Stocks moved up nicely last week despite poor economic data and a huge decline in precious metals and other commodities.
As the charts above illustrate, the Dow Jones Industrial Average gained over 2% last week while the NASDAQ Composite jumped higher by 2.8%.
The Markets & Economy
The economic news everywhere is disappointing. This includes the USA where retail sales were disappointing (see chart next page) along with other economic reports such as this morning’s New York regional survey. Along with this is the horrific news which continues to emanate from Europe where growth is simply non-existent, and finally overnight came word that China is growing more slowly than thought.
All this has combined to make a mockery out of those who just days ago were touting the rejuvenated global economy as the needed background for monetary authorities to end their aggressive policy of money printing sooner versus later.
This has also had the effect of destroying the bull market in precious metals. Needless to say the hype which has gone into that sector over the past few years, as evidenced by the endless commercials on television and radio of the need to own gold/silver, is once again ending badly.
Gold is now down 30% since last fall, and if this were to happen to stocks then investor reaction would be much more dramatic. People have been convinced that gold had become an alternative for paper money and was also a place to protect the value of your assets. Maybe, but you cannot spend gold. Also, many hedge fund managers are seeing their performance suffer from their exposure and are facing margin calls and/or redemptions.
Thus precious metals have fallen quickly in price and in the case of gold are approaching its cost of production. While it may be ugly in the short-run, the worst may soon be over, but the mining shares themselves are not likely to rebound soon since they cannot make money at these prices.
The economic data mentioned above have resulted in lowerGDP estimates for 2013. With higher taxes, a reduction in the growth of government spending and export opportunity slipping - it is hard to expect otherwise.
The good news is that oil prices have retreated to below 90 dollars per barrel due to rising production and lower demand. This combined with the monetary authorities paying attention to the many deflationary signals coming from the markets assures investors that many sectors of the stock market will do very well, while the commodity sensitive banes search for a bottom.
What to Expect This Week
Earnings reports will now flood the scene. In addition, several economic reports including several more regional Fed surveys and news on the housing sector will filter in. Clearly though, the deflation in the commodity markets is the biggest factor. This has created a stronger dollar, lower energy prices, and a boost for defensive names.
On the other hand, there will be others looking to take advantage of the carnage in the commodity markets to start positions at reasonable entry points. Remember, market sentiment swings much more violently and quickly than fundamentals. The USA is not in recession, and remains the best situated economy in the world by virtue of having the reserve currency and by having become energy independent without many even realizing it.
The weekly reading from the Economic Cycle Research Institute continues to suggest norecession, but rather a continued advance which will frustrate both policy makers and the doomsayers who are having their lunch handed to them in the gold market today.
SYMBOL: DEMBF
Last week we sold shares of D.E. Master Blenders for those clients that owned shares in the Company. Management reached an agreement to sell itself to the private equity firm Joh A. Bensicker for $9.8 billion. This deal had been in the works for more than a year. Clients received this equity from the break-up of Sara Lee. We believe this is a fair offer for the Company, and don’t see a bidding war coming in the future.
Three-Month Chart
NATURAL GAS STOCKS
As the price of natural gas continues to rise, shares of both Enterprise and Southwestern continue to head higher. Enterprise also raised its quarterly cash distribution to $0.67, which makes this the 35th consecutive quarter of distribution increases.Southwestern is also trading near 52-week highs and has received multiple upgrades from Wall Street brokerages over the past month.
We believe we are in the early stages of this upward move in natural gas prices, and think both of these companies are undervalued. We expect to see new highs for both of these names by the end of this year, as investors start to focus on the benefits of natural gas.
Enterprise Three-Month Chart Southwestern Three-Month Chart
SYMBOL: EPD SYMBOL: SWN
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