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.
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.
