Please note: there will be no market commentary next week, the week ending July 27th. Thank you.
Stocks moved higher for much of the week before falling sharply on Friday. For the week, both the Dow and S&P gained 0.4% and the Nasdaq returned 0.6%. Gold was fairly quiet, down 0.6%. Oil rose sharply on a weaker dollar and problems with Iran, gaining 5.0% for the week to $91 per barrel. Brent oil, used for much of the gas here in the East, rose to $107. US Treasury bonds hovered around its record lows as investors around the globe look for a safe place to park their cash.
Stocks moved higher for much of the week before falling sharply on Friday. For the week, both the Dow and S&P gained 0.4% and the Nasdaq returned 0.6%. Gold was fairly quiet, down 0.6%. Oil rose sharply on a weaker dollar and problems with Iran, gaining 5.0% for the week to $91 per barrel. Brent oil, used for much of the gas here in the East, rose to $107. US Treasury bonds hovered around its record lows as investors around the globe look for a safe place to park their cash.
Source: MSN Moneycentral
The week was much of the same as the market moved higher on a mix of decent earnings and poor economic data. However, negative news out of Europe helped send the market sharply lower on Friday.
Corporate earnings came in at a steady pace this week, with those earnings beating estimates about 65% of the time. Our only problem is that estimates had been steadily lowered heading into earnings season, so the bar was set very low.
When looking at revenues, what the company actually received (earnings equal revenues minus expenses), the numbers don’t look as good. Over 56% of companies have missed revenue expectations for the quarter and have only grown 2.5% over the past year. On the other hand, the average profit rose almost 30% in just the last quarter according to CNBC and Thomson Reuters. It appears that companies are still cutting expenses (like employees) in order to achieve a decent bottom line.
The Fed was in the news this week with Fed chief Ben Bernanke’s semi-annual testimony in front of Congress. These are always worth a watch, if only to see the ignorance of our elected officials on financial matters.
In his testimony, Bernanke discussed his displeasure with the current weakness of the economy and holds a pessimistic outlook for the future. Remember, here is where bad news is good news for the market, since another stimulus is expected if conditions worsen. While he made no mention of any immediate stimulus, he left the door open for more if conditions worsen.
Inflation figures released this week bolstered the chance of more stimulus as they came in below expectations. On the consumer end (the CPI), prices were flat last month and up only 1.7% over the past year (though we have problems with the CPI as a relevant measure for inflation and feel we are currently in a period of biflation). The Fed has a target of around 2% for inflation and since it typically rises with more stimulus, it gives the Fed room for another round.
A new pressure to inflation, though, food prices are poised to rise in the near future as corn prices continue to increase. Due to the drought conditions, corn has risen over 40% since the beginning of June. Since corn is one of the most basic and widely used crops, found in livestock feed or fructose syrup or even our gas, its price increase affects a wide variety of other items.
Moving on to Europe, the news was relatively quiet for much of the week until Spain reminded us that not all is well. Debt troubles are resurfacing and the Spanish government has lowered its growth outlook. One region of Spain announced it was essentially out of money, with one government official stating that “There is no money in the public coffers. There’s no money to pay for public services.”
These new concerns have increased their borrowing costs and bond yields reached new highs. The government announced spending cuts in order to alleviate lenders concerns, but they haven’t gone over well with the public and massive new protests were the result
Unfortunately, further bailouts prevent the much needed reforms from taking place, only buying time before they are back with their hand out and deeper in debt. Without the necessary changes, we expect this problem to be around for many more years to come.
Next Week
Next week will be a bit quieter but will still have some important information. We will get the GDP results for the second quarter, along with info on housing, manufacturing, and durable goods. The steady pace of corporate earnings will continue into next week, as well.
Investment Strategy
We still hold a negative view due to the poor economic data, both here and abroad, and uninspiring corporate earnings. Plus, we see complacency in the market as the VIX hit a new three-month low this week (the VIX, or volatility index, is often referred to as the “fear gauge”.).
