An event-filled week fueled a large rally for the markets and commodities this week, leading to a new two-year high in the Dow. At the Friday close, the Dow was higher by 2.9%, the S&P 500 climbed 3.6%, and the Nasdaq also returned 2.9%. Commodities soared this week, with oil reaching a new two-year high and closing up nearly 7%. Gold reached new all time highs and was up 3%.
Source: MSN Moneycentral
What a week it was. We will start with the elections and the historic shift of power in Washington. A large Republican victory has shifted the balance of power and gridlock will likely ensue. Judging by the last two years, we do not see this as a bad thing. In fact, compromises may already be happening as President Obama has opened the door to maintaining the tax rates set in place by the Bush administration. This is certainly a good start.
The most important event for the markets came on Wednesday with the Fed announcement on further quantitative easing (QE2). Over the coming months, the Fed will inject roughly $75 million a month into the economy with the total reaching about $600 billion.
This is in line with what the market was anticipating. You can see in the chart above the market reaction early Wednesday afternoon as it bounced about, but ultimately headed higher. After investors had the night to digest the information, the market shot higher on Thursday in anticipation of hundreds of billions flooding the market. In our opinion, this will be good for the markets in the short term, but will have severe and dramatic implications for the long run.
Basically the Fed is printing $600 billion out of thin air (in addition to the $1+ trillion it has already printed). The goal is to keep interest rates low and raise asset prices (the stock market). In their view, if people see the stock market going up and reaching new highs, they will feel more confident. With 401k’s and IRA’s climbing higher, people begin to feel wealthy again. Thus, it creates a new sense of optimism that spurs consumer spending and hiring by businesses…and then flowers bloom and rainbows fill the sky.
See, that will not happen. Santa Claus can’t drop a magic bag of money into the economy and make everything better. There will be consequences. This policy severely weakens the dollar and raises the price of virtually everything a person purchases. See, the weaker dollar means commodities will cost more, and it has already begun. The following are articles taken from the Wall Street Journal the day after the Fed announcement (all charts are from the Wall Street Journal, as well):
Food Sellers Grit Teeth, Raise Prices
It is funny to note that after the Fed announcement, Fed chief Ben Bernanke headed down to Jacksonville (where we are located). He made a speech and took questions from students at Jacksonville University, where the author of this commentary’s brother attended school. Unfortunately he graduated several years ago, otherwise we certainly would have liked to have seen this event, and maybe even posed a question or two!
Anyway, at the end of the week, the stock market closed at a new two-year high. The unemployment report released on Friday came in much higher than expected and reassured the market that the economy is improving. All-in-all, the economy is improving, corporate earnings are decent, and it makes us question the need for further stimulus at this time.
On a final note, we are disappointed by what the stock market has become, especially after this week. It used to be about finding companies and observing fundamentals and earnings in order to make a profit. Now, government agencies can dump massive amounts of money into the market to manipulate it to suit their own agenda. We are not sure when sanity will return to the market, but we don’t see it happening anytime soon.
Next Week
It will be a significantly less hectic week next week, especially after last week. There will be several big corporate earnings releases that have the potential to move the market.
We will also get information on our trade balance and import prices, as well as consumer confidence numbers.
Where are we investing now?
Still little change here. The Fed announcement practically guaranteed a higher market close for the year. We would like to see a pullback to add to our positions, but we are not sure if that will even happen. Other investment professionals who have been underweight the market will also try adding to their positions, which will also send the market higher.
Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. 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 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 MoneycentralWhat a week it was. We will start with the elections and the historic shift of power in Washington. A large Republican victory has shifted the balance of power and gridlock will likely ensue. Judging by the last two years, we do not see this as a bad thing. In fact, compromises may already be happening as President Obama has opened the door to maintaining the tax rates set in place by the Bush administration. This is certainly a good start.
The most important event for the markets came on Wednesday with the Fed announcement on further quantitative easing (QE2). Over the coming months, the Fed will inject roughly $75 million a month into the economy with the total reaching about $600 billion.
This is in line with what the market was anticipating. You can see in the chart above the market reaction early Wednesday afternoon as it bounced about, but ultimately headed higher. After investors had the night to digest the information, the market shot higher on Thursday in anticipation of hundreds of billions flooding the market. In our opinion, this will be good for the markets in the short term, but will have severe and dramatic implications for the long run.
Basically the Fed is printing $600 billion out of thin air (in addition to the $1+ trillion it has already printed). The goal is to keep interest rates low and raise asset prices (the stock market). In their view, if people see the stock market going up and reaching new highs, they will feel more confident. With 401k’s and IRA’s climbing higher, people begin to feel wealthy again. Thus, it creates a new sense of optimism that spurs consumer spending and hiring by businesses…and then flowers bloom and rainbows fill the sky.
See, that will not happen. Santa Claus can’t drop a magic bag of money into the economy and make everything better. There will be consequences. This policy severely weakens the dollar and raises the price of virtually everything a person purchases. See, the weaker dollar means commodities will cost more, and it has already begun. The following are articles taken from the Wall Street Journal the day after the Fed announcement (all charts are from the Wall Street Journal, as well):
Food Sellers Grit Teeth, Raise Prices- Prices of staples including milk, beef, coffee, cocoa, and sugar have risen sharply in recent months. And food makers and retailers…have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.
- Shoppers will have to pay more for clothing next year as skyrocketing cotton prices force companies to take their chances with price increases even as consumer demand remains sluggish.
- Raw-sugar futures have surged to 30-year peaks and look set to break higher as mounting concern over faltering supplies lends fresh impetus to the market.
- Crude-oil futures shot higher on the back of a weaker dollar following the Federal Reserve's decision to inject $600 billion into the U.S. economy.
It is funny to note that after the Fed announcement, Fed chief Ben Bernanke headed down to Jacksonville (where we are located). He made a speech and took questions from students at Jacksonville University, where the author of this commentary’s brother attended school. Unfortunately he graduated several years ago, otherwise we certainly would have liked to have seen this event, and maybe even posed a question or two!
Anyway, at the end of the week, the stock market closed at a new two-year high. The unemployment report released on Friday came in much higher than expected and reassured the market that the economy is improving. All-in-all, the economy is improving, corporate earnings are decent, and it makes us question the need for further stimulus at this time.
On a final note, we are disappointed by what the stock market has become, especially after this week. It used to be about finding companies and observing fundamentals and earnings in order to make a profit. Now, government agencies can dump massive amounts of money into the market to manipulate it to suit their own agenda. We are not sure when sanity will return to the market, but we don’t see it happening anytime soon.
Next Week
It will be a significantly less hectic week next week, especially after last week. There will be several big corporate earnings releases that have the potential to move the market.
We will also get information on our trade balance and import prices, as well as consumer confidence numbers.
Where are we investing now?
Still little change here. The Fed announcement practically guaranteed a higher market close for the year. We would like to see a pullback to add to our positions, but we are not sure if that will even happen. Other investment professionals who have been underweight the market will also try adding to their positions, which will also send the market higher.
Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. 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 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.
