Commentary for the week ending 2-21-14

A late-day decline Friday put stocks in the red for the week.  Through the close, the Dow was lower by 0.3%, the S&P was off a slight 0.1%, while the Nasdaq turned in a more respectable 0.5% gain.  Gold keeps climbing higher, up 0.4% this week.  We are seeing higher gas prices at the pump as oil continues to climb, up 2.1% this week to $102.20 per barrel.  The international Brent oil, used for much of our gas here in the east, rose to $109.84.  

Source: Yahoo Finance (the chart is skewed this week due to the Monday holiday)

The gains we’ve seen in the market over the last few weeks shows us there is a lot less worry than at the beginning of the year.  Though the gains stalled this week, stocks still shrugged off bad news and held their ground. 

The actions of the Fed still seem to be an important driver of the market.  The minutes from the latest Fed meeting were released this week, indicating the reduction in stimulus would continue.  The info was nothing new.  However, stocks dropped sharply on the news Wednesday, as can be seen in the chart above.

It looks like many investors are hoping the Fed will stop its reduction of stimulus, even hoping for more in light of the poor economic reports.  The Fed seems resolute in pulling back, as the minutes made clear.  They even discussed raising interest rates, which is highly unlikely any time soon, but just the mention was enough to worry the market. 

There were several economic reports released this week, and none were good.  Of course the weather has been cited as a factor, although its impact is questionable.  Manufacturing in the New York and Philadelphia regions dropped sharply, and a legitimate argument can be made that weather had an impact on these figures. 

However, housing data continues to deteriorate nationwide, including areas not affected by the poor weather.  In fact, the areas not affected by the weather showed the worst decline, indicating that weather is not a factor. 

Also, inflation figures released this week showed a slight gain, but the comparisons have become cloudy due to a new methodology in computing inflation.  The new method includes more items and claims to be more robust, but we know there are never changes in methodology unless it skews to the governments favor.  As any regular shopper can attest, inflation is many times higher than advertised. 

Finally, a stock story that makes us worry the market is becoming irrationally overvalued.  This week Facebook announced it was purchasing a text message service called WhatsApp.  The service claims to have 450 million users, and showing how knowledgeable we are about social media, we had never heard of it.  

What raised eyebrows is the price Facebook paid.  This text message service, with 50 employees, was purchased for $19 billion ($16B in cash and stock, $3B in restricted stock).  Facebook is paying more than two times its annual revenue for a company with barely any revenue. 

Just for comparison, the valuation of this text message service is higher than many other companies you are familiar with. It’s worth more than ConAgra, for instance, which has 26,000 employees.  Or airlines like Southwest and American.  Or clothing companies like the Gap, Ralph Lauren, and Under Armour.  Or Lowes home improvement stores.  Or Campbell’s Soup.  Harley Davidson.  Xerox.  We could go on, but you get the point.  

This extremely high valuation is reminiscent of the tech bubble in the late 1990’s and makes us worry. 


Next Week

We’ll see a handful of economic reports next week, including data on housing, durable goods, and consumer confidence.  Getting more attention will be the new Fed chief Janet Yellen’s testimony in front of the Senate.  We don’t think we’ll learn anything new, but as we saw with the minutes released this week, investors are hoping for an end to the reduction in stimulus. 


Investment Strategy

Despite going nowhere this week, in the short run, we think the market has a better chance to move to the upside than downside.  In the longer run, we worry that the economy is not as great as many think and other issues like a slowdown in China will cause additional problems.  However, we’ve held this view for some time and the market has continued to move higher. 

Being value investors by nature, we like buying on dips and wouldn’t put new money into the broader market at this point.  We still see many undervalued individual names to invest in, however.  We mentioned our concerns for the longer run, so we are keeping an eye out for trouble and will look to exit if it surfaces.   

As for bonds, yields continue to hover around these current levels and trying to figure out where they’ll go from here is a guessing game, at best.  Bonds will always have their place in a portfolio, but there is a worry about rates rising (so prices would fall).  A short position (bet on the decline in prices) acts as a nice hedge if yields do rise.  Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier investments, so caution is warranted. 

