Commentary for the week ending 9-28-12

The markets closed out the quarter on a sour note.  For the week, the Dow fell 1.1%, the S&P was lower by 1.3%, and the Nasdaq returned -2.0%.  The results for the quarter were much better, with the Dow higher by 4.3%, the S&P rose 5.8%, and the Nasdaq turned in a nice gain of 6.2%.  For commodities, gold was slightly lower by 0.3% this week.  Oil bounced around, but closed down 0.8%.  The other major type of oil, Brent, closed above $112 per barrel.   

Source: MSN Moneycentral

Problems in Europe resurfaced this week, contributing to the negative performance of the market.  Doubts on the effectiveness of the recent stimulus and sour economic data also added to the downward pressure. 

Thinking back to our commentary last week, we mentioned a news article (LINK) that highlighted the “agreement” between our President and European leaders for no surprises from that region before the election.  As this week has shown, that doesn’t appear to be working.

In order to be eligible for bailout funds, a country must show an effort towards reducing their deficits.  This week, Spain and Greece announced new austerity measures of additional tax hikes and spending cuts to again meet that requirement. 

That did not sit well with the populace who took to the streets in protest.  Spain, in particular, saw very large gatherings of protestors.  

The hostile images lead many to wonder if the new tax hikes and spending cuts would actually be implemented.  That would result in a loss of the necessary bailout funds, a worry that sent the markets lower. 

Interestingly enough, some austerity measures have already been implemented in Spain, with tax increases and spending cuts already in place.  Yet we learned this week that spending has risen 8.9% so far this year, while tax receipts were lower by 4.6%. 

Remember, increased taxes have shown to stifle economic growth.  And that slower growth leads to less tax revenue collected by the government.  The optimal combination is lower government spending combined with lower taxes.  Until reforms along those lines are made, the disappointing results are no surprise and will continue. 

Adding to the negative pressure of the market, a Fed official threw cold water on the latest round of stimulus.  Philadelphia Fed President Plosser made news by saying he didn’t think the latest stimulus will improve the economy or boost growth.  He also was concerned that this bond buying would hurt the Fed’s credibility.  The comments were unexpected and helped send the markets lower. 

As for economic data this week, the results were mixed, though leaned to the negative side. 

For the positives, consumer confidence was strong and home prices have risen.  Personal income showed a slight gain (though is negative when considering inflation).  Plus, the employment picture looked a little brighter this week.

On the negative side, new home sales came in below estimates.  Manufacturing in the Chicago region showed a contraction for the first time since 2009.  Durable goods showed a substantial drop of 13.1%.  Most importantly, the final revision to the second quarter GDP showed a growth of only 1.3% (1.25%, actually), revised down from 1.7%.  Unfortunately, economic growth has steadily declined over the past year and the trend is headed lower.


Next week

With the month and quarter ending this week, next week will be busier due to the economic information that will be released.  Of note, we will get info on the strength of the manufacturing and service sectors, auto sales, and the important monthly employment report.  Company earnings will also begin trickling in. 

Fed Chairman Bernanke will be speaking next week, as well.  Since the market is currently more focused on stimulus and bailouts than fundamentals like earnings and economic growth, Bernanke’s comments will be closely scrutinized. 


Investment Strategy

The week was another disappointment after the big stimulus announcement two weeks ago.  Past stimulus programs saw a corresponding rise in the market and that has yet to be the case here.  While most see a good chance the market will rise once the stimulus gets into gear, caution is still warranted.  As these weeks have shown, the market usually does the opposite of what most think it will.

If we do see a buying opportunity, in stocks, 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. 

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  We wouldn’t add to positions at this point, but would not look to sell, either. 

We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run.  However, the recent stimulus may send this sector higher and prices may rise from here. 

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but 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.

Commentary for the week ending 9-21-12

It was a relatively quiet week on Wall Street, resulting in the slightest of losses for the market.  For the week, the Dow was lower by just 0.1%, the S&P fell 0.4%, and the Nasdaq also returned -0.1%.  Gold hovered around its recent highs, gaining 0.3%.  Surprising many, oil dropped sharply by 6.5% to below $93 per barrel.  The story was the same with the other major type of oil, Brent, closing down around $111 per barrel.  We will discuss the move in oil more below. 

Source: MSN Moneycentral

After several active weeks, the markets finally enjoyed a much quieter one.  It was almost “normal” in that the market did not make excessive moves on speculation over central bank actions and stimulus or the European debt responses.  Though that doesn’t mean we didn’t have news on either. 

Market fundamentals were more of a story this week and slowing global growth was the common theme.

