Commentary for the week ending 11-21-14

Please note:  There will be no market commentary next week due to the Thanksgiving holiday.  Additionally, there may or may not be a market commentary the following week, though it is too early to determine at this point. 

Stocks saw another week of record highs.  Through the close Friday, the Dow rose 1.0%, the S&P gained 1.1% and the Nasdaq was higher by 0.5%.  Gold had another increase, up by 1.1%.  Oil prices saw an rise this week with a gain of 0.9% to close at $76.51 per barrel.  The international Brent oil, used for much of our gas here in the East, closed the week slightly higher to just north of $80 per barrel.

Source: Google Finance

The week was relatively uneventful until Friday, with news from central bankers again having a large impact on the market. 

Monday opened with economic data showing Japan had fallen back into a recession.  Their latest GDP report was firmly in the red, which was a surprise to economists who expected a solid improvement. 

Keep in mind, Japan recently implemented a massive stimulus program – the biggest in the history of the world based on the size of their economy – and they are still seeing negative economic growth. 

Despite the lack of results, Japan’s prime minister has promised to do even more stimulus in light of the poor economic growth.  In fact, he is looking to hand out cash or gift certificates to get people to spend more.  It is almost embarrassing how desperate they are to create growth and we worry the long-term damage they are ultimately doing to the economy will be extremely harmful to a lot of people. 

Japan wasn’t the only country announcing more stimulus this week.  Both Europe and China have seen several poor economic reports recently, indicating their economies are slowing.  In an attempt to create more growth, China surprised the market by announcing new stimulus measures.  Europe was not far behind as the head of their central bank made some of the strongest remarks yet that they would print even more money for stimulus.   Stocks soared on the news Friday. 

We keep saying, maybe the fact that these countries have to keep coming back to do more stimulus shows the policy does not work.  Otherwise, their economies would be booming due to the amount of stimulus they have created.  We think history will not look kindly on this period as their growth policies are misguided and harmful.  Still, it does send stocks higher in the meantime. 

Our central bank was in the news, too, as the minutes from their latest policy meeting were released.  However, they told us very little, so there was little reaction in the market. 

Finally, our economic data this week was mixed.  Manufacturing and housing reports showed improvement.  Inflation at the consumer level remained flat from last month while ticking higher at the producer level.  Lower energy prices bring the inflation level down, but prices for other items like food have increased, making the inflation rate a wash. 


Next Week

The Thanksgiving holiday will make next week a quiet one, but we’ll still get a few important economic reports.  There will be a revision to third-quarter GDP, plus durable goods and personal income and spending.  The rest of the world will have a full work-week, so we may see more activity coming from foreign markets. 
   

Investment Strategy

No change here.  We are very cautious on the market at this point.  On a short-term basis, stocks were cheap a month ago and now stand at expensive levels.  We would not put new money into the broader market at this time.  Though we have a cautious outlook, all the money flowing into the market from central bank money printing could keep stocks afloat.  Plus, any time markets fall, a central bank will step in and print money to prevent it from falling.  It’s hard to bet against this. 

Our longer term view remains unchanged.  We continue to have worries for the market due to market distortions created by the central banks and money printing.  Stimulus continues to propel stocks higher, but we worry the longer it continues, the more painful the correction will be. 

We’re again updating one of our leading indicator charts below.  High yield bonds (the black line) have done well to foreshadow the movement in the broader stock market (the orange line).  At this time, they are signaling a more cautious tone.  One factor that may affect this chart is lower oil prices – many energy companies issue this risky, high-yield debt and the lower oil prices are hurting their profitability.  This may be part of high-yield’s decline.  And remember 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 have stalled, similar to stocks.  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).  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 11-14-14

It was another quiet week with stocks inching to new record highs.  Through the Friday close, the Dow and S&P both gained 0.4% and the Nasdaq topped them both with a 1.2% increase.  Gold finally moved higher, up 1.3% on the week.  Oil kept moving lower as it hit new four-year lows to close the week with a 3.6% drop.  The international Brent oil, used for much of our gas here in the East, crossed into the $70’s for the first time in four years to close at $79.60 per barrel.

Source: Google Finance

Investors seem to be more cautious in making bets on the market with stocks back at all-time highs.  This, combined with a quiet week in terms of news, saw stocks remain relatively flat all week. 

We are on the tail-end of corporate earnings season and the results have been decent.  Earnings have come in much higher than expected, though are still modest when looking from a longer-term perspective. 

One trend that continues to grow is that earnings are being helped by cost cuts and companies buying back their own stock.  What is missing is a growth in sales.   

Revenue growth (what a company earns in sales) has been modest.  Per Factset, revenue has seen year-over-year growth of 4.0%, while last quarter this figure stood at 4.4%.  These figures are both under the longer-term average.  Investors like to see sales increase because it is a good signal of a company’s long-term health.  A lack of sales is a concern.

The lack of sales also calls into question the record high prices in stocks.  The last time stocks were this expensive, revenue was growing 7%.  Today it is half that level.  It is one signal that stocks are overvalued. 

