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.
