Commentary for the week ending 8-24-12

Stocks moved lower for much of the week, posting their first loss in six weeks.  Through the Friday close, the Dow fell 0.9%, the S&P returned -0.5%, and the Nasdaq had a modest loss of 0.2%.  Gold had a nice week, rising 3.3% as stimulus talks resurfaced.  Oil prices saw little change, off just 0.2% this week to remain above $96 per barrel.  The other major type of oil, Brent, closed over $113 per barrel. 

Source: MSN Moneycentral

After a couple weeks of slow news and quiet markets, the news flow got a little more active this week.  The stories that have dominated headlines over the past several months, the Fed and Europe, returned to the spotlight.

Beginning with the Fed, the minutes from the latest Fed meeting were released this week.  There was a noticeable increase in the support for further stimulus amongst the Fed members.  They cited the high level of unemployment and slowing growth as a concern, plus the inflation rate is below their goal of 2%. 

Coming off that optimistic outlook for stimulus, the next morning the Fed President of St. Louis, James Bullard, appeared on CNBC.  He discussed the minutes that were just released, calling them “stale” since they were three weeks old. 

In those weeks that had passed, new economic reports and indicators have shown a slight improvement.  The data is moving the opposite direction from what Fed President Bullard believes would spur further stimulus. 

However, the key word in from the minutes was substantial.  Unless substantial growth is seen by the Fed, more stimulus would be needed.  We aren’t sure if anything substantial has been achieved, so more stimulus is not out of the cards. 

To confuse the market even further, Fed Chairman Bernanke wrote in a response to Congressional questions that there was more room for quantitative easing (or stimulus). Statements like this from the Fed Chief carry more weight than from President Bullard, so the news gave the markets a reason to spike on Friday.     

Unfortunately, the past stimulus programs did little to help the economy and possibly made conditions worse.  Seeing further stimulus as a solution to our problems is foolish, but we’ve discussed that enough in these pages here already. 

On to Europe, where Europeans appear to be returning from their vacations as news increased this week.  Greece was the focus as the debates on a potential bailout have resumed.

If nothing is done, Greece could run out of money by October.  Since Germany basically controls the purse strings at this point, they have been the center of the discussions.  While they state that they would like Greece to remain in the Euro, there have been more talks of letting them default and leave the Euro instead of continuing to throw money down a hole. 

Either way, the results of this debate won’t be known for at least several weeks.  The Constitutional Court in Germany will be voting in September on whether a permanent bailout fund is constitutional.  Plus, a report due out in October will contain details on the likelihood of further aid to the country. 

Either way, conditions in Europe appear to be worsening and the road to October may be a rocky one. 

Finally, the week was one for the record book for Apple.  The company passed the record set by Microsoft in terms of market cap (the share price times the amount of shares outstanding) to become the largest company ever.  Interesting to note, the company makes up almost 20% of the Nasdaq, leading many to wonder if the index will rebalance.  


Next Week

Next week will be fairly quiet for economic data and earnings.  We will get info on consumer confidence, housing data, and personal income and spending. 

All eyes will be on the Fed, though.  Next week the Fed heads to Jackson Hole for their annual economic policy symposium.  Fed chief Bernanke will be making a speech on Friday, which investors will be closely watching for any clues on stimulus.  It was here two years ago that the Fed announced their initial stimulus program and many are expecting something similar this year. 

Not only will Bernanke be speaking, but Mario Draghi, the President of the European Central Bank (ECB) will make a speech on Saturday.  Next week will be an interesting one for economic policy.


Investment Strategy

Despite the drop this week, we believe expectations of Fed action is supporting stock prices here.  The market has been reassured that if conditions become bad enough, the Fed will step in and help.  Next week will be important as it will give us a better idea on any new stimulus. 

We aren’t sure anything new will be announced at this Fed meeting, the way many others do.  Perhaps there will be discussion on continuing their current stimulus program, Operation Twist.  There may also be talks of lowering various rates.  But we don’t believe a new quantitative easing (QE, or stimulus) program is in the works and the market will be disappointed. 

There are many reasons for us to be cautious here, like slow economic growth and earnings.  But with the Fed and Europe driving the markets, those reasons are almost inconsequential.  It’s difficult to have strong convictions here either way, since the market is moving more on the unpredictable news out of Europe or the Fed, so agility is important.  

