Commentary for the week ending 4-27-12

The markets dropped sharply to open the week, but rose steadily from there to close with a nice gain.  For the week, the Dow returned a solid 1.5%, the S&P climbed 1.8% and the Nasdaq popped 2.3%.  A large gain on Friday helped gold move higher by 1.3% for the week.  Oil slowly trended higher all week to nearly $105 per barrel, for a 1.0% gain.  Brent crude, used in most of the gas here in the East, moved up to $120 per barrel.

    

Source: MSN Moneycentral

New worries out of Europe put a pressure on the market early in the week, but decent corporate earnings and the prospect of further stimulus helped push the markets higher for the rest of the week. 

Over the weekend France held their first round of elections.  The Socialist candidate received a majority of the votes, a result of the unhappiness with the economy and the steps taken to fix it.  Though a Socialist President is worrisome thought, the election result wasn’t much of a surprise.

What was a surprise, though, was a collapsing of the Dutch government over the weekend.  The idea of a tighter budget has not sat well with the population, resulting in a no-confidence vote in the current government. 

By the end of the week, Romania’s government met a similar fate. 

The worry now becomes Europe not following through with their austerity plans.  The new hot word, austerity here is defined as cuts in government spending with corresponding tax increases to lower their level of debt.  

There is no doubt that spending cuts are badly needed as the status quo is unacceptable.  However, we feel that tax hikes are the wrong way to go.  Higher taxes cut into economic growth, and growth is the solution to their problems.

The trouble is, these tax increases are being lumped in with spending cuts.  As these events in France, the Netherlands, and Romania are showing us, the whole austerity package will get tossed out by the angry citizenry.  A reduction in spending, combined with a reduction in taxes, would be the recipe for success. 

Here in the U.S., corporate earnings have continued to look solid.  Of the companies that have released earnings to this point, 75% have beat expectations.  According to Thomson Reuters, earnings are on pace to grow slightly more than 7% over the last year (and the number falls to 4.7% when stripping out Apple). 

Like we mentioned last week, that 7% growth pace is decent, but still represents a slowdown from the 8.4% growth last quarter and 18% growth in the quarter prior to that. 

Plus, revenues are still roughly flat, indicating a lack of growth in sales.  Much of the growth in earnings has come from a reduction in expenses.  While we like a lean, productive company, we would like to see a pickup in revenues before we get overly optimistic on the corporate picture. 

The Fed was also in the news this week as they held their latest policy meeting.  There was little change in their outlook and they believed interest rates will remain at these historic lows until 2014, like planned.  They also let the door open for another round of stimulus if economic conditions warranted, giving traders the relief they needed that the Fed would step in if the market were to fall. 

Economic data this week rather lackluster. The first look at GDP came in well below estimates, showing just a 2.2% growth.  Though still growing, this indicates that growth is slowing.  It also confirms that this is the worst economic recovery since the last world war.   

Durable goods (which are items with a long life, like a washing machine of TV) were also very poor, showing a drop of 4.2% over the past month.  Weekly unemployment figures notched another gain as they creep back towards the 400,000 a week level. 

We’ll close with some positive news, as consumer confidence ticked slightly higher and housing showed some signs of life. 

Next Week

Next week will again be a busy one.  Corporate earnings will continue to come in at a steady pace. 

With the end of the month next week, we will begin getting April monthly info.  The unemployment report will be released on Friday.  With the recent weekly figures painting a darker picture, we may get a negative surprise here. 

We will also get data on personal income and spending, manufacturing, and service sector strength.

Investment Strategy

Still no change here.  The market looks to have some positive momentum at this point.  Looking further out, we worry about a stagnating economic picture and troubles returning to Europe.  Additionally, the latest round of stimulus wears off in June and the market could drop like it did at the end of the last two stimulus programs.  We would be hesitant to add to stock positions at this point. 

If we were to get a buying opportunity, we like large cap higher-quality and dividend paying 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 an undervalued individual stock at any time. 

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.  We are not looking to add to our gold positions at current prices, though.   

A short Treasury Bond position (bet on a decline in value) provides a nice hedge here, but we think the potential for profit is low at this time. 

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.

Commentary for the week ending 4-20-12

Another bumpy week saw the markets end with mixed results.  Through the Friday close, the Dow turned in a nice 1.4% gain and the S&P was rose 0.6%.  The Nasdaq fell 0.4%, largely due to the poor performance of Apple, which makes up 12% of the index.  Gold slowly trended lower all week, closing down 1.0% to $1,642 an ounce.  Oil was fairly steady and closed a slight 0.2% higher to $103 per barrel.  Brent crude fell to $118 per barrel.  Thankfully, gas prices are beginning to trend lower. 
    

