June 2008 - Posts

Market Update
30 June 08 01:21 PM | Brian Dightman

Last week stock markets reacted to higher crude oil, weak earnings and inflation concerns which sent stocks down.  The Dow lost 4.2% for the week.  Several inflation protection assets (gold, TIPS, international bonds) performed well.

In terms of economic developments, tax rebates appear to have stimulated spending in May but rising food and energy prices are impacting consumer confidence.  Factories appear to be holding up better than the 2001 recession; jobless claims have moved higher and durable goods were flat in May.  The TED SPREAD declined to -1.14%, from -0.86% the week prior, a reminder of the ongoing credit market challenges.

The Fed's comments during the week included a hawkish note on inflation.  Dow Chemical announced a second big price hike in less than a month.  Some product prices will increase by as much as 25% in July.  The move affects dozens of industries.  They are also adding a freight surcharge in North America.

S&P/Case-Shiller reported April home prices experienced record declines.  Existing-home sales fell in May; new home sales rose.

Filed under: TED SPREAD, Inflation Data, Gold

Stocks Under Increasing Pressure
21 June 08 03:56 PM | Brian Dightman

WORLD MARKETS
Both domestic and international stocks have started another leg down and appear headed for a test of the March lows.  Unlike previous weeks of selling, current market leaders recently suffered sharp declines.

Commodities are one of the few areas advancing to higher levels.

Sectors performing well in the current environment include metals & mining, oil/gas exploration & production, agribusiness and basic materials.

Sectors to watch:  water, clean energy, alternative energy.

WORLD ECONOMY
Renewed fears of big write downs and tight liquidity among financials continue to disrupt credit markets.  More downgrades for credit rating agencies have been issued.

Factories continue to slow, the Philly Fed manufacturing index fell in June, the 4th sub-zero reading in a row.

INFLATION DATA
The Philly Fed manufacturing prices paid index shot up to the worst level since 1980, indicating costs are being passed on to customers.

U.S. RESIDENTIAL HOUSING
Home-builders at a recent conference indicated they are making progress clearing out excess inventory but warn that rising unemployment and a recession could hamper the progress being made.

Filed under: Commodities, Inflation Data, Oil and Gas Exploration and Production, Credit Markets, Water, Metals and Mining, Alternative Energy, Clean Energy

The Buy & Hold Portfolio
17 June 08 02:10 PM | Brian Dightman

The following is a modified post I recently made on Marketwatch.com.

 

It is hard to argue with a buy and hold investment strategy, until you look at the numbers.

 

It took the S&P 500 7 YEARS to get back to even from the high hit in March of 2000.  Now it is down around 13% from its new all time high hit in October of 2007.

 

Sure, if you held emerging markets, real estate investment trusts and commodities during the last 8+ years your total portfolio would be up.  But how many buy and hold investors include asset classes outside of US & International Equities and Bonds?  Some yes, but not as many as you would think.  I look at portfolios of the average investor all the time.  While we are at it, how many 401k plans include those asset classes?  Very few.

 

One questions for investment advisors and the media that adopt the B&H strategy with clients, if the results are so spectacular why don’t you publish ACTUAL performance numbers?  I am sure I have missed some examples, but the performance numbers I come across most often from B&H advisors and the media are based on back tested mutual fund performance, not actual client accounts.   There is a VERY BIG difference.

 

Oh yeah, and Paul Farrell’s Lazy portfolio numbers, they only go back about 5 years.  So the portfolios started just about at the bottom of the 2000-2002 bear market.  It has not been terribly difficult to generate double digit returns from just about any asset class (except bonds) in the last 5 years.

 

Buy and hold can be fine if you have the right expectations.  If you are too aggressive, it is going to be very painful to watch the declines roll in year after year (yes, bear markets can last longer than one year), especially if you are in retirement and now pulling income from your investments.

 

My advice, if you are going to use a B&H strategy, use a balanced allocation (approximately 40% in bonds) hold several equity and bond asset classes, keep expenses low, and expect your average long term return to be about 8%.

 

For the record, I use a hybrid model.  I construct highly diversified but unique and focused portfolios.  I over and underweight asset classes based on expectations of the future and right now I am focused on protecting and profiting from rising inflation.

Filed under: S&P 500, Buy & Hold, Balanced Portfolio

200 Day Test
10 June 08 02:02 PM | Brian Dightman

For those that have read my GMM posts over the last few months, you may have picked up on my skepticism regarding the rally stocks embarked on since the middle of March.  Yes, prices have moved up aggressively but without the volume characteristics generally associated with a recovery.

 

More recently I encouraged readers to watch the action of major indices around their 200 day moving average.  Take a look at the charts below.  You can see the S&P 500 (as represented by the exchange traded fund: SPY) has fallen well below its 200 day moving average (red line).  The Nasdaq 100  (as represented by the exchange traded fund: QQQQ) has faired better only testing its 200 day moving average 3 times since the middle of May.  It closed on that line today.

 

With the technical weakness of major U.S. stock indexes, combined with ongoing credit market issues (see April 29^th & May 23^rd posts) and deteriorating economic conditions (unemployment spiked up to 5.5% in May), the most natural path for U.S. stock indexes near term appears to be down.

 

Some sectors have weathered the current U.S. weakness better than others and I would not be surprised if it takes a more selective investment approach to make money in this market.

Filed under: Exchange Traded Funds, NASDAQ 100, S&P 500

Credit Markets, Commodities, U.S. Factory Data & Stocks
04 June 08 02:12 PM | Brian Dightman

If you have been following the credit market mess you probably saw the news yesterday that Lehman Brothers may need to raise more cash.  That is really no surprise to people following credit market developments.  I posted on the subject May 23rd.

Strength in the dollar over the last week has pushed several commodity prices lower, especially oil, closing at just over $122 a barrel today from a high of $135 on May 22nd.  I have recently read several commentaries on the price of oil with most writers' bullish long term.  However, there are strong arguments that the price of oil will come down, potentially much further, in the near term.  Many oil companies are using a price below $100 a barrel to determine if an extraction project is viable.

An interesting projection from the U.N. food summit was reported in Investor's Business Daily yesterday, estimating global food output will need to rise 50% by ’30 to meet global demand.  After spiking around $43, the Powershares DB Agriculture Fund (DBA) is trading in the mid-30s.  DBA is an agriculture commodity price play but I can think of at least two other risk managed ways to participate in the projected increase in global demand for agriculture commodities.

As we muddle through the credit mess it becomes more obvious with each round of economic reports that the U.S. economy has not fallen over a cliff.  It still could, but the Commerce Department reported yesterday stronger-than-expected factory data up 1.1% for April, following March’s 1.5% gain.

U.S. stocks appear mixed on future economic prospects.  I suggested back on May 10th the price action of major indices around their 200 day moving average might be a good proxy for the near term direction of stocks.  I also mentioned back on May 2nd the performance of the Nasdaq 100 looked healthier than the S&P 500, Dow Jones 30 or New York Stock Exchange.  Of the three, only the Nasdaq 100 is still trading above its 200 day moving average.  Stocks are decidedly mixed, with the Nasdaq 100 outperforming in a market that started another correction on May 21st.

Filed under: Commodities, NASDAQ 100, S&P 500, Investors Business Daily, Credit Markets, Global Banks, Agriculture