Tuesday, October 17, 2017

Soros gives away $18 billion

George Soros just gave most of his wealth to his charitable organization, the Wall Street Journal reported Tuesday.

The billionaire philanthropist transferred $18 billion to Open Society Foundations, a sprawling international group of charities that works in more than 100 countries on projects focused on refugee relief, public health and many other topics.

The $18 billion figure amounts to almost 80 percent of the financier's total net worth. Before the transfer, Soros had a net worth of $23 billion, according to a Forbes tally Tuesday. The site ranks him as the 29th wealthiest person in the world.

Soros began his charitable giving in 1979, nine years after launching Soros Fund Management, the hedge fund that would propel him into America's ultrawealthy. He has given away $12 billion in the four decades since, according to his official biography, available on his website.

His first charitable work involved providing black South Africans with scholarships during the country's apartheid. During the Cold War, he provided photocopiers to people living in eastern Europe in order to reprint texts banned by communist governments. He has also underwritten the largest effort to integrate Europe's Roma, according to the biography available on his website.


Tuesday, October 10, 2017

greatest wealth creators since 1926

In the history of the markets since 1926, Apple has generated more profit for investors than any other American company.

In a phone conversation, Professor Bessembinder reminded me that the stock market is a moving target and that his rankings, while valid through the end of 2016, don’t capture the sharp movements of this calendar year. In his 2016 rankings, Exxon Mobil, not Apple, appears at the top, with net wealth creation of more than $1 trillion. Apple lags at about $745 billion.

But it has been a wild year. Exxon Mobil shares have declined more than 11 percent at a time of weak energy prices, while Apple, which just introduced a raft of new iPhones, is on a spectacular stock surge, gaining more than 37 percent.

Run the numbers as I did, and it’s clear that at this moment, Apple has pulled ahead of Exxon Mobil, with total net wealth creation of somewhere in the vicinity of $1 trillion.

As I wrote in July, Amazon, which started trading in 1997, has soared to the 14th spot. Although it hasn’t been in existence long compared with Exxon Mobil, its annualized return is the highest in the list, 37.4 percent through December. A group of young companies have also had remarkable results.

Facebook, which started trading in June 2012, is the youngest on the list, with an annualized return of 34.5 percent. Visa, which had its initial public offering of stock in 2008, is the second-newest company, with a 21 percent annualized return, followed by Alphabet (Google), ranked 11th with a 24.9 percent annualized return.

And then there is that great wealth machine, Microsoft, ranked as the third-greatest wealth creator. Since 1986, it has had an annualized return of 25 percent, making its founder, Bill Gates, the richest man in the world, with a net worth of more than $87 billion, according to Bloomberg.

No list of wealth-generating companies is complete without Berkshire Hathaway. It ranks 12th, just behind Alphabet, with an annualized return of 22.6 percent. By comparison, Exxon Mobil’s annualized return was only 11.94 percent.

Anyone who invested in Apple or Microsoft or, really, in any of these companies at their inception and just held on did extraordinarily well. You might look at that record and conclude that you should just buy the best companies as a foolproof way to get rich.

If only it were that easy.

How do you find those companies? Not here.

“The problem is, I have no idea which companies will generate the best returns over the next 10 or 20 or 30 years, “ Professor Bessembinder said. “Probably it will be some companies we’ve never heard of. Maybe it will be companies that don’t even exist now.”

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Friday, September 29, 2017

the value of a stock idea

The value of a stock idea can come from a combination of four sources:
  1. How much money you put in the idea.
  2. How cheap the stock is.
  3. How fast the stock is compounding its value.
  4. How long you own the stock.
The ideal stock would be a business quickly compounding its intrinsic value per share, which you are able to buy at a deep discount to intrinsic value, which you feel confident allocating a big chunk of your portfolio to and which you are going to hold for a very long time.

Take Buffett’s investment in Coca-Cola for example. This was considered a big bet by Berkshire. By my calculations, however (admittedly, very approximate based on the data I have), Buffett allocated perhaps just under 20% of his entire stock portfolio to Coca-Cola at the time he built the position. Despite putting just 20% of his portfolio into the stock in the late 1980s, however, Berkshire ended up not only with a position that today is worth about 13 times what he originally bought – the one position alone is also worth several times what Berkshire’s entire portfolio was when he made the Coke investment.

How did he do that?

Let’s look at the four ways to get the most out of a stock idea:
  1. You can put a lot into the stock (Buffett put 20% of his portfolio into Coke).
  2. You can hold the stock a long time (Buffett has now owned Coke for just under 30 years).
  3. The stock can compound is intrinsic value at a high annual rate (Coca-Cola compounded EPS at about 11% a year for the first 25 years Buffett owned the stock).
  4. You can buy the stock when it is cheap (the P/E on Coke went from 15 when Buffett bought it to 30 recently).
Coke is pretty close to a perfect example of some value coming from all four possible sources of getting the most out of an idea.

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Whitney Tilson shutting down hedge fund

(Reuters) - Whitney Tilson is closing his hedge fund Kase Capital, and will return capital to investors, he said in a letter to clients.

Tilson cited “high prices and complacency that currently prevail in the market” as main reasons for shutting down his fund.

“Historically, I have invested in high-quality, safe stocks at good prices as well as lower-quality ones at distressed prices,” Tilson wrote to clients on Sunday.

“... However, my favorite safe stocks (like Berkshire Hathaway and Mondelez) don’t feel cheap, and my favorite cheap stocks (like Hertz and Spirit Airlines) don’t feel safe. Hence, my decision to shut down.”

Kase Capital follows a spate of other notable funds that have gone out of business this year, including Eric Mindich's Eton Park Capital Management, and John Burbank's Passport Capital, which recently announced plans to shut its long-short equity fund. reut.rs/2fuEDoI

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Tuesday, September 26, 2017

buying at the peak

If you bought the S&P 500 at this time 10 years ago, you watched more than half your investment erased. You heard buy-and-hold pronounced dead and watched fellow investors pull $200 billion from equities.

