Commentary for the week ending 12-20-13

Please note: Due to the Christmas and New Year’s holidays over the next two weeks, this will be our last commentary for the year.  We wish you all a Merry Christmas and Happy New Year. 

The market again reached new all-time highs, even on an inflation-adjusted basis, on news from the Fed.  For the week, the Dow gained a solid 3.0%, the S&P rose 2.4%, and the Nasdaq returned 2.6%.  Gold fell sharply, down 2.5% to reach its lowest level in over three years.  Oil rose strongly, climbing 2.5% to $99.32 per barrel.  The other major type of oil, Brent, rose steadily as well, closing at $111.84 per barrel. 

Source: Yahoo Finance

All eyes were on the Fed this week as they made an announcement on the direction of their stimulus program.  Roughly half of economists surveyed, including us, expected no change in the direction of the stimulus program.  However, we were all surprised when the Fed did announce a slight reduction in stimulus. 

The reduction comes from the bond buying portion of the stimulus.  Prior to the announcement, the Fed was printing $85 billion a month to buy mortgage and government bonds, which kept borrowing rates low for these items.  They reduced that amount of monthly bond buying by $10 billion, and may continue cutting the amount further in the coming months. 

While this is a reduction in stimulus, there is another type of stimulus the Fed engages in that was extended.  They announced interest rates will be kept at these historic lows for even longer than expected. 

An analogy has been floating around the investment community that is an easy way to summarize the announcement.  Think of the stimulus as a car.  The Fed has used two gas pedals to keep the stimulus going.  One pedal, the bond buying portion, saw the Fed let off the gas slightly.  The other pedal, the low interest rates, was pushed down even harder.  This shows that the announcement by the Fed can be seen a net increase in stimulus for the markets. 

This is why we think stocks rose as sharply as they did.  These low rates allow companies to continue to issue bonds and buy back stock, which boosts stock prices.  It also allows the multiple expansion to continue, which without getting too technical, low rates make future earnings worth more and drives up stock prices.  Unfortunately, it also contributes to speculative bubbles that tend to end badly. 

This continuation of stimulus only adds to the optimistic view of the markets.  A recent sentiment survey by Investors Intelligence, which surveys 100 investment advisors, shows optimism at the highest level since 1987.  This is a very dangerous development and shows investors are overly optimistic. 

With this being our last newsletter of the year, we’ll conclude with a link to a video (we aren’t tech-savvy enough to post the actual video here).  It is from the old Louis Rukeyser program, filmed at the end of 1999, but sounds every bit like it could have been filmed today.  The market in the ‘90s saw a solid boom, with 1999 seeing markets up over 20%.  Just like what we hear today, every panelist on the program expected the trend to continue and saw no dangers on the horizon.

Two weeks after this was filmed, markets topped and moved lower until 2002.  It wasn’t until 2006 that markets again reached that same level seen in 1999.  When nearly everyone is convinced on the direction of the market, it should be time to worry. 


Next Week

With Christmas shortening next week, it looks to be fairly quiet.  We’ll get a few economic reports early in the week, including personal income and spending, durable goods, and new home sales.  Aside from that, there should be little to report. 


Investment Strategy

No change here.  The wind is currently at the back of the market, so stocks may continue moving higher in the short run.  We wouldn’t add to any broader market positions and may trim back if stocks move much higher from here.  As we’ve discussed extensively before, we have concerns for the longer term. 

Right now we prefer finding undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have shown weakness recently, however, they remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold continues to look weak, continuing the volatility this investment has seen recently.  It’s good as a long term hedge, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  This is a longer-term play, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 12-13-13

Stocks notched their second straight weekly decline.  For the week, the Dow and S&P both fell 1.7% and the Nasdaq was lower by 1.5%.  Gold was very active again, closing with a gain of 0.4%.  A late-week drop sent oil lower on the week, losing 1.1% to $96.60 per barrel.  The other major type of oil, Brent, which is used for much of our gas here in the East, declined steadily all week to close at $108.30 per barrel. 

Source: Yahoo Finance

In terms of news and data, this week was very quiet.  All eyes were on the Fed meeting next week, with investors using this period to adjust their portfolios in preparation for the outcome of that meeting. 

The sell-off this week showed more investors are expecting a reduction in stimulus from the Fed.  In fact, stock mutual funds saw their biggest outflow all year according to Lipper.  This makes sense after the year we’ve had in the markets.  Satisfied with returns so far this year, investors can lock in their gains now and not have to worry about the results from the Fed meeting. 

A couple items this week supported the idea that a taper could come soon.  Several Fed officials made speeches that favored an immediate reduction in stimulus.  This did not seem newsworthy to us, though, since they are the same officials who supported an immediate reduction at the September meeting. 

The budget agreement reached between Republican and Democrats also increased the odds of a reduction in stimulus.  One of the reasons the Fed did not pull back on stimulus in September was concerns over the debt ceiling fight.  The left and the right coming together showed some stability in Washington (although this was fairly easy, since the House bill does very little), removing that concern for the Fed. 

