It was another quiet week on Wall Street with mixed results in the markets. The Dow fell 0.5%, although at one point it touched its highest level since 2008. The S&P rose slightly, up 0.1% and the Nasdaq turned in a gain of 1.1%. Comments from the Fed sent commodity prices higher, with oil rising 1.25% to just shy of $100 per barrel. Gold had a terrific week, gaining more than 4%.
Source: MSN Moneycentral
Low volatility continues to be the story in the markets. So far this year, we have only had one day with moves of more than 100 points in the Dow. It wasn’t long ago that it was rare to have a move under 100 points. At that time, stocks were highly correlated and they moved in tandem. Now they are moving more independently. According to the Wall Street Journal, correlation was running at 74% last April (a correlation of 1, or 100%, indicates a perfect correlation, or all stocks moving in tandem). Today, correlation is just 15%.
The Fed was the hot topic this week. In a surprise to everyone, it was announced that they would keep these historically low interest rates in place for longer than anticipated. Their original forecasts kept rates low until 2013, but are now looking to at least 2014, 18 months longer than anticipated.
The Fed originally lowered interest rates to 0% at the height of the financial crisis in order to get liquidity into the economy and help avert a more serious problem. This has been the standard reaction from central banks in a crisis recently, although the results are open to debate.
It is surprising that they see a need to keep this crisis-level response in place for at least six years (from when initially implemented until their forecast of 2014). When rates are this low for this long, a misallocation of capital occurs. That usually leads to an even bigger problem. One only needs to look at how low interest rates fuelled the housing bubble as an example of that.
At any rate, the prospect of additional stimulus and very low interest rates sent the markets higher. The stock market loves cheap money. However, it is inflationary since it weakens our dollar. Commodities popped higher, with gold leading the way.
Another point worth noting, the Fed has now explicitly targeted an inflation rate of 2%. Having a targeted inflation number is difficult for the Fed, since they have two goals. One is price stability (which theoretically a 0% rate of inflation would accomplish, not 2%), but they also try to achieve full employment. These two goals can sometimes run opposite of each other. If that is the case, the Fed said that employment is their first priority.
You can see now as the Fed is goosing the markets to go higher, stoking inflation, in order to increase hiring. Somehow they think rising prices and tighter budgets helps a business to hire. Actually, they keep these rates low to help spur lending, but that has yet to happen. We wish they would stop trying to manipulate the market and allow the free market economy to work.
Getting away from the Fed and looking at the earnings picture, we had a mixed week this week. Corporate earnings have been great in some cases, but quite the opposite in others. Apple tore the cover off the ball with their earnings as sales continue to rise. Other companies like Caterpillar and McDonalds also continue to do fine. Yet there are a slew of other companies that haven’t done well.
It is interesting to note that while Apple is doing great, the service providers like AT&T and Verizon are doing poorly, due in part to the subsidies they must pay Apple for their product.
Economic data this week was also mixed. Home sales and leading economic indicators were poor. Yet durable goods posted a solid gain. We also got the fourth quarter GDP number and it showed that we grew by 2.8% last year. It was below the 3% many were expecting, but it was still the highest level we have seen in 18 months.
Next Week
We will have another busy week next week. Corporate earnings will continue to come in at a steady pace. There will also be a significant amount of economic data released, since next week is also the end of the month. As the week progresses, we will get info on personal income and spending, consumer confidence, manufacturing data, and most importantly, January employment data.
Investment Strategy
As the market continues to rise, we become more and more cautious as we worry that it has become overbought. Low expectations and a lack of news out of Europe has provided a nice backdrop for the markets to rally. However, earnings have been mediocre, growth is still slow, and the problems with Europe were never solved.
The actions of governments and agencies both here and abroad have also had a large influence on the markets. It is difficult to make decisions when centrally planning becomes more prevalent. The prospect of a new stimulus would be a catalyst for the markets, but that comes at the whim of policymakers.
We aren’t looking to put more money into stocks at this point, at least for the short term. Longer term, if we had to put money in, 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 these higher prices.
