Market Week: July 31, 2014

July 30th, 2014

The Markets

U.S. stocks dropped sharply Thursday in response to the downing of a Malaysia Airlines commercial jet over Ukraine and the Israeli ground invasion of Gaza. However, most indexes bounced back Friday to end another week in positive territory. The exception was the Russell 2000 Index, which continued its decline perhaps aided by Fed Chairman Janet Yellen’s comments earlier in the week indicating that valuations in some small-cap sectors appear “substantially stretched.” Treasury yields dropped last week, while gold ended the week about 2% lower.

Market/Index

2013 Close

Prior Week

As of 7/18

Weekly Change

YTD Change

DJIA

16576.66

16943.81

17100.18

.92%

3.16%

Nasdaq

4176.59

4415.49

4432.15

.38%

6.12%

S&P 500

1848.36

1967.57

1978.22

.54%

7.03%

Russell 2000

1163.64

1159.93

1151.61

-.72%

-1.03%

Global Dow

2484.10

2599.40

2622.25

.88%

5.56%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.53%

2.50%

-.03 bps

-.54 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Stocks tumbled Thursday in response to two major geopolitical events, the downing of Malaysia Airlines Flight 17 over Ukraine and Israel’s ground invasion of the Gaza Strip. Treasuries yields dropped and gold futures rose as investors sought safer havens.

· Retail and food sales rose 0.2% in June and were 4.3% higher than a year earlier. However, the Commerce Department does not adjust the numbers for price increases such as those seen in food costs in the last several months; not counting autos, which were down 0.3%, other retail sales were up 0.4% for the month.

· The Federal Reserve’s “beige book” report said most districts expect a continuation of generally steady growth seen at the end of last year. All districts reported year-over-year gains in manufacturing, and most also said retail sales had increased since the last report.

· Wholesale prices rose 0.4% in June, putting the wholesale inflation rate for the last 12 months at 1.9%. The Bureau of Labor Statistics said almost all of the monthly increase was the result of a 2.1% jump in energy costs resulting mostly from higher gas prices.

· Housing starts dropped by 9.3% in June from the previous month, according to a joint release issued by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The decrease stemmed from a nearly 30% drop in the South, where unusually wet weather hampered construction efforts. Other regions reported increases, including the Northeast, which was up 14.1%, and the Midwest, which rose 28.1%. Year-over-year, the index is up 7.5%.

· Manufacturing data was generally positive. The Federal Reserve said U.S. manufacturing output was up for the fifth straight month, while a 0.2% gain in industrial production meant production was up an annualized 5.5% during Q2 2014. Also, the Federal Reserve’s Empire State manufacturing survey rose for the third straight month, hitting its highest level in more than four years (25.6). The Philadelphia Fed Survey reported similar results. The index rose to 23.9 this month, its highest point since March 2011.

· The Conference Board Leading Economic Index rose 0.3% in June. Ataman Ozyildirim, a Conference Board economist, noted that increases over the last six months indicate an improving economy, which might even accelerate a bit in the second half. “Housing permits, the weakest indicator during this period, reflects some risk to this improving outlook. But favorable financial conditions, generally positive trends in the labor markets and the outlook for new orders in manufacturing have offset the housing market weaknesses over the past six months,” he said.

· The Justice Department announced that Citigroup had agreed to provide $200 million worth of financing for new affordable rental housing as part of a $7 billion settlement for misrepresenting mortgage-backed securities it packaged and sold leading up to the 2008 financial crisis. The agreement also includes a $4 billion civil penalty that the Department of Justice said represents the largest settlement under a federal law enacted as a result of actions by thrifts and savings and loan institutions in the 1980s.

Eye on the Week Ahead

This week, investors will likely keep a close eye on continuing geopolitical developments, as well as domestic reports on consumer inflation, existing and new home sales, and durable goods.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Change is normal

July 22nd, 2014

Change happens all the time in probably everything we deal with. Perhaps you remember the famous Greek philosopher who opined that you can never dip your toe into the same stream twice because it’s not the same stream.

Nowhere is this more true than in the Stock Market.

