Commentary for the week ending 9-20-13

Please note:  there will be no market commentary next week.  Thank you.

News from the Fed pushed stocks to new highs this week.  Through the Friday close, the Dow was higher by 0.5%, the S&P gained 1.3%, and the Nasdaq rose 1.4%.  Prices on bonds rose this week, so the yields moved lower.  Similar to stocks, gold rose a solid 1.8%.  Oil continued to trend lower, falling 3.3% to $104.67 per barrel.  The international oil, Brent, moved down to $109. 

Source: Yahoo Finance (a higher Monday open skewed our chart this week)

By now you’ve probably heard that the Fed decided to maintain its current stimulus program.  Almost all asset classes immediately shot higher (while others like the dollar, declined) on news that the punch bowl would not be taken away.  We didn’t realize how widespread the expectation for a reduction in stimulus was, so the news came as a surprise to many investors.  We weren’t surprised, but it caused us to be more worried for the long term.  

The explanation for continuing the stimulus should be concerning.  The Fed currently sees lower growth than expected and downwardly revised its projections for future growth.  This is cited as the reason for continuing the stimulus. 

It is even more worrisome when you realize the Fed has consistently been over-optimistic on its economic growth projections.  For example, in 2011, the Fed forecasted roughly 4% growth for 2013, yet we are on track for less than 2% (LINK).  At no point has the Fed been close in their estimations, so it’s a safe bet that growth will be even lower than their dismal projections. 

It should also be noted that the Fed has been engaging in stimulus programs for five years.  After five years of poor results, a logical conclusion would be to change tactics, not dig the hole deeper.  These actions are not without consequences.  Printing trillions of dollars is extremely negative for the long run.  Keeping interest rates too low for too long produces bubbles that can pop very quickly (and we are likely inflating bubbles at this time).  These are very serious concerns for the long run. 

Putting off a reduction in stimulus also added to future volatility.  The next Fed meeting in late October will be a replay of the guessing game of the last two weeks.  The questions will remain the same and the market reactions are likely to be, too.  Even if a slight pullback in stimulus was announced, every meeting going forward would have investors wondering if they will pull back even more.  The Fed has backed itself into a corner here.  

There was other Fed news impacting the market this week, too (unfortunately markets no longer move on fundamentals, just central planning activities).  Fed chief Bernanke is set to leave his post in January and the leading replacement was rumored to be Larry Summers. 

Over the weekend, Dr. Summers removed himself from the running, leaving Janet Yellen as the likely replacement.  Dr. Yellen is currently the number two at the Fed, behind Ben Bernanke.  She is widely viewed as even more interventionist than Ben Bernanke, and far more than Larry Summers, so markets popped higher on news that stimulus will likely be around longer than it otherwise would have. 

As you can tell, markets like stimulus.  Unfortunately it has done little for the economy. 


Next Week
Next week won’t be as busy as this one, but we’ll still get a fairly good amount of data.  The will be info on consumer confidence, durable goods, housing, GDP, and personal income and spending.  News from the Fed will continue, as well, with several regional presidents will be making speeches. 


Investment Strategy

In the shorter term, stocks started to look expensive (overbought) this week, so we saw more risk to the downside than upward potential.  The sell-off Friday lessened that concern somewhat, but the reasons for the large decline were more likely due to the nuances of the market than a reversal in sentiment.  Friday saw three stocks come out of the Dow index and three new ones move in, plus it was “quadruple witching” Friday, where options and futures all expire at the same time.  This added to the volatility of the day.  Monday will give us a better idea if the sell-off was real or not.    

At this point, we are hesitant to add any new money into stock market indexes.  Not only do stocks look expensive, but we have other concerns like the debt ceiling fight approaching, which weighed on the markets last time around. 

Instead we would look for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy.  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 saw a strong move higher when the continuation of stimulus was announced.  It may do well with more stimulus, but eventually that stimulus will have to be removed.  If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks.  It’s good for a hedge here, but caution is 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 well recently but serves only as a nice hedge.  It isn’t 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 9-13-13

It was a solid week for the markets with the Dow turning in its best week in eight months.  Through the close Friday, the Dow climbed a solid 3.0%, the S&P gained 2.0%, and the Nasdaq returned 1.7%.  Gold moved sharply lower, dropping 5.7% to its lowest level in five weeks.  Oil prices fell as Syria tensions eased, falling 2.1% to $108 per barrel.  The international oil, Brent, moved lower to $112. 