FedEx supported that theme as they discussed their outlook on future earnings.  They made news on this subject a couple weeks ago, but repeated their view again this week. FedEx expects a slowdown in the Asia and European regions, and even a noticeable slowdown in the US.  The nature of their business gives then a good grasp on global trends, making their outlook very valuable.  

Data released this week validated the FedEx view.  China released weak economic data while business activity in Europe fell by the largest amount in over three years.  The European story is interesting in that it showed that Germany, the largest and strongest economy, was relatively strong. 

The other European heavyweight, France, had one of the biggest business activity drops in their history.  It should be noted that the French have recently installed a new Socialist government, whose impact should not be overlooked. 

With weakness around the globe, many more countries are looking to stimulate their economies, similar to the recent steps taken by the US, Europe, and to some extent, China. 

Brazil and Turkey both announced stimulate programs, intended to weaken their currencies in order to boost exports.  A weaker currency makes exports cost less, so that good looks more attractive if another country’s goods cost more. 

In the race to debase currencies, Japan also announced a new round of stimulus, or QE (quantitative easing), making this the eighth round of stimulus since 2000.  If ever there was a great example to show that stimulus does not work, Japan is it.  Japan has been stuck in an economic funk for more than two decades and shows no signs of getting out, despite constant stimulus.  

On to a positive story for supporters of the European bailouts, reports claim progress has been made in the Spanish bailout.  Spain has to implement reforms before accepting any future bailout money and appear to be doing so. 

As part of the reforms, Spain looks to be freezing pensions while increasing the retirement age from 65 to 67 over the next 15 years.  Though the reforms are necessary, we aren’t sure how permanent those changes will be.  We have seen these governments cave when faced with a hostile populace and it’s not clear how steadfast they will be. 

One interesting note on the European debt situation, don’t look for any negative surprises from the region before early November.  According to a Reuters report (LINK), President Obama has been in contact with European leaders, pleading for no negative surprises that will affect the economy before the election.  And apparently, European leaders are willing to work towards that, seeing Obama as someone more likely to support future bailouts and central bank involvement than a President Romney would. 

Finally, we’ll touch on the story in oil.  With the Fed’s stimulus program, most anticipated a rise in commodity prices, including oil.  However, oil dropped sharply and surprisingly, leaving many to wonder why. 

Though the reason for the drop is still not entirely clear (and rarely ever is in these events), reports indicated the Saudi Arabia is looking to boost production to keep prices from rising more from here.  Also, refineries and production facilities are getting back to normal after being idled when hurricane Isaac moved into the Gulf. 

Still, the size of the drop in oil was unusual, though will be very welcomed at the gas pump.   


Next week

Next week looks similar to this past week.  Again there will be a few regional Fed Presidents speaking, plus several economic data releases, though nothing major.  There will be more data on housing, durable goods (which are bigger ticket items, like a refrigerator or TV), personal income and spending, and a revision to last quarters GDP. 


Investment Strategy

Coming off two big weeks with new stimulus announced, many were looking for another big week this week.  Though they were disappointed, past stimulus programs saw a similar market reaction. 

Periods of stimulus can be seen in the shaded regions of the nearby chart (courtesy of LPL Financial and Bloomberg, and though only through March, serves to illustrate our point).  Periods of stimulus did not always start smoothly for the market.  Though once in gear, a steady, sustained rise in the market with little volatility can be seen. 

So at this point, we have the Fed pledging to continue stimulus for an indefinite period and Europe promising to not produce any negative stories until at least November.  In recent months, negative news from both these subjects caused the largest market drops.  Now any negatives from them are off the table.  

This is reassuring for the market and likely indicates a continued move higher.  But what if the market turns its focus to the fundamentals of the stock market: corporate earnings and economic data?  Both subjects have disappointed and are forecasted to continue to do so.  While the market currently has the wind at its back, a cautious outlook is still warranted.  Again, agility remains important here. 

In stocks, 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. 

Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs.  We wouldn’t add to positions at this point, but would not look to sell, either. 

We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run.  However, the Fed has pumped this sector up and prices may continue to rise from here. 

Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds.  We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely.  A short position (bet on a decline in price) provides a nice hedge here but 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.

Commentary for the week ending 9-14-12

Another round of stimulus from the Fed pushed stocks to a new multi-year high.  For the week, the Dow rose 2.2%, the S&P climbed 1.9%, and the Nasdaq turned in a gain of 1.5%.  Gold shot up on the news, returning a nice 1.9% and reaching a new six-month high.  Like most other commodities, oil moved higher by 2.7% to a four-month high of $99 per barrel, though it crossed above the $100 level at one point.  The other major type of oil, Brent, closed above $116 per barrel.

