The stalemate in Washington helped send the markets to their worst weekly performance of the year. Through the Friday close, the Dow plunged 4.2%, the S&P was off 3.9%, and the Nasdaq fell 3.6%. The poor showing this week also sent markets into the red for the month. As investors looked for safer investments, Treasury bonds rose and yields fell to the lowest level since November. Oil fell on the weakness, off 4.2%. Gold continues to chug higher, again reaching new all-time highs and closing the week up 1.7%.
Source: MSN Moneycentral
Grabbing all the headlines this week was the back and forth on the debt ceiling debate. We are sure you’ve been aware of the situation, so we won’t waste much time discussing the details. The looming deadline and lack of resolution created a fear in the markets that resulted in an awful performance in the stock market.
The perceived fear is that a default is imminent if the debt ceiling is not raised. There are various ways for the Treasury to pay our debts, so we believe a default is completely off the table.
We think the bigger fear is of a downgrade to our credit rating. That would result in higher borrowing costs for the government, but also trickle down to Main Street. Even if our debt ceiling is raised, a downgrade is still a possibility. Ratings agencies have said they would like to see at least $3-4 trillion in cuts to prevent a downgrade.
What has us most frightened is that politicians can’t even agree to $3 trillion in cuts – over the next 10 years! That amounts to $300 billion a year, while still a big amount, is nothing compared to what the government currently spends. When we look out to the future, we see monstrous entitlement programs requiring massive government spending in the coming years and decades. If they can’t agree on $300 billion a year now, there is little hope for the future. That’s why we think long term plays like gold and shorting (profit when the value goes down) Treasuries and the dollar will do well.
With the 24/7 coverage of the debt ceiling debate, one would think that there wasn’t any other news this week. In our best Lee Corso (of ESPN college football) voice, not so fast my friend! On Friday we received the 2nd quarter GDP and it came in much lower than expected at just 1.3%. That means the economy grew at just 1.3% last quarter, a terribly weak number. Much of the weakness was attributed to higher prices in food and gas.
Even more surprisingly, the 1st quarter GDP previously stood at 1.9% and was revised down to just 0.4%. Like many others, we thought that number was a typo because it was so bad. This shows just how weak the economy is. Yet the weak economy has had little effect on the stock market.
Despite this weakness, corporate earnings continue to be decent. Not surprisingly, companies with a strong reliance on the U.S. have not fared as well. Companies with a strong reliance on commodity inputs had a tough quarter, as well. You see this in a variety of sectors, from diapers (Kimberly-Clark) to autos (Ford and Chrysler) to photography (Kodak).
However, strength from overseas, as well as solid exports to these regions, has helped the profits of the majority of companies this quarter. As long as there is a strong overseas market, this trend should continue.
Also on the bright side this week, first-time unemployment claims dropped below 400,000 for the first time in four months. Coming in at 398k, that number is likely to be revised higher (they are always revised higher) next week, but it was welcomed, nonetheless.
Next Week
Next week will be lighter in terms of corporate earnings releases than recent weeks, but it will still be busy. We will get a variety of economic data as we begin the new month, from manufacturing, to personal income and spending, to factory production. The most important data comes on Friday with the unemployment report. It has been a rough month, so most economists aren’t too optimistic on this result.
Above everything else, we think the focus will be on Washington next week. At the time of this writing, no resolution has been made. Until one is reached, it could present another volatile investing environment.
Investment Strategy
As we saw this week, headlines out of Washington are driving the market. We dislike investing in such an unpredictable environment (although is any environment predictable?). One bright spot we can look at, though, is what happened in the markets on Friday. As a rumor spread that a compromise was in the works for the debt ceiling, the markets rose sharply. They fell again when this wasn’t the case, but we think that if an agreement is actually reached (an agreement with some teeth), the markets will react similarly. It would also mean a pullback in other investments like gold or bonds.
We are still cautious, though. It is tough to make decisions when one day, news out of Washington pushes all stocks higher, only to do the opposite the next. When all stocks move together, it makes stock picking a fruitless effort.
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 macro events, big money 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 MoneycentralGrabbing all the headlines this week was the back and forth on the debt ceiling debate. We are sure you’ve been aware of the situation, so we won’t waste much time discussing the details. The looming deadline and lack of resolution created a fear in the markets that resulted in an awful performance in the stock market.
The perceived fear is that a default is imminent if the debt ceiling is not raised. There are various ways for the Treasury to pay our debts, so we believe a default is completely off the table.
We think the bigger fear is of a downgrade to our credit rating. That would result in higher borrowing costs for the government, but also trickle down to Main Street. Even if our debt ceiling is raised, a downgrade is still a possibility. Ratings agencies have said they would like to see at least $3-4 trillion in cuts to prevent a downgrade.
What has us most frightened is that politicians can’t even agree to $3 trillion in cuts – over the next 10 years! That amounts to $300 billion a year, while still a big amount, is nothing compared to what the government currently spends. When we look out to the future, we see monstrous entitlement programs requiring massive government spending in the coming years and decades. If they can’t agree on $300 billion a year now, there is little hope for the future. That’s why we think long term plays like gold and shorting (profit when the value goes down) Treasuries and the dollar will do well.
With the 24/7 coverage of the debt ceiling debate, one would think that there wasn’t any other news this week. In our best Lee Corso (of ESPN college football) voice, not so fast my friend! On Friday we received the 2nd quarter GDP and it came in much lower than expected at just 1.3%. That means the economy grew at just 1.3% last quarter, a terribly weak number. Much of the weakness was attributed to higher prices in food and gas.
Even more surprisingly, the 1st quarter GDP previously stood at 1.9% and was revised down to just 0.4%. Like many others, we thought that number was a typo because it was so bad. This shows just how weak the economy is. Yet the weak economy has had little effect on the stock market.
Despite this weakness, corporate earnings continue to be decent. Not surprisingly, companies with a strong reliance on the U.S. have not fared as well. Companies with a strong reliance on commodity inputs had a tough quarter, as well. You see this in a variety of sectors, from diapers (Kimberly-Clark) to autos (Ford and Chrysler) to photography (Kodak).
However, strength from overseas, as well as solid exports to these regions, has helped the profits of the majority of companies this quarter. As long as there is a strong overseas market, this trend should continue.
Also on the bright side this week, first-time unemployment claims dropped below 400,000 for the first time in four months. Coming in at 398k, that number is likely to be revised higher (they are always revised higher) next week, but it was welcomed, nonetheless.
Next Week
Next week will be lighter in terms of corporate earnings releases than recent weeks, but it will still be busy. We will get a variety of economic data as we begin the new month, from manufacturing, to personal income and spending, to factory production. The most important data comes on Friday with the unemployment report. It has been a rough month, so most economists aren’t too optimistic on this result.
Above everything else, we think the focus will be on Washington next week. At the time of this writing, no resolution has been made. Until one is reached, it could present another volatile investing environment.
Investment Strategy
As we saw this week, headlines out of Washington are driving the market. We dislike investing in such an unpredictable environment (although is any environment predictable?). One bright spot we can look at, though, is what happened in the markets on Friday. As a rumor spread that a compromise was in the works for the debt ceiling, the markets rose sharply. They fell again when this wasn’t the case, but we think that if an agreement is actually reached (an agreement with some teeth), the markets will react similarly. It would also mean a pullback in other investments like gold or bonds.
We are still cautious, though. It is tough to make decisions when one day, news out of Washington pushes all stocks higher, only to do the opposite the next. When all stocks move together, it makes stock picking a fruitless effort.
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 macro events, big money 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.
