Commentary for the week ending 11-18-11

Please note: There will be no market commentary next week due to the Thanksgiving holiday.

It was a rough week for the markets. The Dow fell 2.9%, the S&P was off 3.8%, and the Nasdaq fared the worst, down 4.0%. Gold also sold off, down 3.5%. Oil climbed above $102 a barrel at one point this week, only to sell off and close the week down 1.6% to $97.41 a barrel. Brent crude closed at $107.

Source: MSN Moneycentral

The markets had a tough week, but the news flow seemed much quieter than in previous weeks. Europe was still a factor, but the headlines were not as dramatic as they had been.

We heard from the new Prime Minister of Italy, Mario Monti, as he announced major cuts to reduce their debt. He is looking to cut 300,000 public sector jobs, lower government employee salaries, and raise the retirement age, amongst many other new cuts. We see this as a step in the right direction. However, many believe that these cuts will have a hard time getting implemented.

Tax increases have also been, or will be, implemented to raise revenue for governments to pay off debts. As we saw in the Eurozone GDP released this week, growth is slowing or contracting. Higher taxes in the region will only slow growth further. A reduction in spending is the only true solution, but the likelihood of that occurring appears slim.

The debt problems in these Euro countries remain very serious and are spreading. After Greece and Italy, bond yields have risen to new highs in Spain, reaching 6.4% this week (remember, that 7% yield is looked at by many as the “point of no return”). Other countries in the region that we had yet to hear from, like Austria and Finland, are also seeing a rise in bond yields, meaning the risk of default is growing.

Several countries are asking the ECB (European Central Bank) to step in and buy bonds to keep yields lower (similar to what the Fed does here in the US). The ECB has been buying a small amount, but not at the levels many countries would like. The solution is not to keep adding more debt to fix a debt problem. Unfortunately, even leaders here in the US, like President Obama and Treasury Secretary Geithner, are pushing for more ECB intervention.

We doubt Euro leaders should be looking to us for a solution as our debt level crossed the $15 trillion mark this week. In President Obama’s term alone, we have added $4.4 trillion in debt, an increase of over 40%.

We strongly believe that our debts will have severe consequences in the future. How far out? You guess is as good as ours. Unless the debt is addressed and spending is reduced, we are very negative on the long term.

A good way to get the debt under control is possible through the ‘supercommittee’ now in Congress. We are sure you know by now, they have until next Wednesday to find a way to cut $1.2 trillion from the budget over the next ten years. Reports at this time show the likelihood of that occurring is slim.

The holdup appears to be coming from the left with their desire to raise tax rates. We heard one member say that the “wealthy must pay their fair share and sacrifice like the rest of us.” That’s funny, since the top 1% pays 40% of the Federal income taxes and top 49% pays 100%. We have a more progressive tax structure than even far-left countries in Europe. Frankly, we are glad a tax increase is unlikely.

Regrettably, if the agreement is not reached, cuts would occur automatically. While we would like to see spending cuts take place, as someone with a family member currently fighting overseas, those cuts are disproportionately large for the military compared to the other cuts (Shameless plug: Remember, our services are free for all active duty military and half price for retired). It will be interesting to see how this plays out. If we can’t even cut $1.2 trillion over 10 years, we don’t see much hope in addressing our massive debt problems for the future.

As for economic releases this week, the markets viewed the data favorably. Retail sales were higher and initial jobless claims were again lower. Inflation levels in the PPI and CPI showed a decrease, largely due to a decrease in energy prices.

By now, our regular readers are likely aware that we believe inflation is far higher than these metrics show. Just last week, the American Farm Bureau reported that prices for an average Thanksgiving meal rose 13% from last year. Sadly, prices for the things people buy continue to rise, adding pressure to already tight pocketbooks.


Next Week

Activity will be light next week as the markets are closed Thursday for Thanksgiving. The market is open on Friday, but like many of you, many people will be taking the day off.

Through the week, we will get info on housing, durable goods, personal income and spending, and a revision to last quarters GDP. The volume of company earnings will also be light.

The debt supercommittee will be a major story as investors look for any signs of agreement. While it doesn’t look likely, a this point the impact on the markets is uncertain.

Europe will again be something to watch as problems have been spreading to other countries. Should a significant story develop, it could affect our markets more. When there is a smaller volume of trades, market moving news tends to move the markets more than they normally would.


Investment Strategy

Still no change here. We are still cautious due to the questions surrounding the Euro zone.

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 but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Debt problems and continuous bailouts around the world should help elevate gold prices in the long term.

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.

Commentary for the week ending 11-11-11

It was another week with Europe dominating the headlines. The Dow rose 1.4%, the S&P climbed 0.9%, and the Nasdaq returned -0.3%. Gold continued to bounce around but settled near the $1,800 an ounce level, up 1.8% for the week. Sparked by concerns of a nuclear Iran, oil popped higher by 5.0% to $99 per barrel.

Source: MSN Moneycentral

The markets rose nicely every day this week except for one, and unfortunately that day was a doozy. The markets recovered nicely late in the week, though, to eventually move back into positive territory.

Again this week, the market was driven by big changes taking place in Europe with a change in leadership in both Greece and Italy. We opened the week with news that the Greek Prime Minister was stepping down and a new government would be formed.

Catching us by surprise, Italy, the 3rd largest economy in the Euro, also grabbed headlines as their financial condition weakened. Bond yields in the country continued to rise, meaning it would cost them more to borrow money. Italian Prime Minister Berlusconi was also in jeopardy of losing his position after nearly 20 years of service.

We figured the uncertainty created by these stories would send the markets lower, but they climbed higher Monday and Tuesday. It wasn’t until Wednesday that the worries came to a head.

