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 MoneycentralMarket 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).
