Commentary for the week ending 1-23-15

Stocks saw a steadily increasing market this week.  Through the close Friday, the Dow gained 0.9%, the S&P climbed 1.6% and the Nasdaq rose a decent 2.7%.  Gold reached five-month highs with a 1.2% gain on the week.  Oil saw another volatile week to close lower by 7.2% to $45.59 per barrel.  The international Brent oil, used for much of our gas here in the east, moved down to $48.55 per barrel.

Source: Google Finance (the Monday holiday skewed our chart this week)

All eyes were on the European Central Bank (ECB) this week.  They held a widely-anticipated policy meeting on Thursday where they were expected to announce a new stimulus program.  Investors were reluctant to make any big moves before that meeting. 

For years the ECB has discussed doing a new stimulus program where they would print money to buy bonds of the various governments, making it easier for them to borrow (much like what our Fed did here).  It is also supposed to increase inflation, for they believe higher inflation leads to economic growth. 
   
The day before the meeting, it was leaked that the ECB would print €50 billion (about $58 billion) a month to buy government bonds of the Euro countries.  Many speculate the “leak” was intentional, like a trial balloon to gauge interest in the market.  That number was met with a tepid response, as many traders were expecting a larger figure.

As it turned out, the ECB did announce a larger number than the one that was leaked.  They decided to print €60 billion a month and the program would last until September, 2016 at a minimum, but will continue until inflation hits 2%.  It took some time for the market to find direction after the announcement, but stocks closed the day solidly in the green. 

By now you are probably aware of how we feel about these stimulus programs.  We think it will do little to actually help Europe.  The deflation needed to bring prices lower to help the average person will not be allowed occur.  There has been no evidence of higher inflation ever leading to economic growth, too, so we’re not even sure why there is such an emphasis on increasing costs. 

Further, the fundamental reforms necessary to make Europe competitive again will be ignored.  Governments can continue to spend money and drive up debts, papering over problems that will someday rear their head in a terrible manner. 

Japan has tried this program for decades and remains stuck in an economic stagnation.  We embarked on a similar program, resulting in the weakest economic recovery since WWII, despite the biggest stimulus program in the history of the world.  The results have not been pretty, so we question why anyone would wish to continue down this path. 

However, markets are likely to move higher and some of the volatility we have seen this year will be reduced due to all the money printed.  That money will flow into the stock market and push up prices.   This is why the stock market loves these stimulus programs.  In fact, Japan purchased the most European stocks in history the week before the ECB announcement.  Imagine that, buying stocks with money printed out of thin air!  If only we had that ability…

While the focus was on the ECB this week, corporate earnings started coming in at a solid pace.  Unfortunately, the results have not been pretty.  According to Factset, almost 20% of the companies in the S&P 500 have reported their earnings.  Those earnings have shown no growth, which is well below the already low 1.1% economists were expecting.  It is still early in the earnings season so these figures are bound to change, but it has been a disappointing start so far. 


Next Week

Next week looks to be another busy one.  The market will still likely move on this week’s news out of the ECB.  Our Fed will be in the news, too, as they hold a policy meeting, but no policy changes are expected to be announced. 

Corporate earnings will come in at a strong pace, so the market may pay attention to them, too.  As for economic data, we’ll get info on durable goods, housing, and GDP for the fourth quarter.

Lastly, the elections in Greece this weekend are likely to grab some headlines.  A far-left, anti-Euro candidate looks likely to grab the win.  It will be important to see what they can actually do, for any changes in their standing in the Euro or their debt repayments is likely to ripple across the entire continent. 
   

Investment Strategy

With the ECB joining many other central banks in printing money, it is likely to help stocks move higher and reduce volatility in the market.  The new ECB stimulus program doesn’t officially begin until March, but stocks are still likely to move higher.  Clearly this is a wind behind the markets back. 

Despite this, the market is not at a point where we would add new money to the broader index.  However, there are many undervalued individual stocks that look attractive and we picked up a few names this week. 

