Commentary for the week ending 1-25-13

The markets continued to reach new highs this week, not turning in a negative week so far this year.  In the holiday-shortened week, the Dow was higher by 1.8%, the S&P climbed 1.1%, while the Nasdaq was again weighed down by a poorly performing Apple stock, rising just 0.5%.  Gold sold off, falling 1.8%.  Oil appeared to level off this week, losing only 0.2%.  On the other hand, the international Brent crude moved higher, closing at $113.40 per barrel.

Source: Yahoo Finance (this chart includes Friday as we were unable to edit the timeframe)

The Dow and S&P 500 again reached new five-year highs, moving sharply (and uncomfortably) higher in the new year.  Both are within inches of new all-time highs.  Smaller stocks again hit new highs.  It wasn’t just in the U.S. as markets around the world reached new highs of recent years. 

With markets rising as fast as they have this year (the S&P 500 is up 5.4% and the Dow up 6% already), is the rally justified? 

One indicator that received a lot of attention this week is called the “Dow Theory.”  Basically, it states that a move in the overall Dow is justified if the Dow Transportation Average is also moving the same direction.  If not, there is reason to be suspicious.  As you can see in the nearby chart (courtesy of the Bespoke Investment group, LINK), the Transports have risen sharply, justifying the gains. 

So with that justification, will the market keep going higher from here?  Other indicators don’t paint as bright a picture. The Citi U.S. Macroeconomic Index, also referred to as the Economic Surprise Index, compares economic data to their expectations.  It does a fairly decent job at predicting the direction of the market, as you can see in the chart to the left (courtesy Zerohedge.com, LINK). 

Anyway, that indicator turned negative this week and could signal a downturn in the market. 

Earnings released this week were also cited as justification for the rise in the market.  We are in the thick of earnings season and almost half of companies in the S&P 500 have reported so far.  About 67% have beaten estimates, just above the average.

Largely ignored is that the bar was set very low for these earnings, making it easier to beat.  Additionally, those estimates have been revised sharply lower in recent months.  Despite the optimism being reported, corporate earnings are trending lower and are not as great as they appear. 

Apple grabbed much of the earnings spotlight this week.  With a slight increase in revenue and flat profits, the stock tanked on concerns about future demand.  It fell 12% this week (and is 37% off its high), hitting its lowest price in a year.  It is safe to say the stock has fallen sharply out of favor. 

Though we don’t own the stock outright and have no immediate plans to, it piques our interest when a stock becomes so unloved.  Only a couple months ago, it was hard to find a person optimistic on Facebook stock (except for those who are permanently optimistic on everything).  In that short time, the shares moved from a price in the high teens to now now trading in the low thirties.  To paraphrase Warren Buffett, when others are fearful, you should be greedy. 

Also helping this market this week was news out of Washington.  The market moved higher when House Republicans passed a short term extension of the debt limit.  This takes that near-term problem off the table, but sets up a fight in March over the sequester and government funding extension.  It is very likely we will see some market volatility at that time. 

As for economic data this week, the news leaned more towards the negative side.  Reports on manufacturing showed a steady decline while housing data was mixed. 

A seemingly positive report on weekly jobless claims came in at the best level in five years, receiving much fanfare.  It turns out that three states, California, Virginia, and Hawaii, were unable to turn in their data due to the holiday shortened week.  Therefore, their figures were estimated for the grand total.   

Also adding to its unreliability, this data is especially fickle in the early part of the year due to seasonal adjustments.  Unusually large adjustments are being used this year, likely skewing the data.  While some of the data presented to us seems positive on the surface, a little digging is required to verify its accuracy.   


Next Week

Next week will be a very busy week.  Almost 20% of companies in the S&P 500 will be reporting their earnings, with a large number of technology and energy companies in that bunch. 

We will also get a significant amount of economic data.  Of note, we will get our first look at GDP from the last quarter and expectations are very low.  The employment report for January will be released on Friday.  Other economic data includes info on durable goods, housing, consumer confidence, personal income and spending, and construction spending.  Whew!  


