Commentary for the week ending 12-17-10

Please note: There will be no market commentary for the next two weeks as next weekend is Christmas and the following weekend the author of these commentaries will be attending the bowl game of his alma mater. We would like to wish you a Merry Christmas and Happy New Year and will resume commentaries the first week of 2011.

An uneventful week saw the Dow and S&P quietly climb to new two-year highs. At the close Friday, the Dow rose 0.7%, the S&P was up 0.3%, and the Nasdaq was higher by just 0.2%. The commodity sector was mostly quiet, too, with gold up just 0.4% and oil higher by 0.3% and still clinging to its high level. Other commodities like sugar and coffee recorded significant gains this week, though.

Source: MSN Moneycentral

There was very little news making headlines this week. We received several economic indicators that showed the economy continues to grow, and the news helped push the markets higher. Industrial production is up, retail sales are improving, and leading economic indicators continue to rise. Corporate earnings are also looking decent.

Reminding us to be cautious, though, was a report showing a significant drop in imports. Perhaps this is a function of the weak dollar, as imports will cost more when our currency is weaker. Or perhaps our recent economic strength was due to companies rebuilding a depleted inventory, and the drop in imports is a leading indicator of a U.S. slowdown. We aren’t sure. Also, we can’t forget that other indicators like high unemployment continue to weigh on the economy, so caution is always warranted.

The last economic data we will touch on is the Consumer and Producer Price Indexes (CPI & PPI). The CPI shows the gains in the prices consumers pay for products, while PPI is the prices businesses pay for their input materials.

The CPI showed very little movement, rising just 0.1% in November and 1.1% for the past year, indicating inflation is benign. According to the government, anyway. The PPI showed a rather large rise of 0.8%, however. That is like saying the input costs for businesses rose 0.8% last month. Going forward, these costs could weigh on the profits of many companies since they have been reluctant to pass on these costs to their customers.

A big story from the previous week was a drop in bond prices. That story continued for much of this week, too, until a late week rally. The ratings service, Moody’s, reduced their rating on Ireland, which fired up those Euro worries again. Investors fled to the (perceived) safety of U.S. bonds, and that helped reverse some of the losses on U.S. bonds. Still, we feel the trend for bonds is downward, so caution is extremely necessary in this sector.

Lastly, the tax rate extension has finally been passed. We were even pleased with the Presidents speech on Friday, as his tone has mellowed and the vitriol has disappeared. Could this be a new Obama? Only time will tell, but this was a nice change.


Next Week

With Christmas right around the corner, volume will be much lighter over the next two weeks as many investors go on vacation. There will be a few economic and corporate earnings releases next week, but nothing important enough to really impact the markets. Euro concerns have been building again, so we will need to keep an eye on action from overseas.

It is important to realize that with light volume, market movements can be amplified and move much more that they regularly would. Unless due to legitimate concerns, any big movements over the next two weeks should not be something to panic over. Going into the end of the year, we will see investors taking losses on losers for tax purposes and locking in gains on winners, so it might get jumpy.


Where are we investing now?

No change here. With the markets continuing to go up and the Fed there to make sure that it does, it is hard to bet against it. Economic data has been improving and corporate earnings have been relatively decent. However, growing government involvement in the private sector and new regulations has us worried. There has been a very strong rise the past couple months and the market is overdue for a sell-off. In normal times we would be betting against the market here, but with the Fed ramping up its printing press, you just can’t be bearish (pessimistic) here.

We can’t forget about investment managers that have missed the rise and need to get some good returns for the year-end. This will push the markets higher, too, as new money enters the market.

In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we given more attention to.

For the rest of our portfolio, in equities, we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important, but with tax rates in place for the next two years, they are not as important. They have experienced a significant drop in the last several weeks, so there may be opportunities to find some good value here. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor. This sector has had an incredible run this year, so caution is warranted as the odds of a sell-off are increasing.

Commentary for the week ending 12-10-10

It was a rather quiet week for the stock market, however, bonds sold-off strongly. For the week, the Dow only rose 0.3%, the S&P fared much better at 1.3%, and the Nasdaq notched a new three-year high, rising 1.8% this week. Many commodities lost ground this week, with oil down 1.6% and gold off 1.5%.

Source: MSN Moneycentral

Dominating headlines this week was the agreement by president Obama to extend all tax rates for the next two years. In the chart above, you can see where the market opened much higher on Tuesday based on the news. Like many other people, we were not surprised that the rates were extended, but were surprised that President Obama was the one making the compromise in a welcomed shift to the middle.

As Tuesday progressed, though, it became more apparent that this was not a done deal as Congressional democrats balked at the idea of a compromise. In fact, the market sold off rather sharply during Obama’s speech on this subject, as you can see in the chart above.

