Stocks turned in a solid week, reaching new all-time highs. For the week, the Dow gained 2.1%, the S&P rose 2.3%, and the Nasdaq climbed a solid 2.8%. Gold suffered through a tough week, plunging 4.7% to reach a 15-month low. Oil also fell, down 1.5% to $91 per barrel. The international Brent crude, used for much of our gas here in the East, moved lower to $103 per barrel.
Source: Yahoo Finance
The week was fairly uneventful, with no real news behind the strong gains in the market. Economic data released this week was poor and earnings were unimpressive. These aren’t exactly the conditions that result in all-time highs for stocks, which supports our view that the money-printing from central banks around the world has fueled the market higher.
On the economic front this week, retail sales reported their biggest drop in nine months. Consumer confidence also dropped to a nine-month low. Meanwhile, the NFIB small business organization saw optimism fall amongst its members, with 0% reporting plans to hire.
There was some good news, though, as the weekly unemployment figures showed an improvement from an unusually high figure the previous week. Plus, inflation on the producer level, the PPI, showed a drop of 0.6% over the past month (though as we’ve discussed in the past, the methodology to calculate inflation is rather suspect). However, the drop was largely due to lower gas prices as inflation actually rose 0.2% when excluding food and energy.
Earnings season kicked off this week, with several big names releasing their figures: Alcoa, J.P. Morgan, and Wells Fargo. All three had the same story – earnings improved while revenues fell (revenue is the sales a company experienced. Revenue minus expenses gives us the earnings). That tells us conditions aren’t really improving, but companies are getting leaner and cutting costs further to improve the bottom line.
The Fed was also in the news this week. The minutes were released from their most recent meeting, telling us little that was unknown. The majority of the Fed members want the stimulus programs to continue for the next several months, though the opinions vary on what to do at that point.
Basically it all rests on the condition of the economy. With a better economy and employment picture, they expect to pull back on some of the money-printing. However, we don’t see that happening any time soon.
Like we discussed last week, Japan was in a similar situation over a decade ago. Their stimulus measures were intended to last until conditions improved. Over that time, not only did conditions not improve, they got worse. Now they forced upon themselves a radical stimulus program that we believe will ultimately destroy their economy. This isn’t the right path for us to follow.
One other factor we’re seeing in this market rise is more foreign investors getting into the action. There was a report this week that Japanese investors, stung by the low yields on their bonds due to central bank actions, are putting more money into riskier European bonds. We’re seeing this more and more – investors are starved for yield so they venture into riskier and riskier assets to find some return.
It’s not just the bond market that new money is flowing into. This foreign money is also flowing into stock markets around the world, particularly ours and the Japanese.
It’s not just the Japanese people pouring money into our markets, but European and the Chinese, as well. After the recent bank account confiscations in Cyprus, people are losing faith in banking institutions. Instead of leaving their cash in a bank account, that money is instead being invested in the global markets.
We think the Chinese have been increasing their investments here, as well. The Chinese don’t particularly like cash sitting at the bank (or have access to banks) and prefer investing, which usually results in a bubble of the latest hot investment. In the past we’ve seen surges in prices for items like art or wine or even liquor.
Until recently, many Chinese had been investing in their rising housing market. In an effort to cool the market, the Chinese government placed restrictions on these types of investments. With those curbs in place, we suspect their attention is turning to the global markets, as well.
Next Week
We’ll start getting more earnings data next week as earnings season accelerates. There will also be a handful of economic reports worth watching, including inflation with the CPI, leading economic indicators, industrial production, and manufacturing in the New York and Philadelphia regions.
Investment Strategy
Right now it seems like there are no risks in the market. Despite poor economic data and lackluster earnings, the markets keep chugging higher. The vast amounts of money being printed continue to fuel the markets higher, but we feel it is creating a very dangerous situation.
Worth noting, though, there are many investors who believe a pullback is coming after the run we’ve had. When that many people are looking for the market to behave a certain way, it often does the opposite.
We don’t like the broader indexes at this point, as their gains don’t make much sense. Instead, we prefer investing new money into undervalued individual stocks. Though almost 1/3rd of S&P 500 stocks are trading at one-year highs, undervalued stocks can be found. We like to have a shorter-term horizon, so we can keep one foot out the door in case the market turns abruptly.