A few weeks ago, after a significant amount of research from the economics departments of two large banks, I concluded that the Euro index was likely to do better during the second half of this year than the S&P index. So I bought small amounts of the FEZ, a Euro index ETF. It was not meant to be a short term investment, but a place to park a small amount of money used as collateral for option trading into a place where it might grow.

Last week an investor knowledgeable in European affairs met with some Eastern European financial wizards, and came back with a different point of view. According this this theory, since the airplane in the Ukraine was shot down allegedly with the help of Russia, there will be more economic sanctions on Russia. This will cause the Russian economy to drop. This in turn will cause the European economy to drop. And this will have a big impact on the US stock market, which will tumble to new lows in September or October of this year.

It all makes sense, and it might happen. I’m tempted to sell my newly purchased FEZ shares. But I don’t think I will. I expect various markets to go down from time to time. Yes I think there is a good chance the European markets will take a hit from these increased sanctions against Russia, and the overall market will dip.For a while. Maybe.

And then I’ll buy more shares. The effects of the sanctions won’t last forever. Investors have short memories. It’s the “what have you done for me lately” mentality.

Do I think this will cause the US stock market to tumble? Not really. I’m already expecting a correction because of the strength the market has shown lately. Maybe the correction will be greater than usual. But again, it will come back. It always has. And I’ve got cash set aside to buy into a nice big correction. Some of the great US companies (like John Deere and Whole Foods) are trading at really cheap prices already. Most of my stocks are paying a nice dividend, and many of them have covered calls on top. So in a dip I take a nice profit on the covered calls, and keep collecting in the dividends. If the dip is big enough to go below my cost, I buy more to average lower. Then I write more calls.I’m living on the income from the capital investment, not the changing value of the capital.

The US market is really strong. A lot of companies are profiting from sales in Europe, and a dip in those sales will reduce profits. But there is the Asian market, the Canadian market and lots of other places to sell. I don’t think a decline in the Russian economy (which already smells bad) will have that much of an effect on the US market. It will be fun to see who is right.

Mervyn Hecht

Market Week: July 22, 2014

July 21st, 2014

The Markets

U.S. stocks dropped sharply Thursday in response to the downing of a Malaysia Airlines commercial jet over Ukraine and the Israeli ground invasion of Gaza. However, most indexes bounced back Friday to end another week in positive territory. The exception was the Russell 2000 Index, which continued its decline perhaps aided by Fed Chairman Janet Yellen’s comments earlier in the week indicating that valuations in some small-cap sectors appear “substantially stretched.” Treasury yields dropped last week, while gold ended the week about 2% lower.

Market/Index

2013 Close

Prior Week

As of 7/18

Weekly Change

YTD Change

DJIA

16576.66

16943.81

17100.18

.92%

3.16%

Nasdaq

4176.59

4415.49

4432.15

.38%

6.12%

S&P 500

1848.36

1967.57

1978.22

.54%

7.03%

Russell 2000

1163.64

1159.93

1151.61

-.72%

-1.03%

Global Dow

2484.10

2599.40

2622.25

.88%

5.56%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.53%

2.50%

-.03 bps

-.54 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Stocks tumbled Thursday in response to two major geopolitical events, the downing of Malaysia Airlines Flight 17 over Ukraine and Israel’s ground invasion of the Gaza Strip. Treasuries yields dropped and gold futures rose as investors sought safer havens.

· Retail and food sales rose 0.2% in June and were 4.3% higher than a year earlier. However, the Commerce Department does not adjust the numbers for price increases such as those seen in food costs in the last several months; not counting autos, which were down 0.3%, other retail sales were up 0.4% for the month.

· The Federal Reserve’s “beige book” report said most districts expect a continuation of generally steady growth seen at the end of last year. All districts reported year-over-year gains in manufacturing, and most also said retail sales had increased since the last report.

· Wholesale prices rose 0.4% in June, putting the wholesale inflation rate for the last 12 months at 1.9%. The Bureau of Labor Statistics said almost all of the monthly increase was the result of a 2.1% jump in energy costs resulting mostly from higher gas prices.

· Housing starts dropped by 9.3% in June from the previous month, according to a joint release issued by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The decrease stemmed from a nearly 30% drop in the South, where unusually wet weather hampered construction efforts. Other regions reported increases, including the Northeast, which was up 14.1%, and the Midwest, which rose 28.1%. Year-over-year, the index is up 7.5%.