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 problems, 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 have moved higher recently, they are still near historic lows (so prices are near historic highs).  A short position (bet on a decline in price) only provides a nice hedge here and we believe 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 as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future. 

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 8-17-12

It was another very quiet week on Wall Street, though stocks inched towards new highs for the year.  Through the close Friday, the Dow was higher by 0.5%, the S&P returned 0.9%, and the Nasdaq had a nice gain of 1.8%.  Gold was quiet again, too, rising just 0.2%.  Oil prices continue to be a concern, climbing 3.4% this week to $96 per barrel.  Brent oil closed just below $114 per barrel. 

Source: MSN Moneycentral

This week was so uneventful we almost had a hard time finding something to write about.  It was so quiet, three of the five days saw daily changes of less than 10 points on the Dow (which is under a 0.1% move).  Vacations can likely be blamed for some of this lack of news and volume.  Europe is notorious for its lengthy August vacations, while here at home, many are squeezing in one last break before the school year begins. 

News out of Europe on Thursday helped contribute to the one day that did see a relatively large move of 85 points.  German Chancellor Merkel made a statement that Germany was committed to the Euro and would work to prevent a breakup in the currency.  Though a simple and unremarkable statement, a market hungry for news found this enough to warrant a pop higher.

Economic data this week was mixed, but leaned to the positive side.  We received some good news that retail sales picked up last month, plus industrial production, consumer sentiment, and leading economic indicators were all higher, too. 

On the negative side, we saw new reports of further contraction in the manufacturing sector, plus small business optimism fell to nine-month lows.  

We also received data on inflation, which came in roughly flat over the last month (though commodity prices – the things people actually buy – steadily rose).  This is important because this official inflation rate is running below the Fed’s desired target, which increases the chance of another round of stimulus (because stimulus will raise the inflation rate). 

Another hot topic this week was everyone’s favorite stock just three months ago, Facebook.  This week the lock-up ended, which had prevented many insiders from selling their Facebook stock.  Once they had the ability to sell, many of them did, pushing the share price lower.  The stock closed the week down and has lost about half its value from the IPO just three months ago.  Ouch. 

Lastly, the frustrating rise in price of gas has been making headlines.  A gallon at the pump has risen roughly 30 cents over the past month according to AAA reports.  As a response to these high prices, the current administration has contemplated tapping the Strategic Petroleum Reserve (SPR) to bring more supply to the market.  The SPR was designed to be used only in a supply disruption, which this obviously is not.  This is clearly a political move to bring prices down before the election. 

It likely won’t work, though.  The SPR was tapped around this time last year on a similarly dubious scenario and the price of oil did drop, though rose back to the same level shortly thereafter.  If the SPR were to be tapped, we see the results being insignificant, just like before. 

More interesting, this is perhaps another accidental admission that increased oil supply reduces prices, which any half-witted economist could tell you.  With that realization, it would be nice to see the administration pursue policies more favorable to getting that oil out of the ground and onto the market.  After all, lower energy prices are a key to economic growth. 


Next Week

Next week looks quieter in terms of data releases.  Earnings season is virtually over, but we will get some info from big names like Best Buy, Dell, and Hewlett Packard. 

Economic data will also be light and we will get reports on housing and durable goods (which are items that don’t wear out quickly, like a washing machine or TV). 


Investment Strategy

Yet again, no change here.  There are several reasons for us to be cautious here.  First, all indications point to a slower growth in the economy, both here and around the globe. 

Another factor is the high complacency as measured by the VIX (or volatility index, which is considered a gauge of fear in the market).  In fact, the VIX hit a five year low this week.  When complacency is this high (so fear is low), the tide can move sharply in the other direction. 

New this week, the investment research company Trimtabs reported that insider selling rose significantly in early August (insiders are the executives and directors of a company and large investors).  We like to look at the actions of insiders to get a better idea on a company and an abnormal increase in selling is another reason for caution (on the other hand, we think insider buying is a great positive indicator for a stock). 

Also, higher gas prices and the coming food price increases add to our concern. 

Normally these conditions would make us nervous, but like we’ve often mentioned, it’s hard to be too pessimistic when the Fed and ECB move closer to another round of stimulus with each negative report.  While stimulus doesn’t help the economy and is a long term negative, it does boost the market in the short term. 

