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.