It was another decent showing for the markets this week. Through the close Friday, the Dow was higher by 1.4%, the S&P was up 0.9%, and the Nasdaq returned 0.8%. Both gold and oil were off this week, with a -2.0% return for the former and -1.5% for the latter.
Source: MSN Moneycentral
No surprise, news out of Europe was a major factor for our markets this week. Every day there was news moving the markets, especially late in the afternoon.
Investors were anxious over a summit among European leaders to hammer out a solution to their debt problems. It was even described as a “make or break” week for the Euro by some, since the possibility of a breakup of the currency was increasing.
In the end, the European countries did come to an agreement that appears to unify these countries. They agreed to a limit on budget deficits and details on bailout funds.
While this sounds good in theory, the possibility of these new rules being dismissed at the first sign of trouble is likely, since covenants in current agreements are ignored or not enforced.
The UK was a loud, lone voice against these actions, which they rightfully described as a loss of sovereignty. To enforce rules of this treaty, a European court would force sanctions against the countries. Other requirements, like a universal policy on tax rates or tax on financial transactions, were also derided since the financial industry is such a large part of the British economy.
The European Central Bank (or ECB, which is the European version of our Fed) also stepped forward with policies to help the debt crisis. They announced a reduction in interest rates, as well as the discount rate at which banks borrow at. However, the ECB was criticized for not doing more and the markets sank on that realization.
As we have been writing the past several weeks, the ECB is under pressure to buy bonds of various countries to force their interest rates lower, making it cheaper for them to borrow. It is essentially money printing, similar to what the Fed has done here in the US. The ECB has been doing this to a small degree, but continue to refuse to do more.
In a refreshing comment, the new head of the ECB, Mario Draghi, stated that they are prohibited from financing individual governments. Judging by his statement, further action from the ECB here appears unlikely.
To work around this, many are trying to use the IMF (International Monetary Fund) as a vehicle to do what the ECB won’t. Sine the US is required to pay 17% of the IMF commitments, which means US taxpayers will be paying for a European bailout.
Data here in the US this week showed that we continue to have growth, albeit at a slow pace. Weekly initial jobless claims had been hovering at 400,000 level for months, yet turned in a 381k number this week, showing an improvement in the labor picture. Consumer sentiment also showed a nice improvement over the prior report. On the other hand, data on the service sector showed weakness.
Next Week
The level of economic data picks up next week, as we will get info on retail sales and inflation with the CPI and PPI. There will be earnings from several companies, as well, including some big names like Best Buy, FedEx, and Rite Aid.
We will also see how this agreement in Europe plays out. If the past several weeks are any indication, there is bound to be some news from this region that will impact the market.
Investment Strategy
No change here. While the gains of the previous two weeks were encouraging, caution is warranted 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.
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 MoneycentralNo surprise, news out of Europe was a major factor for our markets this week. Every day there was news moving the markets, especially late in the afternoon.
Investors were anxious over a summit among European leaders to hammer out a solution to their debt problems. It was even described as a “make or break” week for the Euro by some, since the possibility of a breakup of the currency was increasing.
In the end, the European countries did come to an agreement that appears to unify these countries. They agreed to a limit on budget deficits and details on bailout funds.
While this sounds good in theory, the possibility of these new rules being dismissed at the first sign of trouble is likely, since covenants in current agreements are ignored or not enforced.
The UK was a loud, lone voice against these actions, which they rightfully described as a loss of sovereignty. To enforce rules of this treaty, a European court would force sanctions against the countries. Other requirements, like a universal policy on tax rates or tax on financial transactions, were also derided since the financial industry is such a large part of the British economy.
The European Central Bank (or ECB, which is the European version of our Fed) also stepped forward with policies to help the debt crisis. They announced a reduction in interest rates, as well as the discount rate at which banks borrow at. However, the ECB was criticized for not doing more and the markets sank on that realization.
As we have been writing the past several weeks, the ECB is under pressure to buy bonds of various countries to force their interest rates lower, making it cheaper for them to borrow. It is essentially money printing, similar to what the Fed has done here in the US. The ECB has been doing this to a small degree, but continue to refuse to do more.
In a refreshing comment, the new head of the ECB, Mario Draghi, stated that they are prohibited from financing individual governments. Judging by his statement, further action from the ECB here appears unlikely.
To work around this, many are trying to use the IMF (International Monetary Fund) as a vehicle to do what the ECB won’t. Sine the US is required to pay 17% of the IMF commitments, which means US taxpayers will be paying for a European bailout.
Data here in the US this week showed that we continue to have growth, albeit at a slow pace. Weekly initial jobless claims had been hovering at 400,000 level for months, yet turned in a 381k number this week, showing an improvement in the labor picture. Consumer sentiment also showed a nice improvement over the prior report. On the other hand, data on the service sector showed weakness.
Next Week
The level of economic data picks up next week, as we will get info on retail sales and inflation with the CPI and PPI. There will be earnings from several companies, as well, including some big names like Best Buy, FedEx, and Rite Aid.
We will also see how this agreement in Europe plays out. If the past several weeks are any indication, there is bound to be some news from this region that will impact the market.
Investment Strategy
No change here. While the gains of the previous two weeks were encouraging, caution is warranted 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.
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.
