Commentary for the week ending 5-20-11

Please note: There will be no commentary next week. In addition being a long weekend, the author of these commentaries will be spending time with his Army brother before he departs for Iraq – again. As a reminder, all Bluefin services are free for enlisted military members and half price for retired military and veterans.

It was a fairly uneventful week on Wall Street with the markets closing slightly lower. For the week, the Dow was off 0.7%, the S&P fell 0.3%, and the Nasdaq dropped 0.9%. Oil was up slightly and is trading around the $100 per barrel level. Gold was also up slightly and is just over the $1,500 an ounce level.

Source: MSN Moneycentral

The market started out the week in a downward direction, moving lower both Monday and Tuesday. Manufacturing data came in considerably lower than expected and latest housing statistics were horrible. The economic recovery has been decent so far, but the data had investors thinking it might not be as strong as expected.

Those worries over Europe won’t seem to go away, either, and are back in the headlines. Greece, Spain, and Portugal continue to be a thorn in the side of the Euro while the news on the arrest of the IMF chief, Dominique Strauss-Kahn didn’t help much either (The IMF is very instrumental in the bailouts of these European countries. Since bailouts seem to be the remedy du jour for any problem in the world, it adds a wrinkle to this process).

As a result, the Euro weakened and the dollar strengthened. That stronger dollar helped commodities sell off slightly since they tend to move opposite of each other. At one point, crude oil was trading down around $95 per barrel. Prices ticked back up later in the week, but remain much lower than their recent highs.

Come Wednesday, the markets changed course and headed back higher. News that the Fed would keep its stimulative policies in place as long as needed helped contribute to the rally. However, we learned that the Fed is discussing the steps they will take when they do take the punch bowl away. The fact that they even discussed an exit strategy is important since there has been little mention of it to this point.

Many companies are realizing that interest rates may be heading higher in the coming months when the Fed does move, so they are looking to take advantage of it now. When interest rates rise, the cost for them to borrow increases. Google, for example, has never issued bonds until this week. Other companies are issuing record loads of debt in order to take advantage of the current environment. While it may be good for these businesses to borrow now while the rates are low, it will not be so good for the average person in the coming months who has to pay higher rates on things like a credit card or mortgage.

Finally, the hot story of the week was an initial public offering (IPO) on Thursday for social media stock, LinkedIn. The initial price for the stock was set at $45 per share but traded sharply higher throughout the day. At one point, the price was over $122 per share and closed the day at $94.

These ‘social media’ type stocks are all the rage right now, but we just don’t get it. In the case of LinkedIn, last year they had a profit of around $15 million. The price the stock reached gave the company a value of over $8 billion ($8 Billion!). These valuations just don’t add up and we were thinking what many other people were thinking, this has to be a bubble, similar to the internet bubble of the late ‘90’s.

In fact, almost everyone we heard believed this was a sign of a bubble. When you think about it, though, bubbles don’t happen when everyone thinks it’s a bubble. They happen when you can’t find someone negative on the stock or market. With LinkedIn, almost everyone is pessimistic, yet the stock is holding up (it was off about 1% on Friday, but remains at its high level). We wouldn’t touch this stock with a ten foot pole, but maybe this is not a classical ‘bubble’ – yet.


Next Week

There will be a modest amount of economic data releases next week, but nothing too important. Likely having more impact will the earnings results from several large companies like Costco, Sony, and Tiffany. Some companies have given us earnings warnings this week, meaning their results won’t be that great next quarter. This is always something to listen for. For instance, this week Gap warned of higher costs cutting into their bottom line and the stock dropped over 17% that day.

Since it is back in the headlines, any news out of Europe, positive or negative, will likely have an impact on the market. Debt problems have become more pronounced and elections in Spain next week have the potential to shine a light on the depth of the debt problems.


Investment Strategy

It is tough to say what the market will do from here. Our economy is still weak, but improving, and yet corporate profits have been solid. Record highs, even. It is a tough dynamic to make decisions in.

At these price levels, things still look expensive. We wouldn’t make any bets on the market as a whole but look for attractive individual stock picks. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety). Commodities prices have bounced back a bit, but still look a bit cheaper here.

If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly multi-nationals. Commodities remain a long term favorite and any weakness could present buying opportunities.

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. 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 positions affected by these weekly and monthly changes. These fluctuations have little impact on positions we intend to hold for several years or longer.



