Stocks stalled for another week. Through the Friday close, the Dow lost just 0.08% and the Nasdaq fell an even smaller 0.06%, its first negative week of the year. Meanwhile, the S&P posted a slight gain of 0.1% and has not had a negative week so far this year. Gold saw heavy selling as large investors pulled money out, falling 3.4% on the week. Oil ended the week with little change, rising 0.2% to just shy of $96 per barrel. The international Brent oil saw its first negative week of the year to close at $117.66 per barrel. Unfortunately, though, prices continue to rise at the pump as refiners switch to the costlier summer blend of gas.
Source: Yahoo Finance
The week was a fairly quiet, uneventful one. In fact, Monday saw the lowest trading volume of the year with activity well below the recent average. Worth noting, when a market trades in a flat, narrow range (as it has the last two weeks) after a relatively long rally, it often indicates a coming decline.
News out of Europe didn’t grab headlines this week, but we feel it was the most important and overlooked. Economic growth in Europe continues to weaken as they saw another contraction in their GDP last quarter, putting them solidly in a recession.
While it wasn’t surprising to see the usual bad actors like Greece, Spain, or Italy posting a contraction, the stronger economies like France and Germany also showed solid losses. Germany even had the largest slowdown since the crisis began.
This indicates that the economic crisis has not gone away for the Eurozone. It had been papered over with cheap money, but the fundamental problems were never resolved. Although we haven’t seen the dramatic negative headlines we saw during the crisis, we worry that they are not too far behind.
This lack of growth has many countries well behind growth targets (as if forecasting growth was that easy in the first place). It also has many countries rethinking the cuts in government spending.
Back in 2010, the G-20 nations pledged to cut their deficits by at least half by 2013 in order to calm the markets. Now they think that government spending is a way to boost growth and are seeking to renege promised spending cuts.
Speaking of more government spending, President Obama made his State of the Union address this week. The President called for more spending to help the economy, even though government and stimulus spending has proven ineffective every time it has been tried. Plus there were proposals for higher taxes to pay for the spending. If implemented, we are sure the policies would be equally ineffective as in the past, though will be successful in driving the debt higher.
Instead, if we were to lower spending and taxes while maintaining a stable currency, we would see economic growth. This has been a recipe to success every time it has been tried, yet we continue to do the opposite. The lack of results is no surprise.
The market saw little reaction to the speech, as is usually the case in these State of the Union addresses. According to LPL Financial, the S&P 500 averaged a gain of just 0.15% the day following these speeches, making this year’s gain of 0.10% pretty close to average.
On to economic data for the week, where the results were mixed. Retail sales saw an ever-so-slight gain of 0.1% for January. Also, manufacturing in the New York region posted a solid increase and consumer confidence ticked higher.
On the other hand, small business optimism came in below expectations and industrial production declined.
Weekly jobless claims were celebrated as they came in much lower than expected. Once again, the data was skewed as two states, Illinois and Connecticut, were unable to report their figures due to the snowstorm. The labor department estimated their figures for the week, artificially improving the results.
Finally, Wal-Mart made news late Friday when an internal email was released. An executive noted that this month has been the slowest he’s seen in his time with the company and noted a weak economic environment. The surprisingly blunt admission worried investors that things aren’t as great as they seem.
Next Week
The holiday-shortened week looks to be fairly quiet. We will get some info on housing, leading economic indicators, plus inflation with the CPI and PPI reports. The Fed will be in the news with their release of the minutes of their latest meeting in January. The amount of corporate earnings releases continues to decline, but the week will have a few bigger names that could make some news.
The G-20 is meeting this weekend and much of the talk will be about the currency war between the countries. Currently in place is an agreement to have market forces determine their exchange rate and to not intervene with their currency. It looks like they remain committed to this idea, but with a bit of a “wink” at the end.
Countries should not directly intervene and devalue their currencies, but if they were to do a fiscal policy that happens to weaken the currency (like printing money by stimulus), well that’s okay. It’s a backwards way of agreeing to let the currency wars continue.
In addition to the currency issue, it also looks like the promised spending cuts will be removed or reduced, as mentioned above. A lot of economic policies will be taking shape this weekend and it will be interesting to see if it has any effect on the market.
Investment Strategy
With little changing in the market over the past week, little has changed in our strategy. We think the market is expensive and probably due for a pullback. Increasing cash by getting out of riskier assets or buying puts (which allow us to be protected from downward moves while still participating in the upside) looks to be a good option at this time.
Economies around the world are either growing slightly or contracting, corporate earnings barely beat inflation, and fights in Washington are approaching. Yet stocks are at record highs.
The one positive we see for stocks is the Fed and other central banks around the world. We believe the money printing by the Fed has been the biggest driver of the stock rally thus far. And since the beginning of the year, they have been printing even more. While it has been of little help to the economy and will have negative long term consequences, it does send stocks higher in the meantime.
At these high levels, though, we are extremely cautious on how much higher the market can go from here.