As for what we are looking for, we like higher-quality and dividend paying stocks, though those have seen the biggest gains so far. Companies with operations overseas have seen better earnings than those who do not. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold has suffered recently despite the massive amounts of money being printed, which also hasn’t made much sense. 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, despite its failed recent performance.
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, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon. Eventually 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.
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.
On the economic front this week, retail sales reported their biggest drop in nine months. Consumer confidence also dropped to a nine-month low. Meanwhile, the NFIB small business organization saw optimism fall amongst its members, with 0% reporting plans to hire.
There was some good news, though, as the weekly unemployment figures showed an improvement from an unusually high figure the previous week. Plus, inflation on the producer level, the PPI, showed a drop of 0.6% over the past month (though as we’ve discussed in the past, the methodology to calculate inflation is rather suspect). However, the drop was largely due to lower gas prices as inflation actually rose 0.2% when excluding food and energy.
Earnings season kicked off this week, with several big names releasing their figures: Alcoa, J.P. Morgan, and Wells Fargo. All three had the same story – earnings improved while revenues fell (revenue is the sales a company experienced. Revenue minus expenses gives us the earnings). That tells us conditions aren’t really improving, but companies are getting leaner and cutting costs further to improve the bottom line.
The Fed was also in the news this week. The minutes were released from their most recent meeting, telling us little that was unknown. The majority of the Fed members want the stimulus programs to continue for the next several months, though the opinions vary on what to do at that point.
Basically it all rests on the condition of the economy. With a better economy and employment picture, they expect to pull back on some of the money-printing. However, we don’t see that happening any time soon.
Like we discussed last week, Japan was in a similar situation over a decade ago. Their stimulus measures were intended to last until conditions improved. Over that time, not only did conditions not improve, they got worse. Now they forced upon themselves a radical stimulus program that we believe will ultimately destroy their economy. This isn’t the right path for us to follow.
One other factor we’re seeing in this market rise is more foreign investors getting into the action. There was a report this week that Japanese investors, stung by the low yields on their bonds due to central bank actions, are putting more money into riskier European bonds. We’re seeing this more and more – investors are starved for yield so they venture into riskier and riskier assets to find some return.
It’s not just the bond market that new money is flowing into. This foreign money is also flowing into stock markets around the world, particularly ours and the Japanese.
It’s not just the Japanese people pouring money into our markets, but European and the Chinese, as well. After the recent bank account confiscations in Cyprus, people are losing faith in banking institutions. Instead of leaving their cash in a bank account, that money is instead being invested in the global markets.
We think the Chinese have been increasing their investments here, as well. The Chinese don’t particularly like cash sitting at the bank (or have access to banks) and prefer investing, which usually results in a bubble of the latest hot investment. In the past we’ve seen surges in prices for items like art or wine or even liquor.
Until recently, many Chinese had been investing in their rising housing market. In an effort to cool the market, the Chinese government placed restrictions on these types of investments. With those curbs in place, we suspect their attention is turning to the global markets, as well.
Next Week
We’ll start getting more earnings data next week as earnings season accelerates. There will also be a handful of economic reports worth watching, including inflation with the CPI, leading economic indicators, industrial production, and manufacturing in the New York and Philadelphia regions.
Investment Strategy
Right now it seems like there are no risks in the market. Despite poor economic data and lackluster earnings, the markets keep chugging higher. The vast amounts of money being printed continue to fuel the markets higher, but we feel it is creating a very dangerous situation.
Worth noting, though, there are many investors who believe a pullback is coming after the run we’ve had. When that many people are looking for the market to behave a certain way, it often does the opposite.
We don’t like the broader indexes at this point, as their gains don’t make much sense. Instead, we prefer investing new money into undervalued individual stocks. Though almost 1/3rd of S&P 500 stocks are trading at one-year highs, undervalued stocks can be found. We like to have a shorter-term horizon, so we can keep one foot out the door in case the market turns abruptly.
As for what we are looking for, we like higher-quality and dividend paying stocks, though those have seen the biggest gains so far. Companies with operations overseas have seen better earnings than those who do not. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold has suffered recently despite the massive amounts of money being printed, which also hasn’t made much sense. 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, despite its failed recent performance.
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, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon. Eventually 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.
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.