Source: Yahoo Finance

There wasn’t a whole lot of news for the market this week.  Instead, stocks seemed to move higher on the absence of bad news.  The big market-moving story comes next week with the Fed policy meeting, so many investors have been cautious to take positions at this time.

One item that did have an impact on the market was news out of Syria.  Diplomatic solutions to the issue became more likely than military strikes, so tensions in the region seemed to ease.  However, this looks more like an “out of sight, out of mind” situation, since the likelihood of the diplomacy actually succeeding is slim.  For politicians, appearances are probably more important here than results. 

As mentioned above, the big story actually comes next week with the Fed policy meeting.  They are expected to make an announcement on the future of the stimulus program, with many expecting a reduction to be announced. 

It is highly likely that stocks will fall if a reduction is announced.  Since the printed money has flowed into the stock market and fueled its rise, even a slight reduction will indicate the crutch is being removed.  This is why stocks will move lower. 

We don’t believe a reduction in stimulus will occur (as much as we want it to).  The Fed is basing their decision on the strength of employment and inflation, and neither is close to their target levels.  The lack of results could logically lead one to conclude that the wrong prescription is being applied, but we’ve beat that horse enough already. 

If the Fed were to pull back on its money printing, we could see them only slightly cutting back on the government bonds they are buying, not the mortgage bonds (each month the Fed prints money to buy $45 billion in government bonds and $40 billion in mortgage bonds to push down interest rates).  The only reason we see this occurring is because the Treasury isn’t creating as many bonds as it previously did.   

Additionally, if they were to cut, the following months will be just as jittery.  The question will become “They’ve cut already, so when are they going to cut again?”  This will not create more certainty, only raises more questions.  It is one of the unintended consequences of intervention in the markets. 

As for economic reports, this week was largely negative.  Retail sales rose only slightly and less than expected, consumer confidence fell to the lowest level since April, and inflation at the producer level rose last month more than expected.  Worth noting, the PPI on a year-over-year basis fell to just 1.4%.  This is important since the Fed is looking for inflation above the 2% level, which makes a tapering in stimulus less likely. 

Finally, a big story late in the week was Twitter filing for an IPO.  Like most of the other social media companies, we have very little interest.  Unfortunately it also means being bombarded with talk about Twitter in coming weeks and months, much like we were with Facebook.  

We may be completely wrong here, but this is highly reminiscent of the tech craze in the late ‘90s.  We don’t understand how the companies in this sector (like Facebook, LinkedIn, Groupon, Zynga, etc.) can have such high valuations.  Granted, they do have a lot of users.  But they all make money one way – advertising.  And that advertising money has to come from businesses.  With very little growth, flat sales and revenues, we aren’t sure how much more money companies can squeeze out for advertising. 

This also assumes that money spent on advertising is effective.  Purely anecdotal, but we have never clicked on any ads (on purpose), much less paid attention to them.  With the popularity of services that block ads, it doesn’t seem like advertising can support such lofty valuations for these social media companies.   


Next Week

Next week will be a very busy and important one.  Not only will there be many economic reports, but the Fed is holding their policy meeting and will make an announcement on the future of the stimulus program.  Either way they decide will have a significant impact on the market. 

On the economic reports, we will get info on inflation at the consumer level, manufacturing in the New York region, industrial production, housing, and leading economic indicators.


Investment Strategy

No change here.  Stocks continue to move higher from their lows of late August and may have a bit more room to run.  Next week will be important for the direction of the market, so it’s too early to make any firm calls. 

An extension in the Feds money-printing program is one of the few items that can send stocks higher (that and low interest rates).  Aside from this, we see little to support stock prices.  They are at very high levels from a longer term perspective, with corporate earnings and economic fundamentals unimpressive.  Plus we have the debt ceiling fights in Washington approaching, a negative event for stocks last time around. 

