Yet another volatile week on this two year anniversary of the market bottom in March, 2009. For the week, the Dow lost 1.0%, the S&P dropped 1.3%, and Nasdaq fared the worst, down 2.5%. Gold sold off slightly, down 0.5%. Oil fell this week but remains over the psychologically important $100 level at $101.16 per barrel (Brent crude is just below $114).
Source: MSN Moneycentral
The price of oil continued to be a major driver of the markets this week. As the situation escalated in the Middle East and North Africa on Monday, oil rose and the markets dropped. As the unrest subsided Tuesday and Wednesday, the reverse happened.
The pendulum reversed again into Thursday as stocks fell sharply lower, although now there were multiple contributors to the drop. First, the credit rating on Spain was lowered (after another downgrade to Greece last weekend), so worries about the Euro countries are rising again.
Then we found that the February projected trade surplus for China was actually a large deficit. They have been a major exporter, so a slowdown here is troubling. There doesn’t seem to be a definitive reason for the drop, but high oil prices and inflation have been speculated. Another belief is that the Chinese lunar new year in came in early February, so vacation days around this event put a damper in productivity. Either way, this is something to keep an eye on in the future.
Middle East tensions flared up again mid day Thursday as there were reports of police officers firing on protesters in Saudi Arabia. A ‘day of rage’ was scheduled for Friday in that country, so things appeared to be heating up in anticipation. The Saudis are a very important country in the region due to the amount of oil they produce, so a lot of attention is focused on them.
Well, the day of rage fizzled on Friday, but a new worry appeared: the Japan earthquake. Markets were down briefly, but rallied back as the day progressed. Large US industrial companies like Caterpillar had solid gains when investors realized that they would be integral to rebuilding Japan.
Some commentators actually speculated that the earthquake would be good for Japan. It would be like a stimulus project that creates new infrastructure, jobs, and economic growth. This is a very Keynesian idea that we strongly disagree with.
This line of thinking is similar to a parable Keynesians like to use about a broken window leading to economic growth. It basically begins with an individual getting a window broken at their home or business. The economy benefits, though, because that person would have to hire someone to come replace the window, so that repairman gets new income. The repairman would have to purchase a pane of glass from some other business, so then they will benefit, and so on. This, they believe, leads to economic growth.
What is forgotten is that the person whose window broke is now worse off. They have to spend money that they otherwise wouldn’t have. Perhaps they would have spent that money on something else, so some other business would miss out on that revenue. Or even worse, the person with the broken glass may not be able to afford a replacement. Japan, with their large amounts of debt, can’t afford massive new spending programs. This is a sad tragedy that is far from stimulative for Japan.
Lastly, changing topics, a major bond fund made changes to their portfolio that we feel are noteworthy. Bill Gross is the chief of the worlds biggest bond funds at Pimco and is widely considered one of the best at his craft. Within the last month, the amount of Treasury bonds went to zero from nearly $30 billion in the previous month. The amount of cash rose to 23%. This shows that he is very pessimistic on government-related bonds and feels interest rates and inflation will rise in the future. He has made a move like this several years ago and was incorrect, though, but when someone of his stature makes a move this dramatic, we pay attention.
Next Week
Again, oil prices will be the thing to watch next week. The headlines out of that region have moderated, so hopefully that trend continues. If there is another scare and oil pops higher, the market will likely fall.
Economic data will pick up next week as the Producer and Consumer Price Indexes (PPI and CPI) will be released, amongst others. All commodity prices are higher, so we would think it would have some impact on these price indexes.
Also important, on Tuesday we will get the interest rate decision from the Federal Reserve. It has been stuck at 0% for far too long, we believe, but it will likely remain there for at least several more months. We will also find out if there have been any changes to the QE2 stimulus program, but we seriously doubt that.
Where are we investing now?
No change here. With all this volatility, we are not looking to make any changes. It is too early to tell if the upward trending market we have had is changing course. It has had a heck of a run the last several months, so a correction is always possible.
The QE2 program, which has been pumping up stocks, is set to expire this summer but will probably keep fueling the market higher in the meantime. We see a brewing stagflation scenario ultimately wearing on the markets once the stimulus wears off. However, there are rumors of a QE3 program which would try to pump up stocks even further. It is too early to tell if this will happen but we hope it does not, for it will create even more long term problems.
Any further shocks out of the Middle East could impact the markets like it did the last three weeks, so this is something to pay close attention to. Also, high food and energy prices are a significant headwind for our still fragile economy.