Continuing with bonds, TIPs remain an important hedge against future inflation and 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 again reached its highest level in three months and has performed well recently.  It remains volatile, so we’d still be cautious, but it acts as a good hedge in the longer run. 

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 see weakness around the globe and favor neither the developed or emerging markets. 

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 week ending 2-14-14

Stocks continued to rally this week, turning in their best performance of the year.  Through the Friday close, the Dow and S&P both rose 2.3% while the Nasdaq was higher by 2.9%.  Gold had a terrific week, climbing 4.4% to break out of the range it’s been stuck in the last several months.  Oil continues to rise, too, up 0.4% to close at $100.30 per barrel.  The international Brent crude moved higher to just above $109 per barrel. 

Source: Yahoo Finance

The week was a very quiet one with little news affecting the market.  Actually, there was more talk about the weather than anything else.   

The cold weather and unusually large amount of snow affecting the country has many worried about its impact on the economy.  Economists are already making downward revisions to their data forecasts and companies are warning of weaker sales.  Regardless of it actually having any impact, the weather will provide an excuse for any poor economic report or corporate earnings over the next several weeks. 

Blaming the weather is nothing new, really.  Every season we hear the weather used as an excuse.  If it’s too cold, people can’t go shop.  If it’s too warm, not enough people bought jackets, which hurt earnings.  You get the idea.  This week it was cited as the reason for the worst decline in retail sales over the past year and a half and a decrease in industrial production.

While we’ll hear this excuse in the coming weeks, it will be difficult to determine its true impact on the economy, especially since the data has been deteriorating over the last several months.  

While economic reports this week weren’t great, the first Congressional testimony of the new Fed chief gave stocks a reason to rise.  As expected, Janet Yellen told us nothing new in expressing a desire to continue the policies of Ben Bernanke.  It was what the market wanted to hear, though, since it doesn’t like change and does like the easy money policies of the Fed. 

Stocks also appeared to get a boost from the extension of the debt ceiling until next year. 

Finally, we’ll take a look at corporate earnings which have been particularly strong.  According to Factset, earnings have grown a solid 8.3% while revenue (what the company made in sales.  Revenue minus expenses gives us earnings) only grew at a 0.8% pace.  Again, this shows how companies have been improving their bottom line not by increasing sales, but by cutting costs. 

Interesting to note is that when announcing positive earnings, only 53% of companies’ stocks rose as a result.  This is far below average.  It shows us that investors are being pickier when looking at earnings and we’ll have to watch for how much impact it has on the broader market going forward.   


Next Week

Next week looks to be a little busier, especially since we only have four trading days due to the Monday holiday.  We’ll see reports on inflation, housing, and leading economic indicators.  We’ll see some corporate earnings reports, too, but the amount of companies reporting continues to decline. 

The Fed will also be in the news since several regional Fed presidents will be making speeches.  Plus, the minutes from the last Fed meeting will be released. 


Investment Strategy

Stocks have reversed course very sharply since their dismal opening to the year.  We may not get another performance like we saw this week, but the market momentum is clearly higher.  Being value investors by nature, we like buying on dips and wouldn’t put new money into the broader market at this point, but still see many undervalued individual names out there.  . 

As for bonds, yields continue to hover around these current levels and trying to figure out where they’ll go from here is a guessing game, at best.  Bonds will always have their place in a portfolio, but there is a worry about rates rising (so prices would fall).  A short position (bet on the decline in prices) acts as a nice hedge if yields do rise.  Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier investments, so caution is warranted. 

Continuing with bonds, TIPs remain an important hedge against future inflation and 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 reached its highest level in three months and finally broke through that $1,300 price level.  It still looks volatile, but also acts as a good hedge in the longer run. 

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 see weakness around the globe and favor neither the developed or emerging markets. 

