Commentary for the week ending 9-26-14

A very volatile week saw stocks take a turn lower.  For the week, the Dow fell 1.0%, the S&P lost 1.4%, and the Nasdaq fared the worst with a decline of 1.5%.  Gold usually does well with market declines, but fell a slight 0.1% on the week.  Our domestic oil saw a gain, rising 2.1% to $93.54 per barrel.  The international Brent oil, which is used for much of our gas here in the east, neared its lowest price in two years to close at $97.45per barrel. 

Source: Yahoo Finance

There wasn’t one single story could blame for the decline in stocks this week.  Instead, it was several smaller stories playing a part.  There are fears over slowing economic growth in foreign markets, plus a reduction in stimulus by our central bank.  This all comes as our stock market becomes increasingly expensive and trades at record highs, making investors nervous.  

Several reports released this week pointed to slower economic growth around the globe.  Reports on the strength of the manufacturing and service sectors in Europe hit the lowest level of the year, leading many to believe Europe was heading back into recession. 

This has prompted traders to speculate whether the European Central Bank (ECB) would take additional stimulus measures.  The ECB has already pledged extraordinary measures, but traders are looking for even more extraordinary measures.  After all, if the medicine hasn’t worked yet, even more should do the trick, right?

China, too, is facing slower growth worries.  The big story is with the slower growth, their central bank does not appear likely to do any more stimulus (again, it’s all about the stimulus).  This has investors worried since stocks rise on stimulus.  It has even prompted the Chinese government to consider replacing the head of the Chinese central bank, signaling their commitment to additional stimulus to hit growth targets. 

Another international story weighing on markets came from Russia.  They are debating the seizure of foreign assets in the country, a step that would severely damage not only their economy, but would hurt Europe and the U.S., too.  It would also increase tensions further in the region.   

Here in the U.S., investors are preparing for the reduction in stimulus from the Fed.  Next month they will end their bond buying program, where they print money to buy bonds, pushing down interest rates to spur borrowing. 

They will also increase interest rates in 2015, which is certain to weigh on stock prices.  The debate is, exactly when will they raise rates?  The Fed sent mixed messages this week.  One regional Fed president indicated rates could rise in early spring, another they won’t be raised until summer, if not later.  This added to the market jitters this week. 

All these stories of increases and decreases in stimulus have had a significant impact on the currency markets.  Countries who talk about doing more stimulus see their currencies weaken.  The U.S., who is pulling back on stimulus, has seen its currency strengthen.  It is near two-year highs against the Euro and six-year highs against the Japanese Yen. 

We see this as a positive.  It reduces prices for commodities like oil and food, leading to lower prices at grocery stores and gas pumps.  We think this will be a net positive for our economy. 

Finally, economic data this week was mixed, but really had little impact on the market.  New home sales showed a very strong gain, but existing home sales showed a decline.  GDP for the second quarter was revised higher, while durable goods (which are items with a longer life) showed a sharp drop. 


Next Week

Next week looks to be another busy one as the third quarter comes to an end.  We will get info on personal income and spending, housing, and the strength of the manufacturing and service sectors. 

The most important report will come on Friday with the monthly employment report.  Last month saw a terrible number, so investors will be watching for a better number this month and possibly an upward revision to last month.  If there is a disappointment here, it is possible the market will rise since the Fed will be less likely to pull back on stimulus of employment is poor. 


Investment Strategy

Even with the sell-off this week, our outlook is unchanged.  We are cautious for the short-term, though not doing any significant selling at this point.  Stocks would need to sell off much further before we did any buying. 

Below is an update to one of the charts we’ve been following as a leading indicator.  High yield bonds (the black line) has recently served as a good leading indicator for the direction of the broader market (the orange line).  Those bonds sold off very strongly this week, indicating a sell-off in stocks is very possible.  However, no indicator is perfect.  As we’ve seen recently, the market has moved on the words of central bankers.  This makes it impossible to time the market when their actions are inherently unpredictable. 

While we are somewhat cautious in the short term, we have serious concerns for the longer run.  Stocks and bonds appear overvalued from a longer term perspective, especially as our central bank cuts back on stimulus.  Other central banks around the world are picking up the slack, but it is still reason for caution.    Europe is a particular worry as they drift back into recession with record levels of overvalued debt.  At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur. 

As for the bond market, bonds rose in price this week (so yields fell) as stocks sold off.  A short position has not done well here (where your profit increases when prices fall) and may continue to do poorly if stocks fall further.  However, a longer term perspective suggests bonds may fall as central banks increase rates.  Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted. 

European bonds look extremely expensive at the moment and also look like fantastic short opportunities. 

