Sunday, May 1, 2016

Commentary for the week ending 4-29-16

It was a rough week for stocks as the market sold off strongly late in the week.  Through the Friday close, the Dow and S&P both fell 1.3% and the Nasdaq was hit hard with a 3.6% drop (not sure why our chart is not accurate this week).  Gold had a nice week on a 3.6% rise.  Oil prices reached new highs for the year, gaining 6.5% to close at $46 per barrel.  The international Brent oil climbed to $47.32.

Source: Google Finance

This week had a little of everything.  We had news from the central banks, from economic data, and from corporate earnings.  All played a small part in the action of the market this week. 

We’ll start with earnings, as a little more than half of the companies in the S&P 500 have reported earnings at this point.  The results remain poor, coming in at the worst level since the financial crisis. 

Remember, though, that the bar was set very low here so while the results are bad, more companies are able to beat their low estimates.  According to Factset, 75% of companies beat their estimates, higher than the average of 67%.  Expectations are important in guiding a share price, so the higher results helped share prices move higher.  

Tech companies were a notable exception as the sector’s results were very weak.  Amazon and Facebook had a solid quarter, but for the most part, tech looks lousy. 

Economic data saw very poor reports this week.  Starting with the GDP report from the first quarter, which came in at the weakest level in two years, signaling a weakening economy.  We also saw disappointing reports on housing, durable goods, business investment, and personal spending. 

Our Fed was in the news this week as they held another policy meeting.  They weren’t expected to announce any changes in their policy – and they didn’t – but investors paid close attention to their commentary to see if it provided any guidance on future rate hikes. 

The commentary was ambiguous as to their intentions for a rate hike (probably intentionally).  They’d mention the economy preforming well in some areas, but was poor in others.  Still, investors interpreted their commentary as less optimistic on the economy and were therefore less likely to raise interest rates.  This gave a boost to stocks. 

The Japanese central bank (the BOJ) was also in the news.  Their economy is faltering despite doing the most stimulus in the history of the world.  They, too, held a policy meeting this week and investors were largely expecting additional stimulus to be announced as a result. 

In the end, the BOJ announced no additions to their stimulus policy and stocks plunged on the news. 

Worth noting, a part of their stimulus program is to print money to buy stocks indirectly by purchasing index funds.  The intention is to push up the stock market so people feel wealthier.  A Bloomberg article this week reported that through these purchases, the BOJ is the top-10 shareholder in 90% of the stocks in their index.  Imagine that, the government is one of the largest owners of companies in Japan!

We think this is a very dangerous activity by the BOJ and is likely to be severely harmful in the long run.  These central banks are really in unchartered waters here and it will not end well.  


Next Week

With the start of the new month, next week looks to be fairly busy as we get economic data for April.  We’ll see reports on the strength of the manufacturing and service sectors, plus the important monthly employment report will come on Friday. 

It will also be a busy week for corporate earnings, though we have passed the peak of earnings season.

Many regional Fed presidents will be making speeches, too, and they always have the potential to move the market. 


Investment Strategy

Despite the late-week selloff, there is no change in our investment strategy.  Stocks are still on the expensive side, though a little less so after this week. 

There may still be room for the market to move lower from here, but we don’t see this as the start of another big decline like we saw at the beginning of the year.  Breadth remains strong, with the amount of advancing stocks well above declining ones and new highs vastly outnumbering new lows.  High yield bonds, small cap stocks, and transportation-sector stocks are all good leading indicators for the market, and they also remain strong.

From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so. 

It’s the longer-term where we have the most concerns.   The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices rose this week (so yields fell) and are at a very high level.  We think demand will keep prices high and yields low, though. 

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.  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 a flight to safety. 

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.

Sunday, April 24, 2016

Commentary for the week ending 4-22-16

A late-week sell-off saw stocks close with little change.  For the week, the Dow rose 0.6%, the S&P returned 0.5%, while the Nasdaq was lower by 0.7%.  Gold was higher on the week, adding 0.4%.  Oil notched its third week of gains with a rise of 2.6% to close at $43.75 per barrel.  The international Brent oil climbed to $45.09.

Source: Google Finance

The week was a very uneventful one for news.  Corporate earnings were the main story, with one-fifth of the companies in the S&P 500 and nearly half of the companies in the Dow index reporting results. 

Earnings remain awful, coming in at the worst level since the financial crisis.  However, it’s the expectations that matter here. 

Companies that beat their estimate – which is very easy as the bar is so low – generally saw their share price rise.  On the other hand, companies that miss estimates, like many tech companies this week (including Microsoft and Google), saw their shares move much lower. 

