Any problems from last week seemed to have been forgotten as the markets reached a new 2 ½ year high this week. At the Friday close, the Dow climbed 2.3%, the S&P was higher by 2.7%, and the Nasdaq popped 3.1% higher. Oil and gold were relatively unchanged, up just 0.3% and 0.6%, respectively.
Source: MSN Moneycentral
The riots in Egypt may have raged on this week, but they had no impact on the markets. In fact, this week we closed out the best January performance in 14 years. Corporate earnings have been decent and economic reports aren’t that bad, so investor confidence is increasing and more money is flowing into U.S. stocks.
While the market kept climbing, though, it seemed like everyone was talking about inflation. Well, everyone but Fed chief Ben Bernanke. Commodities around the globe have climbed to new record highs, but in a speech this week, Mr. Bernanke reaffirmed that inflation is low and he would like to see more of it!
We feel that their measurement of inflation is severely flawed. Just this week, the United Nations food price index, which measures food prices around the globe, hit an all time high. Sugar also reached a new all-time high. So did copper. And practically every other commodity continues to climb towards new highs. How can this be occurring, yet inflation is nonexistent? We understand they dynamics behind the CPI, PPI, and even the PCE deflator, but feel they don’t adequately measure what inflation is to real people.
At some point, these high commodity prices will have a negative impact on the economy and the companies in the stock market. When that happens though remains to be seen. With an economy is built on consumer spending, and consumers have less to spend, that spells trouble.
In our view, this will ultimately result in a stagflation scenario. That is where unemployment is high and things you own, like a home, loses value and the things you buy cost more. Actually, that seems like what we are experiencing right now!
Switching subjects, also grabbing headlines this week was the unemployment rate announcement on Friday. Economists were expecting a gain of roughly 150,000 new jobs, but the result came in at a dismal 36,000. We won’t even get into the “blame it on the bad weather” debate, since retail sales were just fine in the same weather.
Even worse, the labor force plunged to the lowest level in 16 years, so that caused the unemployment rate to actually drop to 9.0% from 9.4%. So while it may sound good that the rate went down, this is actually terrible news. If the labor force just remained the same as a year ago, the unemployment rate would stand at 9.9%. This disappointing news reaffirmed our cautious stance on the stock market.
Next Week
Next week will be rather quiet in terms of economic reports. However, we are still in the peak of corporate earnings releases, so there will be plenty of info to move the markets.
We can’t forget about Egypt and any new developments out of the region. The protests were largely ignored this week, but any news can impact the market like it did last week.
Where are we investing now?
The market continues to climb and we are just going along for the ride. Everything still looks expensive at these levels, so we remain cautious. Fundamentals 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.
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 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 beginning to favor developed international markets as opposed to emerging.
Source: MSN MoneycentralThe riots in Egypt may have raged on this week, but they had no impact on the markets. In fact, this week we closed out the best January performance in 14 years. Corporate earnings have been decent and economic reports aren’t that bad, so investor confidence is increasing and more money is flowing into U.S. stocks.
While the market kept climbing, though, it seemed like everyone was talking about inflation. Well, everyone but Fed chief Ben Bernanke. Commodities around the globe have climbed to new record highs, but in a speech this week, Mr. Bernanke reaffirmed that inflation is low and he would like to see more of it!
We feel that their measurement of inflation is severely flawed. Just this week, the United Nations food price index, which measures food prices around the globe, hit an all time high. Sugar also reached a new all-time high. So did copper. And practically every other commodity continues to climb towards new highs. How can this be occurring, yet inflation is nonexistent? We understand they dynamics behind the CPI, PPI, and even the PCE deflator, but feel they don’t adequately measure what inflation is to real people.
At some point, these high commodity prices will have a negative impact on the economy and the companies in the stock market. When that happens though remains to be seen. With an economy is built on consumer spending, and consumers have less to spend, that spells trouble.
In our view, this will ultimately result in a stagflation scenario. That is where unemployment is high and things you own, like a home, loses value and the things you buy cost more. Actually, that seems like what we are experiencing right now!
Switching subjects, also grabbing headlines this week was the unemployment rate announcement on Friday. Economists were expecting a gain of roughly 150,000 new jobs, but the result came in at a dismal 36,000. We won’t even get into the “blame it on the bad weather” debate, since retail sales were just fine in the same weather.
Even worse, the labor force plunged to the lowest level in 16 years, so that caused the unemployment rate to actually drop to 9.0% from 9.4%. So while it may sound good that the rate went down, this is actually terrible news. If the labor force just remained the same as a year ago, the unemployment rate would stand at 9.9%. This disappointing news reaffirmed our cautious stance on the stock market.
Next Week
Next week will be rather quiet in terms of economic reports. However, we are still in the peak of corporate earnings releases, so there will be plenty of info to move the markets.
We can’t forget about Egypt and any new developments out of the region. The protests were largely ignored this week, but any news can impact the market like it did last week.
Where are we investing now?
The market continues to climb and we are just going along for the ride. Everything still looks expensive at these levels, so we remain cautious. Fundamentals 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.
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 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 beginning to favor developed international markets as opposed to emerging.
