Commentary for the week ending 2-26-10

In a week filled with negative economic reports, the markets closed out a volatile week and month with a modest gain Friday. For the week, the Dow lost 0.74%, the S&P 500 dropped 0.42%, while the Nasdaq posted a -0.25% return. February turned out to be the best month since November, with the Dow rising 2.56%, the S&P gaining 2.85%, and the Nasdaq beating them both at 4.23%.

Source: MSN Moneycentral

Creating some volatility in the markets this week, several economic reports that showed a lingering weakness in the economy. Consumer confidence surprised us to the downside, falling by the largest margin since last February. Contributing to this lack of confidence, the weekly jobless rate increased as initial claims neared 500,000. Additionally, new and existing home sales continue to drop. Durable goods orders came in higher than expected - a good sign. Once you dig in to the report, however, the reason behind the gain is an unusually large increase in aircraft orders. If you strip this number out, durable goods actually dropped.

It wasn’t all bad news this week, though. The fourth quarter GDP number was revised upwards on Friday to 5.9%, helping the markets move slightly higher. A large portion of this gain came from a reduction in inventories, not necessarily an increase in spending by consumers. We can’t forget the large amount of government involvement in this number, either.

We noticed something odd happening this week, too. The Treasury auctioned off nearly $40 billion in short term, four week notes. The odd thing is that these notes went for yields of 0.0000-0.0550%, which is basically nothing (we took it out to four decimals to show there was absolutely no return). Why would anyone buy a note that yielded 0%? Recently the Treasury fiddled with the way the buyers at these auctions are recognized, so we can’t tell exactly who did the purchasing. Given the lack of interest from foreign purchasers recently, we don’t surmise many of the notes were purchased by foreign governments. The speculation is that the Fed purchased many of these notes at 0%. Why is that important? It is the same as printing money off a printing press. It’s like a big scam - one branch of the government issues bonds and another branch purchases them. Eventually we will have to pay for these actions. This furthers our commitment to shorting (profiting when the value goes down) Treasury bonds through investments like TBT since the price of them can’t get much higher. It may be over the course of several months or years, but these 0% rates cannot last forever.

There are several economic releases we will be watching in the upcoming week. Consumer spending, vehicle and retail sales, and manufacturing data are all scheduled to be released. Several Fed governors will be speaking, as well. Their discussions will likely focus on the withdrawal of simulative conditions that are currently have in place. Finally, the big news of the week comes on Friday when we get the February unemployment numbers. The rate is expected to stay at or around the 9.7% unemployment rate from January. As we have discussed in the past, this statistic can be misleading and we will certainly dig deeper into the details.

Where are we investing now?

The past couple months have been marked with a low momentum, sideways market that can be frustrating. We have seen how jittery the markets have been and remain cautious. For the short term, however, we remain optimistic. We believe the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and higher unemployment have us a little worried for the longer term.

Our investment strategy remains basically the same. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe the dollar will head lower despite its recent gains. The situation in Greece could certainly happen here and we are already seeing signs of this in places like California and Pennsylvania. These issues will send the dollar lower. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish on, as we have mentioned above. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 2-19-10

An eventful, short week for the markets resulted in some nice gains for the major indexes. At the close on Friday, the Dow rose 3.00%, the S&P 500 gained 2.76%, and the Nasdaq topped them both at 3.13%.

Of course, the top news of the week came from the worlds #1 golfer, Tiger Woods. As some of you may know, our offices are located at the entrance to the TPC Sawgrass - the location of Tigers press conference. It certainly was a circus around here Friday morning. The amusing part is there is a back entrance these pros go through, including Tiger. The unaware press never caught a glimpse of him arriving or departing.

Now back to business. We received several economic reports this week that shed some more light on this economy. Manufacturing reports released this week show that manufacturing and industrial production continues to grow. The leading economic indicators increased for the tenth straight month. A surprise came in the producer price index (PPI), as it rose more than expected. This means that it costs more to produce goods, a signal that parts of our economy are experiencing inflation. To throw a wrench into that inflation picture, though, the consumer price index (CPI) was released the next day showing a drop in the CPI. This means it costs less for consumers to purchase goods - not a signal of inflation. Despite this, we remain committed to our belief that inflation will pick up this year and into the future, and are investing accordingly.

After the markets closed on Thursday, the Fed announced it would be raising the discount rate from 0.50% to 0.75%. This is the rate that the Fed charges banks for emergency overnight loans in order to meet reserve requirements. It was initially viewed as a signal the Fed would be tightening and the markets sold off sharply. After the news sunk in, investors realized that this is not necessarily tightening, but merely a return to ‘normalcy’. In fact, Ben Bernanke even said this is not a signal they would be tightening any time soon. We don’t expect the Fed to raise rates until late in the year or possibly into next year. This gives us a good indication how the markets will react when the Fed does tighten - there could be a sharp sell-off.

Nothing too exciting in terms of economic releases is expected for the upcoming week. We will get consumer confidence numbers, as well as home sales figures. Coming in on Friday is a second look at the fourth quarter GDP numbers. They initially showed a gain of 5.7% and are expected to be revised slightly lower.

Where are we investing now?

We have basically sat on the sidelines for the past two weeks as the market gained some volatility. We are encouraged that the volatility seems to be subsiding and the markets have closed higher. We will likely be adding money on the pullbacks. For the short term, we remain optimistic. Higher interest rates, higher taxes, increasing government involvement in the private sector, and higher unemployment have us a little worried for the longer term.

