Great returns for the markets this week. The Dow rose 541 points and 4.9%, the S&P returned 6.0%, and the Nasdaq turned in a remarkable 7.6% gain. Treasury bonds sold off, so yields rose. Gold also had a nice week, up 2.9%. Oil continues to climb, up 4.6%, so oil is nearly 10% higher over the last two weeks. Unfortunately, those cheaper prices at the pump may not last much longer.
Source: MSN Moneycentral
There wasn’t much news behind the big move this week. The markets opened with a solid gain on Monday that was attributed to positive news out of Europe that set a positive tone for the week.
There was a report over the weekend that the German and French leaders, Merkel and Sarkozy, will present a package to resolve budget and banking problems in the Eurozone by November. Many traders laughed this off as a “plan for a plan,” which is exactly what it was. As ridiculous as it sounded, the markets soared on the news.
Short covering is also being attributed to the market rise this week. Without getting too technical, shorting a stock is when you bet the stock will go lower. Short covering is when investors buy back the shares they are short of. Reports showed that short positions decreased recently, so traders have been buying back stock to cover their shorts. This activity helps push the market higher, especially if the volume is large enough.
Corporate earnings for the third quarter began trickling in this week. We started with a disappointing report from the aluminum producer Alcoa, whose earnings weren’t as high as many expected. Due to their reliance on commodities, many worried that it could spell trouble for other commodity related companies.
Google was another company releasing earnings and they had a terrific report. Like Alcoa was an indicator for commodity stocks, Google was looked at as a guide for other technology stocks, resulting in nice gains for that sector. It is worth noting that their costs have been rising, but not enough to cause concern at this time.
The other big company releasing earnings this week was JP Morgan. Earnings were very poor. Even worse, portions of their accounting relied on the gimmicky “mark to model” method to account for bad assets like loans.
Mark to market is the accounting method we prefer to see, since assets reflect what they are currently worth in the market. Makes sense, right? Mark to model means they value those assets at whatever their models say they are worth, and you can bet they are valued higher than what they are really worth.
If JP Morgan can’t even turn a profit using accounting gimmicks, things can’t be good. Other bank stocks sold off on these poor reports.
Economic data was light this week and what we did receive was mixed. Retail sales came in much higher than expected. On the other hand, consumer sentiment has declined from its already low level. If anything, it shows that people are worried, but continue to spend.
Next Week
Next week will be very busy. Corporate earnings releases pick up significantly next week, far more companies than we will even begin to list here. Also, the volume of economic data will be high. The most important item we will be watching is the Producer and Consumer Price Indexes (PPI & CPI). Economists are predicting a decline in inflation largely since commodities have sold off. Inflation has unexpectedly popped higher in places like China and Europe, so a miss to the highside here is a possibility.
Investment Strategy
As we have been discussing the past couple weeks, the markets have had large moves on a daily basis, but have been stuck in a fairly narrow range, as you can see in the chart on the right. The gains on Friday pushed the market to the top end of the range. We will see if they continue higher from here or if it will move lower off this ceiling.
Even with the gains this week, we remain cautious. The markets were helped by an absence of news this week and worry that developments out of Europe will disappoint again. A “plan for a plan” sounds nice, but we know their plans only involve bailouts and money printing, nothing that has any real reforms.
Corporate earnings may help as their numbers are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets.
We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street.
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, even after their recent poor performance. Further money printing around the globe will also help gold and silver and we may have reached a bottom for these precious metals.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this is beginning to be a good time to be short again. 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 MoneycentralThere wasn’t much news behind the big move this week. The markets opened with a solid gain on Monday that was attributed to positive news out of Europe that set a positive tone for the week.
There was a report over the weekend that the German and French leaders, Merkel and Sarkozy, will present a package to resolve budget and banking problems in the Eurozone by November. Many traders laughed this off as a “plan for a plan,” which is exactly what it was. As ridiculous as it sounded, the markets soared on the news.
Short covering is also being attributed to the market rise this week. Without getting too technical, shorting a stock is when you bet the stock will go lower. Short covering is when investors buy back the shares they are short of. Reports showed that short positions decreased recently, so traders have been buying back stock to cover their shorts. This activity helps push the market higher, especially if the volume is large enough.
Corporate earnings for the third quarter began trickling in this week. We started with a disappointing report from the aluminum producer Alcoa, whose earnings weren’t as high as many expected. Due to their reliance on commodities, many worried that it could spell trouble for other commodity related companies.
Google was another company releasing earnings and they had a terrific report. Like Alcoa was an indicator for commodity stocks, Google was looked at as a guide for other technology stocks, resulting in nice gains for that sector. It is worth noting that their costs have been rising, but not enough to cause concern at this time.
The other big company releasing earnings this week was JP Morgan. Earnings were very poor. Even worse, portions of their accounting relied on the gimmicky “mark to model” method to account for bad assets like loans.
Mark to market is the accounting method we prefer to see, since assets reflect what they are currently worth in the market. Makes sense, right? Mark to model means they value those assets at whatever their models say they are worth, and you can bet they are valued higher than what they are really worth.
If JP Morgan can’t even turn a profit using accounting gimmicks, things can’t be good. Other bank stocks sold off on these poor reports.
Economic data was light this week and what we did receive was mixed. Retail sales came in much higher than expected. On the other hand, consumer sentiment has declined from its already low level. If anything, it shows that people are worried, but continue to spend.
Next Week
Next week will be very busy. Corporate earnings releases pick up significantly next week, far more companies than we will even begin to list here. Also, the volume of economic data will be high. The most important item we will be watching is the Producer and Consumer Price Indexes (PPI & CPI). Economists are predicting a decline in inflation largely since commodities have sold off. Inflation has unexpectedly popped higher in places like China and Europe, so a miss to the highside here is a possibility.
Investment Strategy
As we have been discussing the past couple weeks, the markets have had large moves on a daily basis, but have been stuck in a fairly narrow range, as you can see in the chart on the right. The gains on Friday pushed the market to the top end of the range. We will see if they continue higher from here or if it will move lower off this ceiling. Even with the gains this week, we remain cautious. The markets were helped by an absence of news this week and worry that developments out of Europe will disappoint again. A “plan for a plan” sounds nice, but we know their plans only involve bailouts and money printing, nothing that has any real reforms.
Corporate earnings may help as their numbers are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets.
We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street.
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, even after their recent poor performance. Further money printing around the globe will also help gold and silver and we may have reached a bottom for these precious metals.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this is beginning to be a good time to be short again. 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.