It appeared that this new, bipartisan, centrist, Obama was, in fact, not. The speech was one of the most churlish, un-Presidential speeches we have ever seen, especially when republicans were referred to as hostage takers. Doubts on the passage of these tax rates arose and grew throughout the week. It looks like the bill will pass, but only after it gets loaded with pork.

Situations like this always make us cringe at the lack of economic knowledge among our leaders. Aside from the fact that the government has actually collected more money in taxes at lower rates, unemployment benefits do not have a stimulative effect on the economy. Money is taken from one group of people and given to another. This is not sitmulative, and actually has the opposite effect. We even heard that unemployment benefits are one of the best ways to stimulate the economy. Perhaps we should all be unemployed then? Imagine the stimulus effect it will have!

The other big story of the week was the bond market. It was one of the biggest weekly drops in bond prices in over a year (that means bond yields are increasing), so investors in bond funds experienced a loss this week. Yields have been so low for so long, that a reversal was bound to happen. The strength of the sell-off is what surprised many investors.

Several factors likely contributed to the drop in bond prices: the looming budget deficit (we reached the highest deficit on record last month), the tax rate debate and future austerity measures, inflation expectations, and Fed chief Ben Bernanke. Yes, Ben Bernanke.

Last Sunday’s episode of 60 Minutes featured an interview with the head of the Federal Reserve Bank. He indicated that the initial $600 billion in QE2 could just be a starting point for future stimulus and nothing was set in stone (even more likely is that this was just a figure pulled out of thin air). He also indicated that he was 100% confident that he has inflation under control. Many traders got a chuckle out of his hubris and are voicing their reservations over his policies. No one is 100% certain about anything, especially in the markets.

It looks like the 60 Minutes interview and those other reasons lured the bond vigilantes out of their shell to start pushing back against these Fed actions. In the quantitative easing process, his bond purchase program was supposed to keep prices high and, therefore, yields low. Since the announcement in early November, they have done just the opposite.

This week may have been a turning point in this long bond rally. Longer term bonds should be avoided (if they haven’t already) and lower duration bond funds should be considered. We can’t forget that the Fed has scheduled for hundreds of billions in new purchases in the coming weeks and months, which will try to drive prices higher (and therefore, yields back lower). So unlike Mr. Bernanke, we are not 100% certain on the future of bonds.


Next Week

After a light week last week, it will be pretty busy next week, both in economic data and corporate earnings. For economic data, we will receive both the PPI and CPI, retail sales, industrial production, housing data, and leading economic indicators.

Many companies will be releasing earnings next week, most notably: Best Buy, FedEx, General Mills, Oracle, and Research in Motion. They will give us a good idea on the strength of the economy and will have the potential to move the market. Friday will be more volatile than usual due to quadruple witching (where futures and options contracts expire), so we could get a lot of movement in the market next week.

The Fed will be meeting on Tuesday to set interest rates, which are expected to remain at these record lows. They will also be evaluating the QE2 program to this point. We are unsure if any changes will be made since it has been in effect for such a short time, but any changes will move the market.

Lastly, China will be important to watch early next week. Just this weekend it was reported that inflation in China was much higher than expected, rising over 5% in the last year (although just this week Wikileaks showed how manipulated Chinese figures actually were-but what country doesn’t manipulate this data?). If China takes measures to slow down their economy, the effects will be felt world-wide. If this happens, we will see a sell-off in the U.S. markets.


Where are we investing now?

No change here. With the markets continuing to go up and the Fed there to make sure that it does, it is hard to bet against it. Economic data has been rather poor, yet improving slightly. Corporate earnings have been relatively decent. However, growing government involvement in the private sector and new regulations have us worried. There has been a very strong rise the past couple months and the market is overdue for a sell-off. In normal times we would be betting against the market here. With the Fed ramping up its printing press, though, you just can’t be bearish (pessimistic) here.

We can’t forget about investment managers that have missed the rise and need to get some good returns for the year-end. This will push the markets higher as new money enters the market.

In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been pleased with.

For the rest of our portfolio, in equities, we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds will play a larger role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor. This sector has had an incredible run this year, so caution is warranted as the odds of a sell-off are increasing.

Commentary for the week ending 12-3-10

The markets shook off their Thanksgiving turkey hangover and started December with a bang. For the week, the Dow gained 2.6%, the S&P rose 3.0% and the Nasdaq climbed 2.2%. The commodity sector continues on its tear, with oil rising to a new 2-year high after climbing 6.5% this week. Gold crossed the psychologically important $1,400 level and was up 3.1% this week. Also this week, silver made a new 30-year high.

Source: MSN Moneycentral

The week started out with worries over Europe weighing on the markets. Both Monday and Tuesday opens were much lower, but luckily for the market, the Fed was poised to inject several more billion into Wall Street and push the markets back higher. The Fed has really ramped up its securities purchases, which makes it really hard for the markets to go lower.

