An agreement reached in Europe this week helped push the markets higher. The Dow rose 3.6% and the S&P and Nasdaq both returned 3.8%. Commodities were up this week and unfortunately for gas prices, oil rose 6.8% to $93 per barrel. Gold also popped higher by 6.8%, returning to the mid-$1,700’s an ounce.
Source: MSN Moneycentral
It was another good week for the market, making it a great month, too. So far for October, the Dow is up over 12%. If it can keep up this pace, it will be the best October performance in almost 25 years.
The gains this week were driven higher primarily by activity in Europe. An agreement on their debt problem was reached this week and is considered the biggest agreement reached so far.
The deal is, the holders of Greek debt will take a “haircut” of 50% (meaning investors lose 50%), but this is supposed to be voluntary. Next, European banks will have to hold more capital in reserves as a cushion. Lastly, the European bailout fund (formally, the European Financial Stability Fund, or EFSF) has been upped to $1.4 trillion (essentially printing $1.4 trillion to cover debts). China may even be a part of this fund. The EFSF provides a guarantee on debt for European countries.
The market rallied higher on the news of this agreement. While it is a resolution, it leaves a lot of questions unanswered. The markets seemed so hungry for good news out of Europe, though, that any questions have been postponed for another day.
One problem that is already rearing its head is an encouragement of fiscal irresponsibility. Other countries with similar debt problems see that Greece got these favorable deals by being bad, essentially. Therefore, it would be in their benefit to do the same.
Only a couple days after the announcement, Ireland came forward to see what kind of a deal they can get. Allow us to go on a tangent for a second, but Ireland is an interesting situation, actually.
The debt problems in Ireland resulted from different circumstances than other European countries. They don’t have the large, expensive welfare state. Similar to the US, they had a massive housing bubble that popped. The government then stepped in to prop up the banks that were holding all that bad debt. This resulted in massive losses that taxpayers were on the hook for. They then took a bailout of about $113 billion.
As a condition of the bailout, the EU wanted Ireland to raise tax rates and increase government spending as a form of stimulus (similar to what Washington wants to do here). Ireland actually did just the opposite. They kept their tax rates low and cut government spending and workers. To this point, Ireland is actually recovering relatively well.
Back on subject, Ireland saw the deal Greece got and expressed a desire to get their interest rates reduced. There is an incentive to show as poor of an economic picture as possible in order to do this. Will it work? We’re not sure. However, this bailout will result in the inevitable moral hazard, where countries have no incentive to behave responsibly.
Also, with the 50% haircut to the Greek debtholders, there is little incentive for investors to buy the bonds of other troubled Euro countries. Why would they want to risk a 50% loss? We see bond yields rising in Europe, meaning it will be harder for those countries to borrow funds. That $1.4 trillion bailout fund could mitigate the rise, but the degree to which is uncertain.
Back here in the US, we had some data that also helped the market. Corporate earnings still are coming in at a decent level. Roughly every three out of four companies are beating earnings estimates.
We also got some good economic data this week. Third quarter GDP rose by 2.5%. This was roughly in line with estimates but is higher than recent quarterly GDP numbers. It is interesting to note that consumer spending rose considerably while at the same time, people are more pessimistic about the economy. Usually if people are pessimistic, spending is lower. Either way, the news also helped the market rise this week.
Next Week
Like the past couple weeks, next week will again be busy. Corporate earnings will still come in at a good pace. For economic data, we will get info on manufacturing. With the month ending next week, we will also get information on the employment level through October. It’s hard to believe it is almost November!
The Fed will also be releasing their statement on interest rate levels. It is widely believed that they will keep rates at these historic lows. More importantly, though, investors will be watching for any changes in Fed policy.
Investment Strategy
As we mentioned above, the markets cheered the news out of Europe this week. But there are many questions that remain unanswered, so we have little doubt that Euro problems will resurface. It may be weeks or months, but we would be cautious here.
With these interventions and money printing, gold and precious metals benefited. Gold has now risen to the mid-$1,700’s an ounce. We did some buying in the $1,600’s but would be hesitant to add any more at higher levels from here.
Corporate earnings have been decent so far and future results are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets.
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 and were encouraged by their recent strong performance. A slowdown in China, who has been a major driver of commodity prices, has us worried in the longer term, though.
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 that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. 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.
It was another volatile week for the markets and the results were mixed. The Dow rose 1.4% and the S&P was up 1.1%, however the Nasdaq was lower by 1.1%. Oil was up slightly, 0.5%, and is slowly inching back to $90 per barrel. Gold was off 2.8% and remains stuck in the mid $1,600’s an ounce range. 