Source: MSN Moneycentral

The markets continued their volatile streak this week with each day seeing large moves.  That action is in stark contrast to the relatively steady market that characterized virtually the entire first quarter.  

Europe was again a factor behind the market moves this week.  Last week, worries about risk in Spain and Italy weighed on the market.  This week the focus narrowed to just Spain.  The cost for the country to borrow rose to the highest level in four months, showing a concern for their poor economy and high debt levels. 

The focus was on Spain due to bond auctions they were holding this week to raise funds.  If the auction went poorly, meaning investors were hesitant to lend them money, it would weigh on the entire continent and even the U.S. markets. 

In the end, their auctions went over reasonably well, with many simply glad it was not worse.  The yield on their 10-year bond (considered the benchmark by which to gauge risk.  A rate above 7% shows a high concern of default) stands slightly above 6%. 

That rate level is still roughly double what it was only a couple months ago, when the European Central Bank (or ECB, which is basically the European version of our Fed) pumped over €1 trillion (about $1.3 trillion in the U.S.) into the European economy.  Risks persist in the European region and are worth closely watching. 

Corporate earnings were another major driver behind the market this week.  Though there were some negative reports, the results were generally positive overall.  According to CNBC, 81% of companies have beat earnings estimates to this point with a 6% growth in earnings over a year ago. 

Of course that sounds great.  Yet estimates have been steadily lowered as we approached this earnings season, so the hurdle to beat estimates is very low.  According to Capital IQ, first quarter growth estimates made last fall called for a 10% gain.  Estimates made in January lowered the number to 4.5%, and the most recent estimate called for just a 0.95% growth.

That 6% growth rate in earnings reported by CNBC is nothing to sneeze at, but keep in mind we saw earnings grow 8.4% last quarter and 18% in the third quarter.  Though still positive, our earnings growth is slowing. 

A different - but very important - way to look at these corporate results is to look at revenue.  That is what the company actually earned selling their goods or services (revenue minus costs equals earnings).  Over the past year, revenue is roughly flat.  That means sales really haven’t grown.  The gain in earnings has come largely due to reductions in costs.  While a lean, productive company is ideal, no growth in revenue shows stagnation.     

Economic data released this week showed a similar story of that slower growth.  Retail sales showed a nice gain, but much of that was attributed to warmer winter weather.  Manufacturing continues to slow and housing data was mostly negative, as well. 


Next Week

Next week will be a rather busy one.  Corporate earnings will continue to come in at a solid pace. 
 
There will also be some important economic data released next week.  The GDP from the first quarter will be released on Friday and will be closely followed.  We will also get more info on housing, plus consumer confidence, durable goods, and manufacturing.    The Fed will be releasing its decision on interest rates, as well. 

One item worth watching will take place this weekend (and may have already occurred by the time you read this commentary) with the Presidential elections in France.  The most likely contender for Nicolas Sarkozy’s seat comes from the Socialist party, where he currently has a double digit lead over the sitting President.

This is worth noting since that candidate, Francois Hollande, is about as far left as they come.  His ideology is basically a replication of an Occupy Wall Street protestor.  If elected, he will raise tax rates on the wealthy to 75%, severely restrict and punish banks, raise the minimum wage, increase government spending, and lower the retirement age, among many other brilliant ideas. 

The French election process comes in two stages, with the first this weekend and a final election between the top two vote-getters coming on May 6th.  The results of this election could have a dramatic effect on the European Union, so the attention is warranted.


Investment Strategy

No change here.  After the recent sell-off, the market now looks to have some momentum to the upside.  Looking further out, we worry about a stagnating economic picture here and troubles returning to Europe.  Plus, as the latest round of stimulus wears off in June, the market could drop just like it did with the conclusion of the previous two stimuli.  We would be hesitant to add to stock positions at this point. 

If we were to get a buying opportunity, we like large cap higher-quality and dividend paying 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 an undervalued individual stock at any time. 

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.  We are not looking to add to our gold positions at current prices, though.   

A short Treasury Bond position (bet on a decline in value) provides a nice hedge here, but we think the potential for profit is low at this time. 

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.

Commentary for the week ending 4-13-12

We had a bit of a roller coaster ride this week as the markets continued to move lower, notching the worst returns of the year. For the week, the Dow was lower by 1.6%, the S&P fell 2.0%, and the Nasdaq returned -2.3%. Gold rose from its recent lows, climbing 1.9% to $1,659 an ounce. Oil has also shown weakness recently and sold off slightly this week, down 0.5% to $102.83 per barrel. Brent crude closed slightly over $121 per barrel.

