Posted by: financiallyspeakinginc | October 15, 2009
Weekly Commentary October 12th, 2009
The downward correction of the past two weeks now appears to be over as the major indexes showed surprising strength last week as earnings season kicked off. Expectations continue to rise about the outlook for businesses through the end of this year and into next. The earnings season may be slightly skewed this quarter, as many companies will compare third quarter 2009 earnings to third quarter 2008 earnings (when the markets fell apart), causing them to look very good. While better than last year, most companies have taken a large hit in earnings and are not yet back to their pre-market-correction levels. Earnings, however, are a somewhat lagging indicator as to how the overall economy fares, because they depend on sales. During earnings season it is more important to hear what the companies say about future outlook.
On the international front last week, Australia did something very interesting last Monday in raising their interest rates. They are the first G-20 country to raise rates, which could be a signal of what is to come. The Bank of England did not follow suit, however, deciding to leave interest rates alone. With Australia’s rate increase, they could potentially see large sums of international money flowing into the country, chasing the higher interest rates. A more long-term consequence of this increase is that the rest of the world will have to follow suit as inflation starts to pick up. We may see a situation where emerging economies start to raise their interest rates while developed countries keep their rates low. This could have many unforeseen consequences. Right now, the emerging economies around the world seem to be recovering much faster than the developed world, presenting a possible investment opportunity that would benefit from an overall increase in the global economies as well as a declining US dollar.
The three major US indexes had a very strong week, making up nearly all of the losses that occurred over the previous two weeks. The S&P 500 performed the best of the three indexes with a return of more than 4.5 percent. The Dow Jones average performed the worst, returning a little under four percent for the week. Commodities all moved up during the course of the week with Gold making a new all-time-high, pushing up near $1,050 per ounce. Gold moved up due to speculation about China choosing to purchase gold and hold it in reserve. Copper moved up dramatically last week as demand for manufacturing started to pick up globally in the emerging markets. Oil continued to trade in the same range it has been since OPEC said that is where they want oil prices to remain. The US dollar continued to slide last week, despite a strong increase in value on Friday. Overall, the trend for the dollar has continued downward, and will probably keep heading in that direction as the US adjusts their fiscal policies to the changing conditions.
For the trading week ending 10/9/09, the returns in our portfolio models were as follows:
Last Week
Year to Date
S&P 500 WD (benchmark)
4.56 %
20.95 %
Aggressive Model
1.55 %
7.27 %
Growth Model
1.11 %
6.80 %
Moderate Model
0.88 %
5.27 %
Stable Model
1.06 %
7.18 %
Last week, we made a few changes to our models, adding to our allocation in Latin America, which has shown surprising strength over the last couple of months. It seems that with every downturn in the markets, Latin America and – in particular – Brazil have found reasons to continue outperforming nearly every other country. Also, we added the small-cap value-sector of the market back into our models over the course of last week, since it has recovered nicely from the sharp downturn of two weeks ago. We bought back into the same fund we had sold (RYAZX), because small-cap value still looks set to outperform both small-cap growth and the small-cap sector in general. As the two-week correction now appears to have ended for the major indexes, we are moving back into a more fully invested position in our models in order to take advantage of a possible rally on the back of the earnings season.
Economic Wrap Up: Last week was a very slow week for economic news releases, with only four releases that had any meaning for the market. On Wednesday, consumer credit was shown to have shrunk during the month of August by $12 billion. While this figure is far from good, it is significantly better than it was the previous few months. On Thursday, initial jobless claims for the previous week were shown to have increased by 521,000 (19,000 better than was originally expected). On the same day, continuing jobless claims came in at 6,040,000 (also better than the expected 6,105,000). This drop in continued jobless claims, however, is somewhat misleading because some of the first people who were let go during this downturn are now running out of jobless benefits and, therefore, are no longer filing claims. Also on Thursday, wholesale inventories for the month of August came out, showing that inventories declined by 1.3 percent during the month. While this number is better than the July reading, it is a far cry from the expectations of some inventors who hoped that companies would start to rebuild inventories. Eventually, companies will replenish inventories, but probably not until they are sure that demand for their products will increase. Very few businesses can afford to build up their inventories and carry them on their books for a prolonged period of time, so most prefer to use something closer to a “just-in-time method” for their inventories so that they do not tie up company assets by having products sitting in a warehouse. Overall for the week, the economic news releases were not overly good or bad; they were just middle-of-the-road and showed no real change in direction.
After last week was so slow, this week will more than make up for it with the number of economic news releases scheduled. Wednesday kicks the week off with retail sales for the month of September. This release could be interesting because it will provide further insight as to what the US consumer is doing during trying times. Some of the major retailers seem to be signaling that we could end up with flat retail sales for the month, which would actually be a positive thing, since expectations are for sales to have declined by 2.1 percent. Also on Wednesday, both business inventories and the FOMC meeting minutes are released. The thing to watch for in these releases is language about actions the Fed is considering so as to unwind some of the money that flooding the system. On Thursday, the CPI figures for the month of September are released and should indicate the level of inflation in the US. On Friday, industrial production for the month of September comes out, and is expected to show an expansion of 0.4 percent. Overall, this week will be exciting for economic news, with everything packed into the last three days of the week.