Source: MSN Moneycentral
There was nothing major behind the moves this week. As usual, we had news out of Europe, both good and bad, pushing the markets either direction. The week opened on Euro worries and the market moved lower. On Tuesday, however, the markets rallied higher when it was announced that the European rescue (bailout) package had been increased to 2 trillion Euros (roughly $2.7 trillion), a massive number. One official refuted the story, but did acknowledge that they were negotiating the size of this bailout. As the week progressed, it was more of the same - even more negative and positive stories out of Europe. It is almost futile to report on them, as the drama never seems to end. Corporate earnings started coming in at a steady pace this week, with almost 70% of companies beating estimates. Banks were a major focus as Citi and Bank of America reported earnings that weren’t too bad. However, others like Wells Fargo and Goldman were rather poor. Still, with almost 3 out of 4 companies beating estimates, earnings season has gotten off to a pretty good start. Also contributing to the good performance this week, it was reported that the Fed is again looking to do more stimulus, although not immediately. The focus now is on the housing market as they look to bring down mortgage rates. As you probably know, we have had problems with the various stimulus interventions in the past and this is no exception. Since historically low mortgage rates haven’t done the trick so far, we aren’t sure what even further rate reductions will accomplish. The only way for the housing market to come back is to let it bottom first. That means getting out of the way. Unfortunately, all these interventions are only prolonging the problem. This week we also received data on inflation. The Consumer Price Index (or CPI; the price level consumers pay for goods and services) came in line with estimates, rising 0.3% in the last month and 3.9% over the last year. However, The Producer Price Index (or PPI; is the price level for producers of that good or service) soared. In the past month, the price level rose by 0.8%, making it up nearly 7% over the past year. This is very troubling. To this point, we haven’t seen much of these price increases passed along to us as consumers (as you can see by the lag in CPI compared to PPI). However, eventually they will have no choice but to pass the costs along. Additionally, these price increases at the producer level will cut into their earnings. Next WeekNext week will again be a busy one. We will continue to get corporate earnings at a steady pace. Economic data will also be important as we get the 3rd quarter GDP number. We will also get info on consumer confidence, durable goods, personal income and spending, and data on home sales. Europe will also be important as European leaders meet this weekend to work out a game plan for their debt and banking problems. Results from this meeting could affect the tone of the markets for the week. Investment StrategyNo change here. Even with the gains this week, we remain cautious. The markets were again helped by an absence of major news this week and worry that developments out of Europe will disappoint again. Corporate earnings have been decent so far and future results are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets. We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street. 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 recent poor performance. Further money printing around the globe will also help gold and silver and we may be reaching a bottom for these precious metals. 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 that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this is beginning to be a good time to be short again. 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.
Great returns for the markets this week. The Dow rose 541 points and 4.9%, the S&P returned 6.0%, and the Nasdaq turned in a remarkable 7.6% gain. Treasury bonds sold off, so yields rose. Gold also had a nice week, up 2.9%. Oil continues to climb, up 4.6%, so oil is nearly 10% higher over the last two weeks. Unfortunately, those cheaper prices at the pump may not last much longer.
Source: MSN Moneycentral
There wasn’t much news behind the big move this week. The markets opened with a solid gain on Monday that was attributed to positive news out of Europe that set a positive tone for the week.
There was a report over the weekend that the German and French leaders, Merkel and Sarkozy, will present a package to resolve budget and banking problems in the Eurozone by November. Many traders laughed this off as a “plan for a plan,” which is exactly what it was. As ridiculous as it sounded, the markets soared on the news.
Short covering is also being attributed to the market rise this week. Without getting too technical, shorting a stock is when you bet the stock will go lower. Short covering is when investors buy back the shares they are short of. Reports showed that short positions decreased recently, so traders have been buying back stock to cover their shorts. This activity helps push the market higher, especially if the volume is large enough.
Corporate earnings for the third quarter began trickling in this week. We started with a disappointing report from the aluminum producer Alcoa, whose earnings weren’t as high as many expected. Due to their reliance on commodities, many worried that it could spell trouble for other commodity related companies.
Google was another company releasing earnings and they had a terrific report. Like Alcoa was an indicator for commodity stocks, Google was looked at as a guide for other technology stocks, resulting in nice gains for that sector. It is worth noting that their costs have been rising, but not enough to cause concern at this time.
The other big company releasing earnings this week was JP Morgan. Earnings were very poor. Even worse, portions of their accounting relied on the gimmicky “mark to model” method to account for bad assets like loans.
Mark to market is the accounting method we prefer to see, since assets reflect what they are currently worth in the market. Makes sense, right? Mark to model means they value those assets at whatever their models say they are worth, and you can bet they are valued higher than what they are really worth.