Source: MSN Moneycentral

The markets opened the week with a steep drop, largely due to the disappointing employment report that was released the prior Friday. The drop continued the trend that started in the prior week, when the latest Fed minutes were interpreted that Chairman Bernanke was unlikely to do another stimulus.

Adding to the downward pressure on stocks, worries in Europe are again rising as investors focus on the economic and debt problems in Spain and Italy. Their ability to reduce that debt has come into question, as well. Dramatic spending cuts have been implemented and are badly needed.

Taxes have been increased in an attempt to raise revenue, but that revenue rarely materializes with tax hikes. A growing economy is the way to increase tax revenues, and higher taxes choke off the necessary growth. In our opinion, a lower tax rate would be favorable to the burdensome high rates many European countries have implemented. Ultimately, we believe the solutions in place will fail.

Slowing growth in China also weighed on the market this week. Though the economy grew at an 8.1% rate in the latest quarter, it is the lowest level of growth since early 2009. Plus, there is a general level of distrust with their government-released data, so there is a concern that the real growth rate is much lower than this.

As we mentioned above, the catalyst for the recent downturn was the speculation of no further stimulus (or quantitative easing, or QE) from the Fed. This week continued the guessing game on the likelihood of future stimulus.

Two Fed officials made headlines with their discussions of new stimulus. The Vice Chairman of the Fed and number two in charge, Janet Yellen, indicated that weaknesses persist in the economy and additional stimulus may be warranted. The Fed has announced that they will hold interest rates at these historically low levels until 2014, but Vice Chair Yellen noted it may be even longer. In a separate speech, the President of the NY Fed made similar remarks.

Since the actions of the Fed have been the primary driver of the stock market, the prospect of new stimulus helped send markets higher.

Corporate earnings for the first quarter began coming in this week. Expectations have been ratcheted lower, so the bar is not set very high here. The average estimate for earnings growth this quarter is just under 1%. Keep in mind, last quarter saw an 8% growth, while the quarter before that had 18% growth.

The earnings released this week were not bad. At least, not at first glance. For some of the bigger names, aluminum producer Alcoa saw a growth in revenue, but had higher costs that lowered overall earnings.

Google saw a nice increase in revenue and even announced a dividend and a stock split (likely to keep up with Apple). However, that splitting of the shares would result in even more power being consolidated to the firm’s founders, and that didn’t go over well with investors. The stock sold off sharply.

Two banks were the other big releases, with both Wells Fargo and JP Morgan turning in nice results. However, higher costs and poor loan growth caught investor’s attention and those stocks sold off, as well.

Continuing that negative theme, economic data this week was rather poor. Weekly unemployment data showed a sharp rise. Small business and consumer sentiment was also lackluster.

Inflation remains above the Fed’s target of 2% with the CPI rising 0.3% last month for a 2.7% annualized number. It’s funny, because the Fed is constantly mentioning how inflation is running below target, but it has been persistently above their stated target of 2%. Inflation is not a concern in their eyes, but is a significant burden when buying groceries or filling up the gas tank.


Next Week

Economic data next week will be relatively light, but corporate earnings will begin coming in at a steady pace. We will get info on retail sales, industrial production, leading economic indicators, and some data on housing.

For corporate earnings, we will get releases from some bigger names like Citigroup, Coca-Cola, IBM, GE, Yum Brands, and McDonald’s.


Investment Strategy

We were not surprised by the recent sell-off and used the opportunity to add to positions mid-week. The market appears oversold in the short term, but we have concerns for the longer term.

We worry that as the latest round of stimulus wears off in June, the market will drop, just like it did at the conclusion of the previous two stimuli.

The chart on the right shows what happened last summer when the stimulus ended. The recent activity of the market is reminiscent of last June, where the market fell and rose again. Unfortunately the market plunged a month later, and that is our concern.

On pull-backs, we look to add to positions in large cap higher-quality and dividend paying 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.

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. We are still hesitant to add more at current prices.

A short Treasury Bond position (bet on a decline in value) provides a nice hedge here, but we 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.

Commentary for the week ending 3-30-12

Please note: There will be no market commentary next week due to the Easter holiday.

The market had some large swings higher and lower this week, but closed out with a decent gain. For the week, the Dow rose 1.0% and both the S&P and Nasdaq returned 0.8%. Gold rose slightly by 0.4%. Oil finally had a negative week, falling 3.6% to $103 per barrel. Brent crude closed slightly below $123 per barrel.

