Commentary for the week ending 7-20-12

Please note: there will be no market commentary next week, the week ending July 27th.  Thank you. 

Stocks moved higher for much of the week before falling sharply on Friday.  For the week, both the Dow and S&P gained 0.4% and the Nasdaq returned 0.6%.  Gold was fairly quiet, down 0.6%.  Oil rose sharply on a weaker dollar and problems with Iran, gaining 5.0% for the week to $91 per barrel.  Brent oil, used for much of the gas here in the East, rose to $107.  US Treasury bonds hovered around its record lows as investors around the globe look for a safe place to park their cash. 
 

Source: MSN Moneycentral

The week was much of the same as the market moved higher on a mix of decent earnings and poor economic data.  However, negative news out of Europe helped send the market sharply lower on Friday. 

Corporate earnings came in at a steady pace this week, with those earnings beating estimates about 65% of the time.  Our only problem is that estimates had been steadily lowered heading into earnings season, so the bar was set very low.

When looking at revenues, what the company actually received (earnings equal revenues minus expenses), the numbers don’t look as good.  Over 56% of companies have missed revenue expectations for the quarter and have only grown 2.5% over the past year.  On the other hand, the average profit rose almost 30% in just the last quarter according to CNBC and Thomson Reuters.  It appears that companies are still cutting expenses (like employees) in order to achieve a decent bottom line. 

The Fed was in the news this week with Fed chief Ben Bernanke’s semi-annual testimony in front of Congress.  These are always worth a watch, if only to see the ignorance of our elected officials on financial matters. 

In his testimony, Bernanke discussed his displeasure with the current weakness of the economy and holds a pessimistic outlook for the future.  Remember, here is where bad news is good news for the market, since another stimulus is expected if conditions worsen.  While he made no mention of any immediate stimulus, he left the door open for more if conditions worsen.  

Inflation figures released this week bolstered the chance of more stimulus as they came in below expectations.  On the consumer end (the CPI), prices were flat last month and up only 1.7% over the past year (though we have problems with the CPI as a relevant measure for inflation and feel we are currently in a period of biflation).  The Fed has a target of around 2% for inflation and since it typically rises with more stimulus, it gives the Fed room for another round.

A new pressure to inflation, though, food prices are poised to rise in the near future as corn prices continue to increase.  Due to the drought conditions, corn has risen over 40% since the beginning of June.  Since corn is one of the most basic and widely used crops, found in livestock feed or fructose syrup or even our gas, its price increase affects a wide variety of other items. 

Moving on to Europe, the news was relatively quiet for much of the week until Spain reminded us that not all is well.  Debt troubles are resurfacing and the Spanish government has lowered its growth outlook.  One region of Spain announced it was essentially out of money, with one government official stating that “There is no money in the public coffers.  There’s no money to pay for public services.” 

These new concerns have increased their borrowing costs and bond yields reached new highs.  The government announced spending cuts in order to alleviate lenders concerns, but they haven’t gone over well with the public and massive new protests were the result

Unfortunately, further bailouts prevent the much needed reforms from taking place, only buying time before they are back with their hand out and deeper in debt.  Without the necessary changes, we expect this problem to be around for many more years to come.  


Next Week

Next week will be a bit quieter but will still have some important information.  We will get the GDP results for the second quarter, along with info on housing, manufacturing, and durable goods.  The steady pace of corporate earnings will continue into next week, as well. 


Investment Strategy

We still hold a negative view due to the poor economic data, both here and abroad, and uninspiring corporate earnings.  Plus, we see complacency in the market as the VIX hit a new three-month low this week (the VIX, or volatility index, is often referred to as the “fear gauge”.). 

However, we can’t be too pessimistic with the Fed and other central banks around the world poised for more stimulus if conditions worsen.  While stimulus doesn’t help the economy and is a long term negative, it does boost the market. 

With the market making big moves based on unpredictable news out of Europe or the Fed, agility is important here. 

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, and further bailouts and stimulus programs.  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), though our concern has increased slightly as the pace of distressed municipalities is increasing.  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds. 

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 7-13-12

The market trended lower all week before popping higher Friday, resulting in the slightest of gains for the week.  Through the close Friday, the Dow returned 0.04%, the S&P gained 0.16%, but the Nasdaq lost 0.98%.  Gold followed a similar path, gaining 0.8% for the week.  Oil bounced around and ended with a 3.1% gain at $87 per barrel.  Brent oil hovered near the $100 level much of the week and closed right at $100.  Finally, US Treasury bonds hit new lows again this week as investors around the globe look for a safe place to park their cash. 

