Another up week for the markets as the Dow reached levels not seen since June, 2008. For the week, the Dow rose 1.0%, the S&P was higher by 1.7%, and the Nasdaq climbed 1.9%. Gold continued to sell off, down 0.6% this week. On the other hand, oil popped higher by 4%, so prices at the pump will keep going up. Many agricultural commodities were higher this week, as well.
Source: MSN Moneycentral
Boy, this market just keeps chugging higher. Corporate earnings season kicked into gear this week and the data was mostly good. Companies are becoming more profitable and conditions are improving. We also received some both optimistic and pessimistic economic reports this week, but the bad news didn’t have much impact on the markets.
The most action this week came on Wednesday with a pop higher attributed to a successful bond sale in Europe. It was considered successful since the yields were much lower than expected, indicating less fear about Europe. Worries over the debt of many European countries had been weighing on our markets for some time now and the ease of those fears resulted in a pop in our markets.
See, countries auction off bonds for a variety of reasons, but mostly to pay their debts. The more worried investors are about the country, the higher the bond yield will be. Think about it like the rate you pay on your credit card- there are higher rates for riskier borrowers and lower rates for the more credit worthy.
What hasn’t really been recognized is that there was a lot of intervention in the auction to keep the rates much lower than they otherwise would be. The European Central Bank (ECB) acted much like our Fed did and pumped loads of money into the auction to keep rates lower.
The other big investor that helped keep rates low was China. This is the main reason the auction is so newsworthy to us. As you know, China is one of the biggest holders of our debt, and now they are gaining an even bigger foothold in Europe. This helps keep the Chinese currency weaker, which makes their exports more attractive. We suppose it also makes them one step closer to world-wide domination. We say that partly in jest, but it gets less and less funny as time goes by.
Here in the U.S., a major topic this week was inflation. It feels like inflation is everywhere you look, since everything seems to cost more. But the Federal Reserve says you’re wrong.
We received the CPI (consumer price index, which measures prices for the things you buy) data on Friday which came in slightly higher than expected, but still at a tame 0.5% (meaning it only costs you 0.5% more to buy the same stuff you bought a year ago). However, the Fed likes to strip out food and energy (you know, the stuff you actually buy) to give them “core” inflation, which stands at a meager 0.1%. This tells them that there is no inflation in the economy and they stick to that.
Since we live in the real world, we know that’s not the case. Other reports released this week can back that up. Just in December, gas prices were higher by 8.5%. For the sector as a whole, energy costs were up 4.8%. Import prices into the U.S. were higher by 4.8% last year, which comes on the back of a 9.6% rise in 2009. Riots around the globe over high food prices are becoming more frequent, even having a part in this weeks overthrow of the Tunisian government.
The prices for raw materials also rose last year by over 12%. These materials go into making the products you buy, meaning it costs more to make the same product.
As we have seen recently, though, companies are afraid to pass those prices on to consumers since that will cut into sales. Yet that means their earnings will be less, and therefore their stock prices will be (should be) lower. That is a major reason why we are cautious on the stock market in the coming months.
Next Week
The market will be closed on Monday, but that condenses a whole slew of corporate earnings next week into just four days. There will be earnings from companies in a variety of different sectors, but a large number of banks and technology companies will present fourth quarter earnings.
Economic reports will be relatively light next week with just some info on housing and leading economic indicators. There will be enough news from corporate earnings to keep it from being a quiet week, though.
Where are we investing now?
Little change here, as everything still looks expensive right now, with everything including the U.S. markets, international stocks, bonds, and many commodities. However, we are not going to fight the trend here, but let our winners run. An increasing complacency and bullishness (optimism) amongst investors is usually a contrarian indicator, though. So at these high levels, we feel the risk is beginning to outweigh potential returns, so we are very cautious.
It is tough to figure what to do now. Fundamentals are not that good and in normal times, we would be betting against the market at these levels. The 20%+ returns over the past four months would make a correction long overdue. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against. .
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller and less popular individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time.
Commodities remain a long term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing significant headwinds for the future, especially inflation. Still, if we had to put new money in, we would favor emerging markets (with only certain sectors in China).