Wednesday saw a big move higher. Favorable news out of Europe and an optimistic employment report fueled the big rise.

The big worry in Europe (at the moment) is a default from Ireland. Steps have been put into place to provide funds and stimulus to this struggling country, similar to the bailouts that have taken place here in the U.S. Since flooding the world with money and bailing out failure seems to be the remedy du-jour, the markets found some relief and soared higher.

To help calm the markets even further, it was also announced on Wednesday that the U.S. would increase the funds it has promised for the Europe bailout (don’t forget, these bailouts are done through the IMF, of which the U.S. contributes over 20% to). In the chart above, you can see the pop higher in the early mid-day based on this news. We aren’t sure how it is good news that the U.S. is spending even more money it doesn’t have on these countries, but the market liked it. In the end, it turned out that this news was false, but the market didn’t seem to notice and kept chugging higher.

On to Friday now and the much anticipated employment report release for the month of November. Markets have been excited about a big employment gain, and was pricing an increase of around 150-200 thousand. The number turned out to be an extremely disappointing number of just 39,000 new jobs and the unemployment rate rose to 9.8%. You would think this would send the markets lower, but it did not. The bad news is good news now, as investors are counting on the bad news to force the Fed into injecting billions more into the economy. Who doesn’t like free money, right?

We’d like to briefly touch on Washington now, as this week was another confirmation to us that any chance of an Obama administration moving to the center is practically dead.

First, in the wake of oil prices at a two-year high, the administration has announced a ban on new drilling in virtually all the places oil is drilled for in this country. As we have seen in the past, when oil crosses the $90 level and higher, economic activity slows dramatically. This move is very short-sighted and horribly wrong, as well as extremely frustrating.

Second, reported this week in the Journal was an article on a new regulation facing retail stores. Apparently companies like Wal-Mart, Target and thousands of others must report on weather their products contain minerals from war-torn countries in Central Africa. Each store must somehow find out if any tin, tungsten, tantalum, or gold from Congo is in any of their products. Frankly, this is one of the stupidest things we have ever heard. Although this regulation comes from the Dodd-Frank Financial Regulation Bill (how is this financial regulation?), we don’t see the administration doing anything to curb and reduce these abuses and continues to forge down this road. We are slowly being regulated to death and the economy will certainly suffer.


Next Week

Next week will be rather light in terms of economic and corporate earnings reports. A few stores like Costco, Talbots, and AutoZone, as well as H&R Block and Novellus are really the most exciting reports we will get.

The Euro worries are still not over, despite last weeks announcements. The bailout is not a done-deal yet, so any drama here will impact the markets as it is finalized. Let’s not forget that after Greece and Ireland, many more European countries face tough economic situations, so there is likely to be many more of these stories coming out of Europe.


Where are we investing now?

With the markets continuing to go up and the Fed there to make sure that it does, it is hard to bet against it. Economic data is really poor, although corporate earnings have been relatively decent, and growing government regulations has us worried. In normal times we would be betting against the market here. It has had a very strong rise the past couple months and is due for a sell-off. With the Fed ramping up its printing press, though, you just can’t be bearish (pessimistic).

Investment managers that have missed the rise and need to get some good returns for the year-end will also push the markets higher.

In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been pleased with.

For the rest of our portfolio, in equities, we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds will play a larger role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor. This sector has had an incredible run this year, so caution is warranted as the odds of a sell-off are increasing.

Commentary for the week ending 11-19-10

Please note: Due to the Thanksgiving holiday next week, there will be no market commentary next weekend. Thank you.

A lot of movement this week, but ultimately the markets ended unchanged. For the week, the Dow gained 0.1% and both the S&P and Nasdaq returned nothing, 0.0%. Most commodities sold off, with oil down 4.0% and gold off 1.0%.

Source: MSN Moneycentral

As you can see in the chart above, the markets sold off strongly early in the week with several factors contributing to the drop. Last week we talked about China taking steps to slow down their red-hot economy, and those concerns carried over into this week. Also, worries about the Euro-zone were reignited with news of Ireland needing a bailout.

By Wednesday, all was forgotten and the markets popped higher. Ireland announced it was very likely to take the bailout they were resisting, which calmed the Euro fears (we won’t waste time discussing this, but Ireland is the complete opposite of Greece and we would have preferred them not take the bailout).

We did not see it reported anywhere, but we believe the CPI and PPI announcements had a lot to do with the Wednesday rally, too.

The producer price index (PPI) and consumer price index (CPI) were released on Tuesday and Wednesday, respectively. Both came in much lower than expected, which means there is little inflation in the economy. This is important because fighting deflation was a main reason for the Fed’s QE2 announcement. The Fed is injecting the $600 billion in the economy to spur inflation, which these reports show is needed. QE2 was a major reason the market has risen the past couple months, and any talk about cancelling it was likely thwarted by these CPI and PPI reports.

