Markets trended higher for much of the week, again reaching new highs, until negative news out of Europe sent the markets sharply lower on Friday. For the week, the Dow fell 0.5%, the S&P was off 0.2%, and Nasdaq was slightly lower, returning -0.1%. Gold sold off modestly with a -0.8% return. Oil was higher by 0.9% this week to $98.67 a barrel. Brent crude (the other major type of crude) has risen to $117 per barrel. Since much of the gas in our region uses this type of crude, it explains why pump prices have continued to rise.
Source: MSN Moneycentral
Yes, Europe was back in the news this week. Greece, more specifically. The news really had little effect on the markets until Friday, though.
As a condition of a Greek bailout, they had to show a commitment in reducing their debt to receive a new infusion of cash. Some of the austerity measures announced included cuts in the amount of government employees and a reduction in minimum wage. That news was generally well received by the markets, seen as a sign of progress.
Not surprisingly, the Greek citizens were less than enthused. They took to the streets, voicing their displeasure with another round of protests. By Friday, it looked as though the deal might fall through and the markets dropped sharply on the news.
Much was made this week over how tiny Greece is and comparisons were made saying it is roughly the size of Rhode Island. Therefore, there is little to worry about. After all, if something bad were to happen to Rhode Island, the impact on the other states would be miniscule. We feel that this Greek drama is more symbolic and perhaps a canary in the coal mine. Once that first domino falls, it is very likely that others will fall behind it.
Getting back to the US, this week had some big news for the banking sector. We saw a settlement in the ongoing foreclosure “abuse” drama. It was announced that several of the big banks agreed to pay $26 billion to settle the legal dispute with the government. The proceeds will go to help homeowners near foreclosure by reducing principal and rates. Additionally, those who have been foreclosed on are eligible for around a $2,000 payment.
If a bank made a mistake in the foreclosure process, there is no doubt they should be penalized. However, it is frustrating to see someone who stopped making payments on their house be the beneficiary of this decision. The responsible homeowner who made a large down payment and played by the rules gets nothing.
It is dangerous precedent when a contract can be altered at the whim of a government. Contractual law has been again usurped. What bank would want to write mortgages when the government can change the terms as they see fit? To compensate for this risk, a bank will charge a premium. In the end, future homeowners will end up paying more for this.
On the positive side, the banks were prepared for this settlement. They have been setting aside funds to pay for this very problem. When the news was announced, bank stocks rallied as they finally have some closure on this subject.
Another good outcome is that it gets the foreclosure ball rolling again. For much of the past year, the banks have been stuck in a foreclosure-limbo. Being able to proceed here allows the housing market to bottom. That is what is needed. The market will never recover until it allows itself to find a bottom – naturally.
Staying on that debt theme, data this week showed that consumer credit (which includes things like credit cards, student loans, and auto loans) increased at a remarkably high rate. This was praised by many as a good sign. An increase in credit allows people to buy more “stuff”, which is good for the economy. We see this as a more dangerous sign. People are trying to keep up their standard of living and borrowing the funds to do so. Debt is not always a good thing. It can be dangerous.
Other economic data this week was light, but still showed the slow growth continuing. The employment picture looks to be improving as weekly unemployment claims fell. Also, the JOLTS report (Job Openings and Labor Turnover, our preferred metric on employment) showed an improvement. Job openings have increased at a nice pace, although the rate of positions filled was not quite as robust.
Next Week
The pace of economic data picks up next week. We will get info on retail sales, imports and exports, housing, industrial production, and inflation with the CPI and PPI. Corporate earnings will continue to come in, but the pace is slowing.
Investment Strategy
We were encouraged by the sell-off Friday, as it is healthy for the market to have pullbacks. The market has trended higher since December, returning more than 7% and we were worried that the market was getting too excited.
Despite the sell-off, the market seems to want to go higher. At these high levels, though, we haven’t been buying, but haven’t been selling, either.
We would look to put new money in on a nice pullback. If it does, we would put money into large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising.
We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position recently, but would still 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 MoneycentralYes, Europe was back in the news this week. Greece, more specifically. The news really had little effect on the markets until Friday, though.
As a condition of a Greek bailout, they had to show a commitment in reducing their debt to receive a new infusion of cash. Some of the austerity measures announced included cuts in the amount of government employees and a reduction in minimum wage. That news was generally well received by the markets, seen as a sign of progress.
Not surprisingly, the Greek citizens were less than enthused. They took to the streets, voicing their displeasure with another round of protests. By Friday, it looked as though the deal might fall through and the markets dropped sharply on the news.
Much was made this week over how tiny Greece is and comparisons were made saying it is roughly the size of Rhode Island. Therefore, there is little to worry about. After all, if something bad were to happen to Rhode Island, the impact on the other states would be miniscule. We feel that this Greek drama is more symbolic and perhaps a canary in the coal mine. Once that first domino falls, it is very likely that others will fall behind it.
Getting back to the US, this week had some big news for the banking sector. We saw a settlement in the ongoing foreclosure “abuse” drama. It was announced that several of the big banks agreed to pay $26 billion to settle the legal dispute with the government. The proceeds will go to help homeowners near foreclosure by reducing principal and rates. Additionally, those who have been foreclosed on are eligible for around a $2,000 payment.
If a bank made a mistake in the foreclosure process, there is no doubt they should be penalized. However, it is frustrating to see someone who stopped making payments on their house be the beneficiary of this decision. The responsible homeowner who made a large down payment and played by the rules gets nothing.
It is dangerous precedent when a contract can be altered at the whim of a government. Contractual law has been again usurped. What bank would want to write mortgages when the government can change the terms as they see fit? To compensate for this risk, a bank will charge a premium. In the end, future homeowners will end up paying more for this.
On the positive side, the banks were prepared for this settlement. They have been setting aside funds to pay for this very problem. When the news was announced, bank stocks rallied as they finally have some closure on this subject.
Another good outcome is that it gets the foreclosure ball rolling again. For much of the past year, the banks have been stuck in a foreclosure-limbo. Being able to proceed here allows the housing market to bottom. That is what is needed. The market will never recover until it allows itself to find a bottom – naturally.
Staying on that debt theme, data this week showed that consumer credit (which includes things like credit cards, student loans, and auto loans) increased at a remarkably high rate. This was praised by many as a good sign. An increase in credit allows people to buy more “stuff”, which is good for the economy. We see this as a more dangerous sign. People are trying to keep up their standard of living and borrowing the funds to do so. Debt is not always a good thing. It can be dangerous.
Other economic data this week was light, but still showed the slow growth continuing. The employment picture looks to be improving as weekly unemployment claims fell. Also, the JOLTS report (Job Openings and Labor Turnover, our preferred metric on employment) showed an improvement. Job openings have increased at a nice pace, although the rate of positions filled was not quite as robust.
Next Week
The pace of economic data picks up next week. We will get info on retail sales, imports and exports, housing, industrial production, and inflation with the CPI and PPI. Corporate earnings will continue to come in, but the pace is slowing.
Investment Strategy
We were encouraged by the sell-off Friday, as it is healthy for the market to have pullbacks. The market has trended higher since December, returning more than 7% and we were worried that the market was getting too excited.
Despite the sell-off, the market seems to want to go higher. At these high levels, though, we haven’t been buying, but haven’t been selling, either.
We would look to put new money in on a nice pullback. If it does, we would put money into large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising.
We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position recently, but would still 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.
