Commentary for the week ending 1-27-12

It was another quiet week on Wall Street with mixed results in the markets. The Dow fell 0.5%, although at one point it touched its highest level since 2008. The S&P rose slightly, up 0.1% and the Nasdaq turned in a gain of 1.1%. Comments from the Fed sent commodity prices higher, with oil rising 1.25% to just shy of $100 per barrel. Gold had a terrific week, gaining more than 4%.

Source: MSN Moneycentral

Low volatility continues to be the story in the markets. So far this year, we have only had one day with moves of more than 100 points in the Dow. It wasn’t long ago that it was rare to have a move under 100 points. At that time, stocks were highly correlated and they moved in tandem. Now they are moving more independently. According to the Wall Street Journal, correlation was running at 74% last April (a correlation of 1, or 100%, indicates a perfect correlation, or all stocks moving in tandem). Today, correlation is just 15%.

The Fed was the hot topic this week. In a surprise to everyone, it was announced that they would keep these historically low interest rates in place for longer than anticipated. Their original forecasts kept rates low until 2013, but are now looking to at least 2014, 18 months longer than anticipated.

The Fed originally lowered interest rates to 0% at the height of the financial crisis in order to get liquidity into the economy and help avert a more serious problem. This has been the standard reaction from central banks in a crisis recently, although the results are open to debate.

It is surprising that they see a need to keep this crisis-level response in place for at least six years (from when initially implemented until their forecast of 2014). When rates are this low for this long, a misallocation of capital occurs. That usually leads to an even bigger problem. One only needs to look at how low interest rates fuelled the housing bubble as an example of that.

At any rate, the prospect of additional stimulus and very low interest rates sent the markets higher. The stock market loves cheap money. However, it is inflationary since it weakens our dollar. Commodities popped higher, with gold leading the way.

Another point worth noting, the Fed has now explicitly targeted an inflation rate of 2%. Having a targeted inflation number is difficult for the Fed, since they have two goals. One is price stability (which theoretically a 0% rate of inflation would accomplish, not 2%), but they also try to achieve full employment. These two goals can sometimes run opposite of each other. If that is the case, the Fed said that employment is their first priority.

You can see now as the Fed is goosing the markets to go higher, stoking inflation, in order to increase hiring. Somehow they think rising prices and tighter budgets helps a business to hire. Actually, they keep these rates low to help spur lending, but that has yet to happen. We wish they would stop trying to manipulate the market and allow the free market economy to work.

Getting away from the Fed and looking at the earnings picture, we had a mixed week this week. Corporate earnings have been great in some cases, but quite the opposite in others. Apple tore the cover off the ball with their earnings as sales continue to rise. Other companies like Caterpillar and McDonalds also continue to do fine. Yet there are a slew of other companies that haven’t done well.

It is interesting to note that while Apple is doing great, the service providers like AT&T and Verizon are doing poorly, due in part to the subsidies they must pay Apple for their product.

Economic data this week was also mixed. Home sales and leading economic indicators were poor. Yet durable goods posted a solid gain. We also got the fourth quarter GDP number and it showed that we grew by 2.8% last year. It was below the 3% many were expecting, but it was still the highest level we have seen in 18 months.


Next Week

We will have another busy week next week. Corporate earnings will continue to come in at a steady pace. There will also be a significant amount of economic data released, since next week is also the end of the month. As the week progresses, we will get info on personal income and spending, consumer confidence, manufacturing data, and most importantly, January employment data.


Investment Strategy

As the market continues to rise, we become more and more cautious as we worry that it has become overbought. Low expectations and a lack of news out of Europe has provided a nice backdrop for the markets to rally. However, earnings have been mediocre, growth is still slow, and the problems with Europe were never solved.

The actions of governments and agencies both here and abroad have also had a large influence on the markets. It is difficult to make decisions when centrally planning becomes more prevalent. The prospect of a new stimulus would be a catalyst for the markets, but that comes at the whim of policymakers.

We aren’t looking to put more money into stocks at this point, at least for the short term. Longer term, if we had to put money in, 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 still very high.