Like many of these statistics, however, there is always the possibility of manipulation. Any person living in the real world can tell you that things cost more. The recent record gain in commodities supports that. These statistics showing no inflation certainly makes us wonder.

Lastly, one of the biggest stories of the week was the initial public offering for General Motors. It was probably the most hyped IPO we have seen and the story dominated the airwaves this week. The initial price was set at $33 and it shot higher once the market opened. As the week progressed, the shares slowly trended lower, almost back to that $33.00 level. The price probably would have gone even lower if it were not for a stipulation that the underwriting banks must purchase more shares at $33 to keep it from going lower.

Frankly, we feel sorry for the original shareholders who lost everything, as well as the bondholders who got shafted in an illegal process that favored the unions. We will never purchase a GM product due to this fiasco and would not shed any tears if the stock dropped lower.


Next Week

A much lighter week next week due to the Thanksgiving holiday on Thursday. The market is open on Friday, but most people just take that day off, as well. Volume will be light next week, so we won’t read much into whatever happens on Wall Street.

Still, next week we will be getting some corporate earnings, notably from Deere, HP, and Tiffany. There will be the updated GDP number, as well as some housing and durable goods data.


Where are we investing now?

Little change here. There was a lot of volatility in the market this week, which typically happens when trends reverse. Still, we believe the market will close the year higher from here, but are certainly more cautious.

Headwinds like uncertainty over future tax hikes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently still optimistic on stocks), that the tide usually changes.

If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds got hit hard this week, but will still play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.

Commentary for the week ending 11-12-10

The markets reversed course this week after a strong showing in the previous week. At the close, both the Dow and S&P lost 2.2% while the Nasdaq fell 2.4%. Commodities climbed early in the week but sold off hard late, resulting in both oil and gold down 2.3%.

Source: MSN Moneycentral

This week was quite a reversal from the seemingly unstoppable bull market last week. Actually, it turned out to be the worst week for the markets in nearly three months. There were several factors that contributed to the drop that we will touch on.

First, this is looking like a case of “buy the rumor, sell the news”. In the run-up to the Fed announcement, the markets gain nearly 20% in anticipation of further quantitative easing. Since that pop higher on the announcement, markets have trended lower.

Also, several news items impacted the markets this week. Earnings out of the tech giant, Cisco, were decent this quarter, but they gave a more sober outlook for future earnings. This spooked the markets and the tech sector lead the way lower.

China announced concerns about inflation in their country and indicated they will take steps to keep it in check. This means raising interest rates and slowing down their economy. Since China has been a major driver of global growth, a slowdown there will slow the global economy as well.

This China news had a major impact on the commodity sector. A lack of demand from China will increase supply, so prices will be lower. On Friday alone, oil fell 3.3%, gold dropped 2.7%, and sugar had a record drop of over 11%. Many agriculture commodities were off over 5%. We aren’t sure where commodities will go from here in the near term, but are fairly confident they will be higher over the long term. Further dips could provide nice buying opportunities.

Finally, the fallout over the Fed decision has become global and very vocal. While we have concerns here about drops in the Fed micromanaging the economy, foreign countries complain about the decline in the value of the dollar. It has a significant impact on global trade, and it severely hurts major exporters like Germany, Brazil, and the Asian region. It seems like the only ones happy with the Fed decision are ivory-tower economists and the US government. We don’t think this will end well.


Next Week

A lot going on next week. There are several economic reports released, including retail sales, housing data, CPI, PPI, and leading economic indicators. There are many corporate earnings announcements to follow, too, including Lowes, Home Depot, Wal-Mart, and Target, to name a few.

Many Fed officials will be speaking, as well, and it will be interesting to see what they have to say about the recent Fed decision on quantitative easing.

An interesting event that has absolutely no impact on us will be taking place next week, with the GM IPO. It will be their first stock offering since re-emerging from bankruptcy. It is expected to be priced well below its intrinsic value, so anyone who can get in on this IPO will essentially be guaranteed a nice return. Only the biggest investment firms will get access to this IPO, and unfortunately that is not us - yet. Anyway, after shafting bond holders last year and illegally giving unions a large ownership stake, we just assume stay away from GM. And just in spite, we certainly will not be purchasing any GM products for the foreseeable future.


Where are we investing now?

Well this sell-off changes things a little. We still believe the market will close the year higher from here, but are certainly more cautious. One poor week does not make a trend, but further pullbacks could see us buying more stock. It is important to note the record insider selling this week, which has reached an all-time high. This large amount of insider selling makes us worry, but is not always a negative indicator. It is just something to add to our caution.

Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently still optimistic on stocks), that the tide usually changes.

If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.

Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.