Source: MSN Moneycentral

A lack of good news from Europe, lackluster earnings, poor economic data, and a China slowdown produced a sour mood on Wall Street, resulting in the market moving steadily lower for much of the week. 

There wasn’t much news out of Europe this week as they continued to work on their banking union.  While there wasn’t necessarily any bad news, little was done to impress the market. 

With China, the slowdown in growth continues to accelerate as the country released its report on second quarter growth.  Though they are still growing, the rate of growth is at its lowest level in three years. 

Since the Chinese government is very secretive about how they compute these numbers, many believe the true rate of growth is much lower than they say.  Economists like to look at other factors like electricity levels, amount of freight shipped by rail, or housing construction to get a better idea.  Metrics like these show a much lower level of growth than reported. 

Corporate earnings season got under way here in the US this week.  While earnings were not great, they weren’t bad, though the bar has been steadily lowered heading into earnings season. 

Economic data was discouraging, too.  Small business surveys show the lowest confidence level since October, 2011.  Consumer sentiment reached lows not seen in seven months.  Plus, inflation on the producer level showed a slight gain last month when a drop was expected due to lower gas prices. 

Adding to the misery, corn prices were a hot topic this week (pun intended).  High temperatures and a lack of rain are hurting corn crops and as a result, prices reached new highs.  The price for corn has risen nearly 30% in the last three weeks.  This is important because it also affects the price of other items like livestock, since corn is used as feed.  Higher prices at the grocery store are right around the corner. 

With all this bad news weighing on the market, why the pop higher Friday?  There were a couple reasons.

One was strength in bank stocks, where earnings released that morning for JP Morgan and Wells Fargo were better than expected. 

The other was the slowdown in China.  Here is an example when bad news was good news.  With the slowing economy, it increases the chance of stimulus in that country, as well as here in the US.  Though the Fed shows no signs of an imminent stimulus, every negative data point increases its chances. 

Due to the depressing tone of this week’s commentary, we’ll conclude with some positive information.  For those of you who like seeing historical trends, a report on Bloomberg TV this week discussed the market reaction in the fourth year of a Presidential cycle. 

According to research done by the Ned Davis research group, historically the market rises from late June until September in an election year.  Once September comes, though, the path diverges depending on who is elected. 

If the incumbent party is reelected, the market had continued to rise.  However, if the incumbent is defeated, the market had begun to move lower at that point.  The stock market favors certainty, which an incumbent provides (perhaps even if that certainty is not business friendly).  We would have liked to have found a suitable image to display here, but it appears to have been solely a segment on TV without a corresponding print article and image. 


Next Week

Next week will be a very busy one.  The pace of corporate earnings picks up significantly and will contain many important names. 

There will be several economic data releases, as well.  Beginning Monday, we will get info on retail sales, the consumer price index (CPI), housing data, the Feds Beige Book (which gives a broad view on the strength of the economy), and leading economic indicators. 

Lastly, Fed Chairman Ben Bernanke will be appearing before Congress for his semi-annual testimony.  Investors will be closely watching for any signs of potential stimulus, since that’s about all the market cares for these days. 


Investment Strategy

Economic data around the world is weak and earnings are expected to disappoint, which is something we would normally be pessimistic on.  With the bar set so low, though, a surprise to the upside becomes easier.  Not to mention, the Fed and other central banks around the world are poised for more stimulus if conditions worsen.  While stimulus doesn’t help the economy and is a long term negative, it does boost the market. 

The Fed even reminded us of its importance this week.  In a report by the New York Fed, data shows that the S&P 500 would be at half its current level if the day before a Fed announcement was excluded from the computation (LINK).  More simply, the market rises before a Fed announcement and missing out on that day would give you half the value you otherwise would have. 

Sadly, the data appears credible and shows how much power the Fed has.  Perhaps it is even more important for the market than traditional metrics like the earnings of stocks or the strength of the economy.

With the market making big moves based on unpredictable news out of Europe or the Fed, agility is important here. 

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, and further bailouts and stimulus programs.  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).  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds. 

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 7-6-12

Negative economic data around the globe weighed on the market this week.  Through the close Friday, the Dow lost 0.8%, the S&P fell 0.6%, while the Nasdaq had a slight gain of 0.1%.  Commodities rose much of the week before selling off Friday, resulting in a loss for gold of 1.6%.  The story was the same with oil, which closed the week down 0.6% to $84.45 per barrel.  Brent oil crossed above the $100 level but closed the week at $98.  

