Commentary for the week ending 12-21-12

Please note: there will be no market commentary next week.  We’d like to wish you a Merry Christmas and prosperous New Year. 

In a repeat of last week, the market started the week with a nice gain, but moved lower later in the week to close with little change.  Through the Friday close, the Dow rose 0.4%, the S&P gained 1.2%, and the Nasdaq rose a nice 1.7%.  Gold saw strong selling, falling 2.3% for the week.  Oil rose on reports of lower supplies, gaining 2.2% to close just below $89 per barrel.  The other major type of oil, Brent, moved higher to $109 per barrel.

 

Source: Yahoo Finance

Tired of hearing about the “fiscal cliff”?  We are too, but it remains the focus of the market and is something that must be followed. 

Once again, stocks rose this week when it seemed like we were moving towards an agreement.  President Obama appeared to move closer to Republicans by raising the tax-hike income threshold to $400,000 while Republicans countered with $1,000,000.

The unbridgeable divide seems to be on the spending side, which is the major factor behind our fiscal problems.  A spending cut plan was introduced this week, though was entirely unrealistic.  Republicans want more spending cuts, while Democrats want cuts in some areas, but almost comically, new spending in other areas. 

When these talks early in the week broke down, new hope was placed in a “Plan B.”  Its subsequent failure made investors really question whether a deal would be done by the end of the year.  The strong sell-off in the market on Friday was the result. 

Our view remains that no agreement will be reached by the year-end.  Tax rates would automatically rise, which would then see politicians immediately cut taxes on all but the top rates.  We think if a deal is reached this year, it would be more temporary in nature and the fight would resume at some point next year. 
 
We will likely see a pop in the market when we finally have an agreement and certainty on this subject (whether this year or early in the next).  However, it may depend on the type of agreement reached.  We think that a “bad” deal could send markets lower, though.

Changing subjects, economic data was mixed this week, though seemed to lean towards the positive side.  The final revision to third quarter GDP came in surprisingly strong at 3.1% growth.  Also, home sales saw an increase, durable goods rose, income and spending were both higher, and business activity in the Philly region increased.  None of the figures were very strong, but still reflects a slow growth in the economy. 

On the negative side, business conditions in the New York region fell, leading economic indicators were lower, and consumer confidence continues to decline. 

Finally, gold saw a significant drop this week.  We’ve seen reports that gold was lower on signs of economic strength, which may be partly true.  We believe a bigger reason for the loss is sellers are taking profits off the table before the year-end.  Also, a large fund with significant gold holdings (managed by John Paulson) is facing significant redemption requests, where that selling is likely adding to the downward pressure. 


Next Week

Next week should be fairly quiet due to the Christmas holiday.  The market closes early on Monday and many will simply take the day off all together, so essentially it will be like a three-day week.  There will be a few economic data releases in those three days, but nothing that will have much impact on the market. 

The fiscal cliff talks will continue, with next week being the make-or-break week in the discussion.  Similar to the end of this week, if a deal isn’t within reach, we may see another sell-off.  Vice versa if the opposite occurs. 


Investment Strategy

There is no change in our strategy heading into the year-end.  Unpredictable news on the fiscal cliff has the market jittery and us cautious, but does little to sway our longer term view. 

We are essentially in a holding pattern on stocks here, not buying or selling.  We do have worries about the future, with corporate earnings declining on lower revenues and economic growth projections being constantly lowered. 

Another worry is the potential for higher taxes next year.  Higher taxes stifle growth, a growth that actually brings in more money to the government rather than simply raising taxes.   

Amid all this worry, though, the Fed is lurking in the background, ready and willing to do more stimulus if needed.  Though we don’t agree with their policies, their actions do have an effect on the market (though it seems to diminish with each new round). 

Though we aren’t looking to do any buying or selling in stocks at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks.  This is more of a long-term play.  We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe. 

With the Fed committed to printing more money, as well as many central banks around the world, we still like gold despite the recent weakness.  It is beginning to look oversold here, but we aren’t looking to add to our positions quite yet. 

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth may weigh on commodity prices in the short run, though. 

As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that direction.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.  We also think TIPs are important as we still expect inflation to increase.

The threat of new tax laws has weighed on the municipal bond market recently.  If changes are indeed made, we would reconsider our investments in this sector.  If all remains the same, these bonds would still work with the higher taxes looming.

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

Please note, 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 12-14-12

The market showed a nice gain the first half of the week, only to reverse course and close with little change.  For the week, the Dow was lower by 0.2%, the S&P was off 0.3%, and the Nasdaq also fell 0.2%.  Gold mirrored the move in the stock market, losing 0.5% on the week.  Oil rose slightly, gaining 0.9% to $86.73 per barrel.  The foreign Brent crude, used for much of our gas here in the East, closed above $108.

Source: Yahoo Finance

The week was again primarily about the “fiscal cliff” negotiations coming out of Washington.  Talks between the involved parties were described as “serious,” but similar to the last several weeks, we didn’t look any closer to an agreement as the week ended. 

As we discussed the last couple weeks, it still appears there will be no agreement by the year-end and we will cross over that cliff.  Our best guess is the new year would then see politicians immediately cut taxes back to the lower levels for all but the top rates.  This has us worried the market may weaken as we close out the year. 

Though it may depend on the type of agreement reached (whether in the next couple weeks or new year), we may see a pop in the market when we finally have an agreement and certainty on the subject.  We do think that a “bad” deal could send markets lower, though. 

One tax break that unfortunately looks to be on the chopping block is the tax exemption for municipal bonds.  For no justification other than them being favored by the wealthy, the break looks to have bipartisan support.  The move would dramatically alter the muni bond sector and borrowing costs for municipal governments are guaranteed to rise.

Giving us a break from the fiscal cliff talks, the Fed held one of their policy meetings this week.  It was no surprise that they will keep interest rates at these historic lows, plus continue their bond-buying stimulus program (in which they print $85 billion a month). 

There were some new wrinkles, though.  Instead of keeping rates low until 2015 as previously reported, they will stay low until the unemployment rate reaches 6.5% (we are currently at 7.7%). 

