It was the best week for the markets so far this year with new highs again reached. For the week, both the Dow and S&P gained 2.4% while the Nasdaq rose 2.2%. Gold had a rough week, falling 3.2%. Oil also sold off slightly, down just 0.3% to $107 per barrel, yet remains very high. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed near $126 per barrel.
Source: MSN Moneycentral
The stock market just continues to chug higher. The Dow pushed its way through that 13,000 level it seemed to be stuck under for several weeks. In its rise this week, the Dow also reached highs not seen in over four years. The S&P 500, too, reached its highest level in four years. More impressively, the Nasdaq reached levels last seen in late 2000.
There were several stories contributing to the market gains this week. The biggest catalyst came late Tuesday with news of the banks passing the latest round of stress tests. It caused the market to spike sharply higher, as you can see in the chart above.
With these stress tests, the Fed was checking to see if banks would have enough cash available if another crisis were to occur. They assumed things like a 50% drop in the stock market, lower housing prices, and the unemployment rate rising to 13%. Of the 19 banks tested, only one did not pass, Ally Bank. Three others, including Citi, were near that failure level. In the end, the news gave a big boost to banking stocks and the market followed suit.
Also on Tuesday, the Fed held a policy meeting where they issued a positive statement on the economy. That news also contributed to the large Tuesday gains.
The Fed statement was important in that it meant another round of stimulus was off the table – at least for the time being – since an improving economy does not warrant further stimulus. Without the prospect of this stimulus, gold dropped sharply, since gold had risen on the prospect of further money printing.
Treasury bonds also sold off sharply, which meant yields rose. The yield on the 10-year bond had been stuck at or below 2% since October but rose to 2.3% this week. These yields are tied to things like mortgage rates, so the cost to borrow could tick higher. The Fed likes lower rates since it means more borrowing, and thus a strengthening of the economy, in their eyes. Hence their desire to keep rates low.
There was some decent economic data this week. New manufacturing reports showed growth and retail sales rose to the highest level in five months.
Inflation reports showed another uptick as both the CPI and PPI rose 0.4% in the last month. Over the past year, the CPI rose 2.9% and PPI rose 3.3%.
As you are probably aware, we have a tough time accepting these measurements as an accurate reflection of inflation, largely due to the “massaging” involved in reaching a final number.
Just last week, the American Institute of Economic Research released its Everyday Price Index, which is a measurement of prices people actually pay for everyday items. This includes things like food, energy, cable bills, etc., while excluding big items like cars or homes. Their index showed a gain of 8.1% in the past year, as any regular grocery shopper can confirm.
A timely example of another problem with these inflation measurements can be seen in the Friday release of the new Apple iPad. Like the iPad 2, the new model went on sale for $500. So both models cost the exact same when released. However, since the newer model has better “stuff” inside, this new iPad is technically worth more than its predecessor. Yet since it sells at the same price, it is actually considered deflation (it is worth more, but sells for less, hence deflation). This makes inflation look lower than it actually is.
Speaking of Apple, shares of the company touched the $600 mark this week and are up almost 45% since the beginning of the year. No doubt this has been an amazing run.
There was an article this week in the Wall Street Journal about dozens of mutual funds owning Apple stock, but they weren’t mutual funds you would expect. 40 mutual funds with a focus on dividends own this stock, yet Apple has never paid a dividend. 50 funds aimed at small and mid cap stocks own Apple, but it is the biggest stock out there.
When investors get this euphoric about a stock, we have to worry. However, we have worried about this stock for many months and have clearly been wrong as it just keeps climbing higher.
Next Week
Next week will be a bit quieter in terms of data. There will be a slew of data releases on housing, plus the leading economic indicators. We will also get earnings releases from some large companies like General Mills, FedEx, and Oracle.
Investment Strategy
It seems like we are in another one of those periods where the market rises no matter what. Obviously it rises on solid economic data, like it did this week. But it also rises on negative data when it knows the Fed will step in with more stimulus. We saw that with the market drop last week when news of another stimulus pushed the markets back up. It is tough to make decisions when government agencies have such an effect on the market.
When investors get this excited, though, we get nervous. At this point we are not actively adding any new money, but are holding back on selling, too.
There are some headwinds we are concerned with for the future. High and climbing gas prices remain a serious concern. Absolutely asinine rhetoric out of Washington does little to help the problem, as well. Perhaps we will get into this topic with a little more detail next week.
A little known index to many investors, but widely watched in the industry, is the VIX index. Without getting to detailed, the VIX is basically a measure of volatility. It spikes higher when investors are more worried and markets are volatile. This week, though, the VIX hit a five year low. That shows complacency in the market and possible signs of topping.
We would still look to add new money on a pullback, with a focus 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. Also, there is always the opportunity to find undervalued individual stocks at any point.
There are several long term ideas we are especially bullish (optimistic) on. As we mentioned in the previous weeks, we like oil producers, especially ones related to the shale oil play. Plus companies related to auto repair and very low end retail businesses.
We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. With the recent gold sell-off, the commodity is beginning to look oversold. However, we would be hesitant to add more at this level.
