Commentary for the week ending 6-25-10

Please note: Due to the 4^th of July holiday next week, there will be no market commentary. Have a safe and happy holiday.

Another round of bad news sent the markets lower this week. At the Friday close, the Dow lost 2.9%, the S&P fell 3.6%, and the Nasdaq was off 3.7%. Gold hovered around its record highs, while oil popped higher on fears of a hurricane in the Gulf of Mexico.

Source: MSN Moneycentral

The week started out strong with news that China will allow its currency to appreciate. Markets shot higher, but the excitement quickly faded and the market began its trend lower. Newly released economic reports contributed to the downtrend. Both new and existing home sales came in significantly weaker than expected. For some reason, analysts were expecting a rise in home sales. It was clear to us that with the expiration of the homebuyer tax credit, home sales would fall - which they did. We see this trend continuing for a considerable period and would avoid housing-related stocks, as well as banking stocks due to the significant amount of foreclosures on (or will eventually be on) their books.

The biggest story of the week came on Friday with the announcement of a completed financial regulation bill. The bill is heralded as the most sweeping legislation of the banking industry since the Great Depression. In our opinion, this bill does very little, which was supported by the rise in banking stocks after the announcement. This bill does increase government control of banks and substantially increase costs, though. These costs will not be paid by the bank, however, but by the bank customers (just like corporations don’t pay taxes - the customer pays the tax in the form of higher costs). We anticipate more fees and higher costs for services, as well as a reduction in the amount credit available for lending. In the long run, we see this as harmful to bank stocks and another reason to avoid this sector.

We were disappointed by the lack of attention paid to Fannie Mae and Freddie Mac, who require substantial changes. If this bill was implemented before the financial crisis, it would not have prevented it, nor do we do not see it accomplishing anything in the future.

Unfortunately this bill was rushed through a marathon all-nighter session in order to have something to discuss at the G-20 summit. It appears to be over 2000 pages long, and no one is sure exactly what is in it. Similar to the healthcare bill, we worry what has yet to be discovered and the unintended consequences it will cause. At any rate, the bill is likely to be passed in a close vote next week.

It wasn’t all bad news last week. Both consumer sentiment and current economic conditions climbed to the highest level in over two years. Additionally, a report on corporate profits showed a significant gain. Frankly, businesses appear to be performing relatively well. The crisis has forced companies to become leaner and meaner, and we think they are better prepared for a potentially rocky future. The greatest risks and worries we see are politically related, as policy mistakes, both here and abroad, have been the driving factor of the markets recently.

Next Week

Next week looks to be a busy one. As the week progresses, we will receive personal income and spending reports, consumer confidence, Case-Schiller home price index, manufacturing, and most importantly on Friday, the June unemployment rate. Any surprises with these will certainly impact the market.

The G-20 summit kicks into full gear next week, as well. The message from the U.S. is to continue deficit spending in order to further stimulate global economies. The message from the European countries looks to be just the opposite, as they have taken substantial austerity measures in response to their recent crisis. Oddly enough, these messages are typically reversed. It is troublesome that European countries would lecture us on financial responsibility. However, we agree with them and would love to see fiscal discipline return to the U.S.

Where are we investing now?

With the volatility of the last couple weeks and months, we still believe a simple ladder of corporate bonds and bond funds looks like the least-scary investment. For a long term horizon, some values in stocks can be found, although we remain cautious. Our big-picture outlook still remains the same, as we are optimistic through the end of the year with the low interest rates and stimulus funds pushing the markets higher. The higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. 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. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently since the drop in the Euro has strengthened the 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.

Commentary for the week ending 6-18-10

Yet another positive week for the markets. At the Friday close, the Dow was higher by 2.4%, the S&P also rose 2.4%, and the Nasdaq climbed 3.0%. This week notched another record high for gold, while oil continues to rise.

Source: MSN Moneycentral

We expected to see more volatility this week, but it never really materialized. Most of the gains came on Tuesday while the remainder of the week traded in a fairly narrow range, frequently fluctuating between gains and losses but ending with little change. Helping the markets higher, the worries about Europe appear to be subsiding. These fears may be subsiding, but we think few of the fundamentals have changed, especially in this short of time.

