Yet another volatile week with mixed results for the markets. By the Friday close, the Dow fell 0.6%, the S&P 500 was lower by 0.2% while the Nasdaq preformed remarkably better, up 1.4%. Treasury bonds ticked higher for the eleventh straight week, so yields continue to fall. Gold closed back down around the $1,500 an ounce level. Oil was a major story this week, closing in the low $90’s per barrel and at one point crossing below the $90 mark.
Source: MSN Moneycentral
As you can see in the chart above, it was a rocky week with some big moves in the market. The week started out strong on positive news out of Europe, continuing the trend from last week. However, fears of economic weakness arose again, sending stocks sharply lower.
Unfortunately the Greek drama refuses to go away, so we will touch on it briefly. Leaders from European countries announced that they will work together to prevent a default of Greek debt. Continuing bailouts with some austerity measures look likely. Additionally, the Greek Prime Minister won a vote that will keep him in power, giving the markets a consistency that they like.
The rally in the early part of the week came to a screeching halt late Wednesday after testimony from Fed Chief Ben Bernanke. The Fed had downgraded its outlook on the economy for the remainder of the year. The line in his speech that caught many traders attention was “We don’t have a precise read on why this slower pace of growth is persisting.” If the all-knowing Fed was unsure why the economy is slowing, it must not be good.
Of course the Fed is avoiding the blame for its part in the slowdown. All this money printing has done little to help the economy. It has triggered inflation through a weaker dollar, which is a significant factor that is holding the economy back.
On the topic of inflation, we learned via a Dow Jones news report that the government is looking to tinker with the way the CPI (consumer price index, the most popular metric for measuring inflation) is measured. We have talked in length how it currently does not accurately measure inflation (over the years, it has been adjusted to make inflation not seem as strong as it is). Now it may be watered down further as part of the debt ceiling negotiations.
You have to remember that many government payouts, like social security, are based on the CPI for cost of living adjustments. By claiming that inflation is low, it will limit the amount the government must pay for these adjustments. We currently invest in TIPs bonds as a way to hedge against inflation and they don’t even work that great due to their linkage to these government inflation metrics. If this change goes through, we will abandon TIPs entirely.
Having a big impact on oil this week was an announcement to tap the strategic petroleum reserve (SPR) to provide an increase in oil supply, thus decreasing prices. Consequently, the news did make oil prices plummet. Even though we welcome the increase in supply, we completely disagree with this action. The SPR was designed only to be used in extreme circumstances, like war or in the event of a catastrophe (it was last used by President Bush after hurricane Katrina). It is not designed as a tool to mitigate higher prices of oil and sets a dangerous precedent going forward. We would prefer to see an increase in supply through domestic drilling, but that doesn’t seem likely.
You would think that lower oil prices would be good news for the market, since cheaper gas prices at the pump are always welcome. However, the markets sold off on the news. It is likely that the move was seen as an attempt to rejuvenate the economy, therefore it was an admission by the government that the economy was weak. It is also a sign of further government intervention in the markets, which is never a welcomed occurrence.
Finally, on an optimistic note, FedEx released solid earnings for its second quarter. Even better was their future outlook where they expect growth to pick up in the coming months. Investors pay close attention to the outlook from companies like FedEx since they have such a solid grasp on the economy due to the nature of their business. Unfortunately the markets continued to move lower after the news, but it was a welcomed outlook, nonetheless.
Next Week
There will be a lot of economic data and corporate reports next week. As the week progresses, we will get info on personal income and spending, consumer confidence, housing prices, and manufacturing and construction data.
We will also get corporate earnings from large companies like Nike, Family Dollar, and General Mills. Higher commodity prices have been eating into earnings of these types of companies, and these reports will give us a good idea if that trend is continuing.
Friday is the deadline given to Vice President Biden for the deficit negotiations, so it will be interesting to see what comes of that.
Also, Thursday is the end of the quarter, so there tends to be a lot of movement as big investors attempt to position their portfolios in the best light possible for reporting purposes.
Investment Strategy
Despite the volatility this week, there is little change in our strategy. We are not sure if this is the time to step in and buy. Much of the recent decline was due to European debt problems that seem to be moderating, so that has helped push the markets higher. At the same time, though, we are seeing a weakening in the economy weighing on stocks. Plus we have an end to the QE2 program, so the Fed will not be (openly) propping up stocks. We feel it is too risky to make any large bets on the general market and are very cautious.
Consequently, picking good individual stocks should be a good play at this time. 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).
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas.
Commodities have generally sold off on a perceived weakness in the economy, as well as a strengthening dollar (the dollar strengthened due to the Euro weakening). We like commodities for the long term and weakness could present a buying opportunity.
