Please note: there will be no market commentary next week due to the Easter holiday.
News out of Europe weighed on stocks this week. Through the Friday close, the Dow was lower by a mere 0.01%, the S&P fell 0.2%, and the Nasdaq lost 0.1%. The European banking concerns boosted gold prices, which closed the week with a 0.9% gain. Oil saw more selling, falling a slight 0.1% to $93.71 per barrel. The international Brent oil traded at a three-month low at one point and closed the week at $107.50.
News out of Europe weighed on stocks this week. Through the Friday close, the Dow was lower by a mere 0.01%, the S&P fell 0.2%, and the Nasdaq lost 0.1%. The European banking concerns boosted gold prices, which closed the week with a 0.9% gain. Oil saw more selling, falling a slight 0.1% to $93.71 per barrel. The international Brent oil traded at a three-month low at one point and closed the week at $107.50.
Source: Yahoo Finance (the chart is skewed higher this week, not accounting for Monday’s lower open)
Stocks opened the week with surprising news out of Europe. Banks on the small Mediterranean island of Cyprus were in need of a bailout. They had taken a hit on bad investments in Greece, plus a weakened real estate sector. While this isn’t an unusual story in the Eurozone, the criteria for the bailout were.
By receiving bailout funds, the debt level in Cyprus would be higher than the levels permitted for the Eurozone countries. Therefore, Cyprus somehow needed to chip in. What better way than by confiscating a portion of bank deposits?
That novel idea sent shockwaves through the market. Since some investors were already concerned over the high price of the market, the bad news provided an opportunity to take some money off the table.
As the week progressed, the criteria for a bailout constantly changed. First, there was the straight bank account confiscation, though the amount to be taken varied. Then they tried to work out an agreement with Russia that included drilling rights. Next, they had a plan involving the collateralizing state assets.
As of late Friday, they circled back to taking funds from bank accounts. Uninsured accounts will take a hit, possibly up to 40% of their value. Bondholders are also poised to lose a portion of their investment. Additionally, there will be capital controls imposed, which will prevent people from moving money abroad once the banks reopen.
This story has been written off by many since Cyprus is such a small and unimportant country. And that’s true. The problem is that it sets a dangerous precedent. The distrust it creates will be very difficult to overcome.
Tying this story back to the U.S., some have humorously pointed out that the Fed has imposed similar wealth confiscations on bank accounts here at home (Link). While not a straightforward confiscation, the Fed has lowered interest rates to such a degree that savers have lost more over the last few years than the Cyprus government has proposed on its bank accounts. That argument does have some merit.
Speaking of the Fed, they were in the news this week with one of their periodic meeting to determine interest rates. In a surprise to no one, they announced no changes to their stimulus program of buying $85 billion a month in bonds (or printing $85 billion a month), plus holding interest rates at these historic lows.
One change that got little attention was the mention that they could reduce the amount of money printed each month (say from the $85 billion to $75 billion). Though still a massive amount of money will be being printed, it is possible to see the market pull back sharply on the prospect of lesser stimulus from the Fed.
A major objective of the Fed policies is to boost housing prices. They see housing as key to economic recoveries. No matter that we were clearly in an unsustainable bubble whose bursting lead to the recession, their goal is to boost housing prices and reflate that bubble. New data this week showed that it is working.
Several housing reports were released this week, nearly all of which showed growth in the housing sector. It was also reported that almost two million more homes were no longer underwater just in the fourth quarter alone.
This may be good news for homeowners, but we’re moving to another unsustainable level for the wrong reasons. The same policies are being implemented (or trying to be implemented) to reflate that bubble. And the end result will probably be the same.
Finally, one data point we like to look at is sales at restaurants. Dining out is usually a good leading indicator on the strength of the economy. The Knapp-Track Index was released this week, which follows sales over the past month. For the third straight month sales fell, dropping more sharply over the most recent month. While this may be a leading indicator for the economy, it hasn’t correlated to the market who continues to rise as dining out falls.
Next Week
Next week will be a busier one. Of course we will still have discussions over the Cyprus situation, though the deadline for a solution is Monday. Plus we will get a variety of economic data. There will be more info on the housing sector, along with durable goods, consumer confidence, personal income and spending, and another revision to the fourth quarter GDP. Several regional Fed presidents will also be making speeches, which often affect the market.
Investment Strategy
There is no change in our investment strategy as prices hang around these high levels. We’re still cautious, though admittedly we’ve been cautious as the market climbed higher.
We don’t feel the economic and earnings picture warrant a record high in stocks. With the central bank money printing and increasingly centrally planned economies, normal market forces have been distorted, making the picture more difficult to forecast. The money printing may send the market higher in the near term, but we are increasingly worried for the longer term.
We’ve taken some money out of the broader index positions and aren’t placing any new bets on the direction of the broader market at this time. Finding undervalued individual companies seems to be a better play for new money, even though many stocks are expensive.
