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.
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.
