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).
Source: MSN MoneycentralBoy, 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).
