The markets moved higher for much of the week until negative news out of Europe caused a drop on Friday. The Dow rose 0.5%, the S&P was up 0.9%, and the Nasdaq returned 1.4%. Gold continued to climb, rising 0.9% for the week. Oil was above the $100 per barrel for much of the week until news broke that Europe would not participate in Iranian oil embargo for at least six months (if ever). That meant there would be no supply problems, so oil fell sharply and closed the week down 2.8% to $98.70 a barrel.
Source: MSN Moneycentral
Until now, we were enjoying a rather uneventful year without news out of Europe impacting the markets. Sadly, we knew that had to end at some point.
On Friday, the ratings company S&P announced a downgrade in the credit rating of several European countries. It started with France (who had a AAA rating, the highest possible), and there were rumors of others. This scared the markets as they dropped over 1.2% at one point, but ended up closing the day down just 0.4%. By the end of the day, nine countries in total were downgraded.
You would think that European bond yields would rise on the news (yields are higher when risk is higher; making it cost more to borrow). However, there was very little reaction.
One explanation is that the downgrade was anticipated, so it was of little surprise. Another is that the European Central Bank (ECB) has been actively buying these bonds (or funding banks to purchase these bonds), so that has been keeping bond yields in check, as well.
Greece also made news over their debt problems. Negotiations with bondholders were halted due to a disagreement on their debt restructuring (they need to change the terms of outstanding debt repayments to remain solvent). Obviously the bondholders have been reluctant to give up too much and thought Greece was asking for to large a sacrifice from them. If Greece can’t manage to straighten out their debt problems, it has been rumored that an exit from the Euro could be possible.
Adding to the jittery market on Friday, JP Morgan announced disappointing earnings from the last quarter. The news sent financial sector stocks sharply lower.
Earlier in the week, the aluminum producer Alcoa reported their earnings. The results were rather poor, but came in at the estimates. That set the mood that earnings season might not be great, but in line with forecasts.
Economic data this week was mixed. The Beige Book from the Fed is a report on economic conditions around the U.S. and it showed a slight growth. While not great, slight growth is better than no growth (or negative growth).
Retail sales for December also showed a slight growth, rising 0.1%. While any gain is nice, the earnings from those sales fell by 0.2%. So stores sold slightly more in December, but they sold items at a cheaper price, meaning they made less money.
Even more interesting, it was reported this week that consumer borrowing (through credit cards, etc.) rose by the largest amount in 10 years in December. This was interpreted as a good sign since it meant people were spending more. This is not a positive development in our opinion, since it means people technically have less money to spend and must borrow to make up the difference. A large reduction in debt is needed, but that doesn’t look like it will happen anytime soon.
The unemployment picture also got a bit darker as initial jobless claims (which measures how many people filed for unemployment benefits in the week) rose sharply to 399,000 for the week. That number had been improving in recent weeks and last stood at 375k. It looks like much of that improvement was due to temporary factors with the holiday season (the figures are reported with seasonal adjustments already, which should account for much of the temporary, seasonal hiring).
Another employment report, the JOLTs survey (is actually called the Job Openings and Labor Turnover Survey. It measures just what it says and is regarded as a more accurate employment metric) showed little improvement. Hiring increased slightly, but job openings have actually decreased. It does not show the same improvement that many were so happy about in the last few weeks.
Next Week
It will be a short week next week as the markets will be closed on Monday for MLK day. The remaining four days will be pretty busy, though. Corporate earnings will start coming in at a steady pace. So far, there has been little to be excited about, but next week will give us a better picture of the earnings picture.
For economic data, we will get info on housing, as well as inflation with the PPI and CPI (the producer and consumer price indexes).
Investment Strategy
It figures that the market would rally when we announce a more cautious outlook. As we saw on Friday, though, the market can be jittery and any negative story can send the markets sharply lower.
With this negative news, we are also entering that loony time where bad news is good news. Traders know if the news is bad enough, the Fed (or ECB) will step up and announce a new stimulus program. Remember last time, the markets shot up on the prospect of a new stimulus.
