The markets closed the week with little change but again reached new highs along the way. Through the close Friday, the Dow was higher by 0.3%, the S&P also rose 0.3%, and Nasdaq returned 0.4%. Gold continues to climb, up 2.9% this week. Also continuing to climb, oil prices reached new highs with (WTI) crude within inches of $110 per barrel and up 6.0% this week. Brent crude (the other major oil type) rose to $125 per barrel.
Source: MSN Moneycentral
Several times this week the Dow crossed the 13,000 mark, a level that hasn’t been reached since mid-2008. Although this is a meaningless round number, it is a milestone that garnered much attention. The Dow wasn’t able to close above this mark, though, but it has had a remarkable ride to get to this point. Still, the Dow and S&P closed at the highest level since mid-2008 and the Nasdaq closed at the highest level in 12 years.
Helping the markets this week was again news from Greece. Over the weekend, they wrapped up their latest bailout package. While there are legitimate questions over whether Greece can live up to their end of the deal, it does take a messy default off the table - for the time being.
China also helped the markets by loosening lending requirements. While China is still growing, their rate of growth has slowed recently. Loosening lending requirements makes it easier for the Chinese to borrow, therefore spurring consumption. This is the same thing many other countries around the world are doing (including us) to boost their economies.
All these bailouts and cheap lending may prop up the market in the short term, but they eventually fall when the stimulus wears off. And it does little, if anything, to help the economy. That is a reason why gold has been rallying recently, and why it looks good in the long run. In the end, these countries will have a weaker currency, higher debt, and higher inflation. That is good for gold.
That also leads us to the big story of the week, oil. Oil prices continue to climb, spiking to levels last seen - and rising in a similar fashion - to a year ago. The proverbial ‘pain at the pump’ is a serious problem for people and the economy. Sadly, the momentum higher shows little sign of subsiding.
It is even more problematic when you consider that every recession since the 1970’s has been preceded by a spike in oil prices. We believe that was a major factor behind the market crash and recession in 2008. While oil isn’t near the $150 per barrel we saw back then, the trend is troubling.
Also giving us reason to be cautious on the market, corporate insiders are now at their most pessimistic level since July, 2011 (as measured by the level of insider buying to selling). It was at that time when the market dropped around 15% in a matter of weeks. While this insider indicator isn’t always correct, it tends to be right more often than not. This alone is not a reason to sell, but is another factor behind our cautious outlook.
Next Week
Earnings season has quieted down, so there will be few earnings releases next week. There will be several releases on economic data, but none of significant importance. We will get info on housing, durable goods, consumer confidence, personal income and spending, and the Fed’s Beige Book.
Investment Strategy
No change here as we are still very cautious. This week we noticed more vocally bearish (pessimistic) comments and more calls for a top - although the market usually does what the majority thinks it won’t. We are not actively selling, but are not buying into the stock market.
If we were to get a pullback, 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.
There is always the opportunity to find undervalued individual stocks at any point. There are several ideas we are especially bullish (optimistic) on. With the high oil prices, we like oil production companies, especially ones related to the shale play, and would add to these positions on a pullback.
We also like businesses related to auto repair as people hold on to their cars for longer periods. Many think that means car sales will eventually pick up soon, but we don’t. Fuel efficiency requirements have raised the costs of new vehicles (and will significantly raise costs in the future). And the costs for used cars has increased, too. Older cars mean more repairs. Still, these stocks are also expensive and would look to buy on a pullback.
The other idea we like is very low end retail stores. These companies will do well as costs increase and shoppers look for bargains.
We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Like we mentioned above, debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. However, we 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 MoneycentralSeveral times this week the Dow crossed the 13,000 mark, a level that hasn’t been reached since mid-2008. Although this is a meaningless round number, it is a milestone that garnered much attention. The Dow wasn’t able to close above this mark, though, but it has had a remarkable ride to get to this point. Still, the Dow and S&P closed at the highest level since mid-2008 and the Nasdaq closed at the highest level in 12 years.
Helping the markets this week was again news from Greece. Over the weekend, they wrapped up their latest bailout package. While there are legitimate questions over whether Greece can live up to their end of the deal, it does take a messy default off the table - for the time being.
China also helped the markets by loosening lending requirements. While China is still growing, their rate of growth has slowed recently. Loosening lending requirements makes it easier for the Chinese to borrow, therefore spurring consumption. This is the same thing many other countries around the world are doing (including us) to boost their economies.
All these bailouts and cheap lending may prop up the market in the short term, but they eventually fall when the stimulus wears off. And it does little, if anything, to help the economy. That is a reason why gold has been rallying recently, and why it looks good in the long run. In the end, these countries will have a weaker currency, higher debt, and higher inflation. That is good for gold.
That also leads us to the big story of the week, oil. Oil prices continue to climb, spiking to levels last seen - and rising in a similar fashion - to a year ago. The proverbial ‘pain at the pump’ is a serious problem for people and the economy. Sadly, the momentum higher shows little sign of subsiding.
It is even more problematic when you consider that every recession since the 1970’s has been preceded by a spike in oil prices. We believe that was a major factor behind the market crash and recession in 2008. While oil isn’t near the $150 per barrel we saw back then, the trend is troubling.
Also giving us reason to be cautious on the market, corporate insiders are now at their most pessimistic level since July, 2011 (as measured by the level of insider buying to selling). It was at that time when the market dropped around 15% in a matter of weeks. While this insider indicator isn’t always correct, it tends to be right more often than not. This alone is not a reason to sell, but is another factor behind our cautious outlook.
Next Week
Earnings season has quieted down, so there will be few earnings releases next week. There will be several releases on economic data, but none of significant importance. We will get info on housing, durable goods, consumer confidence, personal income and spending, and the Fed’s Beige Book.
Investment Strategy
No change here as we are still very cautious. This week we noticed more vocally bearish (pessimistic) comments and more calls for a top - although the market usually does what the majority thinks it won’t. We are not actively selling, but are not buying into the stock market.
If we were to get a pullback, 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.
There is always the opportunity to find undervalued individual stocks at any point. There are several ideas we are especially bullish (optimistic) on. With the high oil prices, we like oil production companies, especially ones related to the shale play, and would add to these positions on a pullback.
We also like businesses related to auto repair as people hold on to their cars for longer periods. Many think that means car sales will eventually pick up soon, but we don’t. Fuel efficiency requirements have raised the costs of new vehicles (and will significantly raise costs in the future). And the costs for used cars has increased, too. Older cars mean more repairs. Still, these stocks are also expensive and would look to buy on a pullback.
The other idea we like is very low end retail stores. These companies will do well as costs increase and shoppers look for bargains.
We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Like we mentioned above, debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. However, we 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.