You also doubled your money.

Or just about, anyway. Using a version of the S&P 500 that reinvests dividends, the index has now pushed its gain since its Oct. 9, 2007 top to 98 percent. Down 55 percent at the market low in March 2009, the benchmark gauge has made all that back plus a lot more, posting annualized gains of more than 7 percent for a decade.

“It was in the early 2000s and again 2008, where a lot of market pundits came out and said, ‘that’s the end of 10 percent a year for stocks,”’ said Rich Weiss, the Los Angeles-based senior portfolio manager at American Century Investments. “Stocks have done what they almost always have done and proved yet again that even with the 2008 disaster, they return 7, 8 percent a year annualized."

[On October 11, 2007, I sold some AMZN at 95 for about a triple of shares bought in 2005.  It closed at 939 today.]


Friday, September 01, 2017

Reitmeister 2017

[9/1/17] It is hard to believe that this is my last Profit from the Pros message. Yet after 16 years of being the head of Zacks.com it is time for a new adventure. Gladly that adventure continues with Zacks...just in a new and exciting capacity.

Zacks.com had just 20 employees back when I started. Now that is nearly 200.

The website traffic has grown 12 times over.

And our valuable ratings are now in the hands of many, many more investors who use it to improve their financial well-being. That is the most gratifying part of all.

I leave you in the very capable hands of Kevin Matras who will take over the helm of Zacks.com and the writing of Profit from the Pros on a daily basis. No doubt you already know Kevin from all of his expert investment commentaries over the years. Most popular of which are his keen market outlooks and Screen of the Week articles.

Please do yourself a favor and keep making Zacks a part of your daily investment diet. I have no doubt that it will help you achieve investment success for many years to come.


Steve Reitmeister

[8/9/17] The S&P made new highs Tuesday getting ever closer to 2500. Then right around noon investors got a case of high anxiety with stocks recoiling a bit, but still in profitable territory.

Just before the closing bell the real fireworks began. That came in the form of some tough talk from the White House that any North Korean aggression will be met with "Fire and Fury".

Since this is an investment publication, we will stay focused on what this means for the market. First, we are used to a lot of bluster from North Korea with no serious action taking place. So, this likely leads to nothing and investors ignore the situation.

Now let's imagine that military action does take place. North Korea is a paper tiger that is easily toppled. (Heck, if you gave me a month with nothing to do, I likely would have a more impressive military arsenal than they do and feed the people and keep the electricity running....but that is beside the point ;-) The reality is that the stock market likes war and typically rises after fighting commences. Some call it a patriotic response by investors.

To be clear, I don't like rooting for war as a catalyst for the stock market. There are plenty of other reasons to be bullish. I just want you to have the correct view of this situation. And that is to realize these issues with North Korea should not cause any continued downside to the market.
[5/10/17] Stocks flirted with their first real breakout above 2400 on Tuesday. Early in the session the S&P got as high as 2404 when investors got altitude sickness leading to a close just a notch below.

I truly believe we will soon break above 2400 touching 2450 or even 2500 before the next consolidation period. And as noted yesterday, it should be a Risk On rally with smaller and growthier companies leading the charge.

Sometimes you need a positive catalyst to create a breakout of this nature. However, other times the fundamental backdrop is solid and it is the lack of negative news that gives a green light for stock advances. I sense that will be the case this time around.


Wednesday, August 23, 2017

80 > 50 (0.2% > 43%)

New data from the Internal Revenue Service show just how old the top millionaires and billionaires in the U.S. are. While people over 80 make up only 3.7 percent of the population, the IRS estimates they control a larger share of the nation's top fortunes than people under 50.

The latest study, released this month and estimating personal wealth in 2013, finds 584,000 Americans, or about 0.2 percent of the U.S. population, with a combined net worth of $6.9 trillion. People in their 80s and 90s control $1.2 trillion of that wealth. Adults under 50, roughly 43 percent of the population, hold barely $1 trillion.


Monday, August 14, 2017

Unlucky 7

Finally, it's a year ending in 7. Where is she going with this one, you may be thinking? More attention is being devoted to this phenomenon recently—including in Barron's this past weekend and in The Leuthold Group’s famous "Green Book" for August —given that we are heading into the period in the year when weakness was often most pronounced in those years. Perhaps it's "mystical," as Barron’' opined; or perhaps it ties into the economic or even political cycles; but the pattern is there nonetheless. As you can see in the chart below, nearly every year ending in 7 since the dawn of the Dow Jones Industrial Average has experienced at least a 10% correction … except 1927—when it came close—and this year, so far.


Thursday, July 27, 2017

Bezos no. 2 / make that no. 1

[7/27/17] Bezos passes Gates this morning to become the richest man in the world.  Asking for ideas on philanthropy.

[7/24/17] For the 30 years FORBES has been tracking global wealth, only five people have ranked on our annual compendium of wealth as the richest person on the planet. At least one other person held the title, but so briefly (just two days), that he never appeared at that rank on FORBES’ annual list of World’s Billionaires.

Now, Amazon CEO Jeff Bezos is poised to join this exclusive single digit club, as Amazon stock continues to soar. The online retailer’s shares climbed 1.3% on Monday, adding $1.1 billion to Bezos’ net worth. Bezos is now a mere $2 billion from assuming the No. 1 spot on FORBES Real-Time Billionaires List, which would put him in the company of an exclusive group of billionaires who have held the title. Bezos has a net worth FORBES estimates at $88.2 billion as of the close of markets on Monday, while Microsoft founder Bill Gates holds the top spot on the list with a $90.1 billion fortune.

[3/30/17] Jeff Bezos has leapt past Amancio Ortega and Warren Buffett to become the world’s second-richest person.

Bezos, 53, added $1.5 billion to his fortune as Amazon.com Inc. rose $18.32 on Wednesday, the day after the e-commerce giant said it plans to buy Dubai-based online retailer Souq.com. Bezos has a net worth of $75.6 billion on the Bloomberg Billionaires Index, $700 million more than Berkshire Hathaway Inc.’s Buffett and $1.3 billion above Ortega, the founder of Inditex S.A. and Europe’s richest person.

