After complaining about a boring market last week, this week was just the opposite. At the close, the Dow dropped 2.1%, the S&P fell 1.7%, and the Nasdaq was off 1.9%. Oil was the story of the week as crude (WTI) climbed to over $103 per barrel but settled around $98. Brent crude (which we discussed last week) reached $120 per barrel but also fell to around $112. Gold rose as well, up 1.5% this week.
Source: MSN Moneycentral
By now we’re sure you’ve heard about the escalating situation in the Middle East and North Africa, particularly in Libya. You’ve probably also seen the surging gas prices that are a result of these conflicts. Crude oil rose by the biggest percentage in over two years to reach the highest price seen in three years.
The high oil price and political unrest helped send the markets lower in the worst weekly performance of the year. It has been a long time since there was any meaningful correction in the market, so this correction was not unexpected. The market could not keep climbing at that trajectory forever.
At any rate, by late Thursday, Saudi Arabia announced it would increase oil production by 8% to make up for any lost supply from Libya. The news reassured the markets, which began to climb, as you can see in the chart above. It also calmed the rising oil markets as they retreated from their highs.
Obviously the situation this week makes us realize how dependent we are on energy supplies from unstable areas. From the U.S. Energy Department, over the last 50 years, our energy demands are 17 times higher, but domestic output has fallen by 40%. It may be of some surprise, but when shale oil is included, the U.S. has almost 3 times the supply of Saudi Arabia! Sunshine and windmills might sound nice, but they may take years and decades to be fully functional, if ever. Until then, more and more of our energy independence remains in the hands of unstable regimes.
It wasn’t just oil and the Middle East making news this week, although it certainly seems like it. Helping the markets higher on Friday was a report showing consumer confidence at the highest level in three years. That is terrific news, but we are curious as to how people can be that optimistic when unemployment is so high and the price of everything is high and climbing.
Sure enough, Rasmussen put out the results of their own economic confidence survey, which came in at the lowest level since December. Only 26% of respondents felt the economy was improving. These results differ dramatically from the other survey; however, we are more inclined to agree with these results.
Finally, largely ignored on Friday was the revision of 4th quarter GDP. The original number stood at 3.2% growth, but was revised lower to just 2.8%. At this point in a typical recovery, GDP should be humming along. It just shows we still have a long way to go for this economy to recover.
Next Week
Next week will wrap up February, so we will begin to get end of the month data. The most important info comes on Friday with the monthly unemployment rate. The January number came in much lower than expected and most economists expect to see a rebound in the February data. We believe a large gain has been priced into the markets, so any miss would likely send the markets lower.
We can’t forget that the market tends to shows gains on the first of the month. Large investors like mutual and pension funds add new money to stocks on this day, driving up prices. There has been a lot of press on this lately and strategies usually stop working when they become too popular. We don’t change our strategy just for the first of the month, so this doesn’t really apply to us, but is just something interesting to watch for.
Where are we investing now?
So was the recent market dip a good buying opportunity? Normally we would believe the market has room to go further south. This market is anything but ordinary, though, and the massive liquidity injections from the Fed will probably keep fueling the market higher. At least for the short to medium term. We see a brewing stagflation scenario ultimately wearing on the markets. Also, any further shocks out of the Middle East could impact the markets like it did this week.
We didn’t really do much buying of stocks this week in response to the dip as we remain rather cautious. If putting new money to work, though, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. We continue to avoid banking and healthcare-related 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 we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
A new week, but the story remained the same as the markets kept chugging higher. For the week, both the Dow and S&P rose 1.0% while the Nasdaq was higher by 0.9%. Gold had a solid week, notching a 2.1% gain. Oil had a slight gain but remains in the mid $80’s per barrel.
Source: MSN Moneycentral
It was another uneventful and rather boring week for the markets this week. Quietly these markets keep reaching new highs and volatility is extremely low. Actually, these last six months have seen very little volatility. We added the chart on the right to show how little movement there has been over that period. This run has been quite remarkable, really. There are not many times in the history of the market where there has been such a smooth rise. It has been an almost straight line upwards since the beginning of December!
Bob Pisani with CNBC did some research into past periods that matched these last six months and found only five other similar instances (1935, 49, 53, 58, and 95), which shows just how rare this is. Most importantly, in the year following each of these periods, the average return was 22.1%. It’s amazing to think that this market can keep going higher, but it seems like even history is on its side.
This week was also another week where everyone was talking about inflation. We received data on the rate of inflation in the form of the Producer and Consumer Price Indexes (PPI and CPI). Both remain rather low, with the PPI rising 0.8% and CPI up just 0.4% in January. We discussed last week about manipulated these figures can be, but even so, we are seeing an acceleration in these numbers. The PPI has had its highest year-over-year growth since 2008. The CPI may be up 1.4% over the past year, but is 3.1% higher for the past six months.
