My closing comments last week in the "Markets" section of the Weekly Market Commentary, were, "This should be an interesting week to say the least." Well, the week did not disappoint. With that in mind, let me summarize what happened and how it affected the markets.
The Republicans took control of the house by a significant margin putting Ohioan John Boehner in the position of House Majority Leader. While the Democrats maintain control over the senate, their loss of six seats reduces their control dramatically.
Mid-week, the Fed announced the extent of their second round of quantitative easing (QE2). You'll recall from last week's WMC, I said the Fed is attempting to push down those stubbornly high, longer term interest rates to help spur economic activity. The tool they are using is called quantitative easing. It consists of the Fed purchasing Treasuries ($600 billion this time) thus reducing the supply of bonds available. If demand stays the same and supply is reduced, then bond prices rise. It's basic economics 101. The less supply, the higher the prices. The reason the Fed wants bond prices to rise is that bond yields fall when their prices go up. When yields are low, companies and investors look for other ways to invest and increase their yield. This, hopefully will spur economic activity.
On Friday, the final round of good news came out with the spurt in job growth that caught everyone by surprise. 151, 000 jobs were created in October with the majority of those positions in the service sector.
The good news didn't stop there; the government also revised August and September job losses by reporting that 11,000 fewer jobs were lost than originally thought.
All of this resulted in a very strong week for the markets. In fact, the current advance has now put us ahead of where we were in September, 2008. That was when the collapse of Lehman Brothers was announced and the credit markets ground to a halt. Many are saying that he fundamentals don't support these higher prices when you consider all the problems that still exist in the US and around the world. However, markets love to climb a wall or worry and that is exactly what seems to be happening. Someone once told me...expect more of the same until the market shows you something different.
Enjoy the gains while we can!
Showing posts with label small cap stocks. Show all posts
Showing posts with label small cap stocks. Show all posts
Wednesday, November 10, 2010
Tuesday, November 2, 2010
The Markets
It was another quiet week for the markets as all eyes focused on the coming weeks events.
Tuesday's election results will be interesting as investors will closely watch for any shift of power in Congress. Republicans are expected to gain enough seats in the House to filibuster against an major legislation that will increase taxes or government spending. Gaining control of the senate is another matter. One of the major items on congress' agenda will be tackling the Bush tax cuts due to expire at the end of 2010.
There is some consensus to keep the tax cuts in place for some taxpayers while letting them expire for others. My concern with this thinking is that it punishes many small business owners who, without much if any help from the government, have willingly taken on risks to live the American dram by building a viable business enterprise. By reaching some level of success, their taxes could be raised by a disproportionate amount.
Taxpayers who earn more, pay more in taxes simply by having the tax rate applied to a larger taxable income figure. An article in a recent Investment News quoting IRS data found that the top 1% of tax returns in 2007 were responsible for over 40% of all federal individual income taxes paid. The top 0.1% of tax returns (one-tenth of one percent) accounted for nearly 20% of the nation's federal income taxes paid. Taxing this group by increasing higher income tax brackets seems counter-intuitive to a free-market economy.
Another event the markets will be keeping a keen eye on will be the announcement by the Fed about their intent on what's been called QE2. Quantitative Easing, the second round, is set to begin soon as the Fed attempts to further stimulate the economy by purchasing large amounts of Treasuries.
The Fed walks a fine line between making too little or too much in Treasury purchases. If the Fed buys only about $100 billion, the markets may take the effort as too little to be effective. On the other hand, if the Fed buys over $500 billion, it may result in stoking inflation fears beyond their control. The negative effect would be stagflation; a stagnant economy with long term rates rising.
Tuesday's election results will be interesting as investors will closely watch for any shift of power in Congress. Republicans are expected to gain enough seats in the House to filibuster against an major legislation that will increase taxes or government spending. Gaining control of the senate is another matter. One of the major items on congress' agenda will be tackling the Bush tax cuts due to expire at the end of 2010.
There is some consensus to keep the tax cuts in place for some taxpayers while letting them expire for others. My concern with this thinking is that it punishes many small business owners who, without much if any help from the government, have willingly taken on risks to live the American dram by building a viable business enterprise. By reaching some level of success, their taxes could be raised by a disproportionate amount.
