Washington remained in focus as stocks showed little change on the week. Through the close Friday, the Dow rose just 0.1%, the S&P gained 0.5%, while the Nasdaq returned a nice 1.5%. Gold moved lower on profit taking, losing 2.3% for the week. Oil was higher by 0.7% to just shy of $89 per barrel. Brent crude closed just above $111.
Source: Yahoo Finance
The fiscal cliff. If we had a dollar for every time we heard that phrase this week, we’d have more money than the recent Powerball winners.
Kidding aside, this week was all about the news coming out of Washington. When a politician made an optimistic statement on resolving the fiscal cliff, the market immediately rallied. On the other hand, a negative statement sent the market immediately lower, often with both occurring the same day.
Either way, it seems to us like both sides are in or near a stalemate. We realize each needs to posture for negotiating purposes, but the sides remain very far apart.
Republicans are open to revenue increasing, but from more pro-growth policies. The left is reluctant to cut spending while insisting on higher rates on the wealthy. In fact, the White House wants immediate tax hikes, as well as more spending, an elimination of the debt ceiling, and an extension of unemployment benefits. It’s hard to reconcile those wide differences.
To us, it appears more likely that we will go off this fiscal cliff at the end of the year, where tax rates rise across the board. In response, the new year would see politicians immediately cut taxes back to the lower levels for all but the top two tax rates.
In this scenario, the market will suffer while nothing is accomplished. It will also result in lower revenue to the government, since we’ve seen time and again, higher rates don’t bring in more revenues. Economic growth brings in more revenue, something that is often ignored.
Companies are rushing to take advantage of these lower rates. Countless businesses are announcing special dividends this year, dispersing money to shareholders at current tax rates. Some companies are even taking on debt in order to make this payout. It is an unusual event that may push stock prices up in the short term, but will see falling prices thereafter. It also proves that tax rates do affect behavior, contrary to comments by many economists and pundits.
Aside from these fiscal cliff talks, the week was rather quiet. Retail companies made news with the Christmas shopping season unofficially kicking off after Thanksgiving. Depending on the report, sales rose by either 13 or 16% on Black Friday and 30 or 17% on Cyber Monday.
Though impressive sounding, Bank of America reports that there is no correlation between shopping on these dates and the outcome of the holiday season in general. Also, the strength of sales on these heavily discounted days could be troubling since shoppers are taking advantage of lower priced items now, cannibalizing higher priced sales later.
Economic data this week was largely positive, though modestly so. Home prices have shown a solid rise over the past year. Durable goods came in above expectations, though showed a 0.0% growth. Consumer confidence reached a new high. The Fed’s Beige book (which shows economic conditions around the country) showed modest improvement. Finally, the GDP was revised higher than previously reported, though the bulk of the gains came from unimpressive areas like government spending and inventory rebuilding.
Next Week
With the month ending this week, next week will be a bit busier as we get economic data for November. We will get data on the strength of the manufacturing and service sectors, construction, and factories, as well as the big employment report on Friday.
There will also be some corporate earnings released and regional Fed presidents making public appearances.
Investment Strategy
We aren’t looking to do any buying or selling in stocks at this point. Even if we were, the focus here should be on the long term, since the unpredictable news out of Washington has the markets jittery.
If a buying opportunity were to present itself, we still like higher-quality stocks, though many of these dividend payers have been hit on tax rate concerns. Again, this is more of a long-term play. We also like smaller and mid sized stocks that don’t have a strong correlation to the market and Europe.
Gold saw some profit-taking this week, but we still like it for the long run. Further money printing, bailouts, and stimulus around the globe will help send it higher. We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that direction. A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds still work as higher taxes loom on the horizon (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 and have shown a large rise to this point.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
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.
Kidding aside, this week was all about the news coming out of Washington. When a politician made an optimistic statement on resolving the fiscal cliff, the market immediately rallied. On the other hand, a negative statement sent the market immediately lower, often with both occurring the same day.
Either way, it seems to us like both sides are in or near a stalemate. We realize each needs to posture for negotiating purposes, but the sides remain very far apart.
Republicans are open to revenue increasing, but from more pro-growth policies. The left is reluctant to cut spending while insisting on higher rates on the wealthy. In fact, the White House wants immediate tax hikes, as well as more spending, an elimination of the debt ceiling, and an extension of unemployment benefits. It’s hard to reconcile those wide differences.
To us, it appears more likely that we will go off this fiscal cliff at the end of the year, where tax rates rise across the board. In response, the new year would see politicians immediately cut taxes back to the lower levels for all but the top two tax rates.
In this scenario, the market will suffer while nothing is accomplished. It will also result in lower revenue to the government, since we’ve seen time and again, higher rates don’t bring in more revenues. Economic growth brings in more revenue, something that is often ignored.
Companies are rushing to take advantage of these lower rates. Countless businesses are announcing special dividends this year, dispersing money to shareholders at current tax rates. Some companies are even taking on debt in order to make this payout. It is an unusual event that may push stock prices up in the short term, but will see falling prices thereafter. It also proves that tax rates do affect behavior, contrary to comments by many economists and pundits.
Aside from these fiscal cliff talks, the week was rather quiet. Retail companies made news with the Christmas shopping season unofficially kicking off after Thanksgiving. Depending on the report, sales rose by either 13 or 16% on Black Friday and 30 or 17% on Cyber Monday.
Though impressive sounding, Bank of America reports that there is no correlation between shopping on these dates and the outcome of the holiday season in general. Also, the strength of sales on these heavily discounted days could be troubling since shoppers are taking advantage of lower priced items now, cannibalizing higher priced sales later.
Economic data this week was largely positive, though modestly so. Home prices have shown a solid rise over the past year. Durable goods came in above expectations, though showed a 0.0% growth. Consumer confidence reached a new high. The Fed’s Beige book (which shows economic conditions around the country) showed modest improvement. Finally, the GDP was revised higher than previously reported, though the bulk of the gains came from unimpressive areas like government spending and inventory rebuilding.
Next Week
With the month ending this week, next week will be a bit busier as we get economic data for November. We will get data on the strength of the manufacturing and service sectors, construction, and factories, as well as the big employment report on Friday.
There will also be some corporate earnings released and regional Fed presidents making public appearances.
Investment Strategy
We aren’t looking to do any buying or selling in stocks at this point. Even if we were, the focus here should be on the long term, since the unpredictable news out of Washington has the markets jittery.
If a buying opportunity were to present itself, we still like higher-quality stocks, though many of these dividend payers have been hit on tax rate concerns. Again, this is more of a long-term play. We also like smaller and mid sized stocks that don’t have a strong correlation to the market and Europe.
Gold saw some profit-taking this week, but we still like it for the long run. Further money printing, bailouts, and stimulus around the globe will help send it higher. We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that direction. A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds still work as higher taxes loom on the horizon (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 and have shown a large rise to this point.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
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.
