The markets trended higher all week until sharply reversing course on Friday. For the week, the Dow was lower by 0.4%, the S&P fell 0.6%, and the Nasdaq had a lot of movement but only lost 0.1%. Similar to the stock market, commodities trended in one direction throughout the week, only to sharply move the opposite direction on Friday. Gold rose 1.7% on Friday to end the week unchanged. Oil dropped to the mid $80’s early in the week, but rallied back to just shy of $90 per barrel.
Source: MSN Moneycentral
Good corporate earnings and economic data helped fuel the market rise for much of this week. However, the protests in Egypt created fears that sent markets lower on Friday, wiping out the gains of the week.
The Egyptian protests grabbed the headlines, but other factors were working against the market on Friday. Ford, Amazon, and Microsoft released disappointing earnings that sent their shares lower. Also, fourth quarter GDP was released Friday morning, coming in below expectations, but at a still decent 3.2%. While it shows that the economy was growing at a nice pace, investors were looking for more.
We think that the solid performance of the markets over the last five months had begun to make investors anxious for pullback. There just hasn’t been the bad news to provide a catalyst, but then came Egypt. The riots in Egypt began on Tuesday and came on the heels of similar drama in Tunisia, so it’s not like anything was new on Friday. Combined with the other bad news mentioned above, in our opinion, it gave investors a nice excuse to take some gains.
A few other stories caught our eye this week. First, the weekly M2 money supply jumped by the highest level since 2008. Fed official have been claiming that the supply of money in circulation has been decelerating, but this shows just the opposite. It is a signal to us that inflation is in our future.
Also, the financial accounting standards board (FASB), had been looking to restore mark-to-market accounting standards to banking balance sheets. Mark-to-market means that banks have to price their outstanding loans to whatever price the market would give it at that time. Makes sense, right? Well, currently banks only mark the values of their loans to whatever it cost them, and since most loans have lost value (like mortgages), it gives a false impression that banks are better off than they are.
This week FASB announced they were no longer considering mark-to-market. This is good news to banks and their shares will probably rise since they can continue to misrepresent their balance sheet. They can be in a horrible financial condition due to scores of faulty loans, but they will continue to price them at cost and look fantastic.
We may miss out on gains by avoiding this sector, but feel that this fraudulent accounting is setting up banks for future failure. It is likely that these banks will be considered “too big to fail”, so taxpayers will be on the hook for any losses-again.
Next Week
Next week contains the end of one month and beginning of a new one. That allows us to see if everyone’s new favorite investing strategy will pay off. Remember, the market always goes up on the first day of the month! Sounds like a dumb strategy, but history has shown it to work more often than not. We don’t actually follow this strategy, but it will be interesting just to see what happens on the 1st. However, once a strategy becomes popular, it usually stops working.
Since it is the end of January, we will begin to get a slew of new economic data. Friday will be the most important with the release of the January unemployment report. We are in the heart of corporate earnings data, too, so there will be plenty of data to keep us busy.
Where are we investing now?
Despite the drop of Friday, we aren’t making any changes. Next week will be important to see if the downtrend continues or if it was just a one-day event. Everything still looks expensive at these levels, so we will remain cautious even if the market heads higher.
Fundamentals have not been that good and in normal times, we would be betting against the market at these levels. Like we wrote above, the 20%+ returns over the past five months would make a correction long overdue. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller and less popular individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run here. 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 we think yields will increase over time.
Commodities remain a long term favorite, although metals, agriculture, and energy sectors are showing some weakness at the moment. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are beginning to favor developed international markets as opposed to emerging.
It was a mixed week for the markets as the S&P and Nasdaq fell, but the Dow climbed higher for an eighth straight week. At the Friday close, the Dow was up 0.7%, while the S&P was lower by 0.8% and the Nasdaq fell hard, down 2.4%. Gold continues to get beat up, falling 1.4% this week. Oil also fell this week by 3.7% to settle just below that $90 per barrel mark.
Source: MSN Moneycentral
There was a rather large divergence among the major indexes that made this week a bit of an unusual one. The Dow and S&P tend to be more closely correlated, so the large separation that began on Wednesday was unusual. The reason for this spread was from remarkably different results from corporate earnings released this week.
Some companies have reported great earnings this week, while others, not so much. A large number of banks released their earnings, and most of them were decent. Big names like Bank of America and Goldman Sachs, on the other hand, were awful. This led to a sell-off in the S&P and Nasdaq on Wednesday, but solid earnings from a major Dow component, IBM, helped keep that index above water.
As the week went on, we continued to get mixed earnings. Cloud computing favorites like F5 Networks and Salesforce.com got creamed, while GE soared. All-in-all, these reports show that conditions are improving for most companies, but many weak spots remain.
