Stocks managed to eke out a fifth-straight week of gains. For the week, the Dow added 0.2%, the S&P also rose 0.2%, and the Nasdaq returned a slight 0.06%. A stronger dollar sent gold to its lowest level in two months with a 1.6% loss. It also helped send oil lower by 2.8% to $93.29 per barrel. The international Brent oil, used for much of our gas here in the east, moved down to $101.53 per barrel.
Source: Yahoo Finance (the Monday holiday skewed our graph this week)
The holiday-shortened week saw a lot of activity crammed into just four days. Economic data was mixed, central banks were again in the headlines, and a cease-fire in Ukraine gave a short-lived boost to stocks.
Starting with economic data, the most important report came on Friday with the release of August’s employment numbers. Economists were expecting job gains in the neighborhood of 225,000, only to be surprised by the worst number of the year at 142,000. The unemployment rate fell, but only because more people left the workforce.
Stocks actually rose on the news since weak economic reports – especially important ones like employment – mean stimulus programs are likely to remain in place longer than projected. Remember, stimulus is good for increasing asset prices like stocks, although they don’t seem to help the underlying economy much.
Other economic data this week was largely positive. Both our service and manufacturing sectors stand at the strongest levels in several years. Productivity moved another notch higher, plus the Fed’s Beige Book report (which compiles anecdotal reports on the strength of the economy) showed continued growth, albeit slow.
The other big news this week came out of Europe’s Central Bank (the ECB). Europe has seen many poor economic reports recently and with a central bank policy meeting this week, expectations were high that they would step up their stimulus programs to boost growth.
And the ECB did not disappoint. In an attempt to spur borrowing, they lowered borrowing rates, plus they increased the penalty for commercial banks that kept cash parked at the central bank.
They will also begin a bond buying program, where they buy asset-backed bonds (creating money out of thin air to do so). These are bonds that are backed with commercial and individual loans. They will not be buying bonds of individual governments, since this is against the law for them. Worth noting, asset-backed bonds were a primary cause of our credit crisis, so this is not without risk.
With lending rates already at historic lows, we’re not sure how much this will help spur borrowing and the broader economy. Adding more debt after a debt crisis makes little sense to us, anyway. It did help the European stocks, though, as they soared on the news. Like we mentioned above, these stimulus programs do help send stocks higher, but have shown to do little to help the economy.
In the opening section we mentioned a stronger dollar resulting in lower prices for oil. The dollar strengthened this week because the Euro fell to 14 month lows on the news of more stimulus. Countries are eager to weaken their currency since it makes their exports look more attractive.
Aside from exports, however, we see a weaker currency as a negative. It increases costs to the people of that country. Oil prices fell here on the stronger dollar, which is obviously a positive. When a currency is strengthened, it takes less of them to purchase a commodity, and vice versa. To us, it makes sense to have a stronger currency which lowers costs and lets a person’s paycheck go further.
Japan provides a great example since they dramatically weakened their currency in recent months. It has resulted in a severe rise in costs for the Japanese people. We don’t see that as a positive, although central bankers do.
In the end, we don’t believe these new stimulus programs will help the European countries, just like it hasn’t helped any other country who has implemented it. Structural changes are needed since they have high taxes, oppressive regulations, stifling labor policies, and high costs. Until these reforms are made, debt will continue to increase as economic growth stagnates.
Next Week
Next week will be very quiet for economic data, with the only notable report coming on Friday with August’s retail sales info. The lack of data will keep investors focusing on events around the globe, whether it is European and China economic data or the Russia/Ukraine conflict.
Investment Strategy
Again, no change here. We aren’t actively buying or selling the broader market at this time. Everything looks expensive and bargains are harder to find, even in individual names that we would hold for a shorter time period.
One indicator we’ve mentioned often lately is the direction of high-yield bonds to the broader stock market. Represented by the black line, high-yield bonds have moved before the S&P 500 (the orange line), acting as a good leading indicator. These bonds took a turn lower this week, so this is something to keep an eye on for our stock holdings.