If we did decide to put new money to work, 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.
Our short and medium term investments are the only ones affected by these weekly and monthly changes. These weekly fluctuations have little impact on positions we intend to hold for several years or more.
Source: MSN MoneycentralThe price of oil continued to be a major driver of the markets this week. As the situation escalated in the Middle East and North Africa on Monday, oil rose and the markets dropped. As the unrest subsided Tuesday and Wednesday, the reverse happened.
The pendulum reversed again into Thursday as stocks fell sharply lower, although now there were multiple contributors to the drop. First, the credit rating on Spain was lowered (after another downgrade to Greece last weekend), so worries about the Euro countries are rising again.
Then we found that the February projected trade surplus for China was actually a large deficit. They have been a major exporter, so a slowdown here is troubling. There doesn’t seem to be a definitive reason for the drop, but high oil prices and inflation have been speculated. Another belief is that the Chinese lunar new year in came in early February, so vacation days around this event put a damper in productivity. Either way, this is something to keep an eye on in the future.
Middle East tensions flared up again mid day Thursday as there were reports of police officers firing on protesters in Saudi Arabia. A ‘day of rage’ was scheduled for Friday in that country, so things appeared to be heating up in anticipation. The Saudis are a very important country in the region due to the amount of oil they produce, so a lot of attention is focused on them.
Well, the day of rage fizzled on Friday, but a new worry appeared: the Japan earthquake. Markets were down briefly, but rallied back as the day progressed. Large US industrial companies like Caterpillar had solid gains when investors realized that they would be integral to rebuilding Japan.
Some commentators actually speculated that the earthquake would be good for Japan. It would be like a stimulus project that creates new infrastructure, jobs, and economic growth. This is a very Keynesian idea that we strongly disagree with.
This line of thinking is similar to a parable Keynesians like to use about a broken window leading to economic growth. It basically begins with an individual getting a window broken at their home or business. The economy benefits, though, because that person would have to hire someone to come replace the window, so that repairman gets new income. The repairman would have to purchase a pane of glass from some other business, so then they will benefit, and so on. This, they believe, leads to economic growth.
What is forgotten is that the person whose window broke is now worse off. They have to spend money that they otherwise wouldn’t have. Perhaps they would have spent that money on something else, so some other business would miss out on that revenue. Or even worse, the person with the broken glass may not be able to afford a replacement. Japan, with their large amounts of debt, can’t afford massive new spending programs. This is a sad tragedy that is far from stimulative for Japan.
Lastly, changing topics, a major bond fund made changes to their portfolio that we feel are noteworthy. Bill Gross is the chief of the worlds biggest bond funds at Pimco and is widely considered one of the best at his craft. Within the last month, the amount of Treasury bonds went to zero from nearly $30 billion in the previous month. The amount of cash rose to 23%. This shows that he is very pessimistic on government-related bonds and feels interest rates and inflation will rise in the future. He has made a move like this several years ago and was incorrect, though, but when someone of his stature makes a move this dramatic, we pay attention.
Next Week
Again, oil prices will be the thing to watch next week. The headlines out of that region have moderated, so hopefully that trend continues. If there is another scare and oil pops higher, the market will likely fall.
Economic data will pick up next week as the Producer and Consumer Price Indexes (PPI and CPI) will be released, amongst others. All commodity prices are higher, so we would think it would have some impact on these price indexes.
Also important, on Tuesday we will get the interest rate decision from the Federal Reserve. It has been stuck at 0% for far too long, we believe, but it will likely remain there for at least several more months. We will also find out if there have been any changes to the QE2 stimulus program, but we seriously doubt that.
Where are we investing now?
No change here. With all this volatility, we are not looking to make any changes. It is too early to tell if the upward trending market we have had is changing course. It has had a heck of a run the last several months, so a correction is always possible.
The QE2 program, which has been pumping up stocks, is set to expire this summer but will probably keep fueling the market higher in the meantime. We see a brewing stagflation scenario ultimately wearing on the markets once the stimulus wears off. However, there are rumors of a QE3 program which would try to pump up stocks even further. It is too early to tell if this will happen but we hope it does not, for it will create even more long term problems.
Any further shocks out of the Middle East could impact the markets like it did the last three weeks, so this is something to pay close attention to. Also, high food and energy prices are a significant headwind for our still fragile economy.
If we did decide to put new money to work, 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.
Our short and medium term investments are the only ones affected by these weekly and monthly changes. These weekly fluctuations have little impact on positions we intend to hold for several years or more.
