It was another very quiet week on Wall Street, though stocks inched towards new highs for the year. Through the close Friday, the Dow was higher by 0.5%, the S&P returned 0.9%, and the Nasdaq had a nice gain of 1.8%. Gold was quiet again, too, rising just 0.2%. Oil prices continue to be a concern, climbing 3.4% this week to $96 per barrel. Brent oil closed just below $114 per barrel.
Source: MSN Moneycentral
This week was so uneventful we almost had a hard time finding something to write about. It was so quiet, three of the five days saw daily changes of less than 10 points on the Dow (which is under a 0.1% move). Vacations can likely be blamed for some of this lack of news and volume. Europe is notorious for its lengthy August vacations, while here at home, many are squeezing in one last break before the school year begins.
News out of Europe on Thursday helped contribute to the one day that did see a relatively large move of 85 points. German Chancellor Merkel made a statement that Germany was committed to the Euro and would work to prevent a breakup in the currency. Though a simple and unremarkable statement, a market hungry for news found this enough to warrant a pop higher.
Economic data this week was mixed, but leaned to the positive side. We received some good news that retail sales picked up last month, plus industrial production, consumer sentiment, and leading economic indicators were all higher, too.
On the negative side, we saw new reports of further contraction in the manufacturing sector, plus small business optimism fell to nine-month lows.
We also received data on inflation, which came in roughly flat over the last month (though commodity prices – the things people actually buy – steadily rose). This is important because this official inflation rate is running below the Fed’s desired target, which increases the chance of another round of stimulus (because stimulus will raise the inflation rate).
Another hot topic this week was everyone’s favorite stock just three months ago, Facebook. This week the lock-up ended, which had prevented many insiders from selling their Facebook stock. Once they had the ability to sell, many of them did, pushing the share price lower. The stock closed the week down and has lost about half its value from the IPO just three months ago. Ouch.
Lastly, the frustrating rise in price of gas has been making headlines. A gallon at the pump has risen roughly 30 cents over the past month according to AAA reports. As a response to these high prices, the current administration has contemplated tapping the Strategic Petroleum Reserve (SPR) to bring more supply to the market. The SPR was designed to be used only in a supply disruption, which this obviously is not. This is clearly a political move to bring prices down before the election.
It likely won’t work, though. The SPR was tapped around this time last year on a similarly dubious scenario and the price of oil did drop, though rose back to the same level shortly thereafter. If the SPR were to be tapped, we see the results being insignificant, just like before.
More interesting, this is perhaps another accidental admission that increased oil supply reduces prices, which any half-witted economist could tell you. With that realization, it would be nice to see the administration pursue policies more favorable to getting that oil out of the ground and onto the market. After all, lower energy prices are a key to economic growth.
Next Week
Next week looks quieter in terms of data releases. Earnings season is virtually over, but we will get some info from big names like Best Buy, Dell, and Hewlett Packard.
Economic data will also be light and we will get reports on housing and durable goods (which are items that don’t wear out quickly, like a washing machine or TV).
Investment Strategy
Yet again, no change here. There are several reasons for us to be cautious here. First, all indications point to a slower growth in the economy, both here and around the globe.
Another factor is the high complacency as measured by the VIX (or volatility index, which is considered a gauge of fear in the market). In fact, the VIX hit a five year low this week. When complacency is this high (so fear is low), the tide can move sharply in the other direction.
New this week, the investment research company Trimtabs reported that insider selling rose significantly in early August (insiders are the executives and directors of a company and large investors). We like to look at the actions of insiders to get a better idea on a company and an abnormal increase in selling is another reason for caution (on the other hand, we think insider buying is a great positive indicator for a stock).
Also, higher gas prices and the coming food price increases add to our concern.
Normally these conditions would make us nervous, but like we’ve often mentioned, it’s hard to be too pessimistic when the Fed and ECB move closer to another round of stimulus with each negative report. While stimulus doesn’t help the economy and is a long term negative, it does boost the market in the short term.