China was a major story this week, too, and that’s not even including Chinese President Hu’s trip to the US. Their economy was a hot topic all by itself. A 9.8% expansion in the fourth quarter has many investors worried about an inflation problem. The prospect of interest rate hikes and slower future growth sent their market sharply lower.
This is actually becoming a similar story around the globe. These emerging markets have experienced phenomenal growth, but that is creating an inflation problem that is tough to control. For this reason, investors believe these countries will take steps to slow their growth, so the eye-popping returns of emerging market stocks might not be around much longer. This also impacts many commodities like gold, so we may see limited growth here, too.
On to insider trading, where it was reported by ZeroHedge this week that in the previous week, of the companies listed in the S&P 500, not one insider bought stock. Not one! We like to look at insider transactions, since obviously they have the best idea what is going on inside their company. While insider purchases have been very low lately, especially in relation to the amount of insider selling, we aren’t sure if there has been a single week without insider buying. That is a red flag to us.
It seems like there has been more talk about a top in our markets this week. Similar to what we have written, investors are noticing the sharp market rise of the last several months without a pullback. A pullback is usually healthy and is also something we would like to see. One indicator of that, the 22%+ rise has lured many individual investors off the sidelines and back into the stock market. Like Warren Buffett says, when people become greedy, you should be fearful. We remain very cautious at these levels.
Next Week
A lot going on next week. A large number of companies will be releasing their earnings, so that alone will help move the markets. Economic data including consumer confidence, home sales, and durable goods will also be released. The big report comes on Friday with the release of the fourth quarter GDP number. Economists are predicting it to come in just below 4%, so a miss either direction will move the markets.
We can’t forget that Tuesday night will be the State of the Union address from President Obama. He has been trying to paint an image of himself as more business-friendly, so hopefully we will hear good things from the speech. However, it isn’t so important what he says, but what he actually does. We’d like to think he will follow through, but have our reservations since his actions have not yet matched his rhetoric.
Where are we investing now?
No change here. Everything still looks expensive, with everything including the U.S. markets, international stocks, bonds, and many commodities. However, we are not going to fight the trend here, but let our winners run. An increasing complacency and bullishness (optimism) amongst investors is usually a contrarian indicator, though. So at these high levels, we feel the risk is beginning to outweigh potential returns, so we are very cautious.
It is tough to figure what to do now. Fundamentals are not that good and in normal times, we would be betting against the market at these levels. Like we wrote above, the 20%+ returns over the past four months would make a correction long overdue. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller and less popular individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run here. 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 we think yields will increase over time.
Commodities remain a long term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are beginning to favor developed international markets as opposed to emerging.
Another up week for the markets as the Dow reached levels not seen since June, 2008. For the week, the Dow rose 1.0%, the S&P was higher by 1.7%, and the Nasdaq climbed 1.9%. Gold continued to sell off, down 0.6% this week. On the other hand, oil popped higher by 4%, so prices at the pump will keep going up. Many agricultural commodities were higher this week, as well.
Source: MSN Moneycentral
Boy, this market just keeps chugging higher. Corporate earnings season kicked into gear this week and the data was mostly good. Companies are becoming more profitable and conditions are improving. We also received some both optimistic and pessimistic economic reports this week, but the bad news didn’t have much impact on the markets.
The most action this week came on Wednesday with a pop higher attributed to a successful bond sale in Europe. It was considered successful since the yields were much lower than expected, indicating less fear about Europe. Worries over the debt of many European countries had been weighing on our markets for some time now and the ease of those fears resulted in a pop in our markets.
See, countries auction off bonds for a variety of reasons, but mostly to pay their debts. The more worried investors are about the country, the higher the bond yield will be. Think about it like the rate you pay on your credit card- there are higher rates for riskier borrowers and lower rates for the more credit worthy.
What hasn’t really been recognized is that there was a lot of intervention in the auction to keep the rates much lower than they otherwise would be. The European Central Bank (ECB) acted much like our Fed did and pumped loads of money into the auction to keep rates lower.
The other big investor that helped keep rates low was China. This is the main reason the auction is so newsworthy to us. As you know, China is one of the biggest holders of our debt, and now they are gaining an even bigger foothold in Europe. This helps keep the Chinese currency weaker, which makes their exports more attractive. We suppose it also makes them one step closer to world-wide domination. We say that partly in jest, but it gets less and less funny as time goes by.
Here in the U.S., a major topic this week was inflation. It feels like inflation is everywhere you look, since everything seems to cost more. But the Federal Reserve says you’re wrong.