Over the years, changes are made to the methods of gathering many government statistics, for obvious reasons. There is a gentleman named John Williams who runs a service called Shadow Government Statistics that tries to cut through, well, the b.s. of these numbers. Through his analysis, if we measured inflation the same way it was measured when Jimmy Carter was president, inflation would be about the same as when Carter was president. Instead of the 1.4% CPI over the past year, the number would actually be around 10%!
A prefect example of how easy it is to massage data occurred this week in China. Inflation has been a serious problem in their country. Until now, food prices made up 31.4% of their CPI (it is 7.4% in the U.S.). Since food prices have been soaring, they quietly reduced the percentage of food in the CPI by 2.2%. They then released their CPI and, surprise, it came in lower than expected (although at a still-high 4.9% over the past year). Inflation remains a serious problem, especially in these emerging economies.
Changing the subject, you may have noticed that the price for oil has come down a bit, but prices at the pump remain high and are climbing. The oil price most followed in the U.S. is called the West Texas Intermediary (WTI) crude. However, there is another type of oil followed on foreign exchanges called Brent crude which accounts for roughly 2/3rds of the international supply.
Usually these two types trade relatively close together. However, the difference has widened considerably over the last couple weeks. WTI is trading in the mid $80’s while Brent is trading over $100. That Brent price is the reason why our gas prices are so high.
We won’t delve into the technicalities behind the spread, but a lot has to do with the unrest in the Middle East and North Africa. Until those issues are resolved and Brent prices come down, our gas prices will remain high.
Next Week
Next week will be quieter, especially since the markets are closed on Monday. Consumer confidence will be released on Tuesday, followed by home sales, durable goods, and the update to 4th quarter GDP.
Several big companies will be releasing earnings next week, as well. Wal-Mart, Home Depot, Office Depot, Transocean, GM, Sears, Target, and JP Penny, to name a few. Earnings have fared well so far and info from these large companies will give us a great view of the strength of the U.S. economy.
Where are we investing now?
Still no change here. The market continues to climb in a practical straight line upwards and we are just going along for the ride. Since the beginning of September, the Dow and S&P are up over 24% and 28%, respectively, while the Nasdaq is over 34% higher! Such a fast rise without a correction is troubling and everything looks expensive at these levels, so we remain cautious. Fundamentals like employment have not been that good and in normal times, we would be betting against the market at these levels. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. 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 we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
The markets continued their slow and steady climb this week, notching another 2 ½ year high along the way. For the week, both the Dow and Nasdaq rose 1.5% while the S&P was higher by 1.4%. Gold climbed 0.9% while oil dropped nearly 4% on the news out of Egypt.
Source: MSN Moneycentral
It was a rather uneventful week for the markets this week. The most newsworthy item came on Friday with the resignation of Egyptian President Mubarak. It ushers in dramatic change for the country and region (Algeria looks like it is next), but what they are changing to remains to be seen. The event really has little impact on U.S. companies, though. The Suez Canal is very important for shipping, especially oil, so a greater impact was felt in this sector.
Inflation, especially in food prices, remains a hot topic as more commodities reach all-time highs. Just this week, several companies (Sarah Lee, LG Electronics, Pepsi, and multiple coffee companies) warned that they will be raising prices as a result of higher input costs (commodity prices). While that is obviously bad for shoppers, we can’t forget that higher costs will likely result in lower earnings for these companies. We worry that in the coming months and quarters, corporate earnings will be much lower than they presently are.
Our favorite inflation denier, Fed chief Ben Bernanke, testified before the House Budget Committee this week. Nothing new was said as he continued to deny inflation concerns both here and abroad. “Inflation remains very, very low,” he told the committee. By the metrics he looks at, he’s right. Things like the CPI and bond yields are what he looks at for signs of inflation, but they have been so skewed and manipulated that they don’t reflect much of anything.
In fact, Zerohedge.com reported this week that food prices only account for 7.8% of the CPI, something we were not aware of. Can you imagine, one of the most important metrics of consumer prices only making up that tiny percentage of the CPI! The lack of concern about this issue will result in serious problems, in our view.
Finally, having little impact on the markets but on the stock market itself, the NYSE announced it was near a deal to be bought by the German exchange, Deutsche Börse. The deal will provide better technology and scale for both companies, which is fine. The problem is, the New York Stock Exchange, which has been around since 1792, will possibly lose its name. Sure, these renamings happen often in acquisitions in our increasingly global economy, but the fact that an icon of American capitalism may lose its name and identity is troubling.