Amazon’s founder has added $10.2 billion this year to his wealth and $7 billion since the global equities rally began following the election of Donald Trump as U.S. president on Nov. 8. The rise is the third biggest on the Bloomberg index in 2017, after Chinese parcel-delivery billionaire Wang Wei’s $18.4 billion gain and an $11.4 billion rise for Facebook Inc. founder Mark Zuckerberg.

Buffett, who’s added $1.7 billion in 2017, has shed $4.7 billion since his fortune peaked at $79.6 billion on March 1. Ortega is up $2.1 billion year-to-date. Bezos remains $10.4 billion behind Microsoft co-founder Bill Gates, the world’s richest person with $86 billion.

*** 5/15/17 ***

Jeff Bezos, founder and CEO of Amazon, is one of the most powerful figures in tech, with a net worth of roughly $82 billion.

Today, his "Everything Store" sells more than $136 billion worth of goods a year.

Here's how the former hedge funder got his start and became one of the world's richest people.


Friday, July 21, 2017

the minimum wage

[1/23/13] Governor Abercrombie is proposing a hike in the minimum wage saying it would help the economy.

But would it?

Googling, I find this December 2012 article at learnvest (the author FWIW is Gabrielle Karol who has a B.A. in English from Yale -- so she's not an economics expert but is presumedly smart and should be able to think/write clearly enough to be understandable).

this summer, the Fair Minimum Wage Act was introduced in Congress to raise the minimum wage from $7.25 to $9.80 and index it to inflation, making it a current political issue. Though the bill is currently sitting with a committee awaiting further action, if it passes, it could significantly change millions of Americans’ answer to the question: Are you better off than you were four years ago?

The first minimum wage law was passed in 1938, guaranteeing workers at least 25 cents an hour (woo!). The heyday of the minimum wage was in the late 1960′s, when the wage was high enough relative to the cost of living to provide a secure income. Since then, it’s risen slowly but surely to $7.25 an hour, which adds up to $15,080 a year for full-time employees.

While the dollar amount has increased over time, the real value has not—it has declined by 30% since 1968, because over the years, the minimum wage has not kept pace with inflation, which is the increase in the general cost of goods and services over time. That means workers aren’t getting as much bang for their buck, so to speak. (Find out why inflation is expected to rise very soon.)

The yearly $15,080 made by a full-time minimum-wage worker, who typically works in retail or food preparation, or as a personal and home care aide, office clerk, customer service rep, waiter/waitress or construction laborer, is below the poverty level for a two-person household. And for tipped workers, the minimum wage is even lower—a measly $2.13 an hour. [so make sure to leave your tips]

While the minimum wage barely provides a solid living as is, studies have shown that workers earning the minimum are actually being underpaid by their employers. A 2008 study of low-wage workers in Chicago, Los Angeles and New York showed that 26% were paid less than the minimum wage, 70% worked off the clock before or after their shift and 76% were underpaid for overtime hours. All told, this resulted in an average loss of $2,634 in earnings for these workers.

Proponents of the Fair Minimum Wage Act argue that raising the minimum wage to $9.80, and then “indexing” it to inflation so it rises at the same rate would help ensure that these low-wage earners would take home enough salary to live on and pay for basic goods and services. But would it?

A living wage ensures that a worker can pay for basic necessities like housing, food, transportation to work and health care. A common definition states that the living wage should be high enough that no more than 30% of take-home pay needs to be spent on housing.

But full-time employees being paid the current minimum wage will have incomes below the living wage in most areas of the country. In dollar terms, that means that if you are a full-time worker supporting a family of four on the current minimum wage, your household income is $7,000 below the poverty line. Proponents of raising the minimum wage to a living wage argue that doing so would give workers and their families a better chance of climbing out of debt and poverty.

As an increasing number of workers take on low-wage jobs, poverty in the United States has increased: In 2005, 12.6% of Americans were living in poverty, compared to 15.7% this year (almost 50 million citizens)–the highest rate of poverty since 1965. Raising the minimum wage to a living wage would hopefully help to reverse this trend.

Higher wages don’t just benefit the individual earner, they also help the economy at large by increasing consumer spending. One 2011 study by the Chicago Federal Reserve Bank showed that every dollar added to the hourly minimum wage resulted in $2,800 in yearly additional consumer spending by that worker’s household.

Additionally, a 2009 study from the Economic Policy Institute predicted that upping the minimum wage to $9.50 an hour would result in $60 billion in additional spending over two years. Furthermore, this additional consumer spending would lead to more job creation—an estimated 100,000 new full-time jobs.

Many workers who earn more than the minimum wage—28 million, in fact—would also see their earnings increase as a result of raising the minimum wage, says the Economic Policy Institute. Why? The minimum wage is seen as the base number from which their wages are calculated, so if that number is raised, their earnings will increase accordingly … which will lead to even more consumer spending.

With all the seeming benefits to raising the minimum wage, is there a compelling reason not to raise it, at the very least to a living wage? And why shouldn’t it be indexed to inflation?

Those opposed to raising it often argue that doing so will put too great a strain on employers concerned with keeping costs down, which will ultimately lead to companies being forced to slash jobs to stay afloat. However, economists like Arindrajit Dube of the University of Massachusetts-Amherst showed that over a 16-year period, areas that raised the minimum wage did not see more employment loss than comparable areas with lower minimum wages.

While over 100 Democrats helped to introduce the bill in the House of Representatives during the summer to raise the minimum wage, most Republicans will likely argue that the fragile economy prohibits such a drastic change to the minimum wage. Though President Obama campaigned in 2008 on the promise to raise the minimum wage, he has not been active in that fight in some time, and in March, Mitt Romney retracted comments he had made as recently as January saying that he would like to see the minimum wage indexed to inflation.

Despite the likely political standstill on the minimum wage issue, recent polls have shown that 70% of Americans support raising the minimum wage and believe that doing so has the power to help the economy in these uncertain times.

