It was a nice week for the markets with a rare five straight days of gains. The Dow was up 4.7%, the S&P climbed 5.3%, and the Nasdaq popped higher by 6.3%. Oil continues to slowly rise, up 0.8% to almost $88 per barrel. Gold had a rough week, falling 2.4% but remaining above the $1,800 an ounce level.
Source: MSN Moneycentral
Yet again, this week was all about Europe. Unlike the last couple weeks, though, the news did not result in a lower market. But it did provide plenty of scares.
Waking up each morning and turning on the TV, we were greeted with bad news out of Europe. Market futures, which generally predict the market open each morning, showed strong losses. Nearly every day looked like it would be downer.
Each day, though, there was another round of news out Europe that provided a positive surprise. On Monday, there was a rumor that China would be stepping in to purchase beleaguered Italian bonds, reassuring European bond investors.
Tuesday, German Chancellor Angela Merkel announced that a Greek bankruptcy and exit from the Euro was not a possibility.
On Wednesday, Treasury Secretary Geithner stated that there was zero chance of a banking collapse in Europe, similar to what we experienced here in 2008. Also, leaders from Germany, France, and Greece stood together and proclaimed that there was no chance of a Euro breakup.
Moving on to Thursday, several global central banks (US, England, Switzerland, and Japan) announced dollar funding to Euro countries if needed. The markets rallied on the news of even further stability. Keep in mind, though, that means US dollars are helping to bail out European countries.
On a more amusing note, on Friday, Geithner was in Europe telling those countries that bold steps were needed to reduce their debts. That drew some chuckles as the Europeans correctly pointed out that in many cases, US debt problems are even worse. He probably should avoid lecturing them until our own house is in order.
The obvious conclusion is that the markets liked the news out of Europe and the potential for stability. However, all these actions are just papering over the problem and not addressing the fundamental issues. They have massive debt problems and are just adding more debt, thinking it will solve the problem. The news this week may have been reassuring and provide some short term stability, but we have no doubt that these problems will resurface soon.
We hate spending so much time discussing Europe, but that was the dominant factor behind the market moves this week. We did receive some economic data that was largely overlooked and that news wasn’t pretty.
There were more signs that the US economy is stagnating. Retail sales were flat. Manufacturing continues to contract. Initial jobless claims rose. Additionally, inflation keeps chugging higher. That report on inflation leads us to another interesting stat. The misery index, which combines the level of inflation with unemployment, is at a 28 year high.
We still have a fundamental weakness in our economy and we worry that it could weigh on our markets in the future.
Next Week
Next week will be quieter in terms of economic and corporate earnings data. There will be some reports on housing and leading economic indicators, but nothing that will have much impact on the markets.
What will have an impact, though, is the meeting of the Federal Reserve. Typically a one-day event, it was lengthened to two by Fed chief Bernanke to discuss future policy (stimulus) options. Investors will be closely watching what is said here.
We always have to keep an eye out for Europe, too. All the shows of unity this week were nice, but it is very easy for their problems to resurface.
Investment Strategy
It figures that when we announce an even more cautious outlook, the market would rise five days in a row. The events of this week may have quelled Euro fears for now, but as we said earlier, have no doubt these problems will be back and a similar drop in the market will be the result. Therefore, caution is still warranted.
Next week will provide an important indicator on the direction of the markets (at least in the short term). Everyone is expecting some sort of stimulus announcement from the Fed and we believe that action is already priced into the market. This will likely be in the form of what has been referred to as ‘Operation Twist’ (leave it to economists to come up with cheesy names).
In an effort to keep long term interest rates down (like for a long-term mortgage), the Fed will buy longer term bonds (which drives yields down) and sell shorter term bonds. Theoretically the costs then result in a wash, since the buying and selling offset each other. Yet the final result is lower rates (again, theoretically).
If an announcement of this type is not presented, the markets will likely drop. However, there is the potential for the Fed to announce even more in simulative policies and the markets will react to the upside. Either way, the mood set this week will likely linger for some time.
