Please note: there will be no market commentary next week. We’d like to wish you a Merry Christmas and prosperous New Year.
In a repeat of last week, the market started the week with a nice gain, but moved lower later in the week to close with little change. Through the Friday close, the Dow rose 0.4%, the S&P gained 1.2%, and the Nasdaq rose a nice 1.7%. Gold saw strong selling, falling 2.3% for the week. Oil rose on reports of lower supplies, gaining 2.2% to close just below $89 per barrel. The other major type of oil, Brent, moved higher to $109 per barrel.
In a repeat of last week, the market started the week with a nice gain, but moved lower later in the week to close with little change. Through the Friday close, the Dow rose 0.4%, the S&P gained 1.2%, and the Nasdaq rose a nice 1.7%. Gold saw strong selling, falling 2.3% for the week. Oil rose on reports of lower supplies, gaining 2.2% to close just below $89 per barrel. The other major type of oil, Brent, moved higher to $109 per barrel.
Source: Yahoo Finance
Tired of hearing about the “fiscal cliff”? We are too, but it remains the focus of the market and is something that must be followed.
Once again, stocks rose this week when it seemed like we were moving towards an agreement. President Obama appeared to move closer to Republicans by raising the tax-hike income threshold to $400,000 while Republicans countered with $1,000,000.
The unbridgeable divide seems to be on the spending side, which is the major factor behind our fiscal problems. A spending cut plan was introduced this week, though was entirely unrealistic. Republicans want more spending cuts, while Democrats want cuts in some areas, but almost comically, new spending in other areas.
When these talks early in the week broke down, new hope was placed in a “Plan B.” Its subsequent failure made investors really question whether a deal would be done by the end of the year. The strong sell-off in the market on Friday was the result.
Our view remains that no agreement will be reached by the year-end. Tax rates would automatically rise, which would then see politicians immediately cut taxes on all but the top rates. We think if a deal is reached this year, it would be more temporary in nature and the fight would resume at some point next year.
We will likely see a pop in the market when we finally have an agreement and certainty on this subject (whether this year or early in the next). However, it may depend on the type of agreement reached. We think that a “bad” deal could send markets lower, though.
Changing subjects, economic data was mixed this week, though seemed to lean towards the positive side. The final revision to third quarter GDP came in surprisingly strong at 3.1% growth. Also, home sales saw an increase, durable goods rose, income and spending were both higher, and business activity in the Philly region increased. None of the figures were very strong, but still reflects a slow growth in the economy.
On the negative side, business conditions in the New York region fell, leading economic indicators were lower, and consumer confidence continues to decline.
Finally, gold saw a significant drop this week. We’ve seen reports that gold was lower on signs of economic strength, which may be partly true. We believe a bigger reason for the loss is sellers are taking profits off the table before the year-end. Also, a large fund with significant gold holdings (managed by John Paulson) is facing significant redemption requests, where that selling is likely adding to the downward pressure.
Next Week
Next week should be fairly quiet due to the Christmas holiday. The market closes early on Monday and many will simply take the day off all together, so essentially it will be like a three-day week. There will be a few economic data releases in those three days, but nothing that will have much impact on the market.
The fiscal cliff talks will continue, with next week being the make-or-break week in the discussion. Similar to the end of this week, if a deal isn’t within reach, we may see another sell-off. Vice versa if the opposite occurs.
Investment Strategy
There is no change in our strategy heading into the year-end. Unpredictable news on the fiscal cliff has the market jittery and us cautious, but does little to sway our longer term view.
We are essentially in a holding pattern on stocks here, not buying or selling. We do have worries about the future, with corporate earnings declining on lower revenues and economic growth projections being constantly lowered.
Another worry is the potential for higher taxes next year. Higher taxes stifle growth, a growth that actually brings in more money to the government rather than simply raising taxes.
Amid all this worry, though, the Fed is lurking in the background, ready and willing to do more stimulus if needed. Though we don’t agree with their policies, their actions do have an effect on the market (though it seems to diminish with each new round).
