Please note: With both Christmas and New Year’s falling on a weekend this year, there will be no weekly commentary for the next two weeks. We will be back the first week of the year. Have a great holiday season.
Coming off two weeks of decent gains, the markets had a rather poor showing. For the week, the Dow lost 2.6%, the S&P sank 2.8%, and the Nasdaq fared the worst, off 3.5%. The losses extended to the commodity sector, which also had a rough week. A drop in gold prices was a big story as it lost 6.8% and closed the week just below $1,600 an ounce. Oil also sold off, down almost 6% to $93.53 a barrel, which is good news for gas prices.
Source: MSN Moneycentral
Tired of hearing about Europe yet? We are too, but it was again a major factor behind the market moves this week.
If you remember back to the previous week, there was a key agreement between the European countries that was intended to strengthen their commitment to the Union and address their debt issues. At the time, the markets popped higher on the news.
When given time to sink in over the weekend, many investors realized their accord accomplished little. It didn’t address how the debt problems would be resolved, nor did it provide a bigger bailout fund or create Euro bonds. These were items many investors were hoping to see. The markets sold off as a result, with the Euro falling sharply against the dollar.
Since it doesn’t look like a solution to the Euro debt problem will happen anytime soon, there has been a pressure on the European Central Bank (or ECB, which is similar to our Fed) to do more to help. Investors and politicians would like to see the ECB purchase more bonds, which will lower borrowing costs for the countries. As we said last week, the ECB has refused to do so even as the pressure increases, claiming they are not allowed to help finance governments. The lack of action by the ECB also worried investors and pressured the markets lower.
If they were to step in and buy bonds (or further lower interest rates, which is likely if they see a chance of deflation), there is little doubt the stock market would pop higher.
We saw that here in the US when the Fed announced its bond buying stimulus programs - the markets soared. However, that high from the stimulus eventually wore off as the program wound down, leaving us back to where we started from, only further in debt and with higher inflation.
We feel the ECB is right not to increase their purchases, although this is an unpopular opinion in the market these days. Yes, countries can borrow at lower rates, but that doesn’t address the fundamental problems facing these countries. They have too much debt and you don’t fix that by adding even more debt.
Back here in the US, the Fed made news this week as they announced they were keeping interest rates at these historically low levels, which wasn’t a surprise. There was a rumor that the Fed would announce another stimulus program, but that never materialized. That surprised many (we aren’t sure why, since it was extremely unlikely) and the markets sold off sharply.
With the prospect of a Fed and ECB not printing more money at the moment, the dollar strengthened. This was a major factor behind the move in the commodity market this week.
Gold was the headline grabber as it sold off sharply, reaching the mid-$1,500’s an ounce at one point. While the dollar story was a factor, there were other reasons for the drop in gold, too. With the end of the year approaching, many investors are locking in gains and selling out to raise cash and reduce risk.
Economic data this week was mixed, with retail sales in November showing a slight gain, but at a lower level than previous months. Industrial production was also lower, but some regional manufacturing reports showed decent gains. Also, initial jobless claims showed a dramatic improvement, falling to just 366,000, far below the 400k number it had been hanging around for months.
We also received data on inflation, which showed very little change. As we often point out, we disagree with the methodology used in these metrics since they don’t capture the true level of inflation. According to shadowstats.com, if we were to measure inflation the same way it was measured in 1990, the rate would stand at about 7%. If we were to measure it using 1980 metrics, inflation would be closer to 11%! The inflation picture looks a lot different if thought about that way.
Next Week
Next week will probably have lighter volume for obvious reasons, but we will continue to get some economic data. There will be several reports on housing, as well as durable goods, leading economic indicators, as well as a revision to the third quarter GDP number. Corporate earnings releases will be rather light.
Investment Strategy
Still no changes here. We remain cautious due to the highly volatile nature of this market.
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 very 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 be favorable to commodities like gold in the long term. After the losses this week, a good buying opportunity could present itself.
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.
Coming off two weeks of decent gains, the markets had a rather poor showing. For the week, the Dow lost 2.6%, the S&P sank 2.8%, and the Nasdaq fared the worst, off 3.5%. The losses extended to the commodity sector, which also had a rough week. A drop in gold prices was a big story as it lost 6.8% and closed the week just below $1,600 an ounce. Oil also sold off, down almost 6% to $93.53 a barrel, which is good news for gas prices.
Tired of hearing about Europe yet? We are too, but it was again a major factor behind the market moves this week.
If you remember back to the previous week, there was a key agreement between the European countries that was intended to strengthen their commitment to the Union and address their debt issues. At the time, the markets popped higher on the news.
When given time to sink in over the weekend, many investors realized their accord accomplished little. It didn’t address how the debt problems would be resolved, nor did it provide a bigger bailout fund or create Euro bonds. These were items many investors were hoping to see. The markets sold off as a result, with the Euro falling sharply against the dollar.
Since it doesn’t look like a solution to the Euro debt problem will happen anytime soon, there has been a pressure on the European Central Bank (or ECB, which is similar to our Fed) to do more to help. Investors and politicians would like to see the ECB purchase more bonds, which will lower borrowing costs for the countries. As we said last week, the ECB has refused to do so even as the pressure increases, claiming they are not allowed to help finance governments. The lack of action by the ECB also worried investors and pressured the markets lower.
If they were to step in and buy bonds (or further lower interest rates, which is likely if they see a chance of deflation), there is little doubt the stock market would pop higher.
We saw that here in the US when the Fed announced its bond buying stimulus programs - the markets soared. However, that high from the stimulus eventually wore off as the program wound down, leaving us back to where we started from, only further in debt and with higher inflation.
We feel the ECB is right not to increase their purchases, although this is an unpopular opinion in the market these days. Yes, countries can borrow at lower rates, but that doesn’t address the fundamental problems facing these countries. They have too much debt and you don’t fix that by adding even more debt.
Back here in the US, the Fed made news this week as they announced they were keeping interest rates at these historically low levels, which wasn’t a surprise. There was a rumor that the Fed would announce another stimulus program, but that never materialized. That surprised many (we aren’t sure why, since it was extremely unlikely) and the markets sold off sharply.
With the prospect of a Fed and ECB not printing more money at the moment, the dollar strengthened. This was a major factor behind the move in the commodity market this week.
Gold was the headline grabber as it sold off sharply, reaching the mid-$1,500’s an ounce at one point. While the dollar story was a factor, there were other reasons for the drop in gold, too. With the end of the year approaching, many investors are locking in gains and selling out to raise cash and reduce risk.
Economic data this week was mixed, with retail sales in November showing a slight gain, but at a lower level than previous months. Industrial production was also lower, but some regional manufacturing reports showed decent gains. Also, initial jobless claims showed a dramatic improvement, falling to just 366,000, far below the 400k number it had been hanging around for months.
We also received data on inflation, which showed very little change. As we often point out, we disagree with the methodology used in these metrics since they don’t capture the true level of inflation. According to shadowstats.com, if we were to measure inflation the same way it was measured in 1990, the rate would stand at about 7%. If we were to measure it using 1980 metrics, inflation would be closer to 11%! The inflation picture looks a lot different if thought about that way.
Next Week
Next week will probably have lighter volume for obvious reasons, but we will continue to get some economic data. There will be several reports on housing, as well as durable goods, leading economic indicators, as well as a revision to the third quarter GDP number. Corporate earnings releases will be rather light.
Investment Strategy
Still no changes here. We remain cautious due to the highly volatile nature of this market.
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 very 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 be favorable to commodities like gold in the long term. After the losses this week, a good buying opportunity could present itself.
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.
