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.
Source: MSN MoneycentralThere 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.