There are other signs that stocks are on the expensive side.  Investor optimism is at extremely high levels, which tends to point to a reversal in stocks.  Additionally, margin levels (which is the amount of money people borrow to buy stock) are at record highs.  This, too, is a signal to be cautious. 

However, the one thing stocks have going for them is the money printed by central banks.  Even though our Fed has stopped printing, other central banks around the world continue to print money at record paces.  These banks openly put that printed money into the stock market, boosting stock prices. 

It almost sounds comical and fraudulent, but it does move stocks higher.  Investors can either sit on the sidelines and rightly point out how dangerous and ridiculous these policies are, or go along for the ride.  The trick is getting out before it collapses. 

Finally, we’ll touch on some news out of Europe this week.  The European economy showed a surprising growth over the last quarter.  It was only a slight growth, but many economists were expecting negative growth.  Of note was Germany, whose economy grew at a slight 0.1% to escape being classified as in a recession.  Greece was somehow the top performing economy, despite one-quarter of the population being out of work. 

Recently many European countries adopted new items to include in the GDP calculations.  The most outrageous items included drug use and prostitution, arguing that though they may be illegal, they are still economic transactions.  We wonder how much impact this had on the surprising growth this quarter?


Next Week

Next week looks to be a little busier.  There are no major economic reports, but we’ll get info on inflation, industrial production, and housing.  Corporate earnings will continue to slow, but we’ll hear from some big names like Home Depot, Best Buy, and Target. 

Investors will also pay attention to the minutes released from the last Fed meeting.  This was the meeting where they ended the bond buying, money printing program, so it will be interesting to get their take on the economy at that time. 


Investment Strategy

We are very cautious on the market at this point.  On a short-term basis, stocks were cheap a month ago and now stand at expensive levels.  We would not put new money into the broader market at this time.  Though we have a cautious outlook, all the money flowing into the market from central bank money printing could keep stocks afloat. 

Our longer term view remains unchanged.  We continue to have worries for the market due to market distortions created by the central banks and money printing.  Stimulus continues to propel stocks higher, but we worry the longer it continues, the more painful the correction will be. 

We’re again updating one of our leading indicator charts below.  High yield bonds (the black line) have done well to foreshadow the movement in the broader stock market (the orange line).  At this time, they are signaling a more cautious tone.  One factor that may affect this chart is lower oil prices – many energy companies issue this risky, high-yield debt and the lower oil prices are hurting their profitability.  This may be part of high-yield’s decline.  And remember 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 have stalled, similar to stocks.  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).  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 11-7-14

An uneventful week saw stocks again hit new record highs.  For the week, the Dow rose 1.1%, the S&P climbed 0.7%, and the Nasdaq was slightly higher by just 0.04%.  Gold does well when currencies weaken, so the stronger dollar pushed gold to a four-and-a-half year low with a 0.1% drop.  Oil continued its move lower, too, hitting three-year lows with a 2.4% drop to $78.65 per barrel.  The international Brent oil, used for much of our gas here in the East, hit four-year lows to close at $83.60 per barrel.

Source: Google Finance

There was no major market-moving news this week, but stocks continued to creep higher.  This week we saw economic data and corporate earnings come in at a decent level, plus central banks around the globe appear poised to do more stimulus.  Finally, the chance for more business-friendly legislation increased with the Republican victory on Tuesday.

Starting with corporate earnings, over 80% of companies in the S&P 500 have now reported their earnings.  According to Factset, earnings growth has been decent with a 7.9% increase, much higher than expected heading into earnings season.  Sales have been more modest, coming in around expectations with a 3.8% increase.  We’re continuing to see companies outperform not because of better sales, but by cutting costs. 

As for economic data, the big story of the week came on Friday with the release of the October employment data.  We saw an increase of 214,000 jobs, which was below estimates and a decline from last month.  It’s not a great number, but not bad – we’d classify it more as “eh.”  One would think after printing $4 trillion dollars in stimulus we’d see much higher growth.

Other economic data this week included a solid increase in the strength of US manufacturing.  The service sector also strengthened, but it did so at a lower level than previous months.  On the negative side, our trade deficit increased as exports fell, which was predictable as our currency strengthened, making our products look more expensive abroad.  We still see a stronger currency as being a net benefit, though. 

Getting back to stimulus, stocks rose on news out of the European Central Bank (ECB) this week.  They held a policy meeting where they appeared more willing to expand their stimulus program.  Similar to the steps taken in the US, they would print more money to buy bonds, injecting the new money into the economy.  One might conclude that if an economy continues to need more stimulus, maybe it isn’t really helping the economy?  Regardless, stocks like the money-printing so they rose on the news. 

Finally, markets got a boost this week after the overwhelming Republican victory on Tuesday.  They strengthened their hold in the House and took control in the Senate.  Stocks rose as it increases the chance for more business-friendly legislation, or at least hold back new burdens. 


Next Week

We’ll see a quieter week next week as the only noteworthy economic data will come on Friday with the retail sales report.  Corporate earnings will slow, too, but we’ll hear from some big companies like Wal-Mart.  There will also be a few more regional Fed presidents making speeches, so that may have some impact on markets. 


