Commentary for the week ending 3-22-13

Please note:  there will be no market commentary next week due to the Easter holiday. 

News out of Europe weighed on stocks this week.  Through the Friday close, the Dow was lower by a mere 0.01%, the S&P fell 0.2%, and the Nasdaq lost 0.1%.  The European banking concerns boosted gold prices, which closed the week with a 0.9% gain.  Oil saw more selling, falling a slight 0.1% to $93.71 per barrel.  The international Brent oil traded at a three-month low at one point and closed the week at $107.50.

Source: Yahoo Finance (the chart is skewed higher this week, not accounting for Monday’s lower open)

Stocks opened the week with surprising news out of Europe.  Banks on the small Mediterranean island of Cyprus were in need of a bailout.  They had taken a hit on bad investments in Greece, plus a weakened real estate sector.  While this isn’t an unusual story in the Eurozone, the criteria for the bailout were.

By receiving bailout funds, the debt level in Cyprus would be higher than the levels permitted for the Eurozone countries.  Therefore, Cyprus somehow needed to chip in.  What better way than by confiscating a portion of bank deposits?

That novel idea sent shockwaves through the market.  Since some investors were already concerned over the high price of the market, the bad news provided an opportunity to take some money off the table.

As the week progressed, the criteria for a bailout constantly changed.  First, there was the straight bank account confiscation, though the amount to be taken varied.  Then they tried to work out an agreement with Russia that included drilling rights.  Next, they had a plan involving the collateralizing state assets.

As of late Friday, they circled back to taking funds from bank accounts.  Uninsured accounts will take a hit, possibly up to 40% of their value.  Bondholders are also poised to lose a portion of their investment.  Additionally, there will be capital controls imposed, which will prevent people from moving money abroad once the banks reopen. 

This story has been written off by many since Cyprus is such a small and unimportant country.  And that’s true.  The problem is that it sets a dangerous precedent.  The distrust it creates will be very difficult to overcome. 

Tying this story back to the U.S., some have humorously pointed out that the Fed has imposed similar wealth confiscations on bank accounts here at home (Link).  While not a straightforward confiscation, the Fed has lowered interest rates to such a degree that savers have lost more over the last few years than the Cyprus government has proposed on its bank accounts.  That argument does have some merit. 

Speaking of the Fed, they were in the news this week with one of their periodic meeting to determine interest rates.  In a surprise to no one, they announced no changes to their stimulus program of buying $85 billion a month in bonds (or printing $85 billion a month), plus holding interest rates at these historic lows. 

One change that got little attention was the mention that they could reduce the amount of money printed each month (say from the $85 billion to $75 billion).  Though still a massive amount of money will be being printed, it is possible to see the market pull back sharply on the prospect of lesser stimulus from the Fed. 

A major objective of the Fed policies is to boost housing prices.  They see housing as key to economic recoveries.  No matter that we were clearly in an unsustainable bubble whose bursting lead to the recession, their goal is to boost housing prices and reflate that bubble.  New data this week showed that it is working.

Several housing reports were released this week, nearly all of which showed growth in the housing sector.  It was also reported that almost two million more homes were no longer underwater just in the fourth quarter alone. 

This may be good news for homeowners, but we’re moving to another unsustainable level for the wrong reasons.  The same policies are being implemented (or trying to be implemented) to reflate that bubble.  And the end result will probably be the same.   

Finally, one data point we like to look at is sales at restaurants.  Dining out is usually a good leading indicator on the strength of the economy.  The Knapp-Track Index was released this week, which follows sales over the past month.  For the third straight month sales fell, dropping more sharply over the most recent month.  While this may be a leading indicator for the economy, it hasn’t correlated to the market who continues to rise as dining out falls. 


Next Week

Next week will be a busier one.  Of course we will still have discussions over the Cyprus situation, though the deadline for a solution is Monday.  Plus we will get a variety of economic data.  There will be more info on the housing sector, along with durable goods, consumer confidence, personal income and spending, and another revision to the fourth quarter GDP.  Several regional Fed presidents will also be making speeches, which often affect the market.