Investment Strategy

We thought the market was beginning to look expensive last week, which means it looks very expensive this week.  The momentum is clearly to the upside, but we are hesitant to add new money to the broader market here.  Instead, we would look to lock in some gains, increase our cash position, or add downside protection (buying S&P puts, for example).

While the debt ceiling increase took the risk of political drama off the table in the near term, it is highly likely that risk will return in mid to late February. 

While the odds of a market sell-off have increased, investors know the Fed looms in the background, ready to ride to the rescue.  Actually, central banks around the globe are committed to more stimulus, which has probably been the single biggest factor in the new highs in the market.  Though it creates problems in the long term, the temporary sugar fix will probably keep the market from experiencing a larger-than-normal sell-off.     

The rest of our outlook is unchanged.  We aren’t looking to do any buying in stock indexes at this point, but if a buying opportunity were to present itself in individual stocks, we still like higher-quality and dividend paying ones.  We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe. 

We still like gold for the long term.  Central banks continue to print money to stimulate their economies are weaken the currencies, a condition that favors gold.   We would look to add to our positions if it goes much lower from here.   

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 bond yields are higher than their recent average and a short hedged position (bet on a decline in price) has done well here.  However, we think this is unlikely to continue, making the short position a nice hedge.  The potential for longer term profit is low at this time. 

We also think TIPs are important as we still expect inflation to increase.  Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases. 

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.

Commentary for the week ending 1-18-13

It was another week with a relatively quiet market.  Through the close Friday, the Dow gained 1.2%, the S&P rose 1.0%, and the Nasdaq was weighed down by a poorly performing Apple stock, rising just 0.3%.  Gold sustained its move higher with a 1.6% return this week.  Oil continues its rise that began in mid-December as it added another 2.1% this week.  The international Brent crude has actually trended lower since the start of the year, closing the week with little change at just below $112 per barrel.

Source: Yahoo Finance (the Nasdaq had troubles populating this week)

Though the week had little in the way of major news, stocks continued to push to new highs.  The Dow and S&P 500 made new five-year highs while smaller stock indexes hit new all-time highs. 

News out of Washington helped send the markets higher as a resolution to the debt ceiling increase was discussed by Republicans in the House.  This had been a worry for the market, especially since the last debt ceiling negotiation saw the market drop by 16%.

This hike would be short-term, only a couple of months, which would push it into the same timeframe as the March 1st sequester deadline and late March government funding renewal.  It looks like this would be contingent on the Senate producing a budget, something not done in many years. 

Corporate earnings were also in the headlines as more companies released their figures this week.  A large percentage of banks released their numbers, only to disappoint.  Actually, the bigger banks were disappointing while smaller banks fared better. 

At this point, only about 13% of S&P 500 stocks have released their earnings and so far there has been no clear trend in the strength of them.  Thompson Reuters reports that 62% have beaten earnings estimates and 67% have beaten revenue estimates, both generally in line with average. 

Remember, though, that these estimates were very low and don’t give us a good indication of their actual strength.  Next week we’ll see some bigger names from a wider variety of sectors, so that will start to give us a better picture. 

The Fed was also in the news with the release of their Beige Book (which looks at economic conditions throughout the country) this week.  Similar to past reports, they noted a modest growth in the economy.  It also placed the blame for any bad news on the drama surrounding the fiscal cliff. 

Fed chief Bernanke noted that he was not satisfied with the current pace of the economy and vowed to do all he could to promote the recovery.  The risk is that he does too much, further stoking inflation.  He addressed this concern by stating that he sees little inflation in the economy and does not forecast any.  However, transcripts released this week of conversations around the market collapse in 2007 shows that the Fed isn’t exactly the best at forecasting the future. 

Any average person can clearly tell prices are rising, but unfortunately the figures the Fed looks at do not reflect this.  The producer and consumer price indexes (PPI and CPI) were released this week, showing no gain in inflation over the previous month.  For the year, these figures show inflation running below the Fed’s target of 2-2.5%.  A laughable conclusion to most regular people, but it sadly means more inflation is on the way.