Economic reports released this week were mostly unfavorable. Housing remains weak, which is not surprising given the expiration of the government assistance programs. Business activity is showing weakness and leading economic indicators came in lower than expected. Both the consumer and producer price indexes (CPI and PPI) showed a drop. Normally that wouldn’t be a bad thing, since it would mean lower prices for consumers. However, this drop is concentrated in the energy sector, as oil prices have fallen. The rest of the economy is showing rising prices and is not enough to offset the drop in oil, hence the drop in consumer and producer prices.

The biggest surprise came in the weekly initial jobless claims, as the report showed 12,000 more initial jobless than the previous week. That number now stands at 472,000 initial jobless claims for the week. Couple this with the disappointing employment report last week and the employment picture is something we are very worried about.

This pessimism is one of the drivers behind the record high prices in gold. Investors are searching for returns but are having a hard time finding them. Bonds are paying very little due to record low interest rates and stocks have been very volatile. Seeing the problems around the globe and concerns over the currencies of debt-laden countries, gold becomes a natural safe haven and new source for returns. Since the start of the year, gold has risen 15% and continually reached new highs. At these record high levels, naturally we do not recommend buying. No one knows how long this rally will continue, but we feel the risks outweigh the benefits at this point.

Next Week

The Federal Reserve will be meeting next week and announcing their decision on the fed funds rate, which currently stands at zero. We expect the rate to remain at zero, but will be watching for any indication on when they plan to raise rates.

Home sales and durable goods orders reports will be released next week, although we see them having minimal impact on trading.

Where are we investing now?

The recent rise in the markets has been encouraging, although they have risen on little news and light volume. At the moment, corporate bonds and bond funds still look like the least-scary investment. For stocks, some values can be found, although we remain cautious. Our big-picture outlook still remains the same, as we are optimistic through the end of the year with the low interest rates and stimulus funds pushing the markets higher. The higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. 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. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently since the drop in the Euro has strengthened the 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.

Commentary for the week ending 6-11-10

For the first time in a month, the major indices closed the week higher. The Dow gained 2.8%, the S&P rose 2.5%, and the Nasdaq was higher by 1.1%. Gold hit another record high this week, while oil was up 3.1%.

Source: MSN Moneycentral

This week was a relatively uneventful one. Although the markets are still volatile, the performance was encouraging. Large investors like hedge funds appear to be re-entering the market, which is a positive sign. Trying to time a market bottom is not something we like to do, for as we have said many times before, it is usually a losing strategy. We always try to remember what Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” Certainly fear is abundant these days and stocks can be purchased at reasonable levels. However, we would like to see more stability and a better employment outlook before we commit any significant amount of funds back to the market.

Economic reports released this week were mixed, although they provided a nice backdrop for the solid performance. In a testimony before Congress, the Fed chief Ben Bernanke reported that the economic recovery is still underway and signs indicate this trend will continue for the foreseeable future. His testimony helped the markets higher as investors were reassured that interest rates would remain low for a considerable period.

A report on retail sales released Friday morning came in much lower than anticipated, sending the market briefly lower. This report shows that consumers are spending less on retail products (while we don’t think consumers acting responsibly and not spending beyond their means is a bad thing, it obviously hurts stocks that rely on people buying their products). Not long after the release of this report, the consumer sentiment report was released, coming in much higher than anticipated. The news helped stocks rebound and eventually close higher for the day.

Next Week

Next week we see as being much more eventful. Political theater will be in full effect as the heads of BP meet with President Obama. A degree of outrage is certainly warranted in this case, but there are worries that the constant demonization of the British business will result in a trade war with that country. Additionally, the issue with the dividend payments will be closely watched, since it is out of line for a government to dictate corporate issues (although that was firmly cast aside when the GM bondholder were surpassed by unions). Another worry is that as BP becomes the latest of many businesses to be publicly attacked and humiliated by the U.S. government, the desire to do business in the U.S. becomes less appealing.

