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.
Source: MSN MoneycentralGood 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.