That triggered some confusion.  The unemployment rate dropped a full percentage point over the past year (though largely due to people leaving the labor force).  If that trend continued, could the Fed possibly raise rates next year?  It looks like the Fed is using this number more as a guidepost and not a hard trigger, so rates will probably stay low until at least 2015. 

Still, this new metric could return us back to the time when good news was bad news.  We know how addicted the market is to stimulus.  Each tick closer to the 6.5% number is a tick closer to less stimulus, and the market could sell off as a result. 

Another new wrinkle was that the Fed welcomes even more inflation, despite their mandate of stable prices.  They are trying their darndest to reflate the housing sector, thinking this is the way to cure the economy.  Never mind the housing situation was clearly an unsustainable bubble to begin with and reflating it is not a safe policy (in our humble view). 

The Wall Street Journal had two good editorials on that subject this week (LINK 1, LINK 2).  We’ve had four years of this stimulus which has done very little to help the economy.  A rational person would change course when such a lack of results is obvious.  Yet they double-down and venture even further into uncharted territory as potential unintended consequences grow. 

Once these easy money policies go into effect, they become very difficult to remove.  We see that in Japan, who have had stimulus programs for the past twenty years.  Until we see a period where the currency is stable and taxes are low, the economy will continue to slog along, never gaining any traction. 

One key point to consider, these stimulus programs keep borrowing rates lower for the government.  That is important, since we’ve borrowed enormous sums of money in recent years.  The lower rates allow us to do so, since it is not as costly to pay back.  This rewards the profligate behavior and prevents any needed reforms from taking place – until it’s too late. 

Back to the news of the week, where economic data was mixed.  Initial jobless claims improved and industrial production rose, while retail sales came in below expectations and small business outlook dropped by a record amount.  

Monthly inflation also showed a decline, thanks largely to lower energy prices.  While most people welcome these lower prices, unfortunately the Fed fails to see such benefit. 


Next Week

Yet again, next week will be a busy one.  As the week progresses, we will get info on manufacturing in the New York region, the strength of housing, a final revision to last quarters GDP, leading economic indicators, personal income and spending, consumer sentiment, and last but not least, durable goods data. 

Also, we may see a bit more action as investors squeeze activity into the week, since the Christmas holiday has shortened the following week. 


Investment Strategy

While there is essentially no change in our strategy from last week, we are becoming more cautious into the year end.  Not only are we worried about the situation in Washington, we’ve seen many companies issuing special dividends before the year end that investors have scooped up.  Once that dividend is paid, we worry those investors will sell, sending the broader market lower. 

Looking further out, corporate earnings have steadily declined on lower revenues, so fourth quarter earnings have the potential to disappoint.  Frankly, it is not inconceivable for the Fed to ramp up even more stimulus if the markets start to suffer. 

Another worry is the potentially higher taxes next year.  Higher taxes stifle growth, a growth that actually brings in more money to the government rather than simply raising taxes. 

Though we aren’t looking to do any buying or selling in stocks at this point, if a buying opportunity were to present itself, we still like higher-quality stocks.  This is more of a long-term play.  We also like smaller and mid sized stocks that don’t have a strong correlation to the market and Europe. 

With the Fed committed to printing more money, as well as many central banks around the world, we still like gold despite the recent weakness.  We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either. 

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth may weigh on commodity prices in the short run, though. 

As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that direction.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.  We also think TIPs are important as we still expect inflation to increase.

A big question mark has been introduced in the muni sector as we discussed above.  If all remains the same, Municipal bonds would still work with the higher taxes looming on the horizon.

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

Please note, 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 12-7-12

It was another week with Washington in the spotlight.  Through the close, the Dow gained 1.0%, the S&P rose just 0.1%, and the Nasdaq returned -1.1%.  Gold saw another week of solid selling, falling 0.4%.  Oil also sold off, losing 3.4% on the week to $86 per barrel.  The foreign Brent crude closed just above $107.

 

Source: Yahoo Finance

Similar to last week, this week was again all about the “fiscal cliff.”  The tug-of-war negotiations continued between both parties, with the market rising on positive news and, not surprisingly, falling on negative news.

A great example can be seen in the sharp rise of the markets Wednesday, coming on optimistic comments from President Obama.  That optimism continued to grow when reports of talks between President Obama and Speaker Boehner surfaced. 

By the end of the week, though, it appeared little progress had been made.  Speaker Boehner called the President’s proposal “a joke” for the firm insistence of higher rates on top earners, plus a removal of the debt ceiling limit, amongst other demands. 

We don’t look any nearer to a solution than we were at the beginning of the week. 

The consensus amongst those on Wall Street is the markets will rise on a resolution.  Any resolution.  But we have our concerns.  We feel a bad agreement could be just as bad as none at all. 

We mentioned last week that it is looking more like we will not get a resolution by the year-end, thus going over the cliff.  That belief remains true as of this week.  Under that scenario, the new year would likely see politicians immediately cut taxes back to the lower levels for all but the top rates. 

The market will suffer as a response.  It will also result in lower revenue to the government, since we’ve seen time and again, higher tax rates don’t bring in more revenue.  Economic growth brings in more money to the government, something we cannot repeat often enough.   

Aside from that topic, the week was rather quiet.  The employment report released on Friday made news as we gained 146,000 jobs in November, much higher than the 80,000 expected.  The unemployment rate dropped to 7.7% from 7.9%. 

Though the numbers appear impressive, the gain in workers is still slow, barely keeping up with the population growth.  Also, the drop in the unemployment rate came from a large amount of people leaving the workforce entirely.  So while the numbers seem impressive, they do leave much to desire. 

Also interesting to note, it was cited that the storm, Sandy, did not have an impact on the numbers.  This is notable since many were expecting a large impact, hence the low guesses.  This is also more telling in how little of an impact the storm has had on data.  It is a popular excuse when data is bad, but conspicuously absent when data is good. 


Next Week

Next week looks to be another busy one.  We will get earnings from several big companies like Dollar General, Costco, Pier 1, and Hovnanian.  For economic data, we will get reports on small business optimism, trade balance, retail sales, industrial production, and inflation with the CPI and PPI. 

