Stocks rebounded this week after the strong sell-off in the previous week. Through the close Friday, the Dow rose 1.1%, the S&P gained 1.7%, and the Nasdaq climbed 2.3%. Commodities bounced back, too, with gold recovering over $100 an ounce for a 4.2% gain. Oil was higher by 5.4% to close at $93 per barrel. The international Brent crude crossed back above the $100 level and finished the week just shy of 103.
Source: Yahoo Finance
Stocks rallied back this week, though much of the gain was probably due to being oversold from last week. Corporate earnings came in at their fastest pace so far this earnings season, and results were just slightly better than estimates. Economic data released this week was mixed, but leaned to the negative side.
Slightly more than half of the companies in the S&P 500 have released their earnings at this point. More than two-thirds have beaten earnings estimates, which is in line with the recent average.
However, two-thirds were worse than expected when it came to revenues (remember, revenue is the money the company actually earned through sales. Earnings, or profits, are what are left after subtracting costs). While it’s fine to see companies cut costs to be profitable, at some point we need to see revenue growth before we can be more optimistic. We just haven’t seen it yet.
One positive note for earnings, last week Factset reported earnings were showing a growth of -0.4%. By the end of this week, they showed a gain of 2.1%. Revenue, on the other hand, is showing a decline of 0.6%.
On to economic data, where the results were mixed. On the positive side we saw encouraging reports on housing, plus weekly jobless claims neared a five-year low. On the other hand, durable goods (which are items with a long life, like a refrigerator or TV) dropped 5.7% over the last month and consumer confidence fell to a three month low.
The big economic report this week was the GDP number for the first quarter. Economists were predicting growth of over 3% annualized, only to be disappointed by the 2.5% result. Though below expectations, the figure is an improvement from last quarter’s 0.4% gain.
One interesting point to note, next quarter the GDP number is guaranteed to be higher. The methodology used to compute GDP is being changed, which is expected to add 3% to growth.
The change will also be added to all past periods, which they rightly say will rewrite history. For example, there is the potential for the recession in the early 1990’s to show no recession at all (since a recession is defined as two straight quarters of negative GDP). With the government eager to show economic growth, we suppose changing the methodology by which growth is computed is as effective as any other policy tried so far.
Staying on the growth theme, Europe has seen a weakening in their economic growth. This week we learned that economic activity (measured in the Markit PMI report) continues to show contraction. Germany, the workhorse of the European Union, showed a contraction for the first time in six months. Additionally, Spain and France both hit new record highs for unemployment.
This weak economic activity has many Euro leaders questioning their austerity programs (the austerity programs called for lower government spending and higher taxes to reduce deficits). In fact, U.S. officials and IMF have both been pushing for less austerity, too.
No surprise, we have problems with this. First, government spending has actually not been reduced in these European countries. Actually, only three EU countries have reduced spending, Ireland, Iceland, and Hungary, but they aren’t the ones complaining about lower government spending. No other country is actually spending less than before.
Second, government spending might show growth in the short run with stimulus and money printing (though slight, as our economy clearly illustrates), but it cannot be sustained. This is exactly how Europe fell into the hole they were in the first place. The same failed policy is being repeated, thinking it will work if tried on an even bigger scale (the U.S. is in that boat, too). We have no doubt problems will arise in the region again in the future.
On the subject of stimulus, a report from Bloomberg this week (LINK) raised some eyebrows. A central bank organization found that 23% of central banks around the world are either outright buying stocks or have plans to do so. Keep in mind, they are creating money out of thin air to do so. While the central banks of both the U.S. and England have mandates preventing them from direct investments, notable names buying stocks included the banks of Japan, Israel, Switzerland, Czech Republic, Korea, and even China.
This is a different and more dramatic way of influencing markets. Before, a central bank would print money that would flow to commercial banks, which would ultimately wind up in the markets. Now, there is no hiding the central bank motives.
It goes to show us that the market is no longer free (at least, to the degree that it was). Every market, whether it is stocks, bonds, currencies, or commodities, is directly being manipulated through money printing by these central banks. This is a very disturbing precedent that we don’t see ending well.
Next Week
Next week will be loaded with economic releases and corporate earnings. 137 of the S&P 500 companies will be reporting earnings. As for economic data, we will get info on personal income and spending, consumer confidence, manufacturing, trade, factory orders, and if that wasn’t enough, the April unemployment figures will be released on Friday.
The Fed will again be in the news with their periodic policy meeting, which is always closely scrutinized for clues on the future of stimulus. The European Central Bank will also hold a meeting, with investors hoping for more stimulus from that region.
Investment Strategy
As we reported above, the overall market is so heavily influenced by the actions of the central banks, it’s hard to make a call on the overall macro picture. The economic and earnings picture isn’t great, but the new money pouring in continues to fuel stocks higher.
These central banks don’t show any signs of pulling back, either. Recently there were talks that our Federal Reserve may pull back from the $85 billion being printed every month. New reports indicate that the Fed may be heading in the other direction, expanding their stimulus programs (LINK). If the past is any indication of the future, stocks will move higher if this is the case.
We still have to be cautious, though. The last couple years started with solid gains, just like this year has. Each spring, however, the economy weakened and the markets dropped. We’re seeing the economic weakness again this year, so a market pull-back would not be a surprise.
With it tougher to figure out the macro picture, we don’t like putting new money into the broader indexes at this point. Finding undervalued individual stocks (which can be tricky around earnings time) seems like a better play. We like to have a shorter-term horizon, too, 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.
