Commentary for the week ending 8-26-11

After several rough weeks, the market finally made some nice gains. The Dow rose 4.3%, the S&P was up 4.7%, and the Nasdaq popped higher by 5.8%. Oil climbed higher on the strength, up 3.6% and it continues to stay in the mid $80’s per barrel range. Gold was quite a story this week, dropping sharply and closing the week down nearly 3%.

Source: MSN Moneycentral

It looks like we finally caught a break this week and investors got a chance to breathe. Bargain hunters began to step in and volatility started to decline. Still, though, the Fed and stimulus talks dominated the week.

Fed chief Ben Bernanke gave a much anticipated speech on Friday at their annual Jackson Hole, WY retreat. A year ago, the QE2 stimulus program was born and many traders were hoping for the same this year.

Remember, stocks took off when QE2 got underway and only recently came crashing down (which is further proof that these stimulus programs create an artificial sugar high that ultimately disappears, usually wiping out any gains). Still, many people made a lot of money on the ride up and were hoping to do the same again.

It was thought that a stimulus would be more likely if economic data is poor. Tuesday was a great example of that. We received data that manufacturing in the mid-Atlantic region was very weak (which comes on top of the northeastern weakness last week). Also, new home sales were well below expectations. Data like this typically doesn’t result in a significant gain in the market, but the Dow popped higher by 3% as investors thought a stimulus was more likely.

The Bernanke announcement came Friday morning and the verdict was that another stimulus program was not necessary at this time. Stocks dropped on the news. However, traders began to realize that he left the door open to further stimulus if warranted, so the market moved back higher. They were particularly interested that the next Fed meeting in September was extended an additional day to discuss the Fed’s “range of tools for stimulating growth.”

The fact that the Fed is even involved in stimulus-type programs is a problem for us. The purpose of the Federal Reserve should be limited to their roles in the banking sector and to maintaining a stable currency. Stimulating the economy should fall well outside of their purview.

Getting off our soapbox and back to the week, gold was another big story. Gold had been soaring higher, far faster than we were comfortable with, and finally had a correction. Selling off sharply, gold dropped to the mid $1,700’s an ounce after peaking around $1,900.

Much was made about the reasons for the drop. Some were saying the bubble finally popped. This was probably true to some extent, but we believe a more likely trigger was the increasing of margin requirements for gold. That means investors have to put up more money in order to buy it. We saw this a few months ago with silver where margins were raised and the price dropped immediately. Only time will tell if gold will come back to its previous highs and even move higher. We like gold for the long run, but it needed a correction as it was moving too high too fast.


Next Week

It will be a busy week next week, especially since August ends and we will begin getting August data. As the week progresses, we will get info on consumer income and spending, consumer confidence, ISM manufacturing, and most importantly, the unemployment data. The bar has been set low for these reports, so any surprises either way will have an impact on the markets.


Investment Strategy

This week was encouraging. We’ve been dipping our toes in, but are still very cautious. It is important to note that the volume of trades on the down days is much higher than on the up days. There is still a strong bias to the downside, so additional caution is warranted.

The economy remains weak and isn’t really improving. Double dip recession talks are becoming more common. Junk bonds are also beginning to price in a recession. We have talked about the weak economy for some time now, but good corporate earnings took the focus off the poor economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. Some quality companies can be found at these prices, but it is easy for them to become even cheaper in this environment.

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 any weakness is an opportunity to invest.

TIPs are important as we expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time, but we have been getting killed on this position recently. 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 daily and weekly fluctuations.



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.

Commentary for the week ending 8-19-11

It turned out to be another rough week for investors. The Dow fell 4.0%, the S&P dropped 4.7%, and the Nasdaq plunged 6.6%. Treasury bond yields reached new lows with the 10-year yielding below 2%, something that has not happened in 50 years. Oil continues to move lower, off 3.6% this week and hovering in the low $80’s per barrel. Gold reached yet another all-time high, up 6.3% to nearly $1,850 an ounce.

Source: MSN Moneycentral

Coming off some upward momentum last week, stocks moved up nicely to start out the week and the volatility subsided. It almost seemed as though we were in the clear after the beating we received the last couple weeks.

Helping the markets higher was some optimistic news out of Europe. German and French leaders, Merkel and Sarkozy, were reportedly having conferences to smooth out recent problems like the debt and bailout situations.

As the week progressed, however, it became clear that little was being fixed in Europe and problems were likely getting worse. GDP growth in Germany, considered the workhorse of the Euro countries, came in flat. If growth is stalling in a lone bright spot of the Euro, things are likely much worse in the others.