While we aren’t looking to do any buying in the broader stock indexes at this point, we are always looking for opportunities. In individual stocks, we still like higher-quality and dividend paying ones. Companies with operations overseas have seen better earnings than those who don’t. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold has sold-off strongly recently, but we still like it for the long term. Central banks continue to print money to stimulate their economies and 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 continue to move higher (so prices have fallen). A short position (bet on a decline in price) has done well here. However, we worry that this is unlikely to continue for much longer, making the short position only 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.
News out of Europe didn’t grab headlines this week, but we feel it was the most important and overlooked. Economic growth in Europe continues to weaken as they saw another contraction in their GDP last quarter, putting them solidly in a recession.
While it wasn’t surprising to see the usual bad actors like Greece, Spain, or Italy posting a contraction, the stronger economies like France and Germany also showed solid losses. Germany even had the largest slowdown since the crisis began.
This indicates that the economic crisis has not gone away for the Eurozone. It had been papered over with cheap money, but the fundamental problems were never resolved. Although we haven’t seen the dramatic negative headlines we saw during the crisis, we worry that they are not too far behind.
This lack of growth has many countries well behind growth targets (as if forecasting growth was that easy in the first place). It also has many countries rethinking the cuts in government spending.
Back in 2010, the G-20 nations pledged to cut their deficits by at least half by 2013 in order to calm the markets. Now they think that government spending is a way to boost growth and are seeking to renege promised spending cuts.
Speaking of more government spending, President Obama made his State of the Union address this week. The President called for more spending to help the economy, even though government and stimulus spending has proven ineffective every time it has been tried. Plus there were proposals for higher taxes to pay for the spending. If implemented, we are sure the policies would be equally ineffective as in the past, though will be successful in driving the debt higher.
Instead, if we were to lower spending and taxes while maintaining a stable currency, we would see economic growth. This has been a recipe to success every time it has been tried, yet we continue to do the opposite. The lack of results is no surprise.
The market saw little reaction to the speech, as is usually the case in these State of the Union addresses. According to LPL Financial, the S&P 500 averaged a gain of just 0.15% the day following these speeches, making this year’s gain of 0.10% pretty close to average.
On to economic data for the week, where the results were mixed. Retail sales saw an ever-so-slight gain of 0.1% for January. Also, manufacturing in the New York region posted a solid increase and consumer confidence ticked higher.
On the other hand, small business optimism came in below expectations and industrial production declined.
Weekly jobless claims were celebrated as they came in much lower than expected. Once again, the data was skewed as two states, Illinois and Connecticut, were unable to report their figures due to the snowstorm. The labor department estimated their figures for the week, artificially improving the results.
Finally, Wal-Mart made news late Friday when an internal email was released. An executive noted that this month has been the slowest he’s seen in his time with the company and noted a weak economic environment. The surprisingly blunt admission worried investors that things aren’t as great as they seem.
Next Week
The holiday-shortened week looks to be fairly quiet. We will get some info on housing, leading economic indicators, plus inflation with the CPI and PPI reports. The Fed will be in the news with their release of the minutes of their latest meeting in January. The amount of corporate earnings releases continues to decline, but the week will have a few bigger names that could make some news.
The G-20 is meeting this weekend and much of the talk will be about the currency war between the countries. Currently in place is an agreement to have market forces determine their exchange rate and to not intervene with their currency. It looks like they remain committed to this idea, but with a bit of a “wink” at the end.
Countries should not directly intervene and devalue their currencies, but if they were to do a fiscal policy that happens to weaken the currency (like printing money by stimulus), well that’s okay. It’s a backwards way of agreeing to let the currency wars continue.
In addition to the currency issue, it also looks like the promised spending cuts will be removed or reduced, as mentioned above. A lot of economic policies will be taking shape this weekend and it will be interesting to see if it has any effect on the market.
Investment Strategy
With little changing in the market over the past week, little has changed in our strategy. We think the market is expensive and probably due for a pullback. Increasing cash by getting out of riskier assets or buying puts (which allow us to be protected from downward moves while still participating in the upside) looks to be a good option at this time.
Economies around the world are either growing slightly or contracting, corporate earnings barely beat inflation, and fights in Washington are approaching. Yet stocks are at record highs.
The one positive we see for stocks is the Fed and other central banks around the world. We believe the money printing by the Fed has been the biggest driver of the stock rally thus far. And since the beginning of the year, they have been printing even more. While it has been of little help to the economy and will have negative long term consequences, it does send stocks higher in the meantime.
At these high levels, though, we are extremely cautious on how much higher the market can go from here.
While we aren’t looking to do any buying in the broader stock indexes at this point, we are always looking for opportunities. In individual stocks, we still like higher-quality and dividend paying ones. Companies with operations overseas have seen better earnings than those who don’t. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold has sold-off strongly recently, but we still like it for the long term. Central banks continue to print money to stimulate their economies and 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 continue to move higher (so prices have fallen). A short position (bet on a decline in price) has done well here. However, we worry that this is unlikely to continue for much longer, making the short position only 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.
