Comentary for the week ending 4-25-14

An uneventful week saw stocks close with little change.  While markets were up over 1% at one point, by Friday the Dow closed lower by 0.3%, the S&P dropped a slight 0.1%, and the Nasdaq lost 0.5%.  Gold gained some ground on geopolitical troubles in Ukraine, rising 0.6%.  Oil prices took a turn lower, losing 2.7% to just over $100 per barrel.  The international Brent oil, used for much of our gas here in the east, closed at $109.39. 

Source: Yahoo Finance

We saw a fairly quiet week on Wall Street this week, where the focus was more on fundamentals like corporate earnings than external factors we typically see, like the Fed. 

We’ll start with earnings, since this was this busiest week for corporations to release their results for the first quarter.  As we can see from the reaction in the market, the results were rather lackluster. 

Nearly half of the companies in the S&P 500 have released their earnings so far and the good news is earnings have beaten estimates.  The market was looking for a 1.4% drop in earnings coming into earnings season, but the results currently stand at a 0.2% gain according to Factset. 

These estimates beats happen every quarter – the bar is set low and then the actual results are celebrated when companies beat the low estimate.  This masks the fact that earnings have grown very little over the past quarter.  Growth in revenue (what a company actually earned in sales.  Earnings are what is left after subtracting costs) is actually negative, so it shows earnings are not improving due to better sales, but the cutting of costs.   

Economic data released this week was fairly light, but leaned to the negative side.  Several housing reports came in much lower than expected as sales slow and mortgage applications declined to their lowest level in 14 years.  Poor weather cannot be cited as the culprit, since sales rose in the Northeast but declined in all other regions.  We also saw a sharp rise in weekly unemployment claims. 

On the positive side, durable goods (which are longer-lasting items like a car or refrigerator) showed a nice increase, though much was due to an increase in airplane orders.  Manufacturing in the mid-Atlantic region showed an increase and consumer sentiment ticked higher. 

Switching gears, this week saw a troubling increase in military activity in the Ukraine-Russia fight.  The market has largely ignored the tensions in the region till now, and it is uncertain if it will have any impact on the market going forward.  However, military activity usually has a negative impact on markets, especially when involving countries with significant energy resources.  This is a very serious situation and is something to watch closely. 

And finally, one last item that makes us a little cautious.  This week saw the largest junk bond issuance in history – by far.  Junk bonds are issued by companies or countries with less-than-stellar financial health and have a higher risk of default. 

A French cable company called Numericable Group issued the bonds, which were met with strong demand.  This tells us investors are moving further and further into riskier investments and we worry they may be taking on too much risk.  This adds to our caution. 


Next Week

Next week looks to be another busy one.  About a quarter of the S&P 500 companies will release their earnings, but there will also be several important economic reports.  We’ll get our first look at GDP from the first quarter, plus employment figures for April (hard to believe we are almost to May!).  There will also be data on personal income and spending and consumer confidence. 

The Fed will also be in the headlines as they hold another of their periodic meetings.  They are expected to announce another cut in their bond buying (money printing) stimulus program, but any changes will have an impact on the market. 


Investment Strategy

We are not looking to make any changes in our investment strategy at this time.  Markets have bounced around these levels for some time now, but aren’t at buying or selling levels.  While we wouldn’t add or subtract money to the broader indexes, there are some individual names that may warrant buying or selling, especially for those with a shorter-term view. 

Bonds continue to do well as prices are climbing and yields falling.  This still remains a volatile play in the short run, though.  In the longer run, there are concerns of an increase in interest rates so a short position (bet on yields rising and prices falling) acts as a good hedge in that case.   Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted. 

Continuing with bonds, we think TIPs remain an important hedge against future inflation while municipal bonds 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 is another hedge for the portfolio, but it remains volatile.

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 see weakness around the globe and favor neither the developed or emerging markets. 

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 4-11-14

Please note: Due to the Easter holiday next weekend, there will be no market commentary.  Thank you.

A very rough and volatile week saw stocks go into negative territory for the year.  On the week, the Dow lost 2.4%, the S&P fell 2.7%, and the Nasdaq saw its worst day in 2 ½ years en route to a 3.1% loss.  Gold showed some life to rise 1.2%.  As if gas prices weren’t high enough, oil climbed 2.6% to $103.74 per barrel.  The international Brent oil rose to $107.15. 