Commentary for the week ending 11-5-10

An event-filled week fueled a large rally for the markets and commodities this week, leading to a new two-year high in the Dow. At the Friday close, the Dow was higher by 2.9%, the S&P 500 climbed 3.6%, and the Nasdaq also returned 2.9%. Commodities soared this week, with oil reaching a new two-year high and closing up nearly 7%. Gold reached new all time highs and was up 3%.

Source: MSN Moneycentral

What a week it was. We will start with the elections and the historic shift of power in Washington. A large Republican victory has shifted the balance of power and gridlock will likely ensue. Judging by the last two years, we do not see this as a bad thing. In fact, compromises may already be happening as President Obama has opened the door to maintaining the tax rates set in place by the Bush administration. This is certainly a good start.

The most important event for the markets came on Wednesday with the Fed announcement on further quantitative easing (QE2). Over the coming months, the Fed will inject roughly $75 million a month into the economy with the total reaching about $600 billion.

This is in line with what the market was anticipating. You can see in the chart above the market reaction early Wednesday afternoon as it bounced about, but ultimately headed higher. After investors had the night to digest the information, the market shot higher on Thursday in anticipation of hundreds of billions flooding the market. In our opinion, this will be good for the markets in the short term, but will have severe and dramatic implications for the long run.

Basically the Fed is printing $600 billion out of thin air (in addition to the $1+ trillion it has already printed). The goal is to keep interest rates low and raise asset prices (the stock market). In their view, if people see the stock market going up and reaching new highs, they will feel more confident. With 401k’s and IRA’s climbing higher, people begin to feel wealthy again. Thus, it creates a new sense of optimism that spurs consumer spending and hiring by businesses…and then flowers bloom and rainbows fill the sky.

See, that will not happen. Santa Claus can’t drop a magic bag of money into the economy and make everything better. There will be consequences. This policy severely weakens the dollar and raises the price of virtually everything a person purchases. See, the weaker dollar means commodities will cost more, and it has already begun. The following are articles taken from the Wall Street Journal the day after the Fed announcement (all charts are from the Wall Street Journal, as well):

Food Sellers Grit Teeth, Raise Prices

• Prices of staples including milk, beef, coffee, cocoa, and sugar have risen sharply in recent months. And food makers and retailers…have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.

Unable to Stretch Further, Apparel Makers Raise Prices

• Shoppers will have to pay more for clothing next year as skyrocketing cotton prices force companies to take their chances with price increases even as consumer demand remains sluggish.

Sugar Prices Hit 30-Year Highs

• Raw-sugar futures have surged to 30-year peaks and look set to break higher as mounting concern over faltering supplies lends fresh impetus to the market.

Oil Tops $86 –Oil Hits 6-month high

• Crude-oil futures shot higher on the back of a weaker dollar following the Federal Reserve's decision to inject $600 billion into the U.S. economy.

We see this as just an example of what the future holds for the U.S. The Fed clearly indicated that it would like for inflation to pick up, since deflation is apparently their only worry. As any consumer can attest, inflation is here. Items cost more to purchase. The problem is that the Fed uses the consumer price index (CPI) as a gauge of inflation, but strips out the food and energy prices (this is referred to as the core CPI. Headline CPI includes food and energy)! This method has never made any sense to us, but then again, neither do economists.

It is funny to note that after the Fed announcement, Fed chief Ben Bernanke headed down to Jacksonville (where we are located). He made a speech and took questions from students at Jacksonville University, where the author of this commentary’s brother attended school. Unfortunately he graduated several years ago, otherwise we certainly would have liked to have seen this event, and maybe even posed a question or two!

Anyway, at the end of the week, the stock market closed at a new two-year high. The unemployment report released on Friday came in much higher than expected and reassured the market that the economy is improving. All-in-all, the economy is improving, corporate earnings are decent, and it makes us question the need for further stimulus at this time.

On a final note, we are disappointed by what the stock market has become, especially after this week. It used to be about finding companies and observing fundamentals and earnings in order to make a profit. Now, government agencies can dump massive amounts of money into the market to manipulate it to suit their own agenda. We are not sure when sanity will return to the market, but we don’t see it happening anytime soon.


Next Week

It will be a significantly less hectic week next week, especially after last week. There will be several big corporate earnings releases that have the potential to move the market.

We will also get information on our trade balance and import prices, as well as consumer confidence numbers.


Where are we investing now?

Still little change here. The Fed announcement practically guaranteed a higher market close for the year. We would like to see a pullback to add to our positions, but we are not sure if that will even happen. Other investment professionals who have been underweight the market will also try adding to their positions, which will also send the market higher.

Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently optimistic on stocks), that the tide usually changes.

If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.

Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.

