GM officially filed for bankruptcy on Monday June 1st, which came as no surprise to market participants, who can finally move on with other important market news. It is unclear how long the company will remain in bankruptcy, but there are hopes that they will be able to restructure and reemerge very quickly. Also in GM news, they have found an apparent buyer for their Hummer vehicle line and to no one’s surprise it is a company located in China. The purchase is far from complete and some automotive industry critics think that the bid is crazy, but the offer has been made. Also on the automotive buy-out front, it appears that Fiat will purchase Chrysler out of bankruptcy. The big question will be: how much of a stink can the pension funds mount, and will anyone on the Supreme Court put a stay on the proceedings. We understand that the pensions believe that they are receiving the raw end of the deal with the buyout, but it seems as though the administration has already ruled out Chrysler coming out of bankruptcy and maintaining viability without the deal going through, so the pensions may be shooting themselves in the foot.
Commodities were volatile last week as they swung wildly: up for three days and down the other two. We can relate most of this to volatility in the US dollar and speculation that the dollar will gain in strength against other world currencies. As the dollar strengthens, commodities and natural resources move lower, because they effectively cost more for the rest of the world to purchase when their currencies are worth less as compared to the dollar. The trend of the dollar strengthening last week will be a short-lived phenomenon; remember that less than three weeks ago investors were wondering if the US would lose the AAA credit rating from Standard and Poor’s. The underlying reasons for the credit rating being discussed three weeks ago have not changed: the government still has a lot of money in circulation in order to try to give the US consumer confidence, and the situation in the rest of the world has not really changed enough to warrant weakness in the other world currencies. We found it funny last week that Ben Bernanke testified before congress that the government really needs to look at the way that they are spending money, when it seems that a large portion of the money going into circulation came from his department.
For the week, gold declined moderately along with almost every other publicly traded natural resource and hard asset. Oil was one of the very few commodities that increased in value over the course of the week, in part due to changes in the supply and demand in gasoline worldwide. The volatility, as measured by the VIX Index, actually ticked up a notch despite all of the broad markets moving higher for the week. This could be a sign that the current level of volatility which we are seeing in the market is near the current equilibrium. Activity in the merger and acquisition space picked up moderately over the course of the last week, with many of the bids being seen as hostile and not expected to go through; it was at least nice to see that there are companies out there that are attempting to move forward past the current economic situation. High yield investments continued to increase in value last week, but the spreads have continued to narrow and the default rates could start to increase, thus making them an investment to watch very closely. Finally, as stated above, the dollar increased in value against many of the world currencies, which we think will be a short-lived trend.
For the trading week ending 6/5/09, the returns in our portfolio models were as follows:
Last Week
Year to Date
S&P 500 WD (benchmark)
2.58 %
5.80 %
Aggressive Model
0.13 %
8.59 %
Growth Model
0.11 %
6.58 %
Moderate Model
0.00 %
3.07 %
Stable Model
-0.09 %
5.61 %
Over the course of last week we made a few tactical investments and are watching them very closely to ensure that they behave as we expect. Our first major change was to sell our hedging position in Direxion Funds S&P 500 bear (DXSSX). Our second and third moves last week were to reinvest in both Latin America and China in a few of our investment models. We invested because both funds showed very good strength over the course of this recent rally, and because geopolitical news from the regions made the risk in the investments worth taking. Our final change last week was to move into the Rydex Precious Metals Fund (RYPMX). This fund is made up of many holdings related to the metals and mining industry and has outperformed the underlying materials during the course of the latest rally. We continue to add to some of our positions and are looking for other investments as the rally continues with the thought always present in our minds that we could need to move back into cash very quickly should the market start to deteriorate. Once we are out of this uncertain period, we will begin to use more managed funds and lean away from the index-related funds that we are currently using. Many fund managers underperform compared to the indexes when there is a big rally and outperform the indexes when they are not in rally mode. The indexes are, for the most part, still in a rally mode.
