The market trended lower for much of the week before popping sharply higher on Friday to move into positive territory. For the week, the Dow rose 0.2%, the S&P gained 0.4%, and the Nasdaq returned 0.3%. Gold saw a high amount of volatility and closed down 0.7%. Oil rose for another week, gaining 1.4% and closing at $91 per barrel. Brent oil, used for much of the gas here in the East, rose to $109 per barrel.
Source: MSN Moneycentral
We received a lot of information on economic data and corporate earnings this week, but Central Banks here and in Europe drew most of the attention. Though that info was mostly negative, a positive employment report on Friday reversed the week’s earlier losses and sent the markets to a 3-month high. .
As the economies in Europe and the US have grown weaker, many had expected Central Banks to embark on new rounds of stimulus to jump start those economies. Last week, the European Central Bank (or ECB) head Mario Draghi even went so far as to promise extraordinary measures to save the Euro.
It turned out, neither central bank would be doing any immediate stimulus.
This week our Fed Chief announced that while they won’t be doing anything immediately, they are closely watching the economy and will take action if needed. Though this is nothing new, their wording did seem to indicate being even more open to a new stimulus.
In Europe, after the pledge to do “whatever it takes,” the ECB head disappointed investors by not following up with anything new or specific. That news was largely responsible for the Thursday market drop.
Economic data this week was mostly negative and pointed to a stubbornly slow growth, which could be seen as a positive for the market if it prods the Fed to do more stimulus. One positive story wiped out all the negative when the unemployment figures came in much better than expected.
Expectations were low heading into the number, with economists estimating just 95,000 jobs added last month. In a surprise, the economy added 163,000 and the market rose sharply on the news.
While that sounds good, we must remember that a growth of around 200,000 is needed just to keep up with population growth. And while the unemployment rate stands at 8.3%, that figure would be closer to 13% if we had the same size labor force as at the beginning of the recession in 2007. However, any gain is better than no gain at all.
On to corporate profits, where roughly 2/3rds of companies are beating earnings expectations and another 13% have met them, according to S&P Capital IQ. As we have mentioned, though, those estimates had been steadily lowered heading into earnings season.
On the revenue side, what the company actually earned, less than half have beaten estimates. And the growth in revenue is just over 1%, according to Thomson Reuters. So far this has been the worst quarter for revenue misses since early 2010, per Barclays.
When looking at future earnings, the figures also look depressing. More companies are warning that earnings next quarter will be lower, with the ratio of negative to positive forecasts at the highest level since 2001, according to Thomson Reuters.
Lastly, the topic of trading made news this week. A company that, among other things, is a market maker and places trades (including for our company) experienced a software malfunction that affected trading in almost 150 stocks.
Knight Capital was in the process of installing new software that resulted in these trading malfunctions, briefly sending the affected shares lower. The blunder cost the firm $440 million and sent the stock sharply lower, falling from over $10 to the low $2’s (though they closed the week just over $4 per share).
Immediately there were calls for further regulation. We disagree. For one thing, it was a glitch in software, nothing that further regulation could prevent. But more importantly, we feel that this failure, this loss of capital without the expectation of a bailout, is the best form of regulation. When a business knows it can lose everything from even a simple misstep, it will take the precautions to prevent it from happening.
That lesson could be applied even more broadly and save us the trouble that further regulations often bring.
Next Week
Next week will less busy for economic data and corporate earnings. We are on the backside of earnings season, so results are beginning to slow. Economic data will be lighter, but we will get info on consumer credit, productivity, trade data, and import and export prices.
The Fed will also make news as the chairman, Ben Bernanke, will be speaking on Monday and Tuesday. Investors will continue to closely watch his words for any clues on further stimulus.
Investment Strategy
Both the corporate and economic data released this week reaffirms our expectations of slow and possibly negative growth. Adding to our caution, the volatility index (or VIX, which is a gauge of fear in the market) is showing a strong level of complacency. Plus, the P/E levels of dividend paying stocks are at their highest level ever when compared to the broad market, indicating an overheating in that area.
Like we’ve often mentioned, it’s hard to be too pessimistic on the market when the Fed and ECB inch closer to another round of stimulus. 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.
As the economies in Europe and the US have grown weaker, many had expected Central Banks to embark on new rounds of stimulus to jump start those economies. Last week, the European Central Bank (or ECB) head Mario Draghi even went so far as to promise extraordinary measures to save the Euro.
It turned out, neither central bank would be doing any immediate stimulus.
This week our Fed Chief announced that while they won’t be doing anything immediately, they are closely watching the economy and will take action if needed. Though this is nothing new, their wording did seem to indicate being even more open to a new stimulus.
In Europe, after the pledge to do “whatever it takes,” the ECB head disappointed investors by not following up with anything new or specific. That news was largely responsible for the Thursday market drop.
Economic data this week was mostly negative and pointed to a stubbornly slow growth, which could be seen as a positive for the market if it prods the Fed to do more stimulus. One positive story wiped out all the negative when the unemployment figures came in much better than expected.
Expectations were low heading into the number, with economists estimating just 95,000 jobs added last month. In a surprise, the economy added 163,000 and the market rose sharply on the news.
While that sounds good, we must remember that a growth of around 200,000 is needed just to keep up with population growth. And while the unemployment rate stands at 8.3%, that figure would be closer to 13% if we had the same size labor force as at the beginning of the recession in 2007. However, any gain is better than no gain at all.
On to corporate profits, where roughly 2/3rds of companies are beating earnings expectations and another 13% have met them, according to S&P Capital IQ. As we have mentioned, though, those estimates had been steadily lowered heading into earnings season.
On the revenue side, what the company actually earned, less than half have beaten estimates. And the growth in revenue is just over 1%, according to Thomson Reuters. So far this has been the worst quarter for revenue misses since early 2010, per Barclays.
When looking at future earnings, the figures also look depressing. More companies are warning that earnings next quarter will be lower, with the ratio of negative to positive forecasts at the highest level since 2001, according to Thomson Reuters.
Lastly, the topic of trading made news this week. A company that, among other things, is a market maker and places trades (including for our company) experienced a software malfunction that affected trading in almost 150 stocks.
Knight Capital was in the process of installing new software that resulted in these trading malfunctions, briefly sending the affected shares lower. The blunder cost the firm $440 million and sent the stock sharply lower, falling from over $10 to the low $2’s (though they closed the week just over $4 per share).
Immediately there were calls for further regulation. We disagree. For one thing, it was a glitch in software, nothing that further regulation could prevent. But more importantly, we feel that this failure, this loss of capital without the expectation of a bailout, is the best form of regulation. When a business knows it can lose everything from even a simple misstep, it will take the precautions to prevent it from happening.
That lesson could be applied even more broadly and save us the trouble that further regulations often bring.
Next Week
Next week will less busy for economic data and corporate earnings. We are on the backside of earnings season, so results are beginning to slow. Economic data will be lighter, but we will get info on consumer credit, productivity, trade data, and import and export prices.
The Fed will also make news as the chairman, Ben Bernanke, will be speaking on Monday and Tuesday. Investors will continue to closely watch his words for any clues on further stimulus.
Investment Strategy
Both the corporate and economic data released this week reaffirms our expectations of slow and possibly negative growth. Adding to our caution, the volatility index (or VIX, which is a gauge of fear in the market) is showing a strong level of complacency. Plus, the P/E levels of dividend paying stocks are at their highest level ever when compared to the broad market, indicating an overheating in that area.
Like we’ve often mentioned, it’s hard to be too pessimistic on the market when the Fed and ECB inch closer to another round of stimulus. 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.
