Please note: Next week marks one of our favorite times of the year. As many of you know, our office is located at the entrance to the TPC Sawgrass, home of the Players Championship. Practice rounds begin Monday and we will be attending much of the week. However, we will be in the office every day next week, though our hours will vary from day-to-day. We will continue to monitor the market even though we may not be in the office. Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. Additionally, there will be no weekly market commentary next week. Thank you.
It was a rough week on Wall Street. For the week, the Dow fell 1.4%, the S&P lost 2.4%, and the Nasdaq had its worst week of the year, down 3.7%. Gold trended lower much of the week, losing 1.2% and settling at $1,644 an ounce. For several reasons which we will discuss below, oil had a substantial drop on Friday to close the week down 6.1% to $98.49 per barrel. Brent crude, used in most of the gas here in the East, had a similar plunge and closed at $113. Thankfully, this is a good sign for gas prices.
This week was all about economic data – both here and abroad. On good economic news, the market popped higher. With the negative economic news, the market obviously headed lower.
Topping headlines this week was the employment report released on Friday. Just looking at the market reaction in the chart above, it is clear that the results were poor.
In the month of March, the U.S. added just 115,000 jobs, well below estimates. That figure is extremely weak and another sign of a slowing economy.
Though the number was poor, the unemployment rate actually showed an improvement, falling to 8.1% from 8.2% and continuing its downward trend. Unfortunately this is the number that grabs headlines and we cringe when hearing news reports like “The unemployment rate fell for another month to the lowest level in over 3 years…”
While true, just looking at this number is highly disingenuous. The reason the rate decreased was due to a large amount of people leaving the labor force (342,000 last month alone). The labor participation rate (which is the amount of people employed or looking for work) now stands at a 31-year low, and that has an effect on how the unemployment rate is calculated, making it appear lower. If the labor rate was at the same level as it was at the (official) end of the recession in 2009, our current unemployment rate would be closer to 11%.
When considering a broader segment of the population, discouraged workers (people who have given up looking for a job), the unemployment rate stands at 14.5%.
For an optimistic view of the economy, on Tuesday we received positive data on the manufacturing sector, leading to a significant pop in the market. Although the growth is slow, the report came in stronger than expected.
Other economic data this week was mixed. Personal income and spending showed nice gains, but negative news on the service sector and productivity added a downward pressure.
Negative stories like the employment report and GDP in the prior week have lead many to wonder if the Fed will step in with more stimulus. Remember, the Fed has indicated that it is willing to do more if economic conditions warrant. Since the market is being fueled by stimulus money, this becomes an important question.
Though the data has been bad, it probably hasn’t been bad enough to warrant further stimulus. That should make things interesting when this current round of stimulus ends (the Fed is still doing its latest stimulus program, “Operation Twist,” that is set to end in June). Will the market fall sharply like it did at the conclusion of the last two stimulus programs? That is something that has us concerned.
Negative economic data out of Europe also weighed on our markets. Manufacturing shows further signs of contacting and Spain officially joined seven other European countries in recession with a negative GDP number. On top of that, the level of unemployment in Europe is at its highest level since 1997.
The negative economic picture in Europe has many leaders rethinking their austerity programs (with austerity here defined as lower government spending and higher taxes). Similar to the regrettable ideas of policy makers in the U.S., many European leaders are calling for more government spending to boost growth.
As we are seeing here in the U.S., government spending is not the way to achieve growth. After all, European governments have spent well beyond their means for many, many years and are in miserable shape. These Keynesian policies of spending to create growth are failures. Less government spending and lower taxes would provide the backdrop for growth to occur. More spending here would only prolong the pain and increase the debt.
A bit of news that we are sure you’ll be excited about, Facebook announced their long awaited IPO will begin trading on May 18th. Though we say this sarcastically, the hype surrounding this company has been nothing short of phenomenal.
The company settled on a range where they’ll price the stock, targeting somewhere in the $28-35 a share range. This values the company at around $77-100 billion, making it the highest value for an IPO in history. For a company with modest revenues, this valuation seems quite lofty.
