Commentary for the week ending 8-23-13

Stocks reversed their decline this week.  Through the Friday close, the Dow turned in a -0.5% return while the S&P was higher by 0.5% and the Nasdaq rose 1.5%.  Yields on government bonds continued to rise, again hitting the highest level in two years (so prices fell to the lowest level over that period), but reversed course late in the week.  Gold showed a nice gain of 1.8%.  The two major types of oil moved in different directions this week with our domestic oil falling 0.8% to $106.42 per barrel.  The international Brent oil, which is used for much of our gas here in the east, moved higher to $111.

Source: Yahoo Finance

This week we saw an end to a six-day losing streak for stocks, the longest and worst losing streak in over a year.  The only news moving the market was again the Fed, whose comments have been closely watched for any clues on the future of stimulus. 

The minutes from the latest Fed meeting in July were released this week.  Basically they told us nothing.  We saw that a “few” regional presidents supported pulling back on the bond buying portion of the stimulus, while a “few” others preferred to wait for more economic data.  It provided no clarity on when the Fed will pull back from its stimulus programs. 

Stocks were unsure what to make of these comments, dropping sharply when the minutes were released, only to rise sharply, and again fall sharply. 

Just like the market, to us it seems like the Fed is confused on how to pull back on their stimulus.  At some point it has to end.  However, we’ve seen that when stimulus is reduced – or threatened to be reduced – the market will fall.  Since so much energy and effort has been put into boosting prices, they are hesitant to pull back and lose any gains that have been made.  It seems like they are still trying to figure out how to exit without disrupting the market.  We’re not sure that is possible.

One view that seemed to have broad agreement amongst the Fed members was that economic growth is much weaker than expected.  But rest assured, they forecast stronger a stronger economy later this year.  Their forecasts have been consistently overly optimistic and incorrect to this point, so we’re pretty sure they will again be incorrect.  We see no reason for economic growth to pick up any time soon. 

The Fed continues with this assumption that more stimulus will help the economy grow, but in the five years since the bond buying began, success is difficult to find.  Economic growth is poor and easily lower than predicted.  The only thing it has been successful in is creating bubbles in asset prices, whether it is in commodities, stocks, or bonds.  And it creates more problems in the longer run. 

Switching gears, there wasn’t much economic data released this week.  We saw an uptick in the weekly unemployment numbers after last week’s strong number.  We also saw conflicting reports on the housing sector, with existing home sales increasing over the last month while new home sales dropped sharply.  The increase in existing home sales was likely due to buyers trying to close before mortgage rates rose higher, so the housing picture doesn’t appear to be as strong as expected. 

Lastly, trading on the Nasdaq exchange was a major story this week.  A glitch halted trading for three hours Thursday afternoon and its effects can be seen in the chart above.  While this posed a serious problem for frequent traders, it really had no impact on trading with our firm, especially since we only place a handful of trades a month – at most.  Problems like this or the flash crash in 2010 may grab headlines, but impacts few of us in the broader investment industry.     


Next Week

The lack of any clear direction for stimulus makes future economic releases even more important.  The market is likely to fall if a positive report is released since it would signal a reduction in stimulus is coming sooner rather than later. 

Closely watched this week will be the revision to second quarter GDP.  The first print showed a 1.7 figure and many are expecting it to be revised above 2%.  We will also get info on durable goods, consumer confidence, and personal income and spending. 


Investment Strategy

Stocks began looking oversold this week, so Thursday may have been a good buying opportunity for the broader stock market, at least for the short term. 

The Fed is still in the driver’s seat when it comes to the direction of the stock market, so any new clues on the future of stimulus will impact its direction.  As a reduction in stimulus becomes more apparent, stocks and bonds will fall.  Many investors believe a taper will begin in September, but we don’t think it is likely in the coming months, so stocks may still have some upside to run. 

We still have concerns for the longer term.  The market is still expensive, margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive.  Still, these factors have mattered little in the stock market’s direction so far as the market has focused on stimulus.   

While we liked the broader stock market this week, we still like finding undervalued individual names to invest in.  Technical analysis helps us find those undervalued stocks while the fundamentals tell us how strong the company is and if it’s worth an investment.  We would avoid stocks in sectors with a strong correlation to interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

As for gold, it continues to bounce around this current level.  It spiked this week on the bad housing data, which signaled more stimulus is likely.  If the Fed does announce a pullback in this money-printing program, gold may move lower.  It may be worth a nibble here, 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 seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

As for bonds, this area continues to receive much attention as yields keep rising (so prices are falling).  A short position (bet on the decline in prices) has done very well here but serves only as a nice hedge, not intended to be a loner term investment.   