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 continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at these higher prices.

We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now, and have looked to short them (bet on the prices falling). However, that is looking like a lost cause. With the Fed keeping rates low as far as the eye can see, the likelihood of yields rising in the near term is slim. We thought the bond market would force rates higher, but fighting the Fed has simply been a losing proposition. A short bond position provides a nice hedge here, but the potential for profit is low at the moment.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work, 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.

Commentary for the week ending 1-20-12

The markets kept chugging higher this week. Through the Friday close, the Dow rose 2.4%, the S&P was higher by 2.0%, and the Nasdaq returned a nice 2.8%. Gold also rose, closing the week with a 2.0% gain. Oil sold off slightly, down 0.2% to $98.46 a barrel.

Source: MSN Moneycentral

Even though it was a short and uneventful week, the markets put up some nice returns and currently stand at six month highs. In fact, according to the Wall Street Journal, this has been the best start of the year for the markets in 15 years.

What’s interesting so far is that the stocks that performed horribly last year are soaring this year. For example, Bank of America lost 57% last year, but is up 27% so far this year. Netflix is up 44% after losing 62% last year. Same with Sears, who lost 63% last year and returned 54% this year. The story is the similar for broader sectors like housing and financials. Also, the most shorted stocks (shorting is when an investor bets that the stock will go down) are handily outperforming the market.

Why is this occurring? For one thing, they began at a pretty low starting point. Also, there has been a noticeable lack of news out of Europe. Correlation between asset classes has come off slightly, allowing stocks to trade more independently and more on their fundamentals. Expectations have been set so low that even a modest improvement has been worthy of a rally.

For the most part, though, corporate earnings have been poor. According to CNBC, only 55% of companies have beat estimates, making that the lowest level in 10 years. Usually that number is in the upper 60’s or above. Less than 20% of companies in the S&P 500 have reported so far, so it is still early, but the trend is worth noting.

Economic data this week was mixed. Manufacturing reports showed a slight growth, same for weekly unemployment figures. Inflation measured by the PPI and CPI also showed no gains, signaling no inflation to the markets.

For the year, producer prices (what producers of a product pay for input materials, etc.) rose 4.8% and consumer prices rose 3.0%. According to shadowstats.com, if we measured CPI the way it was calculated in 1990, that inflation rate would be just above 6%. Using 1980 methodologies, the rate would be slightly above 10%!

As we discuss every month on these inflation numbers, the PPI and CPI doesn’t give a good picture on actual inflation. Methodologies change and skew the results. This is worth noting, since the metrics for the PPI are changing next month, so look for inflation to be even lower – according to the measurements, anyway. However, these are the metrics that the Fed relies on so heavily for their outlook, so it is worth following.


Next Week

Next week will be very busy. About a quarter of the S&P 500 listed companies will be releasing their earnings. Also, we will get economic data on housing, durable goods (which are products that don’t wear out quickly, like an appliance, car, or phone), leading economic indicators, and most importantly, 4th quarter GDP.

The Fed will also be in the news as they meet with their decision on interest rates. This month will be interesting as they are beginning their new “openness” policy. The Fed will give many more details on their outlook and reasoning and Fed Chief Ben Bernanke will also hold a press conference to address questions.


Investment Strategy

The market continues to climb and we have enjoyed the rise. However, we are still cautious and are hesitant to add new money here. Low expectations and a lack of news out of Europe has provided a nice backdrop for the markets to rally. A negative news story can instantly reverse this.

If the news is bad enough, though, the prospect of a new stimulus program (QE3) becomes more likely. Especially since there is little sign of inflation (according to the CPI and PPI). If you recall last time, the markets shot up on the prospect of a new stimulus.

As we also saw, but few recognize, the stimulus did nothing to help the economy. It was successful in creating a massive amount of new debt, though, and the markets dropped back to earth when the spending stopped. With the new voting Fed members (not all of the Federal Bank members vote. It rotates every year and new members began with the new year.) expressing favorable positions on stimulus, the odds of a QE3 are much higher.

If we had to put new money in the markets, 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 still very high.