With the bar so low, though, many more companies are beating estimates, which has helped the market move higher. 

A couple central banks overseas made news, too.  The European Central Bank (ECB) held a policy meeting this week and while no changes to their current stimulus policy were announced, they expressed their willingness to do more stimulus if economic conditions don’t improve. 

They’ve also recently stepped up their bond purchases where the ECB is printing more money to buy corporate bonds.  It sounds insane – printing money to buy corporate debt.  We think these types of interventionist policies do more harm than good by distorting markets and creating long-term problems. 

The Japanese central bank, the BOJ, was the other central bank in the news this week in advance of a policy meeting next week.  Their economy continues to struggle and their currency is stronger (a weaker currency boosts their exports since it makes their products look cheaper to foreign buyers), so they, too, suggested more stimulus was possible.

Keep in mind, they are already doing more stimulus than the world has ever seen and it has failed to work.  These policy makers blindly continue down a destructive path, believing their ideas will eventually work if they only do them at a grander scale.   We don’t see it ending well. 


Next Week

Corporate earnings will come in at a pretty strong pace next week, with some big names like Apple, Facebook, Amazon, and Exxon reporting results.  We’ll also see info on important economic reports like GDP, which is expected to show very little growth.  We’ll also see reports on durable goods, personal income and spending, and housing.

Central banks will be in the news, too.  Our Fed will hold a policy meeting where the subject of interest rate increases will be the focus.  They are not expected to raise rates next meeting, but many investors suspect one will come soon.  They will closely watch what the Fed says about possible future rate hikes. 

Also, above we mentioned the policy meeting of the Japanese central bank next week.  They may very well announce more stimulus, so it is something to keep an eye on. 


Investment Strategy

Everything still looks expensive at this point.  Now, that doesn’t mean it can’t get even more expensive, we just don’t see any opportunities to put new money into the market right now. 

A positive sign for the market, many of the technical indicators we follow are not flashing a red light like we typically see before a big sell-off.  Breadth remains strong, with the amount of advancing stocks well above declining ones and new highs vastly outnumbering new lows.  High yield bonds, small cap stocks, and transportation-sector stocks are all good leading indicators for the market, and they remain strong, as well. 

Still, in the short-term, we think the risks to the downside are greater than the potential upside. 

From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so. 

It’s the longer-term where we have the most concerns.   The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices have been very high (and yields very low) and started to move lower this week (so yields are higher).  We think demand will keep prices high and yields low, though maybe not at the levels of the past few weeks.

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.  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 a flight to safety. 

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.

Sunday, April 17, 2016

Commentary for the week ending 4-15-16

Stocks rose to new highs for the year early in the week, though stalling in the latter half.  For the week, the Dow rose 1.8%, the S&P gained 1.6%, and the Nasdaq also added 1.8%.  Gold took a turn lower, off a slight 0.1%.  Oil rose again, up 1.9% to $40.40 per barrel, which was well off its highs for the week.  The international Brent oil added $1 to close at $42.84.

Source: Barchart.com

This was the first week in a long time where central banks were not the focus of the markets.  Instead the focus was on the corporate earnings from the first quarter that started coming in this week.

Bank earnings were a particular focus as a majority of the large banks reported results.   Their numbers were poor – both earnings and revenue fell across the board (revenue is what the company made in sales, earnings are what remain once costs are subtracted).  Low interest rates, bad loans to oil companies, and poor trading results were among the many factors weighing on banks.

However, the results weren’t as bad as expected and were thus seen as a positive.  Bank stocks rose as a result, which also helped the broader market move higher. 

This is something we expect to see more often this earnings season.  The bar has been set at the lowest level since the financial crisis and becomes a very easy level to beat.  This is likely to provide some support for stocks in the coming weeks. 

Economic data this week was relatively poor, too.  Retail sales fell over the past month and industrial production was lower for the seventh-straight month, something that has never occurred outside of a recession.  On the other hand, the Fed’s Beige Book (which gives anecdotal accounts on the strength of the economy) showed continued moderate economic growth. 

Inflation was also in focus as several inflation reports were released this week.  It looks like inflation rose slightly over the past month, helped by higher gas prices.  However, the inflation results were not as high as expected, making it a disappointment to policymakers who want to see higher inflation levels.  As we mentioned with the earnings results above, it’s all about expectations. 

Chinese economic data was also in focus as they hit their lowest GDP level since 2009.  Worries about Chinese economic weakness have weighed on our markets before, so it is something to keep an eye on.

