Commentary for the week ending 9-10-10

It was another positive one for the markets, albeit slightly, during a holiday-shortened week. At the close, the Dow gained 0.1%, the S&P 500 gained 0.5%, and the Nasdaq climbed 0.4%. Gold sold off slightly, but still remains near all-time highs. Oil rose higher rather sharply, up 2.5%, mainly due to a pipeline shutdown that will limit supply to the US.

Source: MSN Moneycentral

The markets continued to show life this week, although there was little economic data to provide momentum. It looked like no bad news was good news this week. The volume of trades remains light, so we are not seeing a conviction in the rally that we would like to see. Investors continued to pull money out of stocks and into the percieved safety of bonds and money market funds.

The lack of investors in the stock market is a concern for us. There are events like the “flash crash” that contributed to a distrust which is sending investors to the sidelines. Another event this week, however, makes us distrust the markets even more.

On Thursday, weekly unemployment numbers were released and came in much better than expected. The markets rallied on the news. What wasn’t reported, though, was that nine states estimated their numbers. The state offices were closed on Monday for Labor Day when these numbers were due, although this problem never happened in the past.

There has always been a distrust of government numbers to a small degree, but a blatant distortion such as this is unacceptable. It is beginning to feel like the game is rigged and it is not surprising that investors are reluctant to invest in the market. If you want to humorously look at the bright side, the government is rigging numbers to the upside, so we suppose that is bullish (positive) for the market.

Next Week

Coming off a quiet week last week, next week will be full of economic data. There will be retail and industrial data, import info, and the Consumer and Producer Price Indexes releases. A few companies will be releasing earnings, including some big names like Best Buy and FedEx. It looks like there will be plenty of info to move the market next week.

Where are we investing now?

With another positive week for the markets, it will be interesting to see if this was a turning point, marking a new uptrend. There has been little to get us excited, but new bottoms often occur when things are darkest. We still see poor economic conditions hampering the economy, though, so we remain cautious. The potential 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. 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. We are finally starting to see this position go our way as bond yields have risen recently.

Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, but it is currently benefiting from a flight to safety. 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.