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.
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.
