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.
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 MoneycentralThe 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.