Other economic data this week was mixed.  Retail sales over the period that includes Christmas saw a gain of 0.5%, higher than economists predicted though lower than the Christmas season in 2011.  Housing figures showed improvement.  Industrial production also rose while weekly unemployment figures came in at the best level in five years. 

On the other hand, manufacturing in the New York and Philly regions showed contraction while an early look at consumer confidence fell to the lowest level since 2011.  

Finally, last week saw a noteworthy inflow of cash to equity funds, the largest since 2008.  This signaled a positive outlook for stocks.  In the most recent week, however, Lipper reports that $4.2 billion was pulled from U.S. stock funds while $4.5 billion went into foreign stock funds.  Though a net positive of roughly $300 million, it is far short of the $18 billion that flowed into stocks the week before.  Perhaps that was not such a great indicator? 


Next Week

As mentioned above, next week we’ll see some bigger names from a wider variety of sectors releasing their earnings, so that will start to give us a better picture of the overall earnings season. 

There will be several other economic releases, as well.  We will get a couple reports on housing, plus leading economic indicators.  Also, keep in mind that the markets will be closed for the Monday holiday. 


Investment Strategy

The market is beginning to look expensive here.  There might be some room to run higher, but the risk is starting to outweigh the reward.  Adding new money to the broader market is looking less appealing, while bets on individual stocks would make more sense. 

A positive note, the more near-term risk of the debt ceiling debate impacting the market looks to be off the table at the moment. 

On the other hand, fights in Washington still loom on the horizon.  This makes a top in the markets in the near term still likely. 

Corporate earnings haven’t been stellar, but estimate beats have been around the historical average.  The market doesn’t seem to be paying much attention to these releases, anyway. 

Also, we often mention the complacency in the market as measured by the volatility (or VIX) index, which hit new levels not seen in almost six years.  When investors get this complacent, the market often swings the other direction. 

Amid all this, we still have the Fed committed to more stimulus.  Actually, central banks around the globe are committed to more stimulus.  This has probably been the single biggest factor in the new highs in the market.  The market knows that if conditions worsen, the Fed will continue to prop it up.   

The rest of our outlook is unchanged.  Though we aren’t looking to do any buying in stock indexes at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks.  We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe. 

We still like gold for the long term.  Central banks continue to print money to stimulate their economies are weaken the currencies, a condition that favors gold.   We would look to add to our positions if it goes much lower from here.   

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 bond yields are higher than their recent average and a short hedged position (bet on a decline in price) has done well here.  However, we think this is unlikely to continue, making the short position a nice hedge.  The potential for longer term profit is low at this time. 

We also think TIPs are important as we still expect inflation to increase.  Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases. 

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.

Commentary for the week ending 1-11-13

Coming off a big week, this week was fairly quiet with modest gains in the market.  For the week, the Dow and S&P only rose 0.4% while the Nasdaq saw a 0.8% increase.  Gold had its first positive week in some time, closing 0.7% higher.  Oil prices rose on lower supply production, climbing 0.5% this week to $93.56 a barrel.  The international Brent crude closed below $111.  

Source: Yahoo Finance

Even though the week was uneventful, stock funds saw the biggest weekly inflow of dollars since 2008.  This was viewed as a positive sign.  However, a significant portion of that new money went to emerging market stock funds, so it may not tell us much.  It could simply be people putting money back in after the fiscal cliff debate, which they had taken out in the run-up.  We’ll need to see more than one week’s worth of data before determining if this is a new trend.   

The approaching debt ceiling and sequester debates seem to be at the forefront of investor concerns, but has had little impact on the markets at this time.  As an indication of how wacky these debates may become, the printing of a $1 trillion coin to solve the problem was actually floated as a legitimate solution. 

