data this week was mixed. Housing prices showed a gain while initial jobless claims came in much lower than expected. On the other hand, consumer confidence is stuck at very low levels. Personal income also showed a slight drop while spending rose (indicating that people are dipping into their savings). All-in-all, many investors were encouraged that the data wasn’t getting worse, so it looks like a lack of bad news was good news. Of note on the individual stock level, late Friday, the cultural icon Kodak plunged precipitously, over 50%, and was trading as low as 65 cents at one point (65 cents!). It was learned that the company was talking with a law firm about restructuring advice. Unfortunately, that possibly means bankruptcy. Next WeekAs the month and 3rd quarter came to an end this week, we will begin getting economic data for that period. Next week we will get info on levels of manufacturing and the service industry, construction spending, and factory orders. The big news will come on Friday with the release of unemployment data. Remember, last month we had a net of exactly zero jobs. Expectations are low again, but economists are predicting at least modest job growth. Investment StrategyLittle change as we remain cautious here. With a lingering economic malaise and very volatile markets, we are comfortable with our conservative position. We don’t see economic conditions improving measurably in the near future. What we will be watching, though, is corporate earnings that will begin coming in soon. Earnings have been decent so far and are likely to be satisfactory again this quarter. Most investors will be watching for the forward guidance, though. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will be questionable. Poor forward guidance will add to the negative sentiment currently felt on Wall Street. When looking for current investment opportunities, some quality companies can be found at cheap prices. However, it is easy for them to become even cheaper in this environment so caution is still warranted. If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities, even after their recent poor performance. Further money printing around the globe will also help gold and silver, but we aren’t sure if this is the time to get in yet. TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. Steps must been taken to hedge here. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations. This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Source: MSN Moneycentral