At this point we wouldn’t add any new money into stock market indexes, instead preferring to find undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy.  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 has seen a strong reversal in recent weeks.  If the Fed does announce a pullback in this money-printing program, it may move even lower.  On the other hand, a continuation of the stimulus may give it reason to move higher. 

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 9-6-13

The holiday-shortened week saw a rather volatile market.  For the week, the Dow rose 0.8%, the S&P was higher by 1.4% and the Nasdaq climbed a solid 2.0%.  Bonds (as measured by the 10-year Treasury) saw yields hit the highest level in over two years (so prices hit the lowest level).  Gold lost some ground, falling 0.7%.  Oil again rose sharply on the news over Syria, gaining 2.7% on the week to a 28-month high of $110.53 per barrel.  The other major type of oil, Brent, rose above $116. 

Source: Yahoo Finance

Two main factors were responsible for the rocky market this week: Syria and the Fed. 

Stocks opened the week to the upside on news that President Obama would be taking the Syria strike to Congress for approval.  That move pushed back any immediate military action in the region.  Since the market does not like the uncertainty created by war, stocks rose on the news. 

The rally was short lived, however, as Speaker Boehner indicated his initial support for the President’s plan, making immediate military action more likely.  The market drop on Tuesday from the news can be clearly seen in the chart above. 

This back and forth continued for the rest of the week.  Stocks were higher on Wednesday when John McCain came out against the Senate draft proposal.  They then plunged early Friday when Vladimir Putin indicated he would support Syria if attacked. 

As for the Fed, later this month they are holding a policy meeting where an announcement on the stimulus program is expected.  This makes economic data releases even more important since it would influence the Fed’s stance on the direction of the stimulus program.  Positive economic reports would give the Fed a reason to pull back on their stimulus while negative info would give a green light for more stimulus. 

The most watched data release this week came on Friday with the monthly employment report.  We added 169,000 jobs last month, an unimpressive number and much less than expected.  Additionally, the previous two months were revised lower. 

The unemployment rate did move lower to 7.3% from 7.4%.  However, that improvement is solely due to people leaving the labor force.   In fact, the size of the labor force (the amount of people working or looking for work compared to the overall population) stands at the lowest level since 1978.  If we were to use the labor force size from the beginning of the recession to calculate the unemployment rate, we would be standing closer to 11%.

Since this report was weaker than expected, stocks moved higher because it makes the Fed less likely to reduce its stimulus program. 

Other economic data this week was mostly positive, however, with the service and manufacturing sectors both showed an impressive gain over the past month.  Construction activity came in higher than expected, though on the other hand, the trade balance worsened on higher imports and fewer exports. 


Next Week

Next week looks much quieter for economic data, but will be far busier for news about Syria and the Fed.  On economic data, we’ll get info on inflation at the producer level, consumer sentiment, and business inventories. 

Also, we are moving closer to the Fed’s policy meeting starting September 17th.  This meeting is widely anticipated for an announcement on whether the stimulus program will be reduced, so investors have been closely watching for any hints on which direction they might move.   


Investment Strategy

The stock market has come off its recent lows and we would not add to any positions in the broader market at this point.  We see a more volatile investing market in the weeks and months ahead, so caution is warranted.  Just looking at this week, we can see how volatile the market is depending on the news releases.   

In the near term, the situation in Syria is obviously a concern, as well as the stimulus story from the Fed.  If it looks like a reduction in stimulus is likely, stocks and bonds will fall.  An immediate reduction in stimulus is looking less likely and since the stimulus has fueled the market higher, stocks may have some room to run.  Again, this is in the short term. 

As for the longer term, the market is still expensive from a longer-term perspective.  Plus margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive.  Plus we are in September, historically the worst month for stocks. 

As mentioned above, we would not put any new money into stock market indexes; instead we’d look to find undervalued individual names to invest in.  Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy.  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 has done well recently, despite the declines over the last two weeks.  If the Fed does announce a pullback in this money-printing program, gold may move lower.  With the recent rise in prices, we would be hesitant to add any more at these levels. 