Source: MSN Moneycentral

The close on Friday also marked the end of the quarter, and what a quarter it was. The Dow turned in its best first quarter since 1998 with a return of over 8%. The S&P was up 12%. The Nasdaq returned more than 18%! Keep in mind that this return has already exceeded the full-year expectations of analysts. Granted, no one knows where the market will go from here, but the ride so far has been remarkable.

As for the news of the week, the market opened sharply higher on Monday with news from the Fed.

Given the improving economic picture, particularly with the unemployment rate creeping lower, the market generally assumed further stimulus would be off the table. After all, if the economy is decent, further stimulus would not be needed.

Fed chief Ben Bernanke announced that even with an improvement in the unemployment picture, the Fed would still consider doing a stimulus if they desired. Additionally, they will continue to hold interest rates at these record low levels for at least two more years.

With the market so hungry for stimulus, stocks shot higher on the news. As an investor, though, it is frustrating to have an unpredictable Fed with so much influence on the direction of the market. But the market loves stimulus.

As the week progressed, we received some discouraging economic data. Home sales fell slightly last month. Manufacturing in the Texas, Chicago, and Milwaukee regions showed slight growth, though lower than expected.

The story was similar with durable goods (which are items that have a long life, like an appliance), as they showed a slow growth and came in lower than expected. Consumer confidence slipped a notch as people are increasingly worried about future inflation. All together, this data contributed to the decline seen in the middle part of the week.

Europe was back in the news this week, as well. The level of debt and slow growth in Portugal has become a concern. Spain, too, was making headlines as the country experienced large protests due to spending cuts announced by the government. Dramatic cuts in spending are necessary to remain solvent and their commitment to this has become unclear.

By the end of the week, all worries over Europe were gone. Heads of finance in the Euro-zone announced an increase in the size of emergency lending. That should solve the problem, right?

Oil had a nice sell-off this week as there was finally some optimistic news on increasing supply. Plans for potential new pipelines were announced, an important step to reduce the glut of oil stuck in the middle part of the country.

Another knock to oil prices came as it was reported that President Obama was open to possible drilling in the Atlantic and Alaska. At this point, it looks like only he’s open to surveying for potential drilling spots as there are no plans to offer leases any time soon. We aren’t sure what company would be interested in exploring areas they can’t drill on, but it at least appeared to be a step in the right direction.

At the same time, though, he sought to raise taxes on oil companies. We aren’t sure how raising taxes on an industry would bring down prices, but apparently it makes sense to him. Thankfully, Congress rejected this proposal.

It was also speculated that the President would be releasing oil from our Strategic Petroleum Reserve (SPR) to bring down gas prices. Since the SPR was designed to be used only in an emergency supply disruption, we strongly believe the oil should not be released at this time. Nonetheless, the market moved lower on the potential for increased supply.

Finally, we have an interesting story concerning Apple and their major parts supplier, Foxconn. The Fair Labor Association had been investigating the Foxconn plant in China for potential abuse and violations. They found that conditions were generally acceptable, but the employees worked too long of hours and for too many days in a row. Foxconn agreed to cut back working hours to a maximum length of 49 hours per week and limiting overtime to 36 hours per month.

What we found interesting came after this, though. In an article by Reuters (link) titled “Apple supplier Foxconn cuts working hours, workers ask why,” employees expressed their displeasure with this decision. One woman is quoted as saying “We are here to work and not to play, so our income is very important” and would like to work more hours. They don’t mind working seven days a week for as many hours as they can. Seems quite different from the culture found in much of the developed world.


Next Week

With the close of the month and quarter this week, we will begin getting economic data on them next week. The always important employment report will be released on Friday, even with the markets closed for Good Friday. Employment has been a bright spot and expectations are high. We will also get information on production in manufacturing and service sectors, factory orders, auto sales, and consumer credit.

Several Fed Presidents will be speaking next week, as well, and it will be interesting to see how their comments compare to the Fed chief Ben Bernanke.


Investment Strategy

Again, little change here. Investors are extremely bullish (optimistic) at this time, which makes us nervous. Right now we are not actively adding any new money, but are holding back on selling, too.

As we have mentioned recently, VIX index (which is basically a measure of fear) continues to hover at extremely low levels. That shows complacency in the market and possible signs of topping.

One other item worth considering is the effect of the latest round of stimulus from the Fed. Due to end in June, we are in the getting into the later stages of “Operation Twist,” where the Fed buys bonds to drive down interest rates. In the chart on the right provided by Zerohedge.com, you can see the drop in the market once a stimulus is complete.

You can also see the market rising steadily in those stimulus periods marked in blue. They rose with very little volatility. That is exact condition we are experiencing now. Does that mean the market will trend higher, like it did in the previous two periods? Perhaps, but we still remain cautious.

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 again 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 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.