The Wall Street Journal had an excellent editorial on this subject this week. The sale of this American icon is representative of America’s diminishing power in the world. At one point, the NYSE was the dominant force that acquired many other exchanges. New rules and regulations like Sarbanes Oxley has driven much of their business offshore and left the NYSE weak. This is symbolic of the decline of America in general as even more regulation has come down the pipe and business opportunities are increasingly found abroad.
Next Week
It will be a busier week next week as we get data on housing, retail sales, industrial production, and the Producer and Consumer Price Indexes (PPI and CPI), which the government uses as a gauge of inflation. We are most interested in the PPI and CPI to see if the rise in commodity prices has resulted in any gains in the indices. Like we mentioned above, the things people actually purchase are underrepresented these indexes, so we doubt there will be much of a gain here.
Corporate earnings will continue to come in at a steady pace next week. Results have been fairly decent so far with the exception of a few hiccups. We expect for earnings to continue to be strong here.
Also making news next week will be the budget proposed by President Obama on Monday. Dramatic cuts are necessary and all the talk of “new investments” is troubling. The only cuts we have heard about so far have been in the Defense Department, so any other spending cuts would certainly be welcome. When did cutting spending become such a radical idea, anyway?
Where are we investing now?
No change here. The market continues to climb in a practical straight line upwards and we are just going along for the ride. Since the beginning of September, the Dow and S&P are up over 23% and 26%, respectively, while the Nasdaq is over 30% higher! Such a fast rise without a correction is troubling and everything looks expensive at these levels, so we remain cautious. Fundamentals like employment have not been that good and in normal times, we would be betting against the market at these levels. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller and less popular individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. 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 we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
Any problems from last week seemed to have been forgotten as the markets reached a new 2 ½ year high this week. At the Friday close, the Dow climbed 2.3%, the S&P was higher by 2.7%, and the Nasdaq popped 3.1% higher. Oil and gold were relatively unchanged, up just 0.3% and 0.6%, respectively.
Source: MSN Moneycentral
The riots in Egypt may have raged on this week, but they had no impact on the markets. In fact, this week we closed out the best January performance in 14 years. Corporate earnings have been decent and economic reports aren’t that bad, so investor confidence is increasing and more money is flowing into U.S. stocks.
While the market kept climbing, though, it seemed like everyone was talking about inflation. Well, everyone but Fed chief Ben Bernanke. Commodities around the globe have climbed to new record highs, but in a speech this week, Mr. Bernanke reaffirmed that inflation is low and he would like to see more of it!
We feel that their measurement of inflation is severely flawed. Just this week, the United Nations food price index, which measures food prices around the globe, hit an all time high. Sugar also reached a new all-time high. So did copper. And practically every other commodity continues to climb towards new highs. How can this be occurring, yet inflation is nonexistent? We understand they dynamics behind the CPI, PPI, and even the PCE deflator, but feel they don’t adequately measure what inflation is to real people.
At some point, these high commodity prices will have a negative impact on the economy and the companies in the stock market. When that happens though remains to be seen. With an economy is built on consumer spending, and consumers have less to spend, that spells trouble.
In our view, this will ultimately result in a stagflation scenario. That is where unemployment is high and things you own, like a home, loses value and the things you buy cost more. Actually, that seems like what we are experiencing right now!
Switching subjects, also grabbing headlines this week was the unemployment rate announcement on Friday. Economists were expecting a gain of roughly 150,000 new jobs, but the result came in at a dismal 36,000. We won’t even get into the “blame it on the bad weather” debate, since retail sales were just fine in the same weather.
Even worse, the labor force plunged to the lowest level in 16 years, so that caused the unemployment rate to actually drop to 9.0% from 9.4%. So while it may sound good that the rate went down, this is actually terrible news. If the labor force just remained the same as a year ago, the unemployment rate would stand at 9.9%. This disappointing news reaffirmed our cautious stance on the stock market.
Next Week
Next week will be rather quiet in terms of economic reports. However, we are still in the peak of corporate earnings releases, so there will be plenty of info to move the markets.
We can’t forget about Egypt and any new developments out of the region. The protests were largely ignored this week, but any news can impact the market like it did last week.
Where are we investing now?
The market continues to climb and we are just going along for the ride. Everything still looks expensive at these levels, so we remain cautious. Fundamentals have not been that good and in normal times, we would be betting against the market at these levels. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller and less popular individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. 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 we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are beginning to favor developed international markets as opposed to emerging.
Source: MSN Moneycentral