However, we can’t be too pessimistic with the Fed and other central banks around the world poised for more stimulus if conditions worsen. While stimulus doesn’t help the economy and is a long term negative, it does boost the market.
With the market making big moves based on unpredictable news out of Europe or the Fed, agility is important here.
If we were to get a buying opportunity, we still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
We like gold for the long term, as it will do well with debt and economic problems, and further bailouts and stimulus programs. We would look to add to our positions if prices move much lower 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), will result in lower prices in the short term.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep trending lower, a short position (bet on a decline in price) 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), though our concern has increased slightly as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds.
Finally, in international stocks, we favor developed international markets as opposed to emerging.
Corporate earnings came in at a steady pace this week, with those earnings beating estimates about 65% of the time. Our only problem is that estimates had been steadily lowered heading into earnings season, so the bar was set very low.
When looking at revenues, what the company actually received (earnings equal revenues minus expenses), the numbers don’t look as good. Over 56% of companies have missed revenue expectations for the quarter and have only grown 2.5% over the past year. On the other hand, the average profit rose almost 30% in just the last quarter according to CNBC and Thomson Reuters. It appears that companies are still cutting expenses (like employees) in order to achieve a decent bottom line.
The Fed was in the news this week with Fed chief Ben Bernanke’s semi-annual testimony in front of Congress. These are always worth a watch, if only to see the ignorance of our elected officials on financial matters.
In his testimony, Bernanke discussed his displeasure with the current weakness of the economy and holds a pessimistic outlook for the future. Remember, here is where bad news is good news for the market, since another stimulus is expected if conditions worsen. While he made no mention of any immediate stimulus, he left the door open for more if conditions worsen.
Inflation figures released this week bolstered the chance of more stimulus as they came in below expectations. On the consumer end (the CPI), prices were flat last month and up only 1.7% over the past year (though we have problems with the CPI as a relevant measure for inflation and feel we are currently in a period of biflation). The Fed has a target of around 2% for inflation and since it typically rises with more stimulus, it gives the Fed room for another round.
A new pressure to inflation, though, food prices are poised to rise in the near future as corn prices continue to increase. Due to the drought conditions, corn has risen over 40% since the beginning of June. Since corn is one of the most basic and widely used crops, found in livestock feed or fructose syrup or even our gas, its price increase affects a wide variety of other items.
Moving on to Europe, the news was relatively quiet for much of the week until Spain reminded us that not all is well. Debt troubles are resurfacing and the Spanish government has lowered its growth outlook. One region of Spain announced it was essentially out of money, with one government official stating that “There is no money in the public coffers. There’s no money to pay for public services.”
These new concerns have increased their borrowing costs and bond yields reached new highs. The government announced spending cuts in order to alleviate lenders concerns, but they haven’t gone over well with the public and massive new protests were the result
Unfortunately, further bailouts prevent the much needed reforms from taking place, only buying time before they are back with their hand out and deeper in debt. Without the necessary changes, we expect this problem to be around for many more years to come.
Next Week
Next week will be a bit quieter but will still have some important information. We will get the GDP results for the second quarter, along with info on housing, manufacturing, and durable goods. The steady pace of corporate earnings will continue into next week, as well.
Investment Strategy
We still hold a negative view due to the poor economic data, both here and abroad, and uninspiring corporate earnings. Plus, we see complacency in the market as the VIX hit a new three-month low this week (the VIX, or volatility index, is often referred to as the “fear gauge”.).
However, we can’t be too pessimistic with the Fed and other central banks around the world poised for more stimulus if conditions worsen. While stimulus doesn’t help the economy and is a long term negative, it does boost the market.
With the market making big moves based on unpredictable news out of Europe or the Fed, agility is important here.
If we were to get a buying opportunity, we still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
We like gold for the long term, as it will do well with debt and economic problems, and further bailouts and stimulus programs. We would look to add to our positions if prices move much lower 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), will result in lower prices in the short term.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep trending lower, a short position (bet on a decline in price) 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), though our concern has increased slightly as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds.
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.
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.
