Please note: There will be no market commentary next week due to the Easter holiday.
The market had some large swings higher and lower this week, but closed out with a decent gain. For the week, the Dow rose 1.0% and both the S&P and Nasdaq returned 0.8%. Gold rose slightly by 0.4%. Oil finally had a negative week, falling 3.6% to $103 per barrel. Brent crude closed slightly below $123 per barrel.
The close on Friday also marked the end of the quarter, and what a quarter it was. The Dow turned in its best first quarter since 1998 with a return of over 8%. The S&P was up 12%. The Nasdaq returned more than 18%! Keep in mind that this return has already exceeded the full-year expectations of analysts. Granted, no one knows where the market will go from here, but the ride so far has been remarkable.
As for the news of the week, the market opened sharply higher on Monday with news from the Fed.
Given the improving economic picture, particularly with the unemployment rate creeping lower, the market generally assumed further stimulus would be off the table. After all, if the economy is decent, further stimulus would not be needed.
Fed chief Ben Bernanke announced that even with an improvement in the unemployment picture, the Fed would still consider doing a stimulus if they desired. Additionally, they will continue to hold interest rates at these record low levels for at least two more years.
With the market so hungry for stimulus, stocks shot higher on the news. As an investor, though, it is frustrating to have an unpredictable Fed with so much influence on the direction of the market. But the market loves stimulus.
As the week progressed, we received some discouraging economic data. Home sales fell slightly last month. Manufacturing in the Texas, Chicago, and Milwaukee regions showed slight growth, though lower than expected.
The story was similar with durable goods (which are items that have a long life, like an appliance), as they showed a slow growth and came in lower than expected. Consumer confidence slipped a notch as people are increasingly worried about future inflation. All together, this data contributed to the decline seen in the middle part of the week.
Europe was back in the news this week, as well. The level of debt and slow growth in Portugal has become a concern. Spain, too, was making headlines as the country experienced large protests due to spending cuts announced by the government. Dramatic cuts in spending are necessary to remain solvent and their commitment to this has become unclear.
By the end of the week, all worries over Europe were gone. Heads of finance in the Euro-zone announced an increase in the size of emergency lending. That should solve the problem, right?
Oil had a nice sell-off this week as there was finally some optimistic news on increasing supply. Plans for potential new pipelines were announced, an important step to reduce the glut of oil stuck in the middle part of the country.
Another knock to oil prices came as it was reported that President Obama was open to possible drilling in the Atlantic and Alaska. At this point, it looks like only he’s open to surveying for potential drilling spots as there are no plans to offer leases any time soon. We aren’t sure what company would be interested in exploring areas they can’t drill on, but it at least appeared to be a step in the right direction.
At the same time, though, he sought to raise taxes on oil companies. We aren’t sure how raising taxes on an industry would bring down prices, but apparently it makes sense to him. Thankfully, Congress rejected this proposal.
It was also speculated that the President would be releasing oil from our Strategic Petroleum Reserve (SPR) to bring down gas prices. Since the SPR was designed to be used only in an emergency supply disruption, we strongly believe the oil should not be released at this time. Nonetheless, the market moved lower on the potential for increased supply.
Finally, we have an interesting story concerning Apple and their major parts supplier, Foxconn. The Fair Labor Association had been investigating the Foxconn plant in China for potential abuse and violations. They found that conditions were generally acceptable, but the employees worked too long of hours and for too many days in a row. Foxconn agreed to cut back working hours to a maximum length of 49 hours per week and limiting overtime to 36 hours per month.
What we found interesting came after this, though. In an article by Reuters (link) titled “Apple supplier Foxconn cuts working hours, workers ask why,” employees expressed their displeasure with this decision. One woman is quoted as saying “We are here to work and not to play, so our income is very important” and would like to work more hours. They don’t mind working seven days a week for as many hours as they can. Seems quite different from the culture found in much of the developed world.
Next Week
With the close of the month and quarter this week, we will begin getting economic data on them next week. The always important employment report will be released on Friday, even with the markets closed for Good Friday. Employment has been a bright spot and expectations are high. We will also get information on production in manufacturing and service sectors, factory orders, auto sales, and consumer credit.
Several Fed Presidents will be speaking next week, as well, and it will be interesting to see how their comments compare to the Fed chief Ben Bernanke.
Investment Strategy
Again, little change here. Investors are extremely bullish (optimistic) at this time, which makes us nervous. Right now we are not actively adding any new money, but are holding back on selling, too.
As we have mentioned recently, VIX index (which is basically a measure of fear) continues to hover at extremely low levels. That shows complacency in the market and possible signs of topping.
One other item worth considering is the effect of the latest round of stimulus from the Fed. Due to end in June, we are in the getting into the later stages of “Operation Twist,” where the Fed buys bonds to drive down interest rates. In the chart on the right provided by Zerohedge.com, you can see the drop in the market once a stimulus is complete.
You can also see the market rising steadily in those stimulus periods marked in blue. They rose with very little volatility. That is exact condition we are experiencing now. Does that mean the market will trend higher, like it did in the previous two periods? Perhaps, but we still remain cautious.
We would still look to add new money on a pullback, with a focus 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. Also, there is always the opportunity to find undervalued individual stocks at any point.
There are several long term ideas we are especially bullish (optimistic) on. As we mentioned in the previous weeks, we like oil producers, especially ones related to the shale oil play. Companies related to auto repair and very low end retail businesses also look promising.
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. With the recent gold sell-off, the commodity is beginning to look oversold. However, we would still be hesitant to add more at this level.
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). Yields again declined slightly this week, but are still above the recent average. There is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into this bond market move. Still, the short bond position provides a nice hedge here, but we think 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, 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.