Spooking investors further was an announcement that a European bank had to take an emergency loan of between $200 and $500 million (we never heard an exact number). The name of the bank was not released, so all European bank stocks were slammed as a result. It shows how unstable the European banking sector currently is.

Additionally, the meeting between Merkel and Sarkozy yielded nothing positive. The solution to their problems appears to be more bailouts and a new tax on banks. Yeah, that will help. Investors were hopeful that something of substance would be a result, but it only reaffirmed how backwards Europeans think sometimes. Sadly, it looks like nothing will be fixed until someone goes bust.

Back here in the U.S., economic data continues to be weak. This week we received reports showing existing home sales falling from the previous month. Other data showed the strength of manufacturing in the Northeast extremely weak. Additionally, initial jobless claims continue to be above the psychologically important 400,000 number.

Inflation data was released this week, too, coming in much higher than expected. The PPI and CPI reports indicated that prices in food, energy, and clothing have risen more than originally thought (but not to those if us in the real world who buy these items on a regular basis).

One good thing about the inflation data is it makes another round of stimulus from the Fed less likely. Originally, the Fed was concerned about deflation, so one reason they launched a stimulus package was to boost inflation. That part of the stimulus was a roaring success – inflation has picked up considerably (and is much higher than their statistics show). There have been few positive effects from these stimulus programs, hence our pleasure at another Fed stimulus becoming less likely.

While a stimulus from the Fed looks less likely, it was reported that the President Obama is aiming for a new stimulus of his own. Apparently nothing too urgent, though, since it will be announced after his vacation. We’ve already spent hundreds of billions with little benefit, but maybe a few hundred billion more ought to do it.

The programs appear much of the same, more infrastructure spending, more unemployment benefits, a department of jobs (seriously?), etc. Unfortunately these types of projects never work. Taking money from one pocket and putting it in the other, subtracting the cut the government consumes, yields a net negative. The notion that a dollar in government spending yields more than a dollar in benefits is a farce.

Until the government gets out of the way and reduces its burdensome policies, we see little likelihood for meaningful economic improvement.


Next Week

Next week will be quieter in terms of economic and earnings reports. We will get info on new home sales and durable goods along with a handful of corporate earnings.

The most activity will likely come on Friday. We will get the revision to the second quarter GDP. As weak as that number currently stands, many are worried that it could be revised lower.

Also Friday, the Fed will take center stage as Fed Chief Bernanke makes a speech at their annual Jackson Hole, WY meeting. It was here one year ago that QE2 was announced, sparking a market rally that has just recently come undone. We will be watching to see if any new surprises are in store this year.


Investment Strategy

We’re just sitting tight right now – no buying, no selling. There is still substantial volatility that makes investing difficult (more so than it already is). As we mentioned last week, we did some buying in safer stocks at that time. While we don’t look so smart right now, we are comfortable with this as an entry point for long term investments. We are still conservatively positioned with 20-50% cash in our portfolios and feel no need to add more risk at this time.

New recession talks continue to accelerate, adding to our caution. It appears that junk bonds are beginning to price in a recession. We have talked about the weak economy for some time now, but good corporate earnings took the focus off the poor economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. Some quality companies can be found at these prices, but it is easy for them to become even cheaper in this environment.

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 are buying commodities for the long term on weakness. We like gold, but can’t recommend buying at these record high levels (unfortunately we’ve been saying that since gold was around the $1,200-1,300 levels, making it hard to invest in when constantly making new highs).

TIPs are important as we expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time, but we have been getting killed on this position recently. 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 daily and weekly fluctuations.



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.

Commentary for the week ending 8-12-11

Historically high volatility was the story this week on Wall Street. By the end of the week the damage wasn’t that bad, with the Dow off 1.5%, the S&P down 1.7%, and the Nasdaq lower by 1.0%. Treasury bond yields continue to hover around historical lows. Gold keeps chugging higher, at one point crossing the $1,800 an ounce level but settling lower for a gain of 5.5%. Oil continues to move the other way, at one point crossing below $80 per barrel but settled in the mid $80’s, down 1.7%.

Source: MSN Moneycentral

The level of volatility in the markets this week was one for the record books. The first four days of the week had moves of 4% or more. It is extremely rare to see such massive moves and it is very frustrating for investors.

What was behind all the volatility? Sure, we came off a very bad week and the hangover could still be felt. This week we had some disappointing economic news. So did Europe. We also had some good news, too. However, the news was nothing significant enough to move the markets that much.

