An extremely volatile week saw stocks close slightly positive. For the week, the Dow and S&P both rose 0.2% and the Nasdaq was higher by 0.1%. Gold fell steadily throughout the week, off 1.7%. Oil was a big story this week, rising 7.8% to close at $48.05 per barrel. The international Brent oil added $3 to close at $49.05.
Source: Google Finance
While the week was volatile, we finally didn’t have the Fed to blame. Instead, the big stories this week were the banks and oil.
The week opened strongly to the downside after a negative story on the big European bank, Deutsche Bank, appeared over the weekend.
First a little background. The bank’s financial condition has been on shaky ground lately and a $14 billion fine earlier this month by our Dept. of Justice added to their problems. The bank is important because it is one of the biggest in the world and the biggest in Germany, which is the largest economy in Europe. They are also one of the largest employers in the country. A failure of the bank would ripple throughout Europe and throughout the globe.
With that in mind, over the weekend the German government announced it would not bail out the bank if they were to fail. This sent their share price to record lows and dragged the rest of the market with it.
The bank was further damaged later in the week when reports surfaced that some large clients were withdrawing their funds from the bank. The news sparked concerns of a run on the bank and stocks sold off.
The whole situation was very reminiscent of the ’08 financial crisis, causing investors to worry about the health of the banks. This has caused financial stocks to be the worst performing sector so far this year.
The week opened strongly to the downside after a negative story on the big European bank, Deutsche Bank, appeared over the weekend.
First a little background. The bank’s financial condition has been on shaky ground lately and a $14 billion fine earlier this month by our Dept. of Justice added to their problems. The bank is important because it is one of the biggest in the world and the biggest in Germany, which is the largest economy in Europe. They are also one of the largest employers in the country. A failure of the bank would ripple throughout Europe and throughout the globe.
With that in mind, over the weekend the German government announced it would not bail out the bank if they were to fail. This sent their share price to record lows and dragged the rest of the market with it.
The bank was further damaged later in the week when reports surfaced that some large clients were withdrawing their funds from the bank. The news sparked concerns of a run on the bank and stocks sold off.
The whole situation was very reminiscent of the ’08 financial crisis, causing investors to worry about the health of the banks. This has caused financial stocks to be the worst performing sector so far this year.
We don’t think this turn into another crisis (yet). While Deutsche Bank has seen billions withdrawn, the bank has hundreds of billions more. Plus, markets are far more liquid at this time than they were in 2008. Further, the $14 billion fine from the DOJ is likely to be far less when finalized, so that likely will not be an issue.
Confidence is key at this point. It is one of the most important assets a bank needs to survive. If confidence erodes we could see additional problems, but the positive market reaction Friday suggests confidence is not waning.
On to the other big story of the week: oil. An OPEC meeting was held this week where they were looking for an agreement on production levels. The high supply of oil on the market has reduced the price, so they were looking to reduce the amount of oil in order to raise its price. This is a difficult task when there are a dozen different countries all with different views on the subject.
On Wednesday they did announce an agreement on a slight production cut. This immediately raised the price of oil, which brought the stock market along, too.
One issue with the OPEC announcement was that it is just a verbal agreement at this point – the details would be worked out at their next meeting in November. By the end of the week, we already heard doubts emerge about an agreement being formalized. Iraq complained about the methodology OPEC used to determine production and smaller countries like Iran, Nigeria, and Libya wanted to produce more.
So while an agreement was struck in theory, it may be unlikely to materialize.
Next Week
With the end of the month and quarter this week, economic data for both periods will start rolling in next week. We’ll see some important reports like employment and the strength of the manufacturing and service sectors.
A few regional Fed members will be making speeches, too. They didn’t have much impact on the market this week, so they may not have much impact next week, either.
Finally, the banks were a big focus this week, so we’ll keep our eye on that sector, too.
Investment Strategy
No change here. The market has moved off the lows seen earlier this month and we no longer see a good buying opportunity for the short term. We think a move higher in the market is more likely at this point, but the volatility of the past week shows just how quickly things can change in the market.
Our longer view remains unchanged as we continue to have serious concerns. These massive stimulus programs have masked many problems, causing a misallocation of resources and allowed bubbles to form. It prevented necessary changes from occurring at both a corporate and political level – changes that would actually help the economy. Just how far out this day of reckoning is remains anyone’s guess, however.
Bonds prices rose this week as yields fell, but remain in the range of a rising trend we have seen since July. There are talks of the bubble bursting in the bond market (where prices would fall) and we do agree that bond prices are very high. However, we think prices will remain relatively high and yields low as demand from investors will keep prices elevated.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. 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 issues as a flight to safety.
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.
Confidence is key at this point. It is one of the most important assets a bank needs to survive. If confidence erodes we could see additional problems, but the positive market reaction Friday suggests confidence is not waning.
On to the other big story of the week: oil. An OPEC meeting was held this week where they were looking for an agreement on production levels. The high supply of oil on the market has reduced the price, so they were looking to reduce the amount of oil in order to raise its price. This is a difficult task when there are a dozen different countries all with different views on the subject.
On Wednesday they did announce an agreement on a slight production cut. This immediately raised the price of oil, which brought the stock market along, too.
One issue with the OPEC announcement was that it is just a verbal agreement at this point – the details would be worked out at their next meeting in November. By the end of the week, we already heard doubts emerge about an agreement being formalized. Iraq complained about the methodology OPEC used to determine production and smaller countries like Iran, Nigeria, and Libya wanted to produce more.
So while an agreement was struck in theory, it may be unlikely to materialize.
Next Week
With the end of the month and quarter this week, economic data for both periods will start rolling in next week. We’ll see some important reports like employment and the strength of the manufacturing and service sectors.
A few regional Fed members will be making speeches, too. They didn’t have much impact on the market this week, so they may not have much impact next week, either.
Finally, the banks were a big focus this week, so we’ll keep our eye on that sector, too.
Investment Strategy
No change here. The market has moved off the lows seen earlier this month and we no longer see a good buying opportunity for the short term. We think a move higher in the market is more likely at this point, but the volatility of the past week shows just how quickly things can change in the market.
Our longer view remains unchanged as we continue to have serious concerns. These massive stimulus programs have masked many problems, causing a misallocation of resources and allowed bubbles to form. It prevented necessary changes from occurring at both a corporate and political level – changes that would actually help the economy. Just how far out this day of reckoning is remains anyone’s guess, however.
Bonds prices rose this week as yields fell, but remain in the range of a rising trend we have seen since July. There are talks of the bubble bursting in the bond market (where prices would fall) and we do agree that bond prices are very high. However, we think prices will remain relatively high and yields low as demand from investors will keep prices elevated.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. 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 issues as a flight to safety.
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.
