We had yet another week with big moves in the markets. The Dow dropped 2.2%, the S&P was off 1.7%, and the Nasdaq fared the best, down 0.5% (but its line in the chart below is off this week). Treasury bonds continued to climb as investors sought safety, so the yields keep reaching new record lows. Both gold and oil bounced around this week, only to close with little change.
Source: MSN Moneycentral
The week had little economic or corporate news affecting the market. Instead, it was bigger macro stories like Europe and the stimulus here in the US having the biggest impact.
The week beginning on Tuesday started out on a bad note with Euro problems popping up again. It appears that other countries, like Germany, are beginning to tire of the bailouts for Greece and are asking for conditions on the bailouts. The governments of the Euro member countries need to approve the bailouts and investors are worried that support is fading.
Back here in the US, we got some data showing the economy was growing, albeit at a turtle-like speed. Data on service sector jobs showed a very slight increase, as well as the latest reading of the Fed’s beige book (which is basically a commentary on current economic conditions). Still, investors welcomed the news since very slow growth is better than no or negative growth.
The Fed was also in the news this week as various officials made speeches concerning their economic outlook and recommended policies. However, little new was said, disappointing investors that were looking for new information on a future stimulus (we, however, were not disappointed, but enough investors were to push the markets lower).
Friday fared the worst this week with the Dow dropping over 300 points. No surprise, more disappointing news out of Europe spurred the decline.
The chief economist for the European Central Bank (which is similar to our Federal Reserve) resigned over a disagreement on ECB policies. Jurgen Stark, a German, opposed the latest bond buying program the ECB used to keep interest rates down. He is the second German official to leave in recent months.
This really spooked the markets because Germany is considered the cornerstone of the Euro countries. It has the strongest economy of the group and carries the most weight. The concern is that ECB leadership is crumbling and support for recent agreements is waning. Very rightly, the Germans are growing tired of bailing out other countries due to their failures and their dissention could spell trouble for unity in the Euro.
Also clobbering the market Friday, Bank of America announced it is looking to lay off 40,000 employees in the coming months and years. Most investors realize the bank is having a rough time, but no one anticipated an announcement like this. Concerns over weakness also sent other financial stocks lower.
We won’t waste much time discussing President Obama’s job plan speech. Little new was said and it had little effect on the markets. After all, we have already spent hundreds and hundreds of billions trying the exact same policies he recommended over the last couple years. The result was an unquestionable failure and no new spending will change that outcome. Fundamental reform is needed, but it looks unlikely to be achieved.
Over this weekend, though, we learned from a story in the Wall Street Journal that the Treasury Department was looking to change the taxation of corporate profits from overseas. Currently, companies are taxed at the maximum rate if they want to bring those assets back to the US. As a result, companies keep these profits overseas and reinvest them in that host country.
The Treasury is looking to reduce this burden, allowing companies to repatriate funds more cheaply. This idea has promise. We only hope a plan can be achieved but worry that Washington will, frankly, find a way to screw it up.
Next Week
Activity picks up next week. We will get information on August inflation from the PPI and CPI. There will also be data on imports and exports, retail sales, manufacturing, industrial production, and consumer confidence. Friday will also be quadruple witching, which is industry jargon for the day that various options and futures expire. It happens towards the end of every quarter and is often a volatile day as these strategies unwind.
Investment Strategy
This week we saw the Euro problems rear their head, yet again. If these problems are going to dominate headlines again, the markets will surely suffer as they have in the past. Frankly, it is inevitable that something dramatic will happen, as they are taking all the wrong steps to fix their problems. Still, this steady drip of bad news will keep knocking our markets lower.
We had been dipping our toes in on weakness over the last couple weeks but are much more cautious now. With the Euro problems increasing, the risk to the downside has become even greater.
Here in the US, we feel that the risks for a negative surprise are 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.
We also feel that the market is beginning to price in some sort of Fed stimulus action that will be announced at the Fed meeting later this month. If this does not occur, there could be a move lower.
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. 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 MoneycentralThe week had little economic or corporate news affecting the market. Instead, it was bigger macro stories like Europe and the stimulus here in the US having the biggest impact.
The week beginning on Tuesday started out on a bad note with Euro problems popping up again. It appears that other countries, like Germany, are beginning to tire of the bailouts for Greece and are asking for conditions on the bailouts. The governments of the Euro member countries need to approve the bailouts and investors are worried that support is fading.
Back here in the US, we got some data showing the economy was growing, albeit at a turtle-like speed. Data on service sector jobs showed a very slight increase, as well as the latest reading of the Fed’s beige book (which is basically a commentary on current economic conditions). Still, investors welcomed the news since very slow growth is better than no or negative growth.
The Fed was also in the news this week as various officials made speeches concerning their economic outlook and recommended policies. However, little new was said, disappointing investors that were looking for new information on a future stimulus (we, however, were not disappointed, but enough investors were to push the markets lower).
Friday fared the worst this week with the Dow dropping over 300 points. No surprise, more disappointing news out of Europe spurred the decline.
The chief economist for the European Central Bank (which is similar to our Federal Reserve) resigned over a disagreement on ECB policies. Jurgen Stark, a German, opposed the latest bond buying program the ECB used to keep interest rates down. He is the second German official to leave in recent months.
This really spooked the markets because Germany is considered the cornerstone of the Euro countries. It has the strongest economy of the group and carries the most weight. The concern is that ECB leadership is crumbling and support for recent agreements is waning. Very rightly, the Germans are growing tired of bailing out other countries due to their failures and their dissention could spell trouble for unity in the Euro.
Also clobbering the market Friday, Bank of America announced it is looking to lay off 40,000 employees in the coming months and years. Most investors realize the bank is having a rough time, but no one anticipated an announcement like this. Concerns over weakness also sent other financial stocks lower.
We won’t waste much time discussing President Obama’s job plan speech. Little new was said and it had little effect on the markets. After all, we have already spent hundreds and hundreds of billions trying the exact same policies he recommended over the last couple years. The result was an unquestionable failure and no new spending will change that outcome. Fundamental reform is needed, but it looks unlikely to be achieved.
Over this weekend, though, we learned from a story in the Wall Street Journal that the Treasury Department was looking to change the taxation of corporate profits from overseas. Currently, companies are taxed at the maximum rate if they want to bring those assets back to the US. As a result, companies keep these profits overseas and reinvest them in that host country.
The Treasury is looking to reduce this burden, allowing companies to repatriate funds more cheaply. This idea has promise. We only hope a plan can be achieved but worry that Washington will, frankly, find a way to screw it up.
Next Week
Activity picks up next week. We will get information on August inflation from the PPI and CPI. There will also be data on imports and exports, retail sales, manufacturing, industrial production, and consumer confidence. Friday will also be quadruple witching, which is industry jargon for the day that various options and futures expire. It happens towards the end of every quarter and is often a volatile day as these strategies unwind.
Investment Strategy
This week we saw the Euro problems rear their head, yet again. If these problems are going to dominate headlines again, the markets will surely suffer as they have in the past. Frankly, it is inevitable that something dramatic will happen, as they are taking all the wrong steps to fix their problems. Still, this steady drip of bad news will keep knocking our markets lower.
We had been dipping our toes in on weakness over the last couple weeks but are much more cautious now. With the Euro problems increasing, the risk to the downside has become even greater.
Here in the US, we feel that the risks for a negative surprise are 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.
We also feel that the market is beginning to price in some sort of Fed stimulus action that will be announced at the Fed meeting later this month. If this does not occur, there could be a move lower.
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. 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.
