Commentary for the week ending 7-24-15

Last week the market posted nice gains on a solid move higher, but unfortunately this week wiped out those gains as it moved sharply lower.  For the week, the Dow lost 2.9%, the S&P fell 2.2%, and the Nasdaq returned -2.3%.  Gold hit five year lows on a 4.1% decline this week.  Oil continues to move lower, off 6.0% to $48.14 per barrel.  The international Brent oil, which is used to make much of our gas here in the east, closed down to $54.64 per barrel.  We should finally start seeing some lower prices at the pump. 

Source: Google Finance

Greece and China faded even further from the headlines as more domestic issues grabbed investors’ attention.  Corporate earnings, in particular, dominated the headlines this week. 

The earnings picture from this week had a bipolar nature to it.  Some companies have done very well.  Others, the exact opposite.  Overall, earnings have been better than expected, although expectations were very low from the onset. 

According to Factset, nearly 40% of the companies in the S&P 500 have reported so far and earnings are on pace to decline 2.2%.  That doesn’t sound great – and it’s not – but analysts were originally expecting earnings to decline 4.5%.  Revenue (or sales) have come in at a -4.0% pace, which is really not good after being solidly negative last quarter, too. 

The poor performances spanned all sectors, but industrial companies have fared the worst.  These are the companies like Caterpillar, whose bottom line is closely tied to global economic growth.  This tells us the global economy is not as strong as many believe. 

On the other hand, the companies that did well have been handsomely rewarded.  We saw this last week when Google gained 25% and Netflix was higher by 18%.  It was no different this week when Amazon added 10% after their earnings were reported. 

A stock gaining more than 10% after an earnings report is very rare.  We think more and more investors are chasing these names with decent earnings simply because there are so few investment opportunities out there.  We see this type of behavior in bubbles, so it is something to keep an eye on.    

Another big story this week has been commodities.  We reported above how gold hit a five-year low this week.  Many other commodities are in the same boat and have moved lower.  The Bloomberg Commodity Index – which is a basket of 22 different commodities – hit its lowest level since 2002. 

Why?  Part of it is weakness in the global economy.  China, in particular, is a worry as their growth continues to weaken.  

The other part is the strength of our dollar.  When our currency strengthens, it means it is worth more.  Therefore, you need less of them to buy a commodity, which means lower prices for that commodity.

The dollar is strengthening now as investors see the Fed pulling back from its stimulus program this year.  The stimulus program weakens our currency, therefore a retreat from stimulus results in a stronger currency.  When it seems like every other country is embarking on some sort of stimulus program, our currency looks even stronger as a result. 

We often hear companies and the government lament the stronger currency.  True, it makes exporting more difficult since our products look more expensive to foreign buyers.  However, it is a net positive for the country and a stronger currency should be encouraged. 

Finally, last week we discussed how the stock prices of many companies are hitting new lows for the year despite the overall market continuing to rise.  The sell-off this week really exaggerated this trend as even more companies hit new lows for the year.  This is not a positive sign for the market and is something to keep a close eye on. 


Next Week

Next week looks to be a busy one.  Corporate earnings will continue to come in at a steady pace, with another quarter of the companies in the S&P 500 reporting results. 

There will be some economic data to watch this week, including our first look at second-quarter GDP.  We’ll also get info on durable goods, consumer confidence, and housing. 

The Fed will also be in the news as it holds another policy meeting.  We are not expecting any changes in their policy at this time, but investors will be closely listening for any clues as to when that policy will change. 


Investment Strategy

We thought the market looked a little expensive in the short run after last week and expected to see a pause or slight pullback.  We certainly didn’t expect the drop in the market we saw this week.  The broader market is not yet at a level where we’d put any new money in for a short-term trade.  There are many individual stocks that still appear on the cheap side – again, in the short run – but this volatile earnings season keeps us cautious. 

In the longer run, our view remains unchanged.  The market still looks expensive.  There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks. 