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 8-30-13

Geopolitical events weighed on the markets this week.  Through the close Friday, the Dow was lower by 1.3%, the S&P fell 1.8% and the Nasdaq dropped 1.9%.  Friday also marked the end to August, which turned out to be the worst month for stocks in over a year and also the least active in trading volume for the last 16 years.  Gold continued to rise with a slight gain of 0.1%.  Oil rose sharply this week hitting its highest price in two years, closing the week with a gain of 1.2% to $107.65 per barrel.  The international Brent oil, which is used for much of our gas here in the east, rose to $114.45. 

Source: Yahoo Finance

Military action in Syria was the main story behind the market decline this week.  It started when Secretary of State John Kerry made a speech Monday describing possible military action against Syria.  The prospect of military action always creates uncertainty for the market, so stocks dropped sharply on the remarks, which can be seen in the chart above. 

As the week progressed, stocks started to moderate as the initial reaction from possible military activity subsided.  The situation is still in flux as there are no concrete details, so the market is still likely to move on any new information.  We are sure when the military response is finalized, it will be announced to the public in great detail since it makes perfect sense to telegraph military activity – especially to any potential target (this comment is entirely sarcastic). 

Since expectations for the future of stimulus from the Fed has had the biggest impact on the market, this event was also scrutinized for its effect on a Fed taper.  More economists have indicated that this event will cause the Fed to postpone its taper in September, but many still believe a September reduction is likely.  Especially since there are fewer bonds available for the Fed to print money to buy.  

Military action in Syria also had a significant impact on the commodity markets this week.  Obviously the region is very important for the oil industry, so it made sense to see oil prices rise.  Prices could continue to rise if the situation gets messy.  Gold also saw gains, hitting the highest levels in three months. 

Economic reports this week had an impact on the market, too.  We started the week with a negative durable goods report (durable goods are items with a longer life, like a refrigerator or telephone) that sent stocks higher, since poor economic reports make a stimulus reduction less likely. 

On the positive side, GDP was revised higher from 1.7% to 2.5%, although the bulk of the revisions were due to an increase in exports.  The important personal consumption segment was revised lower.  Also, inventories have been building, which has many economists predicting a slower growth in the third quarter (if inventories are high, businesses won’t need to produce more items to fill the shelves). 

As for other economic data this week, economic activity in the Richmond and Chicago regions picked up, consumer confidence ticked higher, weekly jobless claims improved, while personal income and spending were only slightly higher.  A report on housing prices showed a 12% rise from a year ago ending in June, but the creator of the report, Bob Shiller, concedes that speculation is currently running at a very high level 


Next Week

With markets closed Monday, a lot of economic data releases will be crammed into the remaining four days.  We will get info on the strength of the manufacturing and service sectors over the past month, along with construction spending, the trade balance, and factory orders.  The most important report comes on Friday with the release of the employment data since it is one of the benchmarks the Fed looks at regarding stimulus.  A solid report may send the markets lower, since it would signal a reduction in stimulus is more likely. 

There will also be several regional Fed presidents making speeches and all will be closely watched for clues on stimulus.  They have a widely anticipated September meeting on the 17th, so the Fed will be a hot topic for several weeks. 

Finally, next week we are entering the month of September, historically the worst month for stocks.  There are many reasons to be cautious at this point, so we may be entering a more volatile investing period. 


Investment Strategy

The broader stock market still looks on the cheap side, at least for the short term.  Remember, you want to buy when stocks have sold off and sell when they have risen, a simple concept that is difficult to stick to. 

There are some unknowns out there that will have a large impact on the market, so we are looking for a more volatile investing market in the weeks and months ahead.

In the near term, the situation in Syria is obviously a concern, as well as the stimulus story from the Fed.  When a reduction in stimulus becomes more apparent, stocks and bonds will fall.  Many investors still believe a taper will begin in September, but we aren’t so sure for reasons discussed in the past, so stocks may still have some upside to run. 

As for the longer term, the market is still expensive from a longer-term perspective.  Plus margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive.  Now we have the geopolitical risks in the Middle East to contend with.

While the broader market looks more attractive in the short term, 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. 

Gold has done well recently.  If the Fed does announce a pullback in this money-printing program, gold may move lower.  With the recent rise in prices, we would be hesitant to add any more at these levels. 

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.