Bonds to protect against inflation, or TIPs, have done well on the higher inflation reports.  Like the rest of the bond sector, though, they have seen some weakness in the last several weeks.  We think they remain an important hedge against future inflation in the longer run.  Some municipal bonds look attractive for the right client, but not as good as they did several months ago.  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 is another good hedge for the portfolio.  It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines.  It hasn’t fared well lately, but remains a good hedge for the long 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 9-12-14

Please note: there will be no market commentary next week.  Don’t worry; we’ll be back with our market commentary the following week. Thank you.  

Stocks took a turn lower this week.  Through the Friday close, the Dow lost 0.9%, the S&P fell 1.1%, and the Nasdaq moved slightly lower by 0.3%.  Bonds were a big story this week as their prices fell sharply (so yields rose).  Continued strength in the dollar sent gold lower again, this week losing 2.8%.  The same was true with oil as it hit its lowest level in 16 months, falling 1.1% to $92.27 per barrel.  The international Brent oil, used for much of our gas here in the east, hit its lowest price in 17 months to close at $97.80 per barrel. 

Source: Yahoo Finance

Stocks had a downward pressure on them nearly every day this week, though the moves were modest until Friday.  There was no real news behind the declines, either.  It just seemed like investors were looking to take some of their profits off the table. 

The stock market itself wasn’t that big of a story this week.  Instead, two less-exciting markets – the bond and currency markets – were of more interest.  

With our central bank looking to cut back on its low interest rates and money-printing stimulus programs, our currency has strengthened against other countries who are starting more stimulus programs.  The dollar is now at its strongest level in over a year because of this. 

This stronger currency has led to lower prices for commodities like oil, which has resulted in lower prices at the pump.  Oil was also helped by weaker economic data both here and abroad since a weaker economy means less demand for oil and gas.  However, the strength of the dollar appears to be the primary factor for oil prices as their movements are becoming more correlated.

The stronger currency had many economic commentators on television in a panic, fearing it means lower economic growth.  A goal of many governments is to lower the value of a currency in order to boost exports, since the weaker currency makes their goods look cheaper to foreigners.  And the commentators are entirely correct that exports will slow with a stronger currency.

However, it overlooks exactly what we are seeing with lower oil prices.  A stronger currency lowers prices for commodities like oil or food.  This allows a paycheck to go further and people are able to buy more.  We believe this is far more beneficial to an economy, so a stronger currency should be worth pursuing by policymakers. 

The bond market was very similar to the currency market this week, also moving because of these actions from central banks.  Stimulus programs are designed to push bond yields lower (and therefore, prices higher) to spur borrowing, so as the U.S. cuts back on stimulus, our bond yields rose and prices fell.  

The action in the bond market seemed to be a factor in stocks moving lower this week.  Money flowed out of the stocks and into bonds since the higher yields make bonds look like a more attractive investment.


Next Week

After a pretty uneventful week this week, next week looks to be far busier.  For economic data, we’ll get info on industrial production, inflation at both the consumer and producer levels, leading economic indicators, and housing info. 

All eyes will be on the Fed, though, as they hold another policy meeting.  Many investors expect a pullback on the stimulus program mid-2015, so any language indicating otherwise will have an impact on the market. 

Also, investors will be watching the independence vote in Scotland.  A successful vote for independence will bring about significant changes to the region, but perhaps more importantly, encourage independence drives in other parts of the world.  It could bring about a more volatile investing environment. 


Investment Strategy

Still no change here.  We are cautious, but not at levels where we are looking to do any selling.    

Lately we have mentioned the relationship between high-yield bonds and the broader stock market.  The direction of high-yield bonds has been a good leading indicator for stocks.  An update through this week, we can see those bonds moving further lower (the black line) as stocks begin to move lower (orange).  While no indicator is perfect, it does raise our level of caution. 

While we are somewhat cautious in the short term, we have serious concerns for the longer run.  Stocks and bonds appear overvalued from a longer term perspective, especially as our central bank cuts back on stimulus.  Other central banks around the world are picking up the slack, but it is still reason for caution.    Europe is a particular worry as they drift back into recession with record levels of overvalued debt.  At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur. 

As for the bond market, bonds again fell sharply this week (so yields rose).  This may be the start of a new trend lower, but only time will tell.  A short position will profit in this scenario (where your profit increases if prices fall).  Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted. 

European bonds look extremely expensive at the moment and also look like fantastic short opportunities. 

Bonds to protect against inflation, or TIPs, have done well on the higher inflation reports.  Like the rest of the bond sector, though, they have seen some weakness in the last two weeks.  We think they remain an important hedge against future inflation in the longer run.  Some municipal bonds look attractive for the right client, but not as good as they did several months ago.  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 is another good hedge for the portfolio.  It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines.  It hasn’t fared well lately, but remains a good hedge for the long 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 9-5-14

Stocks managed to eke out a fifth-straight week of gains.  For the week, the Dow added 0.2%, the S&P also rose 0.2%, and the Nasdaq returned a slight 0.06%.  A stronger dollar sent gold to its lowest level in two months with a 1.6% loss.  It also helped send oil lower by 2.8% to $93.29 per barrel.  The international Brent oil, used for much of our gas here in the east, moved down to $101.53 per barrel. 