[So thinking it over, raising the minimum wage would force the employers to spend more on wages (assuming they don't have an offsetting amount of layoffs).  But then they would probably raise prices to offset the increase in costs.  The increased wages would be be likely totally spent by the minimum wage workers (rather than saved) and pumped back into the economy.  And it would eventually back up to the employers.  So the money would be circulating more.  Which is what you want for the economy.  But then the increase in prices would be more inflation.]

*** 4/27/14

Buffett not arguing against raising the minimum wage, but suggests that increasing the earned income tax credit may be a better way to attack the problem.

*** 5/5/14

Economists everywhere may soon be thanking Seattle Mayor Ed Murray. Not because of his inspired policymaking, but because Murray seems ready to turn his city into a gigantic laboratory for one of the most ambitious, and quite possibly misbegotten, labor market experiments in recent memory.

Yesterday, Murray announced a plan that would gradually raise Seattle’s minimum wage to $15 an hour and tie it to inflation, which won approval from a large committee of business and labor leaders, as well as some city council members. Today, Washington state’s minimum is a comparatively piddly $9.32. The full council still has to consider Murray’s proposal, but should it pass, Seattle might not just have a far higher minimum wage than its surrounding suburbs, where businesses can easily move; it might well have the highest minimum wage in the world.

I generally support a higher pay floor. And I love a good experiment. But I can’t help but wonder if Seattle is poised to take a step too far.

*** 7/21/17

Here's a study on what happened when Seattle raised their minimum wage twice.


Thursday, July 20, 2017

best performers since 1980

I’ve been doing some catch-up reading on banks recently and bumped into this fascinating table from a recent presentation by M&T Bank (NYSE:MTB). This table shows the best 30 stocks (as of May 31) out of the entire universe of 567 U.S.-based stocks traded publicly since 1980.

Of course this is not the list of the best 30 companies. For one thing, it doesn’t include any company that went public after 1980 so many of the best-performing stocks since then have been left out including biotech companies such Amgen (NASDAQ:AMGN) and Biogen (NASDAQ:BIIB) and internet companies such as Priceline (NASDAQ:PCLN). [Not to mention Microsoft.]

But there are so many interesting things about this table.

Fourteen companies have compounded faster than Berkshire Hathaway (NYSE:BRK.B), although a few by just the tiniest bit, including names that I would not have thought of such as Hasbro (NASDAQ:HAS) and Valspar Corp. (NYSE:VAL), which has just been acquired by another surprising top performer Sherwin-Williams Co. (NYSE:SHW).

I would never have guessed that Eaton Vance Corp. (NYSE:EV) topped the list with a whopping 23.3% CAGR.

Financials, industrials and consumer stocks dominate the list. There are seven financial stocks, 11 consumer stocks and five industrial stocks.

There were only two materials companies (now only one with Sherwin-Williams acquiring Valspar), one information technology company, one energy company and zero utility companies. I’m actually very surprised that there is an energy company on the list. Maybe there’s something special about HollyFrontier (NYSE:HFC).

Berkshire Hathaway and Warren Buffett (Trades, Portfolio)’s favorite sectors are financials, consumers and industrials.

Of the list 10% are specialty retailers, a segment that has been absolutely crushed recently by the Amazon (NASDAQ:AMZN) effect. Can Gap (GPS), L Brands (LB) and V.F. Corp. (VFC) ride out this Amazon storm and continue their 37-year track record?

The following companies did not surprise me: TJX Companies (TJX); Stryker (SYK); Danaher (DHR); Walmart (WMT); Berkshire Hathaway; M&T Bank; Walgreens (WBA); Astronics (ATRO); and Church & Dwight (CHD).


Here's Grahamites follow-up article on the best performers for the last decade.  Topping the list was Netflix.  AMZN is tenth.  AAPL is 40th.  ROST is 45.

A few observations:

None of the companies on the since-1980 top-30 list made it to the top 60 list for the last decade.

Very few stocks on the top 30 list made it guru investors’ portfolios. Most notably, Transdigm (NYSE:TDG) is owned by Wally Weitz, Priceline (NASDAQ:PCLN) owned by Dave Rolfe and Ebix (NASDAQ:EBIX) is owned by our lovely founder Charlie Tian.

Technology and biopharmaceutical companies dominated the list. Three of the FAANG stocks made the top 60: Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Apple (AAPL). Google’s parent company Alphabet (GOOG) surprisingly only ranks No. 299 with a 10-year annualized return of “only” 13.5%. Equally impressive is the new biotech giants such as Regeneron (NASDAQ:REGN) and Incyte (NASDAQ:INCY) with mind-blowing 10-year CAGRs north of 35%.

For those of you who are curious about where Berkshire (BRK.A) falls in the list – Berkshire Hathaway ranks No. 737 with a 10-year annualized return of 8.8%.

What about some of Berkshire’s largest holdings?

Wells Fargo: No. 914, 10-year annualized return of 7.454%.
Coca Cola (NYSE:KO): No. 740, 10-year annualized return of 8.746%.
American Express: No 1240, 10-year annualized return of just 5%.

Among the worst performing stocks of the last decades are a few easily recognizable names:

Fannie Mae (FNMA) and Freddie Mac (FMCC) – both suffered a negative 28% CAGR.
J.C. Penney (NYSE:JCP) – negative 23% CAGR.
American International Group (AIG) – negative 24.75%.
Sears holdings (SHLD) – negative 21.69%.


get rich slowly?

“The people who have gotten rich quickly are also the ones who got poor quickly.” - John Templeton

A July 1974 Forbes article profiled Sir John Templeton and highlighted some of the wisdom he implemented in his investment process. The article touched on his discipline of consistently praying to God “for wisdom and clear thinking” at the start of each directors' meeting for the Templeton Growth Fund. Templeton noted that even with prayer they still “make hundreds of mistakes, but we don’t seem to make as many as others.”

In the article, Templeton also advised that “ninety-nine percent of investors shouldn’t try to get rich too quickly; it’s too risky.” He advised, “Try to get rich slowly.” Templeton is on nearly every short list showcasing the most successful investors of all time, and certainly held in high esteem among value and contrarian managers like us.

