Europe continues to cause problems for the market. Turning in the worst week of the year, the Dow was lower by 3.5%, the S&P dropped 4.3%, and the Nasdaq plunged 5.3%. Gold moved sharply lower early in the week, but large gains on Thursday and Friday gave it a loss of just 0.5%. Oil continues to move lower, losing 4.8% this week to close at $91 per barrel, its lowest price in seven months. Brent crude, used in most of the gas here in the East, also sold off and closed the week at $107 per barrel. Lastly, U.S. Government bonds reached record low yields this week.
A crisis is building in Europe and creating new worries on Wall Street. In the last two weeks, these problems have sent the market lower every day except one. In fact, the Dow only shows a gain of 1.3% for the year, obviously disappointing after starting the year on such a strong note.
While there are problems in several European countries like Spain and Italy, this week the spotlight was on Greece (yet again). Their attempt to form a new government has failed, with no party getting a majority. Clearly a rejection of austerity by the Greek people, the two main governing parties – the ones that supported austerity – did not achieve the necessary 50% of the vote.
That forces another vote in June and opens the door for the other five parties that do not support austerity. At the moment, the favorite party is a far-left group called Syriza, with a 37-year old leader. They firmly reject the austerity measures and refuse to participate.
If the Greeks decline the austerity program, the European Central Bank (or ECB, which is the European version of our Fed) will cut off funding. That funding is essential to the solvency of their banks, which have seen large withdrawals.
The popular Syriza party has gone so far as to claim the Eurozone leaders and the ECB are bluffing with their threats. Syriza believes they will not cut off funding or force Greece out of the Euro. If Greece were to be forced out, Syriza pledges to not pay any bills.
This has become quite the soap opera. But that soap opera has created a new uncertainty in the market, and markets don’t like uncertainty.
With more and more countries refusing austerity programs, like the recent election of the Socialist in France shows, the threat of a break-up in the Euro is increasing. While the thought of a country leaving the Euro was strongly dismissed only a few months ago, there is talk that it could be a possibility.
If a country like Greece were to exit the Euro, the consequences could be dramatic, though are still largely unknown. It also opens the door for other countries to follow and puts the future of the entire Eurozone in doubt. That concern has been the main factor behind our recent market decline.
Even though the market is lower, money has flowed into our Treasury Bonds and Dollar, sending them higher.
The 10-year US Treasury bond, considered the benchmark bond, hit a record low yield this week of 1.69%. When yields are low, that means prices are high. This shows that investors are nervous and these bonds provide a safe place to park money until the dust settles.
Unfortunately, our currency and bonds are only strong because others are so weak. We have our own problems with debt; however, that is a different subject for a different day.
With the market falling like it has, talks of another stimulus are becoming louder. The Fed has explicitly stated that increasing asset prices is an objective of the stimulus, which it has done (although the stimulus has shown to be ineffective in helping the economy, while stoking inflation). Now, like when the last two times the stimulus programs ended, the markets have fallen back lower. We are currently in a stimulus program that is set to end in June, and the timing could be right for yet another program.
Supporting that idea, the Fed meeting minutes released this week shows more support for stimulus, but only if conditions warrant. With problems in Europe, a dropping stock market, and stagnant employment picture, those conditions are looking more likely.
The one factor that could hold the Fed back from more stimulus is inflation. But with the release of the CPI number this week, inflation is becoming less of a concern. The CPI came in flat, showing no gain from last month, largely due to lower gas prices.
Over the last year, the CPI shows an increase of 2.3%, only slightly higher than the Fed’s 2% target. While we believe real-world inflation is much higher than 2.3%, the Fed does not see it that way, and believe inflation is tame. That could give a green light to more stimulus.
Finally, the event we have all been waiting for occurred this week, the Facebook IPO. Easily the most hyped IPO in history, the stock opened to much fanfare. Facebook execs rang the opening bell for the Nasdaq on a stage with a jumbotron and a crowd of thousands of employees.
But the stock didn’t soar out of the gate like many expected. In fact, it floundered. The IPO was priced at $38 per share. At the open it traded slightly higher, only to fall back to that $38 level. At that price, the underwriters of the IPO were required to step in and buy the stock, preventing it from moving below that $38 level. In the end, the stock closed the day with a whopping gain of 23 cents.