Economic Wrap Up: Last week saw a fair amount of economic news release surprises: some that were considered good, others not so good. To start off with the good economic news releases, last Monday personal income showed an uptick of half of a percent while the consensus was for income to drop by two tenths of a percent. This combined with less of a decrease in personal spending (also released last Monday) appears to point to US consumers growing a little more confident in the worst of the economic cycle being behind us. Also released last Monday were better-than-expected construction spending figures, as well as a better-than-expected ISM Index figure. On Tuesday we received confirmation on the previous day’s construction spending figures by seeing that pending home sales jumped upward 6.7 percent during the month of April while “The Street” expected an increase of .5 percent. Now we just need to see if the financing is available for all of those pending sales once closing time rolls around. On Thursday last week the first of a few employment related figures was released: initial jobless claims rose by 621,000 over the prior week, which was moderately above expectations. Then, on Friday, the big news of the week was a jump in the unemployment rate to 9.4 percent, which was above most expectations, while at the same time Nonfarm payrolls were shown to decrease by 345,000 (substantially better than the expected drop of 520,000). On Friday it appeared as though people viewed the employment news as somewhat offsetting, therefore having little overall impact on the general markets. The final economic news release last Friday was the consumer credit figure, which showed a decline in consumer credit of $15.7 billion during the month of April, this coming on the heels of a decline of $16.5 billion during the month of March. The US consumer using less credit will ultimately be good for the economy, but it would be better if consumers chose not to take available credit, rather than the banks not even offering the credit, which seems to more the case right now.
This week is a very slow week for economic news releases. The treasury budget, released on Wednesday is the first economic news release of any importance, and calling that one important is a bit of a stretch. Retail sales figures for the month of May, released on Thursday, will probably be the biggest economic news release of the week. Wall Street will watch this release very closely to see if the resurgence of consumer confidence translates into better retail sales or if the blip in consumer confidence was just a one-time event. Overall, it is a very slow week and the scheduled releases will not move the markets much.
GM officially filed for bankruptcy on Monday June 1st, which came as no surprise to market participants, who can finally move on with other important market news. It is unclear how long the company will remain in bankruptcy, but there are hopes that they will be able to restructure and reemerge very quickly. Also in GM news, they have found an apparent buyer for their Hummer vehicle line and to no one’s surprise it is a company located in China. The purchase is far from complete and some automotive industry critics think that the bid is crazy, but the offer has been made. Also on the automotive buy-out front, it appears that Fiat will purchase Chrysler out of bankruptcy. The big question will be: how much of a stink can the pension funds mount, and will anyone on the Supreme Court put a stay on the proceedings. We understand that the pensions believe that they are receiving the raw end of the deal with the buyout, but it seems as though the administration has already ruled out Chrysler coming out of bankruptcy and maintaining viability without the deal going through, so the pensions may be shooting themselves in the foot.
Commodities were volatile last week as they swung wildly: up for three days and down the other two. We can relate most of this to volatility in the US dollar and speculation that the dollar will gain in strength against other world currencies. As the dollar strengthens, commodities and natural resources move lower, because they effectively cost more for the rest of the world to purchase when their currencies are worth less as compared to the dollar. The trend of the dollar strengthening last week will be a short-lived phenomenon; remember that less than three weeks ago investors were wondering if the US would lose the AAA credit rating from Standard and Poor’s. The underlying reasons for the credit rating being discussed three weeks ago have not changed: the government still has a lot of money in circulation in order to try to give the US consumer confidence, and the situation in the rest of the world has not really changed enough to warrant weakness in the other world currencies. We found it funny last week that Ben Bernanke testified before congress that the government really needs to look at the way that they are spending money, when it seems that a large portion of the money going into circulation came from his department.