The Fed will also be in the news with their meeting in which they are expected to hold interest rates at these record lows.  Also, one of their bond buying stimulus programs is set to expire in the coming weeks, so it is widely believed the Fed will announce a continuation to this program. 


Investment Strategy

No change here from last week.  We aren’t looking to do any buying or selling in stocks at this point.  Even if we were, the focus here should be on the long term, since the unpredictable news out of Washington has the markets jittery. 

If a buying opportunity were to present itself, we still like higher-quality stocks, though many of these dividend payers have been hit on tax rate concerns.  Again, this is more of a long-term play.  We also like smaller and mid sized stocks that don’t have a strong correlation to the market and Europe. 

Gold saw more profit-taking this week, but we still like it for the long run.  Further money printing, bailouts, and stimulus around the globe will help send it higher.  We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either. 

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth may weigh on commodity prices in the short run, though. 

As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that direction.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

We also think TIPs are important as we still expect inflation to increase. Municipal bonds still work as higher taxes loom on the horizon (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing and have shown a large rise to this point. 

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

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 11-30-12

Washington remained in focus as stocks showed little change on the week.  Through the close Friday, the Dow rose just 0.1%, the S&P gained 0.5%, while the Nasdaq returned a nice 1.5%.  Gold moved lower on profit taking, losing 2.3% for the week.  Oil was higher by 0.7% to just shy of $89 per barrel.  Brent crude closed just above $111.

Source: Yahoo Finance

The fiscal cliff.  If we had a dollar for every time we heard that phrase this week, we’d have more money than the recent Powerball winners. 

Kidding aside, this week was all about the news coming out of Washington.  When a politician made an optimistic statement on resolving the fiscal cliff, the market immediately rallied.  On the other hand, a negative statement sent the market immediately lower, often with both occurring the same day. 

Either way, it seems to us like both sides are in or near a stalemate.  We realize each needs to posture for negotiating purposes, but the sides remain very far apart. 

Republicans are open to revenue increasing, but from more pro-growth policies.  The left is reluctant to cut spending while insisting on higher rates on the wealthy.  In fact, the White House wants immediate tax hikes, as well as more spending, an elimination of the debt ceiling, and an extension of unemployment benefits.  It’s hard to reconcile those wide differences. 

To us, it appears more likely that we will go off this fiscal cliff at the end of the year, where tax rates rise across the board.  In response, the new year would see politicians immediately cut taxes back to the lower levels for all but the top two tax rates. 

In this scenario, the market will suffer while nothing is accomplished.  It will also result in lower revenue to the government, since we’ve seen time and again, higher rates don’t bring in more revenues.  Economic growth brings in more revenue, something that is often ignored. 

Companies are rushing to take advantage of these lower rates.  Countless businesses are announcing special dividends this year, dispersing money to shareholders at current tax rates.  Some companies are even taking on debt in order to make this payout.  It is an unusual event that may push stock prices up in the short term, but will see falling prices thereafter.  It also proves that tax rates do affect behavior, contrary to comments by many economists and pundits. 

Aside from these fiscal cliff talks, the week was rather quiet.  Retail companies made news with the Christmas shopping season unofficially kicking off after Thanksgiving.  Depending on the report, sales rose by either 13 or 16% on Black Friday and 30 or 17% on Cyber Monday. 

Though impressive sounding, Bank of America reports that there is no correlation between shopping on these dates and the outcome of the holiday season in general.  Also, the strength of sales on these heavily discounted days could be troubling since shoppers are taking advantage of lower priced items now, cannibalizing higher priced sales later. 

Economic data this week was largely positive, though modestly so.  Home prices have shown a solid rise over the past year.  Durable goods came in above expectations, though showed a 0.0% growth.  Consumer confidence reached a new high.  The Fed’s Beige book (which shows economic conditions around the country) showed modest improvement.  Finally, the GDP was revised higher than previously reported, though the bulk of the gains came from unimpressive areas like government spending and inventory rebuilding. 


Next Week
With the month ending this week, next week will be a bit busier as we get economic data for November.  We will get data on the strength of the manufacturing and service sectors, construction, and factories, as well as the big employment report on Friday. 

There will also be some corporate earnings released and regional Fed presidents making public appearances.   


Investment Strategy

We aren’t looking to do any buying or selling in stocks at this point.  Even if we were, the focus here should be on the long term, since the unpredictable news out of Washington has the markets jittery. 

If a buying opportunity were to present itself, we still like higher-quality stocks, though many of these dividend payers have been hit on tax rate concerns.  Again, this is more of a long-term play.  We also like smaller and mid sized stocks that don’t have a strong correlation to the market and Europe. 

Gold saw some profit-taking this week, but we still like it for the long run.  Further money printing, bailouts, and stimulus around the globe will help send it higher.  We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either. 

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth may weigh on commodity prices in the short run, though. 

As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that direction.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

We also think TIPs are important as we still expect inflation to increase. Municipal bonds still work as higher taxes loom on the horizon (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing and have shown a large rise to this point. 

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

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 11-16-12

Please note:  Due to the Thanksgiving holiday, there will be no market commentary next week. 

Stocks continued the slide that began after the Presidential election as markets hit their lowest level in over four months.  For the week, the Dow was lower by 1.8%, the S&P was down 1.5%, and the Nasdaq had a return of -1.8%.  Gold moved a bit lower, returning -0.9% for the week.  Oil moved on activity in the Mid East, but only rose 0.7% on the week to $86.67 a barrel.  Brent crude closed just below $109 per barrel. 

 

Source: Yahoo Finance

The week was similar to last as the same worries drove stocks lower.  Investors still seem to be taking gains off the table before higher tax rates likely go into effect next year.  Concerns on the “fiscal cliff” remain in the forefront while conflict in the Middle East and a recession in Europe also added to the worries. 

Fiscal cliff talks were ratcheted up this week as President Obama met with leaders from a variety of groups and concluded with Congressional members. 

Early in the week, he laid out his starting point in negotiations asking for twice as much in revenue than originally thought and continued to stress higher taxes for the wealthy.  In fact, he claimed “a modest tax increase for wealthy families wouldn’t break their back.”  The rhetoric raised the anxiety level in the markets.   