Source: MSN Moneycentral

The week started out similar to last week, quiet as we waited for the Fed decision coming on Thursday.  And similar to the European Central Bank (ECB) announcement for more stimulus last week, the market shot higher on the same news from our Fed this week. 

By now you’ve probably heard that the Fed announced their fourth round of stimulus which will begin immediately.  They will buy $40 billion in mortgage bonds every month in addition to their current stimulus program already underway.  Plus they announced interest rates will remain at record low levels until 2015. 

The benefits of more stimulus was argued to be two-fold.  Mortgage rates should move lower, benefitting the housing market. 

The other benefit is what’s described as the “wealth effect”.  Since stimulus floods money into the stock market, it increases the value of investment portfolios and retirement plans, like 401k’s or pensions.  People then see that wealth, feel more confident, and spend more.  It sounds nice in theory, but as we’ll discuss later, it doesn’t seem to work. 

This Fed announcement was historic in that they didn’t put a limit on how long the program will last.  It will remain in place until the Fed is satisfied with the improvement in the labor picture, however long that may be.  If conditions deteriorate, they will increase their bond purchases (or print even more money).  Additionally, they will continue their stimulus programs even after the economy shows improvement. 

It was also historic in that they tied the stimulus to a specific outcome.  The Fed needs to see the employment picture improve, with the unemployment rate getting down to a more normal level.  Many analysts think this means around or below a 7% unemployment rate (we’re at 8.1% currently), which could be several years before achieving.  That means more than $1 trillion printed in pursuit of this goal. 

While the Fed has a mandate to achieve full employment, it also has a mandate to promote stable prices.  Stimulus increases commodity prices, as we saw with the immediate jump in gold, oil, and other commodity prices.  Fed chief Bernanke indicated that the goal of stable prices has moved to the back burner, with full employment being the primary concern. 

In our view, the higher commodity prices cancel out the “wealth effect” we discussed above.  It’s great that our stock portfolio is higher, but now everything costs more.  That is particularly harmful to lower income groups. 

It also inhibits hiring.  Higher commodity prices increase the costs of doing business.  When more money is spent for higher energy bills or input costs, it results in less money available to staff that business. 

In the end, we’re sure this will fail, just like the other stimulus programs.  And we’ll be worse off in the long run. 

One last thought on this subject, the political angle could be considered in the Fed’s decision. 

As we discussed two weeks ago (LINK), history has shown that the incumbent is likely to win when the market rises before the election and falls in an opposition victory.  Mitt Romney has stated that if elected, he would likely replace Bernanke.  Could Bernanke be trying to send markets higher to preserve his job?  That is not an unreasonable question to ask. 

Though we devoted an unusually large amount of this section to one topic, the subject of the Fed and other central banks around the world are easily (and unfortunately) the main factor behind the market direction at this time. 

There was other news as we’ll briefly touch on.  Economic data this week was mixed.  Consumer confidence and small business optimism was strong, along with retail sales.  However, our exports have weakened, industrial production fell, and inflation has risen due to higher gas prices.  Though the stock market rises, the economy still struggles. 


Next week

Next week doesn’t look to have the excitement of the last two weeks.  There will be a few regional Fed Presidents speaking, plus there will be some economic data releases, though nothing major.  We will get info on manufacturing in the New York region, plus housing data and leading economic indicators. 


Investment Strategy

With the Fed continuing to do panic-era responses to fix a slow economy, what was once non-traditional and even unimaginable, has now become mainstream.  To make money in this environment, you have to be in “risky assets” like stocks and commodities.  The Fed has even said as much. 

You would think more people would be happy when stock markets reach multi-year highs.  Most investors have come to realize that while this sugar high is great for our portfolios, it does little to help the economy and produces long-term negative consequences.  So while we like seeing markets reach new highs, we have concerns for when the party ends and the crash occurs.  We do not see it ending well.  

We really don’t like adding new money to a market that is sitting at new highs.  Agility remains important here. 

In stocks, 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 continue to like gold for the long term, as it will do well with debt problems, further bailouts, and stimulus programs.  We wouldn’t add more at this point, but would not look to sell, either. 

We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run.  However, the Fed has pumped this sector up and prices may continue to rise from here. 

Treasury bonds yields have moved off their historic lows (with prices near historic highs), but we wouldn’t yet consider the trend to be changing in this direction.  A short position (bet on a decline in price) provides a nice hedge here but 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. 

