Commentary for the week ending 6-22-12

Another eventful week saw the markets end with mixed results.  For the week, the Dow was lower by 1.0%, the S&P 500 was off 0.6%, but the Nasdaq rose 0.7%.  Gold fell as prospects faded for more stimulus by the Fed, losing 3.8%.  Oil continues to decline and saw new lows of the year, dropping 5.4% to just below $80 per barrel.  Brent oil, used in much of the gas here in the East, hit prices not seen in 18 months and closed the week at $91 per barrel. 

Source: MSN Moneycentral

The hopes for further stimulus from the Fed pushed the market higher this week, but that hope disappeared and negative economic data caused in a drop in the market. 

Still the major factor driving the market, the Fed held a meeting this week where an announcement on further stimulus was to be made.  Since economic data has been so weak, there were hopes that the Fed would announce another round of liquidity injections (or money printing), or QE3. 

In a disappointment to the market, the Fed announced it would extend its current stimulus program called Operation Twist that was due to end this month.  Though still a stimulus, Operation Twist is different from the explicit “liquidity injections” (ahem, money printing) many had hoped for.  It is designed to keep interest rates low while not increasing the money supply. 

We weren’t one of those hoping for further stimulus, since it clearly does not work and will cause greater problems in the long run.  Yet the Fed keeps trying, ignoring its previous failures.  However, the market does rise during stimulus and we wouldn’t want to be on the sideline for the ride.  At least, until the stimulus ends and the market crashes back down. 

At any rate, the markets weren’t exactly excited by news out of the Fed and they struggled to gain any traction.  Several disappointing economic reports, plus a downgrade of more than a dozen banks by Moody’s, added to the pessimistic mood. 

In a sign that growth around the world is slowing, both China and Europe reported a contraction in their manufacturing sectors.  It was particularly worrisome that Germany was a part of that weakness, since the fate of the Euro is relies on their strength.  The U.S. was a part of the fun, too, as manufacturing showed a sharp decline in the Philadelphia region.   

Political problems in Europe were also a concern for the markets this week.  Elections in Greece resulted in a victory for the moderate party, which likely means a continuation of current policies regarding the Euro and their bailouts.  Though initially a relief, Greece still needs to straighten out its debt problems and has had little success doing so. 

French elections were worrisome, too, as the new socialist President Hollande got an increase in the ranks of socialists in Parliament.  This gave his party a majority needed to support his socialist programs.  

Debt problems in Spain continue to grow and the calls for more bailouts have increased.  At present, the question is where the bailouts funds will come from.  The Eurozone has several different methods to get funds to the Spanish banks (and Spain in general), but most rely on Germany footing the bill. 

The Germans have become increasingly reluctant to commit more funds unless fundamental changes occur.  Those countries with the debt problems, as well as entities like the IMF, are growing even more hostile to Germany.  Germany correctly points out that straight bailouts cure nothing, only pushes the problems off to a further date.  Plus, it is the German taxpayer’s money that is going to support these profligate countries, and they are clearly not excited about that. 

The bailout and entitlement mentality on this continent is not all that surprising.  The highest European court ruled this week that if a person were to get sick on their vacation, they are allowed by law to take another one (LINK).  You can’t make this stuff up.
 

Next Week

Next week will be fairly busy.  We will get a significant amount of economic reports, including data on housing, consumer confidence, durable goods, income and spending, and a revision to 1st quarter GDP. 

There will be some other interesting events, as well.  It is expected that the Supreme Court will announce its decision on the healthcare law.  An overturn may help the markets since it would be seen as business friendly.  However, it introduces another uncertainty and will be something to watch closely. 

The EU will hold yet another summit next week to address their debt problems.  The likely outcome will be the countries buried in debt gang up on Germany to throw some more bailout money their way. 