Investment Strategy

There is no change in our investment strategy as prices hang around these high levels.  We’re still cautious, though admittedly we’ve been cautious as the market climbed higher. 

We don’t feel the economic and earnings picture warrant a record high in stocks.  With the central bank money printing and increasingly centrally planned economies, normal market forces have been distorted, making the picture more difficult to forecast.  The money printing may send the market higher in the near term, but we are increasingly worried for the longer term. 

We’ve taken some money out of the broader index positions and aren’t placing any new bets on the direction of the broader market at this time.  Finding undervalued individual companies seems to be a better play for new money, even though many stocks are expensive. 

As for what we are looking for, we like higher-quality and dividend paying stocks.  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 may be turning the corner to move back higher.  Typically the price rise mirrors the growth of the Central Banks balance sheet (the money printed is added to their balance sheet), but has failed to do so recently.  We like it for the long run as central banks around the world devalue their currencies and would add to our positions if it moves further 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, we think yields on Treasury bonds will rise in the long run (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge.  However, the short run is a more difficult story to figure out.

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 3-15-13

Record highs continued into this week as stocks kept marching higher.  For the week, the Dow gained 0.8%, the S&P rose 0.6% while the Nasdaq was higher by just 0.1%.  Gold saw some life and climbed 1.0%.  Oil moved higher with a gain of 1.6% on the week to $93.45 per barrel.  On the other hand, Brent oil moved slightly lower to $110 on the week. 

Source: Yahoo Finance

Though the week was as uneventful as we’ve seen in some time, stocks kept ticking higher.  Through Thursday, the Dow had risen 10 straight days, a feat not accomplished since 1996.  The S&P 500 came within inches of reaching a new high, too. 

Worth noting, last year the markets got off to a similar start.  The S&P 500 was up 11% by this time last year (it is currently up 9.4% YTD), but stalled near that level.  The index moved higher later in the year, but closed out the year only a couple percentage points above that March 2012 level.

Bonds also continue to move higher (so the yield, or the interest you receive, has fallen).  The yield on the riskiest type of bonds, junk bonds (or high-yield), reached a record low this week (meaning you receive less interest for riskier investments).  This shows how desperate investors are for yield.  It is also a red flag for dangers ahead.  When investors are eager to buy bonds of sketchy companies, or even random countries like Zambia, the end of this trend can’t be too far behind. 

While the market has crept to new highs, the volume of trades has been steadily falling.  CNBC noted that we are seeing the lowest trading volume since 1999.  In fact, we’re 13% lower than a year ago and roughly 10% below the level seen just in January.  Higher volume shows a conviction behind the move in the market, and we’re just not seeing that now. 

Aside from the new highs in the market, there was very little other news on the week.  One economic data point that received much attention was retail sales, which were much higher than expected.  Sales grew 1.1% over the last month, better than the 0.5% expected.  Economists had worried that the recent tax increases would be a drag on retail sales, and the results were an encouraging sign for the market. 

However (isn’t there always a “however”?), a 5% gain in the sale of gas from gas stations (due to the higher prices) is responsible for much of the rise.  Also, retail sales were actually lower on the month if the seasonal adjustment is excluded. 

We also received inflation data with the producer and consumer price indexes (PPI and CPI).  Both showed a notable increase, with the CPI posting its largest gain in four years.  Inflation now stands at an annualized 2% rate, a level that used to be the Fed’s target rate (even though the Federal Reserve Act specified stable prices as an objective).  That level was recently raised to 2.5%, so they are aiming for even higher inflation.

Feel like 2% inflation is lower than what you’re actually experiencing?  According to shadowstats.com (LINK), if we were to measure inflation using the methodology of 1990, the rate would be closer to 6%.  Using the 1980 methodology, the rate would be near 10%.  Since 1980, the inflation methodology has been “adjusted” to be tamer than it actually is.   


Next Week

Next week looks to be fairly quiet in terms of data.  We will get a couple reports on the strength of the housing sector, as well as the leading economic indicators.  A few larger companies like General Mills, Oracle, and Nike will be reporting their earnings, too. 

