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.
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 MoneycentralIt 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.