Commentary for the week ending 10-29-10

The week was relatively quiet, with the markets bouncing around but ending mostly unchanged. At the Friday close, the Dow fell just 0.1%, the S&P 500 returned nothing, 0.0%, but the Nasdaq had a nice week, up 1.1%. Most commodities were higher, with oil up 1.8% and gold higher by 3.8%. Friday marked the last trading day of October, as well, and the markets had another nice month. The Dow rose 3.0%, the S&P was up 3.7%, and the Nasdaq beat them both at 5.9%.

Source: MSN Moneycentral

There was little to get excited about on Wall Street this week because investors are looking to a very important week next week. There are the elections on Tuesday, followed by an important Federal Reserve meeting on Wednesday, which we will discuss in detail later. Still, there were a few important events on which we would like to comment on.

On Monday, the government sold another round of bonds, this time Treasury Inflation Protected Securities (commonly referred to as TIPS). While there is nothing special about that, it is important to note that for the first time in history, those bonds were sold with a negative yield (which means you earn less than nothing). These investments will only pay off if inflation rises.

That shows us the demand for inflation protection is so strong and the expectation for future inflation is very high. We and other investors believe future quantitative easing programs (stimulus) will stoke future inflation, so protection is certainly necessary.

On Friday, we received rather weak GDP numbers. While the rate grew to 2.0% from 1.7% last quarter, most investors were looking for a rise of at least 2.1%. Additionally, most of the gain came from restocking current inventories, which is not usually a long term item. It also showed that government spending increased by 8.8% (down from 9.1% last quarter), which is also something we don’t like to see. Unfortunately, these numbers tell us that the U.S. economy remains weak and still pretty fragile at this point.


Next Week

As we mentioned above, next week will be very important, possibly one of the most important weeks of the year.

First, we have the election on Tuesday, which should favor the Republican party. It is almost certain that they will gain control of the House, while the Senate remains in question, and the market has priced these results in. It will be nice to get some more business friendly principles in Washington and hopefully change or slow the country’s current direction.

The most important day for the markets will be Wednesday and the Fed meeting. Here the Fed will announce its plans for the next round of quantitative easing (stimulus). The market is pricing in a big number from the Fed (at least $500 billion to over $1 trillion) and we believe the recent market run reflects that. If the announcement comes in lower than that, we will certainly see a sell off.

Our take is that the Fed will hedge its bets. We think they will announce a relatively small number for initial stimulus, but then indicate that it will provide ongoing stimulus as warranted by market conditions. At best this is just a guess, but it seems to fits with the current modus operandi of this group.

We will certainly see a movement in the markets if there are any surprises from these events, but it is important to note what news the market is responding to. A strong move on Wednesday would not necessarily be due to the election results from the previous day.

We will also receive several economic data reports on productivity, employment, and personal income, as well as many more corporate earnings reports. There are many items that can move the markets next week, so we will certainly be busy.


Where are we investing now?

Again, little change here. There will be plenty of data to move the markets next week, so it will be important to pay close attention to what it tells us. Unless we deduct otherwise from the Fed announcement, we believe the markets will close the year higher from here, so we would look to add to positions in the event of a pullback. The fundamentals of the economy are weak, but we believe the Fed will do everything in its power to send the stock market higher, whether we want them to or not. Also, investment professionals who have missed this rally due to a conservative portfolio positioning will look to participate in the rally, which will also send the market higher.

Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us.

If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.

Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.

Commentary for the week ending 10-22-10

It was a rocky week on Wall Street, but ultimately ended in the third straight week of gains for the markets. For the week, both the Dow and the S&P 500 returned 0.6% while the Nasdaq was higher by 0.4%. Uncertainties about the U.S. dollar policy lead to losses in most commodities, with oil off just 0.3% and gold lower by 3.4%.

Source: MSN Moneycentral

As you can see in the chart above, the markets had a lot of movement this week. A large drop on Tuesday was attributed to a surprise interest rate increase out of China. This is an attempt to slow down the growth of the currently red-hot country.

Several stock-specific stories also contributed to the Tuesday drop. An announcement of a lawsuit against Bank of America by several institutional investors and (most importantly) The Federal Reserve of New York sent the entire banking sector lower. The lawsuit is in regards to the foreclosure paperwork fiasco that has made recent headlines.

Earnings results from Apple and IBM also impacted the market to the downside. Earnings were decent, but left investors wanting more. These stocks have had terrific runs recently and may have gotten a bit ahead of themselves.

As Wednesday rolled around, it seemed like all was forgotten. Encouraging earnings results from several big name stocks improved outlook and the aforementioned sectors rose higher.

By the end of the week, over 80% of the earnings releases had beat their estimates. The economy remains weak, but businesses continue to do relatively well in this environment. The market has risen substantially in recent weeks, and we believe these solid earnings results have largely been priced into the market and may not have more room to run.

We are seeing concerns over macro factors like the actions of the Fed and underlying economic conditions having more of an influence than corporate earnings at this time. After the recent run in the markets, investors are beginning to get nervous and the markets are becoming jittery. This tends to happen when markets reverse course. Obviously we have no idea where the market will go, but will be carefully watching to see how these “jitters” play out.

