It was a rough week for the markets. Through the Friday close, the Dow fell 1.4%, the S&P was down 2.1%, and the Nasdaq fared the worst, down 2.5%. Oil prices continued to climb, up 1.1% and inching back towards the $100 per barrel level. Gold had a banner week after remarks from the Fed chief helped push it higher by 3.2%.
Source: MSN Moneycentral
There was a lot of movement in the markets this week with many different factors having an impact.
Unfortunately, the Euro problems just won’t go away. Greece may be out of the headlines for the moment, but this week Italy resumed its place. The problems with Italy are not as bad as Greece, but investors are worried that these debt problems are spreading to larger European countries. The news started the week out on a sour note for the markets.
Fed chief Ben Bernanke spoke in front of Congress on Wednesday and Thursday and his remarks had a significant impact on the market. On Wednesday he indicated that the Fed was open to another round of stimulus and markets popped higher on the news. He must have realized that his comments were misinterpreted and spent the next day downplaying the likelihood of additional stimulus, sending the markets back lower.
There was one comment from the Fed chief that made a lot of people take notice. He was asked if he thought gold was money, to which he responded “No.” If you look at it in the way the Fed probably looks at it, then it’s probably not. You can’t take gold to the grocery store, for example, and pay for items like you do with a paper currency.
However, gold has been a store of value for centuries. You can’t print more of it, like we have done with the dollar. The recent rally in gold has much to do with that fact. His statement showed little concern for the consequences of printing money and signaled he would have no problem with continued printing. Gold responded by popping higher and reached new all-time highs this week.
We also received inflation data this week that was either better or worse that anticipated, depending on what you look at. Headline inflation was lower, largely due to lower gas prices. Core inflation strips out food and energy and showed a gain.
While we live in the real world and consider headline inflation a better indicator, policymakers like to use core inflation. One of the objectives of the recent stimulus was to boost inflation, since they believe falling prices pose a bigger problem to the economy than rising ones. Further stimulus would hinge a deflation threat, so the uptick in inflation makes further stimulus less likely.
This week was also the official kick-off of second quarter earnings season and earnings were pretty decent. However, they didn’t have much impact on the overall markets. Google released fantastic earnings and their shares popped sharply higher, but the gain had little impact on anything other than Google stock.
A lot was made about good earnings out of Citigroup, but we noticed something that we will be looking for in other banking stocks. The company showed a nice gain in income, but that didn’t actually come from business activity. They recently set aside a large amount of money to cover bad loans; however, the bad loans did not total as much as anticipated. They considered the difference in the amount set aside and the bad loan total as income. Therefore, it gave the company better income than they otherwise would have.
Lastly, the debt ceiling talk dominated headlines this week. However, it had very little impact on the markets. The bond market would be the best place to see any reaction, but it has been relatively unfazed. Bonds continue to trade at very low yields and they would be higher if there was any threat of default. The rhetoric will get louder as we approach the deadline, but think it will continue to have little impact on the markets.
Next Week
Next week will be very light in terms of economic data but corporate earnings will be full gear. Far too many companies to list, but we will get earnings from virtually every sector of the economy. That alone should make next week an interesting one.
Investment Strategy
No change here as earnings season gets underway. Economic factors in the U.S. have been poor recently and we worry that they 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.
Finding good individual stocks could be a good play at this time instead of making any broad bets. 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. 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 MoneycentralThere was a lot of movement in the markets this week with many different factors having an impact.
Unfortunately, the Euro problems just won’t go away. Greece may be out of the headlines for the moment, but this week Italy resumed its place. The problems with Italy are not as bad as Greece, but investors are worried that these debt problems are spreading to larger European countries. The news started the week out on a sour note for the markets.
Fed chief Ben Bernanke spoke in front of Congress on Wednesday and Thursday and his remarks had a significant impact on the market. On Wednesday he indicated that the Fed was open to another round of stimulus and markets popped higher on the news. He must have realized that his comments were misinterpreted and spent the next day downplaying the likelihood of additional stimulus, sending the markets back lower.
There was one comment from the Fed chief that made a lot of people take notice. He was asked if he thought gold was money, to which he responded “No.” If you look at it in the way the Fed probably looks at it, then it’s probably not. You can’t take gold to the grocery store, for example, and pay for items like you do with a paper currency.
However, gold has been a store of value for centuries. You can’t print more of it, like we have done with the dollar. The recent rally in gold has much to do with that fact. His statement showed little concern for the consequences of printing money and signaled he would have no problem with continued printing. Gold responded by popping higher and reached new all-time highs this week.
We also received inflation data this week that was either better or worse that anticipated, depending on what you look at. Headline inflation was lower, largely due to lower gas prices. Core inflation strips out food and energy and showed a gain.
While we live in the real world and consider headline inflation a better indicator, policymakers like to use core inflation. One of the objectives of the recent stimulus was to boost inflation, since they believe falling prices pose a bigger problem to the economy than rising ones. Further stimulus would hinge a deflation threat, so the uptick in inflation makes further stimulus less likely.
This week was also the official kick-off of second quarter earnings season and earnings were pretty decent. However, they didn’t have much impact on the overall markets. Google released fantastic earnings and their shares popped sharply higher, but the gain had little impact on anything other than Google stock.
A lot was made about good earnings out of Citigroup, but we noticed something that we will be looking for in other banking stocks. The company showed a nice gain in income, but that didn’t actually come from business activity. They recently set aside a large amount of money to cover bad loans; however, the bad loans did not total as much as anticipated. They considered the difference in the amount set aside and the bad loan total as income. Therefore, it gave the company better income than they otherwise would have.
Lastly, the debt ceiling talk dominated headlines this week. However, it had very little impact on the markets. The bond market would be the best place to see any reaction, but it has been relatively unfazed. Bonds continue to trade at very low yields and they would be higher if there was any threat of default. The rhetoric will get louder as we approach the deadline, but think it will continue to have little impact on the markets.
Next Week
Next week will be very light in terms of economic data but corporate earnings will be full gear. Far too many companies to list, but we will get earnings from virtually every sector of the economy. That alone should make next week an interesting one.
Investment Strategy
No change here as earnings season gets underway. Economic factors in the U.S. have been poor recently and we worry that they 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.
Finding good individual stocks could be a good play at this time instead of making any broad bets. 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. 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.
