It was a fairly quiet week on Wall Street. For the week, the Dow rose by a fraction, just 0.03%, while both the S&P and Nasdaq were lower by 0.3%. The big story this week was in the commodity sector, with gold reaching a new all-time high, up 3.2%. Oil reached a new 2 ½ year high, rising to a troubling $112.79 (Brent crude closed near $125 per barrel).
Source: MSN Moneycentral
Like we mentioned above, it was a quiet week for stocks. The volume of trades has been very light and we feel that many investors are waiting on several data releases next week before making any big bets. Not only will we be getting some important economic reports, but first quarter corporate earnings will begin coming in, as well.
The most action came on Friday, where the movement was attributed to a growing fear of a government shutdown, which has now been resolved. All week we were hearing that a shutdown would cause a loss of confidence in the abilities of the government, resulting in a wide variety of apocalyptic scenarios. This would cause the market to tank.
Thinking back to the shutdown in 1995, really not much happened. Somehow we managed to function without the Federal government. The market didn’t do much, but most importantly, it didn’t drop like was predicted back then. That would have likely been the case this time around, too. Besides, we feel like the market is focusing more on first quarter data at this time than the dysfunctions of the government.
The actions of the government likely had an impact on the strength of the dollar, though. Although it has been weakening for months due to our incessant money printing, the dollar dropped noticeably on Friday. An increase in interest rates in Europe likely added to the drop.
A consequence of a lower dollar is higher commodity prices. This week we reached new highs in commodities in all sectors: agriculture, metals, and energy. People are already getting squeezed by higher prices and the trend looks like it will keep going higher. In particular, we feel this high oil price will have significant adverse effects on the economy.
Steps can be taken to lower the price of oil besides strengthening the dollar. When prices spiked to near $150 per barrel in 2008, President Bush announced an end to a federal moratorium on drilling. At that point, oil dropped precipitously.
We were shocked, infuriated actually, when President Obama showed very little concern about these high oil prices in an appearance this week. It showed to us that he was unlikely to take any steps to lower oil prices. He stated that it would be years before we can transition to the renewable resources like wind and solar to provide the energy we need. The message was to get used to higher gas prices.
The galling part was when his solution to higher gas prices was to trade in your current vehicle for a higher MPG one. In response to a question about the high price of gas, President Obama stated “If you're getting eight miles a gallon you may want to think about a trade-in. You can get a great deal. I promise you, GM or Ford or Chrysler, they're going to be happy to give you a deal on something that gets you better gas mileage.” The story can be found HERE. Perhaps this off-the-cuff elitist comment is why he rarely strays from the teleprompter?
Next Week
Next week will be very busy and volume should increase. We will get a variety of economic reports, as well as the beginning of first quarter corporate earnings. Investors will be paying very close attention to these results as it will set the tone for the remainder of earnings season.
Investment Strategy
The bar has been set high for these first quarter earnings. Supporting the optimistic outlook, usually before earnings reports come out, a company will warn if their results might disappoint. There have been no noteworthy warnings for this quarter, so that can be considered a good sign. Earnings have not been bad the last several quarters, so the market is expecting a good showing.
We are beginning to worry, though, that these earnings will be disappointing. With high and rising commodity prices, businesses are getting hit with higher costs that they have not yet passed along to consumers. This will negatively impact their earnings and would normally send their share price lower. Perhaps it won’t occur this quarter, but we do believe it will happen in the coming months, so we remain cautious.
We have other concerns over the economy, as well. Inflation is running strong, unemployment is high, and housing data worsening. We strongly believe a stagflation scenario is brewing.
Even with this negative outlook, we still think the market will head higher. We believe that Fed Chief Ben Bernanke will keep flooding the market with money to push the market higher, as has been the case in recent months. The QE2 bond buying stimulus 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 likely double down and try another quantitative easing program if that does happen. This will keep the markets higher in the short tem, but will cause serious problems down the road.
At this time, 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 fluctuations have little impact on positions we intend to hold for several years or longer.
Source: MSN MoneycentralLike we mentioned above, it was a quiet week for stocks. The volume of trades has been very light and we feel that many investors are waiting on several data releases next week before making any big bets. Not only will we be getting some important economic reports, but first quarter corporate earnings will begin coming in, as well.
The most action came on Friday, where the movement was attributed to a growing fear of a government shutdown, which has now been resolved. All week we were hearing that a shutdown would cause a loss of confidence in the abilities of the government, resulting in a wide variety of apocalyptic scenarios. This would cause the market to tank.
Thinking back to the shutdown in 1995, really not much happened. Somehow we managed to function without the Federal government. The market didn’t do much, but most importantly, it didn’t drop like was predicted back then. That would have likely been the case this time around, too. Besides, we feel like the market is focusing more on first quarter data at this time than the dysfunctions of the government.
The actions of the government likely had an impact on the strength of the dollar, though. Although it has been weakening for months due to our incessant money printing, the dollar dropped noticeably on Friday. An increase in interest rates in Europe likely added to the drop.
A consequence of a lower dollar is higher commodity prices. This week we reached new highs in commodities in all sectors: agriculture, metals, and energy. People are already getting squeezed by higher prices and the trend looks like it will keep going higher. In particular, we feel this high oil price will have significant adverse effects on the economy.
Steps can be taken to lower the price of oil besides strengthening the dollar. When prices spiked to near $150 per barrel in 2008, President Bush announced an end to a federal moratorium on drilling. At that point, oil dropped precipitously.
We were shocked, infuriated actually, when President Obama showed very little concern about these high oil prices in an appearance this week. It showed to us that he was unlikely to take any steps to lower oil prices. He stated that it would be years before we can transition to the renewable resources like wind and solar to provide the energy we need. The message was to get used to higher gas prices.
The galling part was when his solution to higher gas prices was to trade in your current vehicle for a higher MPG one. In response to a question about the high price of gas, President Obama stated “If you're getting eight miles a gallon you may want to think about a trade-in. You can get a great deal. I promise you, GM or Ford or Chrysler, they're going to be happy to give you a deal on something that gets you better gas mileage.” The story can be found HERE. Perhaps this off-the-cuff elitist comment is why he rarely strays from the teleprompter?
Next Week
Next week will be very busy and volume should increase. We will get a variety of economic reports, as well as the beginning of first quarter corporate earnings. Investors will be paying very close attention to these results as it will set the tone for the remainder of earnings season.
Investment Strategy
The bar has been set high for these first quarter earnings. Supporting the optimistic outlook, usually before earnings reports come out, a company will warn if their results might disappoint. There have been no noteworthy warnings for this quarter, so that can be considered a good sign. Earnings have not been bad the last several quarters, so the market is expecting a good showing.
We are beginning to worry, though, that these earnings will be disappointing. With high and rising commodity prices, businesses are getting hit with higher costs that they have not yet passed along to consumers. This will negatively impact their earnings and would normally send their share price lower. Perhaps it won’t occur this quarter, but we do believe it will happen in the coming months, so we remain cautious.
We have other concerns over the economy, as well. Inflation is running strong, unemployment is high, and housing data worsening. We strongly believe a stagflation scenario is brewing.
Even with this negative outlook, we still think the market will head higher. We believe that Fed Chief Ben Bernanke will keep flooding the market with money to push the market higher, as has been the case in recent months. The QE2 bond buying stimulus 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 likely double down and try another quantitative easing program if that does happen. This will keep the markets higher in the short tem, but will cause serious problems down the road.
At this time, 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 fluctuations have little impact on positions we intend to hold for several years or longer.
