Finally notching a gain, the markets stopped the decline seen the past several weeks. For the week, the Dow gained 0.7%, the S&P rose 1.7%, and the Nasdaq was higher by 2.1%. Gold sold off, down 1.4%, though still above the lows seen last week. Oil hovered around its recent lows, off 1.0% this week to $91 per barrel. The story was the same for Brent oil, closing the week at $107 per barrel.
The week was fairly uneventful, though some large swings in the market could be attributed to news coming out of Europe. Volatility is still high and the market saw some large daily moves. In the middle of the week, those large daily moves reversed themselves the same day, so they ultimately resulted in little change.
The talk again this week was Europe, and the discussion was largely centered on the “Eurobond.” From the G-8 summit last weekend and in meetings throughout the week, this idea is gaining traction with European leaders – at least in those countries with debt problems.
Currently, each country in Europe has their own bond and the terms of those bonds are contingent on that country’s financial shape. The worse shape a country is in, the harder it is for them to borrow.
Not happy with austerity (or lower government spending, which really hasn’t materialized yet, at least on federal level), these countries are looking for ways to get more funds to spend. Tougher borrowing requirements are not sitting well with countries that have debt problems.
That’s where the Eurobond would come in. Instead of each country having their own bond based on its own conditions, it would make one bond for the entire Eurozone. That bond would be based on the overall economic condition of Europe. Think of it like the situation here in the U.S., where each state has their own bonds, but the Federal government also has bonds based on the overall condition of the country.
The Eurobond would make it easier for debt-ridden countries to borrow, since countries in solid financial shape would balance out the ones with problems.
Obviously this doesn’t sit well with countries in better financial shape, like Germany. Since they are borrowing at record low rates, it would become more difficult for them to borrow.
This has turned into a battle within the Eurozone countries. Germany doesn’t want to pay for its neighbor’s irresponsibility, and those neighbors are becoming increasingly hostile.
Once on Germany’s side, the recent French election of the socialist has turned the French against them. During the G-8 Summit, even President Obama stood with the French (perhaps not surprisingly), calling for more spending by these governments.
We take Germany’s side in this fiasco. These countries never seem to learn that excessive spending got them into this predicament in the first place. Further spending will not solve any problems, only compound them.
On a lighter note, a bright side of these European problems has been to remind us how clever our media is. In the spirit of pop-culture terms like “Bennifer” and “Brangelina”, we are now subjected to ridiculous compounding of words related to the European crisis.
Last week alone, we either heard or read these gems: Grexit (as in, Greek-exit. Get it?), Euroquake, Eurosis, Eurocalypse, and Drachmageddon (the Drachma is the former Greek currency). We thought financial news was safe, but portmanteau is spreading like a virus.
Continuing on the theme of the ridiculous, we arrive at Facebook. What has turned into the worst IPO in a decade, the stock is off almost 17% from last Friday. Now lawsuits are springing out of the woodwork.
Due to the IPO failure, Facebook is being sued. So is the Nasdaq, the exchange it trades on. Same for the IPO underwriters, like Morgan Stanley.
If something criminal occurred, if material information was withheld, then a lawsuit is certainly justified. But we knew the red flags going into the IPO.
We knew they upped the price from the low-end target of $28 per share. We knew the amount of shares offered had increased. We knew 57% of the stock for sale was insiders getting out (a big red flag). We knew revenue was growing at a slower rate. We knew the company valuation was sky-high and based on hope. This was all public information, but was ignored in the hype.
One legitimate argument can be made against the exchange it traded on, though. The Nasdaq was unable to handle the historic volume of trades, causing problems in placing orders. Apparently Facebook has even discussed switching to the NYSE as a sign of their displeasure. In support of the Nasdaq, we aren’t sure if any exchange could handle the record hundreds of millions of shares traded on that first day.
Either way, no individual investor should ever buy an IPO the day it goes public. The deck is stacked against them and it is best to wait at least several weeks before buying. A lawsuit because an investor lost money solves nothing, but is perhaps more emblematic of the times in which we live.
Next Week
With the market closed Monday, we will get a lot of economic info crammed into the remainder of the week. There will be data on consumer confidence, home sales, personal income, manufacturing, and most importantly, employment. The weekly reports on employment have not been that encouraging, so this figure may be disappointing.
Corporate earnings will be light and uneventful.
Investment Strategy
No change here. The markets appear oversold here, but we are reluctant to add any meaningful amounts at this time and hold a large amount of cash. Our worry is for June, when the current round of stimulus from the Fed ends. Problems in Europe and slowing global growth only adds to our caution.