Bond yields rose above 7% in Italy, a level many refer to as “the point of no return.” The chance of default becomes very high, even if meaningful steps are taken to remedy the problem. This was the yield level that lead to bailouts in other Euro countries like Ireland, Portugal, and Greece. A bailout in Italy is more problematic, since they are much larger than any of these other countries and the costs would be enormous.

Investors were spooked by the news, with banks taking the brunt of the hit due to their potential exposure to Europe. By the end of the day, the Dow had fallen 3.2%, the 6th biggest drop for the year.

Conditions moderated for the remainder of the week and the markets climbed back higher, eventually erasing the Wednesday losses. Italy announced plans to boost growth and cut their debt and the markets gave the plan a thumbs up.

The leadership picture in both Greece and Italy improved, as well. The new Prime Minister in Greece, Lucas Papademos, has a economics background with a PhD in Economics from MIT. The likely new leader of Italy, Mario Monti, also has an economics background. Since the problems facing these countries are economic in nature, their background makes them decent fits - for the time being, at least.

Back at home, we saw an improvement in employment that helped push the markets higher. Initial jobless claims have been hovering around the 400,000 level for weeks, but dropped to 390,000 this week. Though still troublingly high, it is a welcomed improvement. Consumer confidence levels showed a gain this week, as well.


Next Week

Next week will be another busy one. Corporate earnings will be lighter, but there will be many economic data releases. We will info on housing, retail sales, productivity, and leading indicators. We will also get inflation data with the PPI and CPI releases.

Europe will also be a focus due to all the changes that occurred this week. The markets seemed to like the changes, but there are many questions that remain unanswered. The volatility will likely continue into next week.

As we approach November 23rd, the Congressional supercommitee will become more of a focus. The lack of a compromise will likely be seen as a negative. They need to cut $1.2 trillion over the next ten years, which, if you average it out, would be $120 billion a year. The fact that it is difficult to agree to just $120 a year is troubling, since massive amounts of cuts will be needed in the future.


Investment Strategy

Again, no change here. We are still cautious due to the questions surrounding Italy, Greece, and the rest of the Euro zone.

Corporate earnings have been good, with over 80% of companies beating their estimates according to Factset. Normally that would help the markets, but as we have mentioned, Europe has been the market driver. When everything goes up or down together, it makes stock picking almost a futile effort.

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.

Commentary for the week ending 11-4-11

Once again, news out of Europe was the driving factor for the markets this week. Through the Friday close, the Dow fell 2.0%, the S&P was off 2.5%, and the Nasdaq sank 1.9%. Gold bounced around but ended the week up just 0.5%. Oil continued its climb, up 1.0% to $94 a barrel.

Source: MSN Moneycentral

This week we continued to receive decent corporate earnings, but it didn’t matter. Europe stole the spotlight yet again.

After the Greek debt rescue package (bailout) was approved in the previous week, we thought it would be weeks or possibly months before Euro problems resurfaced. We were looking forward to a break from Europe dominating the headlines. Unfortunately, it only took a couple days for the cracks to appear.

On Monday, Greek Prime Minister George Papandreou announced that the debt deal they agreed to with the other EU leaders was being put to vote for the Greek people. As the numerous protests have shown us, though, that agreement is very unpopular in Greece. The uncertainty of that vote frightened the markets and sent them lower.

If the people voted for the referendum, then the deal would move forward and the unpopular (with the Greek people) austerity measures would be implemented. If voted down, it would open up a slew of new problems. It may even result in a Greek exit from the Euro.

By Thursday, though, it was announced that the referendum would not occur and the markets moved higher on the news.

Adding to the Greek drama, this weekend we learned that Papandreou survived a confidence vote. However, it appears that this government will be dissolved and a new one will be formed. Unfortunately it looks like the Euro headlines won’t be disappearing anytime soon.

These Euro problems are important because they are having more of an effect on our markets than ever before. RBC Capital Markets ran the numbers and the correlation between the S&P 500 and Euro currency rate over the last month stands at 0.9 (a correlation of 1.0 means their movements are perfectly correlated. A -1 correlation is the exact opposite). A correlation this high hasn’t occurred since 1997. When we get good news out of Europe, the market goes up and vice versa. Little else has mattered.

Having a measurably smaller impact on our markets, the Fed was in the news again this week. No surprise, they announced that they would keep interest rates at these historically low levels. However, they seemed to move even closer to new monetary easing or stimulus.

They see economic conditions improving slightly from here, but at a much lower level than they previously thought. While that sour outlook was concerning, many traders were encouraged that a new stimulus would result from slower growth. More stimulus would give the markets another sugar buzz, but as we saw with the previous stimulus, those problems would still remain.

On the economic data front, we received the employment report for the month of October. In a period when food stamp usage climbed to another record high, the US added 80,000 jobs and the unemployment rate fell to 9.0% from 9.1%. There were just over 100,000 jobs added in the private sector and a loss in government jobs (a trend we like to see).

While any gain in jobs is welcomed, the pace of new job growth is still very slow. The unemployment U-6 number, which measures the underemployed, still hovers above 16%. This level of employment is still a concern for us.


Next Week

Next week will be much quieter in terms of earnings and economic data. We’ve gotten over the bulk of corporate earnings and the pace is beginning to slow. However, many Fed presidents will be speaking, so it will be interesting to hear what they have to say and they have a potential to move the market.

Also, it is likely that the drama in Europe will continue next week. We can only imagine how much uncertainty will be created by the formation of a new Greek government.


Investment Strategy

No change here. We are still cautious due to the questions surrounding Greece and the Euro zone.

Corporate earnings have been good, with over 80% of companies beating their estimates according to Factset. Normally that would help the markets, but as we have mentioned, Europe has been the market driver. When everything goes up or down together, it makes stock picking almost a futile effort.

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.