Starting with economic data, the most important report came on Friday with the release of August’s employment numbers. Economists were expecting job gains in the neighborhood of 225,000, only to be surprised by the worst number of the year at 142,000. The unemployment rate fell, but only because more people left the workforce.
Stocks actually rose on the news since weak economic reports – especially important ones like employment – mean stimulus programs are likely to remain in place longer than projected. Remember, stimulus is good for increasing asset prices like stocks, although they don’t seem to help the underlying economy much.
Other economic data this week was largely positive. Both our service and manufacturing sectors stand at the strongest levels in several years. Productivity moved another notch higher, plus the Fed’s Beige Book report (which compiles anecdotal reports on the strength of the economy) showed continued growth, albeit slow.
The other big news this week came out of Europe’s Central Bank (the ECB). Europe has seen many poor economic reports recently and with a central bank policy meeting this week, expectations were high that they would step up their stimulus programs to boost growth.
And the ECB did not disappoint. In an attempt to spur borrowing, they lowered borrowing rates, plus they increased the penalty for commercial banks that kept cash parked at the central bank.
They will also begin a bond buying program, where they buy asset-backed bonds (creating money out of thin air to do so). These are bonds that are backed with commercial and individual loans. They will not be buying bonds of individual governments, since this is against the law for them. Worth noting, asset-backed bonds were a primary cause of our credit crisis, so this is not without risk.
With lending rates already at historic lows, we’re not sure how much this will help spur borrowing and the broader economy. Adding more debt after a debt crisis makes little sense to us, anyway. It did help the European stocks, though, as they soared on the news. Like we mentioned above, these stimulus programs do help send stocks higher, but have shown to do little to help the economy.
In the opening section we mentioned a stronger dollar resulting in lower prices for oil. The dollar strengthened this week because the Euro fell to 14 month lows on the news of more stimulus. Countries are eager to weaken their currency since it makes their exports look more attractive.
Aside from exports, however, we see a weaker currency as a negative. It increases costs to the people of that country. Oil prices fell here on the stronger dollar, which is obviously a positive. When a currency is strengthened, it takes less of them to purchase a commodity, and vice versa. To us, it makes sense to have a stronger currency which lowers costs and lets a person’s paycheck go further.
Japan provides a great example since they dramatically weakened their currency in recent months. It has resulted in a severe rise in costs for the Japanese people. We don’t see that as a positive, although central bankers do.
In the end, we don’t believe these new stimulus programs will help the European countries, just like it hasn’t helped any other country who has implemented it. Structural changes are needed since they have high taxes, oppressive regulations, stifling labor policies, and high costs. Until these reforms are made, debt will continue to increase as economic growth stagnates.
Next Week
Next week will be very quiet for economic data, with the only notable report coming on Friday with August’s retail sales info. The lack of data will keep investors focusing on events around the globe, whether it is European and China economic data or the Russia/Ukraine conflict.
Investment Strategy
Again, no change here. We aren’t actively buying or selling the broader market at this time. Everything looks expensive and bargains are harder to find, even in individual names that we would hold for a shorter time period.
One indicator we’ve mentioned often lately is the direction of high-yield bonds to the broader stock market. Represented by the black line, high-yield bonds have moved before the S&P 500 (the orange line), acting as a good leading indicator. These bonds took a turn lower this week, so this is something to keep an eye on for our stock holdings.
Despite everything looking expensive, we aren’t actively selling at this time. We are cautious, though, as we worry about a correction in the near-term as trading picks up this fall. Looking further out, we worry about significant overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
We have heard more talk about this new European stimulus marking the end of the bond market rally. Bonds did fall sharply this week (so yields rose), so there may be something to this argument. A position to profit in this scenario (a short position, where your profit increases if prices fall) will profit in that scenario. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge for the long run.
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.
We have heard more talk about this new European stimulus marking the end of the bond market rally. Bonds did fall sharply this week (so yields rose), so there may be something to this argument. A position to profit in this scenario (a short position, where your profit increases if prices fall) will profit in that scenario. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge for the long run.
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.