Finally, oil prices were a big topic this week.  Prices have moved steadily higher recently, well off the lows of just a few months ago.  Oil has moved higher on talks of freezes or cuts in production, but the threat has always been more talk than action. 

This weekend is another meeting with the big oil producing countries.  Odds are we’ll see some sort of agreement on a freeze in oil production which will drive oil prices higher.  We’ve seen this before, though, only to see the agreement fall apart.  We think it’s likely to happen again this time, too. 


Next Week

Earnings will continue to be in focus as one-fifth of the companies in the S&P 500 will report results, along with nearly half of the companies in the Dow index. 

We will see very little in the way of economic data, with a few reports on housing and leading economic indicators. 


Investment Strategy

No change here.  Stocks still appear to be overbought (expensive) in the short run and we are not looking to put any new money in at this time.  Above we mentioned earnings would likely help support the stock market, so we aren’t actively selling, we just think there is more risk to the downside.

From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so. 

It’s the longer-term where we have concerns.   The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices have been very high (and yields very low) and started to move lower this week.  We think demand will keep prices high and yields low, though maybe not as high as we have seen.

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.  We keep a longer term focus with these investments. 

Gold is another good hedge for the portfolio and has showed it in recent weeks.  It is only a hedge at this point – rising on geopolitical issues and a flight to safety. 

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.

Sunday, April 10, 2016

Commentary for the week ending 4-8-16

A volatile week saw stocks turn in their worst performance since early February.  For the week, the Dow and S&P both lost 1.2% and the Nasdaq was down 1.3%.  Bonds were a big story as yields on government bonds fell sharply (so prices rose).  Gold moved higher on the week, up 0.4%.  Oil also moved higher, up 3.4% to $39.66 per barrel.  The international Brent oil added $3 to close at $41.89.

Source: Google Finance

Volatility returned to the markets this week.  Stocks have seen an incredible run since the lows hit in mid-February, so it wasn’t surprising to see them take a breather here.  The volatility is coming from that tug between investors thinking the market will move lower and others who think it will continue higher. 

For the investors thinking the market will go down (the bears), they are seeing certain markets not behave the way the central bankers want to see.  Both the European and Japanese central banks are actively trying to push their currencies lower, but their currencies are actually doing the opposite and rising. 

This is a signal the central banks are losing their ability to influence the market and their policies are becoming ineffective.  The slowing global economic growth despite monumental amounts of stimulus is another sign of the limitations of the central banks. 

On the other hand, investors who think the market will go higher (the bulls) see the slow global growth as a sign our Fed will not pull back on their stimulative policies by raising interest rates (low rates have helped fuel the rise in stocks).  Since this has been important in sending stocks higher, it will continue to be positive for stocks.

News from the Fed this week supported the view that they will not raise interest rates any time soon.  The minutes from last month’s meeting were released this week and affirmed a cautious stance on rate hikes. 

As we have discussed recently, they are shifting from their core mandates of full employment and steady prices to instead focus on global economic issues (which is far outside their responsibilities, in our view).  You can always find a problem somewhere on the globe at any given time, so this always gives them an excuse to keep the stimulative policies alive.  In fact, the word “global” was used 22 times.  This was notable as the word rarely appeared in the past. 

Switching gears, next week will mark the beginning of corporate earnings releases from the first quarter.  The bar has been set very low, with earnings expected to come in at -8.5% according to Factset.  This would be the fourth-straight quarter of negative earnings, something that has not happened since the financial crisis. 

With the bar set so low, though, it does make it more likely earnings will beat estimates and possibly give stocks a reason to move higher.

Finally, in honor of the Masters tournament this week, here is a link to pictures of the course in 1935.  It’s quite a difference from the course we see today!  Below is an image of the iconic 12th green:



Next Week

Corporate earnings will be a big focus next week as first quarter results start rolling in.  We’ll also see a few economic reports, including retail sales, inflation, and industrial production. 

Several regional Fed presidents will again be speaking, and they always have the potential to move the market. 


Investment Strategy

We were not surprised to see stocks move lower here as they were looking overbought (expensive) from a short-term perspective.  They still look expensive, in our view, and we would hesitate to put any new money in at this time. 

From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so. 

It’s the longer-term where we have concerns.   The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices have been very high (and yields very low) and yields moved lower again this week.  We think demand will keep prices high and yields low, though maybe not as high as we are currently seeing.

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.  We keep a longer term focus with these investments. 

Gold is another good hedge for the portfolio and has showed it in recent weeks.  It is only a hedge at this point – rising on geopolitical issues and a flight to safety. 

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.