Essentially an advertising company, 85% of their revenue comes from advertising. According to the Wall Street Journal, their $100 billion valuation is 33 times their ad revenue. Looking at the current valuation of another advertising giant, Google, that company has a valuation of just 5.5 times ad revenue. That means the valuation of Facebeeok is many multiples that of Google. We’re not sure that is sustainable.
Plus, that Facebook revenue is declining. Though revenues are up about 40% over the past year (earning $872 million), they were lower by around 7% in the last three months. Growth is not a given.
Facebook advertisers seem doubtful, as well. There was a great story in the Wall Street Journal this week (link to story: WSJ) that echoed many of our thoughts. Advertisers are questioning whether they are getting their money’s worth. From the article:
The hype surrounding this stock will probably send it higher when it begins trading. However, we don’t see how that high valuation can be sustained when their main source of revenue – ads – are largely ignored by its users.
Finally, we saw a welcomed drop in the price of oil this week. As we mentioned in the intro, there were several factors behind this. The weaker employment picture, both here and in Europe, was a major factor behind the drop. New reports are showing that the supply of oil is creeping higher. Additionally, an exchange that oil trades on has increased the margin requirement for trading oil. That means it will cost more to make trades in the commodity. Though the price increase doesn’t take effect for 3 months, it seems many traders are taking profits now. Either way, the drop in prices is great for prices at the pump.
Next Week
Corporate earnings will begin to slow next week, but we will still get a large amount of economic data. As the week progresses, we will get info on consumer credit, inventories, the trade balance, and consumer confidence. Inflation on the producer level will also be released with the PPI number.
Occurring this weekend, the French elections will have a meaningful impact on the debate in Europe. The socialist candidate appears to have the lead at this point and if elected, it will guarantee a change in tone over the austerity programs in Europe.
Investment Strategy
Though the market had a rough week, there is no change in our investment strategy. We feel optimistic in the short term, but 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.
It was a rough week on Wall Street. For the week, the Dow fell 1.4%, the S&P lost 2.4%, and the Nasdaq had its worst week of the year, down 3.7%. Gold trended lower much of the week, losing 1.2% and settling at $1,644 an ounce. For several reasons which we will discuss below, oil had a substantial drop on Friday to close the week down 6.1% to $98.49 per barrel. Brent crude, used in most of the gas here in the East, had a similar plunge and closed at $113. Thankfully, this is a good sign for gas prices.
Source: MSN Moneycentral
This week was all about economic data – both here and abroad. On good economic news, the market popped higher. With the negative economic news, the market obviously headed lower.
Topping headlines this week was the employment report released on Friday. Just looking at the market reaction in the chart above, it is clear that the results were poor.
In the month of March, the U.S. added just 115,000 jobs, well below estimates. That figure is extremely weak and another sign of a slowing economy.
Though the number was poor, the unemployment rate actually showed an improvement, falling to 8.1% from 8.2% and continuing its downward trend. Unfortunately this is the number that grabs headlines and we cringe when hearing news reports like “The unemployment rate fell for another month to the lowest level in over 3 years…”
While true, just looking at this number is highly disingenuous. The reason the rate decreased was due to a large amount of people leaving the labor force (342,000 last month alone). The labor participation rate (which is the amount of people employed or looking for work) now stands at a 31-year low, and that has an effect on how the unemployment rate is calculated, making it appear lower. If the labor rate was at the same level as it was at the (official) end of the recession in 2009, our current unemployment rate would be closer to 11%.
When considering a broader segment of the population, discouraged workers (people who have given up looking for a job), the unemployment rate stands at 14.5%.
For an optimistic view of the economy, on Tuesday we received positive data on the manufacturing sector, leading to a significant pop in the market. Although the growth is slow, the report came in stronger than expected.
Other economic data this week was mixed. Personal income and spending showed nice gains, but negative news on the service sector and productivity added a downward pressure.
Negative stories like the employment report and GDP in the prior week have lead many to wonder if the Fed will step in with more stimulus. Remember, the Fed has indicated that it is willing to do more if economic conditions warrant. Since the market is being fueled by stimulus money, this becomes an important question.