TIPs are important as we expect inflation to increase (although we will revise our outlook for these securities if any changes are made to the CPI measurements), while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably, slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
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.
A rocky week produced mixed results for the markets. For the week, the Dow rose 0.4%, ending a seven week downtrend. The S&P rose ever-so-slightly, just 0.05%, while the Nasdaq had another down week, off 1.0%. Treasury bonds rose for the 10th straight week, so yields continue to fall. Gold rose slightly while oil had a significant drop on worries of economic weakness, losing over 6% for the week.
Source: MSN Moneycentral
There was a lot of movement in the markets this week due to a variety of reasons. Greek debt problems continue to be in the headlines. Economic data released this week was very poor with few bright spots. Also, options and futures expirations (quadruple witching, as it is referred to on Wall Street) on Friday helped add to a volatile trading environment.
We are almost tired of discussing Greece and their debt default situation. Will there be a bailout, won’t there be a bailout? It seems to be the same story, week after week, month after month. This week was no different. When there was good news out of Greece, the markets rallied, and with bad news, the opposite. However, rioting in the streets this week added to the drama.
It looks almost certain that there will be some sort of debt restructuring and bailout from the IMF (International Monetary Fund) and other Euro countries. Frankly, bailing out and kicking the can down the road is all these groups know how to do. At some point there will be massive defaults, since these countries can not pay their debts no matter how much time they are given. Greece is not alone in this, either; there are many European countries with similar problems.
Economic data this week was very poor. Any momentum there may have been over the last several months seems to be deteriorating. The most telling sign came from the New York and Philly manufacturing indexes, which showed a substantial drop from last month. In fact, the drop in the Philly index over the last three months was the biggest in the history of that report. It is a strong indication of contraction in these regions.
We also received signs of higher inflation from the PPI and CPI (producer and consumer price indexes). The PPI rose 0.2% and the CPI grew by 0.3% in May, higher than expected. The monthly gain in the CPI was the largest in three years.
The frustrating part is that policy makers, namely the Fed, are not concerned by this. The word used to describe inflation currently is ‘transitory,’ meaning these conditions are only temporary. Heck, anything can be described as transitory. The inflation of the 1970’s was transitory. The Great Depression was transitory. They use this word to deflect criticism, but it is a serious problem that their policies created for people not only in the U.S., but around the globe.
There was a slew of other poor data, as well. Initial jobless claims were over the psychologically important 400,000 number for the 10th week in a row. Industrial production is sluggish. Retail sales declined for the first time in nearly a year. Not surprisingly, consumer sentiment is poor. The only ray of sunshine was the leading economic indicators showing improvement, but was drowned out by all the other bad news.
All this negative data is signaling stagflation. Inflation is rising. Growth is slowing. It is as simple as that. Most troubling, conditions are deteriorating, so things may continue to get worse from here.
Finally this week, the IPO (initial public offering) mania grew a little more with the IPO for Pandora. Pandora is a company that streams music over the internet. Apparently Pandora has been round for 10 years, but has yet to generate a profit. No matter. The stock opened for trading at $16 per share and promptly popped higher to the low $20’s. In a refreshing bit of rationality, the shares fell from there. In fact, it closed the week at just over $13 per share, a loss from its initial offering price.
Similar to Pandora, LinkedIn has sold off from its peak of several weeks ago. Does the drop in price signal that investors are growing weary of these tech IPO’s? There is still a slew of other internet-related companies coming public in the coming months, like Groupon, Zynga, and Facebook, so only time will tell.
These companies all have one thing in common, though; they make their money thorough advertising. Take Pandora, 86% of their revenue came from advertising. LinkedIn also makes their money from ads. So does Facebook. And Google, for that matter. Frankly, we just don’t understand how (who pays attention to internet ads?). With all this talk about another bubble in these tech stocks, maybe that’s not the case. Maybe the bubble is in advertising?
Next Week
Next week will be lighter in terms of economic and corporate data. We will get info on housing and durable goods (durables are items bought that generally have a lifespan of over three years, like a car or dryer or desk).
Some large companies will be reporting earnings, including Walgreens, FedEx, ConAgra, and Oracle.
We will also have the monthly Fed meeting with an announcement on interest rates. It is widely believed that they will keep interest rates at these record lows. Fed chief Ben Bernanke will be taking questions from the press, and this will actually be interesting. With inflation ticking up and employment deteriorating, he will face with some tough questions (hopefully). Additionally, the ending of QE2 this month should lead to questions on the future actions of the Fed in terms of exit strategy and further stimulus.