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Finally, in international stocks, we are still not interested in developed markets and 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 8-16-13

Stocks turned in another negative week on fears of a reduction in stimulus.  For the week, the Dow was lower by 2.2%, the S&P fell 2.1%, and the Nasdaq returned -1.6%.  Yields on government bonds rose to the highest level in two years (so prices fell to the lowest level over that period).  Gold turned in a nice week with a rise of 4.5%.  Oil prices climbed steadily, rising 1.4% to $107.46 per barrel.  The international Brent oil, which is used for much of our gas here in the east, moved up to $110.42.

Source: Yahoo Finance

Economic data released this week showed slight improvements, leading many to conclude a reduction in stimulus is likely and thus causing the market to sharply sell-off.  The decline was the worst we’ve seen in a year and stocks have now notched two straight negative weeks, a rare event these days.

Leading the positive economic reports, the weekly jobless claims came in at their best level in six years.  Also closely watched was the inflation metrics, showing the PPI unchanged from the previous month and CPI higher by 0.2%.  Both are now higher than 2% year-over-year. 

These two metrics are important since they are the two specifically targeted by the Fed and their stimulus.  They want to see an improvement in employment and an increase in inflation, so as the data moves in that direction, it indicates less need for stimulus. 

While the data is slowly moving that direction, the regional Fed presidents speaking this week (Bullard and Lockhart) didn’t give any indication a pullback in stimulus was likely in the near term.  They noted it was possible, but they don’t have enough data to make a decision at this time.  Bullard even mentioned the broader employment picture remains poor and the economy in general was probably not strong enough to support a tapering.  Of course, the five years of stimulus and little in the way of results shows the stimulus has been completely ineffective anyway, but we digress.  

The remarks by these Fed officials adds to our belief that a reduction in stimulus will not occur in the coming months.  It may be possible by December, but certainly not September.  The scenario for the market may play out again like June, where the market drops on expectations of a taper, only to rise again when the market sees no tapering imminent. 

Next week will be a big one for the Fed.  Their annual Jackson Hole retreat begins next week and is attended by central bankers around the globe.  It was here in 2010 that Fed chief Bernanke announced the second stimulus program that sent stocks soaring.  This year may be less newsworthy since Bernanke will not be attending, nor will the heads of the European and England central banks.  Nevertheless, investors will be watching closely for any clues on the future of stimulus. 

The growth level of several other countries also made the news this week.  Europe officially exited recession by posting its first GDP gain in six quarters on an increase of 0.3%.  Germany and France were major contributors to the growth.  The situation is still very fragile, though.  These countries have not made the needed reforms, only using stimulus to paper over the problems.  We have no doubt problems will arise again in the future.   

Opposite of Europe, the economic growth level in Japan came in much less than expected.  Economists were predicting a 3.6% growth rate after growing 3.8% in the previous quarter.  However, growth came in at 2.6%, one full point below the estimate.  On the plus side, it was a positive number.  However, it may signal that their radical stimulus program is not working out how they expected. 

Finally, we’ll touch on the corporate earnings picture.  Earnings season is practically complete now, with 93% of companies reporting earnings at this point.  According to Factset, earnings have grown 2.1% while revenue is up roughly the same.  Worth noting, if we exclude the financial sector from the equation, earnings growth is negative, actually down 2.9%.  While these numbers show weakness, analysts have very high hopes for earnings through the end of the year.  However, we don’t see any reason for those expectations will be realized. 


Next Week

As we mentioned above, the Fed will likely be the major story next week.  A few regional presidents will be making speeches, the minutes from their last meeting will be released, plus their annual Jackson Hole summit will begin.  Aside from the Fed, both corporate earnings and economic data will be relatively quiet.  We will see info on the strength of the housing sector, plus leading economic indicators – neither of which will have much impact on the market. 


Investment Strategy

With the pullback this week, the broader stock market is looking more attractive, at least in the short term.  If we see the market move lower from here, it may provide a good buying opportunity – again, at least for the short term.  We don’t think the Fed is likely to reduce its stimulus any time soon, which may send stocks higher similar to the market reaction in June. 

We still have concerns for the longer term.  As we discussed last week, the market is expensive, margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals are poor.  But these items have mattered little in the run-up the market has had.  It’s been the stimulus from the Fed fueling stocks and we don’t see that ending soon. 

We mentioned above that the overall market is looking cheaper, but with its direction so dependent on the actions of the Fed, we would tread lightly.  We like finding undervalued individual names to invest in rather than the overall market.  Technical analysis helps us find those undervalued stocks while the fundamentals tell us how strong the company is and if it’s worth an investment.  We would avoid stocks in sectors with a strong correlation to interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

As for gold, it continues to bounce around this current level.  If the Fed does announce a pullback in its money-printing stimulus program, gold may move lower.  It may be worth a nibble here, 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 seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

As for bonds, this area continues to receive much attention as yields keep rising (so prices are falling).  A short position (bet on the decline in prices) has done very well here but serves only as a nice hedge, not intended to be a loner term investment.   