Investment Strategy

No change here.  We continue to remain neutral on the market.  Stocks have quickly swung from cheap to expensive on a short term basis, so we would expect more of a pause here.  We would not put any new money in now, but are reluctant to sell at this time, as well.   With all the newly-printed money by central banks pouring into the market, stocks continue to have the wind at their backs. 

Our longer term view remains unchanged, as well.  We continue to have worries for the market in the longer run, especially due to market distortions created by the central banks and money printing.  Stimulus continues to propel stocks higher, but we worry 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) have done well to foreshadow the movement in the broader stock market (the orange line).  At this time, they are signaling a more cautious tone.  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 continue to fall (so yields rose) as stocks rise.  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).  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 10-31-14

There was no holding back stocks this week as they again reached new record highs.  Through the Friday close, the Dow climbed 3.5%, the S&P gained 2.7%, and the Nasdaq returned 3.3%.  A stronger dollar sent gold to four-year lows with a loss of 4.9% on the week.  The dollar also helped oil move lower, falling 0.6% to $80.54 per barrel.  The international Brent oil, used for much of our gas here in the East, closed down to $86 per barrel.

Source: Google Finance

It was only a couple weeks ago that markets were dropping and investors feared the worst.  Move the clock forward to today and stocks are back at record highs.  What was behind the move this week?  Part was a just continuation of the rebound that began two weeks ago.  The other part was relatively decent corporate earnings and actions by central banks. 

The main focus this week was on the Fed’s policy meeting, where they were expected to announce an end to their latest stimulus program of printing money to buy bonds.  And they did just that.   

This latest round of bond buying began over two years ago, seeking to push borrowing rates down to make it easier to take out loans and spurring growth (in theory).  Since the latest program began, they have printed nearly $2 trillion, but economic growth remains sluggish.  In total, they have printed closer to $4 trillion and we’ve still had one of the weakest recoveries on record.

One metric whose improvement they cite is unemployment, which has fallen to its lowest level in six years.  However, this has occurred largely because of people leaving the labor force.  If we were to have the same size labor force as when these stimulus programs began, the unemployment rate would be closer to double-digits. 

This round of stimulus was the fourth such stimulus program they have undertaken, though it was the longest.  As each program wound down, markets fell strongly.  It forced the Fed to come back in with another round of stimulus to prop stocks up.  Investors have figured out that stocks fall without stimulus, so the markets were lower on the Fed’s announcement. 

The difference today, though, is that other central banks around the globe are printing even more money.  That money will flow into our markets and is likely to brunt any declines.

In fact, news out of the Japanese Central Bank sent stocks sharply higher on Friday.  A sputtering economy has forced them to increase in the amount of money they will print to stimulate their economy.  They also increased the amount of stocks and market indexes they will purchase – both foreign and domestic – which has a dramatic impact on increasing stock prices. 

Think about that for a moment.  They are creating money out of thin air to purchase stocks.  There is so much wrong with this, it is difficult to even know where to begin.  These markets are not healthy and clearly manipulated, but investors can’t sit on the sideline and watch prices go higher. 

Additionally, if Japan has been doing stimulus in one form or another for 20 years and results remain to be seen, when will central banks realize this is not the right solution?  The fact that it must continually be restarted should be a sign that it is an ineffective policy. 

Getting back to fundamentals over here, economic data leaned to the positive side this week.  Third quarter GDP came in at a solid pace and above expectations, though much of the beat was due to an increase in government spending on military and the war with ISIS.  Home sales continue to climb, though the pace of increases is slowing.  Consumer confidence stands at the highest level since 2007 and personal income has risen.  On the negative side, durable goods declined.

Finally, this was one of the busiest weeks for corporate earnings as nearly a third of the companies in the S&P 500 reported results.  Per Factset, nearly 75% have now reported and earnings have grown 7.3% in the past year though revenue (what a company received in sales) is much lower.  Both are higher than economists projected heading into earnings season, so the results have been decent.   


Next Week

Next week will be another busy one and central banks will remain a big focus.  Many regional bank presidents will be making speeches, plus the European Central Bank will hold a policy meeting.  There will be several important economic reports, too, including a look at employment in October and the strength of manufacturing and service sectors.  Corporate earnings will come in at a steady pace, too.

Finally, we will have elections on Tuesday, but they are unlikely to have much impact on the market. 


Investment Strategy

We are neutral on the market at this point.  Two weeks ago, stocks look oversold (cheap) and due for a bounce.  Stocks rallied strongly off those lows and are now looking expensive on a short term basis.  We would not put any new money in now, but are reluctant to sell at this time, as well.   With all the printed money pouring into the market, stocks continue to have the wind at their backs. 

Our longer term view remains unchanged.  We continue to have worries for the market in the longer run, especially due to market distortions created by the central banks and money printing.  Stimulus continues to propel stocks higher, but we worry 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 are signaling a more cautious tone.  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 on the Fed announcement 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).  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.