The downward correction of the past two weeks now appears to be over as the major indexes showed surprising strength last week as earnings season kicked off. Expectations continue to rise about the outlook for businesses through the end of this year and into next. The earnings season may be slightly skewed this quarter, as many companies will compare third quarter 2009 earnings to third quarter 2008 earnings (when the markets fell apart), causing them to look very good. While better than last year, most companies have taken a large hit in earnings and are not yet back to their pre-market-correction levels. Earnings, however, are a somewhat lagging indicator as to how the overall economy fares, because they depend on sales. During earnings season it is more important to hear what the companies say about future outlook.
On the international front last week, Australia did something very interesting last Monday in raising their interest rates. They are the first G-20 country to raise rates, which could be a signal of what is to come. The Bank of England did not follow suit, however, deciding to leave interest rates alone. With Australia’s rate increase, they could potentially see large sums of international money flowing into the country, chasing the higher interest rates. A more long-term consequence of this increase is that the rest of the world will have to follow suit as inflation starts to pick up. We may see a situation where emerging economies start to raise their interest rates while developed countries keep their rates low. This could have many unforeseen consequences. Right now, the emerging economies around the world seem to be recovering much faster than the developed world, presenting a possible investment opportunity that would benefit from an overall increase in the global economies as well as a declining US dollar.
The three major US indexes had a very strong week, making up nearly all of the losses that occurred over the previous two weeks. The S&P 500 performed the best of the three indexes with a return of more than 4.5 percent. The Dow Jones average performed the worst, returning a little under four percent for the week. Commodities all moved up during the course of the week with Gold making a new all-time-high, pushing up near $1,050 per ounce. Gold moved up due to speculation about China choosing to purchase gold and hold it in reserve. Copper moved up dramatically last week as demand for manufacturing started to pick up globally in the emerging markets. Oil continued to trade in the same range it has been since OPEC said that is where they want oil prices to remain. The US dollar continued to slide last week, despite a strong increase in value on Friday. Overall, the trend for the dollar has continued downward, and will probably keep heading in that direction as the US adjusts their fiscal policies to the changing conditions.
For the trading week ending 10/9/09, the returns in our portfolio models were as follows:
Year to Date
4.56 %
20.95 %
Aggressive Model
1.55 %
7.27 %
Growth Model
1.11 %
6.80 %
Moderate Model
0.88 %
5.27 %
Stable Model
1.06 %
7.18 %
Last week, we made a few changes to our models, adding to our allocation in Latin America, which has shown surprising strength over the last couple of months. It seems that with every downturn in the markets, Latin America and – in particular – Brazil have found reasons to continue outperforming nearly every other country. Also, we added the small-cap value-sector of the market back into our models over the course of last week, since it has recovered nicely from the sharp downturn of two weeks ago. We bought back into the same fund we had sold (RYAZX), because small-cap value still looks set to outperform both small-cap growth and the small-cap sector in general. As the two-week correction now appears to have ended for the major indexes, we are moving back into a more fully invested position in our models in order to take advantage of a possible rally on the back of the earnings season.
Economic Wrap Up: Last week was a very slow week for economic news releases, with only four releases that had any meaning for the market. On Wednesday, consumer credit was shown to have shrunk during the month of August by $12 billion. While this figure is far from good, it is significantly better than it was the previous few months. On Thursday, initial jobless claims for the previous week were shown to have increased by 521,000 (19,000 better than was originally expected). On the same day, continuing jobless claims came in at 6,040,000 (also better than the expected 6,105,000). This drop in continued jobless claims, however, is somewhat misleading because some of the first people who were let go during this downturn are now running out of jobless benefits and, therefore, are no longer filing claims. Also on Thursday, wholesale inventories for the month of August came out, showing that inventories declined by 1.3 percent during the month. While this number is better than the July reading, it is a far cry from the expectations of some inventors who hoped that companies would start to rebuild inventories. Eventually, companies will replenish inventories, but probably not until they are sure that demand for their products will increase. Very few businesses can afford to build up their inventories and carry them on their books for a prolonged period of time, so most prefer to use something closer to a “just-in-time method” for their inventories so that they do not tie up company assets by having products sitting in a warehouse. Overall for the week, the economic news releases were not overly good or bad; they were just middle-of-the-road and showed no real change in direction.
After last week was so slow, this week will more than make up for it with the number of economic news releases scheduled. Wednesday kicks the week off with retail sales for the month of September. This release could be interesting because it will provide further insight as to what the US consumer is doing during trying times. Some of the major retailers seem to be signaling that we could end up with flat retail sales for the month, which would actually be a positive thing, since expectations are for sales to have declined by 2.1 percent. Also on Wednesday, both business inventories and the FOMC meeting minutes are released. The thing to watch for in these releases is language about actions the Fed is considering so as to unwind some of the money that flooding the system. On Thursday, the CPI figures for the month of September are released and should indicate the level of inflation in the US. On Friday, industrial production for the month of September comes out, and is expected to show an expansion of 0.4 percent. Overall, this week will be exciting for economic news, with everything packed into the last three days of the week.
Posted in Weekly Commentary