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 continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices from here.

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.

Commentary for the week ending 1-13-12

The markets moved higher for much of the week until negative news out of Europe caused a drop on Friday. The Dow rose 0.5%, the S&P was up 0.9%, and the Nasdaq returned 1.4%. Gold continued to climb, rising 0.9% for the week. Oil was above the $100 per barrel for much of the week until news broke that Europe would not participate in Iranian oil embargo for at least six months (if ever). That meant there would be no supply problems, so oil fell sharply and closed the week down 2.8% to $98.70 a barrel.

Source: MSN Moneycentral

Until now, we were enjoying a rather uneventful year without news out of Europe impacting the markets. Sadly, we knew that had to end at some point.

On Friday, the ratings company S&P announced a downgrade in the credit rating of several European countries. It started with France (who had a AAA rating, the highest possible), and there were rumors of others. This scared the markets as they dropped over 1.2% at one point, but ended up closing the day down just 0.4%. By the end of the day, nine countries in total were downgraded.

You would think that European bond yields would rise on the news (yields are higher when risk is higher; making it cost more to borrow). However, there was very little reaction.

One explanation is that the downgrade was anticipated, so it was of little surprise. Another is that the European Central Bank (ECB) has been actively buying these bonds (or funding banks to purchase these bonds), so that has been keeping bond yields in check, as well.

Greece also made news over their debt problems. Negotiations with bondholders were halted due to a disagreement on their debt restructuring (they need to change the terms of outstanding debt repayments to remain solvent). Obviously the bondholders have been reluctant to give up too much and thought Greece was asking for to large a sacrifice from them. If Greece can’t manage to straighten out their debt problems, it has been rumored that an exit from the Euro could be possible.

Adding to the jittery market on Friday, JP Morgan announced disappointing earnings from the last quarter. The news sent financial sector stocks sharply lower.

Earlier in the week, the aluminum producer Alcoa reported their earnings. The results were rather poor, but came in at the estimates. That set the mood that earnings season might not be great, but in line with forecasts.

Economic data this week was mixed. The Beige Book from the Fed is a report on economic conditions around the U.S. and it showed a slight growth. While not great, slight growth is better than no growth (or negative growth).

Retail sales for December also showed a slight growth, rising 0.1%. While any gain is nice, the earnings from those sales fell by 0.2%. So stores sold slightly more in December, but they sold items at a cheaper price, meaning they made less money.

Even more interesting, it was reported this week that consumer borrowing (through credit cards, etc.) rose by the largest amount in 10 years in December. This was interpreted as a good sign since it meant people were spending more. This is not a positive development in our opinion, since it means people technically have less money to spend and must borrow to make up the difference. A large reduction in debt is needed, but that doesn’t look like it will happen anytime soon.

The unemployment picture also got a bit darker as initial jobless claims (which measures how many people filed for unemployment benefits in the week) rose sharply to 399,000 for the week. That number had been improving in recent weeks and last stood at 375k. It looks like much of that improvement was due to temporary factors with the holiday season (the figures are reported with seasonal adjustments already, which should account for much of the temporary, seasonal hiring).

Another employment report, the JOLTs survey (is actually called the Job Openings and Labor Turnover Survey. It measures just what it says and is regarded as a more accurate employment metric) showed little improvement. Hiring increased slightly, but job openings have actually decreased. It does not show the same improvement that many were so happy about in the last few weeks.


Next Week

It will be a short week next week as the markets will be closed on Monday for MLK day. The remaining four days will be pretty busy, though. Corporate earnings will start coming in at a steady pace. So far, there has been little to be excited about, but next week will give us a better picture of the earnings picture.

For economic data, we will get info on housing, as well as inflation with the PPI and CPI (the producer and consumer price indexes).


Investment Strategy

It figures that the market would rally when we announce a more cautious outlook. As we saw on Friday, though, the market can be jittery and any negative story can send the markets sharply lower.

With this negative news, we are also entering that loony time where bad news is good news. Traders know if the news is bad enough, the Fed (or ECB) will step up and announce a new stimulus program. Remember last time, the markets shot up on the prospect of a new stimulus.

