Commentary for the week ending 11-22-13

Please note: due to the Thanksgiving holiday, there will be no market commentary next week. 

Stocks continue to climb, turning in their seventh-straight weekly gain.  For the week, the Dow rose 0.7%, the S&P was higher by 0.4%, and the Nasdaq was relatively unchanged with a gain of 0.1%.  Gold hit its lowest level in four months, falling 3.4% this week.  Oil rose slightly, climbing 0.4% to $94.84 per barrel.  The other major type of oil, Brent, rose at a faster pace to close at $110.49.

Source: Yahoo Finance

Stocks have been on a tear recently, notching new all-time highs along the way.  Since early October, they have risen over 8% alone.  Markets have been helped by slightly better than expected – though slowing – profits.  But the main driver of this rally has been the Fed and their stimulus programs.  Once again, they were the factor behind the market moves this week. 

On Wednesday, minutes from the recent October Fed meeting were released.  They showed an ongoing debate on whether the stimulus programs should be pared back, but in the end, nothing new was learned.  They continue to support pulling back on the stimulus if the data supports it.  Since it does mean a tapering is on the table, while unlikely in our opinion, stocks sold off on the news. 

The minutes showed lot of contradictory back-and-forth discussions that seemed to purposely muddle their message.  Recent years have seen a remarkable increase in transparency from the Fed.  While it has shed a light on their thinking, it has kept the market hanging on every word.  To us, it seems like they figured by saying everything and nothing at the same time, the market wouldn’t be able to overreact to every word.  It worked, because no one really understood what was discussed. 

While these minutes were released on Wednesday, Fed chief Bernanke made speech Tuesday evening at the annual dinner for the National Economists Club (a wild bunch of folks, let me tell you).  His remarks were wildly dovish, meaning he showed an enthusiasm for more stimulus, keeping rates at record lows for years and flooding the market with $85 billion a month in printed money.  While the market worries a reduction in stimulus is on the table based on the Fed’s minutes, Bernanke’s comments show it’s not happening any time soon. 

Economic data this week supported that view.  One of the goals of the stimulus program is higher inflation, upwards of 2% annually.  So when inflation rises to this level, they will pull back on the stimulus.  Inflation metrics released this week showed a decline, with inflation at the consumer level standing at just 1%, the lowest level since early 2009. 

It is clear the economic data is not going the way the Fed expects.  Instead of changing course after five years of ineffective policy, they will continue their current path in the hopes that results appear.  It may mean higher stocks in the meantime, but we fear the longer this goes, the worse it will be in the long run.  It is a very dangerous policy. 


Next Week

With the Thanksgiving holiday next week, a lot of economic data will be crammed into the early part of the week.  Markets are actually open on Friday, but it tends to be one of the quietest days of the year.  In the shortened week, we’ll get info on consumer confidence, housing, durable goods, income and spending, and leading economic indicators. 


Investment Strategy

No change here.  Stocks still look expensive for the short run.  We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back.  But caution is warranted as a pullback – or at least a pause – is increasingly likely. 

We’ve written extensively on our concerns for the longer run.   This includes worries of unintended consequences from the Fed’s stimulus, slowing earnings growth, high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and exuberance around the IPO market.  

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and 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. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have shown weakness recently, having the worst year since their inception in 1997.  However, they remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  It’s good as a long term hedge, 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. 

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 11-15-13

It was another week of record highs in the stock market.  For the week, the Dow was higher by 1.3%, the S&P rose 1.6%, and the Nasdaq topped them both with a gain of 1.7%.  Gold eked out a slight gain, rising 0.2%.  Oil fell to its lowest level since June midweek, but climbed higher later to close with a loss of 0.8% at $93.84 per barrel.  The other major type of oil, Brent, took a different path and rose steadily all week to close at $108.50.

Source: Yahoo Finance

The week was fairly quiet, with news out of the Fed again the main driver of the markets. 

Investors were anxious to hear testimony from Fed chairman nominee Janet Yellen at her confirmation hearing on Thursday.  Most already know her stances on issues of the Fed, but few have heard her speak at length, so it gave a good opportunity to hear her views directly from her.

Preceding the event, her written remarks were released on Wednesday, allowing the public to get an early glimpse of her testimony.  The comments were even more dovish than many expected, meaning she was even more supportive of the stimulus programs and willing continue using them.  It caused stocks to pop higher, as can be clearly seen in the chart above.  

From the remarks, we see she believes the stimulus programs are vital in helping the economy recover and more was needed to help the economy further.  She thinks there are dangers in ending the programs too soon, reassuring the market that stimulus will remain in place for the foreseeable future.  Also, any adverse consequences from the stimulus are outweighed by their benefits. 

On the stock market, she does not see the any bubbles forming and denied the Fed’s role in boosting stock prices.  This is ironic, since stocks hang on every word from the Fed and soared on her support of the stimulus. 

