Commentary for the week ending 9-23-11

Another tough week with the markets turning in their worst performance in almost three years. The Dow dropped over 700 points for a -6.4% return, the S&P was off 6.5%, and the Nasdaq was lower by 5.3%. Treasury bonds sold off strongly (yields fell so prices rose), with the 10-year reaching an astoundingly low 1.67% at one point. Oil also sold off, down 9.2% and now just under $80 per barrel. Surprisingly no longer the safe haven play, gold dropped precipitously, off 9.6% this week to 1,637 an ounce. Ouch.

Source: MSN Moneycentral

Well, the Fed did the ‘twist’ this week (sorry, we couldn’t resist the bad ‘twist’ pun). It was little surprise to most investors that the Federal Reserve announced Wednesday their new program, Operation Twist. It is intended to keep interest rates low and stimulate the economy.

The ‘twist’ comes as the Fed will buy longer term Treasury bonds and sell shorter term ones. It is designed to push longer term interest rates down while the costs result in a wash (theoretically) since the buying and selling offset.

We don’t see this latest policy having much effect on stimulating the economy. It will push interest rates down, but they are already around historic low levels and problems still persist. Our troubles primarily originated from too much debt. Encouraging more debt to solve a debt problem is misguided and will not work.

At any rate, the market was not impressed, either, as the twist was already priced in. Many investors were looking for even more in terms of stimulus, which we did not get, and the markets sold off as a result.

When announcing the Twist program, the Fed also spoke about the state of the economy. The line that caught most traders attention was that the Fed sees “significant downside risks to the economic outlook, including strains in global financial markets.” This implied to many that the Fed believes that another recession is a possibility. That grim outlook also contributed to the sell-off.

Bank stocks were also slammed on the news. Since banks are more profitable with higher long term interest rates, this Fed policy will cut directly into their bottom line. At a time when they are already hurting, this wasn’t welcomed news for that sector.

The Fed wasn’t the only story hurting the markets this week. Europe still can’t get out of the headlines. The strength of European banks came into question as worries over Greece and Italy resurfaced yet again.

A new worry was added to the party this week, China. Data coming out of China shows growth slowing in this once red hot economy. Manufacturing is showing weakness. Reinforcing this data was a report from FedEx that Chinese shipments are declining. Reports from companies like FedEx are closely followed since the nature of their business serves as a barometer for economic conditions.

We have worried about the state of China for some time as they have large amounts of debt. Massive spending and construction projects have been underway to give the appearance of growth and boost their GDP. Because of the closed nature of their economy and their data, it was hard to know where the country actually stands. After the reports this week, it looks like the cracks are beginning to form in their façade.

The Chinese weakness was a factor behind the commodity sell-off this week. They require considerable amounts of materials for their construction projects. If growth is slowing, demand will obviously be lower. An increase in margins for metals was also a contributing factor to their fall.


Next Week

It was encouraging that the markets held their level Friday after the strong sell-off during the week. Hopefully that mitigated any strong selling next week. There are a few economic reports and corporate earnings that will be released, but nothing too important to move the market. We will get housing data, consumer confidence, durable goods, and personal income and spending.

Next Friday also marks the end of the month and quarter. It will be interesting to see if activity picks up towards the end of the week as investment managers try to dress up their portfolios after this horrible quarter.

News out of Europe will likely be a factor in the market next week, too.


Investment Strategy

The Fed really set a sour mood for the markets this week that may linger for a while. With drops of this magnitude, we always hear questions of whether this is a good time to get in the market. If your time horizon is long enough (2-3+ years), then probably. For the short term, it’s anyone’s guess.

Our economy is weak and we seem to be taking the wrong steps to address the problems. The same can be said for Europe, as well. More and more policy interventions in the economy will be a result and more dramatic swings in the markets will follow. We don’t see volatility subsiding in a meaningful way any time soon. Therefore, we are very cautious in this environment.

Some quality companies can be found at cheap prices, but it is easy for them to become even cheaper in this environment.

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. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities, even after their performance this week. Further money printing around the globe will also help gold and silver, but we aren’t sure if this is the time to get in yet.

TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but with this unprecedented intervention we’ve been getting killed and have taken steps to hedge here. 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 daily and weekly fluctuations.



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.

Commentary for the week ending 9-16-11

It was a nice week for the markets with a rare five straight days of gains. The Dow was up 4.7%, the S&P climbed 5.3%, and the Nasdaq popped higher by 6.3%. Oil continues to slowly rise, up 0.8% to almost $88 per barrel. Gold had a rough week, falling 2.4% but remaining above the $1,800 an ounce level.

Source: MSN Moneycentral

Yet again, this week was all about Europe. Unlike the last couple weeks, though, the news did not result in a lower market. But it did provide plenty of scares.

Waking up each morning and turning on the TV, we were greeted with bad news out of Europe. Market futures, which generally predict the market open each morning, showed strong losses. Nearly every day looked like it would be downer.

Each day, though, there was another round of news out Europe that provided a positive surprise. On Monday, there was a rumor that China would be stepping in to purchase beleaguered Italian bonds, reassuring European bond investors.

Tuesday, German Chancellor Angela Merkel announced that a Greek bankruptcy and exit from the Euro was not a possibility.

On Wednesday, Treasury Secretary Geithner stated that there was zero chance of a banking collapse in Europe, similar to what we experienced here in 2008. Also, leaders from Germany, France, and Greece stood together and proclaimed that there was no chance of a Euro breakup.

Moving on to Thursday, several global central banks (US, England, Switzerland, and Japan) announced dollar funding to Euro countries if needed. The markets rallied on the news of even further stability. Keep in mind, though, that means US dollars are helping to bail out European countries.

On a more amusing note, on Friday, Geithner was in Europe telling those countries that bold steps were needed to reduce their debts. That drew some chuckles as the Europeans correctly pointed out that in many cases, US debt problems are even worse. He probably should avoid lecturing them until our own house is in order.

The obvious conclusion is that the markets liked the news out of Europe and the potential for stability. However, all these actions are just papering over the problem and not addressing the fundamental issues. They have massive debt problems and are just adding more debt, thinking it will solve the problem. The news this week may have been reassuring and provide some short term stability, but we have no doubt that these problems will resurface soon.

We hate spending so much time discussing Europe, but that was the dominant factor behind the market moves this week. We did receive some economic data that was largely overlooked and that news wasn’t pretty.

There were more signs that the US economy is stagnating. Retail sales were flat. Manufacturing continues to contract. Initial jobless claims rose. Additionally, inflation keeps chugging higher. That report on inflation leads us to another interesting stat. The misery index, which combines the level of inflation with unemployment, is at a 28 year high.

We still have a fundamental weakness in our economy and we worry that it could weigh on our markets in the future.


Next Week

Next week will be quieter in terms of economic and corporate earnings data. There will be some reports on housing and leading economic indicators, but nothing that will have much impact on the markets.

What will have an impact, though, is the meeting of the Federal Reserve. Typically a one-day event, it was lengthened to two by Fed chief Bernanke to discuss future policy (stimulus) options. Investors will be closely watching what is said here.

We always have to keep an eye out for Europe, too. All the shows of unity this week were nice, but it is very easy for their problems to resurface.


Investment Strategy

It figures that when we announce an even more cautious outlook, the market would rise five days in a row. The events of this week may have quelled Euro fears for now, but as we said earlier, have no doubt these problems will be back and a similar drop in the market will be the result. Therefore, caution is still warranted.

Next week will provide an important indicator on the direction of the markets (at least in the short term). Everyone is expecting some sort of stimulus announcement from the Fed and we believe that action is already priced into the market. This will likely be in the form of what has been referred to as ‘Operation Twist’ (leave it to economists to come up with cheesy names).

In an effort to keep long term interest rates down (like for a long-term mortgage), the Fed will buy longer term bonds (which drives yields down) and sell shorter term bonds. Theoretically the costs then result in a wash, since the buying and selling offset each other. Yet the final result is lower rates (again, theoretically).

If an announcement of this type is not presented, the markets will likely drop. However, there is the potential for the Fed to announce even more in simulative policies and the markets will react to the upside. Either way, the mood set this week will likely linger for some time.

