An agreement reached in Europe this week helped push the markets higher. The Dow rose 3.6% and the S&P and Nasdaq both returned 3.8%. Commodities were up this week and unfortunately for gas prices, oil rose 6.8% to $93 per barrel. Gold also popped higher by 6.8%, returning to the mid-$1,700’s an ounce.
Source: MSN Moneycentral
It was another good week for the market, making it a great month, too. So far for October, the Dow is up over 12%. If it can keep up this pace, it will be the best October performance in almost 25 years.
The gains this week were driven higher primarily by activity in Europe. An agreement on their debt problem was reached this week and is considered the biggest agreement reached so far.
The deal is, the holders of Greek debt will take a “haircut” of 50% (meaning investors lose 50%), but this is supposed to be voluntary. Next, European banks will have to hold more capital in reserves as a cushion. Lastly, the European bailout fund (formally, the European Financial Stability Fund, or EFSF) has been upped to $1.4 trillion (essentially printing $1.4 trillion to cover debts). China may even be a part of this fund. The EFSF provides a guarantee on debt for European countries.
The market rallied higher on the news of this agreement. While it is a resolution, it leaves a lot of questions unanswered. The markets seemed so hungry for good news out of Europe, though, that any questions have been postponed for another day.
One problem that is already rearing its head is an encouragement of fiscal irresponsibility. Other countries with similar debt problems see that Greece got these favorable deals by being bad, essentially. Therefore, it would be in their benefit to do the same.
Only a couple days after the announcement, Ireland came forward to see what kind of a deal they can get. Allow us to go on a tangent for a second, but Ireland is an interesting situation, actually.
The debt problems in Ireland resulted from different circumstances than other European countries. They don’t have the large, expensive welfare state. Similar to the US, they had a massive housing bubble that popped. The government then stepped in to prop up the banks that were holding all that bad debt. This resulted in massive losses that taxpayers were on the hook for. They then took a bailout of about $113 billion.
As a condition of the bailout, the EU wanted Ireland to raise tax rates and increase government spending as a form of stimulus (similar to what Washington wants to do here). Ireland actually did just the opposite. They kept their tax rates low and cut government spending and workers. To this point, Ireland is actually recovering relatively well.
Back on subject, Ireland saw the deal Greece got and expressed a desire to get their interest rates reduced. There is an incentive to show as poor of an economic picture as possible in order to do this. Will it work? We’re not sure. However, this bailout will result in the inevitable moral hazard, where countries have no incentive to behave responsibly.
Also, with the 50% haircut to the Greek debtholders, there is little incentive for investors to buy the bonds of other troubled Euro countries. Why would they want to risk a 50% loss? We see bond yields rising in Europe, meaning it will be harder for those countries to borrow funds. That $1.4 trillion bailout fund could mitigate the rise, but the degree to which is uncertain.
Back here in the US, we had some data that also helped the market. Corporate earnings still are coming in at a decent level. Roughly every three out of four companies are beating earnings estimates.
We also got some good economic data this week. Third quarter GDP rose by 2.5%. This was roughly in line with estimates but is higher than recent quarterly GDP numbers. It is interesting to note that consumer spending rose considerably while at the same time, people are more pessimistic about the economy. Usually if people are pessimistic, spending is lower. Either way, the news also helped the market rise this week.
Next Week
Like the past couple weeks, next week will again be busy. Corporate earnings will still come in at a good pace. For economic data, we will get info on manufacturing. With the month ending next week, we will also get information on the employment level through October. It’s hard to believe it is almost November!
The Fed will also be releasing their statement on interest rate levels. It is widely believed that they will keep rates at these historic lows. More importantly, though, investors will be watching for any changes in Fed policy.
Investment Strategy
As we mentioned above, the markets cheered the news out of Europe this week. But there are many questions that remain unanswered, so we have little doubt that Euro problems will resurface. It may be weeks or months, but we would be cautious here.
With these interventions and money printing, gold and precious metals benefited. Gold has now risen to the mid-$1,700’s an ounce. We did some buying in the $1,600’s but would be hesitant to add any more at higher levels from here.
Corporate earnings have been decent so far and future results 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.