With the potential to seriously impact markets, a decision on the financial regulation bill is anticipated for next week. Since its inception, the bill has slowly become less onerous on banking institutions. However, reports are that much stricter language has been introduced and looks likely to remain. If true, it will certainly send the market lower.

Several economic reports will be released next week, as well. Housing starts, Consumer Price Index (CPI), Producer Price Index (PPI), and leading economic indicator repots will be released in the mid to late part of the week. All have the potential to impact markets. Friday looks to be particularly volatile as the futures and options contracts expire, while the S&P Index gets a rebalance. All in all, we think next week will be a pretty busy one.

Where are we investing now?

Corporate bonds and bond funds still look like the least-scary investment choice at this time. For stocks, some values can be found, though we remain cautious. Our big-picture outlook still remains the same, as we are still optimistic through the end of the year with the low interest rates and stimulus funds pushing the markets higher. The higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we would focus on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. 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. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently since the drop in the Euro has strengthened the 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.

Commentary for the week ending 6-4-10

The markets showed some strength early in the week, only to fall considerably on Friday after a discouraging unemployment report. At the close, the Dow lost 2.0%, the S&P lost 2.3%, and the Nasdaq was lower by 1.7%. Oil dropped 3.5% this week, while gold continued to climb higher.

Source: MSN Moneycentral

Despite record losses in May, the market looked like it was beginning to bottom last week. Volatility remained high, but the freefall had subsided. Through Thursday of this week, we believed this trend was continuing as the markets were slowly moving upward. The unemployment report released Friday morning came in significantly below expectations and sent the market sharply lower. Although over 430,000 jobs were added last month, 411,000 of those were temporary Census workers. The unemployment rate fell from 9.9% to 9.7%, but the lower rate is due to the fewer workers being counted in the survey. The news resulted in over 3% losses for the major indices and dampened our hopes for a market bottom.

The disappointing employment report has raised a bigger concern: are government policy missteps beginning to take their toll on the economy? The low interest rates, increased entitlements, and hundreds of billions in stimulus pumped into the economy fueled the rise in the market over the past year. However, the lack of results is causing people to wonder if the cost was worth it. The deficit has soared to record levels, while new taxes and other tax increases have investors worried. The growth in government is slowly crowding out the private sector.

Some of us have been critical since the policies were announced, but opponents are growing in number and becoming more vocal. Historically, these Keynesian spending policies have been proven ineffective, yet the government has doubled down and issued new stimulus measures. We are worried that these policies are continuing down the wrong path and may cause even more harm than good. Unless a more free-market approach with reduced tax burdens and smaller government is implemented, the economy may continue to flounder for years to come.

With all this bad news, we have noticed some encouraging signs. Wal-Mart announced a plan to repurchase $15 billion in their shares. Companies do this when they think the share price is undervalued and look to take advantage before it rises again. Next, insider buying has risen to new high levels. Similar to the news from Wal-Mart, insiders purchase shares when they believe the price is too low. While following insiders is not a foolproof plan since no one knows what the future share price will be, it serves as one of many indicators we look at for direction. Finally, these lower oil prices result in lower prices at the pump, an obvious benefit for consumers. It might be scary out there, but it may not be as bleak as it seems.

Next Week

With the sharp sell-off Friday, we will be anxious to see how the market behaves next week. There are a few economic reports to be released, but none important enough to impact the market in the same manner as the unemployment report. Consumer credit will be released on Monday, while inventories, trade balance, and retail sales will be released later in the week. Global issues continue to weigh on the market, so we will be closely watching for any new developments since new global problems seem to arise daily.

Where are we investing now?

Corporate bonds and bond funds are looking like the least-scary investment choice at this time. For stocks, we continue to be cautious on the market and remain on the sideline. We do believe there are undervalued stocks out there, but are in no rush to begin buying. Our big-picture outlook still remains the same, as we are still optimistic through the end of the year since these easy money and stimulative measures will continue push the markets higher. As mentioned earlier, the costs involved in these actions are beginning to cause concern for investors. The higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.

In equities, we would focus on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. 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. Government policies will weaken the dollar over time, although we have been getting hurt on this trade recently since the drop in the Euro has strengthened the 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.