Regardless of this new info, we still don’t see a reduction in stimulus occurring.  There are two major data points the Fed looks at to make this decision.  One is employment, which saw a solid report last week.  However, this was only slightly better than the three-year average, so it was hardly remarkable.  Then this week, weekly jobless claims worsened sharply.  This shows the employment situation is volatile, so the Fed may wait to see more improvement first. 

Inflation is the other factor the Fed is looking at.  They would like to see inflation running north of two percent a year, but figures watched by the Fed show it running roughly half that level.   

Sadly, the market has become a giant guessing game on the actions of the Fed.  We would love to see them exit these programs completely, especially since they seem to do more harm than good.  However, we just don’t see it happening any time soon and markets may continue to move higher in the meantime. 


Next Week

Next week will be very important.  As mentioned above, all eyes will be on the Fed meeting and announcement on the stimulus program.  We believe there will be no reduction in the stimulus program and the market is likely to rise in that event.  If a reduction is announced, we expect the market to sell-off, and the strength of the sell-off will depend on the size of reduction in stimulus. 

Aside from the Fed, there will also be several economic reports worth watching.  There will be a report on inflation at the consumer level, industrial production, housing info, and a revision to GDP. 


Investment Strategy

Stocks have been due for a pullback, so this decline has not been too surprising.  They’d have to fall quite a bit more before we would add new funds.  Much of the direction of the market will depend on the Fed, though, and next week will be very important for this reason. 

We expect the Fed to hold off any reduction in stimulus, so the market is likely to rise in that case.  This is only a short-term view, looking out a couple weeks or months.  We have serious concerns about the longer run, especially when the Fed begins to pull back on its stimulus programs. 

Like before, we wouldn’t add any new money to the broader stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have shown weakness recently, however, they remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold continues to look weak, continuing the volatility this investment has seen recently.  It’s good as a long term hedge, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  This is a longer-term play, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 12-6-13

Stocks turned in their first weekly decline since early October.  Through the close Friday, the Dow was lower by 0.4%, the S&P fell a miniscule 0.04%, while the Nasdaq eked out a gain of 0.06%.  Bond yields hit their highest level since September, so their prices have fallen.  Gold saw a lot of activity, only to close with a loss of 1.6%.  Oil rose fairly sharply, climbing 5.3% to $97.65 per barrel.  The other major type of oil, Brent, saw far less movement to close at $111.25 per barrel. 

Source: Yahoo Finance

Economic data played a large part in the movement of the market this week.  However, the reaction in stocks was the opposite of what you might think.  Positive reports sent stocks lower and negative or mediocre reports sent stocks higher. 

Unfortunately this requires talking about the Fed again.  Economic reports are being scrutinized for their impact on the Fed’s stimulus program.  Positive economic reports mean less need for stimulus, so they increase the chances that the Fed will pull back on these programs.  Since the money printed by the Fed has fueled the rise in stocks, positive reports send stocks lower. 

As can be seen in the chart above, positive reports were the story for the majority of the week.  Touching on some of these reports, the manufacturing sector showed a solid gain over the last month.  The service sector expanded, as well, though not as much as many hoped. 

Also, the Fed’s Beige Book, which surveys economic conditions over the Fed districts showed continued “modest to moderate” growth (worth noting, businesses are still concerned about costs from the new healthcare law).  Third quarter GDP was revised higher to a solid 3.6% growth, though it should be noted the bulk of the gains came from businesses increasing inventories, not necessarily from rising sales. 

Employment saw several important reports this week, too.  Reports released early in the week showed a fairly solid improvement in the employment situation. 

This brings us to Friday.  Stocks rose sharply when the important government employment report showed a solid increase of 203,000 jobs in November.  Additionally, the unemployment rate fell from 7.3% to 7.0%, its lowest level in five years, although this was more due to the nuances in how the rate is calculated (the number of employed improved, but the labor force increased by a larger amount).  When comparing the amount of people working to the total population of the country, this metric has not seen the same improvement, holding flat since late 2009 (LINK).

With positive reports sending stocks lower all week, why did this seemingly good report send stocks higher?  While it may have been good, it looks like it wasn’t good enough to trigger an immediate reduction in stimulus at the Fed’s next meeting in two weeks.  At least, that’s the best explanation we’ve seen for the reaction in the market. 

Finally, retail sales were another important story this week.  It appears that spending over the Thanksgiving shopping period was lower than a year ago.  Actually, there were more people out shopping and bought more items, but they spent less overall.  This is not a good indicator for the economy.  It means people are worried about their financial situation, where they seek out sales to afford their gifts. 


Next Week

Next week looks to be pretty quiet for economic data.  We’ll get information on retail sales, import prices, and inflation at the producer level.  All eyes will be on the Fed, though, as they hold another meeting the following week.  Investors are watching closely for clues on a tapering in the stimulus program, so be prepared for another week focused on the Fed. 


Investment Strategy

Stocks came off their highs and look a little less expensive here in the shorter run.  Many investors are worried that the Fed will announce a reduction in their stimulus program at their December 18th meeting, which has pressured stocks lower.  We think that is still highly unlikely and stocks have the potential to rise strongly if that is the case.  Regardless, we wouldn’t put new money into the broader market at this time as stocks are still on the expensive side. 

