Another bumpy week saw the markets end with mixed results. Through the Friday close, the Dow turned in a nice 1.4% gain and the S&P was rose 0.6%. The Nasdaq fell 0.4%, largely due to the poor performance of Apple, which makes up 12% of the index. Gold slowly trended lower all week, closing down 1.0% to $1,642 an ounce. Oil was fairly steady and closed a slight 0.2% higher to $103 per barrel. Brent crude fell to $118 per barrel. Thankfully, gas prices are beginning to trend lower.
The markets continued their volatile streak this week with each day seeing large moves. That action is in stark contrast to the relatively steady market that characterized virtually the entire first quarter.
Europe was again a factor behind the market moves this week. Last week, worries about risk in Spain and Italy weighed on the market. This week the focus narrowed to just Spain. The cost for the country to borrow rose to the highest level in four months, showing a concern for their poor economy and high debt levels.
The focus was on Spain due to bond auctions they were holding this week to raise funds. If the auction went poorly, meaning investors were hesitant to lend them money, it would weigh on the entire continent and even the U.S. markets.
In the end, their auctions went over reasonably well, with many simply glad it was not worse. The yield on their 10-year bond (considered the benchmark by which to gauge risk. A rate above 7% shows a high concern of default) stands slightly above 6%.
That rate level is still roughly double what it was only a couple months ago, when the European Central Bank (or ECB, which is basically the European version of our Fed) pumped over €1 trillion (about $1.3 trillion in the U.S.) into the European economy. Risks persist in the European region and are worth closely watching.
Corporate earnings were another major driver behind the market this week. Though there were some negative reports, the results were generally positive overall. According to CNBC, 81% of companies have beat earnings estimates to this point with a 6% growth in earnings over a year ago.
Of course that sounds great. Yet estimates have been steadily lowered as we approached this earnings season, so the hurdle to beat estimates is very low. According to Capital IQ, first quarter growth estimates made last fall called for a 10% gain. Estimates made in January lowered the number to 4.5%, and the most recent estimate called for just a 0.95% growth.
That 6% growth rate in earnings reported by CNBC is nothing to sneeze at, but keep in mind we saw earnings grow 8.4% last quarter and 18% in the third quarter. Though still positive, our earnings growth is slowing.
A different - but very important - way to look at these corporate results is to look at revenue. That is what the company actually earned selling their goods or services (revenue minus costs equals earnings). Over the past year, revenue is roughly flat. That means sales really haven’t grown. The gain in earnings has come largely due to reductions in costs. While a lean, productive company is ideal, no growth in revenue shows stagnation.
Economic data released this week showed a similar story of that slower growth. Retail sales showed a nice gain, but much of that was attributed to warmer winter weather. Manufacturing continues to slow and housing data was mostly negative, as well.
Next Week
Next week will be a rather busy one. Corporate earnings will continue to come in at a solid pace.
There will also be some important economic data released next week. The GDP from the first quarter will be released on Friday and will be closely followed. We will also get more info on housing, plus consumer confidence, durable goods, and manufacturing. The Fed will be releasing its decision on interest rates, as well.
One item worth watching will take place this weekend (and may have already occurred by the time you read this commentary) with the Presidential elections in France. The most likely contender for Nicolas Sarkozy’s seat comes from the Socialist party, where he currently has a double digit lead over the sitting President.
This is worth noting since that candidate, Francois Hollande, is about as far left as they come. His ideology is basically a replication of an Occupy Wall Street protestor. If elected, he will raise tax rates on the wealthy to 75%, severely restrict and punish banks, raise the minimum wage, increase government spending, and lower the retirement age, among many other brilliant ideas.
The French election process comes in two stages, with the first this weekend and a final election between the top two vote-getters coming on May 6th. The results of this election could have a dramatic effect on the European Union, so the attention is warranted.
Investment Strategy
No change here. After the recent sell-off, the market now looks to have some momentum to the upside. Looking further out, we worry about a stagnating economic picture here and troubles returning to Europe. Plus, as the latest round of stimulus wears off in June, the market could drop just like it did with the conclusion of the previous two stimuli. We would be hesitant to add to stock positions at this point.
If we were to get a buying opportunity, we like large cap higher-quality and dividend paying stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. Also, there is always the opportunity to find an undervalued individual stock at any time.
