Commentary for the week ending 10-24-14

Stocks continued their climb higher, turning in their best week in over a year.  Through the close Friday, the Dow gained 2.6%, the S&P rose 4.1%, and the Nasdaq popped higher by 5.3%.  Gold lost ground with a 0.6% decline.  Oil continued to move lower, hitting the lowest level in 27 months with a 1.3% loss.  The international Brent oil, used for much of our gas here in the East, closed a few cents higher at $86.25 per barrel.

Source: Google Finance (our regular chart was not cooperating this week)

The fear we saw in the markets just a week ago largely subsided this week as stocks continued to rebound nicely.  The mood has improved and the market paid attention to fundamentals like corporate earnings.  Global economic growth and central bank stimulus continues to be a factor, but did not play as prominently in the direction of the market this week.

Corporate earnings have been largely ignored during the sharp declines over the last few weeks.  This week, however, investors paid far more attention.

Earnings have been relatively decent, growing 5.6% (per Factset) with nearly half of the companies in the S&P 500 reporting.  This is above economists’ expectations from the beginning of earnings season, though it is nearly half as good as estimates from just a few months ago. 

Revenue (what a company actually received in sales) continues to be modest with a gain of 3.7%.  A large number of companies are reporting no growth in revenue, or at least below the level of inflation.  While earnings look decent, unfortunately it is not from higher sales but more financial engineering. 

A major reason for the recent market sell-off has been the reduction in stimulus from our central bank.   As we pull back, though, Europe is stepping forward.  This has taken a lot of fear out of the market and contributed to the gains this week.

The European Central Bank (ECB) began printing money to buy asset-backed bonds (which are backed by loans, like mortgages) this week.  The market was helped even more by their announcement that they were considering printing money to buy corporate bonds.  This is a step even further into unchartered territory as central banks are pulling out all the stops to send markets higher.  It is likely to boost markets in the near term, but we believe this is a very dangerous path to follow. 

There continues to be pressure on the ECB to buy bonds of individual countries, which so far they have resisted doing.  It is creating conflicts that we feel can have substantial consequences.  Germany, the strongest economy in the Euro zone, does not want to see their tax dollars going to support more irresponsible economies like France or Italy when they refuse to make reforms.  This rift has the potential to break up the Euro, which as we saw in 2011, even talks about breaking up the Euro will send stocks sharply lower.   

Another global growth worry to keep an eye on came from China, who reported their third quarter saw the weakest economic growth in five years.  This comes as their housing sector continues to cool.  It has not had much effect on our market yet, but has the potential to move stocks lower if the trend continues. 

Finally, stocks moved lower only one day this week, which was a day we were reminded that radical Islam has the ability to hit us on our own shores.  The terrorist attack in Canada immediately sent stocks lower and was a wake-up call that serious threats are lurking around the globe. 


Next Week

Next week will be a very, very busy one.  There will be a load of companies releasing their earnings and the calendar is full of economic data.  We’ll get info on durable goods, consumer confidence, 3rd quarter GDP, personal income and spending, and employment costs.

The Fed will also be in the news as they hold another periodic policy meeting.  They are expected an end to their money printing, bond buying stimulus program.  There are hopes it may be extended, so a firm exit may be a disappointment.  Investors will also be watching for clues on when interest rates may be raised. 

All in all, there will be a lot of info to move the market. 


Investment Strategy

Stocks continue to rebound from their lows of last week and possibly have room to run higher in the near term.  We would not add new money to the market at this point, though.  Momentum has shifted strongly, so the big gains have likely already been made in this rebound. 

Our longer term view remains unchanged.  We continue to have worries for the market in the longer run, especially as the stimulus programs wear off, or possibly when investors realize these programs have done little to help the economy as economic growth slows.  Stimulus continues to propel stocks higher, but the longer it continues, the more painful the correction will be. 

We’ve updated one of our leading indicator charts below.  High yield bonds (the black line) continue to precede the movement in the broader stock market (the orange line).  At this time, they do not appear to be signaling any fear.  Keep in mind that no indicator is perfect.  As we continue to see, big moves in the market have come on the words of central bankers, which are inherently unpredictable.  

As for the bond market, bond prices fell this week (so yields rose) as stocks rose.  Many investors see bonds as overpriced have looked for them to fall in value.  A short position would be the trade for this scenario (where your profit increases when prices fall), though it has done poorly recently as bond prices continued to climb.  A short position may make for a nice hedge, but this should be a longer-term trade as the potential for profit seems low at this time.  Floating rate bonds are another trade to consider in this scenario, but they tend to be riskier, so caution is warranted. 