We’re back at it again for the new year and hope the holiday season was good to you. The markets fared rather well for the first week of the year. Big gains Monday helped push the Dow to a return of 0.8% for the week, while the S&P was up 1.1%, and the Nasdaq was higher by 1.9%. Many commodities sold off this week, including a 3.7% drop in gold. Oil also fell 3.7% to settle around $88 per barrel after nearing $93 earlier in the week.
Source: MSN Moneycentral
Market statisticians love the first week of the year. They have all kinds of historical data that tells them if the market does X% the first day of the year and Y% in the first week, the market will do Z% for the rest of the year. Researchers at Birinyi Associates found that when market rises the first day of the year like it did, the average gain for the year is 10.6%. And if the market is up the first week, there is roughly a 3 out of 4 chance that the market will close the year higher. Take that for what it’s worth, but we don’t put much stock into it.
At any rate, the markets opened big on Monday (which distorted our chart above) after reports of increases in manufacturing around the globe. Money also flowed into the markets since the first day of the month is when institutional investors and 401k’s tend to add to their positions.
In fact, a study by S&P found that over the last 10 years, if you only invested money on the first day of the month (buy at the prior days close and sell at the close on that first day), you would have significantly outperformed the S&P 500. Just an interesting stat.
After the pop on Monday, the market did little the rest of the week. Wednesday was higher as economists believed a strong employment report would be coming on Friday after preliminary reports. The market then sold off Friday when that wasn’t the case.
In that employment report, economists were looking for a gain of at least 150,000 jobs in December. The number came in at a paltry 103,000 and in an interesting twist, the unemployment rate dropped dramatically from 9.8% to 9.4%. The U-6 unemployment number, which includes discouraged workers, now stands at 16.7% from over 17% in the prior month.
News organizations and government spinmeisters like to say the rate drop shows that things are improving, but that could not be further from the truth. More people dropped out of the labor force last month, so it skews the base number of employees, and therefore the unemployment rate. In fact, the labor force is now at the lowest level it has been 25 years! Until employment improves, we are extremely cautious on the U.S. economy.
Lately there have been discussions on the modification of tax rates, particularly the corporate tax rate. We see this as fantastic news and long overdue. Just recently, Japan announced it was lowering their corporate tax rate to under 30%. This is significant because until now, Japan had the highest corporate tax rate in the developed world, followed by the US. That now gives us the number one spot. One only has to look at the population migration from high tax states to low tax ones here in America to get a sense of what is happening on a global scale.
Could this tax talk be a shift to the middle by the Obama administration? Perhaps.
Pundits have been claiming that another shift to the middle by this administration was this weeks appointment of William Daley to replace Rahm Emmanuel as Chief of Staff. He has actual business experience, which is a rarity in this group. We have trouble with the fact that he is a Daley, related to the corrupt Daley Chicago mayoral legacy. We see this as a continuation of the Chicago politics in the White House and not really a shift to the middle.
Next Week
Things really kick into gear next week as we get more year-end, quarterly, and monthly reports. For economic reports, we will get data on inventories, import prices, retail sales, industrial production, and the consumer and producer price indexes (CPI and PPI).
Corporate earnings begin on Monday with the first Dow stock, Alcoa, reporting. This stock has had a pretty nice run, so it will be interesting to see their earnings. Heck, almost everything has had a nice run the last couple months. Anyway, we will also be watching earnings from Lennar, Chevron, and JP Morgan.
Last week, Euro debt concerns weighed on European stock indices, but had little effect over here. Hopefully it can stay out of the headlines in the U.S., otherwise we might see it impact our markets lower as it usually has in the past.
The Year Ahead
Everyone loves to make predictions for the new year. What is the market going to do in 2011? We have no idea and neither does anyone else. The vast majority of predictions that we have seen say the market is going high this year. In some cases, much, much higher. We think it would be more appropriate for these prognosticators to include their past predictions with the final result, just so we can get a sense of how good they really are. We’re pretty sure there is a reason they don’t.
So no, we don’t know what the market will do from here, but we see some significant headwinds that could impact it.
