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