Lastly, we didn’t spend any time discussing the situation in Egypt, but this is another area to pay attention to.  By most accounts, the Muslim Brotherhood won their recent elections, but the ruling military has refused to give up their power.  The military has even changed the constitution in their favor, reducing the power of the next President.  We aren’t sure which choice is worse since they are both bad, but the potential for uprisings and violence makes this region worth watching.  


Investment Strategy

Stimulus is no longer in the forefront with the Fed announcement this week.  However, it is in the background as the Fed stated it will take more action if conditions warrant.  That acts like a backstop, where investors know that if the economy were to worsen, the Fed will step in with more stimulus and send the markets higher. 

If it weren’t for that Fed backstop, we would be very pessimistic with slowing growth and persistent problems in Europe, and the wrong remedies being applied to fix them.  

We’re still at a point where basic investing fundamentals like profits, earnings, and the economy have little impact on the direction of the market.  The focus is on the actions of central banks around the globe.  In these unpredictable circumstances, any short to medium term planning becomes more difficult.  Agility is very important at this time. 

If we were to get a buying opportunity, we still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well. 

We like gold for the long term, as it will do well with debt and economic problems leading to further bailouts and stimulus programs.  The lack of immediate money printing by the Fed sent prices lower this week, but we would look to add to our positions if prices move much lower from here.   

We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), will result in lower prices in the short term. 

Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep trending lower, a short position (bet on a decline in price) only provides a nice hedge here.  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.

Commentary for the week ending 6-15-12

Source: MSN Moneycentral

A volatile week saw the markets close with a nice gain.  For the week, the Dow climbed 1.7%, the S&P 500 was higher by 1.3%, and the Nasdaq rose 0.5%.  Talks of stimulus sent gold higher, gaining 2.3%.  Oil ended with little change, staying at $84 per barrel and Brent near $98.  The yield on US Treasury bonds continues to decline, again reaching new all-time lows.

This week was all about stimulus.  And Europe.  And stimulus in Europe.  Each day saw large moves in the market, both higher and lower, as new daily events had a significant impact. 

On the U.S. side, economic data released this week was very poor.  Retail sales were negative.  Manufacturing showed a very weak growth.  Consumer confidence fell.  Weekly unemployment figures show a worsening jobs picture. 

All these reports would normally send the market lower.  But since we are at a point where stimulus from the Fed is the main driver of the market, the worse the picture looks, the more likely the Fed is to step in with more stimulus. 

Besides a worsening economic picture, the Fed needs to see lower inflation before embarking on more stimulus (since a stimulus boosts inflation, particularly commodity prices).  Inflation reports released this week helped with that, too.  The PPI and CPI were both lower, largely due to falling gas prices. 

We believe the market is starting to price in another round of stimulus, or at least a continuation of the current program.   The Fed will be holding a meeting next week and a decision on further stimulus is believed to be announced.  If a stimulus were not to occur, we believed a strong drop in the market will be the result.  However, we feel that is unlikely. 

On to Europe, where it was another week filled with problems.  We opened the week with news of a bailout for Spanish banks and the market was relieved.  Briefly.  It didn’t take long for investors to realize that the bailout was unlikely to solve much and more money would be needed. 

Investors are increasingly worried that the entire country will need a bailout, not just the banks.  This is a major problem due Spain’s large size.  If a bailout is needed, it could put an end to the Euro.  As the week progressed, bond yields pushed into new record high territory (a higher bond yield indicates a greater worry of fiscal strength and increases borrowing costs). 

Realizing the potential problem, a coordinated bailout was announced to calm the markets.  Late Thursday afternoon, the Bank of England announced it would increase funding and lower interest rates to spur lending and prevent an economic downturn. 

The European Central Bank (ECB) also promised lower interest rates if conditions deteriorate.  Our Fed offered to step in, as well, to provide the ECB with US dollars to make loans with.  The Bank of Japan also came with the promise of assistance, if necessary. 

So once again, here we are with more stimulus flooding the globe with fiat currencies.  We’ve been here before and just like last time, we’re sure it won’t work.  It will buy some time, but we’ll be right back in this position in a few months with even more debt.  Serious fundamental reforms are needed, but they likely won’t occur until that can reaches the end of the road. 