Commentary for the week ending 9-7-12

It was a strong week for the stock market with new multi-year highs reached.  For the week, the Dow gained 1.7%, the S&P rose 2.2%, and the Nasdaq returned 2.3%.  The promise of further money printing resulted in another week of solid gains for gold, rising 3.1% to a six-month high.  Oil saw little change, losing just 0.05% to close above $96 per barrel.  The other major type of oil, Brent, closed at $114.60 per barrel.

Source: MSN Moneycentral

Though the week got off to a rough start, news out of Europe sent the markets to multi-year highs.  The Dow and S&P reached levels not seen in more than five years, while the Nasdaq reached an even more impressive 12-year high. 

The week opened with reports showing an increasing weakness in global growth.  Manufacturing growth in Asia is slowing, while Europe and the US show contraction.  In fact, a report showed that 80% of the world’s economies are contracting. 

FedEx supported that view.  With their shipping seen as a barometer for growth, they warned of a slowdown, particularly in China. 

Coming off that sour news, investors were pinning their hopes on more stimulus from the European Central Bank (or ECB).  As you can see in the chart above, Thursday’s gains show they were not disappointed. 

To bring down borrowing costs for troubled European countries, the ECB announced an unlimited purchase of shorter dated bonds (this is similar to what our Fed has done).  The action eliminated the risk of a Euro breakup in the near term and the markets shot higher. 

Essentially this action is printing money.  One caveat is that they will counter the money printing by taking money out of the system by selling longer term bonds.  Theoretically, no new money will enter the economy and should eliminate any potential inflation.  However, many analysts realize this is largely symbolic since banks can continue to borrow from the ECB, increasing the money supply. 

Another problem is that the ECB is prohibited from directly buying bonds of countries, which is considered financing of that government.  Yet that is what they are doing.  To bypass that condition, they decided any bonds under three years don’t constitute financing.  This is a completely arbitrary number designed to circumvent the rules and many are not pleased. 

Germany has been vocal in their criticism, largely because they are on the hook for the profligate countries.  Actually, it has lead to disagreement within Germany, since some are opposed and others support the action.  Next week will give us a better idea which way the country will lean as their courts rule on the constitutionality of the bailout. 

At the end of the day, it’s not likely these steps will be any more successful than past actions.  We’ve seen this story several times before.  Some sort of bailout is announced, the market rallies.  Then no surprise, throwing more money at the problem fails to achieve any lasting improvements.  The market sinks and the cycle begins again.  Hedge fund manager David Einhorn created a great graphic that illustrates this cycle, seen below. 

We closed out the week with a disappointing report on jobs in the US.  For the month of August, the economy added a paltry 96,000 jobs.  This was far lower than estimates and even further below the level needed just to keep up with the growth in population.

Though the unemployment rate fell to 8.1% from 8.3%, the drop can be attributed to a plunge in labor participation.  Our labor force now stands at a 31-year low.  If we were to measure the unemployment rate using the labor force size from the beginning of the recession, that number would be closer to 12%, not 8.1%. 


Next Week

These negative economic reports have increased the likelihood of stimulus from the Fed here in the US. Next week will be very important for this subject as the Fed holds another scheduled meeting where this topic will be front and center. 

Many to most market participants predict an announcement from Fed Chief Bernanke on a new round of stimulus.  If such an announcement is made, we should see a significant gain in the market.  If not, the reverse is true.  Either way, next week could see some relatively large moves.  

As for economic data next week, there will be several reports worth noting.  We will get info on consumer credit, small business optimism, industrial production, and inflation with the CPI and PPI. 


Investment Strategy

As this week has shown, the market is highly reliant on central banks for direction.  For this reason, it is difficult to have strong convictions either way due to the unpredictable nature of their actions.  Next week will be important for this very reason.  If stimulus is announced, the market will rally.  If not, it will head lower.  Odds are high that a new stimulus will be announced, so there is potentially a bigger risk to the downside. 

One thing can be said for sure, any stimulus actions will have a limited effect.  We’ve seen it many times now, both here and abroad.  The market will rally for a short time but ultimately fall when it wears off.  Stimulus does nothing to fundamentally help the economy and possibly does more damage than good. 

But it does send the market higher in the short term and we don’t want to be on the wrong side of that trade.  Like before, agility remains 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.  The recent rally has decreased our chances of adding to our position (and we aren’t looking to sell), but we would add if prices moved 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. 

With Treasury bonds 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.