This may have been a good buying opportunity for gold, as it seems to have found some footing after its recent plunge. We like it for the long run due to the massive amounts of money being printed around the world, but caution is still warranted.
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, so buying on the dips may work with a longer time horizon.
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 (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before this occurs.
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.
Slightly more than half of the companies in the S&P 500 have released their earnings at this point. More than two-thirds have beaten earnings estimates, which is in line with the recent average.
However, two-thirds were worse than expected when it came to revenues (remember, revenue is the money the company actually earned through sales. Earnings, or profits, are what are left after subtracting costs). While it’s fine to see companies cut costs to be profitable, at some point we need to see revenue growth before we can be more optimistic. We just haven’t seen it yet.
One positive note for earnings, last week Factset reported earnings were showing a growth of -0.4%. By the end of this week, they showed a gain of 2.1%. Revenue, on the other hand, is showing a decline of 0.6%.
On to economic data, where the results were mixed. On the positive side we saw encouraging reports on housing, plus weekly jobless claims neared a five-year low. On the other hand, durable goods (which are items with a long life, like a refrigerator or TV) dropped 5.7% over the last month and consumer confidence fell to a three month low.
The big economic report this week was the GDP number for the first quarter. Economists were predicting growth of over 3% annualized, only to be disappointed by the 2.5% result. Though below expectations, the figure is an improvement from last quarter’s 0.4% gain.
One interesting point to note, next quarter the GDP number is guaranteed to be higher. The methodology used to compute GDP is being changed, which is expected to add 3% to growth.
The change will also be added to all past periods, which they rightly say will rewrite history. For example, there is the potential for the recession in the early 1990’s to show no recession at all (since a recession is defined as two straight quarters of negative GDP). With the government eager to show economic growth, we suppose changing the methodology by which growth is computed is as effective as any other policy tried so far.
Staying on the growth theme, Europe has seen a weakening in their economic growth. This week we learned that economic activity (measured in the Markit PMI report) continues to show contraction. Germany, the workhorse of the European Union, showed a contraction for the first time in six months. Additionally, Spain and France both hit new record highs for unemployment.
This weak economic activity has many Euro leaders questioning their austerity programs (the austerity programs called for lower government spending and higher taxes to reduce deficits). In fact, U.S. officials and IMF have both been pushing for less austerity, too.
No surprise, we have problems with this. First, government spending has actually not been reduced in these European countries. Actually, only three EU countries have reduced spending, Ireland, Iceland, and Hungary, but they aren’t the ones complaining about lower government spending. No other country is actually spending less than before.
Second, government spending might show growth in the short run with stimulus and money printing (though slight, as our economy clearly illustrates), but it cannot be sustained. This is exactly how Europe fell into the hole they were in the first place. The same failed policy is being repeated, thinking it will work if tried on an even bigger scale (the U.S. is in that boat, too). We have no doubt problems will arise in the region again in the future.
On the subject of stimulus, a report from Bloomberg this week (LINK) raised some eyebrows. A central bank organization found that 23% of central banks around the world are either outright buying stocks or have plans to do so. Keep in mind, they are creating money out of thin air to do so. While the central banks of both the U.S. and England have mandates preventing them from direct investments, notable names buying stocks included the banks of Japan, Israel, Switzerland, Czech Republic, Korea, and even China.
This is a different and more dramatic way of influencing markets. Before, a central bank would print money that would flow to commercial banks, which would ultimately wind up in the markets. Now, there is no hiding the central bank motives.
It goes to show us that the market is no longer free (at least, to the degree that it was). Every market, whether it is stocks, bonds, currencies, or commodities, is directly being manipulated through money printing by these central banks. This is a very disturbing precedent that we don’t see ending well.
Next Week
Next week will be loaded with economic releases and corporate earnings. 137 of the S&P 500 companies will be reporting earnings. As for economic data, we will get info on personal income and spending, consumer confidence, manufacturing, trade, factory orders, and if that wasn’t enough, the April unemployment figures will be released on Friday.
The Fed will again be in the news with their periodic policy meeting, which is always closely scrutinized for clues on the future of stimulus. The European Central Bank will also hold a meeting, with investors hoping for more stimulus from that region.
Investment Strategy
As we reported above, the overall market is so heavily influenced by the actions of the central banks, it’s hard to make a call on the overall macro picture. The economic and earnings picture isn’t great, but the new money pouring in continues to fuel stocks higher.
These central banks don’t show any signs of pulling back, either. Recently there were talks that our Federal Reserve may pull back from the $85 billion being printed every month. New reports indicate that the Fed may be heading in the other direction, expanding their stimulus programs (LINK). If the past is any indication of the future, stocks will move higher if this is the case.
We still have to be cautious, though. The last couple years started with solid gains, just like this year has. Each spring, however, the economy weakened and the markets dropped. We’re seeing the economic weakness again this year, so a market pull-back would not be a surprise.
With it tougher to figure out the macro picture, we don’t like putting new money into the broader indexes at this point. Finding undervalued individual stocks (which can be tricky around earnings time) seems like a better play. We like to have a shorter-term horizon, too, 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.
This may have been a good buying opportunity for gold, as it seems to have found some footing after its recent plunge. We like it for the long run due to the massive amounts of money being printed around the world, but caution is still warranted.
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, so buying on the dips may work with a longer time horizon.
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 (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before this occurs.
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.