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 2-7-14

A late-week gain put stocks into positive territory for the week.  Through the close Friday, the Dow gained 0.6%, the S&P rose 0.8%, and the Nasdaq turned in a 0.5% return.  Gold rose steadily all week, closing with a 1.9% increase.  Oil was also higher, gaining 2.5% to close just below $100 per barrel.  The international Brent crude moved higher to $108.83 per barrel. 

Source: Yahoo Finance

This week had a little bit of everything.  We began with the worst day of the year for stocks, only to have the best day of the year later in the week.  The gains marked an end to the decline we’ve seen in the markets since the beginning of the year. 

The week started with worries that the economy was losing momentum.  Recent economic reports supported that view – job growth has been weak, the housing market cooling, retail sales poor, and car sales have been dropping.  Released on Monday was a report showing much weaker manufacturing activity, which helped send stocks lower. 

When there was poor economic data in the past, we knew the Fed was nearby with their money printing presses ready to make things right.  While we didn’t like this since it only papers over the problem and causes bigger problems down the road, stocks liked it in the meantime.  Now we know the Fed is committed to pulling back on the stimulus, so the markets don’t have that crutch to help them anymore.  This has contributed to the decline we’ve seen in stocks.  

After the sharp drop, stocks found some footing.  There wasn’t really any news behind the turnaround, it just looks like stocks were oversold and due for a rise. 

For economic data this week, the big news came on Friday with the employment report.  Results were much weaker than expected as the economy added only 113,000 jobs on projections of over 180,000.  The weather did not appear to be a factor, either. 

Additionally, the previous month’s employment report was extremely week, but many investors brushed it off in the belief it would be revised higher.  Unfortunately, it was not.  Taken together, the past two months have shown very disappointing job gains, a concern for the economy going forward. 

Sounding like a positive, the unemployment rate fell to a five-year low of 6.6%.  Since the labor force has weakened so dramatically, this number has lost reliability.  As an example, if the size of the labor force was the same as when President Obama took office, the unemployment rate would be closer to 11%. 

A better metric to look at is the employment-to-population ratio, which is simply the amount of people employed to the total working-age population.  As you can see in the nearby chart, that number has shown no improvement in four years. 

As for other economic data, above we mentioned the weakness in the manufacturing sector, but a report on the service sector showed decent strength. 

Finally, corporate earnings have fared relatively well, although any impact on the market has taken a back seat to the bigger macro issues.  With almost 70% of companies in the S&P 500 reporting earnings so far, Factset reports that earnings have grown 8.1% while revenue (what the company actually earned through sales) only rose 0.8%.  It shows these companies have done well earning a profit, but those profits have come from cutting costs, not increasing sales.  This has been the trend for some time and we worry if it could cause problems down the road. 

Next Week

Next week looks to be a little less busy.  There will be only a couple economic reports released, retail sales and industrial production, and corporate earnings are beginning to slow down.  All eyes will be on the new Fed chair, Janet Yellen, as she makes her first official appearance in front of Congress.  We’ll hear her views on the economy and the stimulus program, though we don’t expect any surprises from her testimony. 

Investment Strategy

The broader market looked very oversold in the early part of the week, providing a good opportunity to buy the index.  We have concerns for the longer run, but think markets have room to move higher in the shorter term.  The lack of a market decline on Friday despite the poor employment report supports that view. 

Since the market has risen off its lows, we feel the buying opportunity for the broader market is less attractive and would again put new money into individual stocks. 

Like we mention every week, when looking at individual stocks, we look at fundamental analysis (looking at the numbers from accounting statements) to find good companies to buy and technical analysis (looking at the charts) to tell us 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 yields rose this week (so prices fell).  A short position (bet on the decline in prices) fared well, and acts as a nice hedge when yields do rise.  It isn’t intended to be a longer term investment, though, just a method for hedging higher rates.   

Continuing with bonds, 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.  Floating rate bonds are becoming a new hot asset class and worth a look.  We keep a longer term focus with these investments. 

Gold again turned in a decent performance, but has been stuck in this $1,200-1,300 range for many weeks now.  It may be good as a long term hedge, but there may still be weakness in the short term. 

