The markets reversed course this week after a strong showing in the previous week. At the close, both the Dow and S&P lost 2.2% while the Nasdaq fell 2.4%. Commodities climbed early in the week but sold off hard late, resulting in both oil and gold down 2.3%.
Source: MSN Moneycentral
This week was quite a reversal from the seemingly unstoppable bull market last week. Actually, it turned out to be the worst week for the markets in nearly three months. There were several factors that contributed to the drop that we will touch on.
First, this is looking like a case of “buy the rumor, sell the news”. In the run-up to the Fed announcement, the markets gain nearly 20% in anticipation of further quantitative easing. Since that pop higher on the announcement, markets have trended lower.
Also, several news items impacted the markets this week. Earnings out of the tech giant, Cisco, were decent this quarter, but they gave a more sober outlook for future earnings. This spooked the markets and the tech sector lead the way lower.
China announced concerns about inflation in their country and indicated they will take steps to keep it in check. This means raising interest rates and slowing down their economy. Since China has been a major driver of global growth, a slowdown there will slow the global economy as well.
This China news had a major impact on the commodity sector. A lack of demand from China will increase supply, so prices will be lower. On Friday alone, oil fell 3.3%, gold dropped 2.7%, and sugar had a record drop of over 11%. Many agriculture commodities were off over 5%. We aren’t sure where commodities will go from here in the near term, but are fairly confident they will be higher over the long term. Further dips could provide nice buying opportunities.
Finally, the fallout over the Fed decision has become global and very vocal. While we have concerns here about drops in the Fed micromanaging the economy, foreign countries complain about the decline in the value of the dollar. It has a significant impact on global trade, and it severely hurts major exporters like Germany, Brazil, and the Asian region. It seems like the only ones happy with the Fed decision are ivory-tower economists and the US government. We don’t think this will end well.
Next Week
A lot going on next week. There are several economic reports released, including retail sales, housing data, CPI, PPI, and leading economic indicators. There are many corporate earnings announcements to follow, too, including Lowes, Home Depot, Wal-Mart, and Target, to name a few.
Many Fed officials will be speaking, as well, and it will be interesting to see what they have to say about the recent Fed decision on quantitative easing.
An interesting event that has absolutely no impact on us will be taking place next week, with the GM IPO. It will be their first stock offering since re-emerging from bankruptcy. It is expected to be priced well below its intrinsic value, so anyone who can get in on this IPO will essentially be guaranteed a nice return. Only the biggest investment firms will get access to this IPO, and unfortunately that is not us - yet. Anyway, after shafting bond holders last year and illegally giving unions a large ownership stake, we just assume stay away from GM. And just in spite, we certainly will not be purchasing any GM products for the foreseeable future.
Where are we investing now?
Well this sell-off changes things a little. We still believe the market will close the year higher from here, but are certainly more cautious. One poor week does not make a trend, but further pullbacks could see us buying more stock. It is important to note the record insider selling this week, which has reached an all-time high. This large amount of insider selling makes us worry, but is not always a negative indicator. It is just something to add to our caution.
Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently still optimistic on stocks), that the tide usually changes.
If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. 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.
Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak 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 (with certain sectors in China) are areas we favor.
Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.
Source: MSN MoneycentralThis week was quite a reversal from the seemingly unstoppable bull market last week. Actually, it turned out to be the worst week for the markets in nearly three months. There were several factors that contributed to the drop that we will touch on.
First, this is looking like a case of “buy the rumor, sell the news”. In the run-up to the Fed announcement, the markets gain nearly 20% in anticipation of further quantitative easing. Since that pop higher on the announcement, markets have trended lower.
Also, several news items impacted the markets this week. Earnings out of the tech giant, Cisco, were decent this quarter, but they gave a more sober outlook for future earnings. This spooked the markets and the tech sector lead the way lower.
China announced concerns about inflation in their country and indicated they will take steps to keep it in check. This means raising interest rates and slowing down their economy. Since China has been a major driver of global growth, a slowdown there will slow the global economy as well.
This China news had a major impact on the commodity sector. A lack of demand from China will increase supply, so prices will be lower. On Friday alone, oil fell 3.3%, gold dropped 2.7%, and sugar had a record drop of over 11%. Many agriculture commodities were off over 5%. We aren’t sure where commodities will go from here in the near term, but are fairly confident they will be higher over the long term. Further dips could provide nice buying opportunities.
Finally, the fallout over the Fed decision has become global and very vocal. While we have concerns here about drops in the Fed micromanaging the economy, foreign countries complain about the decline in the value of the dollar. It has a significant impact on global trade, and it severely hurts major exporters like Germany, Brazil, and the Asian region. It seems like the only ones happy with the Fed decision are ivory-tower economists and the US government. We don’t think this will end well.
Next Week
A lot going on next week. There are several economic reports released, including retail sales, housing data, CPI, PPI, and leading economic indicators. There are many corporate earnings announcements to follow, too, including Lowes, Home Depot, Wal-Mart, and Target, to name a few.
Many Fed officials will be speaking, as well, and it will be interesting to see what they have to say about the recent Fed decision on quantitative easing.
An interesting event that has absolutely no impact on us will be taking place next week, with the GM IPO. It will be their first stock offering since re-emerging from bankruptcy. It is expected to be priced well below its intrinsic value, so anyone who can get in on this IPO will essentially be guaranteed a nice return. Only the biggest investment firms will get access to this IPO, and unfortunately that is not us - yet. Anyway, after shafting bond holders last year and illegally giving unions a large ownership stake, we just assume stay away from GM. And just in spite, we certainly will not be purchasing any GM products for the foreseeable future.
Where are we investing now?
Well this sell-off changes things a little. We still believe the market will close the year higher from here, but are certainly more cautious. One poor week does not make a trend, but further pullbacks could see us buying more stock. It is important to note the record insider selling this week, which has reached an all-time high. This large amount of insider selling makes us worry, but is not always a negative indicator. It is just something to add to our caution.
Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. We can’t forget, that when everyone seems to be on one side of the trade (currently still optimistic on stocks), that the tide usually changes.
If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. 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.
Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak 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 (with certain sectors in China) are areas we favor.
Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.