First, the markets have had a heck of a run the past couple months. Since the beginning of September, the S&P 500 is higher by 21%. The Nasdaq is almost 30% higher! Even commodity markets are so high that food riots are beginning to break out around the world due to the high prices. We feel they have gotten ahead of themselves and are overdue for a pullback.
The rise has all been predicated on the recent stimulus package, commonly referred to as QE2. Massive amounts of money have been injected into the economy which has distorted the usual market forces. When this occurs, a correction must occur to get back to equilibrium. There is no free lunch, as they say, and we will have to take our medicine at one point or another.
With government policies having such an impact on the markets (remember when stocks were bought because of good products and earnings potential?), it is important to look at what impact they might have this year. The recent election was promising, as well as the perceived shift to the middle by the current administration.
However, there are massive and costly new regulations coming from recently passed legislation. And there are still more in the works. We hope the new Congress can put the brakes on some of these laws and policies, but many executive decisions bypass these lawmakers and become law by decree. This is very destructive to the U.S. (in our view) and our economy, so it will be important to keep a close eye on.
We can’t forget about the massive debts that have been incurred, not only on a national level, but state and local, as well. One option to remedy this problem would be to simply stop spending so much money (which makes sense to us). The other way is to inflate our way out (which we see is the more likely scenario at the moment). It becomes easier to pay off debts with cheap or worthless money.
The good news for investors is that your investments will be worth more - in percentage terms, anyway. The dollars you will have earned on the investments will be worth less or nothing, though, so it’s nothing to get excited about.
It may sound like a stretch, but the Zimbabwe stock market in 2006-7 is a great recent example of what could happen. They faced a similar situation as us (although not nearly to the same degree and from dramatically different circumstances) where they printed money to stimulate their economy and then to pay their debts. The result was super-hyper-inflation (perhaps we just created a new word?), but their stock market soared. That is, until everything crashed. Surprisingly, things are the exact opposite for them now. They are the only country in the world with no debt (as far as we know) and have taken positive, free market steps to rebuild their economy. Things actually look promising for this country now.
It may seem like we have gone off on a tangent, and perhaps we have. But it shows the consequences of taking the wrong path, which we feel we are on. This next year will be extremely important to address our issues instead of sweeping them under the rug.
Where are we investing now?
Frankly, everything looks expensive right now. And that’s not just the U.S. markets, but international stocks, bonds, and many commodities. At these levels, we feel the risk is beginning to outweigh potential returns, so we are very cautious.
It is tough to figure what to do now, though. Fundamentals are not that good and in normal times, we would be betting against the market at these levels. Like we said above, the 20%+ returns over the past four months would make a correction long overdue. With the Fed’s printing press in high gear to make sure the market keeps going up, it becomes tough to bet against. We will keep riding it higher from here, but are very cautious at these levels.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been giving more attention to.
We aren’t looking to do much more buying at this time, but if the opportunity presents itself, in equities we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time.
Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important, but with tax rates in place for the next two years, they have not risen in importance. They have experienced some recent volatility, but there may be opportunities to find some good value here. Finally, international stocks have had a significant run already and are facing significant headwinds for the future. Still, if we had to put new money in, we would favor emerging markets (with only certain sectors in China).
Please note: There will be no market commentary for the next two weeks as next weekend is Christmas and the following weekend the author of these commentaries will be attending the bowl game of his alma mater. We would like to wish you a Merry Christmas and Happy New Year and will resume commentaries the first week of 2011.
An uneventful week saw the Dow and S&P quietly climb to new two-year highs. At the close Friday, the Dow rose 0.7%, the S&P was up 0.3%, and the Nasdaq was higher by just 0.2%. The commodity sector was mostly quiet, too, with gold up just 0.4% and oil higher by 0.3% and still clinging to its high level. Other commodities like sugar and coffee recorded significant gains this week, though.
Source: MSN Moneycentral
There was very little news making headlines this week. We received several economic indicators that showed the economy continues to grow, and the news helped push the markets higher. Industrial production is up, retail sales are improving, and leading economic indicators continue to rise. Corporate earnings are also looking decent.