If JP Morgan can’t even turn a profit using accounting gimmicks, things can’t be good. Other bank stocks sold off on these poor reports.
Economic data was light this week and what we did receive was mixed. Retail sales came in much higher than expected. On the other hand, consumer sentiment has declined from its already low level. If anything, it shows that people are worried, but continue to spend.
Next Week
Next week will be very busy. Corporate earnings releases pick up significantly next week, far more companies than we will even begin to list here. Also, the volume of economic data will be high. The most important item we will be watching is the Producer and Consumer Price Indexes (PPI & CPI). Economists are predicting a decline in inflation largely since commodities have sold off. Inflation has unexpectedly popped higher in places like China and Europe, so a miss to the highside here is a possibility.
Investment Strategy
As we have been discussing the past couple weeks, the markets have had large moves on a daily basis, but have been stuck in a fairly narrow range, as you can see in the chart on the right. The gains on Friday pushed the market to the top end of the range. We will see if they continue higher from here or if it will move lower off this ceiling.
Even with the gains this week, we remain cautious. The markets were helped by an absence of news this week and worry that developments out of Europe will disappoint again. A “plan for a plan” sounds nice, but we know their plans only involve bailouts and money printing, nothing that has any real reforms.
Corporate earnings may help as their numbers are expected to be good. We worry that the bar is set high since past numbers have been good. Any disappointments are likely to weigh on the markets.
We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street.
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 recent poor performance. Further money printing around the globe will also help gold and silver and we may have reached a bottom for these precious metals.
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 that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this is beginning to be a good time to be short again. 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.
This week we received some much needed gains as volatility remained high. The Dow rose 1.7%, the S&P was up 2.1%, and the Nasdaq climbed 2.6%. Gold was up slightly, 0.9%, as prices linger in the mid-$1,600 an ounce level. Oil popped higher, up 4.8% to $83 a barrel.
Source: MSN Moneycentral
The week opened on a sour note with the markets moving sharply lower. On Tuesday, we officially entered bear market territory, which is defined as a 20% drop from the most recent peak to trough. That didn’t last long, though, as the markets popped sharply higher late that same day.
Even with all the volatility, we continue to trade in a narrow range, as you can see in the 3-month chart on the right. After a peak in the beginning of September, you can also see the markets have been making lower highs and lower lows. This downtrend gives us some concern.
As for the events of the week, it was again all about Europe. The sour note that opened the week was a worry over European banks and negative news from Greece. It was announced that Greece would not meet their deficit targets this year. However, they are taking steps to lay off more public workers and further raise taxes. The reduction of public workers is probably a wise step, but we have our reservations on increases in taxes. Economic growth is already being choked off and additional tax burdens don’t help.
Pulling stocks out of bear market territory on Tuesday was a rumor of a new plan by European leaders to save any potential failing banks. The markets are so hungry for good news that even rumors like this were enough to move the Dow almost 380 points.
That optimistic news out of Europe set the mood for the remainder of the week.
Back here at home, we received some positive economic reports. In the month of September, the U.S. added just over 100,000 jobs while the unemployment rate held steady at 9.1%. The private sector added 137k while the public sector lost 34k, a positive statistic. Past month employment numbers were also revised higher.
This was very welcomed news, but keep in mind it is still lower than numbers we saw earlier in the year. Additionally, 45,000 jobs were added this month as striking Verizon workers were added back onto the payroll (they were subtracted in the previous month, so the net effect is zero).
Manufacturing reports showed a higher than expected gain, but remains at a very low level of growth. The service sector is also slowly growing, but at a level below what many expected.
Lastly, ‘Operation Twist’ was officially underway this week as the Fed bought billions in longer term bonds. Remember, this latest Fed program is designed to lower long term rates to spur borrowing and lending. On the date of purchase, bonds yields did drop. The widely followed 10-year bond saw its yields drop to around 1.7%. As the week progressed, yields slowly rose and the 10-year closed out the week above 2%. Yields are currently at historic lows and we aren’t sure how much further they can fall from here, regardless of how much money is spent.
Next Week
Next week is the unofficial beginning of quarterly corporate earnings season. Dow member and aluminum producer Alcoa will release its earnings on Thursday. Having a rough couple of months and recently trading below $10 a share, we will see if that sell-off was justified. The drop in metal prices may have cut into their bottom line and could be an indicator for other commodity related stocks.
We will also get earnings from notable companies like Pepsi, JPMorgan, and Google. Economic data will be light as we get retail sales info and business inventory levels.
Investment Strategy
Again, little change as we remain cautious here. The market gain this week was welcomed, but we aren’t sure if it is sustainable. Euro problems just won’t go away and our economy remains weak. With the markets being driven largely by these macro events and the whims of politicians, it is a difficult investing environment.
