Coming off the best week of the year, the markets turned in their worst week, though the decline was relatively mild. For the week, the Dow was lower by 1.2%, the S&P returned -0.5%, and the Nasdaq fell 0.4%. Gold sold off most the week but rose on Friday, giving it a return of 0.4%. Oil followed a similar path to gold, ending the week with a -0.7% return and closing near $107 per barrel. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed slightly above $125 per barrel. We will discuss oil further below.
Source: MSN Moneycentral
Though the market declined steadily throughout the week, it was fairly uneventful.
The decline came largely on news of slowing growth around the world, most notably in China. The mining company, BHP Billiton, reported a decline in demand, indicating that slower growth. Since the country is so reliant on commodities for their growth, commodity prices plunged. Metals like gold, silver, and copper were hit particularly hard. Other commodities like oil fell, as well, since less growth would imply less demand for oil.
Housing data released this week also underwhelmed. Demand for homes was not as strong as estimated, adding another pressure on the market.
Though these news items were disappointing, they were not really that unexpected. We believe the selling was largely due to profit taking. With the S&P 500 up over 11% so far this year, the news provided an opportunity to take some gains off the table.
The market did get support this week, though. Goldman Sachs made news by announcing that this was the best time in a generation to buy stocks. We’re not quite sure if we buy that, especially after the run the market has had recently. We can’t forget that Goldman made a similar call on emerging markets about a year ago. In the past year, emerging markets are off over 8% while the S&P 500 is up almost 8%.
The ever-popular Apple continued its run, up 1.8% this week. The week opened with news that Apple would finally be doing something with their mountain of cash. The company announced a dividend, which was a decent move. Additionally, they will be buying back shares of their stock. We aren’t sure if that is the best play at this point, since shares are selling around all-time highs and up nearly 50% this year alone. The stock initially sold off on the news, but rallied back to close just under that $600 mark for the week.
For the remainder of this section we will discuss the situation with oil prices, as average gas prices near $4.00 a gallon. There has been a lot of rhetoric and misinformation that we believed warranted some clarification. Unfortunately the discussion is rather lengthy, but we tried to be as concise as possible.
Politicians like to say there is no “magic bullet” to bring down gas prices and additional drilling is useless. This is entirely incorrect, as we will discuss further below. First, let’s give a little background.
We’ll start with a popular data point that is constantly mentioned. “The U.S. only has 2% of the world’s oil, but consumes over 20%.” Technically this is correct, but is highly dishonest. The 2% figure excludes oil we know about but are unable to access, which includes land put off limit by the government.
Real world estimates vary, but most put the U.S. as having over a trillion - and into the trillions - of barrels in reserves. However, 20 billion barrels is the figure the government uses for that 2% of supply number, since that is all we can currently prove lies in those permitted areas.
What’s interesting is that in 1944, it was estimated that the U.S. had the same 20 billion in reserves. Yet since that time, we produced almost 170 billion barrels, showing how unreliable these estimates are. More realistic estimates show that we have enough recoverable oil to last 200 years.
Another true fact, the U.S. has increased production in the last couple years. Thankfully, this has come about due to technology advances, making drilling in shale areas more economical. The increase is due to the drilling on private lands, as drilling on federal land has actually declined. The government can not take credit for this increase in drilling, as many in Washington are doing.
In reality, the government has made it more difficult to recover oil. More land has been placed off limits and only 85% of offshore areas are open to drilling.
Additionally, obtaining a permit to drill has become more costly and time consuming. Only 23% of drilling plans have been approved, whereas the average is closer to 75%. The amount of deep water drilling permits is running at 30% below average and permits are actually down under this administration.
Once the oil is out of the ground, it must be sent to refineries to be turned into gas. This is where additional pipelines would help, since there is a glut of oil at the main refining crossroads of Cushing, OK.
The glut at Cushing is caused by several factors. One is the increase in supply from shale oil in the Bakken and oil sand regions, which is a nice problem to have. But another reason for the overabundance is the lack of refineries to send the oil to.
In 2010, there were 12 refineries on the East coast. Since then, four refiners have shut down due to high costs. The Wall Street Journal reported this week that another refinery owned by Sunoco was also looking at shutting down. The increased costs stem from increased regulations by the EPA. Obviously when 1/3 of the refining capacity is lost, prices will rise.
