It was another week with Washington in the spotlight. Through the close, the Dow gained 1.0%, the S&P rose just 0.1%, and the Nasdaq returned -1.1%. Gold saw another week of solid selling, falling 0.4%. Oil also sold off, losing 3.4% on the week to $86 per barrel. The foreign Brent crude closed just above $107.
Source: Yahoo Finance
Similar to last week, this week was again all about the “fiscal cliff.” The tug-of-war negotiations continued between both parties, with the market rising on positive news and, not surprisingly, falling on negative news.
A great example can be seen in the sharp rise of the markets Wednesday, coming on optimistic comments from President Obama. That optimism continued to grow when reports of talks between President Obama and Speaker Boehner surfaced.
By the end of the week, though, it appeared little progress had been made. Speaker Boehner called the President’s proposal “a joke” for the firm insistence of higher rates on top earners, plus a removal of the debt ceiling limit, amongst other demands.
We don’t look any nearer to a solution than we were at the beginning of the week.
The consensus amongst those on Wall Street is the markets will rise on a resolution. Any resolution. But we have our concerns. We feel a bad agreement could be just as bad as none at all.
We mentioned last week that it is looking more like we will not get a resolution by the year-end, thus going over the cliff. That belief remains true as of this week. Under that scenario, the new year would likely see politicians immediately cut taxes back to the lower levels for all but the top rates.
The market will suffer as a response. It will also result in lower revenue to the government, since we’ve seen time and again, higher tax rates don’t bring in more revenue. Economic growth brings in more money to the government, something we cannot repeat often enough.
Aside from that topic, the week was rather quiet. The employment report released on Friday made news as we gained 146,000 jobs in November, much higher than the 80,000 expected. The unemployment rate dropped to 7.7% from 7.9%.
Though the numbers appear impressive, the gain in workers is still slow, barely keeping up with the population growth. Also, the drop in the unemployment rate came from a large amount of people leaving the workforce entirely. So while the numbers seem impressive, they do leave much to desire.
Also interesting to note, it was cited that the storm, Sandy, did not have an impact on the numbers. This is notable since many were expecting a large impact, hence the low guesses. This is also more telling in how little of an impact the storm has had on data. It is a popular excuse when data is bad, but conspicuously absent when data is good.
Next Week
Next week looks to be another busy one. We will get earnings from several big companies like Dollar General, Costco, Pier 1, and Hovnanian. For economic data, we will get reports on small business optimism, trade balance, retail sales, industrial production, and inflation with the CPI and PPI.
The Fed will also be in the news with their meeting in which they are expected to hold interest rates at these record lows. Also, one of their bond buying stimulus programs is set to expire in the coming weeks, so it is widely believed the Fed will announce a continuation to this program.
Investment Strategy
No change here from last week. We aren’t looking to do any buying or selling in stocks at this point. Even if we were, the focus here should be on the long term, since the unpredictable news out of Washington has the markets jittery.
If a buying opportunity were to present itself, we still like higher-quality stocks, though many of these dividend payers have been hit on tax rate concerns. Again, 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 market and Europe.
Gold saw more profit-taking this week, but we still like it for the long run. Further money printing, bailouts, and stimulus around the globe will help send it higher. We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either.
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. Municipal bonds still work as higher taxes loom on the horizon (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 and have shown a large rise to this point.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
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.
A great example can be seen in the sharp rise of the markets Wednesday, coming on optimistic comments from President Obama. That optimism continued to grow when reports of talks between President Obama and Speaker Boehner surfaced.
By the end of the week, though, it appeared little progress had been made. Speaker Boehner called the President’s proposal “a joke” for the firm insistence of higher rates on top earners, plus a removal of the debt ceiling limit, amongst other demands.
We don’t look any nearer to a solution than we were at the beginning of the week.
The consensus amongst those on Wall Street is the markets will rise on a resolution. Any resolution. But we have our concerns. We feel a bad agreement could be just as bad as none at all.
We mentioned last week that it is looking more like we will not get a resolution by the year-end, thus going over the cliff. That belief remains true as of this week. Under that scenario, the new year would likely see politicians immediately cut taxes back to the lower levels for all but the top rates.
The market will suffer as a response. It will also result in lower revenue to the government, since we’ve seen time and again, higher tax rates don’t bring in more revenue. Economic growth brings in more money to the government, something we cannot repeat often enough.
Aside from that topic, the week was rather quiet. The employment report released on Friday made news as we gained 146,000 jobs in November, much higher than the 80,000 expected. The unemployment rate dropped to 7.7% from 7.9%.
Though the numbers appear impressive, the gain in workers is still slow, barely keeping up with the population growth. Also, the drop in the unemployment rate came from a large amount of people leaving the workforce entirely. So while the numbers seem impressive, they do leave much to desire.
Also interesting to note, it was cited that the storm, Sandy, did not have an impact on the numbers. This is notable since many were expecting a large impact, hence the low guesses. This is also more telling in how little of an impact the storm has had on data. It is a popular excuse when data is bad, but conspicuously absent when data is good.
Next Week
Next week looks to be another busy one. We will get earnings from several big companies like Dollar General, Costco, Pier 1, and Hovnanian. For economic data, we will get reports on small business optimism, trade balance, retail sales, industrial production, and inflation with the CPI and PPI.
The Fed will also be in the news with their meeting in which they are expected to hold interest rates at these record lows. Also, one of their bond buying stimulus programs is set to expire in the coming weeks, so it is widely believed the Fed will announce a continuation to this program.
Investment Strategy
No change here from last week. We aren’t looking to do any buying or selling in stocks at this point. Even if we were, the focus here should be on the long term, since the unpredictable news out of Washington has the markets jittery.
If a buying opportunity were to present itself, we still like higher-quality stocks, though many of these dividend payers have been hit on tax rate concerns. Again, 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 market and Europe.
Gold saw more profit-taking this week, but we still like it for the long run. Further money printing, bailouts, and stimulus around the globe will help send it higher. We aren’t looking to reduce our positions at this point, but wouldn’t add to them, either.
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. Municipal bonds still work as higher taxes loom on the horizon (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 and have shown a large rise to this point.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
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.
