The markets continued to push higher this week. Through the Friday close, the Dow rose 1.6%, the S&P climbed 2.2%, and Nasdaq posted a solid 3.2% return. Gold was higher much of the week but tumbled Friday to close with just a 0.3% gain. Oil took the exact opposite path, moving lower most the week then popping higher Friday, but still closed the week down 1.7%.
Source: MSN Moneycentral
We had another week of solid gains in the market, with the Dow closing at highs not seen since 2008. Even more impressive, the Nasdaq hit its highest level since 2000. This week we also closed out January and with a 3.4% gain, making it was the best January performance since 1997. Economic data continues to show growth, albeit slow, and a lack of negative headlines from Europe has provided a nice backdrop for the rally.
The big news of the week came on Friday with a surprising improvement in the labor picture. The U.S. added 243,000 jobs in January, while estimates were for roughly half that amount. The unemployment rate fell to 8.3%, the lowest in three years.
Not surprisingly, the markets jumped on the news, as you can see in the chart above. We haven’t had a triple digit move on the Dow since early January, yet had a nice 156 point pop for the day.
Thought the results were good, the picture becomes a bit muddied when you consider the adjustments made by the Labor Department. At the beginning of every year, they make an adjustment to reflect changes in population. This year is even odder in that it takes into account the census figures, skewing the picture even more. Comparing this month using one set of measurements to the previous month using a different set of measurements gives an unreliable picture.
Without getting too far into the weeds, the result of this adjustment was an increase in the size of the population. However, a record 1.2 million people were excluded from the labor force entirely (the labor force includes those with a job or seeking a job. It leaves out those who have given up looking for work). The labor participation rate now stands at 63.7%, the lowest since 1983.
This labor force number skews the unemployment rate, making it look better than it otherwise would have. Earlier in the week, the CBO (Congressional Budget Office) made news when it brought up this very point. They found that if the labor force had not declined like it had since 2007, at the end of 2011, our unemployment rate would stand at 10%. We have seen other metrics that put this number closer to 11 or 12%.
Due to the distortions of this month, we would not read too much into the employment number.
Also providing excitement for the markets this week, Facebook was in the headlines. The company filed for an initial public offering (IPO) to begin selling shares on the stock exchange. Investors have been very anxious to get into this investment, although it will be several months before they start trading.
Facebook is the latest of these hyped tech stocks that have come public recently. With a potential valuation of $100 billion, it is by far the biggest, though. As a part of filing for the IPO, Facebook had to open its accounting books. We found that they have actually made a profit, something most of the other tech IPO’s did not have going for them.
It is revealing, though not surprising, that they make the bulk of their revenues through advertising. We aren’t sure how they make so much money from tiny little ads on a webpage that no one clicks on. A Bloomberg article reported that for every 7,142 ad views, only one person clicked on the ad. And the time spent on that advertiser’s site was minimal, indicating the person clicked on it by accident. Why would any company want to use this method of advertising?
We just don’t get how a company can be valued at $100 billion, coming largely from advertising. But that’s just us. Google has proven that advertising can bring in big revenues, and that’s the very reason why investors will get into this company. They are looking for the next Google. However, we just don’t get it.
On the broader earnings picture, a majority of earnings have come in, giving us a good idea of the overall picture. Though that picture is mixed, profits have risen by about 7% from last year, according to the Wall Street Journal. However, costs have increased faster than sales. Still, companies have remained profitable.
Next Week
Next week will be a bit lighter in terms of economic data, but corporate earnings will still come in at a solid pace.
Probably the most important story for the market will come this Sunday evening. It’s the Superbowl Indicator (yes, there is such a thing). History has shown that if a team from the NFC wins (this year that would be the Giants), there is a 78% chance that the market will show a gain for the year. If the AFC wins, that would indicate a decline in the market.
Sounds simple, right? After all, 78% is pretty good odds. Well, don’t forget that we’ve seen this Giants/Patriots matchup before, in 2008. The Giants won, and we had one of the worst market performances in decades. Maybe we shouldn’t rely too heavily on this indicator!
Investment Strategy
The market continues to rise and we’ve enjoyed the rally. We haven’t been selling, but we are not doing any buying. The market wants to go higher, but we become more cautious with every gain.