That leads us to the immediate solutions. Scaling back on EPA regulations can alleviate the burden on refiners, bringing additional supply back online. A pipeline to move the oil also helps.
Another problem is the weak dollar. With commodities priced in dollars, when our currency declines, it takes more dollars to buy that commodity. As you can see in the chart on the right (provided by Investors Business Daily), there is a strong correlation between the price of oil and the value of our currency. Easy money policies from the Fed weaken the dollar and cause a rise in oil prices.
The administration is trying to attack the high prices from the demand side. While calling oil the fuel of the past, the focus is more on solar and wind energy, which are very costly and ineffective solutions at this time. They try to reduce consumption by demanding higher mileage requirements on vehicles. This is the problem and is clearly not working.
The best way to bring down the price of oil is to realize that oil is a market, like any other commodity. It is forward-looking, so it will move based on expectations of the future. At this point, the market sees nothing in the future that gives any reason to sell. The market needs some reason to sell.
Even an announcement of further drilling will bring down prices. If you recall back to 2008, prices were also spiking. As oil crept towards $150 per barrel, President Bush made an announcement that the federal moratorium on offshore drilling would be lifted. Prices immediately dropped, and that week marked the very top in oil prices. It doesn’t matter that production won’t come online for years, as this is how the market works. Oil needs a reason to sell, it just hasn’t seen that reason yet.
Next Week
It will be a fairly busy week next week in terms of economic data. There will be more data on housing, plus info on consumer confidence, durable goods (which are items that have a long life, like an appliance), personal income and spending, and info on manufacturing.
Next week will be the last week of the quarter, as well. That could mean upward pressure on stocks as professional investors buy up winning stocks to improve the appearance of their portfolios. This is often referred to as ‘window dressing’.
Investment Strategy
Little change here. Investors are extremely bullish (optimistic) at this time. When investors get this excited, though, we get nervous. Right now we are not actively adding any new money, but are holding back on selling, too.
Like we mentioned last week, the VIX index is basically a measure of volatility. It spikes higher when investors are more worried and markets are volatile. This week it continued to slide lower, again reaching new five year lows. 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. Companies related to auto repair and very low end retail businesses also look promising.
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 still 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). Yields declined slightly this week, but are still above the recent average. There is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into this bond market move. 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 MoneycentralThough the market declined steadily throughout the week, it was fairly uneventful.
The decline came largely on news of slowing growth around the world, most notably in China. The mining company, BHP Billiton, reported a decline in demand, indicating that slower growth. Since the country is so reliant on commodities for their growth, commodity prices plunged. Metals like gold, silver, and copper were hit particularly hard. Other commodities like oil fell, as well, since less growth would imply less demand for oil.
Housing data released this week also underwhelmed. Demand for homes was not as strong as estimated, adding another pressure on the market.
Though these news items were disappointing, they were not really that unexpected. We believe the selling was largely due to profit taking. With the S&P 500 up over 11% so far this year, the news provided an opportunity to take some gains off the table.
The market did get support this week, though. Goldman Sachs made news by announcing that this was the best time in a generation to buy stocks. We’re not quite sure if we buy that, especially after the run the market has had recently. We can’t forget that Goldman made a similar call on emerging markets about a year ago. In the past year, emerging markets are off over 8% while the S&P 500 is up almost 8%.
The ever-popular Apple continued its run, up 1.8% this week. The week opened with news that Apple would finally be doing something with their mountain of cash. The company announced a dividend, which was a decent move. Additionally, they will be buying back shares of their stock. We aren’t sure if that is the best play at this point, since shares are selling around all-time highs and up nearly 50% this year alone. The stock initially sold off on the news, but rallied back to close just under that $600 mark for the week.
For the remainder of this section we will discuss the situation with oil prices, as average gas prices near $4.00 a gallon. There has been a lot of rhetoric and misinformation that we believed warranted some clarification. Unfortunately the discussion is rather lengthy, but we tried to be as concise as possible.
Politicians like to say there is no “magic bullet” to bring down gas prices and additional drilling is useless. This is entirely incorrect, as we will discuss further below. First, let’s give a little background.