We could see more of where the White House was leaning as some of their ideas were made public.  In addition to raising taxes on those over $250,000 in income, targeted tax breaks would be eliminated.  Perhaps not surprising, the groups targeted aren’t exactly left-leaning ones.  Taxes would be increased on commodities and options traders, corporate life insurance policies, oil and gas drillers, and even golf course owners.
  
By the end of the week, Congressional leaders seemed optimistic that a deal could be reached and the market rose on the news.  Words mean little, though, and we’ll see how it plays out in the coming days and weeks. 

Also, the Wall Street Journal reported on Friday that the White House may scrap the required spending cuts and instead substitute smaller targeted spending cuts.  In our view, that would only add to the uncertainty and send markets lower. 

Another worry this week was the Middle East.  After having hundreds of rockets fired into its country, Israel decided it wasn’t going to take any more.  Launching remarkably precise counter-strikes, the conflict escalated and the rhetoric from surrounding countries intensified.  

The significance of the timing should not be underestimated.  Israel’s enemies recognize that an administration that isn’t the friendliest to Israel was reelected here in the US.  These emboldened countries could spell problems in the region down the road, particularly if Iran enters the fray. 

Here in the US, economic data was mostly negative.  Retail sales fell from the previous month, manufacturing in the Mid-Atlantic showed a surprising drop, and industrial production also declined.  As expected, Hurricane Sandy bore the brunt of the blame. 

The storm was cited as the reason behind the very large increase in weekly jobless claims.  Averaging in the mid-300k range before the election, weekly jobless claims rose to 439,000 this week, a gain of 78,000 from the previous week. 

A similar story played out after Hurricane Katrina as jobless claims rose by 100,000 following the storm, returning to more normal levels the following week.  Indeed, figures from New Jersey showed a sharp increase.  However, New York showed an improvement.  More unusual was the large job losses in states like Ohio and Pennsylvania. 

Only time will tell if the storm was the culprit here, or if the economy is actually worse than it appeared. 


Next Week

Even though next week is shortened by the Thanksgiving holiday, there will be some events with the potential to move the market.  Of course a major focus will still be on progress towards averting the “fiscal cliff.”  But the market also will be looking towards Europe as the economy slows, while a few Fed members here will be speaking. 

Economic data will be rather light as we will get info on housing and the leading economic indicators. 


Investment Strategy

As we saw with the gain on Friday, the market is looking to Washington for a resolution on the fiscal cliff.  Not surprisingly, we’ll probably move higher with a deal and vice-versa on the opposite. 

A deal alone is not enough, though, as the substance of a deal will impact how much the market moves.  If we get straight tax rate increases and little spending reduction, the market will not be happy.  On the other hand, if a deal is made to increase revenue from pro growth policies and (importantly) capital gains rates don’t see a dramatic change, we should see a larger pop. 

Bearish (negative) sentiment stands at the highest level since August of 2011 according to AAII.  When that many investors are on one side of the trade, the tide often reverses course.  The market is looking oversold here.  

Of course, we could keep heading lower if headlines from Washington disappoint, so it’s not wise to try to catch a falling knife.  Friday was encouraging and if we see the market stabilizing, we like that as an opportunity to add to our stock positions. 

We’ve seen dividend stocks get hit especially hard as investors fear a tax hike next year.  Dividend stocks are investments we intend to hold for a long period, so we aren’t looking to sell at this time.  We also like smaller and mid sized stocks that don’t have a strong correlation to the market and Europe. 

Gold was reaffirmed as a favorite after the election.  We will continue the easy money policies that have fueled its rise to this point.  Continued money printing, bailouts, and stimulus around the globe will help in the long run.  Though it sold off on weaker demand this week, we aren’t looking to reduce our positions, but wouldn’t add to them, either. 

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth may weigh on commodity prices in the short run, though. 

The election also helped the bond sector.  Though Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), the trend is moving back that direction.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work as higher taxes loom on the horizon (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing. 

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

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 11-9-12

Stocks didn’t appear happy with the election results, selling off sharply for the worst week in five months.  For the week, the Dow dropped 2.1%, the S&P fell 2.4%, and the Nasdaq plunged 2.6%.  Gold rose firmly on the likelihood of continued easy money policies, rising 3.4% on the week.  Oil saw some large moves, closing the week with a modest gain of 1.4% to just over $86 a barrel.  The foreign Brent crude, used in much of our gas here in the East, closed shy of $110.   

Source: Yahoo Finance

Well, at least it’s over.  That’s one of the few positives we took from the election.  The market wasn’t happy, either, as stocks saw their worst day of the year.  The Dow fell more than 300 points, or 2.4%, on Wednesday alone.  Maybe that was an improvement, seeing that the market dropped over 5% the day after President Obama’s first victory. 

Like many others, we didn’t think the market would see such strong moves on the election results.  Perhaps more people than it appeared were looking for a Romney win. 

The election did draw attention to several problems facing us in the near future.  We think the foremost reason for the decline in stocks was the tax outlook. 

With the reelection, it is virtually certain that taxes will rise next year, whether it is income, cap gains, dividends, or estate taxes, or new taxes related to the health care law.  That gives investors a reason to sell now and take gains while taxes are lower.  It is a primary reason why high-flying stocks like Apple were hit this week.

The reelection also meant a continuation of gridlock in government.  This is a concern with the looming tax increases and spending cuts, commonly referred to as the “fiscal cliff” in the press. 

We saw this week a desire amongst politicians to work together to avoid this cliff.  However, the difference in approaches remains apparent as the rhetoric has not changed.  Short-sighted politicians believe a simple rate hike on the wealthy will cure our fiscal ills (we saw the market drop immediately on Friday with similar remarks from the President).

However, a more comprehensive reform is needed.  For the tax side of the argument, history has shown us time and again, raising tax rates actually results in lower revenue to the government.  Reforms that promote growth have been proven to result in higher revenues.  Hopefully any agreement will lean in this direction. 

Regardless, we think even a temporary fix to buy time will be welcomed by the market.  A fundamental, pro-growth reform would be even better. 