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 (and Europe) are also promising. Also, there is always the opportunity to find an undervalued individual stock at any time.
Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. 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 are major drivers of commodity prices.
Although Treasury bond yields are near historic lows (so prices are near 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
The week was fairly uneventful, though some large swings in the market could be attributed to news coming out of Europe. Volatility is still high and the market saw some large daily moves. In the middle of the week, those large daily moves reversed themselves the same day, so they ultimately resulted in little change.
The talk again this week was Europe, and the discussion was largely centered on the “Eurobond.” From the G-8 summit last weekend and in meetings throughout the week, this idea is gaining traction with European leaders – at least in those countries with debt problems.
Currently, each country in Europe has their own bond and the terms of those bonds are contingent on that country’s financial shape. The worse shape a country is in, the harder it is for them to borrow.
Not happy with austerity (or lower government spending, which really hasn’t materialized yet, at least on federal level), these countries are looking for ways to get more funds to spend. Tougher borrowing requirements are not sitting well with countries that have debt problems.
That’s where the Eurobond would come in. Instead of each country having their own bond based on its own conditions, it would make one bond for the entire Eurozone. That bond would be based on the overall economic condition of Europe. Think of it like the situation here in the U.S., where each state has their own bonds, but the Federal government also has bonds based on the overall condition of the country.
The Eurobond would make it easier for debt-ridden countries to borrow, since countries in solid financial shape would balance out the ones with problems.
Obviously this doesn’t sit well with countries in better financial shape, like Germany. Since they are borrowing at record low rates, it would become more difficult for them to borrow.
This has turned into a battle within the Eurozone countries. Germany doesn’t want to pay for its neighbor’s irresponsibility, and those neighbors are becoming increasingly hostile.
Once on Germany’s side, the recent French election of the socialist has turned the French against them. During the G-8 Summit, even President Obama stood with the French (perhaps not surprisingly), calling for more spending by these governments.
We take Germany’s side in this fiasco. These countries never seem to learn that excessive spending got them into this predicament in the first place. Further spending will not solve any problems, only compound them.
On a lighter note, a bright side of these European problems has been to remind us how clever our media is. In the spirit of pop-culture terms like “Bennifer” and “Brangelina”, we are now subjected to ridiculous compounding of words related to the European crisis.
Last week alone, we either heard or read these gems: Grexit (as in, Greek-exit. Get it?), Euroquake, Eurosis, Eurocalypse, and Drachmageddon (the Drachma is the former Greek currency). We thought financial news was safe, but portmanteau is spreading like a virus.
Continuing on the theme of the ridiculous, we arrive at Facebook. What has turned into the worst IPO in a decade, the stock is off almost 17% from last Friday. Now lawsuits are springing out of the woodwork.
Due to the IPO failure, Facebook is being sued. So is the Nasdaq, the exchange it trades on. Same for the IPO underwriters, like Morgan Stanley.
If something criminal occurred, if material information was withheld, then a lawsuit is certainly justified. But we knew the red flags going into the IPO.
We knew they upped the price from the low-end target of $28 per share. We knew the amount of shares offered had increased. We knew 57% of the stock for sale was insiders getting out (a big red flag). We knew revenue was growing at a slower rate. We knew the company valuation was sky-high and based on hope. This was all public information, but was ignored in the hype.
One legitimate argument can be made against the exchange it traded on, though. The Nasdaq was unable to handle the historic volume of trades, causing problems in placing orders. Apparently Facebook has even discussed switching to the NYSE as a sign of their displeasure. In support of the Nasdaq, we aren’t sure if any exchange could handle the record hundreds of millions of shares traded on that first day.
Either way, no individual investor should ever buy an IPO the day it goes public. The deck is stacked against them and it is best to wait at least several weeks before buying. A lawsuit because an investor lost money solves nothing, but is perhaps more emblematic of the times in which we live.
Next Week
With the market closed Monday, we will get a lot of economic info crammed into the remainder of the week. There will be data on consumer confidence, home sales, personal income, manufacturing, and most importantly, employment. The weekly reports on employment have not been that encouraging, so this figure may be disappointing.
Corporate earnings will be light and uneventful.
Investment Strategy
No change here. The markets appear oversold here, but we are reluctant to add any meaningful amounts at this time and hold a large amount of cash. Our worry is for June, when the current round of stimulus from the Fed ends. Problems in Europe and slowing global growth only adds to our caution.
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 (and Europe) are also promising. Also, there is always the opportunity to find an undervalued individual stock at any time.
Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. 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 are major drivers of commodity prices.
Although Treasury bond yields are near historic lows (so prices are near 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.