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 5-6-11

Please note: Next week marks one of our favorite times of the year. As many of you know, our office is located at the entrance to the TPC Sawgrass, home of the Players Championship. Practice rounds begin on Monday and we will be attending several of the days. However, we will be in the office every day next week, though our hours will vary from day-to-day. We will continue to monitor the market, even though we may not be in the office, and any phone calls not immediately answered will be returned that same day. We try to minimize any inconvenience for our clients during this exciting time of the year and hope you understand. There will be no weekly market commentary next week. Thank you.

Wow, what a week. In a reversal from last week, both stocks and commodities traded significantly lower until a positive unemployment report erased some of the losses late in the week. By the Friday close, the Dow had lost 1.3%, the S&P dropped 1.7%, and the Nasdaq fell 1.6%. Commodities bore the brunt of the losses. After its meteoric rise, silver plunged 27% (yes, 27%!) and gold fell 4.2%. Oil fell by nearly $17 per barrel, making it a 15% drop for the week.

Source: MSN Moneycentral

It really was an extraordinary week, particularly for commodities. The markets trended lower early in the week and the selling accelerated on Wednesday and Thursday.

With the big employment report coming on Friday, investors were anxious for any clues on what that number would be. A preliminary employment report, the ADP figure, was released on Wednesday and was much poorer than anticipated, sending the markets lower. Other economic data was weak and corporate earnings were lackluster, both of which added to the pressure on the markets,

Similar to Wednesday, another employment report was released on Thursday, this time the weekly initial jobless claims (which measures first time unemployment applications). It was significantly worse than expected and the selling continued.

A major influence on the markets Thursday was comments from the head of the European Central Bank (similar to our Federal Reserve) indicating that they would leave interest rates low. This caused the Euro to weaken and consequently the dollar to strengthen. This was a major catalyst in the drop in commodities.

For the past several months, the dollar has been getting weaker, which meant commodities have risen in value since they have a strong inverse correlation. Speculators had been piling in on the run-up, too, which made these commodities even more volatile. The news was like pricking the bubble, letting out some of the air. How low it goes and for how long remains to be seen.

The exchanges these commodities trade on have also been trying to suppress some of the speculative fervor, particularly in the silver market. They began raising margin requirements the previous week, which makes it more costly to trade that commodity. This also acted like a pin prick to the silver bubble. We should add that there is a rumor they may be raising margins on oil, but we will have to see if the events of this week had any effect on this decision.

As we limped into Friday, investors were preparing for a disappointing employment report based on the two earlier days. Surprising everyone, it was reported that the U.S. added 244,000 jobs in April. In a quirk of how the numbers are figured, the unemployment rate rose to 9.0%. Still, the news was welcomed and the markets popped higher.

Even though the employment number was higher than expected, the labor situation is still fragile. The 62,000 new hires by McDonalds were included in this gain and the one-time event is not sustainable. The unemployment rate when including discouraged workers (the U6 number) stands closer to 16%. Perhaps the most troubling of all, food stamp usage reached a new high, with 14.3% of U.S. residents using these benefits.

Pressuring commodities on Friday, the decline in the Euro and rise in the dollar accelerated on Friday with more bad news out of Europe. It has been rumored that Greece may be looking to leave the Euro. Officials have denied this, but the news was enough to spook the Euro. Frankly, we would think the news would strengthen the Euro since Greece is such a drag on the currency. Still, the news was enough to push commodities even further lower.


Next Week

The pace of corporate earnings is beginning to taper off, but still remains strong. Several tech and retail companies will announce their earnings, as well as other notables like Toyota and Disney.

We will also get several economic data announcements, most notably the CPI and PPI (Consumer and producer price indexes). We know inflation is strong by using common-sense metrics, but this will give us an idea of inflation levels when using government metrics.


Investment Strategy

It is tough to say what the market will do from here. The employment report on Friday was a positive event, but the trend looks to be lower. Commodities will continue to drop if the dollar strengthens further (much of that will be dependent on news out of Europe). Only time will tell if this was a good buying opportunity.

Actually, the sell-off in commodities this week should be a longer term benefit. With food around all-time highs and gas just shy of $4 a gallon, the drop in prices couldn’t come sooner. We wouldn’t look for any price changes immediately, but eventually gas prices should decline. When oil prices rise, it seems like prices at the pump rise immediately. However, when oil sells off, pump prices take their time to adjust lower. Unfortunately, that’s the way it is, but any relief is better than nothing.

Even with the sell-off, things still look expensive at these levels. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety). Commodities do look a bit cheaper here, though.

If we had to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly multi-nationals. Commodities remain a long term favorite and any further weakness could present buying opportunities since they are still rather expensive at this time.

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. 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 positions affected by these weekly and monthly changes. These fluctuations have little impact on positions we intend to hold for several years or longer.