From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks fell.  However, they are still trading around levels we’ve seen the last three months and we expect little change in the near term.  We would avoid longer-term bonds at this point. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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 7-17-15

The markets calmed down this week and closed with decent gains.  For the week, the Dow added 1.8%, the S&P rose 2.4%, and the Nasdaq gained an impressive 4.3%.  Gold continued to fare poorly, off 2.2% this week.  Oil also continues to decline, down 3.5% to $50.89 per barrel.  The international Brent oil, which is used to make much of our gas here in the east, closed down to $57.10 per barrel.

Source: Google Finance

China and Greece began to fade from the headlines this week as investors turned their focus to more domestic matters.

You’ll remember, last week Greece agreed to conditions for a bailout, promising to take steps like raising taxes, lowering spending, and reforming pensions (which were all conditions the Greek people just voted against).  The details were ironed out over the weekend and approved by the Greek Parliament this week.  It put to rest the fear that Greece will leave the Euro any time soon.

However, there are still some issues that may derail the bailout.  Greece actually has to implement the reforms – something many Euro leaders doubt will happen.  While they may be closer to getting a bailout, they are not out of the woods yet.  Unfortunately, this cloud may be around for some time. 

China also faded from the headlines as their markets found some stability this week, closing with a gain.  There were still some big moves in the market, but nowhere near the magnitude of the previous weeks.  Investors were encouraged to see the Chinese government putting hundreds of billions of dollars into the market as they promised to make stocks go higher.  Unfortunately it shows what a farce the markets have become as they are no longer markets, just tools of the government.  . 

As these stories faded from the headlines, the focus turned to domestic issues like corporate earnings.  Earnings season really got underway this week, with many large names reporting their second quarter results.  

The earnings were better than expected – although expectations are very low – with many of those big name companies turning in solid results.  For example, the Nasdaq index hit a record high this week largely due to Google earnings, which helped the stock to a 25% gain in just one week. 

Though it is still early in the earnings season with only 61 of the 500 companies in the S&P reporting earnings, Factset reports earnings have come in at a -3.7% pace.  Yes, this is still a negative number, but analysts were looking for a -4.5% growth in earnings at the start of earnings season. 

Revenue (what a company received in sales, earnings are what remain after costs are subtracted) was lower by 4%, which would make this the second straight quarter of declining revenue.  You don’t see that in a healthy economy. 

The Fed was also in the news as Fed chief Janet Yellen testified in front of Congress this week.  The big takeaway (other than the fact that some politicians have a cringe-worthy grasp of economic matters) is that the Fed still expects to raise interest rates this year, possibly as soon as September.  The market shrugged off the news, probably because we’ve heard this story many times before.  

Finally, we’ll touch on a technical (or the charts) matter in the markets we’re keeping an eye on. One metric some investors use to judge the momentum of the market is the market “breadth” or the amount of companies advancing or declining.  Without getting too technical, a large number of companies moving higher is a good sign for the market, where a large number of companies declining means the opposite. 

Since last November, the number of companies hitting new highs for the year (a gauge of breadth) has been trending lower.  This is not a good sign. 

Meanwhile, the number of companies hitting new lows for the year has been trending higher since this spring.  Also, not a good sign. 

Despite the market continuing to rise, we need to be cautious.  This isn’t something that would cause us to sell, but it does tell us that if there was a sell-off, it could be larger than normal.  This is something to keep an eye on. 


Next Week

Next week will be very quiet for economic data, only getting some reports on housing and leading economic indicators.  However, it will be extremely busy for corporate earnings as one-quarter of the companies in the S&P 500 will release their results. 


Investment Strategy

Last week the market looked cheap in the short run (which we consider a week or two or three), the sharp run-up this week now makes it look more expensive in the short run.  We wouldn’t be surprised to see it take a little breather here.  There are many individual stocks that still appear on the cheap side – again, in the short run.

In the longer run, our view remains unchanged.  The market still looks expensive.  There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks. 

From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

As for bonds, their price has hovered around these recent low levels (and yields around the relatively high levels), and we expect little change in the near term.  We would avoid longer-term bonds at this point. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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 7-10-15

A very volatile week saw the market end not far from where it started.  For the week, the Dow rose 0.2%, the S&P moved slightly lower by just 0.01%, and the Nasdaq lost 0.2%.  A week filled with geopolitical events left gold strangely unaffected, down 0.5%.  Oil prices saw a nice drop (we use the term “nice” because we see lower oil prices as a net benefit), off 7.4% to $52.74 per barrel.  The international Brent oil, which is used to make much of our gas here in the east, closed down to $59.00 per barrel.