We received the CPI (consumer price index, which measures prices for the things you buy) data on Friday which came in slightly higher than expected, but still at a tame 0.5% (meaning it only costs you 0.5% more to buy the same stuff you bought a year ago). However, the Fed likes to strip out food and energy (you know, the stuff you actually buy) to give them “core” inflation, which stands at a meager 0.1%. This tells them that there is no inflation in the economy and they stick to that.
Since we live in the real world, we know that’s not the case. Other reports released this week can back that up. Just in December, gas prices were higher by 8.5%. For the sector as a whole, energy costs were up 4.8%. Import prices into the U.S. were higher by 4.8% last year, which comes on the back of a 9.6% rise in 2009. Riots around the globe over high food prices are becoming more frequent, even having a part in this weeks overthrow of the Tunisian government.
The prices for raw materials also rose last year by over 12%. These materials go into making the products you buy, meaning it costs more to make the same product.
As we have seen recently, though, companies are afraid to pass those prices on to consumers since that will cut into sales. Yet that means their earnings will be less, and therefore their stock prices will be (should be) lower. That is a major reason why we are cautious on the stock market in the coming months.
Next Week
The market will be closed on Monday, but that condenses a whole slew of corporate earnings next week into just four days. There will be earnings from companies in a variety of different sectors, but a large number of banks and technology companies will present fourth quarter earnings.
Economic reports will be relatively light next week with just some info on housing and leading economic indicators. There will be enough news from corporate earnings to keep it from being a quiet week, though.
Where are we investing now?
Little change here, as everything still looks expensive right now, with everything including the U.S. markets, international stocks, bonds, and many commodities. However, we are not going to fight the trend here, but let our winners run. An increasing complacency and bullishness (optimism) amongst investors is usually a contrarian indicator, though. So at these high levels, we feel the risk is beginning to outweigh potential returns, so we are very cautious.
It is tough to figure what to do now. Fundamentals are not that good and in normal times, we would be betting against the market at these levels. The 20%+ returns over the past four months would make a correction long overdue. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against. .
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller and less popular individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on higher-quality and multi-national stocks. 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 we think yields will increase over time.
Commodities remain a long term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing significant headwinds for the future, especially inflation. Still, if we had to put new money in, we would favor emerging markets (with only certain sectors in China).
We’re back at it again for the new year and hope the holiday season was good to you. The markets fared rather well for the first week of the year. Big gains Monday helped push the Dow to a return of 0.8% for the week, while the S&P was up 1.1%, and the Nasdaq was higher by 1.9%. Many commodities sold off this week, including a 3.7% drop in gold. Oil also fell 3.7% to settle around $88 per barrel after nearing $93 earlier in the week.
Source: MSN Moneycentral
Market statisticians love the first week of the year. They have all kinds of historical data that tells them if the market does X% the first day of the year and Y% in the first week, the market will do Z% for the rest of the year. Researchers at Birinyi Associates found that when market rises the first day of the year like it did, the average gain for the year is 10.6%. And if the market is up the first week, there is roughly a 3 out of 4 chance that the market will close the year higher. Take that for what it’s worth, but we don’t put much stock into it.
At any rate, the markets opened big on Monday (which distorted our chart above) after reports of increases in manufacturing around the globe. Money also flowed into the markets since the first day of the month is when institutional investors and 401k’s tend to add to their positions.
In fact, a study by S&P found that over the last 10 years, if you only invested money on the first day of the month (buy at the prior days close and sell at the close on that first day), you would have significantly outperformed the S&P 500. Just an interesting stat.
After the pop on Monday, the market did little the rest of the week. Wednesday was higher as economists believed a strong employment report would be coming on Friday after preliminary reports. The market then sold off Friday when that wasn’t the case.
In that employment report, economists were looking for a gain of at least 150,000 jobs in December. The number came in at a paltry 103,000 and in an interesting twist, the unemployment rate dropped dramatically from 9.8% to 9.4%. The U-6 unemployment number, which includes discouraged workers, now stands at 16.7% from over 17% in the prior month.
News organizations and government spinmeisters like to say the rate drop shows that things are improving, but that could not be further from the truth. More people dropped out of the labor force last month, so it skews the base number of employees, and therefore the unemployment rate. In fact, the labor force is now at the lowest level it has been 25 years! Until employment improves, we are extremely cautious on the U.S. economy.
Lately there have been discussions on the modification of tax rates, particularly the corporate tax rate. We see this as fantastic news and long overdue. Just recently, Japan announced it was lowering their corporate tax rate to under 30%. This is significant because until now, Japan had the highest corporate tax rate in the developed world, followed by the US. That now gives us the number one spot. One only has to look at the population migration from high tax states to low tax ones here in America to get a sense of what is happening on a global scale.
