The markets kept chugging higher this week. Through the Friday close, the Dow rose 2.4%, the S&P was higher by 2.0%, and the Nasdaq returned a nice 2.8%. Gold also rose, closing the week with a 2.0% gain. Oil sold off slightly, down 0.2% to $98.46 a barrel.
Source: MSN Moneycentral
Even though it was a short and uneventful week, the markets put up some nice returns and currently stand at six month highs. In fact, according to the Wall Street Journal, this has been the best start of the year for the markets in 15 years.
What’s interesting so far is that the stocks that performed horribly last year are soaring this year. For example, Bank of America lost 57% last year, but is up 27% so far this year. Netflix is up 44% after losing 62% last year. Same with Sears, who lost 63% last year and returned 54% this year. The story is the similar for broader sectors like housing and financials. Also, the most shorted stocks (shorting is when an investor bets that the stock will go down) are handily outperforming the market.
Why is this occurring? For one thing, they began at a pretty low starting point. Also, there has been a noticeable lack of news out of Europe. Correlation between asset classes has come off slightly, allowing stocks to trade more independently and more on their fundamentals. Expectations have been set so low that even a modest improvement has been worthy of a rally.
For the most part, though, corporate earnings have been poor. According to CNBC, only 55% of companies have beat estimates, making that the lowest level in 10 years. Usually that number is in the upper 60’s or above. Less than 20% of companies in the S&P 500 have reported so far, so it is still early, but the trend is worth noting.
Economic data this week was mixed. Manufacturing reports showed a slight growth, same for weekly unemployment figures. Inflation measured by the PPI and CPI also showed no gains, signaling no inflation to the markets.
For the year, producer prices (what producers of a product pay for input materials, etc.) rose 4.8% and consumer prices rose 3.0%. According to shadowstats.com, if we measured CPI the way it was calculated in 1990, that inflation rate would be just above 6%. Using 1980 methodologies, the rate would be slightly above 10%!
As we discuss every month on these inflation numbers, the PPI and CPI doesn’t give a good picture on actual inflation. Methodologies change and skew the results. This is worth noting, since the metrics for the PPI are changing next month, so look for inflation to be even lower – according to the measurements, anyway. However, these are the metrics that the Fed relies on so heavily for their outlook, so it is worth following.
Next Week
Next week will be very busy. About a quarter of the S&P 500 listed companies will be releasing their earnings. Also, we will get economic data on housing, durable goods (which are products that don’t wear out quickly, like an appliance, car, or phone), leading economic indicators, and most importantly, 4th quarter GDP.
The Fed will also be in the news as they meet with their decision on interest rates. This month will be interesting as they are beginning their new “openness” policy. The Fed will give many more details on their outlook and reasoning and Fed Chief Ben Bernanke will also hold a press conference to address questions.
Investment Strategy
The market continues to climb and we have enjoyed the rise. However, we are still cautious and are hesitant to add new money here. Low expectations and a lack of news out of Europe has provided a nice backdrop for the markets to rally. A negative news story can instantly reverse this.
If the news is bad enough, though, the prospect of a new stimulus program (QE3) becomes more likely. Especially since there is little sign of inflation (according to the CPI and PPI). If you recall 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 had to put new money in the markets, 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 MoneycentralEven though it was a short and uneventful week, the markets put up some nice returns and currently stand at six month highs. In fact, according to the Wall Street Journal, this has been the best start of the year for the markets in 15 years.
What’s interesting so far is that the stocks that performed horribly last year are soaring this year. For example, Bank of America lost 57% last year, but is up 27% so far this year. Netflix is up 44% after losing 62% last year. Same with Sears, who lost 63% last year and returned 54% this year. The story is the similar for broader sectors like housing and financials. Also, the most shorted stocks (shorting is when an investor bets that the stock will go down) are handily outperforming the market.
Why is this occurring? For one thing, they began at a pretty low starting point. Also, there has been a noticeable lack of news out of Europe. Correlation between asset classes has come off slightly, allowing stocks to trade more independently and more on their fundamentals. Expectations have been set so low that even a modest improvement has been worthy of a rally.
For the most part, though, corporate earnings have been poor. According to CNBC, only 55% of companies have beat estimates, making that the lowest level in 10 years. Usually that number is in the upper 60’s or above. Less than 20% of companies in the S&P 500 have reported so far, so it is still early, but the trend is worth noting.
Economic data this week was mixed. Manufacturing reports showed a slight growth, same for weekly unemployment figures. Inflation measured by the PPI and CPI also showed no gains, signaling no inflation to the markets.
For the year, producer prices (what producers of a product pay for input materials, etc.) rose 4.8% and consumer prices rose 3.0%. According to shadowstats.com, if we measured CPI the way it was calculated in 1990, that inflation rate would be just above 6%. Using 1980 methodologies, the rate would be slightly above 10%!
As we discuss every month on these inflation numbers, the PPI and CPI doesn’t give a good picture on actual inflation. Methodologies change and skew the results. This is worth noting, since the metrics for the PPI are changing next month, so look for inflation to be even lower – according to the measurements, anyway. However, these are the metrics that the Fed relies on so heavily for their outlook, so it is worth following.
Next Week
Next week will be very busy. About a quarter of the S&P 500 listed companies will be releasing their earnings. Also, we will get economic data on housing, durable goods (which are products that don’t wear out quickly, like an appliance, car, or phone), leading economic indicators, and most importantly, 4th quarter GDP.
The Fed will also be in the news as they meet with their decision on interest rates. This month will be interesting as they are beginning their new “openness” policy. The Fed will give many more details on their outlook and reasoning and Fed Chief Ben Bernanke will also hold a press conference to address questions.
Investment Strategy
The market continues to climb and we have enjoyed the rise. However, we are still cautious and are hesitant to add new money here. Low expectations and a lack of news out of Europe has provided a nice backdrop for the markets to rally. A negative news story can instantly reverse this.
If the news is bad enough, though, the prospect of a new stimulus program (QE3) becomes more likely. Especially since there is little sign of inflation (according to the CPI and PPI). If you recall 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 had to put new money in the markets, 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.