Another consequence of the election is a continuation of the Fed’s easy-money and stimulative policies.  While the market has risen with stimulus, it is a negative in the long run. 

It is also another wrinkle that investment managers like us must consider for our portfolios.  Figuring out fundamentals like the direction of corporate earnings and economic strength are difficult enough.  Adding another layer of unpredictability with the economic central-planners at central banks makes investors even more reluctant to invest.

Lastly, the hope for any rollback of regulations has been eliminated.  Whether it is costly rules from Dodd-Frank, the healthcare law, or even EPA regulations, these programs will create another headwind for the economy. 

It wasn’t just the election that weighed on the market this week.  Problems in Europe are back in the headlines. 

Business activity and industrial production in the Euro zone has fallen sharply and estimates for the future have been revised lower.  Particularly worrisome is that Germany, the workhorse of the region, is included in the negative outlook.  There are few bright spots in the region and bad news is likely to persist. 


Next Week

Next week looks to be much quieter than the previous weeks.  The pace of corporate earnings has fallen off as the lackluster earnings season has wound down.  There will be a few economic reports, including inflation on the producer and consumer level (PPI and CPI), as well as info on retail sales and industrial production. 

The focus next week will likely continue be on information coming out of Europe, as well as talk on the fiscal cliff issues here at home. 


Investment Strategy

We underestimated the reaction in the market to the election.  At this time, it looks like the market is more focused on macro issues like the fiscal cliff.  As mentioned above, if a fix is in the works, the market is likely to rally, but the reverse is also true. 

Problems in Europe are another focus, which is a concern any time they are in the headlines. 

As the market moves lower, it looks more and more oversold, meaning we think there is more room for the market to move higher.  That said, there is no telling how the fiscal situation will work out, nor the Euro story.  It might not hurt to nibble, but caution is warranted. 

There is no change in the investments we favor at this time, though different sectors will benefit based on the election.  We still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well.

Gold was reaffirmed as a favorite after the election.  We will continue the easy money policies that have fueled its rise to this point.  Continued money printing, bailouts, and stimulus around the globe will help in the long run.  We wouldn’t add to positions at this point, but would not look to sell, either.

We like other commodities for the long term, especially due to weaker currencies around the globe.  A slowdown in global growth may weigh on commodity prices in the short run, though. 

The election also helped the bond sector.  Though Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), the trend is moving back that direction.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing.  Additionally, higher taxes have increased the attractiveness of these bonds. 

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

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 11-2-12

An unusual week with only three trading days closed with mixed results.  Through the close Friday, the Dow fell slightly, off 0.1%, the S&P rose 0.2%, and the Nasdaq returned -0.2%.  A stronger dollar sent most commodities lower, with gold falling 2.2%.  Providing some relief at the gas pump, oil was also lower, down 1.7% to just under $85 per barrel.  The foreign Brent crude, used in much of our gas here in the East, closed at $105 per barrel.

Source: Yahoo Finance

Extraordinary circumstances related to the storm in the Northeast closed the stock market both Monday and Tuesday.  More importantly to us, it showed how ill-prepared the New York Stock Exchange is to handle disasters of this magnitude. 

We wondered why backup plans were not in place, especially after the September 11th attack.  Even having an alternative location makes sense to us so another closure like this (or worse) does not happen.

Trading resumed on Wednesday and by all accounts, the day seemed pretty normal.  The storm did give a boost to several sectors, like construction and home improvement stores, like Home Depot.  On the other hand, many sectors were obviously hurt by the storm, like retailers. 

Keynesian economists think events like the storm are beneficial in a sense, because it boosts economic activity due to the rebuilding that is needed.  Indeed, there are some that believe we could see a boost in GDP from it.  And that’s entirely possible. 

But looking at an event like the storm in that way is severely flawed.  It doesn’t consider the wealth destroyed.  Nor does it consider that the spending on rebuilding is taken away from other sectors that it otherwise would have been spent on. 

The storm will also distort economic numbers over the next few months, not giving us an accurate view of the overall economy.  We can already see the excuses on earnings reports coming from companies.  Any negative earnings will be blamed on the storm, regardless of that even being the case. 

As for the market this week, stocks jumped on Thursday due to better than expected economic data.  Manufacturing in the US showed a slight tick higher, though still shows extremely slow growth.  Retail sales improved and consumer confidence stood at its highest level since 2008. 

While that was cited as the reason for the large market gain on Thursday, we think it has more to do with the calendar.  Though we have not seen it recently, the first of the month often sees new inflows into the market, pushing it higher.  This was also the beginning of a new fiscal year in many cases.  Higher than normal trading volume and the subsequent market drop on Friday supports this idea. 

This week we also received data on the employment picture, which was highly anticipated after the blowout figures last month. 

The economy added 171,000 jobs over the past month, better than expected, though still woefully short of a figure we should see in a normal recovery.  The unemployment rate ticked higher to 7.9% from 7.8%, while a broader measure of unemployment, the U-6, stood at 14.6%.  Employment seems to be improving, but still has a long way to go. 

As for corporate earnings, three-quarters of the S&P 500 companies have released their numbers so far.  Growth in earnings is basically flat, while a majority have still come in below revenue estimates.  We would like to see the earnings picture improve before we get too optimistic on the future. 


Next Week

Next week is all about the election.  We will get some corporate earnings and economic data on the strength of the service sector, import and export prices, and consumer sentiment, but they will have a negligible impact on the market, at best. 

Will the market move next week based on the election outcome?  Most likely.  But we aren’t sure which way the market would go regardless of the outcome, at least in the short term. 


The Election

Contrary to many others in our industry, we don’t see the election outcome having a significant difference on the markets over the coming years.  While there are considerable differences in the candidates and the direction they will take the country, the stock market often doesn’t correlate with these underlying fundamentals. 

A Romney presidency is largely seen as being friendlier to business.  And it likely will be.  But that doesn’t necessarily mean it will be good for the stock market. 

We believe the stimulus policies from the Fed, with their extremely low interest rates and the printing of nearly two trillion dollars, has fueled the rise in the markets.  A Romney presidency would rightly tighten these policies, but may hurt the market in the meantime.  However, it would be a positive in the long run. 

