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.
Source: MSN MoneycentralThere 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.