This week marked the unofficial beginning to corporate earnings season from the fourth quarter.  While the bar has been set very low here, many economists expect earnings to pick up.  Last quarter saw very little earnings growth, just 0.1% in fact, but estimates are pegged at a 2.8% year-over-year growth rate for this quarter.  This figure was actually lowered from a nearly 10% growth estimate in October. 

We also like to look at revenue growth, which is what the company actually earned from sales (earnings equal revenue, or sales, minus the costs or expenses).  Revenue growth was negative last quarter, but analysts are predicting a nearly 2% rise this quarter. 

We aren’t as optimistic as those expectations, especially since more companies than usual warned of a disappointing quarter. 

The aluminum producer Alcoa traditionally marks the beginning of the season and sets the tone.  Their earnings were higher, but this was due to cost cutting as revenue was negative, so there was little to get excited about.

The other big name to release earnings this week was Wells Fargo.  They actually grew revenue and earnings, but was disappointing in that lending slowed and the money they make off that lending decreased.  This sent the broader financial sector lower. 

With it being so quiet this week, news out of Europe saw more attention than usual.  The European Central Bank (or ECB, which is basically the European equivalent of our Federal Reserve) was expected to cut interest rates to stimulate the economy, but instead held interest rates steady.  They even said “the economy must find its own footing without additional help from the bank.”  It was a refreshing remark that we wish would be considered here. 

The lack of a stimulus announcement disappointed investors since recent economic data was disappointing.  Eurozone unemployment hit a new record high while Germany, considered the strongest economy of the bunch, contracted in the last quarter. 

Overall, news out of Europe hasn’t been that bad recently.  Though still weak, it has been improving.  Bond yields (which can be a gauge of risk) have fallen the past several months while other indicators like consumer sentiment has increased.  Though positive, the needed reforms have been ignored.  The underlying problems are still there and we have no doubt they will resurface at some point.  It’s not a matter of if, but when. 


Next Week

Activity looks like it will pick up next week.  Many more companies will report their earnings while several other regional Fed presidents will be making speeches.   For economic data, we will get info on retail sales, inflation on the producer and consumer level, the money supply, and housing. 


Investment Strategy

As the debate on the debt ceiling approaches, we would look to lighten up on riskier assets like stocks, especially as they are beginning to appear more expensive.  We expect a weak performance in corporate earnings to add to our caution (though in recent quarters, earnings have taken a back seat to macro events and Fed intervention.  We’ll see if that changes this quarter).  Plus, higher tax rates will create a headwind for the economy.  

Additionally, complacency in the market looks to be at its lowest level since 2007 as measured by the volatility index (or VIX).  When investors get this complacent, the market often swings the other direction. 

If conditions deteriorate enough, though, the Fed is likely to step in with more stimulus.  While we don’t agree with their policies, their actions do have an effect on the market (which seems to be less effective in each new round).  The market knows this too, which may prevent a larger sell-off from occurring. 

Though we aren’t looking to do any buying 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. 

Despite the prolonged weakness in gold, we still like it for the longer term.  The Fed minutes released last week worried investors that stimulus may not be as likely in the future, but we feel they are committed to printing more money.  Other banks around the world are in the same boat.  We would look to add to our positions if it goes much lower from here.   

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 bond yields are higher than their recent average and a short hedged position (bet on a decline in price) has done well here.  However, we think this is unlikely to continue, making the short position a nice hedge.  The potential for longer term profit is low at this time. 

We also think TIPs are important as we still expect inflation to increase.  Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases. 

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.

Commentary for the week ending 1-4-13

The markets kicked off the new year with a bang, turning in some record numbers for the week.  In the shortened four-day week, the Dow popped 3.8% higher for its biggest weekly gain in over a year.  The S&P rose a nice 4.6% to close at a five year high.  Meanwhile, the Nasdaq soared 4.8%.  Small cap stocks measured by the Russell 2000 also hit a new record high. 

The bond market didn’t fare as well, with bond prices falling (so yields rose) and yields on government bonds reaching levels not seen in nine months.  Commodities were mixed for the week as gold continued its losing streak after falling 0.4%.  Prices are rising at the gas pump as oil gained 2.5% to $93 per barrel.  The international Brent crude closed higher at over $111 per barrel. 