... With that as a given, we want to remind investors of our role in all of this: we are long-duration investors. Contrarian investors make money when they buy into temporary misery and sell into excitement or mania. The great financier and investor Bernard Baruch would have illustrated good investing as “buy[ing] straw hats in the winter.” We would add by saying that once purchased, investors should simply do their best to get out of the way and allow the fundamentals of those businesses to drive the results. In Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) 1996 letter to shareholders, Warren Buffett (TradesPortfolio) advised:

“If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

At Smead Capital Management, we like to say that we are arbitrageurs of time. When the idea of having to wait becomes distasteful in the psyche of investors, they will greatly discount extraordinary – but perhaps mundane – businesses. We like to use those opportunities to acquire shares.

As contrarians who implement these tenets of investing, we own, in our view, a portfolio full of great businesses that lack current investor excitement. We operate on long-term ideas such as household formation, banking needs and the kind of sustained economic growth that paves the way for business and consumer spending to grow over time. We find attractive value in our banks, home-builders, media companies, health care and select retailers. We believe the economic needs our companies address will persist over time, and we want to be in front of the profitability and cash flow that can be gained in the process.


I wonder how good these Smead guys are?

I see they have a fund called Smead Value Fund.  Looking at the latest (2Q 2017) shareholder letter, SMVLX (the investor class shares) has returned 18.72%, 15.51%, 7.91% for 1 year, 5 years, inception (1/2/08).  The S&P 500 has returned 17.90%, 14.63%, 7.73%.  A very slight outperformance.  Which is actually good, because most funds underperform.

Looking at the website, their top ten holdings are AMGN, NVR, BRK.B, JPM, AXP, BAC, EBAY, PYPL, AFL, LEN.

I guess they're OK, but they're not really knocking it out of the park.

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Wednesday, July 12, 2017

two things

I read an article today about successful marriage. In it, the author says that if you want to have a successful marriage, you only need to do two things: 1) find a good person; 2) deserve a good person yourself by being one.

Somehow this message in marriage reminds me of Buffett and Munger. In order to have lifetime long rewarding relationships, we only need to do two things: 1) be a high quality friend ourselves and 2) find other high quality friends. To achieve great investment results, we also need to do two things: 1) find good companies and keep learning about them; 2) be patient and concentrate.

-- Grahamites

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Tuesday, July 04, 2017

indicators are high

The U.S. stock market remained significantly overvalued June 29, with Warren Buffett (Trades, Portfolio)’s market indicator reaching 133.2%. The high market valuation is partially driven by the deceleration of U.S. gross domestic product during the first quarter.

The Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO measures the total market valuation as the ratio of the Wilshire 5000 index to U.S. GDP. As of July 29, the index reached $25.35 trillion, approximately 133.2% of the last-reported GDP of $19.03 trillion. Based on the current market valuation, the U.S. stock market is expected to return -1.1% per year including dividends.

Since May, Robert Shiller’s cyclically-adjusted price-earnings ratio averaged 30, representing a new high since the 2008 financial crisis. The market Shiller P/E ratio is driven by significantly high ratios in the telecom, technology and real estate sectors, which are 29.8, 32.7 and 48.7 as of June 29. Based on the Shiller P/E valuation, the implied annual market return is about -2%.


Tuesday, June 27, 2017

how to become part of the problem

Warren Buffett says people like him are the problem with the U.S. economy.

With a net worth of more than $75 billion, Buffett is currently the second richest man alive, according to Forbes. As the CEO of investing house Berkshire Hathaway, he is hallowed as the Oracle of Omaha. But for all his personal success, Buffett says the issue really is the 1 percent.

Part of the reason some are struggling, says the octogenarian investor, is that the automation and digitization of the U.S. labor force is happening faster than employees can be retrained.

"We always see shifts in employment. If you think about it, if you go back to 1800, it took 80 percent of the labor force to produce enough food for the country. Now it takes less than 3 percent. Well, the truth is that market systems move people around," says Buffett.

Buffett made his extreme wealth by investing in the stock market, an interest that took hold young. Buffett bought his first stock when he was 11 and has been in the market for 75 years. He recommends others do the same.

"They should just keep buying and buying and buying a little bit of America as they go along. And 30 or 40 years from now, they will have a lot of money," he says.

In an effort to compensate for the wealth inequality that he himself has benefited from, Buffett and his billionaire buddy Microsoft co-founder Bill Gates co-founded the Giving Pledge, a voluntary commitment by the richest people in the world to give away at least half of their wealth. The goal of the Giving Pledge is not only to help those in need but to encourage others to do the same.

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Friday, June 23, 2017

The Witch of Wall Street

[6/23/17] How Hetty Green acquired all that money

[6/7/06] So was Anne Scheiber.

[6/15/05] Hetty Green was a miser.

Tuesday, June 13, 2017

the only game in town?

The easiest way to understand why you don’t want to make money from the late stages of an expensive/futuristic stock boom is to look at what were considered the lowest-risk ways to play the 1990s boom. Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Cisco (NASDAQ:CSCO) were considered “pickaxe” companies to that boom because they were not dotcom flashes in the pan and were drafting on all the activity requiring their software, chips and routers created by the “internet revolution.”

Microsoft’s high stock price in 2000 was $58.38. It bottomed at $17.10 in early 2009. Today, Microsoft is projected to earn $3.02 in 2017 (Value Line). This means the stock sold in 2000 at 19 times 2017 earnings per share. Is it any wonder that investors have only seen 20% appreciation from the height of the Tech Bubble?

Intel and Cisco are even worse. Intel peaked at $66.75 in 2000, and it is projected to earn $2.80 in 2017 (Value Line), which means it traded at 23.8 times 2017 earnings back then. Cisco traded at $77.31 per share at its 2000 peak and bottomed two years later at $10.49. It was projected to earn $2.40 per share (Value Line). It traded for 32 times what it would earn 17 years later. This only happens when you are “the only game in town!”