Reminding us to be cautious, though, was a report showing a significant drop in imports. Perhaps this is a function of the weak dollar, as imports will cost more when our currency is weaker. Or perhaps our recent economic strength was due to companies rebuilding a depleted inventory, and the drop in imports is a leading indicator of a U.S. slowdown. We aren’t sure. Also, we can’t forget that other indicators like high unemployment continue to weigh on the economy, so caution is always warranted.
The last economic data we will touch on is the Consumer and Producer Price Indexes (CPI & PPI). The CPI shows the gains in the prices consumers pay for products, while PPI is the prices businesses pay for their input materials.
The CPI showed very little movement, rising just 0.1% in November and 1.1% for the past year, indicating inflation is benign. According to the government, anyway. The PPI showed a rather large rise of 0.8%, however. That is like saying the input costs for businesses rose 0.8% last month. Going forward, these costs could weigh on the profits of many companies since they have been reluctant to pass on these costs to their customers.
A big story from the previous week was a drop in bond prices. That story continued for much of this week, too, until a late week rally. The ratings service, Moody’s, reduced their rating on Ireland, which fired up those Euro worries again. Investors fled to the (perceived) safety of U.S. bonds, and that helped reverse some of the losses on U.S. bonds. Still, we feel the trend for bonds is downward, so caution is extremely necessary in this sector.
Lastly, the tax rate extension has finally been passed. We were even pleased with the Presidents speech on Friday, as his tone has mellowed and the vitriol has disappeared. Could this be a new Obama? Only time will tell, but this was a nice change.
Next Week
With Christmas right around the corner, volume will be much lighter over the next two weeks as many investors go on vacation. There will be a few economic and corporate earnings releases next week, but nothing important enough to really impact the markets. Euro concerns have been building again, so we will need to keep an eye on action from overseas.
It is important to realize that with light volume, market movements can be amplified and move much more that they regularly would. Unless due to legitimate concerns, any big movements over the next two weeks should not be something to panic over. Going into the end of the year, we will see investors taking losses on losers for tax purposes and locking in gains on winners, so it might get jumpy.
Where are we investing now?
No change here. With the markets continuing to go up and the Fed there to make sure that it does, it is hard to bet against it. Economic data has been improving and corporate earnings have been relatively decent. However, growing government involvement in the private sector and new regulations has us worried. There has been a very strong rise the past couple months and the market is overdue for a sell-off. In normal times we would be betting against the market here, but with the Fed ramping up its printing press, you just can’t be bearish (pessimistic) here.
We can’t forget about investment managers that have missed the rise and need to get some good returns for the year-end. This will push the markets higher, too, as new money enters the market.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we given more attention to.
For the rest of our portfolio, in equities, we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.
Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds are still important, but with tax rates in place for the next two years, they are not as important. They have experienced a significant drop in the last several weeks, so there may be opportunities to find some good value here. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor. This sector has had an incredible run this year, so caution is warranted as the odds of a sell-off are increasing.
It was a rather quiet week for the stock market, however, bonds sold-off strongly. For the week, the Dow only rose 0.3%, the S&P fared much better at 1.3%, and the Nasdaq notched a new three-year high, rising 1.8% this week. Many commodities lost ground this week, with oil down 1.6% and gold off 1.5%.
Source: MSN Moneycentral
Dominating headlines this week was the agreement by president Obama to extend all tax rates for the next two years. In the chart above, you can see where the market opened much higher on Tuesday based on the news. Like many other people, we were not surprised that the rates were extended, but were surprised that President Obama was the one making the compromise in a welcomed shift to the middle.
As Tuesday progressed, though, it became more apparent that this was not a done deal as Congressional democrats balked at the idea of a compromise. In fact, the market sold off rather sharply during Obama’s speech on this subject, as you can see in the chart above.
It appeared that this new, bipartisan, centrist, Obama was, in fact, not. The speech was one of the most churlish, un-Presidential speeches we have ever seen, especially when republicans were referred to as hostage takers. Doubts on the passage of these tax rates arose and grew throughout the week. It looks like the bill will pass, but only after it gets loaded with pork.