Lastly, elections this weekend around to world had an impact on our markets this week.  Greece is being closely watched as two competing ideologies are in a neck-and-neck race.  The extreme left party is vehemently opposed to the Euro and any bailouts, while the (relatively) moderate party is still willing to participate, with a few tweaks.  A win by the moderates would relieve the markets, while a win by the far left would introduce a host of unknowns and send markets lower. 

Getting less attention, but we feel is just as important, are upcoming elections in Egypt.  Two days before the election, their Supreme Court dissolved parliament and put the military back in power.  This hurt the Muslim Brotherhood, who was leading in the polls.  Now, more power is in the hands of the military while the two main factions within the Muslim Brotherhood are beginning to fracture.  The election this weekend could have a profound effect on stability in the entire region. 


Next Week

Next week will be light in terms of economic data and corporate earnings.  We will get some info on housing, as well as leading economic indicators, though they will have little impact on the market. 

What will have an impact is news from the Fed.  They will be holding their meeting and an announcement on further stimulus is widely expected.  Any hint of stimulus will push the market higher, while no specifics on stimulus will see the market fall. 

The elections this weekend in Greece and Egypt will also impact the markets, as discussed above. 


Investment Strategy

No change here.  We still see stimulus as being the most important factor on the market.  Though there is still some uncertainty at this point, indications point to further stimulus ahead, which means a higher stock market. 

Since there is that element of uncertainty, investors will continue to overanalyze every data point and clues for more stimulus, so volatility will persist.  Negative data will likely continue to push the market higher. 

Since the direction of the market is driven by the whims of the Fed, stock picking has become a futile effort.  Correlation among stocks is rising, so stocks are increasingly rising and falling together.  Broader index plays based on macro events are the best option right now. 

If we were to get a buying opportunity, we still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well. 

Gold will do well as debt and economic problems are leading to further bailouts and stimulus programs.  If the price were to move lower we may add more but would not at these current prices. 

We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), will result in lower prices in the short term. 

Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep moving lower, a short position (bet on a decline in value) only provides a nice hedge here.  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.

Commentary for the week ending 6-8-12

Source: MSN Moneycentral

*Our uploading service is being temperamental, so the chart has a new position this week.       

The potential for further stimulus sent the market sharply higher this week.  Through the Friday close, the Dow was higher by 3.6%, the S&P 500 rose 3.7%, and the Nasdaq returned 4.0%.  Coming off a big week last week, gold fell 1.9%.  Oil hovered around its recent lows, gaining 1.1% to $84 per barrel.  Brent oil, used for most of the gas here in the East, closed just shy of $100 per barrel.   
  
Stimulus is back in the spotlight.  The big moves in the market this week resulted from discussions of additional stimulus.  Even talking about more stimulus helped send the market to its best week of the year.

An article in the Wall Street Journal (Link) kicked things off Wednesday morning.  It reported that the recent disappointing economic data and problems in Europe put a potential stimulus back on the table. 

Other Fed officials chimed in, as well, stating their openness to further action and supported the notion that more stimulus was needed. 

However, Fed chief Bernanke made an appearance in front of Congress and addressed the issue.  Any detail of another stimulus was notably absent, disappointing the market.  Bernanke mentioned the Fed was willing to do more if necessary, but avoided making any specific announcements.  

With the talk of more stimulus, we are entering the quirky period where bad news could mean good news for the market.  The market loves stimulus since it has shown substantial gains in those periods.  More bad news would increase the chance of stimulus from the Fed, which is how bad becomes good. 

Since Bernanke gave no specifics this week, their meeting later this month becomes even more important.  Investors will be closely watching for clues on a new stimulus from them, or perhaps even an extension of the current program that ends June 30th. 