Source: Yahoo Finance

The decline in stocks that began late last week spilled over into this week with the high-flying names that were hit hard continuing to lose ground.  After the rise we’ve seen in the markets until recently, a decline is expected at some point.  We’ll have to wait and see if this is a temporary setback or the start of a bigger decline we’ve worried about. 

Like before, there is no real reason behind this sell-off.  There have been worries about high valuations in stocks, the Fed removing its stimulus, and negative corporate earnings estimates, but these concerns have been with us a while.  Even though there isn’t one thing we can point to for the decline, sometimes this is how these reversals happen. 

While the week ended strongly in the red, at one point the market showed some life, as can be seen in the chart above.  The Fed released the minutes of its latest meeting; the one where investors interpreted the Fed would pull back on its stimulus and low interest rates earlier than expected. 

The minutes showed the Fed was worried about this very problem, but emphasized they were committed to holding rates low for a very long time (even though we believe it would be better for markets if they would exit immediately).  They also cited concerns with low inflation (according to their metrics), which added to the belief rates would be held low for longer.  The stock market likes low interest rates and soared on the news, showing us the Fed is still an important, if not most important, factor in stocks moving higher. 

A Greek bond offering this week is an item probably regarded as unimportant to our readers, but is something we feel is worth noting.   The country issued new bonds to help finance their country and was met with surprisingly strong demand.  This indicates very little fear of default, a stunning contrast to a couple years ago. 

The actions of the central banks around the world have pushed investors into riskier and riskier investments to find income, like these bonds.  We feel this is becoming a very dangerous game, since the fundaments are very poor.  These European countries have more debt now than before the debt crisis a few years ago, but the levels their debt trades at implies little concern.  Strong demand for new Puerto Rican bonds shows it’s not just a European problem, either.  We worry about another debt crisis down the road, but this time the consequences will be far more severe. 

Since it is Masters week, we’ll conclude with a little-known tidbit about the tournament.  It turns out the original architect of Augusta National proposed a 19th hole in his plans.  This would be a very short hole which golfers could play as a “double or nothing” hole, where they could try to recoup their betting losses from the round.  This interesting proposal never got off the ground, but could you imagine the course with a 19th hole today?  Link to the original story. 


Next Week

We’ll get a lot of info crammed into the holiday-shortened week, so it could be another volatile one.  About 50 of the S&P 500 stocks will release their earnings and with expectations set so low for these, it could make it easier for companies to beat. 

There will also be several economic reports to watch for, including retail sales, inflation at the consumer level, industrial production, the Fed’s Beige Book (which gives anecdotal accounts on the strength of the economy), and economic data for the Philadelphia region. 

Finally, several regional Fed presidents will be making speeches, which we believe they will try to reassure markets stimulus will not end any time soon. 


Investment Strategy

It’s too early to tell if this is the start of a larger decline we’ve worried about, or just a temporary blip.  We’ve been fairly cautious with our outlook recently, but still think the actions of these central banks have the potential to boost stock prices in the short run.  If this is the time they can’t, we fear a much larger move lower in stocks is possible. 

The other thing we think can boost stocks would be corporate earnings.  Since estimates show a flat to negative earnings quarter, even the slightest beat could help stocks higher. 

While stocks have moved lower, we think it is still too early to put new money into the broader indexes.  As usual, we prefer undervalued individual names, though this can be dicey around earnings time.  There is nothing wrong with leaving some money in cash for the time being. 

Bonds have done well as investor’s exited stocks and sought safer plays for their money.  This still remains a volatile play in the short run, though.  In the longer run, there are concerns for an increase in rates and a short position (bet on yields rising and prices falling) acts as a good hedge for that event.   Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted. 

Continuing with bonds, we think TIPs remain an important hedge against future inflation while municipal bonds 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 is another hedge for the portfolio, but it continues to be volatile.

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 see weakness around the globe and favor neither the developed or emerging markets. 

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 4-4-14

A late-Friday sell-off put a damper on an otherwise nice week for stocks.  For the week, the Dow rose 0.6%, the S&P was higher by 0.4%, and the Nasdaq sold off late in the week for a 0.7% loss.  Gold rose on the potential for more money printing in Europe, but sold off later to close relatively flat.  Oil prices bounced around, but closed up slightly to $101.14 per barrel.  The international Brent oil moved lower to $106.57. 

