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.
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.
