Commentary for the week ending 5-24-13

Stocks turned in their first negative week after four straight weeks of gains.  Through the close Friday, the Dow was lower by 0.3%, the S&P fell 1.1%, and the Nasdaq also returned -1.1%. Gold closed the week with a gain of 1.6%.  Oil ticked lower by 2.2% to just above $94 per barrel.  The other major type of oil, Brent, fell to just shy of $103. 

Source: Yahoo Finance

While it’s been some time since we’ve had a negative week for stocks, it’s also been a long time since we’ve seen three straight negative days for the Dow.  In fact, it hasn’t happened yet this year.  A last minute gain on Friday narrowly saved the Dow from accomplishing that feat.  Regardless, we saw some heavy volume and volatility this week that we haven’t seen in a while. 

Keeping with the recent trend, this week was again all about the Fed.  There was very little in terms of economic data or earnings to move the markets, but there was an abundance of news from the central bank to keep markets moving. 

The money printing and bond buying from the Fed has driven markets higher and investors are beginning to worry that a reduction in this stimulus may be coming.  They have been closely watching for any clues from the Fed, as it would be a sell signal for stocks.  The word “taper” has become a very popular term in recent weeks.      

The week started out with a mixed picture from the Fed.  One regional President (Evans) expressed caution with how large the Fed’s balance sheet is becoming through all their money printing, which indicates a taper in the stimulus would be necessary.  Others (Dudley and Bullard) seemed to indicate satisfaction with the stimulus and support for its continuation. 

It was Wednesday, however, that the real activity began.

Fed chief Ben Bernanke was on the Hill for one of his periodic testimonies before Congress.  His discussions indicated a support for the continuation of the stimulus program, sending stocks sharply higher. 

However, minutes from the latest Fed meeting were released later that day, pouring cold water on the enthusiasm.  “A number” of regional Fed Presidents expressed concerns over the stimulus and advocated for a “taper” as early as June.  They also cited the bubbly nature of the markets as a concern (buoyancy was actually the term they used.  If the Fed were to use the term “bubble,” it would probably start a panic). 

By the end of the day, the Dow had moved almost 280 points and closed solidly in the red. 

The worries spilled into Thursday, aided by negative news out of Asia.  As can be seen in the weekly chart above, the worries didn’t last long.  It’s becoming clearer that the Fed will not pull back on stimulus any time soon.  They have boxed themselves into a corner where they know markets will react negatively to any reduction in the stimulus.  The Fed is holding out until economic conditions improve enough that markets will stand on their own, but after several years of stimulus and little in the way of results, it is unclear if that day will ever come. 

As for the worries in Asia, the Japanese stock market also saw some volatility this week.  Their market has been on a tear since they embarked on their radical new stimulus.  For the year, their market was up almost 50% through Wednesday (and over 80% since November).  A surprisingly negative report on business sentiment in China, combined with the jitters here caused by the Fed, caused their market to drop over 7%, their worst one-day drop since the earthquake and tsunami over two years ago. 

It serves as a reminder to us that these markets can turn very quickly, especially from these artificially inflated levels. 


Next Week

Next week again looks to be quiet.  We will get info on consumer confidence, a revision to first quarter GDP, personal income and spending, and manufacturing info for the mid-Atlantic and Texas regions.  There doesn’t appear to be much info that will come from the Fed, but the market will probably still be on edge from comments made this week. 


Investment Strategy

No change here.  If anything, this week showed that the markets will keep going higher, as long as the central banks continue to print money at the current pace.  And the pace does not show signs of letting up any time soon. 

Still, we don’t recommend putting money into the broader stock market at this time.  Finding undervalued individual stocks seems to be a better play at this time, though they are increasingly hard to find.  We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly. 

We like higher-quality and dividend paying stocks, though those have seen the biggest gains so far.  Companies with operations overseas have seen better earnings than those who do not.  We also like smaller and mid-sized stocks that don’t have a strong correlation to the broader market and Europe. 

Gold managed to stabilize (again) this week, but its short-term prospects look poor.  While demand for physical gold is still very strong, gold as an investment has shown signs of weakness.  We like it for the long run as a good hedge, but caution is still 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, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon.  Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before it becomes profitable. 

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.

Commentary for the week ending 5-17-13

Another week, another round of new highs.  Through the close Friday, the Dow rose 1.6%, the S&P climbed 2.1%, both to all-time highs.  The Nasdaq was up 1.8%, its highest level in 12 years.  Gold continues to have a rough time, falling 5.0% this week as it approaches the lows set last month.  Oil bounced around, but closed the week with little change on a drop of just 0.02% to $96 per barrel.  The other major type of oil, Brent, moved slightly higher to $104.72 per barrel.