European bonds, especially for the profligate countries, look extremely expensive at the moment and also look like fantastic short opportunities.  This trade has done well recently as some of the riskier countries saw the bonds fall in value (so yields rose). 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  They have not done well recently, but are intended to be a longer term investment.  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.  It hasn’t fared well lately, but remains 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.

Commentary for the week ending 10-17-14

The markets moved lower early in the week, only to reverse course and close with modest losses.  For the week, the Dow and S&P both lost 1.0% while the Nasdaq declined 0.4%.  The benchmark government bond index at one point hit its highest level in 16 months (so yields hit the lowest level in that time period).  Gold did well on the weakness in stocks, rising 1.4%.  Oil sold off strongly again, hitting its lowest level in over two years to close the week down 3.6% at $82.75 per barrel.  The international Brent oil, used in much of our gas here in the East, hit its lowest price in four years to close at $86.10 per barrel.

Source: Yahoo Finance

With stocks dropping sharply in recent weeks, investors were extremely nervous when the market continued to fall in the early part of this week.  The decline put stocks into negative territory or flat for the year, depending on the index.  However, it looks like they may have turned the corner – at least in the near term – as they found their footing and closed out the week on a positive note. 

The question is, what has been behind the large drops and the subsequent gains?  There wasn’t any news out of the ordinary, with economic data mixed and unremarkable this week.  No, we think the reason is clear.  As usual, it’s all about the central banks. 

The Fed is in the process of ending a part of its stimulus policy where they printed money to buy bonds, pushing down yields to stimulate borrowing.  This program has been implemented several times before and stocks rose each time.  As each one ended, though, stocks sold off.  The chart below illustrates this phenomenon (the chart may be difficult to read clearly, but this was the most updated chart we could find.  The downturns in the market coincide with periods when the Fed is not printing money). 

We believe the recent sell-off is largely due to this reason, similar to every other time the Fed ended this bond buying program. 

To support this view, the negative mood changed this week when a regional Fed president suggested the Fed not end its bond buying (money printing) program this month.  The comment told investors that the Fed was committed to helping markets higher, giving stocks the support they needed.  It shows just how addicted the market is to stimulus. 

It also shows that a higher stock market is another goal of policymakers.  They want stocks higher so people feel wealthier and spend more.  We caution that it is an extremely dangerous undertaking when markets are used as a tool for social policy.  It always ends badly. 

Weakness in Europe was another issue weighing on markets.  An inflation metric followed by European central bankers (yes, again with central bankers) hit the lowest level in a decade. 

To central bankers, inflation is necessary for economic growth.  The lack of inflation was blamed on lower gas prices, which were described as “dangerous.”  Imagine, low gas prices are dangerous?  This flies in the face of common sense, but is what central bankers believe (and it explains why central bankers have failed to bring about growth despite record-breaking amounts of stimulus). 

The weakness in Europe has increased the call for governments to do more spending to stimulate the economy.  This in itself is creating problems. 

Remember with the Euro, the individual countries must come together to find one common solution.  The countries favoring more stimulus are the least solvent, while the strong countries like Germany are firmly against it.  Like we saw with the European debt crisis in 2011, these rifts have the potential to tear the Euro apart, which is also frightening the markets. 

Finally, corporate earnings came in at a steady pace this week.  You wouldn’t know it, though, since the market paid little attention to them in their wild swings.  Earnings are coming in line with expectations and their projections for next quarter seem decent. 


Next Week

Data wise, next week appears to be another uneventful one.  We’ll get info on housing and inflation at the consumer level.  Additionally, corporate earnings releases will come in at a steady pace.  As we saw with an uneventful week for data this week, the market can still be a volatile one. 


Investment Strategy

Comments from the Fed supported the market this week, but it shows how addicted the market is to stimulus.  Investors see that the Fed is there to boost stocks higher, which gives investors confidence to buy more stocks.  But as we saw over the last several weeks, eventually the stimulus must end and stocks will fall. 

Our view is in the short run, stocks may continue to move higher.  We did some buying this week because of that. 

The addiction to stimulus has us worried in the longer term – though we are increasingly worried that it could be nearer than many expect.  Stocks and bonds appear overvalued on that longer-term perspective, especially as stimulus disappears.  Europe is another 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. 

As for the bond market, bond prices rose again this week (so yields fell) as stocks sold off.  Many investors see bonds as overpriced are looking for them to fall in value.  A short position would be the trade to make (where your profit increases when prices fall), though it has done poorly recently as bond prices continue to climb.  A short position may make for a nice hedge, but this should be a longer-term trade as the potential for profit seems low at this time.  Floating rate bonds are another trade to consider in this scenario, 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.  This trade has done well recently as some of the riskier countries saw the bonds fall in value (so yields rose). 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  They have not done well recently, but are intended to be a longer term investment.  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.  It hasn’t fared well lately, but remains 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.

