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.