It was an ugly Thanksgiving week for the market, with stocks falling sharply as the Euro zone continues to buckle under mounting financial pressure. The averages posted their worst holiday week since 1932, with stocks now closing in the red for 6 consecutive sessions.
I’m not sure how many different ways it can be said, but as we all know, this market is all about the Euro zone. Up to this point, the story has mostly revolved around peripheral nations like Greece, Spain and Italy. The hope was that the stronger nations like Germany and France would be able to support these members by providing financial assistance through facilities like the European Union, IMF (International Monetary Fund) And EFSF (European Financial Stability Facility).
But here is the latest turn in the story and the reason stocks tanked last week. Investors are now concerned that even if Germany and France have the will to provide support, the numbers simply won’t jive. That showed up in a terrible German bond auction, suggesting that Germany is now being viewed as a huge risk through its collateral exposure to weaker EU members.
If that’s the trend, where the market continues to lose faith in the stronger EU nations, then it’s only a matter of time before the whole thing falls to the ground in a pile of ashes.
But of course everyone should expect to see a long string of bailouts and political maneuvering before that happens, so as always, the story will remain incredibly dynamic. But the trend is well in play, and with bond yields continuing to spike, expect more volatility.
Looking forward, we’ll see some attention fall to the domestic economy, with a big jobs report set to hit the wire on Friday. We saw a pretty lousy downgrade on Q2 GDP last week from 2.5% to 2%, triggering renewed concern that the economy may be slowing again. So expect the jobs report to weigh heavily on sentiment.
The outlook doesn’t look great right now, so as we’ve been saying the last few weeks, if you feel uncomfortable or concerned about your risk, don’t hesitate to take a good look at your portfolio and make some strategic adjustments.
Let’s get into some updates.
Updates:
With the market down six days in a row and the averages posting their worst Thanksgiving performance since 1932, there was little to feel good about. That means capital preservation was the name of the game.
We saw that show up in McDonalds Corp (MCD), handily beating the market with a .69% decline as investors rotated into defensive, dividend paying stocks. That also showed up in Buckeye Partners (BPL), where a hefty 6.5 dividend buoyed shares to a 2% loss.
We continue to see weakness in energy stocks, with Baker Hughes (BHI) falling 9% and Cimarex Energy (XEC) dropping 8%. It came on the heels of crude hanging pretty tough, down only 1% on the week in spite of mounting concern about growth. Energy stocks have been hit hard over the last few months, leading the market lower as one of the worst performing sectors in the S&P500. But the funny thing about it is that earnings continue to look great, creating some serious long-term value for investors looking to capitalize on fear. So even though it’s been tough to own energy stocks, anyone who believes in the long-term trend in resources should be thinking about buying.
Shifting gears into some good news, we heard from Deere & Company (DE) this week, reporting Q3 earnings of $1.62, 51% ahead of last year’s results. Sales of $8.6 billion were up 20% from last year. The company also announced plans to build manufacturing plants in China, India and Brazil in order to better serve their growing economies.
On the domestic front, Deere noted that it continues to roll out new products to comply with Federal pollution regulations, which has also sharply affected its cost of research and development and forced it to raise prices. Anyone who wants to know why we have no jobs in this country can look to Deere as the perfect example. Our Federal government in obsessed with straddling great companies with erroneous regulations that stymie profits and weaken margins, while other countries are luring production centers with tax incentives. But once again, I digress…looking forward, the company expects to see strong results out of North America and Asia, while offering a more tempered outlook in Europe as the region continues to battle financial problems. Longer term, this is a pick to provide us with exposure to growth in agriculture and pressure on global food supplies, and that trend isn’t showing any signs of weakness. Deere closed the week with a marginal .85% loss in the weak market.
And finally, Apple, Inc. (AAPL) hung pretty tough, down 3% on the week while other stocks were falling off cliffs. There has been a lot of speculation that Apple is a “dead stock”, a tech giant with great earnings that is stuck in the mud due to questions about the sustainability of its growth. And with Steve Jobs passing away in August, uncertainty is running strong right now. The holiday season will give us some more insight into how the company will cope with these challenges. If sales are strong and shares rally, we will stick with Apple. But if that doesn’t happen, it could be time for us to look for a fresh pick out of technology. Either way, we have a plan to stay nimble and adjust accordingly.
That’s all for this week, but until next time, here is a quick article on Black Friday and an early look at how consumers are behaving this holiday season. Enjoy.
Black Friday Sales Rise to Record
Your Investment Partner,
Mike