Source: Google Finance (a lower open Monday skewed the chart this week)

There’s very little way to describe the week as other than “weird.” The volatility of the market is clear in the chart above.  We had news out of Greece and China having significant impact on the market – when the market was not shut down due to a computer failure. 

We’ll start with Greece.  You’re tired of hearing about them and we’re tired of writing about them, but this was a big week for the country.

Monday opened with the Greeks firmly voting against the austerity measures demanded by their creditors (the people who have lent them money).  The markets plunged as the Greeks celebrated, for it meant the country was closer to bankruptcy and likely to be forced out of the Euro. 

The euphoria soon faded as the Greek people realized they have no money and commerce was at a standstill.  Greek leaders understood a bailout was needed to keep the country afloat, so they approached other European leaders with a plan to do so.  The plan was similar – if not identical – to what the Greek people just voted against, so it seemed like nothing but a waste of time.

Euro leaders are meeting this weekend to decide if the plan is acceptable.  At the time of this writing, it looks as though the Greeks will get another bailout in exchange for reforms that will never happen.  We’re likely to be right back here again in a few months.  Regardless, it may be off the front pages and the markets cheered the news. 

Next we’ll go to China.  A few weeks ago we talked about the rural farmers opening and actively trading investment accounts, showing how exuberant the market had become.  Since then the market has plunged, 30% off its highs set just a month ago. 

This week opened with China stocks falling the most since 2012.  Until now, the communist government took small steps to help boost the market.  Now they are all in.  Here is a list of a few policies they implemented to boost the stock market: 

• They are flooding the market with new money, giving cash directly to government-controlled brokerages, who then give the money to investors as a loan, and that new money will then buy stocks. 
• Government-controlled investment firms were ordered to buy stocks.
• No new stocks will trade on the exchanges.  These tend to be more speculative investments and dilute the market.
• Over half the stocks in the market have seen their trading halted.  If they can’t be traded, they won’t lose value.
• Selling of stock is prohibited by big shareholders and institutional investors.
• Police will investigate any short sellers (who make bets the stock will go lower).  Presumably you will be arrested for shorting a stock.

Increasingly we are seeing that stock markets are no longer stock markets.  They are tools used by governments to achieve a social objective.  Former Fed chief Ben Bernanke openly admitted his objective was to increase stock values due to the “wealth effect,” where people would have more money to buy “more stuff.”  This isn’t what the market is for. 

It is also a form of market manipulation, a manipulation China has taken to a dangerous new extreme. 

Switching gears to close out this section, corporate earnings for the second quarter started rolling in this week.  It’s far too early to judge how the quarter will turn out, but Factset estimates an overall decline of 4.5% this quarter.  Last quarter started with a similar prediction, only to end higher.  That’s how the earnings game works – they set the bar low so it becomes easier to clear. 


Next Week

Maybe next week Greece falls from the headlines.  It all depends on the outcome of this weekend’s meeting of Euro leaders, but it at this time it looks as though something may be accomplished. 

Next week will be a busy one for data in our markets.  Corporate earnings for the second quarter really start coming in, with a load of banks due to report.  We’ll also see economic reports on retail sales, inflation at the consumer and producer levels, industrial production, and housing data.  Plus, Fed chief Yellen testifies before Congress, so we may get more info out of those appearances. 


Investment Strategy

With the recent volatility, it’s tough to figure what to do here.  The broader market still looks to be on the cheap side in the short run and may be worth a nibble.  There are a load of individual stocks that we consider undervalued – again, in the short run – but it’s tough to get the timing right with all the volatility.   

In the longer run, we still see the market as expensive.  There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks. 

From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

As for bonds, their price has hovered around these recent low levels (and yields around the relatively high levels), and we expect little change in the near term.  We would avoid longer-term bonds at this point. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.