As for what we are looking for, we like higher-quality and dividend paying stocks. Companies with operations overseas have seen better earnings than those who don’t. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold may be turning the corner to move back higher. Typically the price rise mirrors the growth of the Central Banks balance sheet (the money printed is added to their balance sheet), but has failed to do so recently. We like it for the long run as central banks around the world devalue their currencies and would add to our positions if it moves further from here.
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, we think yields on Treasury bonds will rise in the long run (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge. However, the short run is a more difficult story to figure out.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases.
Finally, in international stocks, we are less enthusiastic on developed markets, but 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.
By receiving bailout funds, the debt level in Cyprus would be higher than the levels permitted for the Eurozone countries. Therefore, Cyprus somehow needed to chip in. What better way than by confiscating a portion of bank deposits?
That novel idea sent shockwaves through the market. Since some investors were already concerned over the high price of the market, the bad news provided an opportunity to take some money off the table.
As the week progressed, the criteria for a bailout constantly changed. First, there was the straight bank account confiscation, though the amount to be taken varied. Then they tried to work out an agreement with Russia that included drilling rights. Next, they had a plan involving the collateralizing state assets.
As of late Friday, they circled back to taking funds from bank accounts. Uninsured accounts will take a hit, possibly up to 40% of their value. Bondholders are also poised to lose a portion of their investment. Additionally, there will be capital controls imposed, which will prevent people from moving money abroad once the banks reopen.
This story has been written off by many since Cyprus is such a small and unimportant country. And that’s true. The problem is that it sets a dangerous precedent. The distrust it creates will be very difficult to overcome.
Tying this story back to the U.S., some have humorously pointed out that the Fed has imposed similar wealth confiscations on bank accounts here at home (Link). While not a straightforward confiscation, the Fed has lowered interest rates to such a degree that savers have lost more over the last few years than the Cyprus government has proposed on its bank accounts. That argument does have some merit.
Speaking of the Fed, they were in the news this week with one of their periodic meeting to determine interest rates. In a surprise to no one, they announced no changes to their stimulus program of buying $85 billion a month in bonds (or printing $85 billion a month), plus holding interest rates at these historic lows.
One change that got little attention was the mention that they could reduce the amount of money printed each month (say from the $85 billion to $75 billion). Though still a massive amount of money will be being printed, it is possible to see the market pull back sharply on the prospect of lesser stimulus from the Fed.
A major objective of the Fed policies is to boost housing prices. They see housing as key to economic recoveries. No matter that we were clearly in an unsustainable bubble whose bursting lead to the recession, their goal is to boost housing prices and reflate that bubble. New data this week showed that it is working.
Several housing reports were released this week, nearly all of which showed growth in the housing sector. It was also reported that almost two million more homes were no longer underwater just in the fourth quarter alone.
This may be good news for homeowners, but we’re moving to another unsustainable level for the wrong reasons. The same policies are being implemented (or trying to be implemented) to reflate that bubble. And the end result will probably be the same.
Finally, one data point we like to look at is sales at restaurants. Dining out is usually a good leading indicator on the strength of the economy. The Knapp-Track Index was released this week, which follows sales over the past month. For the third straight month sales fell, dropping more sharply over the most recent month. While this may be a leading indicator for the economy, it hasn’t correlated to the market who continues to rise as dining out falls.
Next Week
Next week will be a busier one. Of course we will still have discussions over the Cyprus situation, though the deadline for a solution is Monday. Plus we will get a variety of economic data. There will be more info on the housing sector, along with durable goods, consumer confidence, personal income and spending, and another revision to the fourth quarter GDP. Several regional Fed presidents will also be making speeches, which often affect the market.
Investment Strategy
There is no change in our investment strategy as prices hang around these high levels. We’re still cautious, though admittedly we’ve been cautious as the market climbed higher.
We don’t feel the economic and earnings picture warrant a record high in stocks. With the central bank money printing and increasingly centrally planned economies, normal market forces have been distorted, making the picture more difficult to forecast. The money printing may send the market higher in the near term, but we are increasingly worried for the longer term.
We’ve taken some money out of the broader index positions and aren’t placing any new bets on the direction of the broader market at this time. Finding undervalued individual companies seems to be a better play for new money, even though many stocks are expensive.
As for what we are looking for, we like higher-quality and dividend paying stocks. Companies with operations overseas have seen better earnings than those who don’t. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold may be turning the corner to move back higher. Typically the price rise mirrors the growth of the Central Banks balance sheet (the money printed is added to their balance sheet), but has failed to do so recently. We like it for the long run as central banks around the world devalue their currencies and would add to our positions if it moves further from here.
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, we think yields on Treasury bonds will rise in the long run (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge. However, the short run is a more difficult story to figure out.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases.
Finally, in international stocks, we are less enthusiastic on developed markets, but 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.