Taxpayers who earn more, pay more in taxes simply by having the tax rate applied to a larger taxable income figure. An article in a recent Investment News quoting IRS data found that the top 1% of tax returns in 2007 were responsible for over 40% of all federal individual income taxes paid. The top 0.1% of tax returns (one-tenth of one percent) accounted for nearly 20% of the nation's federal income taxes paid. Taxing this group by increasing higher income tax brackets seems counter-intuitive to a free-market economy.
Another event the markets will be keeping a keen eye on will be the announcement by the Fed about their intent on what's been called QE2. Quantitative Easing, the second round, is set to begin soon as the Fed attempts to further stimulate the economy by purchasing large amounts of Treasuries.
The Fed walks a fine line between making too little or too much in Treasury purchases. If the Fed buys only about $100 billion, the markets may take the effort as too little to be effective. On the other hand, if the Fed buys over $500 billion, it may result in stoking inflation fears beyond their control. The negative effect would be stagflation; a stagnant economy with long term rates rising.
Thursday, June 24, 2010
The Markets
The markets turned in another strong performance last week. In fact, our main indicator, the New York Stock Exchange Bullish Percent, changed back to positive after being negative for about six weeks. The New York Stock Exchange Bullish Percent is calculated by taking all the stocks whose charts are on a buy signal and divide them by the total number of stocks that trade on the NYSE. This gives us a figure that, when plotted on a chart, can tell us if market conditions are getting stronger or weaker. It also gives us an indication whether stock prices are overvalued or undervalued.
This is good news for investors. It appears that the recent pullback in May was a healthy pause, as markets have turned upward. The beginning of second quarter earnings reports are about three weeks away. The markets will definitely be looking to these reports for reasons to continue climbing.
Consumer prices fell an unexpected 0.2% in May even though many commodity prices such as fuel, metals, and food are rising. This has the effect of squeezing company profits as their cost or production rises faster than they can raise prices. This is especially true when the economy is recovering from the current recession. Businesses are reluctant to raise prices on consumers when demand is still weak.
Rising commodity prices is further proof that the economy is picking up steam. In fact, the Wall Street Journal recently reported that while states such as Nevada and California are still struggling with high unemployment, much of the south and Midwest is experiencing an uptick in hiring as manufacturing increases. If this trend continues, we could see a strong rebound in the market as earnings are released over the next couple of months. Remember, the market is a forward looking indicator.
This is good news for investors. It appears that the recent pullback in May was a healthy pause, as markets have turned upward. The beginning of second quarter earnings reports are about three weeks away. The markets will definitely be looking to these reports for reasons to continue climbing.
Consumer prices fell an unexpected 0.2% in May even though many commodity prices such as fuel, metals, and food are rising. This has the effect of squeezing company profits as their cost or production rises faster than they can raise prices. This is especially true when the economy is recovering from the current recession. Businesses are reluctant to raise prices on consumers when demand is still weak.
Rising commodity prices is further proof that the economy is picking up steam. In fact, the Wall Street Journal recently reported that while states such as Nevada and California are still struggling with high unemployment, much of the south and Midwest is experiencing an uptick in hiring as manufacturing increases. If this trend continues, we could see a strong rebound in the market as earnings are released over the next couple of months. Remember, the market is a forward looking indicator.
Tuesday, June 8, 2010
The Markets
Just when it appeared things were beginning to settle down in the markets, a one-two punch was delivered to investors on the last trading day of the week. Friday's 323 point drop put it back under the psychologically significant 10,000 point level.
Why the cause for concern? What was the one-two punch? It was a combination of weak employment data combined with concerns about Hungary's debt.
431,000 jobs were added in May. While that may sound good, most of those jobs came from temporary census workers. Private sector employment only rose by 41,000. Private sector jobs are what analysts look at when determining the strength of recovery from the recession since they are usually sustainable and lead to an expansion of the recovery.
The jobless rate dipped to 9.7% from 9.9% but don't let that number fool you; workers who become disenfranchised and stop looking for work fall off the tally of those counted. Unemployment is much worse than the 9.7% quoted.
More concerns came out of Europe as Hungary's newly elected officials voiced concern over the country's debt levels. Vice President Lajos kosa said Hungary faces a sovereign-debt crisis similar to the situation in Greece. The Euro, which has been in a downward spiral broke below it's ten-year average of $1.20 settling in at $1.1966.