It’s unfortunate we are back in this position, having the whim of the Fed driving the market.  It creates an unpredictability (even more so than the market already is) that makes volatility rise and investing difficult.  As we saw this week, even the mention of stimulus sent the market sharply higher.  The reverse is true when the prospect of stimulus is reduced. 

That also ignores the fact that stimulus has been proven ineffective.  The economy has not improved while debt and inflation has soared.  We also have to worry about the future consequences of trillions of dollars currently being printed. 

We would like to see the economy left to heal on its own, without the constant interventions.  Nevertheless, we realize that the market rises on stimulus, so we have to be positioned to take advantage of these moves. 

On to Europe, where problems continued to fester this week, though they had little impact on our markets. 

Spain essentially admitted it was out of money and will need a bailout to shore up their troubled banks.  That put the focus on Germany, a fiscally responsible country who must bail out the irresponsible ones.  The Germans indicated that they were willing to work with Spain and the Eurozone in general, but they must meet certain conditions, similar to the Greek bailouts. 

Of course these irresponsible countries just want to be bailed out, no strings attached.  The people of these countries despise the responsible Germans and the division gets wider.  It doesn’t seem like this will end well. 

Moving from Europe to Asia, last week we mentioned slowing growth in China.  In an effort to spur growth, China lowered its interest rate for this first time in four years.  China has a report coming out this weekend (and will likely have passed by the time you have read this) on their growth, and that rate cut is looking like a preemptive response to a disappointing report. 


Next Week

There will be a slew of events coming next week, keeping the market busy.  Starting this weekend, we will hear more details on the potential Spain bailout and the economic strength of China, as mentioned above. 

There will be several economic data releases, including reports on manufacturing, retail sales, consumer confidence, and inflation with the PPI and CPI.  Inflation will likely tick lower due to falling gas prices, which would be another positive for potential stimulus. 

Several more Fed officials will be speaking this week and their remarks will be closely scrutinized. 

Finally, there are reports that several big banks in the US will be downgraded next week, which will pressure their stocks and likely the broader market. 


Investment Strategy

This week could have been a turning point for the market now that the potential for stimulus has entered the picture.  Since it is in the picture, though, it could mean more volatility as investors overanalyze every economic data point and word out of the Fed.  We are still cautious here, but realize that the market will likely rise in the face of more stimulus. 

Seeing that everyone knows the market will rise on more stimulus, it makes us wonder if it actually will.  Similar to the Facebook IPO, when everyone knows a stock will behave a certain way, it tends not to. 

Investors are beginning to realize that stimulus has not helped the economy.  Adding to that, interest rates are already at all-time lows without much room to move lower.  Plus the pop from each additional stimulus is diminishing.  So perhaps we may not see the same reaction as the past three stimulus programs?  Or perhaps this is just a convenient way of us hedging our bets, so we can say we were right either way?  Either way, right now we’d bet on a market rise in the face of more stimulus. 

If we were to get a buying opportunity, we still like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time, as well. 

Gold will do well as debt and economic problems are leading to further bailouts and stimulus programs.  If the price were to move lower we may add more but would not at these current prices. 

We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), will result in lower prices in the short term. 

Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep moving lower, a short position (bet on a decline in value) only provides a nice hedge here.  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.

Commentary for the week ending 6-1-12

Negative economic data around the world sent the markets lower for yet another week.  Though shortened by the holiday, the Dow lost 2.7%, the S&P fell 3.0%, and the Nasdaq dropped 3.2%.  A large gain on Friday sent gold higher for the week, up 3.3%.  Providing some relief at the gas pump, oil prices plunged fantastically this week, falling 8.4% to $82 per barrel.  Brent oil fell below the $100 mark, closing at $98 per barrel, its lowest level in a year-and-a-half. 
    

Source: MSN Moneycentral

One of the worst weeks of the year also saw the close to the worst month in two years.  In May, the Dow lost more than 6%, the biggest monthly drop since May of 2010.  When combined with the biggest daily drop of the year on Friday, the Dow crossed into negative territory for the year. 

