Finally, it was a nice week for the markets. At the Friday close, the Dow rose 3.1%, the S&P gained 2.7%, and the Nasdaq turned in a nice 3.8% gain. Oil rose 3.5% and reached new 2 ½ year highs along the way (Brent crude closed around $115 per barrel). Gold notched a new all time high earlier in the week but settled for a gain of 0.7%. 
Source: MSN Moneycentral
The volatility continued as the markets closed lower for the third straight week. At the Friday close, the Dow lost 1.5%, the S&P fell 1.9%, and the Nasdaq had another rough week, down 2.6%. Oil remained a hot topic this week as it saw some big moves, only to end the week relatively unchanged, losing just nine cents to $101.07 (Brent crude closed just below $114 again). It was a similar story for gold, as it lost just 0.4% for the week.
Source: MSN Moneycentral
The markets have felt like they have a one track mind lately. They focus on one problem so intensely while seeming to ignore others. For the last several weeks, the focus was on the countries in the Middle East and North Africa, starting with the uprisings in Egypt. European debt problems dominated headlines not long before that. And China before that. This week, the sole focus was on Japan.
Beginning on Monday, the destruction found in Japan continued to worry investors as the Dow fell nearly 150 points before rebounding late in the day. Radiation scares picked up on Tuesday, leading to a sharp drop at the open. The Dow was off almost 300 points before rallying for the rest of the day.
Those radiation fears lingered into Wednesday, but negative economic data out of the U.S. really helped push the markets lower. Housing starts (which measures new homes that began construction) came in at the lowest level in 27 years, reminding us that the economic recovery is still very fragile.
The Producer Price Index (it measures the price changes a business pays to produce goods) was also released on Wednesday and came in rather tame when excluding food and energy (which the Fed likes to do). When they are included, though, the PPI was much higher than expected. This was caused by a 3.3% rise in energy costs and 3.9% increase in food costs in February. The rise in food prices was the biggest gain seen since 1974. This news, combined with the housing numbers and Japan troubles lead to a large drop in the market Wednesday.
The outlook changed for the latter part of the week, though. Many investors felt that the sell-off may have been overdone, so investors stepped back in and began buying (including us). The fears about Japan still lingered, but have probably been adequately priced into the market with that large sell-off.
Released on Thursday, the Consumer Price Index (which measures the change in prices that consumers pay for items) for February came in slightly higher than expected, but also still rather tame. We have discussed in the past how we feel this index does not accurately reflect U.S. inflation. It is the metric the government uses, though, so it is still the most important. Similar to the PPI, the CPI had a spike in food and energy prices, but not to the same levels as the PPI. Food was up just 0.6% and energy higher by 3.4% in February.
We feel that the CPI underestimates the amount of inflation in the economy. Another metric we like to look at for inflation is called the “Billion Price Project” and it was created by MIT (and can be found HERE). The most recent chart is on the right. It is rater ingenious in that it scans the internet every day for the prices of items (the Fed sends people out to stores to find prices of items to calculate their indexes). Millions of items. You can see how the MIT numbers (the red line) have followed the CPI (the blue line) rather closely, but the gap has widened in recent months. We feel that the MIT numbers are much more accurate and this graph just shows the discrepancy that exists.
Next Week
Next week will be important to see if the rally that started late this week will continue. The nuclear situation in Japan will be very important, but we feel that headlines coming out of Libya and the Middle East will again be the main focus. At the moment, the situation in Libya seems to be escalating and any negative news will likely send the markets lower.
The week will be quieter in terms of economic and corporate earnings reports. There will be more data on housing numbers, so that will be important to watch after the poor housing numbers from this week.
Where are we investing now?
Like we mentioned above, we did a little buying this week. The non-stop gains of the last six months had investors anxious for an overdue correction. The fears created by the Middle East and Japan provided investors a nice opportunity to take some gains. The selling created a nice correction, which is entirely healthy, and produced a nice opportunity for new buyers to step in.
We still have serious concerns over the economy, with inflation running strong, unemployment high, and home prices falling. We strongly believe a stagflation scenario is brewing. There is also a worry that first quarter corporate earnings will begin coming out in the next couple weeks and they will be disappointing. Like we saw in the PPI, businesses are getting hit with higher costs that they have not yet passed along to consumers. This will negatively impact their earnings and send stocks lower.