The Fed will also be in the news as they hold their meeting on interest rates.  No change is expected here, but the market will react if any changes are announced. 

A surprise bailout of Cyprus this weekend, and a very troubling wealth confiscation, could put European troubles back on the map next week.  


Investment Strategy

With little changing in the market this week, there is no change in our investment strategy.  The roulette wheel of the market has constantly landed on black (positive), and it makes us increasingly nervous.  Granted, we’ve been nervous for much of this rise but the market kept chugging higher. 

As we’ve discussed in the past, we don’t think the fundamentals in the economy justify the current market level.  The wild card fueling this run is the Fed and its printing press, which may aid stocks higher in the near term.  History has shown that this increase in central planning spells failure in the long run, but in the short term the market continues to rally.   

We think the risk outweighs the potential returns at this point and are not looking to do any buying in the broader stock indexes, but are holding off on doing any more selling.  Finding undervalued individual companies seems to be a better play for new money, even though many stocks are expensive at this time. 

As for what we are looking for, we like higher-quality and dividend paying stocks.  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. 

Only time will tell, but gold may be bottoming for the near-term.  We like it for the long run as central banks around the world devalue their currencies and would add to our positions if it moves further 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, we think yields on Treasury bonds will rise in the long run (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge.  However, the short run is a more difficult story to figure out.

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 3-8-13

Stocks turned in a solid week as the Dow reached a new all-time high.  For the week, the Dow and S&P both rose a strong 2.2% while the Nasdaq gained 2.4%.  Gold saw little change, rising just 0.3%.  Oil rose slightly from its recent lows, gaining 1.4% on the week.  The international Brent oil, used for much of the gas here in the east, rose a hair to just shy of $111 per barrel.

Source: Yahoo Finance

The major story on Wall Street this week was the market itself.  By now you’re probably aware that the Dow reached a new all-time high.  It looks like the new highs begat more buying as stocks rose every day this week, a feat not achieved since 2011.

The new record for the Dow was unique in that there was little fanfare.  Indeed, when considering inflation since the past highs, this was no record.  But it was the highest numeric level that the Dow has ever seen, an occurrence that is usually met with even minor celebration. 

Investors have been burned badly over the past decade and it looks like they are more cautious at these high levels.  In fact, we even saw the stock market record mentioned on ESPN’s SportsCenter, of all places, where the host worried of an impending drop.  We become pessimistic on the market when we see an overexcitement, and we haven’t seen much this time around. 

Looking at it from a contrarian perspective, could this many people negative on the market be a sign that it has room to run higher?  It’s hard to answer that question, but that is a possibility.  That said, we do remain worried at these high levels.

We’ve mentioned this many, many times, but we see the dominant factor in the market rise being the Fed.  Printing trillions of dollars (trillions!) and keeping interest rates at zero percent for years has been the fuel for stocks to climb.   

However, we heard many commentators mention the run has been fueled by corporate earnings (“unprecedented” was the word used by one prominent economist) and a strong economy.  We firmly believe this is not the case.

Corporate earnings have been disappointing.  While the fourth quarter was decent at a 4.2% annualized growth rate (according to the research firm Factset), they have been steadily declining over the past several quarters.  This can be seen in the chart on the right (courtesy zerohedge.com.  Chart is ex-financials, but was the best we could find for illustrative purposes.  Roughly a percent or so can be added to these figures for the total earnings growth in recent quarters).

Plus, revenue growth has languished (revenue is the money the company actually earned through sales.  Earnings, or profits, are what are left after subtracting costs), rising 4.0% in the fourth quarter (again, according to Factset).  If we strip out one company, Prudential, who had an unusually large revenue rise, revenue growth would be 2.6%.  The growth in earnings can largely be attributed to cutting costs, not by increasing revenue. 

Not to mention, earnings growth was negative in the third quarter, its worst quarter in three years. 

Plus, first quarter 2013 projections are extremely poor and forecast another negative quarter. 

As for the strength in the economy, GDP grew just 0.1% over the most recent quarter, a terribly slow growth.  The Beige Book (which provides an anecdotal account on the strength of the economy) released by the Fed this week also pointed to a modest growth.  Worth noting, they found that the recent tax hikes and health care law requirements are having a negative impact on growth. 