Aside from the Fed announcement, we feel that the risk for a negative surprise here in the US is small. The economy is weak, but the markets already realize this. We have talked about this subject for some time now, but good corporate earnings took the focus off the poor economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. Some quality companies can be found at these prices, but it is easy for them to become even cheaper in this environment.

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. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is high at the moment. We like commodities for the long term and any weakness is an opportunity to invest.

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, but we have been getting killed on this position recently. 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 daily and weekly fluctuations.



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.

Commentary for the week ending 9-9-11

We had yet another week with big moves in the markets. The Dow dropped 2.2%, the S&P was off 1.7%, and the Nasdaq fared the best, down 0.5% (but its line in the chart below is off this week). Treasury bonds continued to climb as investors sought safety, so the yields keep reaching new record lows. Both gold and oil bounced around this week, only to close with little change.

Source: MSN Moneycentral

The week had little economic or corporate news affecting the market. Instead, it was bigger macro stories like Europe and the stimulus here in the US having the biggest impact.

The week beginning on Tuesday started out on a bad note with Euro problems popping up again. It appears that other countries, like Germany, are beginning to tire of the bailouts for Greece and are asking for conditions on the bailouts. The governments of the Euro member countries need to approve the bailouts and investors are worried that support is fading.

Back here in the US, we got some data showing the economy was growing, albeit at a turtle-like speed. Data on service sector jobs showed a very slight increase, as well as the latest reading of the Fed’s beige book (which is basically a commentary on current economic conditions). Still, investors welcomed the news since very slow growth is better than no or negative growth.

The Fed was also in the news this week as various officials made speeches concerning their economic outlook and recommended policies. However, little new was said, disappointing investors that were looking for new information on a future stimulus (we, however, were not disappointed, but enough investors were to push the markets lower).

Friday fared the worst this week with the Dow dropping over 300 points. No surprise, more disappointing news out of Europe spurred the decline.

The chief economist for the European Central Bank (which is similar to our Federal Reserve) resigned over a disagreement on ECB policies. Jurgen Stark, a German, opposed the latest bond buying program the ECB used to keep interest rates down. He is the second German official to leave in recent months.

This really spooked the markets because Germany is considered the cornerstone of the Euro countries. It has the strongest economy of the group and carries the most weight. The concern is that ECB leadership is crumbling and support for recent agreements is waning. Very rightly, the Germans are growing tired of bailing out other countries due to their failures and their dissention could spell trouble for unity in the Euro.

Also clobbering the market Friday, Bank of America announced it is looking to lay off 40,000 employees in the coming months and years. Most investors realize the bank is having a rough time, but no one anticipated an announcement like this. Concerns over weakness also sent other financial stocks lower.

We won’t waste much time discussing President Obama’s job plan speech. Little new was said and it had little effect on the markets. After all, we have already spent hundreds and hundreds of billions trying the exact same policies he recommended over the last couple years. The result was an unquestionable failure and no new spending will change that outcome. Fundamental reform is needed, but it looks unlikely to be achieved.

Over this weekend, though, we learned from a story in the Wall Street Journal that the Treasury Department was looking to change the taxation of corporate profits from overseas. Currently, companies are taxed at the maximum rate if they want to bring those assets back to the US. As a result, companies keep these profits overseas and reinvest them in that host country.

The Treasury is looking to reduce this burden, allowing companies to repatriate funds more cheaply. This idea has promise. We only hope a plan can be achieved but worry that Washington will, frankly, find a way to screw it up.


Next Week

Activity picks up next week. We will get information on August inflation from the PPI and CPI. There will also be data on imports and exports, retail sales, manufacturing, industrial production, and consumer confidence. Friday will also be quadruple witching, which is industry jargon for the day that various options and futures expire. It happens towards the end of every quarter and is often a volatile day as these strategies unwind.


Investment Strategy

This week we saw the Euro problems rear their head, yet again. If these problems are going to dominate headlines again, the markets will surely suffer as they have in the past. Frankly, it is inevitable that something dramatic will happen, as they are taking all the wrong steps to fix their problems. Still, this steady drip of bad news will keep knocking our markets lower.

We had been dipping our toes in on weakness over the last couple weeks but are much more cautious now. With the Euro problems increasing, the risk to the downside has become even greater.

