A new week, but the story remained the same as the markets kept chugging higher. For the week, both the Dow and S&P rose 1.0% while the Nasdaq was higher by 0.9%. Gold had a solid week, notching a 2.1% gain. Oil had a slight gain but remains in the mid $80’s per barrel.
Source: MSN Moneycentral
It was another uneventful and rather boring week for the markets this week. Quietly these markets keep reaching new highs and volatility is extremely low. Actually, these last six months have seen very little volatility. We added the chart on the right to show how little movement there has been over that period. This run has been quite remarkable, really. There are not many times in the history of the market where there has been such a smooth rise. It has been an almost straight line upwards since the beginning of December!
Bob Pisani with CNBC did some research into past periods that matched these last six months and found only five other similar instances (1935, 49, 53, 58, and 95), which shows just how rare this is. Most importantly, in the year following each of these periods, the average return was 22.1%. It’s amazing to think that this market can keep going higher, but it seems like even history is on its side.
This week was also another week where everyone was talking about inflation. We received data on the rate of inflation in the form of the Producer and Consumer Price Indexes (PPI and CPI). Both remain rather low, with the PPI rising 0.8% and CPI up just 0.4% in January. We discussed last week about manipulated these figures can be, but even so, we are seeing an acceleration in these numbers. The PPI has had its highest year-over-year growth since 2008. The CPI may be up 1.4% over the past year, but is 3.1% higher for the past six months.
Over the years, changes are made to the methods of gathering many government statistics, for obvious reasons. There is a gentleman named John Williams who runs a service called Shadow Government Statistics that tries to cut through, well, the b.s. of these numbers. Through his analysis, if we measured inflation the same way it was measured when Jimmy Carter was president, inflation would be about the same as when Carter was president. Instead of the 1.4% CPI over the past year, the number would actually be around 10%!
A prefect example of how easy it is to massage data occurred this week in China. Inflation has been a serious problem in their country. Until now, food prices made up 31.4% of their CPI (it is 7.4% in the U.S.). Since food prices have been soaring, they quietly reduced the percentage of food in the CPI by 2.2%. They then released their CPI and, surprise, it came in lower than expected (although at a still-high 4.9% over the past year). Inflation remains a serious problem, especially in these emerging economies.
Changing the subject, you may have noticed that the price for oil has come down a bit, but prices at the pump remain high and are climbing. The oil price most followed in the U.S. is called the West Texas Intermediary (WTI) crude. However, there is another type of oil followed on foreign exchanges called Brent crude which accounts for roughly 2/3rds of the international supply.
Usually these two types trade relatively close together. However, the difference has widened considerably over the last couple weeks. WTI is trading in the mid $80’s while Brent is trading over $100. That Brent price is the reason why our gas prices are so high.
We won’t delve into the technicalities behind the spread, but a lot has to do with the unrest in the Middle East and North Africa. Until those issues are resolved and Brent prices come down, our gas prices will remain high.
Next Week
Next week will be quieter, especially since the markets are closed on Monday. Consumer confidence will be released on Tuesday, followed by home sales, durable goods, and the update to 4th quarter GDP.
Several big companies will be releasing earnings next week, as well. Wal-Mart, Home Depot, Office Depot, Transocean, GM, Sears, Target, and JP Penny, to name a few. Earnings have fared well so far and info from these large companies will give us a great view of the strength of the U.S. economy.
Where are we investing now?
Still no change here. The market continues to climb in a practical straight line upwards and we are just going along for the ride. Since the beginning of September, the Dow and S&P are up over 24% and 28%, respectively, while the Nasdaq is over 34% higher! Such a fast rise without a correction is troubling and everything looks expensive at these levels, so we remain cautious. Fundamentals like employment have not been that good and in normal times, we would be betting against the market at these levels. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
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 in this area. 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 and any weakness could present buying opportunities. 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 favoring developed international markets as opposed to emerging.
Source: MSN Moneycentral
It was another uneventful and rather boring week for the markets this week. Quietly these markets keep reaching new highs and volatility is extremely low. Actually, these last six months have seen very little volatility. We added the chart on the right to show how little movement there has been over that period. This run has been quite remarkable, really. There are not many times in the history of the market where there has been such a smooth rise. It has been an almost straight line upwards since the beginning of December! Bob Pisani with CNBC did some research into past periods that matched these last six months and found only five other similar instances (1935, 49, 53, 58, and 95), which shows just how rare this is. Most importantly, in the year following each of these periods, the average return was 22.1%. It’s amazing to think that this market can keep going higher, but it seems like even history is on its side.
This week was also another week where everyone was talking about inflation. We received data on the rate of inflation in the form of the Producer and Consumer Price Indexes (PPI and CPI). Both remain rather low, with the PPI rising 0.8% and CPI up just 0.4% in January. We discussed last week about manipulated these figures can be, but even so, we are seeing an acceleration in these numbers. The PPI has had its highest year-over-year growth since 2008. The CPI may be up 1.4% over the past year, but is 3.1% higher for the past six months.
Over the years, changes are made to the methods of gathering many government statistics, for obvious reasons. There is a gentleman named John Williams who runs a service called Shadow Government Statistics that tries to cut through, well, the b.s. of these numbers. Through his analysis, if we measured inflation the same way it was measured when Jimmy Carter was president, inflation would be about the same as when Carter was president. Instead of the 1.4% CPI over the past year, the number would actually be around 10%!
A prefect example of how easy it is to massage data occurred this week in China. Inflation has been a serious problem in their country. Until now, food prices made up 31.4% of their CPI (it is 7.4% in the U.S.). Since food prices have been soaring, they quietly reduced the percentage of food in the CPI by 2.2%. They then released their CPI and, surprise, it came in lower than expected (although at a still-high 4.9% over the past year). Inflation remains a serious problem, especially in these emerging economies.
Changing the subject, you may have noticed that the price for oil has come down a bit, but prices at the pump remain high and are climbing. The oil price most followed in the U.S. is called the West Texas Intermediary (WTI) crude. However, there is another type of oil followed on foreign exchanges called Brent crude which accounts for roughly 2/3rds of the international supply.
Usually these two types trade relatively close together. However, the difference has widened considerably over the last couple weeks. WTI is trading in the mid $80’s while Brent is trading over $100. That Brent price is the reason why our gas prices are so high.
We won’t delve into the technicalities behind the spread, but a lot has to do with the unrest in the Middle East and North Africa. Until those issues are resolved and Brent prices come down, our gas prices will remain high.
Next Week
Next week will be quieter, especially since the markets are closed on Monday. Consumer confidence will be released on Tuesday, followed by home sales, durable goods, and the update to 4th quarter GDP.
Several big companies will be releasing earnings next week, as well. Wal-Mart, Home Depot, Office Depot, Transocean, GM, Sears, Target, and JP Penny, to name a few. Earnings have fared well so far and info from these large companies will give us a great view of the strength of the U.S. economy.
Where are we investing now?
Still no change here. The market continues to climb in a practical straight line upwards and we are just going along for the ride. Since the beginning of September, the Dow and S&P are up over 24% and 28%, respectively, while the Nasdaq is over 34% higher! Such a fast rise without a correction is troubling and everything looks expensive at these levels, so we remain cautious. Fundamentals like employment have not been that good and in normal times, we would be betting against the market at these levels. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against it.
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 in this area. 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 and any weakness could present buying opportunities. 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 favoring developed international markets as opposed to emerging.