Source: MSN Moneycentral

Though the week was short due to the July 4th holiday, it was full of negative news. 

New economic data released this week shows that slow growth continues to be the story around the globe.  We received data that the service sector showed only slight growth last month, while manufacturing in the US actually contracted.

Europe also showed a contraction in their manufacturing sector.  The most troubling aspect is that Germany, the ATM of broke European countries, saw a contraction as well.  On top of the manufacturing data, European unemployment rose to a record high level. 

The big news came on Friday with the release of our employment report.  In the month of June, the economy added a paltry 80,000 jobs.  The number was much lower than expected and far below the roughly 200,000 we need just to keep up with population growth. 

It was thought that if the employment number was bad enough, the Fed would step in with more stimulus to boost the market.  However, a gain of 80,000 does show growth, though slight, which is likely to keep the Fed at bay for now.  The market sold off strongly as a result with the Dow falling by nearly 200 at one point, but closing the day down 124. 

While it doesn’t seem likely that the Fed will step up stimulus in the near future, other central banks around the globe made a coordinated effort to stimulate their markets.  Actually, they say it wasn’t “coordinated,” but it can’t be a coincidence when multiple central banks announce easing measures at the same time. 

In an attempt to spur lending so people will spend and boost the economy, five central banks announced easing measures on Thursday.  Those central banks included the European Central Bank (or ECB, which is essentially the European version of our Fed), the Bank of England, the National Bank of Denmark, and the People’s Bank of China (which was unusual since it is the second such move in a month).

Not to be left out, even the central bank of Kenya got into the action and cut rates.  Their situation is interesting since they are lowering the rate to 16.5% (for comparison, ours is at 0%) since inflation is nearing their 9% target.  9%! 

Unfortunately, all these measures to stimulate the economy don’t work as the past several years have shown us.  As we have constantly repeated, fundamental reforms are necessary to achieve a growing, healthy economy.  There was a great article in the Wall Street Journal this weekend discussing the reforms Germany made in the early 2000’s (LINK).  The reforms were difficult, but it made them the strongest economy in Europe. 

Until reforms like these are made, economies around the world will stagnate and debt will continue to build.  Printing more money and lowering borrowing rates only papers over the problems and leaves us worse off in the end.

It is interesting, especially this week, that these central banks openly manipulate their markets in order to reach a desired interest rate.  Recently a controversy has erupted in what has become known as the LIBOR scandal. 

LIBOR (London InterBank Offer Rate) is important because it is the most used benchmark for interest rates around the globe.  Its computation has always been a bit murky since the rate is determined by a panel of banks each day. 

It turns out that some of the banks on the panel set the rate so it would be advantageous to them (sometimes higher, sometimes lower).  This “scandal” has already cost the job of Barclays CEO.  Yet these issues were understood as far back as the 1980’s and are an obvious problem of banks determining their own interest rate. 

Central banks around the globe openly manipulate interest rates, but the press is hypocritically outraged when banks do the same. 


Next Week

Next week will be a busy one as we begin getting corporate earnings for the second quarter.  With the weakness overseas and here at home, it will be interesting to see how that impacted earnings.  Estimates have been steadily lowered as we approached earnings season and far more companies have been lowering earnings estimates versus raising them.  The bar has been set fairly low here. 

We will get a few economic releases, but nothing to really impact the market.  There will be reports on consumer credit, inventories, the producer price index (PPI), and consumer confidence. 

There will also be several regional Fed presidents speaking over the week and it will be interesting to see their take on the economy and what steps the Fed may be willing to take to address it. 

Lastly, the details of the recent debt agreement in Europe should begin getting ironed out next week.  Our guess is that the process will be more difficult than estimated and the deal has a good chance of falling apart.  


Investment Strategy

Normally we would be pessimistic at this point, with slow global growth, low expectations for corporate earnings, and a European problem that just won’t go away.  However, the Fed is still lurking in the background, ready to step in if the market falters.  While more stimulus won’t work to help the economy, it will boost the markets. 

With the market making big moves based on unpredictable news out of Europe or the Fed, agility becomes more important here. 

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, and further bailouts and stimulus programs.  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).  Additionally, higher taxes from the health care law will increase the attractiveness of these bonds. 