We’ll start with a popular data point that is constantly mentioned. “The U.S. only has 2% of the world’s oil, but consumes over 20%.” Technically this is correct, but is highly dishonest. The 2% figure excludes oil we know about but are unable to access, which includes land put off limit by the government.
Real world estimates vary, but most put the U.S. as having over a trillion - and into the trillions - of barrels in reserves. However, 20 billion barrels is the figure the government uses for that 2% of supply number, since that is all we can currently prove lies in those permitted areas.
What’s interesting is that in 1944, it was estimated that the U.S. had the same 20 billion in reserves. Yet since that time, we produced almost 170 billion barrels, showing how unreliable these estimates are. More realistic estimates show that we have enough recoverable oil to last 200 years.
Another true fact, the U.S. has increased production in the last couple years. Thankfully, this has come about due to technology advances, making drilling in shale areas more economical. The increase is due to the drilling on private lands, as drilling on federal land has actually declined. The government can not take credit for this increase in drilling, as many in Washington are doing.
In reality, the government has made it more difficult to recover oil. More land has been placed off limits and only 85% of offshore areas are open to drilling.
Additionally, obtaining a permit to drill has become more costly and time consuming. Only 23% of drilling plans have been approved, whereas the average is closer to 75%. The amount of deep water drilling permits is running at 30% below average and permits are actually down under this administration.
Once the oil is out of the ground, it must be sent to refineries to be turned into gas. This is where additional pipelines would help, since there is a glut of oil at the main refining crossroads of Cushing, OK.
The glut at Cushing is caused by several factors. One is the increase in supply from shale oil in the Bakken and oil sand regions, which is a nice problem to have. But another reason for the overabundance is the lack of refineries to send the oil to.
In 2010, there were 12 refineries on the East coast. Since then, four refiners have shut down due to high costs. The Wall Street Journal reported this week that another refinery owned by Sunoco was also looking at shutting down. The increased costs stem from increased regulations by the EPA. Obviously when 1/3 of the refining capacity is lost, prices will rise.
That leads us to the immediate solutions. Scaling back on EPA regulations can alleviate the burden on refiners, bringing additional supply back online. A pipeline to move the oil also helps.
Another problem is the weak dollar. With commodities priced in dollars, when our currency declines, it takes more dollars to buy that commodity. As you can see in the chart on the right (provided by Investors Business Daily), there is a strong correlation between the price of oil and the value of our currency. Easy money policies from the Fed weaken the dollar and cause a rise in oil prices. The administration is trying to attack the high prices from the demand side. While calling oil the fuel of the past, the focus is more on solar and wind energy, which are very costly and ineffective solutions at this time. They try to reduce consumption by demanding higher mileage requirements on vehicles. This is the problem and is clearly not working.
The best way to bring down the price of oil is to realize that oil is a market, like any other commodity. It is forward-looking, so it will move based on expectations of the future. At this point, the market sees nothing in the future that gives any reason to sell. The market needs some reason to sell.
Even an announcement of further drilling will bring down prices. If you recall back to 2008, prices were also spiking. As oil crept towards $150 per barrel, President Bush made an announcement that the federal moratorium on offshore drilling would be lifted. Prices immediately dropped, and that week marked the very top in oil prices. It doesn’t matter that production won’t come online for years, as this is how the market works. Oil needs a reason to sell, it just hasn’t seen that reason yet.
Next Week
It will be a fairly busy week next week in terms of economic data. There will be more data on housing, plus info on consumer confidence, durable goods (which are items that have a long life, like an appliance), personal income and spending, and info on manufacturing.
Next week will be the last week of the quarter, as well. That could mean upward pressure on stocks as professional investors buy up winning stocks to improve the appearance of their portfolios. This is often referred to as ‘window dressing’.
Investment Strategy
Little change here. Investors are extremely bullish (optimistic) at this time. When investors get this excited, though, we get nervous. Right now we are not actively adding any new money, but are holding back on selling, too.
Like we mentioned last week, the VIX index is basically a measure of volatility. It spikes higher when investors are more worried and markets are volatile. This week it continued to slide lower, again reaching new five year lows. 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. Companies related to auto repair and very low end retail businesses also look promising.
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 still 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). Yields declined slightly this week, but are still above the recent average. There is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into this bond market move. 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.