We still have concerns for the longer term of the market.  We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices).  Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be. 

As for the bond market, bond prices rose (so yields fell) when investors pulled money out of stocks and put them into the safer bonds.  This reversed when stocks rose this week.  Bond prices may continue to rise (so yields fall) as the stimulus programs push up bond prices around the globe.  

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, but we are keeping a longer term focus with them.  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, too. 

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 has done well lately, but with the volatility we’ve seen in it over the years, it is better to think of it as a hedge for the portfolio. 

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 1-16-15

It was another tough week for stocks.  Through the Friday close, the Dow fell 1.3%, the S&P dropped 1.2% and the Nasdaq declined 1.5%.  Bonds were a big story this week as investors poured money into this sector, pushing yields on government bonds lowest level in almost two years for 10-year bonds and the lowest level ever for 30-year bonds (so refi that mortgage if you can!).

Commodities were also a big story this week.  Gold hit its highest level in four months with a gain of 5.0%.  Oil saw significant volatility, at one point hitting its lowest level in six years, only to close slightly higher by 0.7% to $48.69 per barrel.  The international Brent oil, used for much of our gas here in the east, closed at 49.90 per barrel.

Source: Google Finance

It sure has been a volatile start to the year and this week was no exception.  Much of the volatility this week could be attributed to the central banks.  Since they are easily the biggest force moving the market, investors carefully watch their moves.  The European Central Bank is expected to discuss a new stimulus policy at a meeting next week and the anticipation caused much of the volatility this week.   

Before getting into the central banks, we must talk about commodities.  We’ve discussed the plunge in oil over the last few weeks, where oil would fall and stocks would follow suit.  The drop in oil continued into this week, but that oil-stock link seems to have been broken.  Stocks moved higher when oil was down and vice-versa.  It may be temporary, but we see this as a good sign for the market. 

The other big story in commodities this week was copper.  Copper plunged to its lowest level in six years and saw its worst one-day drop in three years. 

Why do we care about copper?  Because copper is often referred to as “Dr. Copper,” where it is viewed as a gauge on the health of an economy.  Since copper is used in everything from phones to homes, an increase in copper use signals a healthy economy. 

The drop in copper was concerning because it signals that the economy is not healthy.  China, in particular, is a serious worry as many see their economy weakening.  Since they are such a large player in the global economy, this is something to pay attention to.  And maybe the drop we’ve seen over the last few months was signaling trouble ahead. 

As economies around the globe continue to weaken, attention has shifted back to the central banks and the possibility of further stimulus.  The European Central Bank (or ECB) is particularly in focus because of their policy meeting next week. 

For years the ECB has discussed doing a new stimulus program where they would print money to buy bonds of the various governments to make it easier for them to borrow (much like what our Fed did here).  Until now, it has only promised to do so at some point in the future.  However, investors are saying that now is the time for you to act.  Positioning by other central banks this week signaled a new European stimulus was likely, so investors are increasingly optimistic. 

While further stimulus will likely boost the stock market, it is unlikely to improve the economy.  We’ve discussed this often – fundamental reforms like improving taxes, regulations, labor, etc. are needed for the economy to improve.  Printing money and increasing debt only papers over the problems that will eventually resurface, but at an even greater magnitude.  This is why we have found ourselves at this spot many times over the years, but keep taking the same actions at a bigger and bigger scale and expecting a different result. 

Switching gears and focusing on economic data here this week, corporate earnings for the fourth quarter started rolling in.  Economists have predicted earnings and revenue growth both increasing 1.1%, which is the lowest level since 2012.  This is a significant decrease in expectations from only a couple months ago, where in October they predicted an 8.4% growth.  The good news with these very low expectations is that it makes the hurdle easier to clear, so we may see excitement over a better-than-expected earnings season, even though it is unlikely to be very strong. 

Though we have only begun earnings season, the results are even worse than those low projections.  According to Factset, earnings and revenue (what a company actually received in sales.  Earnings are what is left when costs are subtracted) are both disappointing.