Could this tax talk be a shift to the middle by the Obama administration? Perhaps.
Pundits have been claiming that another shift to the middle by this administration was this weeks appointment of William Daley to replace Rahm Emmanuel as Chief of Staff. He has actual business experience, which is a rarity in this group. We have trouble with the fact that he is a Daley, related to the corrupt Daley Chicago mayoral legacy. We see this as a continuation of the Chicago politics in the White House and not really a shift to the middle.
Next Week
Things really kick into gear next week as we get more year-end, quarterly, and monthly reports. For economic reports, we will get data on inventories, import prices, retail sales, industrial production, and the consumer and producer price indexes (CPI and PPI).
Corporate earnings begin on Monday with the first Dow stock, Alcoa, reporting. This stock has had a pretty nice run, so it will be interesting to see their earnings. Heck, almost everything has had a nice run the last couple months. Anyway, we will also be watching earnings from Lennar, Chevron, and JP Morgan.
Last week, Euro debt concerns weighed on European stock indices, but had little effect over here. Hopefully it can stay out of the headlines in the U.S., otherwise we might see it impact our markets lower as it usually has in the past.
The Year Ahead
Everyone loves to make predictions for the new year. What is the market going to do in 2011? We have no idea and neither does anyone else. The vast majority of predictions that we have seen say the market is going high this year. In some cases, much, much higher. We think it would be more appropriate for these prognosticators to include their past predictions with the final result, just so we can get a sense of how good they really are. We’re pretty sure there is a reason they don’t.
So no, we don’t know what the market will do from here, but we see some significant headwinds that could impact it.
First, the markets have had a heck of a run the past couple months. Since the beginning of September, the S&P 500 is higher by 21%. The Nasdaq is almost 30% higher! Even commodity markets are so high that food riots are beginning to break out around the world due to the high prices. We feel they have gotten ahead of themselves and are overdue for a pullback.
The rise has all been predicated on the recent stimulus package, commonly referred to as QE2. Massive amounts of money have been injected into the economy which has distorted the usual market forces. When this occurs, a correction must occur to get back to equilibrium. There is no free lunch, as they say, and we will have to take our medicine at one point or another.
With government policies having such an impact on the markets (remember when stocks were bought because of good products and earnings potential?), it is important to look at what impact they might have this year. The recent election was promising, as well as the perceived shift to the middle by the current administration.
However, there are massive and costly new regulations coming from recently passed legislation. And there are still more in the works. We hope the new Congress can put the brakes on some of these laws and policies, but many executive decisions bypass these lawmakers and become law by decree. This is very destructive to the U.S. (in our view) and our economy, so it will be important to keep a close eye on.
We can’t forget about the massive debts that have been incurred, not only on a national level, but state and local, as well. One option to remedy this problem would be to simply stop spending so much money (which makes sense to us). The other way is to inflate our way out (which we see is the more likely scenario at the moment). It becomes easier to pay off debts with cheap or worthless money.
The good news for investors is that your investments will be worth more - in percentage terms, anyway. The dollars you will have earned on the investments will be worth less or nothing, though, so it’s nothing to get excited about.
It may sound like a stretch, but the Zimbabwe stock market in 2006-7 is a great recent example of what could happen. They faced a similar situation as us (although not nearly to the same degree and from dramatically different circumstances) where they printed money to stimulate their economy and then to pay their debts. The result was super-hyper-inflation (perhaps we just created a new word?), but their stock market soared. That is, until everything crashed. Surprisingly, things are the exact opposite for them now. They are the only country in the world with no debt (as far as we know) and have taken positive, free market steps to rebuild their economy. Things actually look promising for this country now.
It may seem like we have gone off on a tangent, and perhaps we have. But it shows the consequences of taking the wrong path, which we feel we are on. This next year will be extremely important to address our issues instead of sweeping them under the rug.
Where are we investing now?
Frankly, everything looks expensive right now. And that’s not just the U.S. markets, but international stocks, bonds, and many commodities. At these levels, we feel the risk is beginning to outweigh potential returns, so we are very cautious.
It is tough to figure what to do now, though. Fundamentals are not that good and in normal times, we would be betting against the market at these levels. Like we said above, the 20%+ returns over the past four months would make a correction long overdue. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against. We will keep riding it higher from here, but are very cautious at these levels.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on higher-quality and multi-national stocks. 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 we think yields will increase over time.
Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important, but with tax rates in place for the next two years, they have not risen in importance. They have experienced some recent volatility, but there may be opportunities to find some good value here. Finally, international stocks have had a significant run already and are facing significant headwinds for the future. Still, if we had to put new money in, we would favor emerging markets (with only certain sectors in China).
Source: MSN Moneycentral
