Commentary for the week ending 12-20-13

Please note: Due to the Christmas and New Year’s holidays over the next two weeks, this will be our last commentary for the year.  We wish you all a Merry Christmas and Happy New Year. 

The market again reached new all-time highs, even on an inflation-adjusted basis, on news from the Fed.  For the week, the Dow gained a solid 3.0%, the S&P rose 2.4%, and the Nasdaq returned 2.6%.  Gold fell sharply, down 2.5% to reach its lowest level in over three years.  Oil rose strongly, climbing 2.5% to $99.32 per barrel.  The other major type of oil, Brent, rose steadily as well, closing at $111.84 per barrel. 

Source: Yahoo Finance

All eyes were on the Fed this week as they made an announcement on the direction of their stimulus program.  Roughly half of economists surveyed, including us, expected no change in the direction of the stimulus program.  However, we were all surprised when the Fed did announce a slight reduction in stimulus. 

The reduction comes from the bond buying portion of the stimulus.  Prior to the announcement, the Fed was printing $85 billion a month to buy mortgage and government bonds, which kept borrowing rates low for these items.  They reduced that amount of monthly bond buying by $10 billion, and may continue cutting the amount further in the coming months. 

While this is a reduction in stimulus, there is another type of stimulus the Fed engages in that was extended.  They announced interest rates will be kept at these historic lows for even longer than expected. 

An analogy has been floating around the investment community that is an easy way to summarize the announcement.  Think of the stimulus as a car.  The Fed has used two gas pedals to keep the stimulus going.  One pedal, the bond buying portion, saw the Fed let off the gas slightly.  The other pedal, the low interest rates, was pushed down even harder.  This shows that the announcement by the Fed can be seen a net increase in stimulus for the markets. 

This is why we think stocks rose as sharply as they did.  These low rates allow companies to continue to issue bonds and buy back stock, which boosts stock prices.  It also allows the multiple expansion to continue, which without getting too technical, low rates make future earnings worth more and drives up stock prices.  Unfortunately, it also contributes to speculative bubbles that tend to end badly. 

This continuation of stimulus only adds to the optimistic view of the markets.  A recent sentiment survey by Investors Intelligence, which surveys 100 investment advisors, shows optimism at the highest level since 1987.  This is a very dangerous development and shows investors are overly optimistic. 

With this being our last newsletter of the year, we’ll conclude with a link to a video (we aren’t tech-savvy enough to post the actual video here).  It is from the old Louis Rukeyser program, filmed at the end of 1999, but sounds every bit like it could have been filmed today.  The market in the ‘90s saw a solid boom, with 1999 seeing markets up over 20%.  Just like what we hear today, every panelist on the program expected the trend to continue and saw no dangers on the horizon.

Two weeks after this was filmed, markets topped and moved lower until 2002.  It wasn’t until 2006 that markets again reached that same level seen in 1999.  When nearly everyone is convinced on the direction of the market, it should be time to worry. 


Next Week

With Christmas shortening next week, it looks to be fairly quiet.  We’ll get a few economic reports early in the week, including personal income and spending, durable goods, and new home sales.  Aside from that, there should be little to report. 


Investment Strategy

No change here.  The wind is currently at the back of the market, so stocks may continue moving higher in the short run.  We wouldn’t add to any broader market positions and may trim back if stocks move much higher from here.  As we’ve discussed extensively before, we have concerns for the longer term. 

Right now we prefer finding 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, 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 continues to look weak, 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.  This is a longer-term play, 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 12-13-13

Stocks notched their second straight weekly decline.  For the week, the Dow and S&P both fell 1.7% and the Nasdaq was lower by 1.5%.  Gold was very active again, closing with a gain of 0.4%.  A late-week drop sent oil lower on the week, losing 1.1% to $96.60 per barrel.  The other major type of oil, Brent, which is used for much of our gas here in the East, declined steadily all week to close at $108.30 per barrel. 

Source: Yahoo Finance

In terms of news and data, this week was very quiet.  All eyes were on the Fed meeting next week, with investors using this period to adjust their portfolios in preparation for the outcome of that meeting. 

The sell-off this week showed more investors are expecting a reduction in stimulus from the Fed.  In fact, stock mutual funds saw their biggest outflow all year according to Lipper.  This makes sense after the year we’ve had in the markets.  Satisfied with returns so far this year, investors can lock in their gains now and not have to worry about the results from the Fed meeting. 

A couple items this week supported the idea that a taper could come soon.  Several Fed officials made speeches that favored an immediate reduction in stimulus.  This did not seem newsworthy to us, though, since they are the same officials who supported an immediate reduction at the September meeting. 

The budget agreement reached between Republican and Democrats also increased the odds of a reduction in stimulus.  One of the reasons the Fed did not pull back on stimulus in September was concerns over the debt ceiling fight.  The left and the right coming together showed some stability in Washington (although this was fairly easy, since the House bill does very little), removing that concern for the Fed. 

Regardless of this new info, we still don’t see a reduction in stimulus occurring.  There are two major data points the Fed looks at to make this decision.  One is employment, which saw a solid report last week.  However, this was only slightly better than the three-year average, so it was hardly remarkable.  Then this week, weekly jobless claims worsened sharply.  This shows the employment situation is volatile, so the Fed may wait to see more improvement first. 

