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 MoneycentralAs 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.