Source: Yahoo Finance

The week was a relatively uneventful one.  We did receive several economic reports, but comments from the Fed to start the week sent stocks higher and they kept drifting higher from there until late Friday.   

On Monday morning, the new Fed chief Janet Yellen kicked off the week with a speech aimed at reassuring the market that stimulus will be around for a “long time.”  She focused primarily on unemployment, discussing how they can do more to increase jobs. 

Her speech was different from any other Fed president in that she highlighted the plight of three people struggling to find employment and discussed how the Fed’s actions will help them get back to work. 

We have serious concerns with this approach.  She postures the Fed’s policy as the sole driver in putting people to work, ignoring structural issues like poor government policies that hurt employment.  One woman highlighted had worked in the medical insurance field before losing her job.  Could the new healthcare law have affected her position?  The Fed seems to ignore such factors. 

Also not mentioned, two of the three individuals highlighted had prior felony convictions, one a heroin conviction just a year ago.  Perhaps this hindered their job search?  This seems to be quite an omission.

Janet Yellen sounded more like a politician than a central banker.  The proper role of the central bank is not to set public policy; it is to maintain steady prices and a functioning banking system.  It is up to elected officials to set the fiscal policy to improve the employment situation. 

It seemed a little funny to us, too, since the Fed has engaged in these stimulus policies for over five years.  Yellen is admitting a poor employment scenario, so how will even more of the same lead to success?  It is clear a different policy is needed.

Getting back to the events of the week, several economic reports released this week showed improvement.  Manufacturing and the service sectors showed gains, plus factory orders increased.  However, exports fell strongly last month, leading to the largest trade deficit since September. 

The big economic report came on Friday with the release of the March jobs number.  The last several months saw very poor numbers which many attributed to the cold winter weather, therefore expecting a rebound in this month’s number as temperatures warmed up.  Economists were estimating 200,000 jobs added in March, but whisper numbers reached as high as 300,000.  The actual number came in at 192,000, on the low end of expectations, but an improvement from the last several months. 

Lastly, some cracks are emerging in the market as the high-flying momentum stocks have been quietly, but strongly, moving lower.  These are the stocks that have plowed higher, good news or bad.  They were behind the strong sell-off late Friday. 

There has been no real reason why they’ve sold off like they have; sometimes this is the way the market behaves.  We can’t say it’s because they looked too expensive, because they’ve looked expensive for many months but continued to move higher.  It will be something to watch closely to see if it starts dragging the broader market lower. 

The chart below shows how some of these high-flying names have behaved recently.  The top blue line represents the S&P 500, while the remainder are popular momentum stock names.  The company names should be easy to determine from their ticker symbols.  Link. 

Next Week

It starts to get busy next week as we get data from the first quarter.  We’ll get a handful of earnings and estimates are very, very low, so this will be something to watch.  Additionally, we’ll get more info on employment with the JOLTs figures (although these lag by a month), trade, import prices, and inflation at the producer level. 

We’ll also get minutes from the latest Fed meeting and several regional Fed presidents will be making speeches.  All-in-all, there will be plenty of info to move the market next week. 


Investment Strategy

We continue to worry about the longer-term for the market, and while we think stocks are getting expensive for the short-term, they may have some room to run higher, especially as the Fed continues to prop up the market with stimulus.  For new money into the market, undervalued individual stocks look more appealing than the broader index. 

There are a variety of factors for our cautious outlook, whether it is record high margin levels (where investors borrow money to buy stock, and high levels indicate a correction is likely), record corporate insider selling, or a record amount of unprofitable IPO’s coming to market, plus global concerns like a slowdown in China.  The recent sell-off in the high-flyers also adds to our caution. These low interest rates continue to make stocks look good, but any hint of a rise can send them sharply the other direction. 

On bonds, bond yields hit their highest level in a month this week (so prices hit their lowest level), making a short position (bet on prices falling) look good.  Still, they have been in this range for some time now and trying to figure out where they’ll go from here is a guessing game, at best.  The short provides a nice hedge, but isn’t intended to be a long-term investment.  Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted. 

Continuing with bonds, we think TIPs remain an important hedge against future inflation while municipal bonds 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 is another hedge for the portfolio, but it continues to be volatile.

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 see weakness around the globe and favor neither the developed or emerging markets. 

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.