Inflation is the other factor the Fed is looking at.  They would like to see inflation running north of two percent a year, but figures watched by the Fed show it running roughly half that level.   

Sadly, the market has become a giant guessing game on the actions of the Fed.  We would love to see them exit these programs completely, especially since they seem to do more harm than good.  However, we just don’t see it happening any time soon and markets may continue to move higher in the meantime. 


Next Week

Next week will be very important.  As mentioned above, all eyes will be on the Fed meeting and announcement on the stimulus program.  We believe there will be no reduction in the stimulus program and the market is likely to rise in that event.  If a reduction is announced, we expect the market to sell-off, and the strength of the sell-off will depend on the size of reduction in stimulus. 

Aside from the Fed, there will also be several economic reports worth watching.  There will be a report on inflation at the consumer level, industrial production, housing info, and a revision to GDP. 


Investment Strategy

Stocks have been due for a pullback, so this decline has not been too surprising.  They’d have to fall quite a bit more before we would add new funds.  Much of the direction of the market will depend on the Fed, though, and next week will be very important for this reason. 

We expect the Fed to hold off any reduction in stimulus, so the market is likely to rise in that case.  This is only a short-term view, looking out a couple weeks or months.  We have serious concerns about the longer run, especially when the Fed begins to pull back on its stimulus programs. 

Like before, we wouldn’t add any new money to the broader 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, 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 continues to look weak, 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.  This is a longer-term play, 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 12-6-13

Stocks turned in their first weekly decline since early October.  Through the close Friday, the Dow was lower by 0.4%, the S&P fell a miniscule 0.04%, while the Nasdaq eked out a gain of 0.06%.  Bond yields hit their highest level since September, so their prices have fallen.  Gold saw a lot of activity, only to close with a loss of 1.6%.  Oil rose fairly sharply, climbing 5.3% to $97.65 per barrel.  The other major type of oil, Brent, saw far less movement to close at $111.25 per barrel. 

Source: Yahoo Finance

Economic data played a large part in the movement of the market this week.  However, the reaction in stocks was the opposite of what you might think.  Positive reports sent stocks lower and negative or mediocre reports sent stocks higher. 

Unfortunately this requires talking about the Fed again.  Economic reports are being scrutinized for their impact on the Fed’s stimulus program.  Positive economic reports mean less need for stimulus, so they increase the chances that the Fed will pull back on these programs.  Since the money printed by the Fed has fueled the rise in stocks, positive reports send stocks lower. 

As can be seen in the chart above, positive reports were the story for the majority of the week.  Touching on some of these reports, the manufacturing sector showed a solid gain over the last month.  The service sector expanded, as well, though not as much as many hoped. 

Also, the Fed’s Beige Book, which surveys economic conditions over the Fed districts showed continued “modest to moderate” growth (worth noting, businesses are still concerned about costs from the new healthcare law).  Third quarter GDP was revised higher to a solid 3.6% growth, though it should be noted the bulk of the gains came from businesses increasing inventories, not necessarily from rising sales. 

Employment saw several important reports this week, too.  Reports released early in the week showed a fairly solid improvement in the employment situation. 

This brings us to Friday.  Stocks rose sharply when the important government employment report showed a solid increase of 203,000 jobs in November.  Additionally, the unemployment rate fell from 7.3% to 7.0%, its lowest level in five years, although this was more due to the nuances in how the rate is calculated (the number of employed improved, but the labor force increased by a larger amount).  When comparing the amount of people working to the total population of the country, this metric has not seen the same improvement, holding flat since late 2009 (LINK).

With positive reports sending stocks lower all week, why did this seemingly good report send stocks higher?  While it may have been good, it looks like it wasn’t good enough to trigger an immediate reduction in stimulus at the Fed’s next meeting in two weeks.  At least, that’s the best explanation we’ve seen for the reaction in the market. 

Finally, retail sales were another important story this week.  It appears that spending over the Thanksgiving shopping period was lower than a year ago.  Actually, there were more people out shopping and bought more items, but they spent less overall.  This is not a good indicator for the economy.  It means people are worried about their financial situation, where they seek out sales to afford their gifts. 


Next Week

Next week looks to be pretty quiet for economic data.  We’ll get information on retail sales, import prices, and inflation at the producer level.  All eyes will be on the Fed, though, as they hold another meeting the following week.  Investors are watching closely for clues on a tapering in the stimulus program, so be prepared for another week focused on the Fed. 


Investment Strategy

Stocks came off their highs and look a little less expensive here in the shorter run.  Many investors are worried that the Fed will announce a reduction in their stimulus program at their December 18th meeting, which has pressured stocks lower.  We think that is still highly unlikely and stocks have the potential to rise strongly if that is the case.  Regardless, we wouldn’t put new money into the broader market at this time as stocks are still on the expensive side. 

We still have worries for the longer run.   This includes concerns over the unintended consequences from the Fed creating massive amounts of money out of thin air, slowing earnings growth, still-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.  

While we wouldn’t add any new money to stock market indexes at this point, we prefer finding 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, 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 continues to look weak, 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.