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.
Source: MSN MoneycentralAs 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.