It looks like we are seeing a tug-of-war between investors who think the market will go higher and ones who believe it will go lower (the bulls vs. the bears). It is a market dynamic that often happens after big moves like we saw in the previous weeks. Sometimes the bulls win and it marks the bottom of the market. Other times, the bears are right and the market heads lower. We fall in the bullish camp, at least for the time being, and we will discuss this more in the Investment Strategy section below. For now, though, a brief recap of the events of the week.

We started out on a pessimistic note due to the S&P ratings downgrade. Granted, it was one ratings agency who has had made questionable calls in the past, but it is a serious wake-up call.

True to form, government players came out and blasted S&P while showing little sense of responsibility for getting us to this position in the first place. Midday Monday, President Obama took to the podium in an attempt to calm the plunging markets and anxious Americans. Instead it was the typical bash the rich and corporations speech we’ve heard many times over. It didn’t sit well with the markets and the rhetoric exacerbated the selling.

Even with the downgrade, investors flocked to the Treasury market, which is the opposite of what you would think would happen in a credit downgrade. Really, though, most investors don’t look to ratings agencies when making investment decisions. They are only important because the law requires them to be used in many cases. Most investors look to other markets like the CDS market (which can be technical, but is like an insurance rate in case of a default) to get a better sense of risk.

The Federal Reserve was in the news again this week as they were out with their decision on interest rates. In an unusually blunt statement, they decided to leave interest rates at these historic lows until mid-2013. It was odd enough that they would give a specific date, but more odd that they were (rightfully) harsh in criticizing the poor economy.

That bluntness initially worried investors and markets dropped. Typical of the week, they rebounded sharply when they figured the Fed would continue to support the market (likely with a quantitative easing/stimulus program). Past stimulus programs gave a quick sugar high, but those gains are temporary. This week the market fell back to levels from before the QE2 program, wiping out any benefits we saw in stocks.

Also making news, these problems in Europe never seem to go away. Now France is in the spotlight as the strength of their banks came into question. Also, a ratings downgrade of their country was rumored to be in the works. It lead to a poor week for the entire Euro block.

Apparently things are so bad that many countries have banned short selling (short selling is where investors profit when the investments lose value). Politicians think that banning these shorts will keep their markets from falling. History has shown that these bans never work. Often they make things worse since intervention in the markets can be very hazardous.

No matter, though. Politicians think they should appear to be doing something and shorts make a great scapegoat. It wouldn’t surprise us if they decided to make it illegal for the market to go down. Maybe we shouldn’t give them any ideas.


Next Week

After such a volatile week, it will be interesting to see what happens next week. We think the volatility should begin subsiding, absent of any surprises.

There will be several more earnings reports we will be watching, with some big names like Wal-Mart, Home Depot, Lowes, HP, and Sears, to name a few. There will be an increase in economic data as we get results on housing, imports and exports (which will be important after the recently announced widening trade deficit), and industrial production. Inflation data will also be available as the PPI and CPI (producer and consumer price indexes) are announced.


Investment Strategy

Amid all the volatility, we did a little buying and selling this week. We sold off some losers in taxable accounts so a loss can be taken for tax purposes. When buying, we are dipping our toes in, focusing on safer investment opportunities (while not buying substantially similar investments if we made sales in taxable accounts). Markets are still very volatile and can turn on a dime, as we saw this week. Things may be cheap now, but it is easy for them to become even cheaper.

We were comforted as one of our favorite indicators rose sharply this week. Insider buying has risen sharply after this selloff, hitting levels not seen since 2009. This is one of the ways investments get on our radar screen. We like it when our strategies stay out of the limelight but unfortunately this got a lot of press this week. Nothing seems to work as well after the press draws attention to it. Either way, insiders tend to buy when they feel their shares our cheap, so we feel this is a good sign.

On the worrisome side, talk of a double dip recession picked up this week. These worries have been growing as the slowdown increases. We have talked about the weak economy for some time now, but good corporate earnings took the focus off the economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. It is another reason for investors to be on their toes.

When putting new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We are buying commodities for the long term on weakness.

TIPs are important as we expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time, especially since our credit rating has been downgraded. 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.

Commentary for the week ending 8-5-11

There’s no way to sugarcoat it, this week was brutal. By the close Friday, the Dow dropped almost 700 points or 5.8%, the S&P was fell 7.2%, and the Nasdaq plunged 8.1%. In the last two weeks, the indices are off nearly 10%. Investors fled to the safety of Treasury bonds, resulting in the best performance in two years (prices rose, so yields fell). Gold reached new all time highs, but fell off late in the week, resulting in a 1.3% gain. The good news? Oil sold off significantly, 9.2% to the mid $80’s per barrel range, so there may be some relief at the pump.

