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.
Source: MSN MoneycentralThis 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.