Are we doing something very similar today? Here are the P/E ratios of the FANG stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL), based on Value Line estimates:
  • Facebook – $4.75 in 2017, P/E ratio 32.
  • Amazon – $7.95 in 2017, P/E ratio 125.
  • Netflix – $1.10 in 2017, P/E ratio 148.
  • Alphabet – $35.00 in 2017, P/E ratio 29.
A quick glance at these numbers shows that Amazon and Netflix are certainly as expensive as Cisco and other glamour large cap stocks were in 1999. Facebook and Alphabet are less expensive – or like what Microsoft, IBM and Hewlett Packard were in 1999. Therefore, as we consider how this might play out, we will ask how the FANG stocks became “the only game in town.” FANG dominance is best represented by their gains since the beginning of 2015 as compared to the gains in the remaining stocks in the Standard & Poor's 500 Index. The chart below shows that the FANG stocks gained 48.92% while the remaining stocks gained 4.96% on an equally weighted basis (1):


We have no idea when this euphoria episode will end. However, we believe we know what to do with it. When a group of stocks gets mega-popular, we must avoid the area the same way we would avoid Palm Beach during a Miami hurricane alert. This is especially true when it is “the only game in town.”

-- Smead Capital Management


[P.S. I personally own every stock mentioned above -- in varying degrees, with no immediate plans to sell.]

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Friday, June 09, 2017


"The big money is not in the buying and selling … but in the waiting"   Charlie Munger


Tuesday, June 06, 2017

I predict...

Making bold predictions is a fool’s errand. I think Yogi Berra summed it up best when he spoke about the challenges of making predictions:

“It’s tough to make predictions, especially about the future.”

While making predictions might seem like a pleasurable endeavor, the reality is nobody has been able to consistently predict the future (remember the 2012 Mayan Doomsday?), besides perhaps palm readers and Nostradamus. The typical observed pattern consists of a group of well-known forecasters bunched in a herd coupled with a few extreme outliers who try to make a big splash and draw attention to themselves. Due to the law of large numbers, a few of these extreme outlier forecasters eventually strike gold and become Wall Street darlings…until their next forecasts fail miserably.

Like a broken clock, these radical forecasters can be right twice per day but are wrong most of the time. Here are a few examples:

Peter Schiff: The former stockbroker and President of Euro Pacific Capital has been peddling doom for decades (see Emperor Schiff Has No Clothes). You can get a sense of his impartial perspective via Schiff’s reading list (The Real Crash: America’s Coming Bankruptcy, Financial Armageddon, Conquer the Crash, Crash Proof – America’s Great Depression, The Biggest Con: How the Government is Fleecing You, Manias Panics and Crashes, Meltdown, Greenspan’s Bubbles, The Dollar Crisis, America’s Bubble Economy, and other doom-instilled titles.

Meredith Whitney: She made an incredible bearish call on Citigroup Inc. (C) during the fall of 2007, alongside her accurate call of Citi’s dividend suspension. Unfortunately, her subsequent bearish calls on the municipal market and the stock market were completely wrong (see also Meredith Whitney’s Cloudy Crystal Ball).

John Mauldin: This former print shop professional turned perma-bear investment strategist has built a living incorrectly calling for a stock market crash. Like perma-bears before him, he will eventually be right when the next recession hits, but unfortunately, the massive appreciation will have been missed. Any eventual temporary setback will likely pale in comparison to the lost gains from being out of the market. I profiled the false forecaster in my article, The Man Who Cries Bear.

Nouriel Roubini: This renowned New York University economist and professor is better known as “Dr. Doom” and as one of the people who predicted the housing bubble and 2008-2009 financial crisis. Like most of the perma-bears who preceded him, Dr. Doom remained too doom-ful as the stock market more than tripled from the 2009 lows (see also Pinning Down Roubini).

Rather than paying attention to crazy predictions by academics, economists, and strategists who in many cases have never invested a penny of outside investor money, ordinary investors would be better served by listening to steely investment veterans or proven prediction practitioners like Billy Beane (minority owner of the Oakland Athletics and subject of Michael Lewis’s book, Moneyball), who stated the following:

“The crime is not being unable to predict something. The crime is thinking that you are able to predict something.”

-- Wade Slome, CFA, CFP

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Sunday, May 28, 2017

10 stocks to last the decade

In August 2000, Fortune ran an article titled “10 Stocks to Last the Decade.” The author’s intention was clear, as captured in a short description preceding the article: “A few major trends will likely shape the next 10 years. Here's a buy-and-forget portfolio to capitalize on them.”

Well, we have more than 15 years behind us. Let’s look back and see how the picks held up over time. Let’s also see if we can spot any trends that should have caught the reader’s eye.


The 10 stocks are Nokia, Nortel, Enron, Oracle, Broadcom, Viacom, Unvision, Charles Schwab, Morgan Stanley, Genentech.

Here's the conclusion of the article:

After 15 years, here’s the final result: a handful of winners, a handful of laggards and some serious disasters. You lost most – if not all – of your investment on half of the positions. By comparison, the S&P 500 has increased by ~65% (cumulative) since the article was written.

What’s most interesting to me is what we can learn from the losers: Without fail, these were the companies that were part of the “sweeping trends that have the potential to transform the economy.” They had grown like crazy in recent years; analysts and investors expected the good times to continue in perpetuity. Their valuations required perfection – and in some cases, even more. The author stepped to the plate in search of riches. In reaching for home runs, investors ended up with a number of devastating strikeouts. The subsequent experience of investors in these 10 companies – especially those with the potential to transform the economy and the world as we know it – offers an important lesson that shouldn’t be forgotten.

[see also Ten Stocks for the Next Ten Years]


What about my top 10?  Well, I didn't have exactly have a top 10, but I had a 20 Punch Portfolio that I wrote up in August 2004.  I wonder how they have done since.  That's about 13 years ago, but for convenience, I'll just use Morningstar's 10 and 15 year returns.  For comparison, the S&P 500 has returned 7.06% and 7.67%.