Though we aren’t looking to do any buying or selling in stocks at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks. This is more of a long-term play. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
With the Fed committed to printing more money, as well as many central banks around the world, we still like gold despite the recent weakness. It is beginning to look oversold here, but we aren’t looking to add to our positions quite yet.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that 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. We also think TIPs are important as we still expect inflation to increase.
The threat of new tax laws has weighed on the municipal bond market recently. If changes are indeed made, we would reconsider our investments in this sector. If all remains the same, these bonds would still work with the higher taxes looming.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
Please note, 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.
Once again, stocks rose this week when it seemed like we were moving towards an agreement. President Obama appeared to move closer to Republicans by raising the tax-hike income threshold to $400,000 while Republicans countered with $1,000,000.
The unbridgeable divide seems to be on the spending side, which is the major factor behind our fiscal problems. A spending cut plan was introduced this week, though was entirely unrealistic. Republicans want more spending cuts, while Democrats want cuts in some areas, but almost comically, new spending in other areas.
When these talks early in the week broke down, new hope was placed in a “Plan B.” Its subsequent failure made investors really question whether a deal would be done by the end of the year. The strong sell-off in the market on Friday was the result.
Our view remains that no agreement will be reached by the year-end. Tax rates would automatically rise, which would then see politicians immediately cut taxes on all but the top rates. We think if a deal is reached this year, it would be more temporary in nature and the fight would resume at some point next year.
We will likely see a pop in the market when we finally have an agreement and certainty on this subject (whether this year or early in the next). However, it may depend on the type of agreement reached. We think that a “bad” deal could send markets lower, though.
Changing subjects, economic data was mixed this week, though seemed to lean towards the positive side. The final revision to third quarter GDP came in surprisingly strong at 3.1% growth. Also, home sales saw an increase, durable goods rose, income and spending were both higher, and business activity in the Philly region increased. None of the figures were very strong, but still reflects a slow growth in the economy.
On the negative side, business conditions in the New York region fell, leading economic indicators were lower, and consumer confidence continues to decline.
Finally, gold saw a significant drop this week. We’ve seen reports that gold was lower on signs of economic strength, which may be partly true. We believe a bigger reason for the loss is sellers are taking profits off the table before the year-end. Also, a large fund with significant gold holdings (managed by John Paulson) is facing significant redemption requests, where that selling is likely adding to the downward pressure.
Next Week
Next week should be fairly quiet due to the Christmas holiday. The market closes early on Monday and many will simply take the day off all together, so essentially it will be like a three-day week. There will be a few economic data releases in those three days, but nothing that will have much impact on the market.
The fiscal cliff talks will continue, with next week being the make-or-break week in the discussion. Similar to the end of this week, if a deal isn’t within reach, we may see another sell-off. Vice versa if the opposite occurs.
Investment Strategy
There is no change in our strategy heading into the year-end. Unpredictable news on the fiscal cliff has the market jittery and us cautious, but does little to sway our longer term view.
We are essentially in a holding pattern on stocks here, not buying or selling. We do have worries about the future, with corporate earnings declining on lower revenues and economic growth projections being constantly lowered.
Another worry is the potential for higher taxes next year. Higher taxes stifle growth, a growth that actually brings in more money to the government rather than simply raising taxes.
Amid all this worry, though, the Fed is lurking in the background, ready and willing to do more stimulus if needed. Though we don’t agree with their policies, their actions do have an effect on the market (though it seems to diminish with each new round).
Though we aren’t looking to do any buying or selling in stocks at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks. This is more of a long-term play. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
With the Fed committed to printing more money, as well as many central banks around the world, we still like gold despite the recent weakness. It is beginning to look oversold here, but we aren’t looking to add to our positions quite yet.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), but the trend is moving back that 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. We also think TIPs are important as we still expect inflation to increase.
The threat of new tax laws has weighed on the municipal bond market recently. If changes are indeed made, we would reconsider our investments in this sector. If all remains the same, these bonds would still work with the higher taxes looming.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
Please note, 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.
