Although we had a lot of movement in the markets this week, stocks ended with little change. For the week, the Dow was off 0.4% to 12,922, the S&P rose just 0.1%, and Nasdaq was higher by 0.4%. Gold roughly mirrored the movement of stocks, returning 0.1%. Oil remains high at $107.40 per barrel and rose 0.7% this week. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed at $126 per barrel. These high oil prices remain a serious concern.
Source: MSN MoneycentralThe Dow is having a hard time breaking through that 13,000 level. We first reached this point 3 weeks ago and have hovered below it ever since. We received some economic data this week that was decent, but new headlines out of Europe muddied the waters a bit.
Greece was back making news as they were to finally restructure their debt. Basically that meant Greece would reduce the amount of debt they owe and investors would lose a lot of money on their bonds. To be binding, the bondholders actually had to agree to the terms of the restructuring, which is not an easy task.
On Tuesday, it looked like Greece would have some difficulty in getting that agreement and the markets sold off sharply. At least, that was one reason for the sell-off.
We saw the Greek news as more of as an excuse to take profits, since the news wasn’t that significant. The market has steadily risen without a pullback, with the S&P up over 9% for the year and well over 20% since the October lows. A climb like this without a pullback makes many investors anxious (including us), and the news provided a reason to sell. We think the drop was mostly a round of profit taking by anxious investors after this remarkable run.
The Greek debt situation was wrapped up by the end of the week, though, with a solid majority of bondholders accepting the restructuring deal. These bondholders will take a loss of over 50% on their investment, erasing a little over €100 billion (or around $130 billion) in debt from their books. This default is the largest ever for a sovereign country.
So why would anyone agree to a loss of over 50% on their investment? There are many reasons why, but for one thing, it may be better than the alternative of nothing.
One of the other reasons is that many investors had insurance on their investment through the CDS market (the CDS, or Credit Default Swap, market provides a financial product that acts like insurance and pays out in case of default). This restructuring was seen as a default, so the CDS will pay out a chunk of money, similar to the way an insurance company would have to pay out for a claim.
At any rate, the market drop on Tuesday was the largest of the year and had many wondering if this was the beginning of the next leg down. However, the Fed decided it would have none of that.
On Wednesday morning, the Wall Street Journal reported that the Fed was contemplating a new round of stimulus (you can see the rise in the market around mid-morning when the story was released). Without getting too into the details, the Fed would be buying more bonds to drive down interest rates and spur lending.
With the market so dependent on stimulus, it was no surprise they rose steadily on the news. It also sent commodity prices higher and the strength of the dollar lower.
It has become a frustration to have the Fed constantly intervene in the market. For one thing, this isn’t their job. Their purpose is to stabilize prices and promote employment. These stimulus programs seem to do the exact opposite. Prices continue to rise as the dollar weakens and employment shows only slight growth (which we will touch on later). Interest rates are already at historic lows, so we aren’t sure what more they can accomplish.
We long for the days when the market can function on its own, without the constant meddling by the government and its agencies.
Economic data this week was mostly good. Service sector businesses showed solid improvement and consumer borrowing also showed growth (well, the market likes this increase in borrowing, but we don’t agree that increases in debt are a positive). On the other hand, our trade deficit increased to the largest level in over three years as our exports have slowed considerably.
Also this week we got information on the employment picture. In the month of February, the economy gained 227,000 jobs, slightly better than estimates and the official unemployment rate held steady at 8.3%.
These figures were still decent as any growth is a positive, but they still leave much to be desired. Digging a little more into the data, about half of the jobs were low paying positions and 45,000 of those are temporary jobs. The labor participation rate did tick higher, but if we were to figure the unemployment rate using the size of the labor force at the beginning of the recession, our unemployment rate would be over 10%.
Next Week
Next week will again be a busy one as we get several economic reports. There will be info on retail sales, manufacturing strength, employment with the JOLTS report (which gives a more accurate and detailed look at employment, but lags by a month), and inflation with the PPI and CPI reports.
Of particular importance, we will be watching the effect the solar storms will have on the markets. We say this lightheartedly, but for those of you who like looking at historical data, Bloomberg reported that the stock market traditionally sells off after a solar storm. In the six days after its occurrence, historically, the return on the S&P is -0.76%, the Nasdaq is -2.51%, and -1.76% for all stocks listed on the New York Stock Exchange.
Investment Strategy
While we mentioned above that we would love to see the Fed leave the market alone, complaining about it doesn’t make us any money. If the Fed will keep stepping in and propping up the market, odds are the market will go higher.
We still remain cautious, but it’s hard to be too pessimistic with the Fed lurking with their money printing presses. At this point we are not actively adding any new money, but are holding back on selling, too.
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. With the high oil prices, we like oil production companies, especially ones related to the shale play, and would add to these positions on a pullback.
We also like businesses related to auto repair as people hold on to their cars for longer periods, despite the appearance of recent sales growth. Many think car sales will eventually increase, but we don’t. Fuel efficiency requirements have raised the costs of new vehicles (and will dramatically raise costs in the future). The price of used cars has increased, too. Older cars mean more repairs. Still, these stocks are also expensive and would look to buy on a pullback.
The other idea we like is very low end retail stores. These companies will do well as costs increase and shoppers look for bargains.
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. Even at these recent low levels, we would be hesitant to add more at these here.
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, 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.