It’s difficult to have strong convictions here either way, since the market is moving more on the unpredictable news out of Europe or the Fed, so agility is 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 problems, 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 have moved higher recently, they are still near historic lows (so prices are near historic highs). A short position (bet on a decline in price) only provides a nice hedge here and we believe 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.
News out of Europe on Thursday helped contribute to the one day that did see a relatively large move of 85 points. German Chancellor Merkel made a statement that Germany was committed to the Euro and would work to prevent a breakup in the currency. Though a simple and unremarkable statement, a market hungry for news found this enough to warrant a pop higher.
Economic data this week was mixed, but leaned to the positive side. We received some good news that retail sales picked up last month, plus industrial production, consumer sentiment, and leading economic indicators were all higher, too.
On the negative side, we saw new reports of further contraction in the manufacturing sector, plus small business optimism fell to nine-month lows.
We also received data on inflation, which came in roughly flat over the last month (though commodity prices – the things people actually buy – steadily rose). This is important because this official inflation rate is running below the Fed’s desired target, which increases the chance of another round of stimulus (because stimulus will raise the inflation rate).
Another hot topic this week was everyone’s favorite stock just three months ago, Facebook. This week the lock-up ended, which had prevented many insiders from selling their Facebook stock. Once they had the ability to sell, many of them did, pushing the share price lower. The stock closed the week down and has lost about half its value from the IPO just three months ago. Ouch.
Lastly, the frustrating rise in price of gas has been making headlines. A gallon at the pump has risen roughly 30 cents over the past month according to AAA reports. As a response to these high prices, the current administration has contemplated tapping the Strategic Petroleum Reserve (SPR) to bring more supply to the market. The SPR was designed to be used only in a supply disruption, which this obviously is not. This is clearly a political move to bring prices down before the election.
It likely won’t work, though. The SPR was tapped around this time last year on a similarly dubious scenario and the price of oil did drop, though rose back to the same level shortly thereafter. If the SPR were to be tapped, we see the results being insignificant, just like before.
More interesting, this is perhaps another accidental admission that increased oil supply reduces prices, which any half-witted economist could tell you. With that realization, it would be nice to see the administration pursue policies more favorable to getting that oil out of the ground and onto the market. After all, lower energy prices are a key to economic growth.
Next Week
Next week looks quieter in terms of data releases. Earnings season is virtually over, but we will get some info from big names like Best Buy, Dell, and Hewlett Packard.
Economic data will also be light and we will get reports on housing and durable goods (which are items that don’t wear out quickly, like a washing machine or TV).
Investment Strategy
Yet again, no change here. There are several reasons for us to be cautious here. First, all indications point to a slower growth in the economy, both here and around the globe.
Another factor is the high complacency as measured by the VIX (or volatility index, which is considered a gauge of fear in the market). In fact, the VIX hit a five year low this week. When complacency is this high (so fear is low), the tide can move sharply in the other direction.
New this week, the investment research company Trimtabs reported that insider selling rose significantly in early August (insiders are the executives and directors of a company and large investors). We like to look at the actions of insiders to get a better idea on a company and an abnormal increase in selling is another reason for caution (on the other hand, we think insider buying is a great positive indicator for a stock).
Also, higher gas prices and the coming food price increases add to our concern.
Normally these conditions would make us nervous, but like we’ve often mentioned, it’s hard to be too pessimistic when the Fed and ECB move closer to another round of stimulus with each negative report. While stimulus doesn’t help the economy and is a long term negative, it does boost the market in the short term.
It’s difficult to have strong convictions here either way, since the market is moving more on the unpredictable news out of Europe or the Fed, so agility is 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 problems, 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 have moved higher recently, they are still near historic lows (so prices are near historic highs). A short position (bet on a decline in price) only provides a nice hedge here and we believe 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.