· Manufacturing data was generally positive. The Federal Reserve said U.S. manufacturing output was up for the fifth straight month, while a 0.2% gain in industrial production meant production was up an annualized 5.5% during Q2 2014. Also, the Federal Reserve’s Empire State manufacturing survey rose for the third straight month, hitting its highest level in more than four years (25.6). The Philadelphia Fed Survey reported similar results. The index rose to 23.9 this month, its highest point since March 2011.

· The Conference Board Leading Economic Index rose 0.3% in June. Ataman Ozyildirim, a Conference Board economist, noted that increases over the last six months indicate an improving economy, which might even accelerate a bit in the second half. “Housing permits, the weakest indicator during this period, reflects some risk to this improving outlook. But favorable financial conditions, generally positive trends in the labor markets and the outlook for new orders in manufacturing have offset the housing market weaknesses over the past six months,” he said.

· The Justice Department announced that Citigroup had agreed to provide $200 million worth of financing for new affordable rental housing as part of a $7 billion settlement for misrepresenting mortgage-backed securities it packaged and sold leading up to the 2008 financial crisis. The agreement also includes a $4 billion civil penalty that the Department of Justice said represents the largest settlement under a federal law enacted as a result of actions by thrifts and savings and loan institutions in the 1980s.

Eye on the Week Ahead

This week, investors will likely keep a close eye on continuing geopolitical developments, as well as domestic reports on consumer inflation, existing and new home sales, and durable goods.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Market Week: July 10, 2014

July 9th, 2014

The Markets

After generally positive economic data once again suggested that the economy really did begin to rebound this spring, the Dow industrials surpassed 17,000 for the first time, while the S&P 500 hit three new all-time records during the week. And as investors embraced stocks, worries about the potential impact of a strong economy on potential Fed rate increases also sent the benchmark 10-year Treasury yield up and the price down.

Market/Index

2013 Close

Prior Week

As of 7/4

Weekly Change

YTD Change

DJIA

16576.66

16851.84

17068.26

1.28%

2.97%

Nasdaq

4176.59

4397.93

4485.93

2.00%

7.41%

S&P 500

1848.36

1960.97

1985.44

1.25%

7.42%

Russell 2000

1163.64

1189.49

1208.15

1.57%

3.83%

Global Dow

2484.10

2603.77

2638.59

1.34%

6.22%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.54%

2.65%

11 bps

-39 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The unemployment rate fell to 6.1% in June; that’s 1.4% lower than a year earlier and the lowest level in almost six years. The economy added 288,000 new jobs during the month, higher than the 272,000 monthly average since March. The data, coupled with upward revisions to payroll figures for April and May, suggested possible acceleration in job growth. The Bureau of Labor Statistics said the widespread job gains were led by professional/business services, retail, restaurants/bars, and health care.

· A 2% increase in new orders placed with U.S. manufacturers put orders at their highest level since late 2013. Even though the Institute for Supply Management’s index showed that manufacturing growth didn’t accelerate in June, it still remained at a healthy 55.3% reading (any number above 50 represents expansion). The ISM’s measure of the services sector also showed slightly slower growth than the previous month, though the reading remained at a robust 56.3%.

· After three straight monthly increases, new orders for U.S. manufactured goods slipped 0.5% in May, though most of the decline was in the volatile transportation sector. The Commerce Department also said inventories were at their highest level on record and have increased 18 of the last 19 months.

· Commercial construction spending rose 1.1% in May, but the Commerce Department said that was largely offset by a 1.4% drop in the value of new home projects. The 0.1% overall increase in construction spending was weaker than April’s 0.8% gain, but the annual rate was 6.6% higher than a year ago.

· As expected, the European Central Bank left two key interest rates unchanged, hoping that measures taken last month will be enough to help stimulate the economy.

· Higher auto-related exports and less spending on imported oil and consumer goods helped cut the U.S. trade deficit by 5.5% in May to $44.4 billion, according to the Bureau of Economic Analysis.