For the week, gold declined moderately along with almost every other publicly traded natural resource and hard asset. Oil was one of the very few commodities that increased in value over the course of the week, in part due to changes in the supply and demand in gasoline worldwide. The volatility, as measured by the VIX Index, actually ticked up a notch despite all of the broad markets moving higher for the week. This could be a sign that the current level of volatility which we are seeing in the market is near the current equilibrium. Activity in the merger and acquisition space picked up moderately over the course of the last week, with many of the bids being seen as hostile and not expected to go through; it was at least nice to see that there are companies out there that are attempting to move forward past the current economic situation. High yield investments continued to increase in value last week, but the spreads have continued to narrow and the default rates could start to increase, thus making them an investment to watch very closely. Finally, as stated above, the dollar increased in value against many of the world currencies, which we think will be a short-lived trend.
For the trading week ending 6/5/09, the returns in our portfolio models were as follows:
Year to Date
S&P 500 WD (benchmark)
2.58 %
5.80 %
Aggressive Model
0.13 %
8.59 %
Growth Model
0.11 %
6.58 %
Moderate Model
0.00 %
3.07 %
Stable Model
-0.09 %
5.61 %
Over the course of last week we made a few tactical investments and are watching them very closely to ensure that they behave as we expect. Our first major change was to sell our hedging position in Direxion Funds S&P 500 bear (DXSSX). Our second and third moves last week were to reinvest in both Latin America and China in a few of our investment models. We invested because both funds showed very good strength over the course of this recent rally, and because geopolitical news from the regions made the risk in the investments worth taking. Our final change last week was to move into the Rydex Precious Metals Fund (RYPMX). This fund is made up of many holdings related to the metals and mining industry and has outperformed the underlying materials during the course of the latest rally. We continue to add to some of our positions and are looking for other investments as the rally continues with the thought always present in our minds that we could need to move back into cash very quickly should the market start to deteriorate. Once we are out of this uncertain period, we will begin to use more managed funds and lean away from the index-related funds that we are currently using. Many fund managers underperform compared to the indexes when there is a big rally and outperform the indexes when they are not in rally mode. The indexes are, for the most part, still in a rally mode.
Economic Wrap Up: Last week saw a fair amount of economic news release surprises: some that were considered good, others not so good. To start off with the good economic news releases, last Monday personal income showed an uptick of half of a percent while the consensus was for income to drop by two tenths of a percent. This combined with less of a decrease in personal spending (also released last Monday) appears to point to US consumers growing a little more confident in the worst of the economic cycle being behind us. Also released last Monday were better-than-expected construction spending figures, as well as a better-than-expected ISM Index figure. On Tuesday we received confirmation on the previous day’s construction spending figures by seeing that pending home sales jumped upward 6.7 percent during the month of April while “The Street” expected an increase of .5 percent. Now we just need to see if the financing is available for all of those pending sales once closing time rolls around. On Thursday last week the first of a few employment related figures was released: initial jobless claims rose by 621,000 over the prior week, which was moderately above expectations. Then, on Friday, the big news of the week was a jump in the unemployment rate to 9.4 percent, which was above most expectations, while at the same time Nonfarm payrolls were shown to decrease by 345,000 (substantially better than the expected drop of 520,000). On Friday it appeared as though people viewed the employment news as somewhat offsetting, therefore having little overall impact on the general markets. The final economic news release last Friday was the consumer credit figure, which showed a decline in consumer credit of $15.7 billion during the month of April, this coming on the heels of a decline of $16.5 billion during the month of March. The US consumer using less credit will ultimately be good for the economy, but it would be better if consumers chose not to take available credit, rather than the banks not even offering the credit, which seems to more the case right now.
This week is a very slow week for economic news releases. The treasury budget, released on Wednesday is the first economic news release of any importance, and calling that one important is a bit of a stretch. Retail sales figures for the month of May, released on Thursday, will probably be the biggest economic news release of the week. Wall Street will watch this release very closely to see if the resurgence of consumer confidence translates into better retail sales or if the blip in consumer confidence was just a one-time event. Overall, it is a very slow week and the scheduled releases will not move the markets much.
Posted in Weekly Commentary