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 and were encouraged by their recent strong performance. A slowdown in China, who has been a major driver of commodity prices, has us worried in the longer term, though.
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 level is proving a good time to 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 MoneycentralIt was another good week for the market, making it a great month, too. So far for October, the Dow is up over 12%. If it can keep up this pace, it will be the best October performance in almost 25 years.
The gains this week were driven higher primarily by activity in Europe. An agreement on their debt problem was reached this week and is considered the biggest agreement reached so far.
The deal is, the holders of Greek debt will take a “haircut” of 50% (meaning investors lose 50%), but this is supposed to be voluntary. Next, European banks will have to hold more capital in reserves as a cushion. Lastly, the European bailout fund (formally, the European Financial Stability Fund, or EFSF) has been upped to $1.4 trillion (essentially printing $1.4 trillion to cover debts). China may even be a part of this fund. The EFSF provides a guarantee on debt for European countries.
The market rallied higher on the news of this agreement. While it is a resolution, it leaves a lot of questions unanswered. The markets seemed so hungry for good news out of Europe, though, that any questions have been postponed for another day.
One problem that is already rearing its head is an encouragement of fiscal irresponsibility. Other countries with similar debt problems see that Greece got these favorable deals by being bad, essentially. Therefore, it would be in their benefit to do the same.
Only a couple days after the announcement, Ireland came forward to see what kind of a deal they can get. Allow us to go on a tangent for a second, but Ireland is an interesting situation, actually.
The debt problems in Ireland resulted from different circumstances than other European countries. They don’t have the large, expensive welfare state. Similar to the US, they had a massive housing bubble that popped. The government then stepped in to prop up the banks that were holding all that bad debt. This resulted in massive losses that taxpayers were on the hook for. They then took a bailout of about $113 billion.
As a condition of the bailout, the EU wanted Ireland to raise tax rates and increase government spending as a form of stimulus (similar to what Washington wants to do here). Ireland actually did just the opposite. They kept their tax rates low and cut government spending and workers. To this point, Ireland is actually recovering relatively well.
Back on subject, Ireland saw the deal Greece got and expressed a desire to get their interest rates reduced. There is an incentive to show as poor of an economic picture as possible in order to do this. Will it work? We’re not sure. However, this bailout will result in the inevitable moral hazard, where countries have no incentive to behave responsibly.
Also, with the 50% haircut to the Greek debtholders, there is little incentive for investors to buy the bonds of other troubled Euro countries. Why would they want to risk a 50% loss? We see bond yields rising in Europe, meaning it will be harder for those countries to borrow funds. That $1.4 trillion bailout fund could mitigate the rise, but the degree to which is uncertain.
Back here in the US, we had some data that also helped the market. Corporate earnings still are coming in at a decent level. Roughly every three out of four companies are beating earnings estimates.
We also got some good economic data this week. Third quarter GDP rose by 2.5%. This was roughly in line with estimates but is higher than recent quarterly GDP numbers. It is interesting to note that consumer spending rose considerably while at the same time, people are more pessimistic about the economy. Usually if people are pessimistic, spending is lower. Either way, the news also helped the market rise this week.
Next Week
Like the past couple weeks, next week will again be busy. Corporate earnings will still come in at a good pace. For economic data, we will get info on manufacturing. With the month ending next week, we will also get information on the employment level through October. It’s hard to believe it is almost November!
The Fed will also be releasing their statement on interest rate levels. It is widely believed that they will keep rates at these historic lows. More importantly, though, investors will be watching for any changes in Fed policy.
Investment Strategy
As we mentioned above, the markets cheered the news out of Europe this week. But there are many questions that remain unanswered, so we have little doubt that Euro problems will resurface. It may be weeks or months, but we would be cautious here.
With these interventions and money printing, gold and precious metals benefited. Gold has now risen to the mid-$1,700’s an ounce. We did some buying in the $1,600’s but would be hesitant to add any more at higher levels from here.
Corporate earnings have been decent so far and future results 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.
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 and were encouraged by their recent strong performance. A slowdown in China, who has been a major driver of commodity prices, has us worried in the longer term, though.
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 level is proving a good time to 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.