Here in the US, we feel that the risks for a negative surprise are small. The economy is weak, but the markets already realize this. We have talked about this subject for some time now, but good corporate earnings took the focus off the poor economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. Some quality companies can be found at these prices, but it is easy for them to become even cheaper in this environment.

We also feel that the market is beginning to price in some sort of Fed stimulus action that will be announced at the Fed meeting later this month. If this does not occur, there could be a move lower.

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. Smaller and little-known stocks with low correlation to the market are also promising. We like commodities for the long term and any weakness is an opportunity to invest.

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, but we have been getting killed on this position recently. 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 daily and weekly fluctuations.



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.

Commentary for the week ending 9-2-11

The markets saw some big moves this week but ultimately closed with little change. The Dow was off just 0.4%, the S&P down 0.2%, and the Nasdaq had the slightest of gains, up 0.02%. Yields on Treasury bonds continue to hover around historic lows. After selling off in the prior week, gold crept back towards its all time high, rising 4.4% to $1,873 an ounce. Oil continues to climb, also, up 1.3% to $86.5 a barrel.

Source: MSN Moneycentral

The markets opened the week higher on some economic strength, as well as a relief that the hurricane was not as destructive as originally thought. Bargain hunters are also stepping in to buy up stocks perceived as underpriced. Minutes from the latest Fed meeting showed a group divided on future stimulus, but the potential of another round also gave the markets a boost. The volume of trades was very light, though, so it doesn’t really show a conviction in the direction of the market.

This week we also closed out the worst August in ten years and entered the historically weakest month, September.

As the week progressed, we got several reminders of how fragile the economy actually is. Consumer confidence stands at the weakest level in two years. Manufacturing showed very little growth. Worst of all, the August employment report showed a net of absolutely zero jobs last month.

The report showed that the unemployment rate stayed flat at 9.1%, but when counting discouraged workers, the number ticked higher to 16.2%. Also, the labor participation rate remains around a 30-year low. If that 9.1% unemployment rate was measured with the same labor participation as at the beginning of the recession, our unemployment rate would actually be around 12%.

The weak employment number really spooked the markets. It was the first time in a year that there were no jobs added, so investors are worried that conditions are deteriorating.

This makes the speech President Obama will give next week on employment even more important. While investors are anticipating what will be said, early reports show there is nothing new being announced. There are calls for more infrastructure spending, some targeted tax breaks, maybe an extension in unemployment benefits, etc. None of this has worked in the past, so it is not likely that it will work in the future.

As the last two years have shown, government doesn’t create jobs. All it can do is create a favorable business environment and get out of the way. That is what has been missing.

It doesn’t help much when we get stories that the government is suing banks over mortgage problems (story). What on earth will that accomplish? Or it is raiding a company like Gibson Guitar over ridiculous regulations (story). Plus it has added scores of new laws, fees, and regulations like Dodd-Frank and the new healthcare program. We currently have a very hostile business environment and it must improve before the economy recovers. No amount of stimulus can solve these structural problems.

To his credit, though, when the poor jobs report was released, Obama called for an end to the new burdensome EPA regulations. These would have significantly raised energy rates further, as recently implemented policies have already raised energy rates the last several years. It is a major detriment to the economy and the benefits are questionable, at best. This is a good start and more steps like this would be encouraging.


Next Week

Besides being a short week, next week will be quieter than usual for economic data and corporate earnings. However, a variety of Fed officials will be making speeches and traders will be watching closely as any of them have the potential to move the market.


Investment Strategy

Like we’ve said the past couple weeks, we’ve been dipping our toes in on weakness, but are still very cautious. The poor employment report and subsequent drop in the market is a reminder of how fragile the market is. Also, it is important to note that the volume of trades on the down days is much higher than on the up days. There is still a strong bias to the downside, so additional caution is warranted.

We have talked about the weak economy for some time now, but good corporate earnings took the focus off the poor economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. Some quality companies can be found at these prices, but it is easy for them to become even cheaper in this environment.

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. We like commodities for the long term and any weakness is an opportunity to invest.

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, but we have been getting killed on this position recently. 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 daily and weekly fluctuations.



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.