Even with this negative outlook on the economy, we still believe that Fed Chief Ben Bernanke will keep flooding the market with money to push the market higher. The QE2 bond buying program is set to expire this summer and without the Fed intervention, the market will likely fall. We feel that the Fed has too much invested for that to happen, so they will probably double down and try another quantitative easing program. This will keep the markets higher, in the short term anyway.
If we were to put new money to work, 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 healthcare-related 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 since they are rather expensive 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 favoring developed international markets as opposed to emerging.
Our short and medium term investments are the only ones affected by these weekly and monthly changes. These weekly fluctuations have little impact on positions we intend to hold for several years or more.
Yet another volatile week on this two year anniversary of the market bottom in March, 2009. For the week, the Dow lost 1.0%, the S&P dropped 1.3%, and Nasdaq fared the worst, down 2.5%. Gold sold off slightly, down 0.5%. Oil fell this week but remains over the psychologically important $100 level at $101.16 per barrel (Brent crude is just below $114). 
Source: MSN Moneycentral
Volatility picked up in the markets this week as some large moves ultimately resulted in an unchanged market. For the week, the Dow gained 0.3% while the S&P and Nasdaq rose just 0.1%. Gold reached new highs, rising 1.4% this week. Oil continues to climb, with the crude (WTI) crossing $104 a barrel and Brent crude nearing $116.
Source: MSN Moneycentral
This week was characterized by big swings in the market and the price of oil played a significant factor. Starting on Tuesday, oil prices climbed towards $100 per barrel on further unrest in the Middle East and North Africa, which sent the markets sharply lower.
The interesting part of that drop was that it came on the first of the month. As you may recall, we mentioned that the market tends to be higher on the first due to strong buying with new cash inflows. The up trend tends to occur some 70-odd percent of the time and has happened the last seven months straight. Making things worse, the market wasn’t just a little lower, but nearly 170 points lower. Thankfully we don’t actively follow this strategy of seeking gains on the first, but we know there were some traders hurting Tuesday evening.
On to Thursday, which saw the best single-day performance of the year. Some optimistic reports on employment and retail sales helped set the mood, while a drop in oil prices sealed the deal. Oil prices were lower on the perception of moderating tensions in the Mid East, stemming from rumors of peace talks in Libya. If this tells us anything, though, its how desperate people are for good news, as the peace talks were the creation of Hugo Chavez. Of all people!
Anyway, a terrific Thursday saw the tide turn on Friday as the Dow lost over 160 points before recovering slightly late in the day. A rise in oil prices was a factor again once people remembered that Chavez was nuts, but we believe the February employment report was the main reason for the drop.
The employment report showed that the U.S. added 192,000 jobs in February, just shy of the 200,000 most economists were expecting. The press has touted this gain and the drop in the unemployment rate to 8.9%. However, this is misleading. While the gain was welcomed, the amount of people in the labor force (the amount of people working or looking for work) remains at 25 year lows. If the labor force was the same level as before the recession, the current unemployment rate would be 11.5%. This weak level of employment is a major reason for our cautious outlook.
Along that line, this week we set another record for food stamp usage, with 14.3% of Americans now on the government dole. This comes as the UN released a report indicating that global food prices have hit yet another all-time high. This report covered a period before the recent spike in oil prices, so future reports will likely be higher still.
Also showing us higher prices, the Fed released its beige book survey this week (which measures anecdotal information on the strength of the economy), and it showed strong growth. However, higher input prices due to high commodity prices are impacting businesses. They are beginning to raise prices for their products, after months of being reluctant to pass along costs. The beige book also warns that prices will be higher still in the coming months. Another reason for us to remain cautious.
Next Week
Oil prices will be very important to watch next week, as it was an important factor on the markets this week. We will get more economic data next week, but nothing as important as this week. Consumer credit, wholesale and business inventories, the trade balance, and retail sales, to name a few. There will also be a few corporate earnings reports, but again, nothing major.
Where are we investing now?
With all this volatility, we are not looking to make any changes. It is too early to tell if the upward trending market we have had is changing course. It has had a heck of a run the last several months, so a correction is always possible.
The QE2 program, which has been pumping up stocks, is set to expire this summer but will probably keep fueling the market higher in the meantime. We see a brewing stagflation scenario ultimately wearing on the markets once the stimulus wears off. However, there are rumors of a QE3 program, which would try to pump up stocks even further. It is too early to tell if this will happen but we really hope it does not, for it will create even more long term problems.
Also, any further shocks out of the Middle East could impact the markets like it did the last two weeks, so this is something to pay close attention to.
If we did decide to put new money to work, 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 healthcare-related 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