Further evidence of the Fed’s role in the market can be seen in the chart below, taken from an article by Lance Roberts of STA Wealth.  It shows the movements of the stock market strongly corresponding to the money printed from the Fed.   

Her take on the market is different from her predecessor, Ben Bernanke.  He openly supported the “wealth effect” created by the Fed’s actions, where rising stock prices increased people’s wealth, therefore causing people to spend more and boost the economy. 

We viewed her testimony as highly dangerous.  It assumes the only way for the economy to recover is through stimulus programs from the Fed.  When all you have is a hammer, every problem looks like a nail. 

With five years of stimulus already, growth is hard to find.  One might logically conclude after this amount of time and the lack of results, a different approach is needed.  Unfortunately, the longer this continues, the more difficult and painful it will be to end.

As for other news this week, economic data was largely negative.  Small business optimism fell sharply, exports declined while imports increased, and national industrial production and New York area manufacturing were both negative.

Lastly, corporate earnings for the third quarter are nearly complete.  92% of companies have reported so far, with Factset finding 73% beating earnings estimates and 53% topping revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted).  Remember, though, that these estimates were dramatically lowered as earnings season approached.

Compared to a year ago, profits have grown 3.5% while revenue is 2.9% higher.  These numbers aren’t great, but are an improvement from recent quarters. 


Next Week

Next week again looks fairly quiet.  Corporate earnings will trickle in, but will have little impact on the market.  We will get a few important economic reports, including inflation at the consumer and producer level and retail sales. 


Investment Strategy

With the gain in the markets this week, stocks are appearing overly expensive for the short run.  We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back.  But caution is warranted as a pullback – or at least a pause – is increasingly likely. 

We’ve written extensively on our concerns for the longer run, which includes worries of unintended consequences from the Fed’s stimulus, mentioned above.  Other concerns include high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and an exuberance around the IPO market.  

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or the charts) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and 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. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  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. 

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 11-8-13

This week saw a bit more activity than the last as stocks again reached a new record high.  Through the Friday close, the Dow rose 0.9%, the S&P gained 0.5%, and the Nasdaq was lower by 0.1%.  Gold fell sharply on Friday to close the week with a 2.2% loss.  Oil continued to fall most the week, but a gain on Friday left it unchanged for the week.  The other major type of oil, Brent, closed the week down to $105 per barrel.

Source: Yahoo Finance

This week was a bit of an odd one.  News from Europe and economic reports here sent stocks one direction initially, yet reversed course shortly thereafter and moved strongly the opposite direction.  Then we had a new stock start trading that had never made a profit, yet was valued higher than half the companies in the S&P 500. 

We’ll start with news out of Europe.  Concerned about deflation, the European Central Bank (the European equivalent of our Fed) surprised markets on Thursday by lowering interest rates to promote more inflation.  Since more intervention by global central banks has fueled stock gains, stocks rose on the news.  The gains were short lived and stocks moved sharply lower.

European stocks have done very well lately, now at their highest level in five years.  We would be very cautious on this region, though.  The rise in their stock market is very similar to ours – central bank stimulus has pushed stocks higher.  Underlying fundamentals are still poor with growth anemic, employment abysmal, and government debt levels even higher than when the debt crisis hit.  Like our stock market, they may continue to rise as long as the central banks provide the stimulus, but this can only mask the poor fundamentals for so long. 

Back here in the states, two major economic reports were much better than expected.  Since everything is now viewed through the prism of the Fed and the effect of economic data on stimulus, positive economic reports would cause stimulus to end earlier.  SO the positive reports resulted in stocks falling initially, but later reversed course to close the week higher.  

First, GDP for the third quarter came in much better than expected at a 2.8% growth.  It was a solid number, but masked some underlying issues.  The consumer spending component was lower than expected and business investment was solidly negative.  Plus, 0.8% of the 2.8% came from inventory rebuilding, which is not necessarily an indicator of growth.  

Then we had employment figures for October coming in almost twice as high as expected.  We added a decent 204,000 jobs over the month and the two previous months were revised higher.   However, the size of the labor force fell by the third-largest amount in history to reach the lowest level since 1978. 

The government shutdown may have skewed this number though, as the one-week delay altered their data collecting.  Overall, the positive number showed that the shutdown had little impact on the economy. 

The other big story of the week was the initial stock offering of Twitter.  Despite never turning a profit and losing $134 million so far this year, the stock soared at the opening.  Somehow the company is now valued higher than half the companies in the S&P 500. 

The exuberance around these IPO’s has many worried that stocks are getting too overvalued, worried that the liquidity from the Fed has pushed investors into risky investments. 