As we also saw, but few recognize, the stimulus did nothing to help the economy. It was successful in creating a massive amount of new debt, though, and the markets dropped back to earth when the spending stopped. With the new voting Fed members (not all of the Federal Bank members vote. It rotates every year and new members began with the new year.) expressing favorable positions on stimulus, the odds of a QE3 are much higher.

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 still very high.

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 continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices from here.

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.

Commentary for the week ending 1-6-12

We’re back at it for 2012, hoping you had a pleasant Christmas and New Year’s. Stocks jumped right out of the gate to open 2012, with the Dow rising 1.1%, the S&P climbed 1.6%, and the Nasdaq popped higher by 2.6%. Commodities also rebounded, with gold higher by 3.2% to $1,616 an ounce. Gas prices rose as the threat from Iran increased, with oil rising above $100 a barrel and closing the week up 2.8%.

Source: MSN Moneycentral

The year kicked off with much welcomed gains in a relatively uneventful week on Wall Street. We even had a rare period without European problems dominating headlines.

The gains for the week all came on the first day, Tuesday, likely due to new money being put back in the market for the new year. Referred to as the January effect, money generally enters the first month of the year as investors get back into the market after selling out of losers last year for tax purposes.

The beginning of the year is also when investors like to break out the old stock traders almanac and make predictions based on historical patterns. For example, if the market rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.

Also, if the first month closes higher, there is about a 3 out of 4 chance that the market will be higher for the year. These predictions didn’t work out last year, so we wouldn’t go making investment decisions based on these patterns.

Now is time of year when analysts get on TV to make predictions for the year, too. The average of all these predictions stands at about a 6% return for 2012. Last year the average was 8% and the market returned 0%, just for some historical context. We would love to see a track record of their past calls to see how accurate they really are, but we are pretty sure there is a reason why this is not done.

We have no idea what the market will do next year and neither does anyone else, frankly. We can say with certainty that large amounts of debt around the world will create headwinds for the future. Unfortunately, we are living in a world where policy makers and macro events are having more of an impact on the markets than more traditional metrics like business earnings and sales. The uncertainty this creates requires caution.

Getting back to the week, we did receive some encouraging economic data. Manufacturing showed growth, rising slightly from its very slow pace.

The top story was the employment report, showing a surprising gain in December. The economy created 200,000 jobs and the unemployment rate crept lower to 8.5%. There is no doubting this is a good number, but as we’ve said in the past, there is more to this picture than is usually reported.

When digging deeper, we find that the size of the labor force currently stands at a 27 year low. If we were to measure the unemployment rate using the size of the labor force at the beginning of the recession, that rate would be around 11-12%. The worst statistic of all, the average length of unemployment stands at 40.8 weeks. The means the average person is unemployed for around 10 months! So while the numbers are improving, the labor picture is still very poor.


Next Week

Not much time to rest as next week will be very busy. Earnings season gets underway on Monday as the aluminum producer, Alcoa, is set to report. With commodities weakening over the last quarter, their report is not likely to be very good, setting a sour tone for earnings season.

Economic data will also be fairly strong as we get info from the Fed in their Beige Book report (which is a report on current economic conditions), info on inventories, and details on trade. Retail sales are also set to report, but early reports show little strength there as the Christmas shopping season wasn’t as strong as expected.

While we have enjoyed not hearing about Europe, they may be back in the headlines next week. German leader Merkel and French leader Sarkozy are set to meet, laying groundwork for a European-wide meeting at the end of the month. So this will be a meeting about a meeting, if you will. The strength of the Euro currently stands at a 16-month low against the dollar and bond yields are rising, so the importance of this meeting is increasing.


Investment Strategy

In the short term, the market is beginning to look expensive here. Bearish (negative) sentiment is extremely low, meaning investors are becoming overly optimistic. That is usually a predictor of a coming sell-off. Volatility is low at the moment, but a negative story out of Europe can change that in an instant.

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 still very high.

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. Like we mentioned above, debt problems and continuous bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices.

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.