 Source: Yahoo Finance

 The story just doesn’t seem to change.  Stocks continued to rise this week, again pushing to new highs.  As can be seen in the nearby chart of the Dow, this has been the story for the last six months.  The S&P was the same, rising 22% over that period without much of a pullback.  This is a highly unusual time we are in.

The market didn’t have much going for it this week to contribute to the gains.  Economic data leaned to the negative side while corporate earnings were lackluster.

The good news first, retail sales saw a surprising increase, which was even better when considering gas prices have fallen.  Small business optimism rose, although from a very low level, while consumer confidence stood at the highest level since 2007.  Additionally, inflation with the CPI and PPI both showed declines, largely due to lower gas prices (though the Fed doesn’t like to see declining prices).

On the other hand, manufacturing activity in the New York and Philadelphia contracted, industrial production was also negative, weekly jobless claims showed a sharp increase, and housing starts were down, though permits were up (an article by Bloomberg this week sees the housing sector becoming bubbly again, especially as the homeownership rate declines while investors drive prices higher.  LINK).

What did drive markets higher?  Central banks around the globe and their money printing.  We again saw evidence that the market is dependent on Fed as it dropped sharply on reports of a pullback in stimulus.

It began last week with rumors of an article on the Fed scaling back its printing of $85 billion per month.  The article appeared over the weekend and we learned nothing new, frankly, but it did dampen enthusiasm on Monday.

The other occurrence came late Thursday when a regional Fed president (Williams) mentioned he thought the stimulus program would begin winding down this summer and conclude by year-end.  The reaction from his comments can be seen in the weekly chart above.

Still, many if not most don’t see the Fed tapering any time soon, so the market shrugged off these reports and resumed its rise. 

In our opinion, we don’t see the Fed winding down its stimulus program any time soon.  The Fed firmly believes its stimulus policies are the way to improve the economy.  As the economy languishes, the employment picture remains poor, and inflation is below their target (although deflation is often not a bad thing), they will not pull back on the stimulus.  One might think this would be evidence that their response is incorrect, but we only have to look at Japan and their decade-long stimulus programs to realize how stubborn these economists can be.

Another topic we’d like to touch on is Europe.  We’ve seen an increase in discussion on investors warming to European bonds.  A higher bond yield indicates a riskier country and investment (like your credit card – riskier borrowers pay a higher interest rate), but the yields have been steadily improving, drawing in more investors.

Indeed, we aren’t seeing the apocalyptic stories coming out of the region we saw a year ago.  No countries are on the verge of leaving the Eurozone.  But that doesn’t mean risk isn’t there.  The fundamental problems have not been addressed, merely papered over with cheap money.

We learned this week that the Eurozone again saw a contraction in GDP over the last quarter.  This is the sixth straight quarter of declines, the worst stretch since WWII.  The Eurozone is clearly in recession, while the worst-off countries are certainly in a depression.  Regardless, their stock markets are up, with the performance of the broader European index (FTSE Europe) rising very similarly to our own stock market.

Greece was also highlighted due to the amount of investors warming to the country.  Bond yields are plunging (which indicates less perceived risk) and are now yielding 8% when they were yielding 30% a year ago.  Stocks are rising, too, with their stock market up 80% over the past year.  This is worrisome, especially since their economy is 20% smaller than when the crisis began, plus unemployment stands at 27% and youth unemployment is over 60%.

We are truly living in unprecedented times.  Though stocks continue to rise around the globe, we don’t see this ending well in the long run.


Next Week

Next week looks to be fairly quiet.  Over 90% of S&P 500 companies have reported first quarter earnings so far, so the remaining releases will only trickle in.  For economic data, we will see some reports on housing, plus the growth of durable goods.  Several Fed presidents will be speaking, notably with Fed chief Bernanke on the Hill, plus they will release the minutes from their latest meeting.


Investment Strategy

It would be highly irresponsible to recommend putting money into the broader stock market at this time.  Could stocks continue to rise from here?  Absolutely.  But the risk outweighs the return, in our opinion.

Finding undervalued individual stocks seems to be a better play at this time, though they are increasingly hard to find.  We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.

There is no change in what we are looking for.  We still like higher-quality and dividend paying stocks, though those have seen the biggest gains so far.  Companies with operations overseas have seen better earnings than those who do not.  We also like smaller and mid-sized stocks that don’t have a strong correlation to the broader market and Europe.

Conditions continue to deteriorate for gold.  While demand for physical gold is still very strong, gold investments have been very poor.  We like it for the long run as a good hedge, but caution is still 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, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon.  Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before it becomes profitable.

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.

