It certainly felt like a rough week on the markets, with media headlines screaming the stock markets dropped 300 points; however, from March 10, 2011 through March 16, 2011, the Standard & Poor’s 500 Index is only down about 2%. For more perspective, as of the close on March 17, the S&P is up 1.28% for the year. Even from the peak in February, to the trough, the S&P has only fallen 6.4%. This is pretty incredible considering what we have witnessed with the Egyptian riots, the uprising in Libya, unrest in Bahrain and Saudi Arabia, and now the earthquakes and tsunami in Japan.
- On average, our markets dip about 5% three times a year.
- It has been more than a year since our markets have dropped 10%, which they do on average once a year.
- A 10% correction is usually caused by a shock to the system, and we have had plenty in the last month.
- The fact the markets are down only 6.4% is likely due to the strong economic news offsetting the global crises.
- In 2008, our markets saw a 54% decline.
Broad Picture Economics: Inflation is no longer on the horizon, but already here.
- The Federal Reserve Open Market Committee meeting concluded Tuesday leaving our monetary policy unchanged.
- The Fed plans to continue its quantitative easing program, which is scheduled to conclude at the end of June.
- The committee said they are seeing signs of improvement in the economy, indicating it might be the long-term signals they are expecting.
- The Fed funds rate will remain near 0% for an extended period.
- Housing starts plummeted in February to an annualized rate of 479,000.
- This was a 22.5% drop from January.
- The nation needs 1.2 million units a year to keep up with population growth and immigration.
- We feel we are digging a hole, creating a backlog of new homes.
- Inflation in producer prices is firming up, as prices for finished goods rose 1.6% in February beating the estimates of a 0.6% increase.
- Excluding food and energy, core prices for finished goods rose 0.2%.
- The consumer price index rose 0.5% in February.
- Food and energy contributed most of the upside, as core CPI rose a healthy 0.2.
- On an annualized basis, inflation is at 2.2%, which is in line with the Fed’s target rate of inflation.
- Food and energy are considered too volatile, so the Fed excludes them to see a longer term trend of inflation.
- However, the two things we need most—food and fuel—are rising at an annualized rate of near 6%.
Given the ongoing disaster in Japan, it is no surprise Treasury yields plunged this week, as investors sought the safety of U.S. Government Bonds.
- The two-year Treasury yield fell to 0.60%, and has now fallen about 0.25% in the past few weeks.
- The five-year Treasury yield dropped to 1.92%.
- The 10-year Treasury rate plunged to 3.25%.
- Both the five-year and 10-year are down about 0.50% since mid-February.
- The 30-year Treasury yield decreased to 4.43%, and has fallen about 0.35% since mid-February.
Why did the yen rise against the dollar?
- It is likely the repatriation of the yen as companies are bringing money back into Japan to rebuild.
- More companies are trading in dollars for yen so the demand increased.
- We do not see this as an argument about the U.S. dollar loosing ground as the world’s reserve currency.
- The flight to quality was apparent as U.S. Treasury bond rates decreased as the demand increased this week.
In company news:
- FedEx Corp. (NYSE: FDX) announced third-quarter earnings fell 3% as a result of rising fuel prices and harsh winter weather.
- The company warned that earnings for this quarter and the entire year may be trimmed.
- Ross Stores Inc. (NASDAQ: ROST) reported a higher holiday quarter profit, as shoppers are still looking for designer brands at affordable prices.
- Berkshire Hathaway (NYSE: BRK) announced Monday, March 14, it will spend about $9 billion to add specialty chemical maker Lubrizol Corp. (NYSE: LZ) to its portfolio.
- Berkshire said it will pay about $135 a share—well above the company’s closing price of $105.44 on Friday, March 11—resulting in a near overnight gain of 28% for the stock on Monday.
- Lubrizol was one of our holdings in our Small-Mid Recommended Portfolio. We sold it, taking the gains from Berkshire’s announcement.
- While we believe Warren Buffet and Berkshire are good for the money, why wait six months for the price to increase from $134 to $135?