We’ve noticed that more investors are in this boat, increasing caution on the gains. Typically the market does what you don’t think it will. When many people think the market should go a certain direction, it never seems to work out that way.
Like we mentioned before, 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 recently, 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 MoneycentralWe had another week of solid gains in the market, with the Dow closing at highs not seen since 2008. Even more impressive, the Nasdaq hit its highest level since 2000. This week we also closed out January and with a 3.4% gain, making it was the best January performance since 1997. Economic data continues to show growth, albeit slow, and a lack of negative headlines from Europe has provided a nice backdrop for the rally.
The big news of the week came on Friday with a surprising improvement in the labor picture. The U.S. added 243,000 jobs in January, while estimates were for roughly half that amount. The unemployment rate fell to 8.3%, the lowest in three years.
Not surprisingly, the markets jumped on the news, as you can see in the chart above. We haven’t had a triple digit move on the Dow since early January, yet had a nice 156 point pop for the day.
Thought the results were good, the picture becomes a bit muddied when you consider the adjustments made by the Labor Department. At the beginning of every year, they make an adjustment to reflect changes in population. This year is even odder in that it takes into account the census figures, skewing the picture even more. Comparing this month using one set of measurements to the previous month using a different set of measurements gives an unreliable picture.
Without getting too far into the weeds, the result of this adjustment was an increase in the size of the population. However, a record 1.2 million people were excluded from the labor force entirely (the labor force includes those with a job or seeking a job. It leaves out those who have given up looking for work). The labor participation rate now stands at 63.7%, the lowest since 1983.
This labor force number skews the unemployment rate, making it look better than it otherwise would have. Earlier in the week, the CBO (Congressional Budget Office) made news when it brought up this very point. They found that if the labor force had not declined like it had since 2007, at the end of 2011, our unemployment rate would stand at 10%. We have seen other metrics that put this number closer to 11 or 12%.
Due to the distortions of this month, we would not read too much into the employment number.
Also providing excitement for the markets this week, Facebook was in the headlines. The company filed for an initial public offering (IPO) to begin selling shares on the stock exchange. Investors have been very anxious to get into this investment, although it will be several months before they start trading.
Facebook is the latest of these hyped tech stocks that have come public recently. With a potential valuation of $100 billion, it is by far the biggest, though. As a part of filing for the IPO, Facebook had to open its accounting books. We found that they have actually made a profit, something most of the other tech IPO’s did not have going for them.
It is revealing, though not surprising, that they make the bulk of their revenues through advertising. We aren’t sure how they make so much money from tiny little ads on a webpage that no one clicks on. A Bloomberg article reported that for every 7,142 ad views, only one person clicked on the ad. And the time spent on that advertiser’s site was minimal, indicating the person clicked on it by accident. Why would any company want to use this method of advertising?
We just don’t get how a company can be valued at $100 billion, coming largely from advertising. But that’s just us. Google has proven that advertising can bring in big revenues, and that’s the very reason why investors will get into this company. They are looking for the next Google. However, we just don’t get it.
On the broader earnings picture, a majority of earnings have come in, giving us a good idea of the overall picture. Though that picture is mixed, profits have risen by about 7% from last year, according to the Wall Street Journal. However, costs have increased faster than sales. Still, companies have remained profitable.
Next Week
Next week will be a bit lighter in terms of economic data, but corporate earnings will still come in at a solid pace.
Probably the most important story for the market will come this Sunday evening. It’s the Superbowl Indicator (yes, there is such a thing). History has shown that if a team from the NFC wins (this year that would be the Giants), there is a 78% chance that the market will show a gain for the year. If the AFC wins, that would indicate a decline in the market.
Sounds simple, right? After all, 78% is pretty good odds. Well, don’t forget that we’ve seen this Giants/Patriots matchup before, in 2008. The Giants won, and we had one of the worst market performances in decades. Maybe we shouldn’t rely too heavily on this indicator!
Investment Strategy
The market continues to rise and we’ve enjoyed the rally. We haven’t been selling, but we are not doing any buying. The market wants to go higher, but we become more cautious with every gain.
We’ve noticed that more investors are in this boat, increasing caution on the gains. Typically the market does what you don’t think it will. When many people think the market should go a certain direction, it never seems to work out that way.
Like we mentioned before, 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 recently, 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.
