Stocks moved lower for much of the week, posting their first loss in six weeks. Through the Friday close, the Dow fell 0.9%, the S&P returned -0.5%, and the Nasdaq had a modest loss of 0.2%. Gold had a nice week, rising 3.3% as stimulus talks resurfaced. Oil prices saw little change, off just 0.2% this week to remain above $96 per barrel. The other major type of oil, Brent, closed over $113 per barrel.
Source: MSN Moneycentral
After a couple weeks of slow news and quiet markets, the news flow got a little more active this week. The stories that have dominated headlines over the past several months, the Fed and Europe, returned to the spotlight.
Beginning with the Fed, the minutes from the latest Fed meeting were released this week. There was a noticeable increase in the support for further stimulus amongst the Fed members. They cited the high level of unemployment and slowing growth as a concern, plus the inflation rate is below their goal of 2%.
Coming off that optimistic outlook for stimulus, the next morning the Fed President of St. Louis, James Bullard, appeared on CNBC. He discussed the minutes that were just released, calling them “stale” since they were three weeks old.
In those weeks that had passed, new economic reports and indicators have shown a slight improvement. The data is moving the opposite direction from what Fed President Bullard believes would spur further stimulus.
However, the key word in from the minutes was substantial. Unless substantial growth is seen by the Fed, more stimulus would be needed. We aren’t sure if anything substantial has been achieved, so more stimulus is not out of the cards.
To confuse the market even further, Fed Chairman Bernanke wrote in a response to Congressional questions that there was more room for quantitative easing (or stimulus). Statements like this from the Fed Chief carry more weight than from President Bullard, so the news gave the markets a reason to spike on Friday.
Unfortunately, the past stimulus programs did little to help the economy and possibly made conditions worse. Seeing further stimulus as a solution to our problems is foolish, but we’ve discussed that enough in these pages here already.
On to Europe, where Europeans appear to be returning from their vacations as news increased this week. Greece was the focus as the debates on a potential bailout have resumed.
If nothing is done, Greece could run out of money by October. Since Germany basically controls the purse strings at this point, they have been the center of the discussions. While they state that they would like Greece to remain in the Euro, there have been more talks of letting them default and leave the Euro instead of continuing to throw money down a hole.
Either way, the results of this debate won’t be known for at least several weeks. The Constitutional Court in Germany will be voting in September on whether a permanent bailout fund is constitutional. Plus, a report due out in October will contain details on the likelihood of further aid to the country.
Either way, conditions in Europe appear to be worsening and the road to October may be a rocky one.
Finally, the week was one for the record book for Apple. The company passed the record set by Microsoft in terms of market cap (the share price times the amount of shares outstanding) to become the largest company ever. Interesting to note, the company makes up almost 20% of the Nasdaq, leading many to wonder if the index will rebalance.
Next Week
Next week will be fairly quiet for economic data and earnings. We will get info on consumer confidence, housing data, and personal income and spending.
All eyes will be on the Fed, though. Next week the Fed heads to Jackson Hole for their annual economic policy symposium. Fed chief Bernanke will be making a speech on Friday, which investors will be closely watching for any clues on stimulus. It was here two years ago that the Fed announced their initial stimulus program and many are expecting something similar this year.
Not only will Bernanke be speaking, but Mario Draghi, the President of the European Central Bank (ECB) will make a speech on Saturday. Next week will be an interesting one for economic policy.
Investment Strategy
Despite the drop this week, we believe expectations of Fed action is supporting stock prices here. The market has been reassured that if conditions become bad enough, the Fed will step in and help. Next week will be important as it will give us a better idea on any new stimulus.
We aren’t sure anything new will be announced at this Fed meeting, the way many others do. Perhaps there will be discussion on continuing their current stimulus program, Operation Twist. There may also be talks of lowering various rates. But we don’t believe a new quantitative easing (QE, or stimulus) program is in the works and the market will be disappointed.
There are many reasons for us to be cautious here, like slow economic growth and earnings. But with the Fed and Europe driving the markets, those reasons are almost inconsequential. 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 as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
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.
Beginning with the Fed, the minutes from the latest Fed meeting were released this week. There was a noticeable increase in the support for further stimulus amongst the Fed members. They cited the high level of unemployment and slowing growth as a concern, plus the inflation rate is below their goal of 2%.
Coming off that optimistic outlook for stimulus, the next morning the Fed President of St. Louis, James Bullard, appeared on CNBC. He discussed the minutes that were just released, calling them “stale” since they were three weeks old.
In those weeks that had passed, new economic reports and indicators have shown a slight improvement. The data is moving the opposite direction from what Fed President Bullard believes would spur further stimulus.
However, the key word in from the minutes was substantial. Unless substantial growth is seen by the Fed, more stimulus would be needed. We aren’t sure if anything substantial has been achieved, so more stimulus is not out of the cards.
To confuse the market even further, Fed Chairman Bernanke wrote in a response to Congressional questions that there was more room for quantitative easing (or stimulus). Statements like this from the Fed Chief carry more weight than from President Bullard, so the news gave the markets a reason to spike on Friday.
Unfortunately, the past stimulus programs did little to help the economy and possibly made conditions worse. Seeing further stimulus as a solution to our problems is foolish, but we’ve discussed that enough in these pages here already.
On to Europe, where Europeans appear to be returning from their vacations as news increased this week. Greece was the focus as the debates on a potential bailout have resumed.
If nothing is done, Greece could run out of money by October. Since Germany basically controls the purse strings at this point, they have been the center of the discussions. While they state that they would like Greece to remain in the Euro, there have been more talks of letting them default and leave the Euro instead of continuing to throw money down a hole.
Either way, the results of this debate won’t be known for at least several weeks. The Constitutional Court in Germany will be voting in September on whether a permanent bailout fund is constitutional. Plus, a report due out in October will contain details on the likelihood of further aid to the country.
Either way, conditions in Europe appear to be worsening and the road to October may be a rocky one.
Finally, the week was one for the record book for Apple. The company passed the record set by Microsoft in terms of market cap (the share price times the amount of shares outstanding) to become the largest company ever. Interesting to note, the company makes up almost 20% of the Nasdaq, leading many to wonder if the index will rebalance.
Next Week
Next week will be fairly quiet for economic data and earnings. We will get info on consumer confidence, housing data, and personal income and spending.
All eyes will be on the Fed, though. Next week the Fed heads to Jackson Hole for their annual economic policy symposium. Fed chief Bernanke will be making a speech on Friday, which investors will be closely watching for any clues on stimulus. It was here two years ago that the Fed announced their initial stimulus program and many are expecting something similar this year.
Not only will Bernanke be speaking, but Mario Draghi, the President of the European Central Bank (ECB) will make a speech on Saturday. Next week will be an interesting one for economic policy.
Investment Strategy
Despite the drop this week, we believe expectations of Fed action is supporting stock prices here. The market has been reassured that if conditions become bad enough, the Fed will step in and help. Next week will be important as it will give us a better idea on any new stimulus.
We aren’t sure anything new will be announced at this Fed meeting, the way many others do. Perhaps there will be discussion on continuing their current stimulus program, Operation Twist. There may also be talks of lowering various rates. But we don’t believe a new quantitative easing (QE, or stimulus) program is in the works and the market will be disappointed.
There are many reasons for us to be cautious here, like slow economic growth and earnings. But with the Fed and Europe driving the markets, those reasons are almost inconsequential. 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 as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
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.