The coming weeks will be interesting as we receive corporate earnings results. Past numbers have been decent and are expected to be similar this quarter. The bar is still set high, so any disappointments will likely affect the markets lower.
We will also be watching the forward guidance that accompanies these earnings. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will in question. Poor forward guidance will add to the negative sentiment currently felt on Wall Street.
When looking for current investment opportunities, some quality companies can be found at cheap prices. However, it is easy for them to become even cheaper in this environment so caution is still warranted.
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 recent poor performance. 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 that has yet to happen due to the unprecedented intervention from the Fed. Steps must been taken 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.
Another volatile week yielded mixed results for the markets. The Dow closed the week up 1.3% but S&P was slightly lower, down 0.4%, and the Nasdaq returned -2.7%. Both gold and oil were off slightly, down 1.1% and 0.8%, respectively. Friday also marked the end of the quarter, which turned out to be the worst quarterly performance since early 2009. The Dow fell 12%, the S&P was off 14%, and the Nasdaq down 13%. 
Source: MSN Moneycentral
Although the Dow was up this week, it still remains a frustrating investing environment. High levels of volatility from the large swings in the market make decision making far more difficult. Even though the daily swings have been large, the market remains stuck in a relatively narrow range, as you can see in the chart on the right. There was little news behind the market moves this week. A large reason for the early week gains could be attributed to end-of-quarter window dressing by portfolio managers. In an attempt to make their holdings and performance look better, many managers sell their loosing stocks and buy better performing ones. This drives up stock prices and therefore the markets in general. Europe was also a factor behind the market moves. As plans come together for another bailout program, the markets rallied on the news. Further austerity measures (mostly tax hikes) have been undertaken in Greece, meeting a requirement that opens them up to further aid. Giving the markets some concern, though, each one of countries in the Euro zone must approve the additional bailout measures. There were concerns that countries like Germany would vote against it, since it is unpopular with their citizens (which is understandable since these responsible countries must pay for the irresponsible ones). At any rate, Germany agreed to vote for the bailouts and it looks like the other Euro countries will, as well. Like we have said many times before, we strongly believe these measures will not work. Significant increases in taxes will do nothing but choke off growth and the downward spiral will continue lower. Unfortunately these steps will ensure that the Euro problems will persist and continue to impact our markets. A big story this week was not something usually discussed, copper. The metal is sometimes called “Dr. Copper” since it is a good predictor of economic health. Over the past month, copper sold off around 25%, worrying many investors (including us, since we do hold some copper). The sell-off has many concerned about another dip back into recession. Contributing to the decline in copper demand, China, a primary consumer of raw materials, continued to show weakness. Data from that country shows further declines in manufacturing. Also, the CDS levels (which are generally seen as a measurement of risk) in China rose substantially, showing that many investors are concerned about the health of China. Here in the U.S., economic data this week was mixed. Housing prices showed a gain while initial jobless claims came in much lower than expected. On the other hand, consumer confidence is stuck at very low levels. Personal income also showed a slight drop while spending rose (indicating that people are dipping into their savings). All-in-all, many investors were encouraged that the data wasn’t getting worse, so it looks like a lack of bad news was good news. Of note on the individual stock level, late Friday, the cultural icon Kodak plunged precipitously, over 50%, and was trading as low as 65 cents at one point (65 cents!). It was learned that the company was talking with a law firm about restructuring advice. Unfortunately, that possibly means bankruptcy. Next WeekAs the month and 3rd quarter came to an end this week, we will begin getting economic data for that period. Next week we will get info on levels of manufacturing and the service industry, construction spending, and factory orders. The big news will come on Friday with the release of unemployment data. Remember, last month we had a net of exactly zero jobs. Expectations are low again, but economists are predicting at least modest job growth. Investment StrategyLittle change as we remain cautious here. With a lingering economic malaise and very volatile markets, we are comfortable with our conservative position. We don’t see economic conditions improving measurably in the near future. What we will be watching, though, is corporate earnings that will begin coming in soon. Earnings have been decent so far and are likely to be satisfactory again this quarter. Most investors will be watching for the forward guidance, though. That is the company’s expectation for their future performance. With the poor economic conditions, many are worried that future earnings will be questionable. Poor forward guidance will add to the negative sentiment currently felt on Wall Street. When looking for current investment opportunities, some quality companies can be found at cheap prices. However, it is easy for them to become even cheaper in this environment so caution is still warranted. 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 recent poor performance. 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 that has yet to happen due to the unprecedented intervention from the Fed. Steps must been taken 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 Moneycentral
