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.