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.
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.