Though the data has been bad, it probably hasn’t been bad enough to warrant further stimulus. That should make things interesting when this current round of stimulus ends (the Fed is still doing its latest stimulus program, “Operation Twist,” that is set to end in June). Will the market fall sharply like it did at the conclusion of the last two stimulus programs? That is something that has us concerned.
Negative economic data out of Europe also weighed on our markets. Manufacturing shows further signs of contacting and Spain officially joined seven other European countries in recession with a negative GDP number. On top of that, the level of unemployment in Europe is at its highest level since 1997.
The negative economic picture in Europe has many leaders rethinking their austerity programs (with austerity here defined as lower government spending and higher taxes). Similar to the regrettable ideas of policy makers in the U.S., many European leaders are calling for more government spending to boost growth.
As we are seeing here in the U.S., government spending is not the way to achieve growth. After all, European governments have spent well beyond their means for many, many years and are in miserable shape. These Keynesian policies of spending to create growth are failures. Less government spending and lower taxes would provide the backdrop for growth to occur. More spending here would only prolong the pain and increase the debt.
A bit of news that we are sure you’ll be excited about, Facebook announced their long awaited IPO will begin trading on May 18th. Though we say this sarcastically, the hype surrounding this company has been nothing short of phenomenal.
The company settled on a range where they’ll price the stock, targeting somewhere in the $28-35 a share range. This values the company at around $77-100 billion, making it the highest value for an IPO in history. For a company with modest revenues, this valuation seems quite lofty.
Essentially an advertising company, 85% of their revenue comes from advertising. According to the Wall Street Journal, their $100 billion valuation is 33 times their ad revenue. Looking at the current valuation of another advertising giant, Google, that company has a valuation of just 5.5 times ad revenue. That means the valuation of Facebeeok is many multiples that of Google. We’re not sure that is sustainable.
Plus, that Facebook revenue is declining. Though revenues are up about 40% over the past year (earning $872 million), they were lower by around 7% in the last three months. Growth is not a given.
Facebook advertisers seem doubtful, as well. There was a great story in the Wall Street Journal this week (link to story: WSJ) that echoed many of our thoughts. Advertisers are questioning whether they are getting their money’s worth. From the article:
The question with Facebook and many of the social media sites is, 'What are we getting for our dollars?'" said Michael Sprague, vice president of marketing at Kia Motors Corp.'s North American division. The automaker has advertised on Facebook since 2009 and plans to increase its ad spending on the site. While building brand awareness on a site with 900 million users is valuable, Mr. Sprague said he's unclear if "a consumer sees my ad, and does that ultimately lead to a new vehicle sale.”When thinking of our own behavior on social media sites, any advertising is ignored entirely. We wonder if it is advertising that is currently in a bubble?
The hype surrounding this stock will probably send it higher when it begins trading. However, we don’t see how that high valuation can be sustained when their main source of revenue – ads – are largely ignored by its users.
Finally, we saw a welcomed drop in the price of oil this week. As we mentioned in the intro, there were several factors behind this. The weaker employment picture, both here and in Europe, was a major factor behind the drop. New reports are showing that the supply of oil is creeping higher. Additionally, an exchange that oil trades on has increased the margin requirement for trading oil. That means it will cost more to make trades in the commodity. Though the price increase doesn’t take effect for 3 months, it seems many traders are taking profits now. Either way, the drop in prices is great for prices at the pump.
Next Week
Corporate earnings will begin to slow next week, but we will still get a large amount of economic data. As the week progresses, we will get info on consumer credit, inventories, the trade balance, and consumer confidence. Inflation on the producer level will also be released with the PPI number.
Occurring this weekend, the French elections will have a meaningful impact on the debate in Europe. The socialist candidate appears to have the lead at this point and if elected, it will guarantee a change in tone over the austerity programs in Europe.
Investment Strategy
Though the market had a rough week, there is no change in our investment strategy. We feel optimistic in the short term, but 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.