We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now, and have looked to short them (bet on the prices falling). However, that is looking like a lost cause. With the Fed keeping rates low as far as the eye can see, the likelihood of yields rising in the near term is slim. We thought the bond market would force rates higher, but fighting the Fed has simply been a losing proposition. A short bond position provides a nice hedge here, but the potential for profit is low at the moment.
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).
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 MoneycentralLow volatility continues to be the story in the markets. So far this year, we have only had one day with moves of more than 100 points in the Dow. It wasn’t long ago that it was rare to have a move under 100 points. At that time, stocks were highly correlated and they moved in tandem. Now they are moving more independently. According to the Wall Street Journal, correlation was running at 74% last April (a correlation of 1, or 100%, indicates a perfect correlation, or all stocks moving in tandem). Today, correlation is just 15%.
The Fed was the hot topic this week. In a surprise to everyone, it was announced that they would keep these historically low interest rates in place for longer than anticipated. Their original forecasts kept rates low until 2013, but are now looking to at least 2014, 18 months longer than anticipated.
The Fed originally lowered interest rates to 0% at the height of the financial crisis in order to get liquidity into the economy and help avert a more serious problem. This has been the standard reaction from central banks in a crisis recently, although the results are open to debate.
It is surprising that they see a need to keep this crisis-level response in place for at least six years (from when initially implemented until their forecast of 2014). When rates are this low for this long, a misallocation of capital occurs. That usually leads to an even bigger problem. One only needs to look at how low interest rates fuelled the housing bubble as an example of that.
At any rate, the prospect of additional stimulus and very low interest rates sent the markets higher. The stock market loves cheap money. However, it is inflationary since it weakens our dollar. Commodities popped higher, with gold leading the way.
Another point worth noting, the Fed has now explicitly targeted an inflation rate of 2%. Having a targeted inflation number is difficult for the Fed, since they have two goals. One is price stability (which theoretically a 0% rate of inflation would accomplish, not 2%), but they also try to achieve full employment. These two goals can sometimes run opposite of each other. If that is the case, the Fed said that employment is their first priority.
You can see now as the Fed is goosing the markets to go higher, stoking inflation, in order to increase hiring. Somehow they think rising prices and tighter budgets helps a business to hire. Actually, they keep these rates low to help spur lending, but that has yet to happen. We wish they would stop trying to manipulate the market and allow the free market economy to work.
Getting away from the Fed and looking at the earnings picture, we had a mixed week this week. Corporate earnings have been great in some cases, but quite the opposite in others. Apple tore the cover off the ball with their earnings as sales continue to rise. Other companies like Caterpillar and McDonalds also continue to do fine. Yet there are a slew of other companies that haven’t done well.
It is interesting to note that while Apple is doing great, the service providers like AT&T and Verizon are doing poorly, due in part to the subsidies they must pay Apple for their product.
Economic data this week was also mixed. Home sales and leading economic indicators were poor. Yet durable goods posted a solid gain. We also got the fourth quarter GDP number and it showed that we grew by 2.8% last year. It was below the 3% many were expecting, but it was still the highest level we have seen in 18 months.
Next Week
We will have another busy week next week. Corporate earnings will continue to come in at a steady pace. There will also be a significant amount of economic data released, since next week is also the end of the month. As the week progresses, we will get info on personal income and spending, consumer confidence, manufacturing data, and most importantly, January employment data.
Investment Strategy
As the market continues to rise, we become more and more cautious as we worry that it has become overbought. Low expectations and a lack of news out of Europe has provided a nice backdrop for the markets to rally. However, earnings have been mediocre, growth is still slow, and the problems with Europe were never solved.
The actions of governments and agencies both here and abroad have also had a large influence on the markets. It is difficult to make decisions when centrally planning becomes more prevalent. The prospect of a new stimulus would be a catalyst for the markets, but that comes at the whim of policymakers.
We aren’t looking to put more money into stocks at this point, at least for the short term. Longer term, if we had to put money in, 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 these higher prices.
We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now, and have looked to short them (bet on the prices falling). However, that is looking like a lost cause. With the Fed keeping rates low as far as the eye can see, the likelihood of yields rising in the near term is slim. We thought the bond market would force rates higher, but fighting the Fed has simply been a losing proposition. A short bond position provides a nice hedge here, but the potential for profit is low at the moment.
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).
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.