All-in-all, corporate earnings have been rather poor and the economy is sluggish.  These aren’t exactly the conditions that lead to records in the stock market.  Hence, we attribute the gains to the Fed and its stimulus programs. 

Changing subjects, the other big story of the week was the employment report released on Friday.  The number came in at a surprisingly high 236,000 jobs added in February.  The unemployment rate stands at 7.7%, down from 7.9%, for its lowest level in four years. 

Not to always focus on the negatives, but there are some important caveats to consider. 

First, the quality of jobs added has been poor.  Part-time jobs have been rising, while Gallup reported this week that very few full-time jobs were added over the past year. 

Second, more people dropped out of the labor force last month, with the labor participation rate standing at a 30-year low.  If we were to measure the unemployment rate using the participation level of just a year ago, we would have an 8.3% unemployment.  Using the participation level from the beginning of the recession, unemployment would be closer to 12%. 

The BLS creates a broader (and possibly better) measure of the employment picture, called the employment-to-population ratio.  It is simple and straightforward, measuring the amount of people working to the total amount of people who are working-age.  As you can see in the chart to the right, job growth has stagnated in the past three years (LINK to source). 


Next Week

The market clearly has an upward momentum behind it, so we’ll see if it keeps pushing to new highs.  The S&P 500, a broader measure of the market (the Dow only has 30 companies), is less than 1% from its all-time highs.  It will be more noteworthy for that index to break new highs, which it could do next week. 

There won’t be a whole lot of economic or earnings data to impact the market next week.  We will get info on retail sales, import and export prices, industrial production, and inflation with the PPI and CPI.  Several retail companies will also be releasing their earnings. 


Investment Strategy

The path of least resistance is higher and the market may keep hitting new records from here.  Sentiment is important and as we mentioned above, many investors are still cautious.  Euphoria is not present, a signal to contrarians that the market may indeed have room to run. 

However, we see reports of investors putting new money into the market as it reaches new highs.  This makes us nervous.  Buy low.  Sell high.  We think the risk is outweighing the potential returns at this point, though we’ve been nervous for several weeks as the market churned higher. 

Adding to our concern, we don’t like the fundamentals and see growing risks.  But the market does have the Fed and its printing press going for it, and that may be enough to drive prices higher. 

We aren’t doing any more selling at this point and are not looking to do any buying in the broader stock indexes, either.  Finding undervalued individual companies seems to be a better play for new money, even though many are expensive at this time.  As for what we are looking for, we like higher-quality and dividend paying stocks.  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 been stuck at this lower price and we like it for the long run, but it may need to move a little lower before it looks attractive to buy again. 

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 popped higher this week (so prices have fallen).  A short position (bet on a decline in price) has provided a nice hedge, but we think 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 3-1-13

We saw another week with large daily swings in the market, only to end not far from where we started.  Through the close Friday, the Dow gained 0.6%, the S&P rose 0.2%, and the Nasdaq was higher by 0.3%.  Gold also closed the week with little change, falling a miniscule 0.03%.  Oil sold off again this week, dropping 2.6% to just over $90 per barrel, its lowest level of the year.  The international Brent oil, used for much of the gas here in the east, continued its strong decline to close at $110.  It looks like some relief is finally coming to the gas pump. 

Source: Yahoo Finance

This week we saw more of a bi-polar market.  Stocks turned in their worst day of the year Monday and doom and gloom forecasts dominated the news programs.  The markets promptly reversed course and the Dow rocketed to within inches of an all-time high, and headlines were dominated with optimistic outlooks.  If anything, it was an entertaining dynamic that played out over the week. 

Negative news out of Europe was the cause for our woes early in the week.  Elections in Italy over the weekend saw no clear winner, adding a new uncertainty for the region. 