As for economic data, the story was largely negative.  Retail sales and industrial production in December both showed a surprising drop.  Additionally, inflation at the consumer and producer level were both lower than expected due to lower gas prices (although food prices were higher).  While most people find lower gas prices a relief, central bankers adamant on increasing inflation find this a problem.  Look for more activity out of the central banks to “save” us from these horrible low gas prices. 


Next Week

Next week will be fairly light for economic data, but corporate earnings releases will start to pick up.  However, their importance will be a distant second to the ECB meeting on Thursday.  For years investors have been expecting this new stimulus plan out of Europe and the meeting this week is expected to tell us what, if any, new stimulus there will be. 

It is a bit tricky to figure out what the market reaction will be.  The market will certainly sell-off if no stimulus is announced.  The tricky part will be figuring out the market reaction if a new plan is announced.  It seems to be pricing in a large stimulus, so a smaller plan will likely result in a sell-off, too. 

A big plan might see the market go up, but there is a good chance the market goes down, too (we’re really hedging our bets on this one, huh?).  Remember the old Wall Street saying, “Buy the rumor, sell the news?”  Stocks may still fall on a big stimulus announcement if that is the case.  In the end, we really don’t know what will happen in the market – most other investors don’t, either – so it may be a quiet week until Thursday. 
   

Investment Strategy

We are still not doing any buying or selling at this point.  However, we are seeing brighter prospects for the market at this time, though this all depends on the news that comes out of the ECB next week.

More stocks are near buying levels now, too, after all this volatility – especially ones related to oil and energy – so there may be some bargains to be found.  We’d be a little more cautious with energy companies, though, because a stronger dollar may continue to weaken oil in the new year. 

Looking at the longer term for the market, we still have our concerns.  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. 

As for the bond market, bond prices rose sharply (so yields were lower) when investors pulled money out of stocks and put them into the safer bonds.  This reversed when stocks rose, so we’ll have to see if this trend continues.  At this point, it’s anyone’s guess how it will play out in the longer run.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, but we are keeping a longer term focus with them.  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, too. 

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. 

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 1-9-15

Stocks kicked off the year in a volatile fashion.  For the week, the Dow lost 0.5%, the S&P fell 0.6% and the Nasdaq declined 0.5%.  Gold gained ground on the weakness in stocks, climbing 2.5% on the week.  Oil continues to be a big story, hitting the lowest level in nearly six years and falling 8.2% on the week to $48.36 per barrel.  The international Brent oil, used for much of our gas here in the east, also moved lower to $62.15 per barrel.

Source: Google Finance

Hopefully this week was not an indication of the volatility markets will see in 2015.  Stocks got off to their worst start since 2008 before posting solid gains to briefly turn positive for the year, only to move lower again.  The end result was the worst week of the year for stocks (that’s a little dry humor for you careful readers).

There were several stories behind the market moves this week.  Weighing on stocks was a concern over weaker economic growth around the globe, which many see reflected in the falling oil prices.  Plus, stability of the Eurozone is coming in to question as the likelihood of Greece leaving the Euro is becoming larger. 

On the other hand, economic data this week was decent and central banks around world stand poised to do more stimulus, fueling a rise in stocks.

Oil continues to receive a lot of attention as prices keep falling.  Some investors worry that the decline in this market is an indication of slower economic growth (a weaker economy would mean less demand for gas, for example).  There is also the concern the lower prices will hurt oil companies, who have been a bright spot in hiring and capital investments.  This is why big down days in oil have usually seen a similar move lower in stocks. 

However, we see it more as a supply issue.  The U.S. has increased production dramatically and that higher supply is bringing oil prices down.  In the end, we see it as a net positive.  Yes, there will be some pain in oil producing companies, but the benefits will outweigh the drawbacks. 

The Fed was also a major factor in the market activity this week.  The minutes from their latest meeting were released and investors liked what they heard.  The Fed did not see interest rates rising any time soon (low interest rates have fueled a rise in stocks), even going so far as to say they will not rise before April. 