Commentary for the week ending 10-10-14

This was the third straight week of declines for the market and it was a very volatile week, at that.  For the week, the Dow dropped 2.7%, the S&P fell 3.1%, and the Nasdaq plunged 4.5%.  Gold ended its losing streak, actually moving higher by 2.4%.  Oil remains a big story as it hit the lowest level in over two years, declining 4.4% to $85.82 per barrel.  The international Brent, used in much of our gas here in the East, hit its lowest price in almost three years to close at $90.27 per barrel.

Source: Yahoo Finance

Volatility was the story this week.  The moves in the market were so big that we saw both the best day and worst day of the year for stocks.  This made it the most volatile week in three years. 

With such volatility, everyone is looking for a reason for the big moves.  Unfortunately, there really isn’t one thing we can point to as the cause.  The news has not been any better or worse than it has recently. 

However, one thing that is different now is we are nearing the end of the Fed’s bond buying program.  Plus, we are inching closer to higher interest rates (low interest rates helped fuel the stock market rise).  These programs had dampened volatility and sent stocks higher, so a market without stimulus may be more volatile.

As for the news of the week, poor economic growth around the globe remains a concern.  Europe, in particular, grabbed headlines as Germany posted very poor numbers.  Germany is the strongest economy in Europe, so a decline here indicates trouble for the continent. 

Germany blamed the weakness on the fighting in Ukraine and the sanctions which have limited their exports.  This may be part of the blame, but there is another factor involved here.  Several weeks ago, the Wall Street Journal published an article (LINK) detailing the reason many manufacturing companies were leaving the country.  The country has invested heavily in renewable energy, making their energy costs among the most expensive in the world.  Companies are fleeing to lower cost nations, including the U.S., and German consumers are feeling the pinch in their wallets.  

Examples like this help explain why stimulus from central banks are so ineffective.  There are fundamental problems holding economic growth back, something that low interest rates and money printing cannot overcome.  This is very important to recognize.

Indeed, this was cited by the European Central Bank (ECB) as a reason for not taking their stimulus program a step further.  The head of the ECB said he wanted to see structural reforms implemented before additional stimulus was undertaken.  Knowing the unlikeliness of this occurring, stocks sold off on the news. 

The week was not all negative, as we also saw the best day of the year.  The gain could be attributed entirely to news out of our central bank (see how much impact the central banks have on the market these days?). 

The Fed released the minutes from its latest meeting, expressing concerns over slow growth and a strong dollar.  That view signaled a reduction in stimulus and increase in interest rates was unlikely any time soon.  Remember, the market wants to see more stimulus, so it soared on the news.

To us, the minutes showed how unlikely the Fed is to ever pull back from stimulus.  We say this jokingly, but they really seem determined to keep the spigots open. 

Regarding the weaker dollar, there is one legitimate concern of a weaker currency.  It makes exports more expensive and less attractive to foreign buyers.  This hurts companies that do a lot of exporting (nearly half the revenue of companies in the S&P 500 comes from outside this country).  However, companies have been hedging currency fluctuations for centuries.  This is not a new phenomenon, so we think the stronger currency will have little impact on companies’ bottom lines. 

The Fed brought up another concern with the weaker dollar that was a bit infuriating.  A goal of their stimulus program is to boost inflation, thinking this will lead to economic growth (which we disagree with, but that’s a different subject for a different day).  The stronger dollar has reduced energy prices, and lower energy prices means less inflation.  Because of this, they expressed their concerns over lower energy prices and would like to weaken the currency to get prices rising again. 

It’s hard to see how lower gas prices or lower power bills are a bad thing, especially as people have been struggling with these higher costs for years.  This view of the Fed shows us just how disconnected from common sense their policies can be.   


Next Week

Next week will be fairly quiet for economic data, but still has the potential to be a volatile one.  For economic data, we’ll get info on retail sales, industrial production, and housing. 

Investors are more likely to focus on corporate earnings that really start to roll in next week.  Many financial and tech companies will be reporting, so those sectors could be particularly active.  The focus on earnings may take the attention off the global issues that have weighed on the market recently. 


Investment Strategy

Well, it looks like last Thursday was not a good buying opportunity, at least in the short run.  We don’t think this is the start of a bigger decline (though only time will tell) and we would look to do some buying if the market moves a little lower from here.  We don’t want to try to catch a falling knife, though, and would wait for a little stability.  There are many individual stocks that are at attractive buying levels, too.

Below is an update to a leading indicator chart we often mention, where high yield bonds (the black line) have tended to move before the broader stock market (the orange line).  They moved mostly in tandem this week, but the longer term trend still looks to be lower.  We’ll continue to watch this indicator, but keep in mind that no indicator is perfect.  As we saw this week, big moves in the market have come on the words of central bankers, which are inherently unpredictable. 