We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We are not looking to add to our gold positions at current prices, though.
A short Treasury Bond position (bet on a decline in value) provides a nice hedge here, but we think the potential for profit is low at this time.
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, in international stocks, 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 Moneycentral
The markets continued their volatile streak this week with each day seeing large moves. That action is in stark contrast to the relatively steady market that characterized virtually the entire first quarter.
Europe was again a factor behind the market moves this week. Last week, worries about risk in Spain and Italy weighed on the market. This week the focus narrowed to just Spain. The cost for the country to borrow rose to the highest level in four months, showing a concern for their poor economy and high debt levels.
The focus was on Spain due to bond auctions they were holding this week to raise funds. If the auction went poorly, meaning investors were hesitant to lend them money, it would weigh on the entire continent and even the U.S. markets.
In the end, their auctions went over reasonably well, with many simply glad it was not worse. The yield on their 10-year bond (considered the benchmark by which to gauge risk. A rate above 7% shows a high concern of default) stands slightly above 6%.
That rate level is still roughly double what it was only a couple months ago, when the European Central Bank (or ECB, which is basically the European version of our Fed) pumped over €1 trillion (about $1.3 trillion in the U.S.) into the European economy. Risks persist in the European region and are worth closely watching.
Corporate earnings were another major driver behind the market this week. Though there were some negative reports, the results were generally positive overall. According to CNBC, 81% of companies have beat earnings estimates to this point with a 6% growth in earnings over a year ago.
Of course that sounds great. Yet estimates have been steadily lowered as we approached this earnings season, so the hurdle to beat estimates is very low. According to Capital IQ, first quarter growth estimates made last fall called for a 10% gain. Estimates made in January lowered the number to 4.5%, and the most recent estimate called for just a 0.95% growth.
That 6% growth rate in earnings reported by CNBC is nothing to sneeze at, but keep in mind we saw earnings grow 8.4% last quarter and 18% in the third quarter. Though still positive, our earnings growth is slowing.
A different - but very important - way to look at these corporate results is to look at revenue. That is what the company actually earned selling their goods or services (revenue minus costs equals earnings). Over the past year, revenue is roughly flat. That means sales really haven’t grown. The gain in earnings has come largely due to reductions in costs. While a lean, productive company is ideal, no growth in revenue shows stagnation.
Economic data released this week showed a similar story of that slower growth. Retail sales showed a nice gain, but much of that was attributed to warmer winter weather. Manufacturing continues to slow and housing data was mostly negative, as well.
Next Week
Next week will be a rather busy one. Corporate earnings will continue to come in at a solid pace.
There will also be some important economic data released next week. The GDP from the first quarter will be released on Friday and will be closely followed. We will also get more info on housing, plus consumer confidence, durable goods, and manufacturing. The Fed will be releasing its decision on interest rates, as well.
One item worth watching will take place this weekend (and may have already occurred by the time you read this commentary) with the Presidential elections in France. The most likely contender for Nicolas Sarkozy’s seat comes from the Socialist party, where he currently has a double digit lead over the sitting President.
This is worth noting since that candidate, Francois Hollande, is about as far left as they come. His ideology is basically a replication of an Occupy Wall Street protestor. If elected, he will raise tax rates on the wealthy to 75%, severely restrict and punish banks, raise the minimum wage, increase government spending, and lower the retirement age, among many other brilliant ideas.
The French election process comes in two stages, with the first this weekend and a final election between the top two vote-getters coming on May 6th. The results of this election could have a dramatic effect on the European Union, so the attention is warranted.
Investment Strategy
No change here. After the recent sell-off, the market now looks to have some momentum to the upside. Looking further out, we worry about a stagnating economic picture here and troubles returning to Europe. Plus, as the latest round of stimulus wears off in June, the market could drop just like it did with the conclusion of the previous two stimuli. We would be hesitant to add to stock positions at this point.
If we were to get a buying opportunity, we like large cap higher-quality and dividend paying stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. Also, there is always the opportunity to find an undervalued individual stock at any time.
We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We are not looking to add to our gold positions at current prices, though.
A short Treasury Bond position (bet on a decline in value) provides a nice hedge here, but we think the potential for profit is low at this time.
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, in international stocks, 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.