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 4-29-11

Another good week for the markets with many new records reached. This week, the Dow hit a new three year high and was up 2.4%. The S&P climbed 2.0% while the Nasdaq rose 1.9%. Additionally, small cap stocks measured by the Russell 2000 reached a new all-time high.

It was also a banner week for commodities, with gold reaching another all-time high, up 3.5% this week. Silver is just inches away from another record. Oil reached a 2 ½ year high as a barrel now stands just shy of $114. (The international crude, Brent, closed near $126). Lastly, the dollar hit a new three-year low.

Source: MSN Moneycentral

So why are all these records being reached? A major reason has to do with the weakness of the dollar. Events this week assured the dollar will weaken even further.

Ben Bernanke, the head of the Federal Reserve, held a much-hyped press conference where he answered questions from the press (this was very rare, but will now be a quarterly occurrence). Investors were anxious to hear any new insights or information about future Fed policies. Instead, we heard nothing new. He reaffirmed his easy, money-printing policies in an effort to stimulate growth. He even indicated he would like to target a higher inflation rate. That means the pounding the dollar has taken will only continue.

Many policy makers don’t mind the idea of a weak dollar. It helps exports. It also makes it easier to pay off national debts. However, since commodities are priced in dollars, it takes more dollars to buy that commodity, therefore the price goes up. That’s why we are seeing new highs in many, many commodities.

The downside of these high commodity prices is obvious. Almost everything you buy now costs more. And it will likely get worse from here. It is frustrating that our decision makers are okay with that.

Investors also interpreted the Fed message as a go-ahead to invest in stocks, which was part of the reason for the surge in stock prices. Since the announcement of the QE2 last fall, the performance of the market has had a very strong correlation to the size of the Fed’s balance sheet. That means the more money the Fed prints, the higher stocks rise. Since they aren’t cutting back any time soon, the market will likely keep rising. Hopefully this doesn’t turn into a Zimbabwe type scenario where they printed tons of money and the stock market soared, only to crash spectacularly.

Also contributing to the run in the stock market, corporate earnings have been very strong. Companies with overseas operations have been particularly stellar. We can’t forget that the market is just a collection of these individual companies with good earnings. Sometimes the fundamentals of the economy don’t match the performance of the stock market.

A major indicator of these fundamentals is the GDP (gross domestic product, which is the value of all the goods and services in the country). This week we received the GDP for the first quarter and it was extremely weak, showing just 1.8% growth. This was much lower than the 3.1% of the previous quarter. To give you some perspective, at this point in a recovery, GDP usually runs around 4%. High prices from commodities like food and energy were a major reason for the underperformance this quarter.

A bright spot in the GDP report, in our opinion, was a cut in federal spending (which is included in GDP). That cut came after the biggest spending spree since WWII, so that trajectory of spending was clearly unsustainable. Unfortunately much of the spending cuts came from defense, which is one segment we don’t like seeing cut.

The trillions spent so far has done very little to help the economy as main street still suffers. Unemployment continues to be a problem. Initial jobless claims were above 400,000 for the third straight week after several weeks in the 300’s. The press likes to point to stories of companies that are hiring and loved the news that McDonalds hired 62,000 people last week. Unfortunately, over 1 million people applied for jobs there. That means only 6% of applicants were hired! It is a sad situation when only 6% are taken for entry level work, showing just how tough it is out there.


Next Week

Next week will be another busy week. We continue to get first quarter economic data, but also April data since we are beginning a new month. The most important information comes on Friday with the April unemployment report. The rate currently stands at 8.8% and economists predict an improvement in this number. It is important to not take the rate at face value, but dig into the reasons behind any change. Shrinkage in the labor force has allowed the rate to get this low, so that will be an important factor to watch.

Corporate earnings will come in at a steady clip next week, as well. They have been pretty decent so far and the trend looks like it will continue. Either way, there will be plenty of data to move the markets.


Investment Strategy

We have been discussing the likelihood of a stagflation scenario here in the U.S. and feel the data is beginning to support that. Inflation is high and growing (even by the Fed’s standards) and growth is slowing, as evidenced by the poor GDP number.

So what does that mean for the markets? Probably not much right now. As long as the Fed keep printing money, the markets will likely head higher. As much as we disagree with their actions, you have to position yourself to make money.

It is hard to put new money to work as everything looks expensive at these levels. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety). Obviously we are uncomfortable here, but again, you can’t fight the Fed.

If we had to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly multi-nationals. Commodities remain a long term favorite and any weakness could present buying opportunities since they are rather expensive at this time.

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. 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.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.