The outlook for stocks in the short run is still cloudy, but on a longer term perspective we have serious concerns.  Stocks and bonds appear overvalued from a longer term perspective, especially as our central bank cuts back on stimulus.  Other central banks around the world are picking up the slack, but there is still reason for caution.    Europe is a particular 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. 

As for the bond market, bonds rose in price this week (so yields fell) as stocks sold off.  A short position has not done well here (where your profit increases when prices fall) and may continue to do poorly if stocks fall further.  However, a longer term perspective suggests bonds may fall as central banks increase rates.  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, remain a good long term hedge for inflation.  They have not done well recently, but are intended to be a longer term investment.  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.  It hasn’t fared well lately, but remains 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.

Commentary for the week ending 10-3-14

Stocks trended lower all week until a solid gain Friday narrowed the decline.  For the week, the Dow lost 0.6% and both the S&P and Nasdaq declined 0.8%.  Gold continues to show weakness as the dollar strengthens, hitting four-year lows and falling 1.8% on the week.  Oil hit the lowest level in over a year with a 4.1% loss to close at $89.74 per barrel.  The international Brent oil hit its lowest level in over two years to close at $92.82 per barrel.  This is great news for gas prices. 

Source: Yahoo Finance

The factors moving the market this week were much the same as the last few weeks: slowing economies abroad and an expensive stock market here at home. 

The week started with jitters out of China as pro-democracy protestors flooded the streets in Hong Kong.  This is important because Hong Kong is the biggest city in China for business, especially internationally.  Weaker economic growth is already a worry in the country, so this only added to the concerns.

Europe, too, continues to show weakness.  Because of that weakness, many were expecting the head of the European Central Bank (ECB) to announce an expansion in their stimulus program at a meeting this week.  Unfortunately from them, he did not.  The sell-off in the market early Thursday was the result. 

As we’re seeing with Europe, far too often do we hear of lack of stimulus as the cause of poor economic growth.  It completely ignores the fundamentals of that economy, where they have bad economic policies, too many regulations, restrictions on labor, high costs, etc.  Stimulus may paper over the problems but the fundamental issues are not solved.  We don’t see a fix in their economy until structural changes are implemented.  Stimulus prevents this from happening. 

As for the U.S., this week was full of economic data.  The two main focuses of the Fed are on increasing inflation and employment, both of which had data released this week.  With stock prices high and a potential reduction in stimulus looming, investors were paying close attention to these reports. 

The inflation report released this week (the personal consumption expenditure, a more wonky inflation report), showed inflation running below their target.  This indicated the Fed would be less likely to pull back on its stimulus.  Worth noting, the report may have showed little inflation, but the food component showed the biggest annual gain in two years.  Most people wouldn’t agree that there is no inflation.   

The employment report for September was also released this week, coming in better than expected.  We added 248,000 jobs and previous month’s figures were revised higher.  Plus, the unemployment rate hit the lowest level since 2008, although this was due more to people leaving the labor force than conditions improving.  Stocks rose strongly on this news, which was somewhat surprising since a solid employment picture would indicate less need for stimulus.  Good news was actually good news. 

Other economic data this week leaned to the negative side.  Both the service and manufacturing sectors showed smaller increases from the previous month, while the gains in home prices slowed. 


Next Week

Next week will be fairly busy.  We won’t get a whole lot of economic data, but corporate earnings for the third quarter will start to roll in.  There will also be several regional Fed presidents will be making speeches.  There will be a lot of info to move markets, so it may be another active week. 


Investment Strategy

Thursday looked like a good buying opportunity, at least for the short term.  The market is still on edge as the Fed pulls back from its stimulus, but stocks may head higher in the short run. 

High yield bonds continue to be a good leading indicator for the broader stock market.  We’ve updated the chart below, with the black line representing high yield bonds and the orange line is the broader stock market.  In the chart, this week you can see the bonds turning higher and stocks following.  We’ll keep watching this indicator, but keep in mind that no indicator is perfect.  Recently the market has moved on the words of central bankers, which are inherently unpredictable. 

While stocks may have some room to the upside in the short term, we have serious concerns for the longer run.  Stocks and bonds appear overvalued from a longer term perspective, especially as our central bank cuts back on stimulus.  Other central banks around the world are picking up the slack, but there is still reason for caution.    Europe is a particular 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. 

As for the bond market, bonds rose in price this week (so yields fell) as stocks sold off.  A short position has not done well here (where your profit increases when prices fall) and may continue to do poorly if stocks fall further.  However, a longer term perspective suggests bonds may fall as central banks increase rates.  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, remain a good long term hedge for inflation.  They have not done well recently, but are intended to be a longer term investment.  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.  It hasn’t fared well lately, but remains 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.