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.
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.