An Obama presidency will impose more headwinds to businesses and the economy.  Faced with those headwinds, though, it is extremely likely that the Fed will pump more stimulus into the economy, continuing this giant Keynesian experiment.  One only has to look at Japan, with their never-ending stimuli and stagnant growth over the last 20 years, to see how this will play out. 

As the benefit from each stimulus has less and less impact, it is a worrisome path to take.  Yet the market may rise with more stimulus – until it will inevitably come crashing down.  Who knows when that will happen, though. 

Though it may likely be a wash for the stock market in general, under the different administrations, certain sectors will perform better than others:

    Romney victory:  Consumer staples, Health care, Financials, and the Dollar.
    Obama victory:  Technology, Telecom, Commodities, Gold, and Bonds.


Investment Strategy

The market may have room to move lower from here, but it is looking more and more oversold as it does.  However, next week will likely be quiet until after the election.  It’s anyone’s guess as to how the market will react once we learn the outcome. 

It may not be worth taking much of a gamble here in the short run.  We’d like to see a larger sell-off before committing more money, but it might not hurt to cautiously nibble. 

There is no change in the investments we favor at this time, though as we discussed above, different sectors will benefit based on the election.  We still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well.

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  We wouldn’t add to positions at this point, but would not look to sell, either.

We like other commodities for the long term, especially due to money printing around the globe.  A slowdown in global growth may weigh on commodity prices in the short run. 

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

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 10-26-12

Disappointing corporate earnings sent stocks lower this week.  Through the close Friday, the Dow was off 1.8%, the S&P lost 1.5%, and the Nasdaq fell 0.6%.  Gold sold off, too, losing 0.7%.  Like the others, oil was also down, which will be good news at the gas pump.  It fell sharply by 4.6% to $86 per barrel while the other major type of oil, Brent, closed below $110.

Source: Yahoo Finance

The market has continued to focus on fundamentals this week (here, the fundamentals are corporate earnings) which repeatedly disappointed, pressuring the markets lower.  This is a change in the focus of the market, where it had previously been more concerned with macro issues around the globe and stimulus from the central banks. 

We knew heading into earnings season that the results would be disappointing and that appears to be the case.  A little more than half of the companies in the S&P 500 have released their earnings and about 60% have beat earnings estimates.  Only about 40% have beat revenue estimates, though (revenues are what the company actually earns through sales.  Subtracting costs from revenues gives us the profit, or earnings). 

The revenue portion is probably the most disappointing story of the earnings season.  Estimates had revenue growing by more than 5%, yet that figure is barely above 1%. 

For earnings, they actually had negative estimates, but are roughly flat.  The quality of the beats has been poor, since companies continue to cut costs to improve their bottom line.

Adding to the negative earnings picture, more and more companies are warning that next quarter won’t be as strong as projected.  Commonly referred to as forward guidance, we are seeing the highest negative-to-positive warnings outlook since early 2007.  Companies are citing weak global growth as the main culprit behind the sour outlook. 

Even high-flying favorites like Apple have disappointed.  The company had a rare miss, with lower-than-expected revenues, earnings, and outlook for the future.  The stock traded above $700 as recently as last month, yet it crossed below the $600 level this week. 

On to economic data, which leaned towards the positive side this week.  Housing data was solid, durable goods showed a nice gain, and preliminary data on manufacturing was encouraging.

The GDP figure for the latest quarter also came in higher than expected.  The gain of 2.0% was above the 1.8% estimated and much higher than the 1.3% gain from the previous quarter.

Digging further into this number shows a large portion of the gain came from federal government spending, so the figure might not be as strong as it seems. 

It should also be noted that last quarter saw a similar initial number that was revised lower to 1.3%, so it may be worth waiting for revisions before making conclusions on the strength of the economy

The week was also nice in that there was little news out of Europe or the Fed.  The Fed did hold a meeting this week, but nothing new was announced, as expected.  Actually, a MarketWatch article (LINK) early in the week mentioned that the Fed was open to expanding its stimulus program (remember, they are buying (or printing) $40 billion a month in mortgage bonds and $45 billion in government treasuries every month as stimulus) if conditions warrant. 

Unfortunately, these stimulus programs have failed to work and likely do more damage in the long run.  The Fed seems hell-bent on forcing it to work, so this could be another factor to consider in the future. 


Next Week

Next week will be another busy one.  Corporate earnings will continue to come in at a steady pace.  There will also be many economic releases.  As the week progresses, we will get info on personal income and spending, consumer confidence, manufacturing, and construction. 

On Friday we will get the unemployment data.  Last month made headlines due to the unusual drop in unemployment to 7.8%.  This month, many expect the number to climb as the numbers revert back to the mean. 

The topic dominating headlines next week, at least the early part, will likely be “the worst storm in 100 years”.  Unfortunately there is no escaping it, since New York City is the center of the media universe and we will all be forced to hear of their woes. 


Investment Strategy

It looks to us like this recent sell-off has pushed the market to an oversold position.  Though we are negative on fundamentals (and the market has been focusing on the fundamentals), it may be worth dipping a toe in here, even just for the short term.  Longer term we have our worries. 

We’d like to see more of a sell-off before committing more money, but it may be a good point to nibble.  We still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well.

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  Even with its recent sell-off, we wouldn’t add to positions at this point, but would not look to sell, either.

We like other commodities for the long term, especially due to money printing around the globe.  A slowdown in global growth may weigh on commodity prices in the short run. 

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.

Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either. 

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 10-12-12

Please note: there will be no market commentary next week, the week ending October 19th.

The week was a rough one for stocks as the market turned in its worst performance in over four months.  Through the close Friday, the Dow fell 2.1%, the S&P lost 2.2%, and the Nasdaq dropped 2.9%.  Gold was down, too, losing 1.2%.  Oil was higher by 2.2% to close just below $92 per barrel while the other major type of oil, Brent, closed above $114 per barrel.

Source: Yahoo Finance

Earnings season for the third quarter kicked off this week and the market was not impressed.  Underwhelming earnings helped send the markets lower while signs of slower growth around the globe added to the downward pressure. 