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), and actually got some relief on this position this week. However, there is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into the bond market move this week. Still, the short bond position provides a nice hedge here, but we still think 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, in international stocks, 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 stock market just continues to chug higher. The Dow pushed its way through that 13,000 level it seemed to be stuck under for several weeks. In its rise this week, the Dow also reached highs not seen in over four years. The S&P 500, too, reached its highest level in four years. More impressively, the Nasdaq reached levels last seen in late 2000.
There were several stories contributing to the market gains this week. The biggest catalyst came late Tuesday with news of the banks passing the latest round of stress tests. It caused the market to spike sharply higher, as you can see in the chart above.
With these stress tests, the Fed was checking to see if banks would have enough cash available if another crisis were to occur. They assumed things like a 50% drop in the stock market, lower housing prices, and the unemployment rate rising to 13%. Of the 19 banks tested, only one did not pass, Ally Bank. Three others, including Citi, were near that failure level. In the end, the news gave a big boost to banking stocks and the market followed suit.
Also on Tuesday, the Fed held a policy meeting where they issued a positive statement on the economy. That news also contributed to the large Tuesday gains.
The Fed statement was important in that it meant another round of stimulus was off the table – at least for the time being – since an improving economy does not warrant further stimulus. Without the prospect of this stimulus, gold dropped sharply, since gold had risen on the prospect of further money printing.
Treasury bonds also sold off sharply, which meant yields rose. The yield on the 10-year bond had been stuck at or below 2% since October but rose to 2.3% this week. These yields are tied to things like mortgage rates, so the cost to borrow could tick higher. The Fed likes lower rates since it means more borrowing, and thus a strengthening of the economy, in their eyes. Hence their desire to keep rates low.
There was some decent economic data this week. New manufacturing reports showed growth and retail sales rose to the highest level in five months.
Inflation reports showed another uptick as both the CPI and PPI rose 0.4% in the last month. Over the past year, the CPI rose 2.9% and PPI rose 3.3%.
As you are probably aware, we have a tough time accepting these measurements as an accurate reflection of inflation, largely due to the “massaging” involved in reaching a final number.
Just last week, the American Institute of Economic Research released its Everyday Price Index, which is a measurement of prices people actually pay for everyday items. This includes things like food, energy, cable bills, etc., while excluding big items like cars or homes. Their index showed a gain of 8.1% in the past year, as any regular grocery shopper can confirm.
A timely example of another problem with these inflation measurements can be seen in the Friday release of the new Apple iPad. Like the iPad 2, the new model went on sale for $500. So both models cost the exact same when released. However, since the newer model has better “stuff” inside, this new iPad is technically worth more than its predecessor. Yet since it sells at the same price, it is actually considered deflation (it is worth more, but sells for less, hence deflation). This makes inflation look lower than it actually is.
Speaking of Apple, shares of the company touched the $600 mark this week and are up almost 45% since the beginning of the year. No doubt this has been an amazing run.
There was an article this week in the Wall Street Journal about dozens of mutual funds owning Apple stock, but they weren’t mutual funds you would expect. 40 mutual funds with a focus on dividends own this stock, yet Apple has never paid a dividend. 50 funds aimed at small and mid cap stocks own Apple, but it is the biggest stock out there.
When investors get this euphoric about a stock, we have to worry. However, we have worried about this stock for many months and have clearly been wrong as it just keeps climbing higher.
Next Week
Next week will be a bit quieter in terms of data. There will be a slew of data releases on housing, plus the leading economic indicators. We will also get earnings releases from some large companies like General Mills, FedEx, and Oracle.
Investment Strategy
It seems like we are in another one of those periods where the market rises no matter what. Obviously it rises on solid economic data, like it did this week. But it also rises on negative data when it knows the Fed will step in with more stimulus. We saw that with the market drop last week when news of another stimulus pushed the markets back up. It is tough to make decisions when government agencies have such an effect on the market.
When investors get this excited, though, we get nervous. At this point we are not actively adding any new money, but are holding back on selling, too.
There are some headwinds we are concerned with for the future. High and climbing gas prices remain a serious concern. Absolutely asinine rhetoric out of Washington does little to help the problem, as well. Perhaps we will get into this topic with a little more detail next week.
A little known index to many investors, but widely watched in the industry, is the VIX index. Without getting to detailed, the VIX is basically a measure of volatility. It spikes higher when investors are more worried and markets are volatile. This week, though, the VIX hit a five year low. That shows complacency in the market and possible signs of topping.
We would still look to add new money on a pullback, with a focus 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. Also, there is always the opportunity to find undervalued individual stocks at any point.
There are several long term ideas we are especially bullish (optimistic) on. As we mentioned in the previous weeks, we like oil producers, especially ones related to the shale oil play. Plus companies related to auto repair and very low end retail businesses.
We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. With the recent gold sell-off, the commodity is beginning to look oversold. However, we would be hesitant to add more at this level.
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), and actually got some relief on this position this week. However, there is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into the bond market move this week. Still, the short bond position provides a nice hedge here, but we still think 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, in international stocks, 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.