It is interesting to note that the days the market rose are the same days that the Fed injected money into the system (through the Permanent Open Market Operations - POMO - which we have discussed in the past). In fact, most days these operations occur see a higher stock market, if not a temporary jolt higher, depending on how many billions were injected. The Fed actually pulled money out of the system on Thursday and you can see where the market pulled back. This makes us worry that the market is being supported solely by these POMO operations.

Next Week

We will start with this weekend, as the G-20 meeting of financial officials gets underway. There will be debates on exchange rate and currency fluctuations and it will be interesting to see if any agreements are reached and what impact that will have on the dollar (and therefore, commodities). New banking regulations will also be discussed, so bank stocks will certainly be affected by the outcomes, if any agreements are reached.

Next week will certainly be busy as we head into the peak of earnings season. It will also be an important week for economic reports as housing data and durable goods orders will be announced. We will cap the week off on Friday with the third quarter GDP report. There looks to be plenty of information to impact the markets next week.

Where are we investing now?

Little change here. With this jittery market, a correction could be in the works. We believe the markets will close the year higher from here, though, so we would look to add to positions in the event of a pullback. The fundamentals of the economy are weak, but we believe the Fed will do everything in its power to send the stock market higher. Also, investment professionals who have missed this rally due to a conservative portfolio positioning will look to participate in the rally, which will also send the market higher.

Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. Corporate insiders continue to sell their own stock, as well, at a pace of 2,000 for every one buying. To us, that is another red flag.

If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.

Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.

Commentary for the week ending 10-15-10

The markets continued their climb higher this week. At the Friday close, the Dow rose 0.5%, the S&P 500 was higher by 1.0%, and the Nasdaq had popped higher by 2.8%. The weak dollar story continues as most commodities were higher, including a 2.0% rise in gold with a new record high set this week. Oil dropped 1.7%, but remains above the $80.00 level.

Source: MSN Moneycentral

Without a doubt, the Federal Reserve has been the story of the week. Basically, anything that moved in the market was in response or in anticipation of activity from the Fed. Fed chief Ben Bernanke spoke this week and made it all but certain that a second round of quantitative easing (a fancy term for printing boatloads of money and pumping it into the market) was in the works. Stocks and commodities rose, since QE2 is designed to pump up the price of assets, while the value of the dollar continued to drop.

The Fed believes this new stimulus will solve the high unemployment, depressed real estate values, and a perceived deflationary scenario. In order to create inflation and demand for products, they are injecting liquidity into the markets to push stock prices higher and yields on bonds lower. The low yields are designed to stimulate lending since a low yield means consumers can borrow at a low rate (we already have historically low mortgage rates). A cheap dollar is also a result, as it makes our exports more appealing since they will be cheaper to foreign purchasers.

The problem is, we don’t believe it will work and will open a giant can of worms. The first round of stimulus failed to produce anything, so we wonder what a second round would accomplish. We believe the best results will come if nothing is done at all. That’s right, if the free market is allowed to run its course, we will be much better off.

Why won’t it work? First, they see it very important to prop up the housing sector, since it was the housing sector that has led us out of past recessions. Understandably, it is also a major concern of the millions whose homes have lost their value. Unfortunately, these historically low mortgage rates have done little to spur buyer’s interest (not to mention the distractions from this mortgage fiasco). Additionally, home values are probably still too high (in many areas, at least). Propping us this sector will do nothing until the market is able to find the bottom on its own - without government interference.

Next, this weak dollar will create plenty of headaches here in the U.S. The prices of commodities have been on a tear and are positioned to go even higher. This means things you buy will cost more. Gas prices will rise. Food costs are already rising. Corn prices have soared in the last several weeks. Cotton is at the highest price since the Civil War. How anyone can think the benefits of a weak dollar offset costs such as these is beyond us.

The Fed also indicated this week that they are targeting an inflation rate of 2.0%. Inflation is seen as more beneficial to the economy than the deflation they believe we are seeing. We received the Consumer Price Index (a gauge of inflation) numbers this week, and they were relatively low at just 0.1%.

However, we also received the Producer Price Index (another gauge of inflation) and it showed a substantial gain of 0.4% last month and 4.0% in the past year. This is very important. First, it shows that there is inflation. But this inflation is seen by the companies who make the products you consume. They are not willing to pass these higher costs on to consumers in this weak economic environment. Using the record high in cotton from above, it costs more to make an article of clothing, but the store will probably not raise their prices to reflect that. That means companies are less profitable, which will result in lower stock prices.