Source: MSN Moneycentral

This week was very rough and our investments performed poorly, plain and simple. In our portfolios, there was a solid drop in our broad market index positions and even worse drop in our individual stock picks. Commodities also sold off. Bond holdings performed nicely, though. We wish we held more gold, as it also had a nice week, but we haven’t significantly added to our positions since it was in the $1,200-1,300 an ounce level. Our accounts have been 20-50% cash, helping mitigate the losses, and we are comfortable at that level for the time being.

So what happened?

The week started out on a bright note with the resolution of the debt ceiling issue and the markets popped higher. That lasted for about 30 minutes and it was all downhill from there.

At 10am, we got economic data showing weakness in the manufacturing sector and that set the theme for the week, economic weakness. As the week progressed, we also got poor data on consumer spending and the service sector. When combined with other poor economic data like the troubling GDP numbers, the fear of a worsening economy has accelerated.

That set the stage for the massive sell-off on Thursday. The economic problems have been bad enough, but renewed European fears (Italy and Spain this time) exacerbated the selling. At the end of the day, the Dow sold off more than 500 points.

After a scary Thursday, investors were anxious to see what Friday held. The much anticipated employment report was seen as the guide for what was in store for the market. In a welcomed relief, the U.S. added 117k jobs in July according to the non-farm payroll report, a number much higher than expected. The unemployment rate fell from 9.2 to 9.1%. The markets opened higher as a result.

As investors were given time to dig deeper into the numbers, the employment report didn’t look that great and the selling intensified. Keep in mind, we still need about 120k new jobs a month to keep up with population increases. Plus the labor participation rate reached new lows and length of unemployment reached new record highs.

Also adding to the sell off was a rumor that the ratings agency, S&P, was set to downgrade the U.S. credit rating. At the time, it didn’t hold up, but now we know this true.

Late Friday night, the S&P downgraded our debt from the highest rating of AAA. There has been some debate on how important that actually is, as ratings agencies have had there fair share of criticism due to ineffectiveness. However, their analysis looks very credible and convincing. We feel this is a HUGE deal, since this is the first S&P downgrade in our history.

It’s not unexpected, either. In the debt ceiling discussions, S&P said they were looking for at least $3, and preferably $4 trillion in spending cuts over the next decade. The $2 trillion agreed to in the debt ceiling resolution falls woefully short of that figure (and even that $2 figure is very questionable). We have a serious debt and spending problem and unless addressed, more credit downgrades could be in our future.


Next Week

The market held up on Friday after selling off all week, so next week will show if that was a new floor or was just a pause on the way down. Thankfully, there won’t be a whole lot of economic data to spook the markets further. Corporate earnings will continue to come in at a steady pace, but earnings have carried less weight as the economic story moved to the front burner. Also, any news out of Europe could also have an impact on our markets.

It will be interesting to see the reaction to the credit downgrade from S&P. We would normally anticipate a sell off, but the downgrade wasn’t unexpected. We aren’t sure what the outcome will be and are anxious to see how it plays out next week.

The Fed will be meeting next week and recent events have increased the importance of this meeting. Investors will be looking for any clues on another quantitative easing (stimulus) program. We sure hope not, but it is possible. A year ago, the concept of QE2 was introduced, marking the bottom of the most recent market run. Depending on the size of a new QE program, a similar result in the markets could be possible. As we have recently seen recently, does nothing to help the economy.


Investment Strategy

With the market drop this week, the first question on the mind of most is whether this is a buying opportunity. This is a quote on the tack board in our office:

Bull markets are born on pessimism,
Grow on skepticism,
Mature on optimism,
And die on euphoria.

That comes from the famous investor Sir John Templeton, founder of what is now Franklin Templeton (interestingly enough, Sir John renounced his US citizenship and moved to the Bahamas to avoid US income and investment taxes. Another reason why we like the guy).

Obviously things are very pessimistic right now. But does that mean it’s a good time to buy? With a long enough time horizon, it might not hurt much to dip your toe in, but with all the volatility, we are comfortable on the sidelines. Yes, stocks have become cheaper, but we feel they are more in line with their fair value, meaning they are not yet cheap. We would exercise caution, especially with new economic problems popping up.

We’ve worried about the weak economy for some time now, but good corporate earnings were the main focus that kept the markets higher. Now, the focus is on the economy and the good earnings have been pushed to the back burner.

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 this weakness could present a buying opportunity.

TIPs are important as we expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time, especially since our credit rating has been downgraded. 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.

How about another optimistic quote to end on? This time from Warren Buffet:

Be fearful when others are greedy
And greedy when others are fearful.

There is plenty of fear to go around right now.


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.