Situations like this always make us cringe at the lack of economic knowledge among our leaders. Aside from the fact that the government has actually collected more money in taxes at lower rates, unemployment benefits do not have a stimulative effect on the economy. Money is taken from one group of people and given to another. This is not sitmulative, and actually has the opposite effect. We even heard that unemployment benefits are one of the best ways to stimulate the economy. Perhaps we should all be unemployed then? Imagine the stimulus effect it will have!
The other big story of the week was the bond market. It was one of the biggest weekly drops in bond prices in over a year (that means bond yields are increasing), so investors in bond funds experienced a loss this week. Yields have been so low for so long, that a reversal was bound to happen. The strength of the sell-off is what surprised many investors.
Several factors likely contributed to the drop in bond prices: the looming budget deficit (we reached the highest deficit on record last month), the tax rate debate and future austerity measures, inflation expectations, and Fed chief Ben Bernanke. Yes, Ben Bernanke.
Last Sunday’s episode of 60 Minutes featured an interview with the head of the Federal Reserve Bank. He indicated that the initial $600 billion in QE2 could just be a starting point for future stimulus and nothing was set in stone (even more likely is that this was just a figure pulled out of thin air). He also indicated that he was 100% confident that he has inflation under control. Many traders got a chuckle out of his hubris and are voicing their reservations over his policies. No one is 100% certain about anything, especially in the markets.
It looks like the 60 Minutes interview and those other reasons lured the bond vigilantes out of their shell to start pushing back against these Fed actions. In the quantitative easing process, his bond purchase program was supposed to keep prices high and, therefore, yields low. Since the announcement in early November, they have done just the opposite.
This week may have been a turning point in this long bond rally. Longer term bonds should be avoided (if they haven’t already) and lower duration bond funds should be considered. We can’t forget that the Fed has scheduled for hundreds of billions in new purchases in the coming weeks and months, which will try to drive prices higher (and therefore, yields back lower). So unlike Mr. Bernanke, we are not 100% certain on the future of bonds.
Next Week
After a light week last week, it will be pretty busy next week, both in economic data and corporate earnings. For economic data, we will receive both the PPI and CPI, retail sales, industrial production, housing data, and leading economic indicators.
Many companies will be releasing earnings next week, most notably: Best Buy, FedEx, General Mills, Oracle, and Research in Motion. They will give us a good idea on the strength of the economy and will have the potential to move the market. Friday will be more volatile than usual due to quadruple witching (where futures and options contracts expire), so we could get a lot of movement in the market next week.
The Fed will be meeting on Tuesday to set interest rates, which are expected to remain at these record lows. They will also be evaluating the QE2 program to this point. We are unsure if any changes will be made since it has been in effect for such a short time, but any changes will move the market.
Lastly, China will be important to watch early next week. Just this weekend it was reported that inflation in China was much higher than expected, rising over 5% in the last year (although just this week Wikileaks showed how manipulated Chinese figures actually were-but what country doesn’t manipulate this data?). If China takes measures to slow down their economy, the effects will be felt world-wide. If this happens, we will see a sell-off in the U.S. markets.
Where are we investing now?
No change here. With the markets continuing to go up and the Fed there to make sure that it does, it is hard to bet against it. Economic data has been rather poor, yet improving slightly. Corporate earnings have been relatively decent. However, growing government involvement in the private sector and new regulations have us worried. There has been a very strong rise the past couple months and the market is overdue for a sell-off. In normal times we would be betting against the market here. With the Fed ramping up its printing press, though, you just can’t be bearish (pessimistic) here.
We can’t forget about investment managers that have missed the rise and need to get some good returns for the year-end. This will push the markets higher as new money enters the market.
In order to avoid the market manipulation by the Fed, the high frequency traders, and hedge fund algorithms, we are increasingly turning to smaller individual stocks. The lack of correlation to these other factors is a nice change. By no means is this a major portion of our portfolios, but something we have been pleased with.
For the rest of our portfolio, in equities, we are focused on higher-quality and multi-national stocks. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.
Commodities remain a longer term favorite, with metals, agriculture, and now energy showing solid gains that we believe will continue. Municipal bonds will play a larger role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor. This sector has had an incredible run this year, so caution is warranted as the odds of a sell-off are increasing.
Source: MSN Moneycentral