It’s difficult to have strong convictions here either way, since the market is moving more on the unpredictable news out of Europe or the Fed, so agility is important.  

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 problems, 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 have moved higher recently, they are still near historic lows (so prices are near historic highs).  A short position (bet on a decline in price) only provides a nice hedge here and we believe 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.

Commentary for the week ending 8-10-12

A quiet week on Wall Street resulted in a slight gain for the market.  For the week, the Dow was higher by 0.9%, the S&P rose 1.1%, and the Nasdaq climbed 1.8%.  Gold was also quiet, rising 0.9%.  Oil continued to climb, gaining 1.6% to close at $93 per barrel.  Brent oil, used for much of the gas here in the East, rose to more than $113 per barrel.  

Source: MSN Moneycentral

Stocks popped higher out of the gate Monday aided by more talks of stimulus, reaching a three-month high and nearing a four-year high.  The market trended lower from there on very little news for the remainder of the week. 

We opened the week with news from the president of the Federal Reserve Bank of Boston, Eric Rosengren, who strongly supports further stimulus from the Fed.  And not just a little more stimulus, but an aggressive amount. 

This includes buying more bonds by the Fed, both mortgage and Treasury, which is essentially printing money.  He also supports lowering the interest rate the Fed pays to banks for their reserve cash from 0.25% to 0%, which would spur lending by the banks (even though our problems originated from too much debt in the first place). 

A new idea is for the stimulus to continue indefinitely until certain conditions are met.  Conditions would be more like targets or goals, like improving to a certain level of growth or employment or income.

News like this makes us feel like we are banging our head against a wall.  It completely ignores the failure of the previous stimulus programs, which, though they succeeded in lowering interest rates, have been no help in improving the economy or employment picture.  Further stimulus programs will continue to fail and create more problems in the future.  

The good news is that only five of the nine Fed bank presidents get a vote on policy matters and thankfully, the Fed president of Boston is not one of those voting members.  However, it does illustrate the debate that is going on inside the Fed and this view is becoming more popular.  It also makes the annual Fed conference in Jackson Hole later this month all the more interesting. 

Changing gears, close to 90% of the companies in the S&P 500 have reported second quarter earnings so far, with 64% beating estimates.  According to S&P Capital IQ, that is above the 10-year average of 62%. 

This sounds great as a headline in the news, but as we’ve constantly mentioned, the estimates have been lowered and tell us little about the actual results.  Earnings growth actually appears to be negative and revenues (what the company actually earned) are slowing.  Plus, companies have increasingly warned that next quarter appears worse than this one. 

Fortunately for the market, info like this has had little impact.  The bigger macro picture is dominating the market, whether it is stimulus news from the Fed or debt-resolutions in Europe. 

As for Europe, there was little news this week from the region.  Manufacturing data did show a contraction in the last quarter, with even Germany showing a decline. 

The rhetoric between the leaders of insolvent Italy, Spain, and somewhat-solvent France has been increased against Germany.  The Germans are reluctant to commit their funds to endless bailouts without reforms.  Obviously this doesn’t sit well with those leaders and frustrations in Europe are growing.  It could make future agreements all the more difficult. 


Next Week

After a light week this week, next week looks to be busier.  We will get several economic reports, including data on manufacturing, inflation, retail sales, housing, and leading economic indicators. 

Earnings season is coming to a close, but there will be several notable companies releasing their earnings, particularly in the retail sector.  Wal-Mart, Target, and Sears, amongst several others, will be released next week, making it a busy week for the retail area. 


Investment Strategy

No change here.  Corporate and economic data point to a slower growth.  Complacency is high in the market with the volatility index (or VIX, which is a gauge of fear in the market) reaching new lows.  Plus, the P/E levels of dividend paying stocks are at their highest level ever when compared to the broad market, indicating an overheating in that area.     

Also, higher gas prices and the coming food price increases (because of the higher corn costs) add to our concern. 

Normally these conditions would make us nervous, but like we’ve often mentioned here, it’s hard to be too pessimistic when the Fed and ECB inch closer to another round of stimulus.  While stimulus doesn’t help the economy and is a long term negative, it does boost the market. 

It’s difficult to have strong convictions here either way, since the market is moving more on the unpredictable news out of Europe or the Fed, so agility is important.  

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.