Investment Strategy
It was a relief to not see the markets going down seven weeks in a row. We are not sure if this is the time to step in and buy, though. A lot of the decline was due to European debt problems that seem to be moderating (for now, at least). At the same time, though, we are seeing a weakening in the economy. Plus we have an end to the QE2 program, so the Fed will not be (openly) propping up stocks. We feel it is too risky to make any large bets on the general market.
Consequently, picking good individual stocks should be a good play at this time. 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).
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas.
Commodities have generally sold off on a perceived weakness in the economy, as well as a strengthening dollar (the dollar strengthened due to the Euro weakening). We like commodities for the long term and weakness could present a buying opportunity.
TIPs are important as we expect inflation to increase, while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably, slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
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.
Yet another bad week on Wall Street as the major indices closed lower for the sixth straight week. By the Friday close, the Dow lost 1.6%, the S&P fell 2.2%, and the Nasdaq fared the worst at -3.3%, making it negative for the year. It was another relatively quiet week for commodities with gold and oil both off 0.9%.
Source: MSN Moneycentral
With six straight negative weeks for the market, we are looking at the longest market downtrend since 2002. The poor economic data that was responsible for much of that selloff continued to be a problem this week. Unfortunately, all this sour data is increasing the fears of a double dip recession and adding a downward pressure to the markets.
The strong selling we saw last week carried over into Monday, making four straight days of losses for the markets. Looking to find some bargains in all this selling, investors began buying stocks on Tuesday, pushing the markets higher.
However, late in the day, Fed chief Ben Bernanke gave a speech commenting on the strength of the economy, saying it was worse than he expected. The sour mood of his speech caused late day selling that sent the markets into the red for the day and on into Wednesday.
By Thursday, the markets reversed course again and popped sharply higher. The Dow closed the day with a gain of 75 points (0.6%), yet was off from the highs from earlier in the day. Tired of all the recent selling, it seemed like investors were looking to do some buying on the first sign of good news. Announced Thursday morning, the US trade deficit narrowed by almost 7%. It was good news, but nothing remarkable. Since it wasn’t bad, though, it gave people a reason to start buying again.
With the market trading higher, further bad economic news of the day (high initial jobless claims, weak inventory growth, and a slowdown in sales of wholesalers) had little impact on the markets, but showed us a slowdown in demand for products.
Although that news was overlooked on Thursday, investors noticed on Friday as the markets plunged back lower. The bad news kept coming in and the markets reacted accordingly. Import prices rose, indicating that inflation from overseas was coming to the U.S. Also, the U.S. budget deficit widened by much more than expected.
At the end of the day, the Dow fell over 170 points (1.4%) and is now up only 3% for the year. The Nasdaq turned negative for the year. On the bright side, though, oil prices dropped on anticipation of an economic slowdown and increased supplies from overseas.
Beginning many months ago, when there was bad news, it was brushed aside since investors figured the Fed would step in with some sort of stimulus to prop things up. They did, through the quantitative easing programs, and it contributed to the remarkable rise in the stock market. Now, though, the stimulus (QE2) is set to expire at the end of the month and there is no indication that there will be further stimulus.
Seeing that the stimulus did little to help the economy (yet created a massive new amount of debt, a weakness in the dollar, and a rise in commodity prices), many people are voicing their displeasure with the Fed and the government. This makes a new stimulus unlikely.
If anything, we think that if markets fall far enough, they do something to prop the market up. There is little chance it will be formerly announced and will definitely not be called “QE”. After all, there is an election coming up and we fear they will do anything for a short term jolt.
Next Week
Same as last week, it will be interesting to see what happens with the markets in the coming week. We had commented on how rare six straight down weeks in the market was, now we can say the same for seven weeks. If there is further selling, it could have us rethinking our outlook on the markets (which it has to a small degree already).
Next week will be packed full of corporate earnings and economic data. There will be some smaller, yet still important reports, like retail sales, industrial production, housing starts, and leading economic indicators.
We are really interested to see the producer and consumer price index reports (CPI and PPI). Although distorted by government manipulation, these are the main reports on inflation in our economy. Economists are predicting a slight increase in these figures, but like all the other recent reports, they could be worse than expected.
Quadruple witching occurs this Friday, as well, which is when options and futures expire at the same time. It tends to add more volatility to the market, so this and the slew of other data could make it a choppy trading week.
Investment Strategy
Like we said last week and above, it is rare to have this many down weeks in a row. Maybe investors will step in and buy this dip, but of course we don’t know. We are still very cautious to buy at this level, as it is tough to say what the market will do from here. Our economy is weak and yet corporate profits have been solid. Record highs, even. It is a tough dynamic to make decisions in.