The market had some large swings higher and lower this week, but closed out with a decent gain. For the week, the Dow rose 1.0% and both the S&P and Nasdaq returned 0.8%. Gold rose slightly by 0.4%. Oil finally had a negative week, falling 3.6% to $103 per barrel. Brent crude closed slightly below $123 per barrel.
The close on Friday also marked the end of the quarter, and what a quarter it was. The Dow turned in its best first quarter since 1998 with a return of over 8%. The S&P was up 12%. The Nasdaq returned more than 18%! Keep in mind that this return has already exceeded the full-year expectations of analysts. Granted, no one knows where the market will go from here, but the ride so far has been remarkable.
As for the news of the week, the market opened sharply higher on Monday with news from the Fed.
Given the improving economic picture, particularly with the unemployment rate creeping lower, the market generally assumed further stimulus would be off the table. After all, if the economy is decent, further stimulus would not be needed.
Fed chief Ben Bernanke announced that even with an improvement in the unemployment picture, the Fed would still consider doing a stimulus if they desired. Additionally, they will continue to hold interest rates at these record low levels for at least two more years.
With the market so hungry for stimulus, stocks shot higher on the news. As an investor, though, it is frustrating to have an unpredictable Fed with so much influence on the direction of the market. But the market loves stimulus.
As the week progressed, we received some discouraging economic data. Home sales fell slightly last month. Manufacturing in the Texas, Chicago, and Milwaukee regions showed slight growth, though lower than expected.
The story was similar with durable goods (which are items that have a long life, like an appliance), as they showed a slow growth and came in lower than expected. Consumer confidence slipped a notch as people are increasingly worried about future inflation. All together, this data contributed to the decline seen in the middle part of the week.
Europe was back in the news this week, as well. The level of debt and slow growth in Portugal has become a concern. Spain, too, was making headlines as the country experienced large protests due to spending cuts announced by the government. Dramatic cuts in spending are necessary to remain solvent and their commitment to this has become unclear.
By the end of the week, all worries over Europe were gone. Heads of finance in the Euro-zone announced an increase in the size of emergency lending. That should solve the problem, right?
Oil had a nice sell-off this week as there was finally some optimistic news on increasing supply. Plans for potential new pipelines were announced, an important step to reduce the glut of oil stuck in the middle part of the country.
Another knock to oil prices came as it was reported that President Obama was open to possible drilling in the Atlantic and Alaska. At this point, it looks like only he’s open to surveying for potential drilling spots as there are no plans to offer leases any time soon. We aren’t sure what company would be interested in exploring areas they can’t drill on, but it at least appeared to be a step in the right direction.
At the same time, though, he sought to raise taxes on oil companies. We aren’t sure how raising taxes on an industry would bring down prices, but apparently it makes sense to him. Thankfully, Congress rejected this proposal.
It was also speculated that the President would be releasing oil from our Strategic Petroleum Reserve (SPR) to bring down gas prices. Since the SPR was designed to be used only in an emergency supply disruption, we strongly believe the oil should not be released at this time. Nonetheless, the market moved lower on the potential for increased supply.
Finally, we have an interesting story concerning Apple and their major parts supplier, Foxconn. The Fair Labor Association had been investigating the Foxconn plant in China for potential abuse and violations. They found that conditions were generally acceptable, but the employees worked too long of hours and for too many days in a row. Foxconn agreed to cut back working hours to a maximum length of 49 hours per week and limiting overtime to 36 hours per month.
What we found interesting came after this, though. In an article by Reuters (link) titled “Apple supplier Foxconn cuts working hours, workers ask why,” employees expressed their displeasure with this decision. One woman is quoted as saying “We are here to work and not to play, so our income is very important” and would like to work more hours. They don’t mind working seven days a week for as many hours as they can. Seems quite different from the culture found in much of the developed world.
Next Week
With the close of the month and quarter this week, we will begin getting economic data on them next week. The always important employment report will be released on Friday, even with the markets closed for Good Friday. Employment has been a bright spot and expectations are high. We will also get information on production in manufacturing and service sectors, factory orders, auto sales, and consumer credit.
Several Fed Presidents will be speaking next week, as well, and it will be interesting to see how their comments compare to the Fed chief Ben Bernanke.
Investment Strategy
Again, little change here. Investors are extremely bullish (optimistic) at this time, which makes us nervous. Right now we are not actively adding any new money, but are holding back on selling, too.
As we have mentioned recently, VIX index (which is basically a measure of fear) continues to hover at extremely low levels. That shows complacency in the market and possible signs of topping.
One other item worth considering is the effect of the latest round of stimulus from the Fed. Due to end in June, we are in the getting into the later stages of “Operation Twist,” where the Fed buys bonds to drive down interest rates. In the chart on the right provided by Zerohedge.com, you can see the drop in the market once a stimulus is complete. You can also see the market rising steadily in those stimulus periods marked in blue. They rose with very little volatility. That is exact condition we are experiencing now. Does that mean the market will trend higher, like it did in the previous two periods? Perhaps, but we still remain cautious.
We would still look to add new money on a pullback, with a focus 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. Also, there is always the opportunity to find undervalued individual stocks at any point.
There are several long term ideas we are especially bullish (optimistic) on. As we mentioned in the previous weeks, we like oil producers, especially ones related to the shale oil play. Companies related to auto repair and very low end retail businesses also look promising.
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. With the recent gold sell-off, the commodity is beginning to look oversold. However, we would still be hesitant to add more at this level.
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). Yields again declined slightly this week, but are still above the recent average. There is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into this bond market move. Still, the short bond position provides a nice hedge here, but we think 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, 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.