We have no intention of owning any part of this company. If we miss out on the next Google, so be it. We don’t see how they can live up to their high valuation of over $100 billion. Sure, they have almost a billion users, but unless they can figure out how to convert that many users to something profitable remains to be seen. Right now, the valuation is based on the hope they can do it. We have our reservations
The other effect of this unsuccessful IPO could mean a top to the social media craze (or bubble). Company after company has come out with sky-high valuations, thinking it will be the next Facebook.
Just this week, the online website, Pinterest, came out with a valuation of $1.5 billion. Pinterest is nothing more than a website of mostly women putting up pictures of things they like. The company has never made money, and we don’t see how it ever will. How could this possibly be worth $1.5 billion?
Granted, we may not be the most tech-savvy people out there (you may be shocked to learn that this author doesn’t even own a smart phone!), these valuations are absurd. The failure of the Facebook IPO could spell an end to these ridiculous prices.
Next Week
Next week will be relatively quiet in terms of corporate earnings and economic data. We will get some info on housing and durable goods, but nothing to really move the market.
News coming out of Europe next week will likely continue to have an impact. With the G-8 meeting this weekend here in the U.S., there may be more clarity on the outlook for Europe.
Worth noting, President Obama met with the new Socialist French president Hollande before the summit began. Apparently they share the idea that France, and Europe in general, should be more focused on growth while closing budget deficits.
In their view, that means more government spending, since that spurs growth (again, in their view) and higher taxes (since that will close the budget deficit, in their view yet again). Unfortunately, this is the exact opposite of what should be done. At any rate, it will be interesting to see what comes out of this weekend’s summit.
Investment Strategy
We have worried about June with the expiration of the stimulus, plus our slowing growth and lingering problems in Europe. Well, it looks like those problems came earlier than anticipated and the market is getting clobbered.
Right now we are very cautious and hold a large amount of cash, but are reluctant to buy these dips in the stock market. Before committing any meaningful amount of capital, we would still wait until June. By then we will have a better understanding of a possible new stimulus and elections in Greece.
As mentioned above, a dropping market and deteriorating economy could mean another round of stimulus. Although we don’t like stimulus since it fixes nothing while creating inflation and more debt, the market does rise because of it. Obviously we would not sit that out.
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.
The recent decline in gold prices provided a nice entry point this week. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term and we would add to positions if the price falls further from here.
We like other 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.
Although Treasury bond yields are at historic lows (so prices are at historic highs), a short position (bet on a decline in value) only provides a nice hedge here. 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.
Source: MSN Moneycentral
A crisis is building in Europe and creating new worries on Wall Street. In the last two weeks, these problems have sent the market lower every day except one. In fact, the Dow only shows a gain of 1.3% for the year, obviously disappointing after starting the year on such a strong note.
While there are problems in several European countries like Spain and Italy, this week the spotlight was on Greece (yet again). Their attempt to form a new government has failed, with no party getting a majority. Clearly a rejection of austerity by the Greek people, the two main governing parties – the ones that supported austerity – did not achieve the necessary 50% of the vote.
That forces another vote in June and opens the door for the other five parties that do not support austerity. At the moment, the favorite party is a far-left group called Syriza, with a 37-year old leader. They firmly reject the austerity measures and refuse to participate.
If the Greeks decline the austerity program, the European Central Bank (or ECB, which is the European version of our Fed) will cut off funding. That funding is essential to the solvency of their banks, which have seen large withdrawals.
The popular Syriza party has gone so far as to claim the Eurozone leaders and the ECB are bluffing with their threats. Syriza believes they will not cut off funding or force Greece out of the Euro. If Greece were to be forced out, Syriza pledges to not pay any bills.
This has become quite the soap opera. But that soap opera has created a new uncertainty in the market, and markets don’t like uncertainty.
With more and more countries refusing austerity programs, like the recent election of the Socialist in France shows, the threat of a break-up in the Euro is increasing. While the thought of a country leaving the Euro was strongly dismissed only a few months ago, there is talk that it could be a possibility.
If a country like Greece were to exit the Euro, the consequences could be dramatic, though are still largely unknown. It also opens the door for other countries to follow and puts the future of the entire Eurozone in doubt. That concern has been the main factor behind our recent market decline.
Even though the market is lower, money has flowed into our Treasury Bonds and Dollar, sending them higher.