We still have worries for the longer run.   This includes concerns over the unintended consequences from the Fed creating massive amounts of money out of thin air, slowing earnings growth, still-high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and exuberance around the IPO market.  

While we wouldn’t add any new money to stock market indexes at this point, we prefer finding undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have shown weakness recently, however, they remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold continues to look weak, continuing the volatility this investment has seen recently.  It’s good as a long term hedge, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 11-22-13

Please note: due to the Thanksgiving holiday, there will be no market commentary next week. 

Stocks continue to climb, turning in their seventh-straight weekly gain.  For the week, the Dow rose 0.7%, the S&P was higher by 0.4%, and the Nasdaq was relatively unchanged with a gain of 0.1%.  Gold hit its lowest level in four months, falling 3.4% this week.  Oil rose slightly, climbing 0.4% to $94.84 per barrel.  The other major type of oil, Brent, rose at a faster pace to close at $110.49.

Source: Yahoo Finance

Stocks have been on a tear recently, notching new all-time highs along the way.  Since early October, they have risen over 8% alone.  Markets have been helped by slightly better than expected – though slowing – profits.  But the main driver of this rally has been the Fed and their stimulus programs.  Once again, they were the factor behind the market moves this week. 

On Wednesday, minutes from the recent October Fed meeting were released.  They showed an ongoing debate on whether the stimulus programs should be pared back, but in the end, nothing new was learned.  They continue to support pulling back on the stimulus if the data supports it.  Since it does mean a tapering is on the table, while unlikely in our opinion, stocks sold off on the news. 

The minutes showed lot of contradictory back-and-forth discussions that seemed to purposely muddle their message.  Recent years have seen a remarkable increase in transparency from the Fed.  While it has shed a light on their thinking, it has kept the market hanging on every word.  To us, it seems like they figured by saying everything and nothing at the same time, the market wouldn’t be able to overreact to every word.  It worked, because no one really understood what was discussed. 

While these minutes were released on Wednesday, Fed chief Bernanke made speech Tuesday evening at the annual dinner for the National Economists Club (a wild bunch of folks, let me tell you).  His remarks were wildly dovish, meaning he showed an enthusiasm for more stimulus, keeping rates at record lows for years and flooding the market with $85 billion a month in printed money.  While the market worries a reduction in stimulus is on the table based on the Fed’s minutes, Bernanke’s comments show it’s not happening any time soon. 

Economic data this week supported that view.  One of the goals of the stimulus program is higher inflation, upwards of 2% annually.  So when inflation rises to this level, they will pull back on the stimulus.  Inflation metrics released this week showed a decline, with inflation at the consumer level standing at just 1%, the lowest level since early 2009. 

It is clear the economic data is not going the way the Fed expects.  Instead of changing course after five years of ineffective policy, they will continue their current path in the hopes that results appear.  It may mean higher stocks in the meantime, but we fear the longer this goes, the worse it will be in the long run.  It is a very dangerous policy. 


Next Week

With the Thanksgiving holiday next week, a lot of economic data will be crammed into the early part of the week.  Markets are actually open on Friday, but it tends to be one of the quietest days of the year.  In the shortened week, we’ll get info on consumer confidence, housing, durable goods, income and spending, and leading economic indicators. 


Investment Strategy

No change here.  Stocks still look expensive for the short run.  We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back.  But caution is warranted as a pullback – or at least a pause – is increasingly likely. 

We’ve written extensively on our concerns for the longer run.   This includes worries of unintended consequences from the Fed’s stimulus, slowing earnings growth, high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and exuberance around the IPO market.  

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have shown weakness recently, having the worst year since their inception in 1997.  However, they remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  It’s good as a long term hedge, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 11-15-13

It was another week of record highs in the stock market.  For the week, the Dow was higher by 1.3%, the S&P rose 1.6%, and the Nasdaq topped them both with a gain of 1.7%.  Gold eked out a slight gain, rising 0.2%.  Oil fell to its lowest level since June midweek, but climbed higher later to close with a loss of 0.8% at $93.84 per barrel.  The other major type of oil, Brent, took a different path and rose steadily all week to close at $108.50.

Source: Yahoo Finance

The week was fairly quiet, with news out of the Fed again the main driver of the markets. 

Investors were anxious to hear testimony from Fed chairman nominee Janet Yellen at her confirmation hearing on Thursday.  Most already know her stances on issues of the Fed, but few have heard her speak at length, so it gave a good opportunity to hear her views directly from her.

Preceding the event, her written remarks were released on Wednesday, allowing the public to get an early glimpse of her testimony.  The comments were even more dovish than many expected, meaning she was even more supportive of the stimulus programs and willing continue using them.  It caused stocks to pop higher, as can be clearly seen in the chart above.  

From the remarks, we see she believes the stimulus programs are vital in helping the economy recover and more was needed to help the economy further.  She thinks there are dangers in ending the programs too soon, reassuring the market that stimulus will remain in place for the foreseeable future.  Also, any adverse consequences from the stimulus are outweighed by their benefits. 

On the stock market, she does not see the any bubbles forming and denied the Fed’s role in boosting stock prices.  This is ironic, since stocks hang on every word from the Fed and soared on her support of the stimulus. 

