The markets had a terrific week, posting the highest gains in nearly two years and the Dow had the second biggest point gain ever. For the week, the Dow rose 7.0%, the S&P climbed 7.4%, and the Nasdaq soared higher by 7.6%. Dollar weakness led to gains in many commodities, with gold rising 3.6% for the week. Oil hovered around the $100 per barrel mark much of the week, closing at $100.96 for a 4.3% gain.
Source: MSN Moneycentral
Europe was again dominating the headlines this week. The big news came on Wednesday as the Federal Reserve announced a plan in conjunction with other central banks around the world to make it cheaper for Europe to get US dollars. The news sent the markets soaring as the Dow rose nearly 500 points for a 4.2% gain.
Basically, the plan reduces swap rates for borrowing US dollars. Without all the industry jargon, it just means that the Fed made it cheaper and easier for foreign countries, specifically Europe, to borrow our currency.
Banks in Europe own US debt through items like bonds and mortgages, so they have a need for US dollars. In an emergency, they will need to hold US dollars to cover the debts or be forced to sell those assets, which would drive up yields and make borrowing more expensive in here in the US. This move by the Fed was a step to prevent that from happening.
Alone, this action is of modest importance and wouldn’t normally warrant such a response in the markets. The fact that it was coordinated with other central banks around the globe made it more impressive. It was also a reminder that the Fed is here to save the day. Still, it seemed like quite an overreaction in the markets, so the rebound could have been helped by a bounce-back after selling off the last two weeks.
While making it easier to get US dollars sounds nice, it also weakens our currency. On the news, we saw the dollar drop in value while commodity prices rose.
Also, it does little to solve the fundamental problems of Europe. They have far too much debt and spending and this does nothing to help. Actually, it promotes more debt.
A question many have been asking is “Why now?” Is there something - or could there be something - bad happening that justifies a world-wide emergency response? Some have speculated that a European bank was close to failure and this action was needed to prevent that. Even though the market rallied, many are seeing more questions than answers.
Having far less impact on the markets, the other news to come out of Europe this week was a plan to provide more loans and funding to European countries.
To this point, bond yields have been rising in these countries as worries increase, making it more expensive to borrow. There have been calls for the European Central Bank (the ECB; is similar to our Fed) to buy up bonds to push yields lower (like the Fed does here), which is essentially just printing money. They have been doing this to a small degree, but many officials are calling for more. A major dissenter of this is Germany, who is against more lending to these countries.
To work around the ECB and Germany, the IMF (International Monetary Fund) may step in to provide funding. They would provide assets to bail out countries and push borrowing costs lower.
In our eyes, the problem is that the US provides over 17% of the funding for the IMF, meaning we would be contributing to the bailout of Europe. Additionally, we aren’t even sure if this is what the IMF was designed for. Not to mention the fact that these bailouts need to stop for needed fundamental reform to take place.
Getting back to the US, there was an excitement in the beginning of the week over Black Friday shopping results. Sales on that day rose by 6.6% over last year, so many are predicting a better shopping season which would help retail companies.
We are very cautious of that view and would prefer to see how the season plays out. With more customers clamoring for the sales on Black Friday, it could mean they are being more frugal and will therefore be spending less money this year. There may have been more shoppers in the stores, but those stores aren’t making much of a profit selling items on sale.
Lastly, we received news on the labor picture this week. Over the past month, the economy added 120,000 jobs, less than the 150,000 many expected. Catching headlines, though, was the drop in unemployment rate from 9.0% to 8.6%. It has been about three years since the rate had been that low.
While the low unemployment rate sounds good, the drop came from a large decrease in the labor force (the formula to calculate the unemployment rate is unemployed workers / total labor force). When the labor force is lower, it makes the rate deceptively lower. If we were to use the size of the labor force at the beginning of the recession, our unemployment rate would be around 12%. So although it is improving, the employment picture is still not very rosy.
Next Week
Next week will be light in terms of economic and earnings releases. We will get information on factory orders, international trade, and consumer sentiment.
Europe is always good for a surprise or two, so news out of that region wouldn’t be unexpected. Euro country leaders will be having meetings to work out a path forward, so Europe could again be in the headlines.
Investment Strategy
The gains of this week were encouraging. It was a reminder that the Fed is around to provide assistance should conditions deteriorate. As you probably know by now, we disagree with much of the Fed’s money-printing and stimulus policies, but by no means would we fight them. Our job is to make money in any market condition and will go along with what the market gives us.
Though we have done some buying in the two weeks prior to this and did well this week, caution is warranted due to the highly volatile nature of this market environment.