Commentary for the week ending 8-3-12

The market trended lower for much of the week before popping sharply higher on Friday to move into positive territory.  For the week, the Dow rose 0.2%, the S&P gained 0.4%, and the Nasdaq returned 0.3%.  Gold saw a high amount of volatility and closed down 0.7%.  Oil rose for another week, gaining 1.4% and closing at $91 per barrel.  Brent oil, used for much of the gas here in the East, rose to $109 per barrel.  

Source: MSN Moneycentral

We received a lot of information on economic data and corporate earnings this week, but Central Banks here and in Europe drew most of the attention.  Though that info was mostly negative, a positive employment report on Friday reversed the week’s earlier losses and sent the markets to a 3-month high.  .  

As the economies in Europe and the US have grown weaker, many had expected Central Banks to embark on new rounds of stimulus to jump start those economies.  Last week, the European Central Bank (or ECB) head Mario Draghi even went so far as to promise extraordinary measures to save the Euro. 

It turned out, neither central bank would be doing any immediate stimulus. 

This week our Fed Chief announced that while they won’t be doing anything immediately, they are closely watching the economy and will take action if needed.  Though this is nothing new, their wording did seem to indicate being even more open to a new stimulus. 

In Europe, after the pledge to do “whatever it takes,” the ECB head disappointed investors by not following up with anything new or specific.  That news was largely responsible for the Thursday market drop. 

Economic data this week was mostly negative and pointed to a stubbornly slow growth, which could be seen as a positive for the market if it prods the Fed to do more stimulus.  One positive story wiped out all the negative when the unemployment figures came in much better than expected. 

Expectations were low heading into the number, with economists estimating just 95,000 jobs added last month.  In a surprise, the economy added 163,000 and the market rose sharply on the news. 

While that sounds good, we must remember that a growth of around 200,000 is needed just to keep up with population growth.  And while the unemployment rate stands at 8.3%, that figure would be closer to 13% if we had the same size labor force as at the beginning of the recession in 2007.  However, any gain is better than no gain at all. 

On to corporate profits, where roughly 2/3rds of companies are beating earnings expectations and another 13% have met them, according to S&P Capital IQ.  As we have mentioned, though, those estimates had been steadily lowered heading into earnings season. 

On the revenue side, what the company actually earned, less than half have beaten estimates.  And the growth in revenue is just over 1%, according to Thomson Reuters.  So far this has been the worst quarter for revenue misses since early 2010, per Barclays. 

When looking at future earnings, the figures also look depressing.  More companies are warning that earnings next quarter will be lower, with the ratio of negative to positive forecasts at the highest level since 2001, according to Thomson Reuters. 

Lastly, the topic of trading made news this week.  A company that, among other things, is a market maker and places trades (including for our company) experienced a software malfunction that affected trading in almost 150 stocks. 

Knight Capital was in the process of installing new software that resulted in these trading malfunctions, briefly sending the affected shares lower.  The blunder cost the firm $440 million and sent the stock sharply lower, falling from over $10 to the low $2’s (though they closed the week just over $4 per share).  

Immediately there were calls for further regulation.  We disagree.  For one thing, it was a glitch in software, nothing that further regulation could prevent.  But more importantly, we feel that this failure, this loss of capital without the expectation of a bailout, is the best form of regulation.  When a business knows it can lose everything from even a simple misstep, it will take the precautions to prevent it from happening. 

That lesson could be applied even more broadly and save us the trouble that further regulations often bring.   


Next Week

Next week will less busy for economic data and corporate earnings.  We are on the backside of earnings season, so results are beginning to slow.  Economic data will be lighter, but we will get info on consumer credit, productivity, trade data, and import and export prices. 

The Fed will also make news as the chairman, Ben Bernanke, will be speaking on Monday and Tuesday.  Investors will continue to closely watch his words for any clues on further stimulus. 


Investment Strategy

Both the corporate and economic data released this week reaffirms our expectations of slow and possibly negative growth.  Adding to our caution, the volatility index (or VIX, which is a gauge of fear in the market) is showing a strong level of complacency.  Plus, the P/E levels of dividend paying stocks are at their highest level ever when compared to the broad market, indicating an overheating in that area.     

Like we’ve often mentioned, it’s hard to be too pessimistic on the market when the Fed and ECB inch closer to another round of stimulus.  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.