Source: Yahoo Finance (unfortunately we weren’t able to adjust the chart to four days)

Broad gains in the market came as a result of the fiscal cliff agreement reached this week, avoiding the automatic tax increases and spending cuts.  Finally, the drama from this subject has ended, giving a relief to the markets.  

We’re sure you’ve heard the details on the agreement by now, so we won’t get into the specifics.  While the deal wasn’t very good, a positive is that the tax outcome could have been worse. 

The negative was that it completely ignored the spending side of the equation, which is where the problems lie.  Spending cuts were pushed out two months, coinciding with the debt ceiling negotiations.  Unfortunately, the debates in Washington will resume and we will go through the same drama as the next deadline approaches. 

While the news out of Washington had the biggest impact on the markets, another reason for the gain this week could have been from the “January effect.”  This occurs as investors get back into the market after selling out of losers last year for tax purposes.

The beginning of the year is also when investors like to break out the old Stock Trader’s Almanac and make predictions based on historical patterns. For example, if the market (here, the market is represented by the S&P 500) rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.

If the market rises the first five days, there is an 86% chance of closing the year higher.

Likewise, if the first month closes higher, there is about a 75% chance that the market will be higher for the year.

The market started last year similar to this one and the predictions held true.  On the other hand, they didn’t work out so well the year before.   So while this is an interesting statistic to note, we wouldn’t go making investment decisions based on these trends. 

As for the other events of the week, the Fed was back in the headlines as the minutes from their December meeting were released.  It was newsworthy in that several members indicated a willingness to end the quantitative easing stimulus measures well before the end of 2013 for fear of market distortions.  Remember, the Fed’s timeline predicted continuing the stimulus until 2015.  Though the Fed is unlikely to remove the stimulus any time soon, it was a wake-up call for a market addicted to stimulus,

Lastly, the monthly employment report was released on Friday.  December saw 155,000 jobs added, slightly below the 160,000 predicted, as the unemployment rate remained unchanged at 7.8%.  While any job growth is a positive, it still shows a sluggish growth. 

Going forward, we think the slow growth in the labor market will persist as the economy trudges along.  Additionally, the one-year extension of unemployment benefits as part of the fiscal cliff deal did little to help.  Though subject to much debate, credible studies have shown these benefits, where people are paid not to work, actually hurts the labor market.


Next Week

Next week looks fairly quiet for economic data.  We will get info on small business optimism, jobs in the Jolts report (which lags by a month and measures job openings and turnover), and the trade balance. 

While the economic data will be quiet, fourth quarter company earnings will begin coming in.  Notable releases include the aluminum producer Alcoa and Wells Fargo.  Additionally, several regional Fed presidents will be making speeches, something investors will follow closely in light of the recent Fed minutes release.  


Investment Strategy

While the year got off to a nice start, we know problems will arise in about two months when Washington must hammer out another deal.  Odds are the market will react similarly to the most recent debates and we would look to lighten up on stocks before this occurs.  Probably not in the immediate future, as there are still many weeks to go, but it will be a consideration going forward. 

Adding to our concern, corporate earnings begin rolling in next week and expectations are very low.  While the low hurdle makes it easier to impress, the results are likely to be poor. 

Also, the higher tax environment creates a headwind for the economy. 

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 (which seems to be less effective in each new round). 

Though we aren’t looking to do any buying 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. 

Despite this long sell-off in gold, we still like it for the longer term.  The Fed minutes worried investors that stimulus may not be as likely in the future, but we feel they are committed to printing more money.  Other banks around the world are in the same boat.  We would look to add to our positions if it goes much lower from here.   

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 bond yields are moving higher at the moment and a short hedged position (bet on a decline in price) has done well here.  However, we think the move was temporary and unlikely to continue, making the short position a nice hedge but the potential for longer term profit is low at this time. 

We also think TIPs are important as we still expect inflation to increase.  Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases. 

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.