Further evidence of the Fed’s role in the market can be seen in the chart below, taken from an article by Lance Roberts of STA Wealth.  It shows the movements of the stock market strongly corresponding to the money printed from the Fed.   

Her take on the market is different from her predecessor, Ben Bernanke.  He openly supported the “wealth effect” created by the Fed’s actions, where rising stock prices increased people’s wealth, therefore causing people to spend more and boost the economy. 

We viewed her testimony as highly dangerous.  It assumes the only way for the economy to recover is through stimulus programs from the Fed.  When all you have is a hammer, every problem looks like a nail. 

With five years of stimulus already, growth is hard to find.  One might logically conclude after this amount of time and the lack of results, a different approach is needed.  Unfortunately, the longer this continues, the more difficult and painful it will be to end.

As for other news this week, economic data was largely negative.  Small business optimism fell sharply, exports declined while imports increased, and national industrial production and New York area manufacturing were both negative.

Lastly, corporate earnings for the third quarter are nearly complete.  92% of companies have reported so far, with Factset finding 73% beating earnings estimates and 53% topping revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted).  Remember, though, that these estimates were dramatically lowered as earnings season approached.

Compared to a year ago, profits have grown 3.5% while revenue is 2.9% higher.  These numbers aren’t great, but are an improvement from recent quarters. 


Next Week

Next week again looks fairly quiet.  Corporate earnings will trickle in, but will have little impact on the market.  We will get a few important economic reports, including inflation at the consumer and producer level and retail sales. 


Investment Strategy

With the gain in the markets this week, stocks are appearing overly expensive for the short run.  We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back.  But caution is warranted as a pullback – or at least a pause – is increasingly likely. 

We’ve written extensively on our concerns for the longer run, which includes worries of unintended consequences from the Fed’s stimulus, mentioned above.  Other concerns include high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and an exuberance around the IPO market.  

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 11-8-13

This week saw a bit more activity than the last as stocks again reached a new record high.  Through the Friday close, the Dow rose 0.9%, the S&P gained 0.5%, and the Nasdaq was lower by 0.1%.  Gold fell sharply on Friday to close the week with a 2.2% loss.  Oil continued to fall most the week, but a gain on Friday left it unchanged for the week.  The other major type of oil, Brent, closed the week down to $105 per barrel.

Source: Yahoo Finance

This week was a bit of an odd one.  News from Europe and economic reports here sent stocks one direction initially, yet reversed course shortly thereafter and moved strongly the opposite direction.  Then we had a new stock start trading that had never made a profit, yet was valued higher than half the companies in the S&P 500. 

We’ll start with news out of Europe.  Concerned about deflation, the European Central Bank (the European equivalent of our Fed) surprised markets on Thursday by lowering interest rates to promote more inflation.  Since more intervention by global central banks has fueled stock gains, stocks rose on the news.  The gains were short lived and stocks moved sharply lower.

European stocks have done very well lately, now at their highest level in five years.  We would be very cautious on this region, though.  The rise in their stock market is very similar to ours – central bank stimulus has pushed stocks higher.  Underlying fundamentals are still poor with growth anemic, employment abysmal, and government debt levels even higher than when the debt crisis hit.  Like our stock market, they may continue to rise as long as the central banks provide the stimulus, but this can only mask the poor fundamentals for so long. 

Back here in the states, two major economic reports were much better than expected.  Since everything is now viewed through the prism of the Fed and the effect of economic data on stimulus, positive economic reports would cause stimulus to end earlier.  SO the positive reports resulted in stocks falling initially, but later reversed course to close the week higher.  

First, GDP for the third quarter came in much better than expected at a 2.8% growth.  It was a solid number, but masked some underlying issues.  The consumer spending component was lower than expected and business investment was solidly negative.  Plus, 0.8% of the 2.8% came from inventory rebuilding, which is not necessarily an indicator of growth.  

Then we had employment figures for October coming in almost twice as high as expected.  We added a decent 204,000 jobs over the month and the two previous months were revised higher.   However, the size of the labor force fell by the third-largest amount in history to reach the lowest level since 1978. 

The government shutdown may have skewed this number though, as the one-week delay altered their data collecting.  Overall, the positive number showed that the shutdown had little impact on the economy. 

The other big story of the week was the initial stock offering of Twitter.  Despite never turning a profit and losing $134 million so far this year, the stock soared at the opening.  Somehow the company is now valued higher than half the companies in the S&P 500. 

The exuberance around these IPO’s has many worried that stocks are getting too overvalued, worried that the liquidity from the Fed has pushed investors into risky investments. 

Supporting that idea, October saw the most IPO’s come to market since 2007, before the latest market crash.  Additionally, University of Florida professor and researcher Jay Ritter noted that 61% of companies who came to market this year have lost money over the last 12 months.  This is the highest percentage since 2000, again before a market crash.  This is another red flag for investors to consider on the longer-term direction of the market. 


Next Week

Next week looks very quiet from a data standpoint.  For economic reports, we’ll get info on small business optimism, the trade balance, and industrial production.  Corporate earnings are already coming in at a slower pace and will slow further next week. 