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 see weakness around the globe and favor neither the developed or emerging markets. 

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 1-31-14

It was another rough week on Wall Street.  Through the Friday close, the Dow dropped 1.1%, the S&P fell 0.4%, and the Nasdaq returned -0.6%.  For bonds, government bond prices rose and yields fell again to the lowest level in two months.  After turning in a solid performance last week, gold didn’t fare so well, falling 1.9% this week.  Oil prices continued to climb, up 0.9% to $97.49 per barrel.  The international Brent crude, used for much of our gas here in the East, actually moved lower to $105.79 per barrel. 

Source: Yahoo Finance

“As goes January, so goes the year.” 

Friday marked the end of the month, with the Dow down 5.3% and the S&P lower by 3.6%, the worst start to the year since 2009.  If this saying holds true, it looks like 2014 will be a rougher ride than 2013.  Though we don’t usually put much weight in these indicators, this is one of the better ones with 70% accuracy.  Either way, it signals caution for the year ahead.    

Last week a big story was the troubles in emerging markets.  The story was the same this week as they continued to be volatile.  Central bankers around the world are scrambling to right their respective currencies and taking extraordinary steps to do so. 

Our central bank was in the news, too, as it announced a continued reduction in stimulus.  Many thought there was a chance the Fed would not pull back in light of the events going on around the globe.  By continuing the reductions, it signaled that the Fed is serious about decreasing the stimulus.  Therefore, the money they created will not be supporting the markets as it did in the past.  Not surprisingly, markets sold off on the news. 

Moving on to economic data, the news was mostly negative, although the GDP report was surprisingly good.  It has been decent in the past, too, but that was usually from unsustainable items like inventories or government spending.  That wasn’t the case this time. 

This time we saw a decent increase in consumer spending.  Plus, contributing 1.3 points to the 3.2% gain was exports.  This is due entirely to our remarkable increase in oil and gas production. 

Also encouraging, at least in our view, was a reduction in government spending.  The government shutdown occurred in the early part of the quarter, with many warning that the reduction in government spending would hurt the economy.  As the data has shown, it had no impact.  In fact, it looks as though it’s been a positive.  It seems people have more money to spend when the government gets out of the way, a strange concept to policymakers in this day and age. 

As for the poor economic reports, housing data was overwhelmingly negative.  Durable goods (which are bigger-ticket items like a refrigerator or car) showed a surprising drop.  Additionally, income for Americans was flat over the past month while spending increased slightly. 

Taking a look at earnings, half of the companies in the S&P have reported earnings and growth still looks decent with a 7.9% gain according to Factset.  Revenue growth, or what the company actually received in sales, underwhelmed at a gain of just 0.8%.  While earnings seemed to have an impact on the market last week, they were largely ignored this week as the big macro issues pushed the markets around. 


Next Week

We’ll see another busy week next week.  Corporate earnings will continue to come in at a steady pace.  Plus, we’ll get several important economic reports, including information on the strength of the manufacturing and service sectors and the always-important employment report.  Markets are likely to continue their volatility, so it could be another bumpy week. 


Investment Strategy

Stocks are getting more attractive as they look more and more oversold.  At least in the short run, looking out a few weeks or couple months.   We’d like to see some support before we buy, meaning some other buying to come in, before we would put any new money here. 

We continue to think individual names are the play right now, with fundamental analysis (looking at figures from accounting statements) pointing us to good companies and technical analysis (looking at the charts) tells us whether it is a good time 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 yields moved lower this week (so prices rose).  A short position (bet on the decline in prices) didn’t fare too well here, but still acts as a nice hedge.  It isn’t intended to be a longer term investment.   

Continuing with bonds, 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.  Floating rate bonds are becoming a new hot asset class and worth a look.  We keep a longer term focus with these investments. 

After a solid week, gold turned in a poor performance.  It has been stuck in this $1,200-1,300 range for many weeks now, so it may be good as a long term hedge, but there may still be weakness in the short term. 

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 see weakness around the globe and favor neither the developed or emerging markets. 

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.