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Finally, in international stocks, we are still not interested in developed markets and 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 8-9-13

Fed taper worries crept back into the market, giving the Dow its second-worst week of the year.  Through the close Friday, the Dow fell 1.5%, the S&P dropped 1.1%, and the Nasdaq was lower by 0.8%.  Gold showed a little life, rising 0.2%.  Meanwhile, oil prices fell 0.9% to $106 per barrel.  The international Brent oil, which is used for much of our gas here in the east, closed lower to just under $107. 

Source: Yahoo Finance

While the talks of a reduction in stimulus by the Fed played a large part in the decline in the markets this week, there were several other stories that added to the downward pressure.  These were also stories that are making us cautious on the direction of the stock market in the longer term. 

First, this week we heard increasing chatter out of the regional Fed presidents on the prospects for a pullback in the Fed’s stimulus programs, perhaps as early as September.  Most notably, Charles Evans of the Chicago bank indicated a taper was “Quite likely later this year” and possibly occurring in September.  This is notable because Evans has been one of the largest advocates for more stimulus, so it is very telling if he thinks a pullback is possible. 

Even with these Fed presidents signaling a taper on the horizon, we don’t feel it will happen in the coming months.  Maybe by December, but as we’ve discussed often, we just don’t seem to be nearing the targets they laid out (higher inflation, higher employment) to trigger a reduction. 

While the Fed and their stimulus was the focus of the market, some other stories caught our attention.  The P/E multiple (price to earnings ratio, which is the current stock price divided by its annual earnings per share) of the overall stock market reached its highest level since 2009 and is above its 10-year average.  This indicates to us that stocks are not as cheap as many believe. 

The P/E ratio has been moving higher as many investors expect higher corporate earnings growth later in the year.  Indeed, Factset has reported estimates of 4.3% earnings growth in the third quarter (which was a reduction from the estimates of 6.7% at the end of June).  This would be a significant increase from the 2.1% growth we’ve seen this quarter.

As for other earnings stats this quarter, 90% of S&P 500 companies have reported so far, with 72% of companies beating earnings estimates while 54% have beaten revenue expectations.  Keep in mind, these expectations have been steadily lowered, so the bar to beat was very low. 

The other story making us cautious this week was an article (Link and Link) on record high margin levels in the stock exchange (margin is basically borrowed money used to buy stocks).  Margin levels tend to get overly high near tops in the market.  The following decline is often very sharp since investors have to sell their stock holdings to pay back the cash they borrowed. 

As for other economic data on the week, the results were mostly positive.  The service sector in the U.S. picked up strength, coming in above expectations.  The trade deficit improved sharply as higher oil exports and fewer oil imports helped narrow the gap.  Also, weekly jobless claims improved, pushing the four-week average to the lowest level since 2007, although the JOLTs report (which gives a more thorough view of the employment picture) showed the increases in employment have not been as strong as thought. 

One last item we’d like to mention, this week Japan had the dubious honor of crossing the ¥1 quadrillion in debt level.  Although it is only 10.7 trillion in dollar terms (which is still an extremely high number), terms like “quadrillion” were unthinkable not too long ago.  It does cause us to worry about the debt levels around the globe and the trajectory we are on. 


Next Week

Next week looks to be a little busier.  All eyes will continue to be on the Fed, so the speeches from several regional Fed presidents will be closely followed.  On the economic front, we will get info on retail sales, inflation at the producer and consumer levels, industrial production, and housing.  There will be a few corporate earnings reports, but the pace of the releases has declined steadily. 


Investment Strategy

As we discussed above, we are very cautious on the outlook for the market.  The biggest issue to watch for is the pullback in stimulus from the Fed.  Since the stimulus programs fueled the rise in stocks, it is only natural to see them move lower on the prospect of a taper, just like we saw with the taper rumors in June. 

The thing is, we don’t think they will be tapering in the near future.  This may play out again like June, where the market drops on expectations of a taper, only to rise again when the market sees it no tapering imminent.  In fact, the technicals right now show we may be due for a short-term pop. 

With the market being so focused on the Fed for direction, plus the other concerns we addressed above, we prefer to find undervalued individual names to invest in, rather than the overall market.  Technical analysis helps us find those undervalued names while the fundamentals tell us how strong the company is and if it’s worth an investment.  We would avoid stocks in sectors with a strong correlation to interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

As for gold, it continues to hang around this current level.  If the Fed does announce a pullback in its money-printing stimulus program, gold may move lower.  It may be worth a nibble here, 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 seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

As for bonds, this area continues to receive much attention as yields keep rising (so prices are falling).  A short position (bet on the decline in prices) has done very well here but serves only as a nice hedge, not intended to be a loner term investment.   