Investment Strategy

Stocks haven’t done much lately, and while they still have a little room to move higher, the downside risk is significant.  In the short run we could continue to rise from here as long as the Fed keeps stimulating.  If the trend of positive economic reports continues, though, it could cause the market to worry a reduction in stimulus was near and force a sell-off.   

We’ve often discussed our worries for the longer-term which include:  stocks as a whole looking expensive as valuation ratios are high.  Margin levels remain at record highs.  The most amount of money since 2007 has poured into stock funds.  The excitement around the IPO situation discussed above is cause for concern.  Finally, the adverse effect of money printing from the Fed is a serious issue to consider. 

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 11-1-13

A relatively uneventful week saw stocks end with little change.  For the week, the Dow was higher by 0.3%, the S&P gained a slight 0.1%, while the Nasdaq fell 0.5%.  Gold had a rough week, closing down 2.9%.  Oil continues its move lower, falling 3.3% to $94.61 per barrel.  The other major type of oil, Brent, closed the week just below $106 per barrel.

Source: Yahoo Finance

Stocks reached new all-time highs early in the week, only to reverse course after comments from the Fed. 

One of their periodic policy meetings was held this week to determine the level of interest rates and the amount of monthly stimulus.  No change was expected, and no change was the result.

They also noted the economy is expanding at a moderate pace, in line with their previous statements.  This line made stocks drop, though.  Apparently many investors expected a downgrade in the Fed’s economic outlook and for them to mention slowing growth.  If the economy is improving, a reduction in stimulus is possible in the near future.  And since stimulus has sent stocks higher, a reduction in stimulus would be bad for the market.  

We didn’t interpret the report that way and don’t think they will pull back on stimulus any time soon (even though we think the economy would be better off if they did).  They still see the economy as weak overall, citing a slowdown in the housing sector, employment, and inflation figures lower than they would like. 

Data released this week supported that view.  Pending home sales fell for the first time in two years as mortgage rates moved higher.  An employment report released by payroll company ADP was very weak.  Also, inflation at the producer level is the lowest since 2009 and the consumer level is running at 1.2% (1.7% core), below their 2-2.5% target.  Unless these figures move more in line with the Fed’s objectives, we won’t see any form of tapering any time soon. 

Other economic data this week was better.  Manufacturing figures showed substantial improvement and industrial production rose more than expected.  Additionally, retail sales were lower by 0.1%, but were up 0.4% when excluding auto sales. 

Finally, we’re beyond the peak for earnings reports this quarter with three-quarters of the companies in the S&P 500 reporting earnings.  According to data service firm Factset, 74% of companies have beat earnings estimates and 53% beat revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted). 

Remember, though, that these estimates were dramatically lowered as earnings season approached.  When comparing figures from a year ago, earnings have grown 3.0% over that time and revenue is 2.9% higher.  These figures aren’t great, but not as bad as they have been. 


Next Week

The amount of corporate earnings releases will continue to slow next week, but we’ll get a few important economic reports.  We’ll get a look at GDP growth over the past quarter, plus the employment numbers for October.  Other reports include the strength of the service sector, factory orders, leading economic indicators, and personal income and spending. 


Investment Strategy

Still no change here.  Stocks were due for a breather after rising steadily since early October, but as long as the Fed has the pedal down on its money printing, we’ll likely head higher in the short run. 

We have concerns for the longer run, though.  The money printing from the Fed is an obvious long term concern, but we’re also seeing other red flags like record high margin levels (borrowing money to buy stocks), extremely high optimism, and above average valuation ratios like price-to-earnings or market cap-to-GDP.  Frankly, everything is looking a bit expensive. 

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

In bonds, yields have fallen (so prices have risen).  We see yields rising (and therefore prices falling) when it looks like the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term.  A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 10-25-13

Stocks continued to reach new highs this week.  Through the close Friday, the Dow was higher by 1.1%, the S&P gained 0.9%, and the Nasdaq rose 0.7%.  Bond yields moved lower again, nearing their lowest level in almost four months (so prices hit a four-month high).  Gold kept moving higher, too, up 2.9% on the week.  Oil hit its lowest level in four months, falling 3.2% to $97.85 per barrel.  The other major type of oil, Brent, used in much of our gas here in the East, fell to $107.

Source: Yahoo Finance

Stocks crept higher this week, actually helped by poor economic data.  The delayed September employment report was released on Tuesday, underwhelming at a gain of only 148,000 jobs on the month.  Economists were looking for an increase closer to 180,000.

Since this number was lower than expected and showed a slower pace of job gains from the early part of the year, it was reassuring to investors.  It meant that the Fed would not be pulling back on its stimulus program any time soon, so stocks popped higher on the news. 

In fact, it looks like economists think the Fed won’t pull back on its money printing until March, 2014.  Only a few weeks ago they were expecting a reduction in stimulus by September of this year. 

It is clear that the actions of the Fed have pushed the market higher.  It is less clear how effective it has been in actually helping the economy.  After five years of these extraordinary measures, we would expect to see better jobs growth than a meager 148k.  A change of course is needed, but seems very unlikely.  We worry that this “solution” will end up doing more harm than good. 