Negative and worsening economic data around the globe has been responsible for the recent moves lower. 

The employment report released Friday showed a much slower growth than was expected, with the U.S. only adding 69,000 jobs last month.  The unemployment rate ticked higher to 8.2% and when including discouraged workers (the U-6), the rate stands at 14.8%. 

Other economic data this week didn’t help much either.  Manufacturing reports supported the slowing growth theme. First quarter GDP growth was also lower than expected.  An earlier report showed a gain of 2.2%, but the most recent figure points to just a 1.9% growth. 

Though you are likely tired of hearing about Europe, their problems are worsening with Spain getting the spotlight this week.  Banks in Spain have experienced significant withdrawals and their solvency has become a concern. 

This week, the government of Spain announced they will bail out their largest bank, Bankia, to the tune of $24 billion dollars.  The problem is, the Spanish government doesn’t have the money to cover this.

Their cash shortfall has led to calls for a “banking union” in Europe, where all countries would share the losses if a bank went under.  Obviously this continues the battle of the rich-vs.-poor among European countries.  Countries in poor financial shape want the wealthier (respectively) ones to share in the burden as the divide worsens. 

The drama in Europe has taken its toll on Asian countries, as well.  Europe is the top destination for Chinese exports.  A slowdown there, as well as in the U.S., has had a negative impact on their economy.  New data on manufacturing shows a very, very slow growth in China.  Those who have been calling China a bubble are calling this the start of the decline. 

These global problems put the spotlight on the bond market this week.  While bond yields have risen in countries with debt problems (meaning it is harder and more expensive for them to borrow), yields are at historic lows for “safe-haven” countries. 

Investors are looking for a safe place to put their money and there are few alternatives.    That benefits the bond market as new money pours in.  Here in the U.S., bond yields are at the lowest levels of all time.  If you were to give your money to the government for 10 years, they will pay you just 1.44% per year.  30 years?  They’ll pay just 2.5% (which means mortgage rates are also at rock bottom levels).

While bond yields have moved steadily lower the past 30 years, we have to wonder how much lower they can go.  Yet every time we ask that, they move even further lower.  At least we know they can’t go below 0%, right?


Next Week

A lighter amount of economic data will come in next week.  We will get info on productivity of the service sector, as well as info on consumer credit, the trade deficit, and the Fed’s Beige Book (which gives a broad view of the health of the economy).

The disappointing data this week has put the focus back on the Fed and the outlook for their stimulus programs.  Several Fed Presidents will be speaking, while Fed Chief Ben Bernanke will appear in front of Congress.  Investors will be closely watching for any clues on further stimulus. 


Investment Strategy

No change here.  Normally we like to buy when the outlook is bleak, but we are reluctant to add any significant amounts at this time and hold a large amount of cash.  Our worry is for June, when the current round of stimulus from the Fed ends.  Problems in Europe and slowing global growth adds to our caution. 

The big question is whether there will be further stimulus.  Economic data shows that slowest recovery since WWII keeps getting slower, which gives the Fed a reason for stimulus.  In our great Keynesian experiment of spending trillions in stimulus and printing trillions more by the Fed, we should be further ahead by now. 

But perhaps that was not the right prescription, as many critics argued?  Even though the evidence shows these policies have failed, there are calls for even more of the same medicine.  We don’t see further stimulus helping anything, only boosting the stock market temporarily. 

If we were to get a buying opportunity, we like large cap higher-quality and dividend paying stocks.  Smaller and little-known stocks with low correlation to the market (and Europe) are also promising.  There is always the opportunity to find an undervalued individual stock at any time. 

Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term.  Gold prices had a nice spike higher this week on the potential for more stimulus (more money printing is favorable to gold).  If the price were to move lower we may add more but would not at these higher prices. 

We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who are major drivers of commodity prices.

Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep moving lower, a short position (bet on a decline in value) only provides a nice hedge here.  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.