1.  BRK.B  8.51%   8.18%
2.  WSC    bought out by Berkshire Hathaway
3.  MKL    7.07%  10.86%
4.  DHR   11.60%  12.80%
5.  WMT    7.16%   3.75%
6.  COST  13.95%  11.88%
7.  KSS   -4.12%  -3.03%
8.  BBBY  -1.39%   0.04%
9.  ORLY  21.10%  20.04%
10. HD    16.05%   9.58%
11. LOW   10.57%   9.05%
12. FAST   9.29%  11.52%
13. EBAY   8.32%  11.43%
14. RPM   10.85%   9.58%
15. CSL    9.71%  12.40%
16. ACS   bought out by Xerox (-8.27%, -0.96%)
17. DELL  went private
18. APPB  went private
19. EAT    3.97%   5.17%
20. JNJ    9.13%   6.47%

I still own 15 out of the 20.  Gone are WSC, CSL, ACS, DELL, APPB.  The only one I actually sold was CSL (mistake).  Out of those 15, 10 have outperformed the S&P for 15 years.

What about my other top holdings?  Let's see, stocks not listed above that are currently in my top 20 are MSFT, AAPL, UNH, ROST, CSCO, WBA, ORCL, AMZN, PG, PYPL, CHKP, INTC, BABA.   (The Punch stocks that are in my current top 20 are BRK.B (and A), MKL, COST, ORLY, HD, LOW, JNJ.  And I guess you could sort of count EBAY since it split up into EBAY and PYPL.  DHR would be there too, but it spun off FTV.)  How have they done?

MSFT   9.97%  7.89%
AAPL  25.97% 35.13% (sheesh)
UNH   13.12% 15.29%
ROST  23.24% 18.54%
CSCO   3.44%  5.27%
WBA    7.26%  6.06%
ORCL   9.73% 12.04%
AMZN  30.68% 29.99% (another sheesh)
PG     5.64%  6.40%
PYPL    N/A    N/A
CHKP  16.91% 12.91%
INTC   7.15%  3.12%
GOOGL 12.40%   N/A
BABA    N/A    N/A

Out of the 11 stocks above that have a track record, 7 have beaten the S&P 500.  Out of the top 10 stocks in my portfolio (BRK, MSFT, AAPL, UNH, JNJ, HD, ROST, CSCO, MKL, LOW), 2 have underperformed the market (JNJ and CSCO).  I don't have any plans to sell out any of my top 20 stocks, though I might trim here and there.  Of those remaining on my 20 Punch list, KSS is the shakiest.

(Alphabet would replace BABA in my top 20, if you combine the A and C shares.  So I revised the list above.)


Friday, May 19, 2017

the stock market and Watergate

Stocks are enduring their worst stretch of 2017 as Washington is in the grips of yet another scandal that requires a special prosecutor.

The Dow Jones industrial average tanked more than 370 points Wednesday on news reports that President Trump allegedly asked now-former FBI director James Comey to end the bureau’s investigation into former National Security Adviser Michael Flynn and his possible ties to Russian influence.

Those reports - and Trump’s firing of Comey last week - sparked an immediate debate about whether the president may have obstructed justice as the FBI investigates whether Russia tried to interfere with the U.S. presidential elections.

The Justice Department has now appointed former FBI Director Robert Mueller as a special prosecutor to investigate whether there was any coordination between Russian officials and Trump campaign associates to interfere in the 2016 elections.

For investors, there are two immediate fears: At the very least, this scandal is sucking all the oxygen out of Washington, making it that much harder for the Trump administration to push its agenda for cutting taxes and stimulating growth through infrastructure spending.

The "markets had risen on the expectation of tax and health reform along with an infrastructure spending plan, but the constant string of high profile distractions involving the president or members of his administration has put all that into jeopardy," said Tom Siomades, head of the Investment Consulting Group of Hartford Funds.

What’s more, many "worry that the market will react negatively to the firing of FBI Director Comey, as it did following President Nixon’s firing of Archibald Cox, the Watergate special prosecutor, in October 1973," notes Sam Stovall, chief investment strategist for CFRA.

"Investors are now concerned that President Trump will be impeached and are looking warily at historical precedent," Stovall noted.

What does that history show?

Constitutional crises are never good for the stock market. During the Watergate scandal, when Cox was fired and then-Attorney General Elliot Richardson resigned in protest - the S&P 500 fell 14% from October 1st through November.

But investors shouldn’t jump to conclusions. Nixon’s so-called Saturday Night Massacre took place while Wall Street was already mired in one of the worst bear markets in history. From January 1973 through August 1974 - a period that includes the conviction of the Watergate burglars, Nixon’s resignation, global oil shock, Middle East turmoil, and a dramatic spike in inflation - stocks lost 42% of their value.

"[T]he 1973-to-1974 slump seemed endless," Jason Zweig wrote in Money in 1997. "[I]n a crescendo of calamity, war broke out in the Mideast, oil prices quadrupled, Richard Nixon resigned over the Watergate scandal, and inflation hit an annual rate of 12.2%."

Today, Wall Street is in the midst of one of the second-longest bull markets ever. Inflation continues to be muted, and oil prices seem to have stabilized.

This doesn’t mean that the stock market is out of the woods just yet.

The S&P 500 fell nearly 20% in the weeks leading up to special prosecutor Kenneth Starr’s report on President Clinton, which ultimately resulted in Clinton’s impeachment. And that was in the late 1990s, when the stock market and economy were booming.

"However, after investors concluded that this event would not likely lead to recession, the [market] then went on to recover the entire decline and set a new all-time high" at the end of November, says Stovall, months before the Senate acquitted Clinton in February.

"This time around, while the current crisis may trigger a correction, we do not think it will lead to recession and therefore will not result in a new bear market."

Still, that means a correction - defined as a loss of 10% to 20% of the stock market’s value - could be lurking around the corner, depending on what the special prosecutor finds.