As stocks keep climbing, we are seeing a significant increase in the red flags being raised.  Valuation indicators like price-to-earnings or market cap-to-GDP are above their historical norms. Investor sentiment from the American Association of Individual Investors (AAII) shows investors are the most optimistic in 10 months and least pessimistic in almost two years.  Plus we’re seeing the highest amount of borrowing to buy stocks (referred to as margin) on record.   

Additionally, many big name investors with long, successful track records are returning money to investors, citing fewer investment opportunities available.   

We’re also seeing over-exuberance in momentum driven stocks.  Last week we mentioned the hype around Google crossing the $1,000 a share mark.  Other names in this group include stocks like Tesla (up 404% year-to-date), Netflix (up 260%), Pandora (up 194%), LinkedIn (up 112%), Facebook (up 98%), and Priceline (up 73%).  All appear severely overvalued, yet nothing had been able to slow them down.  The chart below (LINK) shows the run they’ve had so far this year.  While their gains may be appealing, these momentum stocks can turn on a dime and usually fall much faster than they rise. 

The excitement around stocks in this sector took a hit this week, though.  Netflix rose 10% overnight after posting improved earnings.  The CEO, Reed Hastings, came out the next morning and mentioned worries over the “euphoria” surrounding the stock.  These remarks pricked the bubble and sent the stock down 6% for the day.  It also sent other momentum-driven stocks lower, most of them closing the week in the red. 

In a normal market, all these red flags would receive a lot of attention and frankly, there have been red flags for a while now.  But as long as the Fed keeps printing money, stocks keep moving higher. 

Finally, it looks like a new, reliable metric for determining the direction of the market is…the World Series.  A St. Louis paper reports that in the year following a St. Louis World Series victory, stocks on average rose 12.4%.  On the other hand, a Boston win averaged only a 0.2% growth.  It’s clear that investors should be cheering for a Cardinal win. 


Next Week

We’ll get another busy week next week.  Corporate earnings continue to come in at a strong pace.  As for economic data, we’ll see reports on inflation at the consumer and producer levels, retail sales, and info on industrial production and manufacturing. 

The Fed will also be in the news as they make their announcement on the level for interest rates.  A few weeks ago, many investors thought they would announce a reduction in the stimulus at this meeting.  The government shutdown and poor economic data make that highly unlikely now, though. 


Investment Strategy

No change here.  Above we mentioned serious concerns for the longer run.  In the shorter run, though, stocks probably have a little more room to run.  Especially as long as the Fed keeps printing money. 

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (or chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

In bonds, yields have fallen (so prices have risen).  We see yields rising (and therefore prices falling) when it looks like the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term.  A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold had a nice week this week, but has had a shaky stretch in the longer term.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 10-18-13

Stocks reached new all-time highs this week as the debt ceiling agreement was finalized in Washington.  For the week, the Dow returned 1.1%, the S&P rose 2.4%, and the Nasdaq gained a nice 3.2%.  Bond yields hit their lowest level in three months (so prices hit a three-month high).  Gold also rose on the news, up a solid 3.7%.  Oil moved lower, falling 1.2% to $101 per barrel.  The international oil, Brent, fell to just below $110. 

Source: Yahoo Finance

The S&P 500 notched a new record high, its 27th record high this year, on the agreement to raise the debt ceiling and reopen the government.  The news was a relief to the market for the short term, but has kept the status quo and pushed the fight out a few months. 

We’ll be seeing the same fight – and same volatility in the market – again in early 2014, the new deadline that the spending and debt levels have been punted to.  A deadline for the broader budget agreement is set for December 13th, but since they imposed no consequences if an agreement is not reached, we’re fairly confident nothing will come of it.   

This whole fight shows how hard it is to achieve any real reforms in Washington, long-term reforms that are badly needed due to our country’s spending trajectory.  Gold rose and the dollar weakened when the agreement was announced, both of which signaled longer term concerns. 

Another impact of the shutdown was to make the Fed less likely to reduce its stimulus program later this month, and likely even this year.  The shutdown has prevented several economic reports from being released, with the Fed members commenting that the lack of data has limited their ability to make decisions.  The reports that were released haven’t shown much improvement, so a reduction in stimulus probably wouldn’t occur, anyway. 

One thing the shutdown has done is provide an excuse if earnings or economic growth is poor.  If the weather is too cold or rainy over a certain period, companies often claim it kept people from coming to the stores.  If it was too warm, it kept people from buying cold-weather clothing.  It’s laughable, but not uncommon.  Now we’re seeing companies warn that the shutdown will have an effect on their earnings. 

The government is also warning that economic growth would have been greater without the shutdown (never mind that the money the government spends is sucked out of the private sector in the first place).  In reality, the impact from the government shutdown is extremely small, but we expect to be hearing this excuse for several months. 

On to corporate earnings, where Factset has reported that 20% of S&P 500 companies have reported third quarter earnings thus far.  Almost 70% have beaten earnings estimates and 53% have beaten revenue estimates (revenue is what the company actually earned through sales; its earnings, or profit, is what is left over after costs are considered).  Remember, though, that estimates have been steadily lowered going into earnings period.  Thompson Reuters reported recent estimates of 4.2% this quarter, when they had estimates of 8.5% growth back in July. 