Where to focus?
The markets are looking for signs of improvement in the U.S. economic situation or continued growth in corporate earnings. Since we won't be seeing anything significantly reported on the earnings front until the middle of July (the beginning of second quarter earnings reports), the markets are focusing on domestic economic data as well as what's happening around the world. And right now, that information is urging caution.
While all markets have become more interconnected and interdependent on each other, the U.S. remains a very significant source of corporate profits. Concern over Europe will take a back seat to what happens here at home. The most important factor for our continued recovery will be in next quarter's earnings. That will tell if we are still on the road to recovery, or things are beginning to pull back.
Why the cause for concern? What was the one-two punch? It was a combination of weak employment data combined with concerns about Hungary's debt.
431,000 jobs were added in May. While that may sound good, most of those jobs came from temporary census workers. Private sector employment only rose by 41,000. Private sector jobs are what analysts look at when determining the strength of recovery from the recession since they are usually sustainable and lead to an expansion of the recovery.
The jobless rate dipped to 9.7% from 9.9% but don't let that number fool you; workers who become disenfranchised and stop looking for work fall off the tally of those counted. Unemployment is much worse than the 9.7% quoted.
More concerns came out of Europe as Hungary's newly elected officials voiced concern over the country's debt levels. Vice President Lajos kosa said Hungary faces a sovereign-debt crisis similar to the situation in Greece. The Euro, which has been in a downward spiral broke below it's ten-year average of $1.20 settling in at $1.1966.
Where to focus?
The markets are looking for signs of improvement in the U.S. economic situation or continued growth in corporate earnings. Since we won't be seeing anything significantly reported on the earnings front until the middle of July (the beginning of second quarter earnings reports), the markets are focusing on domestic economic data as well as what's happening around the world. And right now, that information is urging caution.
While all markets have become more interconnected and interdependent on each other, the U.S. remains a very significant source of corporate profits. Concern over Europe will take a back seat to what happens here at home. The most important factor for our continued recovery will be in next quarter's earnings. That will tell if we are still on the road to recovery, or things are beginning to pull back.
Monday, May 24, 2010
Weekly Market Commentary
The Markets
The U.S. markets sounded a little like Rodney Dangerfield last week: They get no respect. All the while the vast majority of economic news and corporate earnings continue to come in strong. Sure, new jobless claims were a little higher than what we would have liked to see, but two major inflation statistics, the Producer Price Index(PPI) and the Consumer Price Index both show there is no threat of inflation at the moment.
The PPI dropped an unexpected -0.1% in April. This was the second decrease in three months according to Bloomberg. Even core inflation at the wholesale level remains very subdued.
For the CPI, we also got good news as the cost of goods and services at the consumer level came in at the same -0.1%. This was the first drop since March of 2009. This helps take the pressure of the Fed to increase rates due to inflationary concerns. Low interest rates will help continue to fuel the growth of this recovery.
The market has given up all its gains for 2010 and then some, the volatility index has doubled over the last few weeks, I tell you....the market gets no respect.
But seriously, what now? Well, it looks like we have gotten the first official 10% correction since this bull rally started in March 2009. What happens now will tell us if this is just a correction or the beginning of a more serious pullback. Some sectors are showing more signs of breaking down than others.
If we were getting bad news from company earnings, or we were seeing significantly higher inflation figures, I would be a lot more concerned. But things look good out there. You have to remember how much corporations cut expenses to the bone. Even though we still have problems to deal with, we are not going into them as we did at the end of 2007. Companies are not bloated with inventory or over-staffed as they were. This enables them to stay lean and profitable.
If you or anyone you know is concerned about the last few weeks in the markets, please drop us a note or give us a call. I'd be glad to discuss it in more detail with you.
More on Europe
Last week I mentioned my concern for the U.S. bailing out more European countries when we have enough of our own problems to deal with. Well, last week, the Senate voted 94-0 to approve a measure making it harder to deploy U.S. funds in rescuing foreign governments. The amendment was attached to the financial regulatory overhaul bill. The bipartisan measure requires the administration to certify that any future loans made to the International Monetary Fund (IMF) would be fully repaid. If there is not certification, the U.S. representative tothe IMF would be required to oppose the lending, according to the Wall Street Journal.