· The U.S. Supreme Court ruled that closely held, for-profit companies can choose to opt out of a provision of the Affordable Care Act that requires that employees’ insurance include coverage for birth control. The court also ruled that workers who aren’t full-fledged public employees cannot be required to pay fees to a union even if they benefit from its collective bargaining efforts.

· Two separate assessments suggested that China’s sluggish manufacturing sector may be rebounding. The reading on the Chinese government’s purchasing managers’ index nudged up slightly to 51 in May. Meanwhile, HSBC/Markit’s Manufacturing PMI was basically flat but stayed in expansion territory, apparently responding to small steps taken by the government to stimulate economic growth.

Eye on the Week Ahead

In a week that’s light on fresh economic reports, investors may begin to focus on the Q2 earnings season, which has its unofficial start on Tuesday when Alcoa reports. Minutes of the most recent Federal Open Market Committee meeting could shed new light on the debate over whether the Fed should be concerned yet about inflation.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Ideas for the weekend – and happy Fourth of July

July 4th, 2014

With the market as high as it is now, I’m cautious about buying into equities. And with interest rates so low I’m not happy buying bonds. Even gold is too high for me.

So what to do with my portfolio? SELL CALLS. On equity stocks that I have that have appreciated a lot (I wish there were more!) it’s time to sell out-of-the-money calls and, if they continue up 5-10% over current prices take the profit and look for alternative investments for a while.

In my website DoubleYourYield.com we have a covered call writing program. It allows us to put in certain parameters for covered call writing. So what I am doing is putting in the parameters of $1 premium or more, 90 days, and the name of my portfolio on the site (the portfolio manager) and the program looks at all of my long holdings and lets me know if I have any stocks on which I can write calls to produce that much premium. It’s a great program for today’s market.

As I suggested a few weeks ago, I’m buying into the Euro index, on the theory that Europe usually trails the US by a year or so. So now that the US market is up so much I expect the European market to move up within the next 12 months.

The Foreign Shareholder Yield Fund (FYLD) is another possibility, although it too is way up. But it has holdings not only in Europe, but Canada and Japan, a nice diversification. Or you can diversify into Canada and skip Japan by buying the Royal Bank of Canada (RV). Earnings are strong and there’s a nice 3.8 % yield, which is a lot more than my broker is paying for my cash on hand.

I read that Bill Gates is investing in Republic Services (RSG), a competitor to Waste Management. Waste disposal is certainly a good, growing business in today’s world, and the statistics for this company are vastly better than the leading company, Waste Management. And even at it’s high, about $38, it pays a nice 2.8% dividend. But it’s not for me because the option premiums on both sides are too low.

Periodically I invest in Xerox, a wonderful established company that keeps investors happy with increasing dividends. Option premiums are not high because there’s not much volatility. With the stock at $12.45 I’m looking at selling the January (2015) 12 puts to take in about $.80 and buying the January 13 calls to pay about $.60. Yes I only take in $.20 which just about covers my costs. But if the stock goes down to 12 I’m glad to buy a few shares. And if the stock goes over $13 I can make as much as if I owned the stock. It seems like a cheap way to effectively own the stock for the rest of year in case the bull market continues.

All my significant holding are up except BAC, which is almost at my cost, but I’m ahead from option writing, and WFM in which I am down almost $10,000, with about $2,000 pending recovery from writing options on both sides of it. Check my back blogs for those recommendations that have done so well. And keep tuned!

Merv

Patience

July 3rd, 2014

It does pay off sometimes. I’ve been holding FCX for some time, hoping for a rise in copper. Finally it’s happening. My cost, with fees, is under $33 a share. The stock is now over $36. I invested $10,000 (300 shares) and have about a $1,000 profit.

Should I take it? NO. Now is when it looks like this commodity is finally taking off. But there’s another reason. I’m earning almost 4% annually in dividends on my investment. That’s hard to beat. And if the stock starts to go back down I’ll start writing calls on it and pick up the returns to over 6%. Those so inclined might want to sell puts on FCX right now to acquire it at below today’s price.

The market seems pretty high right now, and I’m hanging back. But as we get into the Summer months, when trading is lower and there is less volatility, I plan to start writing calls on the S&P index. I don’t expect a big jump in the overall market during the Summer.

Merv
07/03/2014