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.
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.