The 10-year US Treasury bond, considered the benchmark bond, hit a record low yield this week of 1.69%. When yields are low, that means prices are high. This shows that investors are nervous and these bonds provide a safe place to park money until the dust settles.
Unfortunately, our currency and bonds are only strong because others are so weak. We have our own problems with debt; however, that is a different subject for a different day.
With the market falling like it has, talks of another stimulus are becoming louder. The Fed has explicitly stated that increasing asset prices is an objective of the stimulus, which it has done (although the stimulus has shown to be ineffective in helping the economy, while stoking inflation). Now, like when the last two times the stimulus programs ended, the markets have fallen back lower. We are currently in a stimulus program that is set to end in June, and the timing could be right for yet another program.
Supporting that idea, the Fed meeting minutes released this week shows more support for stimulus, but only if conditions warrant. With problems in Europe, a dropping stock market, and stagnant employment picture, those conditions are looking more likely.
The one factor that could hold the Fed back from more stimulus is inflation. But with the release of the CPI number this week, inflation is becoming less of a concern. The CPI came in flat, showing no gain from last month, largely due to lower gas prices.
Over the last year, the CPI shows an increase of 2.3%, only slightly higher than the Fed’s 2% target. While we believe real-world inflation is much higher than 2.3%, the Fed does not see it that way, and believe inflation is tame. That could give a green light to more stimulus.
Finally, the event we have all been waiting for occurred this week, the Facebook IPO. Easily the most hyped IPO in history, the stock opened to much fanfare. Facebook execs rang the opening bell for the Nasdaq on a stage with a jumbotron and a crowd of thousands of employees.
But the stock didn’t soar out of the gate like many expected. In fact, it floundered. The IPO was priced at $38 per share. At the open it traded slightly higher, only to fall back to that $38 level. At that price, the underwriters of the IPO were required to step in and buy the stock, preventing it from moving below that $38 level. In the end, the stock closed the day with a whopping gain of 23 cents.
We have no intention of owning any part of this company. If we miss out on the next Google, so be it. We don’t see how they can live up to their high valuation of over $100 billion. Sure, they have almost a billion users, but unless they can figure out how to convert that many users to something profitable remains to be seen. Right now, the valuation is based on the hope they can do it. We have our reservations
The other effect of this unsuccessful IPO could mean a top to the social media craze (or bubble). Company after company has come out with sky-high valuations, thinking it will be the next Facebook.
Just this week, the online website, Pinterest, came out with a valuation of $1.5 billion. Pinterest is nothing more than a website of mostly women putting up pictures of things they like. The company has never made money, and we don’t see how it ever will. How could this possibly be worth $1.5 billion?
Granted, we may not be the most tech-savvy people out there (you may be shocked to learn that this author doesn’t even own a smart phone!), these valuations are absurd. The failure of the Facebook IPO could spell an end to these ridiculous prices.
Next Week
Next week will be relatively quiet in terms of corporate earnings and economic data. We will get some info on housing and durable goods, but nothing to really move the market.
News coming out of Europe next week will likely continue to have an impact. With the G-8 meeting this weekend here in the U.S., there may be more clarity on the outlook for Europe.
Worth noting, President Obama met with the new Socialist French president Hollande before the summit began. Apparently they share the idea that France, and Europe in general, should be more focused on growth while closing budget deficits.
In their view, that means more government spending, since that spurs growth (again, in their view) and higher taxes (since that will close the budget deficit, in their view yet again). Unfortunately, this is the exact opposite of what should be done. At any rate, it will be interesting to see what comes out of this weekend’s summit.
Investment Strategy
We have worried about June with the expiration of the stimulus, plus our slowing growth and lingering problems in Europe. Well, it looks like those problems came earlier than anticipated and the market is getting clobbered.
Right now we are very cautious and hold a large amount of cash, but are reluctant to buy these dips in the stock market. Before committing any meaningful amount of capital, we would still wait until June. By then we will have a better understanding of a possible new stimulus and elections in Greece.
As mentioned above, a dropping market and deteriorating economy could mean another round of stimulus. Although we don’t like stimulus since it fixes nothing while creating inflation and more debt, the market does rise because of it. Obviously we would not sit that out.
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.
The recent decline in gold prices provided a nice entry point this week. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term and we would add to positions if the price falls further from here.
We like other 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.
Although Treasury bond yields are at historic lows (so prices are at historic highs), a short position (bet on a decline in value) only provides a nice hedge here. 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.