Supporting that idea, October saw the most IPO’s come to market since 2007, before the latest market crash.  Additionally, University of Florida professor and researcher Jay Ritter noted that 61% of companies who came to market this year have lost money over the last 12 months.  This is the highest percentage since 2000, again before a market crash.  This is another red flag for investors to consider on the longer-term direction of the market. 


Next Week

Next week looks very quiet from a data standpoint.  For economic reports, we’ll get info on small business optimism, the trade balance, and industrial production.  Corporate earnings are already coming in at a slower pace and will slow further next week. 


Investment Strategy

Stocks haven’t done much lately, and while they still have a little room to move higher, the downside risk is significant.  In the short run we could continue to rise from here as long as the Fed keeps stimulating.  If the trend of positive economic reports continues, though, it could cause the market to worry a reduction in stimulus was near and force a sell-off.   

We’ve often discussed our worries for the longer-term which include:  stocks as a whole looking expensive as valuation ratios are high.  Margin levels remain at record highs.  The most amount of money since 2007 has poured into stock funds.  The excitement around the IPO situation discussed above is cause for concern.  Finally, the adverse effect of money printing from the Fed is a serious issue to consider. 

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and 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. 

Bonds have been volatile recently as yields are again rising (so prices are falling).  A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  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. 

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 11-1-13

A relatively uneventful week saw stocks end with little change.  For the week, the Dow was higher by 0.3%, the S&P gained a slight 0.1%, while the Nasdaq fell 0.5%.  Gold had a rough week, closing down 2.9%.  Oil continues its move lower, falling 3.3% to $94.61 per barrel.  The other major type of oil, Brent, closed the week just below $106 per barrel.

Source: Yahoo Finance

Stocks reached new all-time highs early in the week, only to reverse course after comments from the Fed. 

One of their periodic policy meetings was held this week to determine the level of interest rates and the amount of monthly stimulus.  No change was expected, and no change was the result.

They also noted the economy is expanding at a moderate pace, in line with their previous statements.  This line made stocks drop, though.  Apparently many investors expected a downgrade in the Fed’s economic outlook and for them to mention slowing growth.  If the economy is improving, a reduction in stimulus is possible in the near future.  And since stimulus has sent stocks higher, a reduction in stimulus would be bad for the market.  

We didn’t interpret the report that way and don’t think they will pull back on stimulus any time soon (even though we think the economy would be better off if they did).  They still see the economy as weak overall, citing a slowdown in the housing sector, employment, and inflation figures lower than they would like. 

Data released this week supported that view.  Pending home sales fell for the first time in two years as mortgage rates moved higher.  An employment report released by payroll company ADP was very weak.  Also, inflation at the producer level is the lowest since 2009 and the consumer level is running at 1.2% (1.7% core), below their 2-2.5% target.  Unless these figures move more in line with the Fed’s objectives, we won’t see any form of tapering any time soon. 

Other economic data this week was better.  Manufacturing figures showed substantial improvement and industrial production rose more than expected.  Additionally, retail sales were lower by 0.1%, but were up 0.4% when excluding auto sales. 

Finally, we’re beyond the peak for earnings reports this quarter with three-quarters of the companies in the S&P 500 reporting earnings.  According to data service firm Factset, 74% of companies have beat earnings estimates and 53% beat revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted). 

Remember, though, that these estimates were dramatically lowered as earnings season approached.  When comparing figures from a year ago, earnings have grown 3.0% over that time and revenue is 2.9% higher.  These figures aren’t great, but not as bad as they have been. 


Next Week

The amount of corporate earnings releases will continue to slow next week, but we’ll get a few important economic reports.  We’ll get a look at GDP growth over the past quarter, plus the employment numbers for October.  Other reports include the strength of the service sector, factory orders, leading economic indicators, and personal income and spending. 


Investment Strategy

Still no change here.  Stocks were due for a breather after rising steadily since early October, but as long as the Fed has the pedal down on its money printing, we’ll likely head higher in the short run. 

We have concerns for the longer run, though.  The money printing from the Fed is an obvious long term concern, but we’re also seeing other red flags like record high margin levels (borrowing money to buy stocks), extremely high optimism, and above average valuation ratios like price-to-earnings or market cap-to-GDP.  Frankly, everything is looking a bit expensive. 

We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in.  Fundamental analysis tells us how good a company is, while the technical (or chart) side gives us a good idea of when to buy.  We would avoid stocks in sectors with a strong correlation to the broader stock market and 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. 

In bonds, yields have fallen (so prices have risen).  We see yields rising (and therefore prices falling) when it looks like the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term.  A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now.  It isn’t intended to be a longer term investment.   

TIPs have showed some recent improvement, and remain an important hedge against future inflation.  Municipal bonds are in the same boat and work for the right client.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold took another turn lower, continuing the volatility this investment has seen recently.  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. 

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.