Our investment strategy remains basically the same. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe the dollar will head lower despite its recent gains. The issues the Greece experienced could certainly happen here and we are already seeing signs of this in places like California and Pennsylvania. These issues will send the dollar lower. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 2-12-10

Another volatile week for the stock market, fortunately resulting in slight gains as the Dow closed above 10,000 on Friday. For the week, both the Dow and the S&P gained 0.87%, while the Nasdaq turned in a 1.98% gain.

Several news stories contributed to the volatility in the markets this week. The Greece debt default story has had an impact on the markets the past couple weeks, and a resolution may be in sight. Throughout the past week, news had been circulating that Germany and France would be stepping up within the European Union to bail out Greece. EU meetings are being held Monday on this matter. While nothing specific has been mentioned, indications are that they will emerge with a solution. Frankly, we are tired of the numerous bail outs seen over the past year, but markets are eager for a resolution and will likely be higher on the news. We wonder what will happen when Portugal, Spain, Ireland, and Italy begin to default on their debt and come looking for a handout. We aren’t so sure they would receive such a favorable deal.

Another big story this week came from the Fed chairman, Ben Bernanke. For the first time, he indicated the Fed may be tightening its monetary policy. However, no indication was given as to when that time might be. This is a sign that the economy is regaining its health, but the easy-money policies we currently have will certainly end. We don’t see this happening anytime soon, though - late in the year at the earliest (and likely after the 2010 elections). Once we see employment returning and home prices moderating, a rate hike shouldn’t be too far behind.

Also having an impact on the market Friday, China announced it would raise its reserve rate another 0.5% in order to reign in their growth. The news helped contribute to a 160-point drop in the Dow. The markets came back during the day on news of a gain in retail sales last month, as well as positive reports from technology stocks. Friday we also learned that the German economy’s growth was flat in the fourth quarter - disappointing news since they are believed to be the strongest member of the EU.

There are a few economic reports we will be watching during the upcoming week. Housing starts will be released on Wednesday, and as we mentioned above, it is a closely watched statistic by the Fed. Thursday we will get the Producer Price Index (PPI) and the leading economic indicators. On Friday we will get the Consumer Price Index (CPI). Also likely to impact the markets will be the outcome of that EU meeting on Greece. The market is closed on Monday for the holiday, so digesting all this news over a short week may add to volatility.

Where are we investing now?

We were encouraged the Dow held its 10,000 level for the week. Still, we remain cautious about adding and money at this time. For the short term, we still remain optimistic and may add some money if the there is a significant pullback, but we will likely remain on the sidelines.

If we were to put some money to work, we would continue on the trend we have been following. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish on commodities and believe the dollar will head lower despite its recent gains. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are an area we favor.

Commentary for the week ending 2-5-10

After closing out January on a sour note, the markets showed some strength to start out February, opening higher early in the week, only to lose those gains in the latter part of the week. As of the close on Friday, the Dow was off 0.55%, the S&P 500 lost 0.72%, and the Nasdaq dropped 029%.

We saw 100+ point upward moves in the Dow on Monday and Tuesday as we received encouraging economic reports and corporate earnings. Industrial production increased, as well as personal income and spending – each one a sign that the economy is growing. As the week progressed, several factors began weighing on the markets and we experienced a sharp sell-off Thursday, dropping nearly 270 points. The downward trend continued into Friday as the Dow was down nearly 170 points at one time, breaking through the psychologically important 10,000 level. However, it staged an impressive rally in the last hour of trading to finish the day slightly positive.

Two big stories weighed on the markets this week: the debt of European governments and unemployment. First, the debt concerns in Europe are very troubling, especially in Greece. The amount of debt this country incurred has it nearing a debt default. Portugal, Ireland, and Spain are in the same boat, though not quite as bad. The troubling part of this situation is we can see similarities between them and us-massive fiscal deficits, record government spending, and a shrinking labor force. For now, though, the troubles in Europe will weigh on their currencies, thereby strengthening the dollar (Although we may have a weak dollar, it becomes stronger when compared to the Euro).

The other big story of the week came on Friday as the unemployment report came in better than expected at 9.7%, despite a net loss of 20,000 jobs. Last month this number stood at 10.0% and was forecasted to come in at 10.1%. At first glance, the lower rate looks encouraging. However, the metrics used to measure unemployment have been getting skewed in recent months. The amount of discouraged workers has risen steadily and we now have the smallest workforce we have seen since the mid-1980’s. Once these discouraged workers begin looking for a job again, we should see the unemployment number pop higher. That could mark a turning point in the economy and it is something we will be watching carefully. Until then, we remain pessimistic about the unemployment picture.

We have a fairly quiet week coming up, but it will be important to see if the Dow can stay above its 10,000 level. In addition to corporate earnings, Tuesday we get the release of the small business optimism index. The trade balance comes in on Wednesday and we expect that to be lower than the previous month. Lastly, we will be paying attention to the retail sales figures on Thursday as it is expected to come in higher than the previous month.


Where are we investing now?

We are pulling back a little here and not actively doing any buying or selling. We would like to see how the market will play out during this week. It has come a long way in a short time and we expected to see a pull-back at some point. We still remain bullish (optimistic) for the short term, however. If we were to put some money to work, we would continue on the trend we have been following. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish on commodities and believe the dollar will head lower despite its recent gains. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are an area we favor.