Source: Yahoo Finance (the Monday holiday skewed our graph this week)

The holiday-shortened week saw a lot of activity crammed into just four days.  Economic data was mixed, central banks were again in the headlines, and a cease-fire in Ukraine gave a short-lived boost to stocks. 

Starting with economic data, the most important report came on Friday with the release of August’s employment numbers.  Economists were expecting job gains in the neighborhood of 225,000, only to be surprised by the worst number of the year at 142,000.  The unemployment rate fell, but only because more people left the workforce.

Stocks actually rose on the news since weak economic reports – especially important ones like employment – mean stimulus programs are likely to remain in place longer than projected.  Remember, stimulus is good for increasing asset prices like stocks, although they don’t seem to help the underlying economy much. 

Other economic data this week was largely positive.  Both our service and manufacturing sectors stand at the strongest levels in several years.  Productivity moved another notch higher, plus the Fed’s Beige Book report (which compiles anecdotal reports on the strength of the economy) showed continued growth, albeit slow. 

The other big news this week came out of Europe’s Central Bank (the ECB).  Europe has seen many poor economic reports recently and with a central bank policy meeting this week, expectations were high that they would step up their stimulus programs to boost growth. 

And the ECB did not disappoint.  In an attempt to spur borrowing, they lowered borrowing rates, plus they increased the penalty for commercial banks that kept cash parked at the central bank. 

They will also begin a bond buying program, where they buy asset-backed bonds (creating money out of thin air to do so).  These are bonds that are backed with commercial and individual loans.  They will not be buying bonds of individual governments, since this is against the law for them.  Worth noting, asset-backed bonds were a primary cause of our credit crisis, so this is not without risk.   

With lending rates already at historic lows, we’re not sure how much this will help spur borrowing and the broader economy.  Adding more debt after a debt crisis makes little sense to us, anyway.  It did help the European stocks, though, as they soared on the news.   Like we mentioned above, these stimulus programs do help send stocks higher, but have shown to do little to help the economy. 

In the opening section we mentioned a stronger dollar resulting in lower prices for oil.  The dollar strengthened this week because the Euro fell to 14 month lows on the news of more stimulus.  Countries are eager to weaken their currency since it makes their exports look more attractive. 

Aside from exports, however, we see a weaker currency as a negative.  It increases costs to the people of that country.  Oil prices fell here on the stronger dollar, which is obviously a positive.  When a currency is strengthened, it takes less of them to purchase a commodity, and vice versa.  To us, it makes sense to have a stronger currency which lowers costs and lets a person’s paycheck go further. 

Japan provides a great example since they dramatically weakened their currency in recent months.  It has resulted in a severe rise in costs for the Japanese people.  We don’t see that as a positive, although central bankers do. 

In the end, we don’t believe these new stimulus programs will help the European countries, just like it hasn’t helped any other country who has implemented it.  Structural changes are needed since they have high taxes, oppressive regulations, stifling labor policies, and high costs.  Until these reforms are made, debt will continue to increase as economic growth stagnates. 


Next Week

Next week will be very quiet for economic data, with the only notable report coming on Friday with August’s retail sales info.  The lack of data will keep investors focusing on events around the globe, whether it is European and China economic data or the Russia/Ukraine conflict. 


Investment Strategy

Again, no change here.  We aren’t actively buying or selling the broader market at this time.  Everything looks expensive and bargains are harder to find, even in individual names that we would hold for a shorter time period. 

One indicator we’ve mentioned often lately is the direction of high-yield bonds to the broader stock market.  Represented by the black line, high-yield bonds have moved before the S&P 500 (the orange line), acting as a good leading indicator.  These bonds took a turn lower this week, so this is something to keep an eye on for our stock holdings. 

Despite everything looking expensive, we aren’t actively selling at this time.  We are cautious, though, as we worry about a correction in the near-term as trading picks up this fall.  Looking further out, we worry about significant overvaluations in riskier investments, ranging from stocks to the bond market.  Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt.  At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur. 

We have heard more talk about this new European stimulus marking the end of the bond market rally.  Bonds did fall sharply this week (so yields rose), so there may be something to this argument.  A position to profit in this scenario (a short position, where your profit increases if prices fall) will profit in that scenario.  Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted. 

European bonds look extremely expensive at the moment and also look like fantastic short opportunities. 

Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data.  We think they remain an important hedge against future inflation and are likely to do well as inflation increases.  Some municipal bonds look attractive for the right client, but not as good as they did several months ago.  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 is another good hedge for the portfolio.  It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now.  Still, it is a good hedge for the long 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.