The U.S. markets sounded a little like Rodney Dangerfield last week: They get no respect. All the while the vast majority of economic news and corporate earnings continue to come in strong. Sure, new jobless claims were a little higher than what we would have liked to see, but two major inflation statistics, the Producer Price Index(PPI) and the Consumer Price Index both show there is no threat of inflation at the moment.
The PPI dropped an unexpected -0.1% in April. This was the second decrease in three months according to Bloomberg. Even core inflation at the wholesale level remains very subdued.
For the CPI, we also got good news as the cost of goods and services at the consumer level came in at the same -0.1%. This was the first drop since March of 2009. This helps take the pressure of the Fed to increase rates due to inflationary concerns. Low interest rates will help continue to fuel the growth of this recovery.
The market has given up all its gains for 2010 and then some, the volatility index has doubled over the last few weeks, I tell you....the market gets no respect.
But seriously, what now? Well, it looks like we have gotten the first official 10% correction since this bull rally started in March 2009. What happens now will tell us if this is just a correction or the beginning of a more serious pullback. Some sectors are showing more signs of breaking down than others.
If we were getting bad news from company earnings, or we were seeing significantly higher inflation figures, I would be a lot more concerned. But things look good out there. You have to remember how much corporations cut expenses to the bone. Even though we still have problems to deal with, we are not going into them as we did at the end of 2007. Companies are not bloated with inventory or over-staffed as they were. This enables them to stay lean and profitable.
If you or anyone you know is concerned about the last few weeks in the markets, please drop us a note or give us a call. I'd be glad to discuss it in more detail with you.
More on Europe
Last week I mentioned my concern for the U.S. bailing out more European countries when we have enough of our own problems to deal with. Well, last week, the Senate voted 94-0 to approve a measure making it harder to deploy U.S. funds in rescuing foreign governments. The amendment was attached to the financial regulatory overhaul bill. The bipartisan measure requires the administration to certify that any future loans made to the International Monetary Fund (IMF) would be fully repaid. If there is not certification, the U.S. representative tothe IMF would be required to oppose the lending, according to the Wall Street Journal.
Monday, July 6, 2009
The fourth of July is a mere few days behind us now, but the fireworks are still going on in the market and I wanted to take this opportunity to update you on how the market indicators I follow stand at the halfway point of 2009. Interestingly enough, one of the main equity indicators that I follow, the NYSE Bullish Percent, forced us to get a bit more defensive at the end of last month for the first time since March. Coming into the second quarter of this year the NYSE Bullish Percent had already reversed back up to signal us to get more offensive with our equity exposure, and remained offensive for roughly three months until just recently. Following this indicator forced us to be invested in one of the best quarters for equities in more than 10 years. In general we were able to participate in a market that was driven by new demand, and the returns across various segments of the equity landscape reflect the fact that the investing climate was generally positive. Looking more specifically at the monthly returns this quarter, both April and May were huge contributors, some of the best on record in fact. April's returns in particular were among the best handful of months since 1987. Given the broad strength many of the worst performing US Equity ETFs were still in positive territory for the quarter. Specific winners was the Emerging markets side of the Non-US equity arena. Small Cap stocks notably outperformed Large Cap stocks, and Crude Oil provided exceptional returns relative to the broader commodity benchmarks. The weakest asset class was clearly the fixed income category, and even it had pockets of strength in corporate bonds. Overall though, the diversified fixed income market was effectively flat on the quarter, and the Gov't Long Bonds were among the worst. With that said, here are some of the other notable thoughts I have about the financial markets as we head into the third quarter of the year.
Market Thoughts:
· A comparison of stocks to bonds has moved back to favoring stocks for the first time in a year, suggesting that the equity market is a place that is likely to outperform fixed income. This certainly does not mean that stocks won’t experience pullbacks or breathers along the way, but it suggests that we use those pullbacks as buying opportunities so long as this relative strength relationship holds true. The last time stocks were favored over bonds was from July 2003 to July 2008. This comes at a time, interestingly enough, that defensive team is on the field. What this means to me is that we will maintain much of the equity exposure that we current have, however, we will not begin to put new money to work until we see offense return to the field.