They also mentioned weakness overseas as a reason not to pull back from their stimulative policies.  With overseas economies looking shaky and deteriorating, this, too, will be a factor preventing the Fed to toughen its stance on stimulus. 

One regional Fed president made news, too, with his comments sending stocks soaring.  Charles Evans of the Chicago bank said raising rates any time in 2015 would be a catastrophe.  Since stocks increase on lower rates, they immediately soared on the news.  This was a major factor in the large market increase Thursday. 

It wasn’t just the U.S. central bank in focus this week, but the European Central Bank, as well.  Like all the other central banks, a major focus of the ECB is increasing inflation.  Data released this week shows inflation falling and prices are actually lower on an annual basis.  This is another signal to investors that the ECB will undergo further stimulus to boost inflation and the new money printed will flow into stocks.  This, too, was a factor in the sharp rise in stocks. 

We continue to believe this policy of higher inflation is foolish and the lack of economic growth is evidence of that.    We look at it this way: if an economy is poor and the people are hurting, what sense is there in sending prices higher?  How do higher gas or food prices help?  It makes little sense and hurts people further.  Instead, prices need to come down to help improve an economy.  Unfortunately, we see little chance of that occurring. 

Finally, the problems faced by European countries in 2010 are resurfacing as there is a threat of Greece leaving the Eurozone.  While Greece is only a small player in the Euro, the chance that a country may leave it creates stability problems.  Just remembering the volatility the Euro crisis caused five years ago makes this news significant and something to pay attention to. 


2015

Taking a look at 2015, most analysts have predicted around an 8% increase for the stock market.  That’s a pretty safe number – not too high, not too low.  However, these analysts are always an optimistic bunch, never having forecasted a decline in stocks.  So we take their estimate as more of a guess. 

Where do we see stocks ending the year?  We think it is pretty foolish to make such predictions since we have no idea.  There are a number of factors to keep an eye on, though.  Actions of the central banks are likely to still be the most dominant factor for stocks.  An increase in rates will be a knock for stocks, but further stimulus measures by other central banks around the globe are likely to keep the party going.  Global economies look weak, whether it is Europe or Asia (especially Japan), so more stimulus from them is likely.   

The market does have a couple things going for it this year, too.  Since the year 1885, a year ending in a “5” has only been lower once.  Plus, the year before a Presidential election has an average return of over 15%.  These are somewhat silly stats and have no bearing on our investment strategy, but are just interesting to mention. 


Next Week

Next week looks to be a busy one.  Corporate earnings will start streaming in, so that will give investors something to look at.  Plus there will be several economic reports worth watching.  Inflation at the consumer and producer levels will be reported, we’ll get retail sales for December, and also industrial production. 

Investors are likely to keep an eye on oil prices and news out of Europe, so it is likely to be another busy week. 
   

Investment Strategy

At this point we are not doing any buying or selling.  Many stocks have been hit hard and are near buying levels – especially ones related to oil and energy – so there may be some bargains to be found.  We’d be a little more cautious with energy companies, though, because a stronger dollar may continue to weaken oil in the new year. 

Looking at the longer term for the market, we still have our concerns.  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. 

One of items we often discussed here is high yield bonds as a leading indicator for the market.  High yield bonds (or riskier, junk bonds) tended to move higher or lower before the stock market, making it a nice leading indicator for the direction of stocks.  However, that trend seems to have ended over the last couple weeks.  They seem to be moving more in tandem at present, so they don’t seem to be as good of a forecasting tool.  We’ll be watching to see if this reverses, but at this time it is of little help. 

As for the bond market, bond prices rose sharply (so yields were lower) when investors pulled money out of stocks and put them into the safer bonds.  This reversed when stocks rose, so we’ll have to see if this trend continues.  At this point, it’s anyone’s guess how it will play out in the longer run.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, but we are keeping a longer term focus with them.  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, too. 

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. 

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.