Commentary for the week ending 5-3-13

Please note: As many of you know, our office is located at the entrance to the TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending much of the week. However, we will be in the office every day next week, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office.  Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. Additionally, there will be no weekly market commentary next week. Thank you.

Markets again pushed through new highs this week.  Through the close Friday, the Dow gained a solid 1.8%, the S&P rose by 2.0%, and the Nasdaq popped 3.0% higher.  Gold showed a slight increase, posting a 0.7% rise on the week.  Late-week gains sent oil higher by 2.8% to close at $95.61 per barrel.  The international Brent crude, used for much of our gas here in the east, moved up to $104 per barrel.   

Source: Yahoo Finance

In reaching new highs this week, the Dow and S&P both crossed notable milestones.  The Dow rose above the 15,000 level while the S&P passed the 1,600 level.  Since November, these indices have both risen nearly 20%, practically in a straight line (the Dow is seen right). 

We saw some good employment reports this week that contributed to the optimism, but the rest of the economic data was rather poor. 

The employment figures showed a modest gain of 165,000 jobs over the last month, right in line with the average over the past year.  Also, the previous two months saw solid upward revisions.  The unemployment rate moved lower from 7.6% to 7.5%, the lowest level since 2008, while a broader measure of unemployment ticked higher to 13.9% from 13.8%. 

The response to this report bordered on giddiness, though we failed to see why.  While the figures were better than expected, they were hardly worth getting excited over.  The job gains don’t keep up with population growth, part-time employment was very high, and more workers are leaving the labor force. 

A different employment report we like to look at is the employment-to-population ratio.  It’s as straightforward as it sounds, measuring the amount of people working to the overall population.  As seen in the chart to the right dating back to 2008, little improvement can be seen (link to data). 

It was a different story for other economic data this week.  Reports on the manufacturing and the service sectors showed weakening over the past month, while data out of the Dallas and Chicago regions showed contraction. 

A large amount of corporate earnings were released this week, though they failed to gain much attention.  Over 80% of companies in the S&P 500 have reported so far and the results are slightly above average.  According to Factset, over two-thirds have beaten earnings estimates, but more than half were worse than expected in regards to revenue growth (revenue is the money the company actually earned through sales.  Earnings, or profits, are what are left after subtracting costs). 

Overall, earnings have grown 3.2% over the past year while revenues declined 0.1%.  We would like to see better revenue growth before we get too excited on the earnings picture. 

Global central banks were also in the headlines this week (though it is rare for them not to be these days). 

Here in the U.S., the Fed held one of its periodic meetings and little changed in their outlook.  There was one slight difference, however.  In the past, the Fed discussed pulling back on their $85 billion in monthly money printing if conditions warranted.  New this month was language indicating increases in their program was possible, too. 

We see an expansion of their stimulus program as a far more likely scenario than any reduction.  Economic data has been lackluster and inflation as they measure it is below their target.

Unwilling to admit that printing money simply hasn’t worked, they will double down on this policy in hopes that it does, similar to the recent actions of the Japanese.  Virtually every other central bank in the world is following suit. 

History has shown that fundamental growth policies are effective for true economic growth – lower taxes and lower government spending.  History has also shown that the current policies are ineffective.  Until this endless stimulus cycle ends, we will create more asset bubbles that will ultimately burst, only to be reflated again as the boom and bust cycle continues. 


Next Week

Earnings season is winding down and only a couple economic data points will be released next week, so the week looks fairly quiet.  More likely to have an impact on the market is several regional Fed presidents making speeches, including Ben Bernanke.  These speeches will be closely watched for any hints on further stimulus. 


Investment Strategy

Economic data over the last several weeks has shown a weakening economy.  The celebrated employment report was not great, either.  Poor economic fundamentals and mediocre earnings with declining revenues don’t usually result in record highs for stocks. 

Instead, the market has been so heavily influenced by the actions of the central banks and the new money flooding in, which has propelled the market higher.  Under this increasingly centrally-planned economy, it is difficult to make predictions on the direction of the market. 

With a cloudier macro picture and already high stock prices, we don’t like putting new money into the broader indexes at this point.  Finding undervalued individual stocks (which can be tricky around earnings time) seems like a better play.  We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly. 

There is no change in what we are looking for.  We still like higher-quality and dividend paying stocks, though those have seen the biggest gains so far.  Companies with operations overseas have seen better earnings than those who do not.  We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe. 

Gold has found some footing after its recent drop, but hasn’t really moved much.  We like it for the long run due to the massive amounts of money being printed around the world, but caution is still warranted.   

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, so buying on the dips may work with a longer time horizon. 

As for bonds, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon.  Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before this occurs. 

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.