The fourth quarter got off to a solid start this week. Through the Friday close, the Dow gained 1.3%, the S&P rose 1.4%, and the Nasdaq climbed just 0.6%. Gold continued its climb higher, rising 0.4% for the week. Oil saw some big daily moves and closed the week down 2.5% to just below $90 per barrel. The other major type of oil, Brent, closed just above $112 per barrel.
Source: MSN Moneycentral
While the week saw more negative news out of Europe, the market actually focused on fundamentals instead. Positive economic data in the US helped push the markets higher, closing the week near a five year high.
Right out of the gate Monday morning, we learned that manufacturing expanded ever-so-slightly last month. Though unimpressive, it was an improvement since manufacturing showed a slight contraction in the previous month.
As the week went on, we also saw that the service showed an improvement. Capping the week was either a terrific or mediocre employment report, depending on your point of view.
Though we don’t usually spend much time getting into the details, the monthly employment report is composed of two different parts – one that gives the job gains or losses that you see in the news and is referred to as the establishment survey. The other is the household survey (they phone roughly 60,000 people a month), which gives the unemployment rate.
The establishment report, the non-farm payrolls, showed a gain of just 114,000 jobs last month, not nearly enough to keep up with population growth.
On the other hand, making headlines was the household report. It showed an unemployment rate of 7.8%, a rare three point improvement from the previous 8.1% figure. This was important since it was the lowest rate of the Obama presidency.
What was behind the improvement that left many scratching their heads? The household survey showed a gain of 873,000 jobs last month (remember, the other report showed a gain of 114,000). This was the largest gain in nearly 30 years. Of those 873k, exactly two-thirds (oddly enough) were part-time jobs. This had many questioning the reliability of the report, but it dominated headlines, nonetheless.
On to Europe, where it was another rough week. Spain and Greece both made news with weaker outlooks for the future. Also, manufacturing continues to show contraction in the region while unemployment ticked to another record high.
It was reported that Spain was closer to meeting the terms needed to be eligible for a bailout. This was a relief to the markets since a bailout would prevent any imminent Euro breakup talks, but does little to actually fix the problem.
We’ll conclude this section with the story this week in oil. Oil dropped sharply on Wednesday by more than 4%. Behind the move was a report on slowing growth in China (if growth is slowing, they won’t need as much oil), plus a report that oil production in the US has risen to its highest level since 1996. This is due entirely to production on private land, as production on government land is lower.
But also playing a role was Iran. Due to sanctions on their economy, their currency (the rial) has fallen sharply. Against the dollar, the rial was down 25% last week alone. Iranians are experiencing dramatic inflation and possibly hyperinflation, leading to rare protests in the country.
It looked like the oil market was encouraged by the protests, since it had potential to lead to changes in the regime. This added to the downward pressure.
The drop was all but forgotten by Thursday, though, as oil popped higher and erased the previous days losses. The new conflict in Syria and Turkey was cited as the cause for the rise. Then oil dropped again Friday on weaker growth prospects, closing out a volatile week for oil.
Next week
Activity starts to pick up next week as corporate earnings begin rolling in. We’ll also get a report on inflation at the producer level, plus import/export prices and the trade balance.
Investment Strategy
Right out of the gate Monday morning, we learned that manufacturing expanded ever-so-slightly last month. Though unimpressive, it was an improvement since manufacturing showed a slight contraction in the previous month.
As the week went on, we also saw that the service showed an improvement. Capping the week was either a terrific or mediocre employment report, depending on your point of view.
Though we don’t usually spend much time getting into the details, the monthly employment report is composed of two different parts – one that gives the job gains or losses that you see in the news and is referred to as the establishment survey. The other is the household survey (they phone roughly 60,000 people a month), which gives the unemployment rate.
The establishment report, the non-farm payrolls, showed a gain of just 114,000 jobs last month, not nearly enough to keep up with population growth.
On the other hand, making headlines was the household report. It showed an unemployment rate of 7.8%, a rare three point improvement from the previous 8.1% figure. This was important since it was the lowest rate of the Obama presidency.
What was behind the improvement that left many scratching their heads? The household survey showed a gain of 873,000 jobs last month (remember, the other report showed a gain of 114,000). This was the largest gain in nearly 30 years. Of those 873k, exactly two-thirds (oddly enough) were part-time jobs. This had many questioning the reliability of the report, but it dominated headlines, nonetheless.
On to Europe, where it was another rough week. Spain and Greece both made news with weaker outlooks for the future. Also, manufacturing continues to show contraction in the region while unemployment ticked to another record high.
It was reported that Spain was closer to meeting the terms needed to be eligible for a bailout. This was a relief to the markets since a bailout would prevent any imminent Euro breakup talks, but does little to actually fix the problem.
We’ll conclude this section with the story this week in oil. Oil dropped sharply on Wednesday by more than 4%. Behind the move was a report on slowing growth in China (if growth is slowing, they won’t need as much oil), plus a report that oil production in the US has risen to its highest level since 1996. This is due entirely to production on private land, as production on government land is lower.
But also playing a role was Iran. Due to sanctions on their economy, their currency (the rial) has fallen sharply. Against the dollar, the rial was down 25% last week alone. Iranians are experiencing dramatic inflation and possibly hyperinflation, leading to rare protests in the country.
It looked like the oil market was encouraged by the protests, since it had potential to lead to changes in the regime. This added to the downward pressure.
The drop was all but forgotten by Thursday, though, as oil popped higher and erased the previous days losses. The new conflict in Syria and Turkey was cited as the cause for the rise. Then oil dropped again Friday on weaker growth prospects, closing out a volatile week for oil.
Next week
Activity starts to pick up next week as corporate earnings begin rolling in. We’ll also get a report on inflation at the producer level, plus import/export prices and the trade balance.
Investment Strategy
While the market hasn’t yet seen the same gangbuster rise as in previous stimulus periods, the trend looks like it is still higher. As you can see in the nearby chart, the market continues to move within the upward-sloping range it has been in since June. Like before, though, we still remain cautious.
With economic data and corporate earnings beginning to come in next week, it is possible the market will continue to focus these fundamentals.
Earnings will be particularly interesting to watch. The bar has been set low here as companies have warned about slowing earnings. Like usual, we’ll probably see a good number of companies beat these lower estimates.
But it is important to watch the revenue figures – the money the company actually brought in from sales. Only 41% of companies beat revenue estimates last quarter according to Thompson Reuters. It shows that growth is slowing and is something to keep an eye on.
As for specific investments, there is no change here. 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.
With economic data and corporate earnings beginning to come in next week, it is possible the market will continue to focus these fundamentals.
Earnings will be particularly interesting to watch. The bar has been set low here as companies have warned about slowing earnings. Like usual, we’ll probably see a good number of companies beat these lower estimates.
But it is important to watch the revenue figures – the money the company actually brought in from sales. Only 41% of companies beat revenue estimates last quarter according to Thompson Reuters. It shows that growth is slowing and is something to keep an eye on.
As for specific investments, there is no change here. 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.