When looking at earnings on a year-over-year basis, earnings have grown only 1.3% and revenue is up 1.9%. 

While we worry that earnings won’t be as solid as expected, they really haven’t really mattered much to the overall direction of the market.  Instead the focus has been on the Fed and its stimulus, along with the fights in Washington like we’ve seen the last couple weeks.  We don’t expect that to change in the coming weeks. 


Next Week

Next week will be extremely busy.  Now that the government is back in action, several reports not released during the shutdown will begin rolling in.  The big employment report will come on Tuesday and durable goods will come on Friday.  We will also get info on housing and import prices.  Corporate earnings will continue to come in at a strong pace, too. 


Investment Strategy

The lack of conflict in Washington and the printing of money by the Fed are likely to help stocks move higher in the short run.  Over the longer term we remain cautious as stocks look more expensive and investors appear overly optimistic.  We only need to look at the reaction of Google stock this week as evidence, whose share price jumped $122, or 14%, on good earnings.   

Other concerns include fights returning to Washington in the coming months and the Fed either pulling back on its stimulus or we start to feel the consequences of massive money printing. 

While we are hesitant to add any new money into stock market indexes at this point, we would instead look for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

In bonds, yields have fallen recently (so prices have risen).  We see yields rising (so prices fall) when it looks as though the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term.  A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now.  It isn’t intended to be a longer term investment.   

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Gold had a nice week this week, but has had a shaky stretch.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 10-11-13

Events in Washington were again the main driver of the markets this week.  For the week, the Dow rose 1.1%, the S&P gained 0.8%, while the Nasdaq was lower by 0.4%.  Gold continued to move lower, falling 3.2% this week.  The two different types of oil moved different directions, with the domestic oil falling 1.8% to $102 per barrel.  The international oil, Brent, rose to $110.29. 

Source: Yahoo Finance

The worries in Washington carried into this week as stocks moved firmly lower through Wednesday.  An op-ed in the Wall Street Journal by Paul Ryan (LINK) provided a path to compromise and the olive branch halted the market decline of the last three weeks.  Stocks soared for their second biggest gain of the year when it appeared the stalemate in Washington was over. 

Though the details are still being worked out, the deal appears to be a six week extension of the debt ceiling in exchange for a long-term entitlement and spending reform.  It seems like we just went through similar negotiations in 2011 and 2012 that ultimately failed, resulting in the sequester.  We see these upcoming talks failing just as before and adding uncertainty back to the markets. 

The markets were also helped by news out of the Fed this week.  Janet Yellen, currently second-in-charge at the Fed, will be named chairman when Ben Bernanke steps down in January.  She provides some continuity that is a relief to the markets.  She is also likely to continue the current stimulus programs, as she is seen favoring stimulus and intervention even more than Bernanke.  We don’t like this for the long term, but the markets like this stimulus right now. 

An article in the Wall Street Journal (LINK) showed us the back and forth of policy discussions that has gone on at the Fed in recent months.  It showed us that the Fed is not as sophisticated as it seems in determining policy (in fact, they seem pretty clueless) and are making policy decisions on the fly. 

They are stuck with no way to orderly wind down the stimulus program, correctly fearing that any pullback would rattle markets.  This shows us that a reduction in the stimulus program may drag out for monger than many currently estimate. 

Switching gears, corporate earnings for the third quarter started rolling in this week.  According to research firm Thompson Reuters, analysts are expecting a 4.2% earnings growth for the quarter.  This is a higher number than we’ve seen in recent quarters, but it was also less than half of the 8.5% growth they expected back in July.  

Anyway, Alcoa usually gets the earnings ball rolling to much fanfare, since it was the first of the 30 Dow stocks to report.  It was recently removed from the Dow, though, so its earnings lacked as much interest.  Still, it continued the trend of beating lowered estimates.

Two big banks, Wells Fargo and JPMorgan, also reported their earnings.  Their results were lackluster (and were aided by loan loss reserves), but the kicker was the massive drop in mortgage originations.  It wasn’t entirely surprising given the rise in mortgage rates, but confirms a slowdown in this sector.

Economic data has been a casualty of the government shutdown, as several reports were not released this week.  The two major reports that were, were very poor.  Consumer confidence fell to the lowest level of the year.  Similarly, weekly jobless claims hit their second-worst level of the year.  The results were blamed on faulty computer programs, but this was also the culprit in jobless claims hitting the best levels of the year in previous weeks.  It looks like the latest figure may have added back those missed over previous weeks. 


Next Week

The government shutdown will continue to affect economic data releases scheduled for next week, so it looks like we won’t get info on inflation at the consumer level, industrial production, or housing.  However, we will get info on manufacturing in the New York and Philadelphia regions and the leading economic indicators. 

Corporate earnings will start being released at a stronger pace next week.  While we will get results from a wide variety of firms, banking companies will be the biggest sector releasing results. 


Investment Strategy

Stocks were looking oversold (cheap) for the short run this week, which helped them spring back higher when positive news was announced on Thursday.  Markets are likely to rise from here as long as Washington cooperates and the Fed continues its stimulus.  The drama is sure to return when the two parties can’t find an agreement on the longer-term financial matters. 