The worrisome part of the election was that it favored candidates who promised to roll back the austerity programs of the last several months.  These programs were a requirement to receive aid (bailouts) and the rejection could raise tensions between the countries doing the bailing out, like Germany.  Not to mention the chance that other countries, like Spain, could follow Italy’s lead and reject their austerity measures (worth noting, overall government spending continues to rise in these countries.  It is the stiff tax increases seem to be doing the damage). 

After plunging Monday, stocks turned their attention to what has been driving the market recently – no, not fundamentals like earnings or the economy – the Fed. 

Fed chairman Ben Bernanke made an appearance before Congress and discussed his stimulus program.  He defended the bond buying program and believes it must be continued.  The benefits outweigh any risks, he claims, though he sees no risks at this time.  After all, we see no problem curing a debt crisis with even more debt. 

We’ve mentioned that the actions of the Fed have been the main driver of the market.  It sells off sharply when investors worry the stimulus program could be scaled back.  Now it rallies strongly as Bernanke reaffirms his commitment to the program.  He even intimated the bond buying could extend into 2016, frankly a terrifying thought due to the amount of money that will be printed. 

The sequester was also a popular topic this week, though it had very little, if any, impact on the market.  While some cuts in spending will be made (particularly to the military), government spending as a whole will still increase going forward.  The main drivers of our debt, Medicare, Medicaid, and Social Security, remain untouched. 

The hysteria surrounding these “cuts” makes us realize how difficult it will be to get any real spending cuts in this country, a worrisome sign for the future. 

One thing it does do is provide an excuse to politicians for any bad economic data, whether it was the cause or not, since the counterfactual cannot be proved.  Much like storms in the wintertime, we look forward to hearing this as an excuse for underwhelming data points for some time to come.     

As for economic data this week, the results were mixed.  New home sales showed a solid gain, though the seasonal adjustment probably should be given the credit.  Manufacturing expanded by a greater pace than was expected, while consumer sentiment (somehow) stands at the best level since November. 

On the negative side, the most important data point of the week was the GDP revision.  The first reading showed a decline of 0.1%, but was written off on the expectation that the revisions would come in much higher.  Well, that wasn’t exactly the case. 

The revision showed growth increasing a scant 0.1%, a pathetic growth number especially when considering the amount of money spent (or printed) in stimulus to boost the economy.  A reduction in government spending got much of the blame, but as we discussed previously, government spending actually rose by $98 billion over the quarter. 

Other negative data on the week included a drop in durable goods (which are items with a longer life like appliances or electronics) of 5.2%.  Also, personal income dropped by the largest amount in 20 years, falling 3.6% over the last month.  With that lower income, somehow personal spending managed to increase slightly; meaning people are taking on more debt. 


Next Week

Next week doesn’t look to be as busy, but we will get some important economic data points.  There will be a report on the strength of the service sector over the past month, factory orders, trade, the Fed’s Beige Book (which provides an anecdotal account on the strength of the economy), and most importantly, the unemployment report on Friday. 


Investment Strategy

No change here.  The market still looks expensive, though it inched away from its highly overbought level this week, giving it more room to potentially move to the upside.  We are extremely reluctant to add any money to the broader indices at this point, though. 

In our view, the one thing the market has going for it is the Fed and other central banks around the world.  While their stimulus (money printing) has been of little help to the economy as the last several years have shown, it does send stocks higher.  And these central banks have reaffirmed their commitment to printing more money for many years.

As for the negatives, we see economies either growing slightly or contracting, corporate earnings barely beating inflation, and higher gas prices which weigh on the economy.  Washington got through the sequester fight, but a bigger battle is likely to emerge later this month with the continuing resolution.  Also, the negative stories out of Europe are gaining attention.   

While the broader macro picture isn’t great, the data has been largely overlooked anyway.  It’s the money printing that has been making the big moves in the market. 

While we aren’t looking to do any buying in the broader stock indexes at this point, we are always looking for opportunities.  We still like higher-quality and dividend paying individual stocks.  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 halted its decline this week, but may need to move a little lower before it looks attractive to buy again.  We still like it for the long term with central banks continuing to print money to stimulate their economies and weaken their currencies.

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 moved a little lower this week (so prices have risen).  A short position (bet on a decline in price) has provided a nice hedge, but we think 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.