Wow, what a week. The market performed exceptionally well with the Dow rising 5.4%, the S&P 500 higher by 5.6%, and the Nasdaq up 6.2%. Treasury bonds fell sharply (prices dropped, so yields rose), with the end of QE2 likely having some impact. Gold was lower by 1.2% and oil climbed back higher by 4.1% as the effects of the strategic petroleum reserve releases began to wear off.
Source: MSN Moneycentral
It isn’t often that you see a chart that looks like the one above. It was a remarkable week for the markets and the gains were the biggest we’ve seen in two years. There was some optimistic news that helped fuel the run, but nothing really spectacular that we can point to.
Of course Greece was in the headlines again. Helping the markets move higher, the government passed austerity measures that allowed them further bailout funds. This ruled out a debt default for the time being.
While austerity measures and less government spending is needed, we are sure there will continue to be problems. The size of their debt is so large that it will be very difficult to pay off. Also, the wave of new taxes will have a negative effect on growth. Lower taxes will promote growth, thereby maximizing future tax revenues (as we have seen in the U.S. in the past). Not to mention that the national pastime in Greece is tax avoidance. Greece may be fading out of the headlines for now, but we are sure to see them back before too long (as well as any of the other troubled Euro countries).
Also contributing to the rise this week was better than expected manufacturing data. The news really wasn’t that great, ‘modest’ is the word we would use to describe it. However, other manufacturing data we have recently received was awful, so expectations were very low. The news signaled that we may not be entering another downturn. Also, the data showed that inflation was not having as big an impact as it had in the past, largely due to the pullback in oil prices.
We believe that the biggest reason for the market rise this week was window dressing. This occurs at the end of the quarter or month when investment professionals add new positions and bid up stock prices to make their performance look better. The volume of trades this week was extremely light so it doesn’t take much to push the markets around. The news on manufacturing and Greece was nice, but probably not enough to push markets over 5% higher.
Government bond yields moved sharply higher (so prices dropped) this week. It is no coincidence that bonds are making these moves just as QE2 ends. Remember, in the QE2 program, the Federal Reserve bought hundreds of billions in bonds in order to keep yields low. That was thought to help the economy by making borrowing easier through low interest rates, low mortgage rates, etc (unfortunately it helped very little). Now that the Fed isn’t keeping bond yields low, we anticipate a further rise in rates (thereby a further drop in bond prices).
Next Week
Being a short week, next week will have no major earnings releases and few economic reports. All eyes will be on employment data on Thursday and Friday, though. All signs point to a deterioration in employment. The market may be anticipating this, though, so there might not be much of a sell-off on bad news. Surprises either way will likely move the markets, though. It will be interesting to see if the market can hold the levels we reached last week.
Investment Strategy
Even with the sharp rise in the markets this week, there is little change in our strategy. We will see if last week was a changing point in the market or was due to artificial elements like window dressing. The coming weeks will give us a clue as 2nd quarter earnings will be released. Earnings have been solid up to now, but many economists think the negative aspects of the economy may begin to take their toll on earnings. At this point, we feel it is too risky to make any large bets on the general market and are very cautious.
However, picking good individual stocks should be a good play at this time. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety).
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, 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.
Commodities have generally sold off on a perceived weakness in the economy, as well as a strengthening dollar (the dollar strengthened due to the Euro weakening). We like commodities for the long term and weakness could present a buying opportunity.
TIPs are important as we expect inflation to increase (although we will revise our outlook for these securities if any changes are made to the CPI measurements), while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time and is looking more likely as QE2 has ended. 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 weekly and monthly changes.
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 MoneycentralIt isn’t often that you see a chart that looks like the one above. It was a remarkable week for the markets and the gains were the biggest we’ve seen in two years. There was some optimistic news that helped fuel the run, but nothing really spectacular that we can point to.
Of course Greece was in the headlines again. Helping the markets move higher, the government passed austerity measures that allowed them further bailout funds. This ruled out a debt default for the time being.
While austerity measures and less government spending is needed, we are sure there will continue to be problems. The size of their debt is so large that it will be very difficult to pay off. Also, the wave of new taxes will have a negative effect on growth. Lower taxes will promote growth, thereby maximizing future tax revenues (as we have seen in the U.S. in the past). Not to mention that the national pastime in Greece is tax avoidance. Greece may be fading out of the headlines for now, but we are sure to see them back before too long (as well as any of the other troubled Euro countries).
Also contributing to the rise this week was better than expected manufacturing data. The news really wasn’t that great, ‘modest’ is the word we would use to describe it. However, other manufacturing data we have recently received was awful, so expectations were very low. The news signaled that we may not be entering another downturn. Also, the data showed that inflation was not having as big an impact as it had in the past, largely due to the pullback in oil prices.
We believe that the biggest reason for the market rise this week was window dressing. This occurs at the end of the quarter or month when investment professionals add new positions and bid up stock prices to make their performance look better. The volume of trades this week was extremely light so it doesn’t take much to push the markets around. The news on manufacturing and Greece was nice, but probably not enough to push markets over 5% higher.
Government bond yields moved sharply higher (so prices dropped) this week. It is no coincidence that bonds are making these moves just as QE2 ends. Remember, in the QE2 program, the Federal Reserve bought hundreds of billions in bonds in order to keep yields low. That was thought to help the economy by making borrowing easier through low interest rates, low mortgage rates, etc (unfortunately it helped very little). Now that the Fed isn’t keeping bond yields low, we anticipate a further rise in rates (thereby a further drop in bond prices).
Next Week
Being a short week, next week will have no major earnings releases and few economic reports. All eyes will be on employment data on Thursday and Friday, though. All signs point to a deterioration in employment. The market may be anticipating this, though, so there might not be much of a sell-off on bad news. Surprises either way will likely move the markets, though. It will be interesting to see if the market can hold the levels we reached last week.
Investment Strategy
Even with the sharp rise in the markets this week, there is little change in our strategy. We will see if last week was a changing point in the market or was due to artificial elements like window dressing. The coming weeks will give us a clue as 2nd quarter earnings will be released. Earnings have been solid up to now, but many economists think the negative aspects of the economy may begin to take their toll on earnings. At this point, we feel it is too risky to make any large bets on the general market and are very cautious.
However, picking good individual stocks should be a good play at this time. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety).
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, 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.
Commodities have generally sold off on a perceived weakness in the economy, as well as a strengthening dollar (the dollar strengthened due to the Euro weakening). We like commodities for the long term and weakness could present a buying opportunity.
TIPs are important as we expect inflation to increase (although we will revise our outlook for these securities if any changes are made to the CPI measurements), while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time and is looking more likely as QE2 has ended. 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 weekly and monthly changes.
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.