Aside from the Fed announcement, we feel that the risk for a negative surprise here in the US is small. The economy is weak, but the markets already realize this. We have talked about this subject 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. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. 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.
Source: MSN MoneycentralYet again, this week was all about Europe. Unlike the last couple weeks, though, the news did not result in a lower market. But it did provide plenty of scares.
Waking up each morning and turning on the TV, we were greeted with bad news out of Europe. Market futures, which generally predict the market open each morning, showed strong losses. Nearly every day looked like it would be downer.
Each day, though, there was another round of news out Europe that provided a positive surprise. On Monday, there was a rumor that China would be stepping in to purchase beleaguered Italian bonds, reassuring European bond investors.
Tuesday, German Chancellor Angela Merkel announced that a Greek bankruptcy and exit from the Euro was not a possibility.
On Wednesday, Treasury Secretary Geithner stated that there was zero chance of a banking collapse in Europe, similar to what we experienced here in 2008. Also, leaders from Germany, France, and Greece stood together and proclaimed that there was no chance of a Euro breakup.
Moving on to Thursday, several global central banks (US, England, Switzerland, and Japan) announced dollar funding to Euro countries if needed. The markets rallied on the news of even further stability. Keep in mind, though, that means US dollars are helping to bail out European countries.
On a more amusing note, on Friday, Geithner was in Europe telling those countries that bold steps were needed to reduce their debts. That drew some chuckles as the Europeans correctly pointed out that in many cases, US debt problems are even worse. He probably should avoid lecturing them until our own house is in order.
The obvious conclusion is that the markets liked the news out of Europe and the potential for stability. However, all these actions are just papering over the problem and not addressing the fundamental issues. They have massive debt problems and are just adding more debt, thinking it will solve the problem. The news this week may have been reassuring and provide some short term stability, but we have no doubt that these problems will resurface soon.
We hate spending so much time discussing Europe, but that was the dominant factor behind the market moves this week. We did receive some economic data that was largely overlooked and that news wasn’t pretty.
There were more signs that the US economy is stagnating. Retail sales were flat. Manufacturing continues to contract. Initial jobless claims rose. Additionally, inflation keeps chugging higher. That report on inflation leads us to another interesting stat. The misery index, which combines the level of inflation with unemployment, is at a 28 year high.
We still have a fundamental weakness in our economy and we worry that it could weigh on our markets in the future.
Next Week
Next week will be quieter in terms of economic and corporate earnings data. There will be some reports on housing and leading economic indicators, but nothing that will have much impact on the markets.
What will have an impact, though, is the meeting of the Federal Reserve. Typically a one-day event, it was lengthened to two by Fed chief Bernanke to discuss future policy (stimulus) options. Investors will be closely watching what is said here.
We always have to keep an eye out for Europe, too. All the shows of unity this week were nice, but it is very easy for their problems to resurface.
Investment Strategy
It figures that when we announce an even more cautious outlook, the market would rise five days in a row. The events of this week may have quelled Euro fears for now, but as we said earlier, have no doubt these problems will be back and a similar drop in the market will be the result. Therefore, caution is still warranted.
Next week will provide an important indicator on the direction of the markets (at least in the short term). Everyone is expecting some sort of stimulus announcement from the Fed and we believe that action is already priced into the market. This will likely be in the form of what has been referred to as ‘Operation Twist’ (leave it to economists to come up with cheesy names).
In an effort to keep long term interest rates down (like for a long-term mortgage), the Fed will buy longer term bonds (which drives yields down) and sell shorter term bonds. Theoretically the costs then result in a wash, since the buying and selling offset each other. Yet the final result is lower rates (again, theoretically).
If an announcement of this type is not presented, the markets will likely drop. However, there is the potential for the Fed to announce even more in simulative policies and the markets will react to the upside. Either way, the mood set this week will likely linger for some time.
Aside from the Fed announcement, we feel that the risk for a negative surprise here in the US is small. The economy is weak, but the markets already realize this. We have talked about this subject 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. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. 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.