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 6-29-12

Late-week gains sent the markets into positive territory for the week.  Through the close Friday, the Dow gained 1.9%, the S&P rose 2.0%, and the Nasdaq was higher by 1.5%.  Commodities mirrored the market as a late week gain put gold up 2.4% for the week.  A weaker dollar and worries over Iran sent oil sharply higher, gaining nearly 10% on Friday alone.  It closed the week with a gain of 6.5% to $85 per barrel while Brent oil closed just shy of $100. 

Source: MSN Moneycentral

The excitement for the market came late in the week with the Supreme Court ruling on the constitutionality of the health care overhaul, as well as progress made on the European debt problem.  

No doubt by now you have heard the Supreme Court ruling and have your own opinions on the decision.  We won’t discuss the merits (or lack thereof) of government-run healthcare or our ever-increasing entitlement state, but its passage will have a significant impact on the future of the country and economy.

As evidenced by the drop in the market immediately after the ruling, the new health care law is seen as a negative.  Since its initial passage, business hiring has stalled due to the myriad of new costs, regulations, and uncertainties the bill created.  It also adds new taxes and burdens that are difficult for a company to comply with. 

There are also new costs for individuals.  Specific to our industry, there is a new 3.8% surtax on investment income for high earners.  While it will be a burden once implemented in 2013, it may give investors a push to take gains this year.  Not to mention the tax creates a new incentive to move to the tax free arena of municipal bonds. 

For companies, we see them foregoing their current insurance program and putting employees on government exchanges and paying the modest penalty.  Why pay the higher insurance premiums when the penalty is much lower?  Unfortunately, that modest penalty increases dramatically in the following years, though it will still be cheaper than most private insurance premiums. 

That may be a benefit for the business in the short term, but the massive new tax increases will be a hindrance to the overall economy in the long run.  Not to mention the increase to our already enormous debt. 

At any rate, the markets fell sharply on the decision, with the Dow lower by more than 170 at one point.  That is, until news out of Europe sent the market higher. 

European leaders were holding yet another summit to work out their debt problems, with this being the 19th of such meetings.  This time, though, it appears they did come to some sort of an agreement. 

Since Germany is the country footing the bill for the profligate countries, it has been holding out for more fiscal responsibility before committing to any bailouts.  It was reported that Germany made some concessions that allowed troubled banks to be bailed out directly.  Until now, bailout funds had to go to the government who then gave it to the bank. 

Also, there are reports that bailed out countries wouldn’t have the austerity requirement as a condition of receiving any funds. 

Fantastic, right?  Yet it fixes absolutely nothing.  It throws more money at a problem with no changes being made to fix that problem.  We have no doubt the European debt problems will be around for years to come and won’t be surprised when trouble resurfaces shortly. 

One concern is that the deal is not done yet as details need to be ironed out and implemented.  That could throw a wrench into their agreement as we have seen these deals unravel in the past. 

There could even be disagreements amongst the German leaders since the Finance Minister was the one offering the concessions.  Earlier in the week, Chancellor Merkel stated that “Europe will not have shared liability for debt as long as I live.”  After all, why would a country who is increasing the retirement age to 67 want to bail out a country like France who is dropping the retirement age to 60?  This could get interesting. 


Next Week

Next week will be a bit odd with the July 4th holiday coming on a Wednesday.  It may result in lower trading volumes as traders take a few extra days off. 

There will be some significant economic reports, though, as 2nd quarter reports begin coming out.  We will get info on the strength of the manufacturing and service sectors, plus the always important unemployment report.  Expectations are very low for that report but it may be a case where bad news is good news, since a bad report may prod the Fed to do more stimulus. 


Investment Strategy

While the pop in the market on Friday was nice, we think the European “agreement” has a good chance of unraveling like it has in the past.  We wouldn’t be surprised to see the markets move lower if that happens. 

Also something to consider on Friday’s gain was the impact of it being the last trading day of the quarter.  That could have pushed the markets higher than they otherwise would have. 

Still lurking in the background is the Fed, who has pledged to step in should conditions deteriorate.  That means more potential stimulus, resulting a corresponding rise in the market (although it doesn’t help the economy). 

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 can’t be too negative on the market knowing that Fed chief Bernanke has his helicopter ready to dump bags of money over the market if needed. 

As the market makes big moves based on unpredictable news out of Europe or the Fed, agility becomes more important. 

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.  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).  As we mentioned above, higher taxes from the health care law will increase the attractiveness of these bonds. 

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.