· The international equities market and commodities are the two asset classes that are showing superior strength versus all asset classes that we follow including domestic equity, international equity, commodities, foreign currency, fixed income, and cash. Specifically, for international equity exposure, we are focusing on emerging markets.
· The Energy markets have seen a tremendous rally over the course of the past few months with Crude Oil moving from $34 back in February to a recent high of $72.50 per barrel. The picture for Crude now shows that this commodity remains among the tops on a relative strength basis, however, in the near term Crude Oil is overbought, which suggests the probabilities of a pullback or consolidation period for Crude is high here.
· After a positive year in 2008 where the US Dollar gained about 6%, the greenback returned to a negative trend in March of this year, and continues to show weakness on an absolute basis as well as relative to the broader foreign currencies market.
· Focus is essential. We don’t want to become a victim of following the crowd by turning to the financial news media for investment advice. The goal of these outlets is to get more eyeballs to watch or listen, not manage a portfolio. My goal is to balance risk with reward in your portfolio. So, I turn off the TV and radio and instead turn to my charts and data to analyze changing trends in the market place and how best to position your portfolio.
We have no way of knowing how this defensive possession will play out. Ideally, we would like to see demand regain control over the equities market so we can begin focusing on wealth accumulation again; however, we are not going to jump the gun in this regard and attempt to tell the market what it should do. Rather, we will let the market tell us when the time is right. Until then, I will continue to diligently review your account. Additionally, while we are on defensive I will be looking for new opportunities to surface when we go back on offense so we are ready to take advantage of the next offensive session. We will adhere to both the buy and sell side of our decision making process and let the discipline which has helped us successfully navigate this market continue to be our light in any stormy environment. If you have any questions regarding these strategies, or any other strategies for that matter, feel free to contact me and I would be happy to discuss them in further detail with you. In the meantime, kick back, relax and enjoy the summer.
Market Thoughts:
· A comparison of stocks to bonds has moved back to favoring stocks for the first time in a year, suggesting that the equity market is a place that is likely to outperform fixed income. This certainly does not mean that stocks won’t experience pullbacks or breathers along the way, but it suggests that we use those pullbacks as buying opportunities so long as this relative strength relationship holds true. The last time stocks were favored over bonds was from July 2003 to July 2008. This comes at a time, interestingly enough, that defensive team is on the field. What this means to me is that we will maintain much of the equity exposure that we current have, however, we will not begin to put new money to work until we see offense return to the field.
· The international equities market and commodities are the two asset classes that are showing superior strength versus all asset classes that we follow including domestic equity, international equity, commodities, foreign currency, fixed income, and cash. Specifically, for international equity exposure, we are focusing on emerging markets.
· The Energy markets have seen a tremendous rally over the course of the past few months with Crude Oil moving from $34 back in February to a recent high of $72.50 per barrel. The picture for Crude now shows that this commodity remains among the tops on a relative strength basis, however, in the near term Crude Oil is overbought, which suggests the probabilities of a pullback or consolidation period for Crude is high here.
· After a positive year in 2008 where the US Dollar gained about 6%, the greenback returned to a negative trend in March of this year, and continues to show weakness on an absolute basis as well as relative to the broader foreign currencies market.
· Focus is essential. We don’t want to become a victim of following the crowd by turning to the financial news media for investment advice. The goal of these outlets is to get more eyeballs to watch or listen, not manage a portfolio. My goal is to balance risk with reward in your portfolio. So, I turn off the TV and radio and instead turn to my charts and data to analyze changing trends in the market place and how best to position your portfolio.
We have no way of knowing how this defensive possession will play out. Ideally, we would like to see demand regain control over the equities market so we can begin focusing on wealth accumulation again; however, we are not going to jump the gun in this regard and attempt to tell the market what it should do. Rather, we will let the market tell us when the time is right. Until then, I will continue to diligently review your account. Additionally, while we are on defensive I will be looking for new opportunities to surface when we go back on offense so we are ready to take advantage of the next offensive session. We will adhere to both the buy and sell side of our decision making process and let the discipline which has helped us successfully navigate this market continue to be our light in any stormy environment. If you have any questions regarding these strategies, or any other strategies for that matter, feel free to contact me and I would be happy to discuss them in further detail with you. In the meantime, kick back, relax and enjoy the summer.
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