Commentary for the week ending 8-31-12

Stocks moved lower for the week with activity picking up towards the end.  Through the Friday close, the Dow was off 0.5%, the S&P lost 0.3%, and the Nasdaq had a slight loss of 0.1%.  Gold rose sharply on Friday with stimulus talks, pushing it to a five-month high and a gain of 0.9% this week.  The story was the same with oil, rising 0.3% for the week and closing at $96.47 per barrel, while prices at the pump continue to rise.  The other major type of oil, Brent, closed at $114.68 per barrel. 

Source: MSN Moneycentral

The markets were quiet early as investors were reluctant to place any big bets before the Fed conference in Jackson Hole on Friday.  Expectations were high for an announcement on new stimulus, or at least clues pointing that direction, though many investors had doubts.  That uncertainty kept many investors on the sidelines for fear of ending up on the wrong side of the trade. 

Volatility picked up as we neared the Friday speech.  The market fell on Thursday in part due to an increasing worry that there might not be any more stimulus, at least in the immediate future.  

The reactions were mixed when the speech from Fed chief Bernanke was finally released.  Basically Ben Bernanke closed the door on any stimulus right now, but upgraded the likelihood of action if needed. 

We saw this as little change from previous statements, but as you can see in the chart above, it got a big reaction.  Nothing concrete was learned and the QE (stimulus) question remains.

A major part of the speech was a defense of the Fed’s recent untraditional actions.  The Fed has printed over $2 trillion conducting these stimulus programs and many (including us) are questioning whether this will cause unintended consequences.  Interest rates at these exceptionally low levels for such a long period also raises concerns.   

But Bernanke was adamant that their actions were necessary and the benefits outweigh the costs (what benefits?).  Additionally, he believes any side effects will be manageable. 

This was encouraging to investors since it was interpreted as openness to further stimulus. 

Europe was (once again) the other major story this week.  It should come as little surprise that conditions in Europe continue to deteriorate.  This week the unemployment rate for the Eurozone countries hit a new all-time high while inflation ticked higher. 

More debt worries in Spain surfaced as another region asked for a bailout, bringing the total to three broke regions at the moment.  This leads many to wonder where the money for these bailouts will come from.  Or if a bailout will even come at all. 

To try to boost revenue to the Spanish government, they are looking to raise taxes and have proposed a sharp increase in the value-added tax.  Unfortunately this is the wrong medicine as increasing taxes stifles the economy and never results in the tax revenues politicians predict. 

England joined in the tax hike debate as politicians proposed a new, one-time “wealth tax” to raise revenues.  Unfortunately their 50% tax rate on the rich has not worked out so well, so they have proposed another similarly brilliant plan whose fate will likely be the same.  As more countries fall further into debt, look for more desperate tax raising ideas in the future. 

As the Presidential race heats up, we’ll conclude this section with something we touched on several weeks ago.  In July we wrote about the market trends in an election year (LINK).  Today we’ll revisit that. 

According to research done by the Ned Davis group, the market has historically risen in the June to August period in an election year.  This year followed that same pattern. 

September is where the direction differs.  In years where the incumbent wins, the market has historically continued to rise from here.  However, the market started to move lower around this point when the incumbent loses.  Below is a chart from Ned Davis and T. Rose Price illustrating this trend.

This is just an interesting market stat to keep in mind as we head into the fall.  Still, there’s no telling what will happen in this unprecedented period where the Fed lurks in the background with their printing presses ready. 

Next Week

Next week looks to be a busy one, even though the markets are closed on Monday.  We will get several new economic reports for the month just ended.  Of the notable releases, there will be info on the strength of the manufacturing and service sectors, plus the all-important employment report. 

The week will also be a busy one for data from Europe.  There will be a meeting of the European Central Bank (or ECB, which is basically the European version of our Fed), where the bailouts will likely be the main topic.  Many are looking for new bond buying programs, similar to the actions taken by our Fed. 

However, not everyone is on board.  The German court will be ruling on the constitutionality of a bailout in the following week, so the ECB meeting will probably be unlikely to make any major announcements before that outcome is known. 


Investment Strategy

It is difficult to have strong convictions either way here as the unpredictable nature of the Fed’s central planning and the European debt responses have the most impact on the market.  The focus on the election should increase and as we see in the chart above, the market can take a very different path depending on the outcome. 

We still lean towards the cautious side, especially heading into September, which is historically the worst month for market performance.  Expectations of Fed (and ECB) stimulus have buoyed the markets to this point and will continue to hang on every word from these organizations.  Agility remains 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.  The rise this week decreased our chances of adding to our position (and we aren’t looking to sell), but we would add 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.