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.
Source: MSN MoneycentralWell, 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.