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Finally, in international stocks, we are still not interested in developed markets and 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 8-2-13

A more active week this week ended with stocks in the green.  Through the Friday close, the Dow rose 0.6%, the S&P was higher by 1.1%, and the Nasdaq topped them both with a nice 2.1% gain.  Gold took a breather this week as it came off 0.8%.  Oil prices rose firmly, though a decline Friday put the domestic crude up 2.1% for the week to $107 per barrel.  The international oil benchmark, Brent, closed near $109. 

Source: Yahoo Finance

This week we saw a large amount of companies releasing their earnings, but they haven’t really mattered to the market.  Instead, all eyes were on the Fed, who held a policy meeting this week.  It also made the GDP and employment reports released this week even more important, since those results would give clues on the direction of the Fed’s stimulus programs.

The excitement began on Wednesday with the GDP report.  Growth after the second quarter stood at 1.7%, higher than the 1% expected and an increase from last quarter.  The expectations for this number were a bit of a guessing game though, since it was the first quarter where significant changes were made to the computation of GDP, as we discussed last week. 

As a part of those changes, GDP growth last quarter was revised significantly lower from 1.8% to just 1.1%, which was how growth this quarter looked higher than last quarter. 

In general, the changes made economic growth look stronger than before, which is not surprising.  More recently, it made 2012 growth look slightly better, but turned 2011 growth negative from a slight positive. 

All-in-all, this GDP number is extremely weak and is likely to be revised lower.  It also reaffirms that we are experiencing the worst economic recovery since WWII.  Economists think growth will noticeably increase in the second half, but they were also the ones predicting 3-4% growth in the first half, a figure we didn’t come close to achieving. 

The other big economic news was the employment report on Friday.  The amount of jobs added last month was much lower than expected at only 162,000.  Previous months gains were also revised lower.  The unemployment rate ticked down to 7.4%, which is the lowest since 2008.  That may sound positive, but that improvement was not really an improvement, since the rate was lowered due to people leaving the labor force. 

While these two economic reports were very weak, they did show slight increases.  This has many thinking the Fed will still pull back on their stimulus programs in the coming months.  We don’t. 

This week the Fed noted the fragile economy and low inflation (by their metrics) in their policy meeting.  They would like to see those figures improve before pulling back on the stimulus programs, so when combined with the economic reports this week, it doesn’t seem like a pullback is likely.

These lackluster economic reports beg the question, how are the Fed’s programs actually helping the economy?  The results have been poor and the downside risks of printing trillions of dollars out of thin air are extremely high.  However, it is clear the stimulus has boosted stock prices and any tapering would reverse that.  This is why the market wants to see the stimulus continue. 

As for other economic data this week, the results were mixed.  Manufacturing last month grew at a surprisingly strong pace.  Also, in the first half of the year, home prices grew at the fastest pace since the housing bust.  However, home ownership stands at the lowest level since 1995 while rental costs are at the highest level on record.  

Lastly, we’ll take a look at the earnings picture.  So far, almost 80% of S&P 500 companies have reported their earnings.  According to Factset, 73% have beat earnings estimates and 55% have beaten revenues (revenue is what a company actually receives in sales, earnings are what remain when costs are subtracted from revenue). 

As we have mentioned numerous times, these “beats” have come from downwardly revised estimates, so the number to beat is extremely low.  When looking at actual growth, earnings have risen 1.7% and revenues have climbed 1.9%, both weak numbers.
 

Next Week

Next week looks to be much less busy than this week.  We are past the peak for corporate earnings releases, but we’ll get about 10% of the S&P 500 companies releasing their figures next week.  Economic data looks to be fairly quiet too, as we get reports on the strength of the service sector and the trade balance.


Investment Strategy

It’s hard not to be in the market as the Fed drives stock prices higher while pledging to do everything it can to keep pushing them higher.  The overall market looks expensive, though, so we are very cautious and would not put new money into it at this time. 

Instead, we prefer to find undervalued individual names.  Technical analysis helps us find those undervalued names while the fundamentals tell us how strong the company is and if it’s worth an investment.  We would avoid stocks in sectors with a strong correlation to interest rates.  Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly. 

Gold continues to show stability around this level.  It has performed poorly this year, but might be starting to bottom.  It may be worth a nibble, 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 seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon. 

As for bonds, this area continues to receive much attention as yields keep rising (so prices are falling).  A short position (bet on the decline in prices) has done very well here but only time will tell how long this will last.     

TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road.  Municipal bonds are in the same boat, but will work for the right client.  We keep a longer term focus with these investments. 

Finally, in international stocks, we are still not interested in developed markets and 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.