The outlook for company earnings had been steadily lowered as we headed into earnings season, so the bar has been set low.  Forecasts actually point to a decline in profits (earnings) over the past quarter, the first time in three years.  Data provider S&P Capital IQ projects an average decline of 1.3% for S&P 500 companies, down from a gain of just 0.8% in the previous quarter.

The aluminum company, Alcoa, got the ball rolling with disappointing earnings.  They actually beat estimates, but that estimate was for a loss.  Their revenue (the money from what they actually sold) declined from the previous quarter.  Adding to the negative news, they warned that future demand looks to be lower due to slower global growth. 

The story with Alcoa is an example why we aren’t keen on the popular “earnings estimates” metric.  Most companies beat “estimates,” and that tells us very little about how they actually performed.  We prefer to first look at their revenues, then earnings (revenues minus expenses), and compare the numbers to previous periods.  This gives us a better idea how the company is actually performing.

Continuing with earnings, news from several other companies added to the downbeat mood.  Two companies with strong connections to the global economy, Chevron and Cummins (the diesel engine maker) both warned that their earnings would disappoint. 

Several financial companies also released their earnings, with mixed results.  JP Morgan looked to have had a solid quarter while Wells Fargo did not. 

The initial forecast of lower earnings was supported by the data released this week, while the outlook for the remaining corporate earnings is just as dim. 

On to the global growth story, where we received more negative news.  The IMF lowered its estimates for global growth for this year.  While they see higher growth next year, they also revised this lower.  A slowing China, plus troubles in Europe were cited as a cause, while the problems in the US should also not be ignored.

As for Europe, Spain was again in focus as Euro leaders met to discuss their bailout.  The debate is on the conditions Spain must meet in order to be eligible for additional bailout funds.   

The stock market would like to see a bailout since it takes a Euro breakup off the table for the time being.  As we’ve mentioned here before, a bailout does little to solve their problems, only buying time.  We have seen this with past bailouts, as these countries keep coming back to the table. 

Meanwhile, S&P Ratings Services downgraded the country’s debt.

Economic data here in the US was mixed this week.  Coming off the odd drop in the unemployment rate the previous week, this week had a few more unusual positive surprises. 

Initial jobless claims are released on a weekly basis and tell us how many people applied for unemployment during the week.  The numbers sharply improved to levels not seen since January of 2008, sending the market higher.  It wasn’t until further reading indicated that one state did not properly report their claims for the week, skewing the numbers. 

Also a surprise, the University of Michigan consumer confidence number soared to levels not seen in five years.  This seemed funny, especially since we learned this week that inflation on the producer level (the PPI) rose by 1.1% over the previous month, driven largely by an increase in energy costs.  Higher costs don’t usually result in an increase in consumer confidence. 

Other economic data was somewhat mixed.  The Beige book released by the Fed (which gives info on current economic conditions) showed somewhat of an improvement in conditions, but still remain sluggish, while small business optimism fell over the last month. 


Next Week

Next week looks to be a busy one.  For economic data, as the week progresses, we will get info on retail sales, inflation with the CPI, industrial production, housing info, and leading economic indicators. 

Company earnings really start rolling in as we will get results from a slew of big names.  It will be particularly active for companies in the financial sector. 


Investment Strategy

Last week we mentioned the upward-sloping range the market has been stuck in since June (indicated by the blue lines).  With the drop in the market this week, prices look to be right at the bottom of this range.  It will be interesting to see if the market moves back in that range next week, or if the trend has ended. 

At the moment, the market doesn’t have much going for it.  Earnings aren’t great, global growth is slow, the game plan from the Fed is mapped out for at least the next several months, and Europe continues to languish. 

These lowered expectations give a positive surprise more potential impact on the market.  Bailout news on Spain could give the market a boost.  An improvement in the corporate earnings picture would help, too.  How likely is this at the moment?  Doubtful, but still possible.  As we know, though, the market usually does the opposite of what you expect it to.  Like before, agility remains important.   

Again, there is no change in our investment options.  If we do see a buying opportunity, in stocks, we still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well.

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  We wouldn’t add to positions at this point, but would not look to sell, either.

We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run.  However, the recent stimulus may send this sector higher and prices may rise from here.

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.

Finally, in international stocks, 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 10-5-12

The fourth quarter got off to a solid start this week.  Through the Friday close, the Dow gained 1.3%, the S&P rose 1.4%, and the Nasdaq climbed just 0.6%.  Gold continued its climb higher, rising 0.4% for the week.  Oil saw some big daily moves and closed the week down 2.5% to just below $90 per barrel.  The other major type of oil, Brent, closed just above $112 per barrel.  

Source: MSN Moneycentral

While the week saw more negative news out of Europe, the market actually focused on fundamentals instead.  Positive economic data in the US helped push the markets higher, closing the week near a five year high. 

Right out of the gate Monday morning, we learned that manufacturing expanded ever-so-slightly last month.  Though unimpressive, it was an improvement since manufacturing showed a slight contraction in the previous month.

As the week went on, we also saw that the service showed an improvement.  Capping the week was either a terrific or mediocre employment report, depending on your point of view.

Though we don’t usually spend much time getting into the details, the monthly employment report is composed of two different parts – one that gives the job gains or losses that you see in the news and is referred to as the establishment survey.  The other is the household survey (they phone roughly 60,000 people a month), which gives the unemployment rate.

The establishment report, the non-farm payrolls, showed a gain of just 114,000 jobs last month, not nearly enough to keep up with population growth. 

On the other hand, making headlines was the household report.  It showed an unemployment rate of 7.8%, a rare three point improvement from the previous 8.1% figure.  This was important since it was the lowest rate of the Obama presidency. 

What was behind the improvement that left many scratching their heads?  The household survey showed a gain of 873,000 jobs last month (remember, the other report showed a gain of 114,000).  This was the largest gain in nearly 30 years.  Of those 873k, exactly two-thirds (oddly enough) were part-time jobs.  This had many questioning the reliability of the report, but it dominated headlines, nonetheless. 

On to Europe, where it was another rough week.  Spain and Greece both made news with weaker outlooks for the future.  Also, manufacturing continues to show contraction in the region while unemployment ticked to another record high. 