At this point, 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 reasonable here.
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Commodities remain a long term favorite and weakness could present buying opportunities if the price is right.
TIPs are important as we expect inflation to increase, while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds for the future, most notably, inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
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.
It was a terrible week on Wall Street as negative economic data sent the major indices lower for the fifth straight week. At the Friday close, the Dow, S&P, and Nasdaq all fell 2.3%. Oil was off slightly, 0.4%, and continues to trade around the $100 per barrel level. There was little movement in gold, also, which rose just 0.4%.
Source: MSN Moneycentral
As you can see in the chart above, it wasn’t a very pretty week. Poor results from many economic reports showed a slowing growth in the US economy, resulting in selling across the board.
Fresh off the three-day weekend, investors were greeted with downgrades in GDP estimates from several large investment companies and economists, as they see the economy growing less than originally thought. Fresh consumer sentiment reports also came in lower than expected.
However, news about a solution to the Greek debt problem (this story never seems to go away) outweighed the other bad news, so the markets popped higher. Tuesday closed with a nice 130 point gain in the Dow.
Unfortunately the tide turned on Wednesday as the poor economic data was too much to ignore, resulting in the biggest drop in nearly a year.
Starting out the day, we received very poor employment data from the ADP report (the ADP employment report measures job gains or losses from companies using the ADP payroll service. It usually gives acts as a guide for the results of the big employment report that comes later in the week.). It showed a gain of just 38,000 jobs in May, much less than expected.
Later that morning, the latest home price data showed that prices had fallen back to levels last seen in 2002 (which we see as a good thing, since prices need to bottom in order to begin recovering). Then manufacturing data from the ISM (Institute for Supply Management) showed a sharp drop in activity last month.
At the end of the day, the Dow fell 280 points. The ironic part is that the biggest drop in a year came on the first of the month. As you may recall form many months back, a new trend was identified where the markets where likely to rise on the first for several reasons. Once these things become popular and anticipated, they tend to stop working. It is safe to say that this month really blew a hole in that investing strategy.
The markets continued the trend lower on Thursday. Much of the selling was likely related to the news from Wednesday, but there was also some negative news on factory orders. Reports from some retail and dining companies showed a slowdown in these sectors. Inflation in the commodities these companies use for their products is cutting into earnings.
Finally, on to Friday. The big employment report (the BLS non-farm payroll, which comes from the government and is seen as the official number on US employment) was released Friday morning, coming in much lower than expected. Last month the US only created 54,000 jobs. There was a gain in private employment of 83,000 and a loss of 29,000 in the government sector (which we see as good news). The official unemployment rate climbed to 9.1%.
While this number was bad enough, you have to consider the fudging the government does to that number. Labor participation (the amount of people in the workforce) remains near its lows, so if we were to figure the unemployment rate with the labor force at pre-recession levels, our unemployment rate would be around 12%. When including discouraged workers, the rate is around 16%. Worst of all, a report from Zerohedge.com found that they used a birth/death number (counts the creation, or ‘birth,’ of new businesses, not people. It is basically an educated guess based on models and not any solid data.) of 200,000. That means they added an extra 200,000 to this jobs number based on a projection, so without it, the economy actually lost 150,000 jobs.
The bad economic news this week had many people questioning the economic policies of the government. We have spent trillions in order to stimulate the economy and have very little to show for it. We have long known that these Keynesian policies of spending money (that we don’t have) will not stimulate the economy. It has never worked in the past and won’t work now. However, politicians love it because it gives them power and makes it look like they are doing something. Usually it is best to get out of the way and let the economy recover on its own, which it will.
All that money, which was printed or borrowed, has fuelled the stock market rise, but has done very little to help the economy.
Next Week
It will be interesting to see what happens with the markets next week. To this point, we have had five straight down weeks in the market, which hasn’t happened since 2004. Obviously it will be even rarer for six straight down weeks.
There won’t be many economic or corporate reports next week to move the market, just some info on mortgages and imports and exports. Earnings from National Semiconductor will give us insight into the tech sector and Lululemon (the high-flying yoga clothing company) will add to the retail picture.
Investment Strategy
Like we said above, it is rare to have this many down weeks in a row. Maybe investors will step in and buy this dip, but of course we don’t know. We are still very cautious to buy at this level, as it is tough to say what the market will do from here. Our economy is weak and yet corporate profits have been solid. Record highs, even. It is a tough dynamic to make decisions in.
At this point, 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 reasonable here.
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Commodities remain a long term favorite and weakness could present buying opportunities if the price is right.
TIPs are important as we expect inflation to increase, while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds for the future, most notably, inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
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.
Source: MSN Moneycentral