As we also saw, but few recognize, the stimulus did nothing to help the economy. It was successful in creating a massive amount of new debt, though, and the markets dropped back to earth when the spending stopped. With the new voting Fed members (not all of the Federal Bank members vote. It rotates every year and new members began with the new year.) expressing favorable positions on stimulus, the odds of a QE3 are much higher.
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 still very high.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices from here.
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.
Source: MSN MoneycentralUntil now, we were enjoying a rather uneventful year without news out of Europe impacting the markets. Sadly, we knew that had to end at some point.
On Friday, the ratings company S&P announced a downgrade in the credit rating of several European countries. It started with France (who had a AAA rating, the highest possible), and there were rumors of others. This scared the markets as they dropped over 1.2% at one point, but ended up closing the day down just 0.4%. By the end of the day, nine countries in total were downgraded.
You would think that European bond yields would rise on the news (yields are higher when risk is higher; making it cost more to borrow). However, there was very little reaction.
One explanation is that the downgrade was anticipated, so it was of little surprise. Another is that the European Central Bank (ECB) has been actively buying these bonds (or funding banks to purchase these bonds), so that has been keeping bond yields in check, as well.
Greece also made news over their debt problems. Negotiations with bondholders were halted due to a disagreement on their debt restructuring (they need to change the terms of outstanding debt repayments to remain solvent). Obviously the bondholders have been reluctant to give up too much and thought Greece was asking for to large a sacrifice from them. If Greece can’t manage to straighten out their debt problems, it has been rumored that an exit from the Euro could be possible.
Adding to the jittery market on Friday, JP Morgan announced disappointing earnings from the last quarter. The news sent financial sector stocks sharply lower.
Earlier in the week, the aluminum producer Alcoa reported their earnings. The results were rather poor, but came in at the estimates. That set the mood that earnings season might not be great, but in line with forecasts.
Economic data this week was mixed. The Beige Book from the Fed is a report on economic conditions around the U.S. and it showed a slight growth. While not great, slight growth is better than no growth (or negative growth).
Retail sales for December also showed a slight growth, rising 0.1%. While any gain is nice, the earnings from those sales fell by 0.2%. So stores sold slightly more in December, but they sold items at a cheaper price, meaning they made less money.
Even more interesting, it was reported this week that consumer borrowing (through credit cards, etc.) rose by the largest amount in 10 years in December. This was interpreted as a good sign since it meant people were spending more. This is not a positive development in our opinion, since it means people technically have less money to spend and must borrow to make up the difference. A large reduction in debt is needed, but that doesn’t look like it will happen anytime soon.
The unemployment picture also got a bit darker as initial jobless claims (which measures how many people filed for unemployment benefits in the week) rose sharply to 399,000 for the week. That number had been improving in recent weeks and last stood at 375k. It looks like much of that improvement was due to temporary factors with the holiday season (the figures are reported with seasonal adjustments already, which should account for much of the temporary, seasonal hiring).
Another employment report, the JOLTs survey (is actually called the Job Openings and Labor Turnover Survey. It measures just what it says and is regarded as a more accurate employment metric) showed little improvement. Hiring increased slightly, but job openings have actually decreased. It does not show the same improvement that many were so happy about in the last few weeks.
Next Week
It will be a short week next week as the markets will be closed on Monday for MLK day. The remaining four days will be pretty busy, though. Corporate earnings will start coming in at a steady pace. So far, there has been little to be excited about, but next week will give us a better picture of the earnings picture.
For economic data, we will get info on housing, as well as inflation with the PPI and CPI (the producer and consumer price indexes).
Investment Strategy
It figures that the market would rally when we announce a more cautious outlook. As we saw on Friday, though, the market can be jittery and any negative story can send the markets sharply lower.
With this negative news, we are also entering that loony time where bad news is good news. Traders know if the news is bad enough, the Fed (or ECB) will step up and announce a new stimulus program. Remember last time, the markets shot up on the prospect of a new stimulus.
As we also saw, but few recognize, the stimulus did nothing to help the economy. It was successful in creating a massive amount of new debt, though, and the markets dropped back to earth when the spending stopped. With the new voting Fed members (not all of the Federal Bank members vote. It rotates every year and new members began with the new year.) expressing favorable positions on stimulus, the odds of a QE3 are much higher.
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 still very high.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices from here.
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.
