The markets turned in another solid performance, again reaching new highs. For the week, the Dow rose 1.2%, the S&P was up 1.4%, and Nasdaq turned in a gain of 1.7%. Gold again had little change, up 0.1% for the week. High oil prices continue to pose a problem as prices rose 4.6% to $103 per barrel. Brent crude (the other major type of oil) was up nearly 2% to almost $120 per barrel. We will discuss oil prices further below.
Source: MSN Moneycentral
The markets just keep chugging higher and have shown little signs of slowing down. Some good news about the economy, as well as Europe, provided the momentum this week. The Dow is currently near its highest level in four years.
We opened the week with news out of Greece. Over the weekend, the government passed tough spending measures that allowed them to receive a new round of bailout money. However, the Greek people took to the streets, protesting and burning many businesses.
There is still the possibility that the cuts don’t take place, though, as we believe they will have a tough time being implemented. Still, the markets would like closure on this subject for now, even though we may be revisiting this issue again in the near future.
The troubles in this region have had an effect on oil prices, though the major driver behind the price increase is Iran. Iran is a real nuisance and their activities have helped push Brent crude prices to the highest level since May.
Brent is the type of oil found in most of the European region, but is also used in gas along much of the East and West coasts of the US. That is why we are experiencing a surge in gas prices. While prices are high now, they tend to be even higher in the summer. This is a troubling though and poses a major threat to our economy. Makes you wonder why we would turn down oil from Canada, forcing them to export it to China.
The Fed gave the markets some support this week. The minutes from their latest meeting showed that more stimulus is still on the table. The Fed would again buy bonds to push down interest rates and spur lending if the conditions warranted it. And the threshold looks relatively low. Any chance of decline in the employment picture, even with slow growth, would give them a green light for more stimulus.
The last few stimulus programs did little to help the economy and we have doubts that another round would help. Interest rates are already at all-time lows, yet problems persist. We have too much debt that needs to be worked off. Flooding the market with more cheap money only creates more problems and fuels inflation.
On the subject of inflation, this week we saw the January numbers on inflation in the CPI and PPI. Both showed little change, with prices rising 0.2% for consumers and 0.1% for producers. For the past year, consumer prices have risen 2.9% and 4.1% for producers. As we say every month, these numbers don’t accurately reflect the high prices people are faced with in their everyday lives. The new threat from rising oil prices is yet another inflation headwind to contend with.
Next Week
We have a short week next week with the President’s day holiday on Monday. The remainder of the week will be fairly light for economic data, with some info on housing and manufacturing. Corporate earnings will be lighter, but will still have some big names like Home Depot, Wal-Mart, HP, and Toll Brothers.
Investment Strategy
We are still cautious about the market despite this remarkable run. Climbing in practically a straight line up since the beginning of the year, the Dow has risen about 6%. The S&P is up over 8%. Even more incredibly, the Nasdaq is 13% higher! If you go back to an earlier starting point, the Dow is up over 20% from the lows seen last October. The Nasdaq is up over 26%!
Interesting to note on the Nasdaq, Apple currently comprises 15% of that index. Not sure how Apple has been able to do it, but this one company is up 24% year-to-date. This explains a large factor behind the rise of the Nasdaq market.
When markets rise this much and investors get this excited, we begin to worry. It can be frustrating having a cautious outlook on a rise like this without a pullback. Like the legendary investor John Templeton said, markets die on euphoria. It’s impossible to tell if we’ve reached the “euphoria” stage yet, but investors are clearly excited.
If we were to get a pullback, we would put money into large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising.
We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. However, we 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.
Source: MSN MoneycentralThe markets just keep chugging higher and have shown little signs of slowing down. Some good news about the economy, as well as Europe, provided the momentum this week. The Dow is currently near its highest level in four years.
We opened the week with news out of Greece. Over the weekend, the government passed tough spending measures that allowed them to receive a new round of bailout money. However, the Greek people took to the streets, protesting and burning many businesses.
There is still the possibility that the cuts don’t take place, though, as we believe they will have a tough time being implemented. Still, the markets would like closure on this subject for now, even though we may be revisiting this issue again in the near future.
The troubles in this region have had an effect on oil prices, though the major driver behind the price increase is Iran. Iran is a real nuisance and their activities have helped push Brent crude prices to the highest level since May.
Brent is the type of oil found in most of the European region, but is also used in gas along much of the East and West coasts of the US. That is why we are experiencing a surge in gas prices. While prices are high now, they tend to be even higher in the summer. This is a troubling though and poses a major threat to our economy. Makes you wonder why we would turn down oil from Canada, forcing them to export it to China.
The Fed gave the markets some support this week. The minutes from their latest meeting showed that more stimulus is still on the table. The Fed would again buy bonds to push down interest rates and spur lending if the conditions warranted it. And the threshold looks relatively low. Any chance of decline in the employment picture, even with slow growth, would give them a green light for more stimulus.
The last few stimulus programs did little to help the economy and we have doubts that another round would help. Interest rates are already at all-time lows, yet problems persist. We have too much debt that needs to be worked off. Flooding the market with more cheap money only creates more problems and fuels inflation.
On the subject of inflation, this week we saw the January numbers on inflation in the CPI and PPI. Both showed little change, with prices rising 0.2% for consumers and 0.1% for producers. For the past year, consumer prices have risen 2.9% and 4.1% for producers. As we say every month, these numbers don’t accurately reflect the high prices people are faced with in their everyday lives. The new threat from rising oil prices is yet another inflation headwind to contend with.
Next Week
We have a short week next week with the President’s day holiday on Monday. The remainder of the week will be fairly light for economic data, with some info on housing and manufacturing. Corporate earnings will be lighter, but will still have some big names like Home Depot, Wal-Mart, HP, and Toll Brothers.
Investment Strategy
We are still cautious about the market despite this remarkable run. Climbing in practically a straight line up since the beginning of the year, the Dow has risen about 6%. The S&P is up over 8%. Even more incredibly, the Nasdaq is 13% higher! If you go back to an earlier starting point, the Dow is up over 20% from the lows seen last October. The Nasdaq is up over 26%!
Interesting to note on the Nasdaq, Apple currently comprises 15% of that index. Not sure how Apple has been able to do it, but this one company is up 24% year-to-date. This explains a large factor behind the rise of the Nasdaq market.
When markets rise this much and investors get this excited, we begin to worry. It can be frustrating having a cautious outlook on a rise like this without a pullback. Like the legendary investor John Templeton said, markets die on euphoria. It’s impossible to tell if we’ve reached the “euphoria” stage yet, but investors are clearly excited.
If we were to get a pullback, we would put money into large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising.
We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. However, we 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.