We believe we are living in a period that will have dramatic effects on the future. These actions by the Fed are very substantial and will produce many unseen consequences. Once inflation gets started, it is very difficult to control or contain, and it could be dramatic. Also, bubbles usually are a result from artificially low interest rates (i.e. - the latest housing bubble). Could there be bubbles now forming in stocks (especially emerging markets), bonds, and commodities? Prices have certainly risen substantially in response to the Fed actions, but only time will tell, although the potential is there.

Next Week

For a change, there won’t be many economic reports next week. We will get some industrial numbers, as well as housing starts and leading economic indicators.

Next week will again be Fed overload, as many more Fed presidents will be making speeches which will be carefully followed. We will be looking for any further indicators on future Fed actions and QE2. Regardless of what is said, it will certainly have an impact on the markets.

Finally, corporate earnings releases kicks into high gear this week. Many banks will release earnings, and they are expected to be much lower than last quarter. On the other hand, many tech companies will release their numbers (most notably Apple on Monday), and earnings are expected to be solid. These mixed results have been the trend so far, as we saw great earnings from Google last week, but poor earnings from GE.

Where are we investing now?

Don’t fight the Fed. As wrong as we think they might be, it is our job to make money no matter the circumstances. We still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. Also, after 2,400 corporate insiders were selling for every one buying last week, that ratio dropped to 1,200-1 this week, which is still horrible and gives us cause for concern.

In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite, as mentioned above, as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.

Commentary for the week ending 10-8-10

It was a solid showing for the markets this week. At the Friday close, the Dow rose 1.6%, the S&P 500 climbed 1.7%, and the Nasdaq had a more rocky road, but was still higher by 1.3%. The weak dollar continues to fuel the commodity rally, with oil up 1.3% and gold up 2.14% notching further records along the way.

Source: MSN Moneycentral

A large loss on Monday was followed by a pop higher Tuesday when it became increasingly evident that the Federal Reserve will step in with a second round of quantitative easing. That means purchasing even more Treasury bonds in order to keep yields low, which keeps borrowing rates for consumers low. They will also continue with their POMO operations which is essentially them pumping money into the stock market to push stocks prices higher. This method has been largely responsible for the most recent rise in the market. At any rate, this quantitative easing will only happen if the economic outlook worsens, which is why the markets have been cheering bad news.

We received the monthly unemployment report on Friday, which showed a loss of 95,000 jobs. So we are back to the bad-news-is-good-news scenario, where the markets rallied and investors became even more confident in further stimulus. On the plus side, the report did show a gain of 64,000 private sector jobs, but this was lower than the 75,000 that was estimated. A broader measure of unemployment, the U-6 report, showed even greater job losses and the unemployment number rose to 17.1%.

Third quarter earnings began rolling in this week and were not that bad. The Dow component, Alcoa, is one of the key early releases and analysts like to look at their numbers to get a sense of what the remaining earnings reports will look like. The results out of Alcoa were mixed, with profit falling, but the volume of sales rose. Their shares were higher on the day, though, as their numbers were better than expected. We believe this will be the theme for earnings season - decent growth and solid earnings - and the markets will respond higher.

A troubling report caught our eye again this week. After last weeks report that 1,400 insiders were selling for every one buying, this week that number increased to 2,300-1. Again, this is not always the best strategy to follow, but it is hard to argue against numbers that daunting. It certainly makes us cautious when considering investment opportunities.

Even though the markets are looking stronger, it really feels like we are living in bizarre times. The reliable, free market, capitalist system we have had in the past is becoming just that, a thing of the past. The fact that a bank won’t foreclose on a home that is months and even years behind in payments - and is congratulated for it - is troubling. When the government floods the economy with trillions of dollars in stimulus, it is troubling. When the Fed becomes the second largest holder of US debt behind China (essentially just printing money), it is troubling. And when bad economic news and a cloudy future sends the markets higher, it is troubling.

A stable, reliable economy with a strong currency and established rule of law were ingredients to America’s greatness. Businesses were created and drawn here due to this favorable climate. As uncertainty creeps in, businesses and investors are fleeing the US economy and establishing operations abroad, where stable, fiscally-responsible countries are capitalizing. This phenomenon is clearly evident as merging markets have been booming largely due to this fact. We hate to sound apocalyptic, but currently, better investment opportunities can be found overseas.

Next Week

Activity will begin picking up next week as earnings season kicks into gear. Similar to last quarter, we want to see revenues rise, not just earnings (cutting expenses can boost earnings, but means little. Increased revenue means increasing sales).

For economic data, we will be receiving the CPI and PPI, as well as the trade balance and retail sales.

Where are we investing now?

It has been a good run for the markets and we do believe it will be higher through the end of the year. Not because the economy is stronger, but because of another round of stimulus and investment managers trying to make some gains before the year ends. There is still a considerable weakness in the economy, though, and we would wait for a pullback before making any considerable positions. There are many headwinds, too, like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, which continues to worry us.

In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.

Commodities remain a longer term favorite, as mentioned above, as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.