It was reported that Spain was closer to meeting the terms needed to be eligible for a bailout.  This was a relief to the markets since a bailout would prevent any imminent Euro breakup talks, but does little to actually fix the problem. 

We’ll conclude this section with the story this week in oil.  Oil dropped sharply on Wednesday by more than 4%.  Behind the move was a report on slowing growth in China (if growth is slowing, they won’t need as much oil), plus a report that oil production in the US has risen to its highest level since 1996.  This is due entirely to production on private land, as production on government land is lower. 

But also playing a role was Iran.  Due to sanctions on their economy, their currency (the rial) has fallen sharply.  Against the dollar, the rial was down 25% last week alone.  Iranians are experiencing dramatic inflation and possibly hyperinflation, leading to rare protests in the country. 

It looked like the oil market was encouraged by the protests, since it had potential to lead to changes in the regime.  This added to the downward pressure. 

The drop was all but forgotten by Thursday, though, as oil popped higher and erased the previous days losses. The new conflict in Syria and Turkey was cited as the cause for the rise.  Then oil dropped again Friday on weaker growth prospects, closing out a volatile week for oil. 


Next week

Activity starts to pick up next week as corporate earnings begin rolling in.  We’ll also get a report on inflation at the producer level, plus import/export prices and the trade balance.


Investment Strategy

While the market hasn’t yet seen the same gangbuster rise as in previous stimulus periods, the trend looks like it is still higher.  As you can see in the nearby chart, the market continues to move within the upward-sloping range it has been in since June.  Like before, though, we still remain cautious. 

With economic data and corporate earnings beginning to come in next week, it is possible the market will continue to focus these fundamentals. 

Earnings will be particularly interesting to watch.  The bar has been set low here as companies have warned about slowing earnings.  Like usual, we’ll probably see a good number of companies beat these lower estimates. 

But it is important to watch the revenue figures – the money the company actually brought in from sales.  Only 41% of companies beat revenue estimates last quarter according to Thompson Reuters.  It shows that growth is slowing and is something to keep an eye on. 

As for specific investments, there is no change here.  If we do see a buying opportunity, in stocks, we still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well. 

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  We wouldn’t add to positions at this point, but would not look to sell, either. 

We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run.  However, the recent stimulus may send this sector higher and prices may rise from here. 

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time. 

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future. 

Finally, in international stocks, 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 9-28-12

The markets closed out the quarter on a sour note.  For the week, the Dow fell 1.1%, the S&P was lower by 1.3%, and the Nasdaq returned -2.0%.  The results for the quarter were much better, with the Dow higher by 4.3%, the S&P rose 5.8%, and the Nasdaq turned in a nice gain of 6.2%.  For commodities, gold was slightly lower by 0.3% this week.  Oil bounced around, but closed down 0.8%.  The other major type of oil, Brent, closed above $112 per barrel.   

Source: MSN Moneycentral

Problems in Europe resurfaced this week, contributing to the negative performance of the market.  Doubts on the effectiveness of the recent stimulus and sour economic data also added to the downward pressure. 

Thinking back to our commentary last week, we mentioned a news article (LINK) that highlighted the “agreement” between our President and European leaders for no surprises from that region before the election.  As this week has shown, that doesn’t appear to be working.

In order to be eligible for bailout funds, a country must show an effort towards reducing their deficits.  This week, Spain and Greece announced new austerity measures of additional tax hikes and spending cuts to again meet that requirement. 

That did not sit well with the populace who took to the streets in protest.  Spain, in particular, saw very large gatherings of protestors.  

The hostile images lead many to wonder if the new tax hikes and spending cuts would actually be implemented.  That would result in a loss of the necessary bailout funds, a worry that sent the markets lower. 

Interestingly enough, some austerity measures have already been implemented in Spain, with tax increases and spending cuts already in place.  Yet we learned this week that spending has risen 8.9% so far this year, while tax receipts were lower by 4.6%. 

Remember, increased taxes have shown to stifle economic growth.  And that slower growth leads to less tax revenue collected by the government.  The optimal combination is lower government spending combined with lower taxes.  Until reforms along those lines are made, the disappointing results are no surprise and will continue. 

Adding to the negative pressure of the market, a Fed official threw cold water on the latest round of stimulus.  Philadelphia Fed President Plosser made news by saying he didn’t think the latest stimulus will improve the economy or boost growth.  He also was concerned that this bond buying would hurt the Fed’s credibility.  The comments were unexpected and helped send the markets lower. 

As for economic data this week, the results were mixed, though leaned to the negative side. 

For the positives, consumer confidence was strong and home prices have risen.  Personal income showed a slight gain (though is negative when considering inflation).  Plus, the employment picture looked a little brighter this week.

On the negative side, new home sales came in below estimates.  Manufacturing in the Chicago region showed a contraction for the first time since 2009.  Durable goods showed a substantial drop of 13.1%.  Most importantly, the final revision to the second quarter GDP showed a growth of only 1.3% (1.25%, actually), revised down from 1.7%.  Unfortunately, economic growth has steadily declined over the past year and the trend is headed lower.


Next week

With the month and quarter ending this week, next week will be busier due to the economic information that will be released.  Of note, we will get info on the strength of the manufacturing and service sectors, auto sales, and the important monthly employment report.  Company earnings will also begin trickling in. 

Fed Chairman Bernanke will be speaking next week, as well.  Since the market is currently more focused on stimulus and bailouts than fundamentals like earnings and economic growth, Bernanke’s comments will be closely scrutinized. 


Investment Strategy

The week was another disappointment after the big stimulus announcement two weeks ago.  Past stimulus programs saw a corresponding rise in the market and that has yet to be the case here.  While most see a good chance the market will rise once the stimulus gets into gear, caution is still warranted.  As these weeks have shown, the market usually does the opposite of what most think it will.

If we do see a buying opportunity, in stocks, we still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well. 

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  We wouldn’t add to positions at this point, but would not look to sell, either. 

We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run.  However, the recent stimulus may send this sector higher and prices may rise from here. 

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time. 

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future. 

Finally, in international stocks, 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.