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. For the first time in years, this week China reduced interest rates to boost the economy, a sign that growth is slowing. However, debt problems and continuous bailouts around the world should help elevate commodities like gold 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.
Source: MSN MoneycentralEurope was again dominating the headlines this week. The big news came on Wednesday as the Federal Reserve announced a plan in conjunction with other central banks around the world to make it cheaper for Europe to get US dollars. The news sent the markets soaring as the Dow rose nearly 500 points for a 4.2% gain.
Basically, the plan reduces swap rates for borrowing US dollars. Without all the industry jargon, it just means that the Fed made it cheaper and easier for foreign countries, specifically Europe, to borrow our currency.
Banks in Europe own US debt through items like bonds and mortgages, so they have a need for US dollars. In an emergency, they will need to hold US dollars to cover the debts or be forced to sell those assets, which would drive up yields and make borrowing more expensive in here in the US. This move by the Fed was a step to prevent that from happening.
Alone, this action is of modest importance and wouldn’t normally warrant such a response in the markets. The fact that it was coordinated with other central banks around the globe made it more impressive. It was also a reminder that the Fed is here to save the day. Still, it seemed like quite an overreaction in the markets, so the rebound could have been helped by a bounce-back after selling off the last two weeks.
While making it easier to get US dollars sounds nice, it also weakens our currency. On the news, we saw the dollar drop in value while commodity prices rose.
Also, it does little to solve the fundamental problems of Europe. They have far too much debt and spending and this does nothing to help. Actually, it promotes more debt.
A question many have been asking is “Why now?” Is there something - or could there be something - bad happening that justifies a world-wide emergency response? Some have speculated that a European bank was close to failure and this action was needed to prevent that. Even though the market rallied, many are seeing more questions than answers.
Having far less impact on the markets, the other news to come out of Europe this week was a plan to provide more loans and funding to European countries.
To this point, bond yields have been rising in these countries as worries increase, making it more expensive to borrow. There have been calls for the European Central Bank (the ECB; is similar to our Fed) to buy up bonds to push yields lower (like the Fed does here), which is essentially just printing money. They have been doing this to a small degree, but many officials are calling for more. A major dissenter of this is Germany, who is against more lending to these countries.
To work around the ECB and Germany, the IMF (International Monetary Fund) may step in to provide funding. They would provide assets to bail out countries and push borrowing costs lower.
In our eyes, the problem is that the US provides over 17% of the funding for the IMF, meaning we would be contributing to the bailout of Europe. Additionally, we aren’t even sure if this is what the IMF was designed for. Not to mention the fact that these bailouts need to stop for needed fundamental reform to take place.
Getting back to the US, there was an excitement in the beginning of the week over Black Friday shopping results. Sales on that day rose by 6.6% over last year, so many are predicting a better shopping season which would help retail companies.
We are very cautious of that view and would prefer to see how the season plays out. With more customers clamoring for the sales on Black Friday, it could mean they are being more frugal and will therefore be spending less money this year. There may have been more shoppers in the stores, but those stores aren’t making much of a profit selling items on sale.
Lastly, we received news on the labor picture this week. Over the past month, the economy added 120,000 jobs, less than the 150,000 many expected. Catching headlines, though, was the drop in unemployment rate from 9.0% to 8.6%. It has been about three years since the rate had been that low.
While the low unemployment rate sounds good, the drop came from a large decrease in the labor force (the formula to calculate the unemployment rate is unemployed workers / total labor force). When the labor force is lower, it makes the rate deceptively lower. If we were to use the size of the labor force at the beginning of the recession, our unemployment rate would be around 12%. So although it is improving, the employment picture is still not very rosy.
Next Week
Next week will be light in terms of economic and earnings releases. We will get information on factory orders, international trade, and consumer sentiment.
Europe is always good for a surprise or two, so news out of that region wouldn’t be unexpected. Euro country leaders will be having meetings to work out a path forward, so Europe could again be in the headlines.
Investment Strategy
The gains of this week were encouraging. It was a reminder that the Fed is around to provide assistance should conditions deteriorate. As you probably know by now, we disagree with much of the Fed’s money-printing and stimulus policies, but by no means would we fight them. Our job is to make money in any market condition and will go along with what the market gives us.
Though we have done some buying in the two weeks prior to this and did well this week, caution is warranted due to the highly volatile nature of this market environment.
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. For the first time in years, this week China reduced interest rates to boost the economy, a sign that growth is slowing. However, debt problems and continuous bailouts around the world should help elevate commodities like gold 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.