Like always, we still have a cautious outlook for the longer run.  A new item adding to our caution this week was a report (LINK) that 68% of the companies who had initial public offerings (IPO) this year lost money in the 12 months before coming to market.  This indicates a high tolerance to risk.  What’s more important, the last two times the level was this high was in 2001 and 2007, prior to serious market declines. 

Our other concerns include a slowing momentum of this bull market as stock prices become more expensive.  Additionally, even though the Fed is still active in their stimulus measures and are unlikely to pull back soon, they are doing operations to pull some liquidity out of the economy.  They cite these operations simply as tests, but there has to be a reason for the testing.  

While we are hesitant to add any new money into stock market indexes at this point, we would instead look for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Gold continues to have a rocky road.  It may move higher if a continuation in stimulus is expected, but eventually that stimulus will be removed.  If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

As for bonds, this area continues to receive much attention as yields keep rising (so prices are falling).  A short position (bet on the decline in prices) has done well recently but serves only as a nice hedge.  It isn’t intended to be a loner term investment.   

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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 10-4-13

Drama in Washington weighed on stocks this week.  Through the close Friday, the Dow fell 1.2%, the S&P was slightly lower by 0.1%, while the Nasdaq notched a gain of 0.7%.  We thought gold would have risen on the shutdown in Washington, but instead moved lower by 2.1%.  Oil moved higher, rising 0.9% to $104 per barrel.  The international oil, Brent, closed at $108.46. 

Source: Yahoo Finance

It’s no surprise that the government shutdown was the topic of the week.  The threat of a closure greeted us Monday morning and the two sides were no closer to a deal by the weeks end. 

In reality, this shutdown has little impact on the economy.  JPMorgan economists analyzed past shutdowns and found that each week the government is closed results in a 0.12% hit to GDP (although it’s often forgotten that the money spent by the government is pulled from the private sector, which could have been used in other more productive ways).  Federal employees are likely to get back pay, anyway, so the impact will be even less than advertised.  Plus they receive a vacation paid for by the taxpayers.    

This did give a lack of confidence to the markets, though, as stocks sold off much of the week.  Stocks did rise strongly on the day of the shutdown, but this was likely more due to it being the first of the month and quarter, when new money tends to flow into the market. 

The big concern is further down the road with the debt ceiling.  A divided government on this issue will probably result in an even larger reaction in the markets. 

On the subject of the debt ceiling, we are already hearing threats of default if the ceiling is not raised.  The rhetoric has reached a new level, where even the highest members of this administration are warning the markets of an approaching calamity (LINK).  We can’t say we’ve ever heard a sitting President issue threats like this to investors before. 

A default on the debt is not possible.  If the debt ceiling is not raised, the Treasury can prioritize payments so that creditors can get paid.  If a default were to occur, it will have been entirely self-inflicted and highly irresponsible. 

A casualty of the shutdown was several economic data reports provided by the government.  In particular, the important monthly jobs report was not released Friday morning due to the closure.  This report is a key metric for the Fed and their stimulus program, since an improving employment picture would indicate less stimulus needed.  Therefore, it looks even less likely that the Fed will announce a reduction on the stimulus at its meeting later this month. 

A substitute to the government jobs report was the employment figures from data processor ADP.  It uses a different methodology, but give or take it tends to resemble the government jobs report, so this report received the attention this week.  It showed a gain of 166,000 jobs, a weak number, and the last two months figures were revised lower.  The employment picture appears remains poor.

On the positive side, other economic reports this week were mostly positive.  Business activity in the southern and mid-west regions showed signs of growth.  Manufacturing in the U.S. expanded over the last month to the highest level since April, 2011.  However, the service sector saw a significant slowing over the last month.  


Next Week

Next week looks to be fairly quiet for economic data.  We will get reports on the trade balance, retail sales, and inflation at the producer level.  There will again be several regional Fed presidents making speeches, so that might give us some additional insight to the future of the stimulus program. 

The real issue moving markets next week will again be Washington.  Movement closer to or further from a resolution – especially on the debt ceiling – will be the big driver of the markets. 


Investment Strategy

We’re still cautious on the markets due to the drama surrounding Washington, though it is highly likely that stocks will jump if a resolution is announced.  However, the debt ceiling fight is just up the road and we could see another volatile period at that time (unless this issue is resolved during the current shutdown).   

In the longer run we see reason for caution, too.  The momentum of this bull market is slowing as stock prices become more expensive.  Additionally, even though the Fed is still active in their stimulus measures and are unlikely to pull back soon, they are doing operations to pull some liquidity out of the economy.  They cite these operations simply as tests, but there has to be a reason for the testing.  

While we are hesitant to add any new money into stock market indexes at this point, we would instead look for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Gold continues to have a rocky road.  It may move higher if a continuation in stimulus is expected, but eventually that stimulus will be removed.  If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks.  It’s good for a hedge here, but caution is warranted.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

As for bonds, this area continues to receive much attention as yields keep rising (so prices are falling).  A short position (bet on the decline in prices) has done well recently but serves only as a nice hedge.  It isn’t intended to be a loner term investment.   

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Finally, in international stocks, we are still not interested in developed markets and not totally sold on emerging, either. 

Please note, 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.