Wednesday, May 10, 2017

Chuck Carnavale's investment lesson

The theme of this article is to share what I consider to be the most important stock investment lesson I ever learned. This important lesson is supported by virtually every master investor I have learned to respect and admire. This lesson was also emphatically taught to me in the school of hard knocks, but my motivation to write this is born from the realization that very few “investors” are able to implement this lesson in real-world situations.

From a broad or general perspective, this investment lesson is simply to apply the discipline to only take investment advice from credible sources. Unfortunately, it has been my experience that most investors are keen to get their investment advice from pathological liars. Obviously, pathological liars are not a reliable source.

More specifically, this important investment lesson is: do not base investment decisions on stocks based on short-term price volatility. Truly aware investors recognize and accept the reality that stock price movements can be, and often are, irrational in the short run.

The key is to think and act like a business owner when you purchase a stock. When people invest in or start a new business, they are not thinking about selling in the next day, month or even year. Instead, they are thinking about owning and running the businesses for years to come. Of course, if the businesses are privately held, there is also the benefit that no one is continuously shoving purchase quotes in their faces either.

It’s critical to understand and remember that short-term price volatility is not always rational and certainly not always fundamentally based. Instead, short-term price volatility is more often than not emotionally charged. Consequently, a rising stock price is not always indicative of a good company, but sometimes it can be. Conversely, a falling stock price is not always indicative of a bad company, but sometimes it can be.
The secret is to have a realistic assessment of the true value of the business you own, and make your buy, sell or hold decisions accordingly. The primary point is to focus your attention on how you think the business will perform going forward.

In the long run, stock price will inevitably relate to business results. In the short run, fear or greed can drive the price up or down unjustifiably. And most importantly, short-term price aberrations are totally unpredictable. Therefore, you cannot, and I argue should not, place too much importance on them.

In the long run, stock prices will correlate very closely to the success of the business behind the stock. Therefore, if you are a prudent long-term oriented investor, it only makes sense to focus more on business results (fundamentals) than it does short-term price action. The reason I consider this the most important stock lesson I ever learned is because it allows me to make rational decisions in the face of emotionally charged periods of time.

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Wednesday, April 26, 2017

Seth Klarman on buying

Position sizing is another important part of portfolio management. Different stocks can command different percentages of your investment portfolio, depending on conviction. Klarman believes one of the best strategies to build a position, as well as an understanding of the business you are investing in, is to build a new position gradually:

“The single most crucial factor in trading is developing the appropriate reaction to price fluctuations…One half of trading involves learning how to buy. In my view, investors should usually refrain from purchasing a 'full position' (the maximum dollar commitment they intend to make) in a given security all at once…Buying a partial position leaves reserves that permit investors to 'average down,' lowering their average cost per share, if prices decline…If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at lower prices. If, prior to purchase, you realize that you are unwilling to average down, then you probably should not make the purchase in the first place.”

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Sunday, April 23, 2017

temperament edge

Temperament edge and time horizon edge are mostly commonly cited moats in the value investing world. I agree both are advantageous, but it becomes more and more clear to me they are not very advantageous, maybe just a little bit advantageous.

I am not saying temperament is not important. In fact, I think it is a prerequisite to be a great value investor. But temperament is genetic and we know that somewhere between 1% to 3% of the population is wired to have that genetic temperament advantage. It is genetic, but also at the same time generic – everybody born with the temperament edge have similar temperaments and most genuine value investors have it. If you have the right temperament, you can outperform the market by 1% to 2% a year just like if you buy a basket of low price-earnings (P/E), low price-book (P/B) stocks you can outperform the market by 1% to 2% a year statistically speaking, but no more than 2%. I do not think outsized returns can be generated just because one has this temperament edge, except in extreme cases.

Temperament edge has a few dimensions:


Most people with the temperament edge can check two or three boxes out of the five, but very few check all of them. For instance, many value investors recognized that Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) were undervalued a few years back, but only a few acted on it and very few concentrated their investments on them like Munger did.

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Sunday, April 02, 2017

How overvalued are stocks?

The bull market entered a new phase last year when it broke solidly above S&P 2,100 and bounced off that level after the election. The subsequent 10%+ rally is justified by accelerating economic and earnings growth, with Q1 expected to hit a 9% EPS advance, the highest since Q4 of 2011.

But with the trailing P/E multiple hitting nearly 22 times -- S&P 2350 / $108 EPS for 2016 = 21.75 -- many investors are looking for the end of the bull market based on valuation alone.

Given this pricey picture, it's a very good time to take a step back and get a read on just how over-valued the market might be.

Historically Speaking 

We all know about the great Nasdaq Tech Bubble of 1999. Just how far away from a fair value P/E of 15X were big cap stocks then? 

While the Nasdaq P/E was much higher, at the end of 1999 the S&P 500 flashed a trailing 12-month P/E multiple of over 29X. It had peaked even higher near 31X in July of that year. 

And for broader context, the last six bull market tops all saw the S&P 500 trailing P/E ratio hit an average peak of 30X earnings. I doubt we get that high again after the lessons learned in the two bear markets of the previous decade, but it's certainly still possible. 

Bottom line: Historically speaking, we aren't even close to a bubbly valuation peak that would have me concerned about the end of the bull market. Especially with 2-3% GDP growth, attractive interest rates, and the return of nearly 10% earnings growth.

-- Kevin Cook, Weekend Wisdom


Monday, March 13, 2017

get-rich books

in a sentence, each.  (plus a bonus quote)

 "Think and Grow Rich" by Napoleon Hill
Originally published: 1937

Mastering your money has more to do with mindset and overcoming psychological barriers than anything else. At the end of the day, you can think your way to success.

"Riches begin in the form of thought! The amount is limited only by the person in whose mind the thought is put into motion."

"The Intelligent Investor" by Benjamin Graham
Originally published: 1949

"Value investing" — buying stocks when they are undervalued and holding them for a long period of time — is the most effective way to put your money to work . . . and a hallmark of Warren Buffett's investment strategy.

"But investing isn't about beating others at their game. It's about controlling yourself at your own game."

"The Richest Man in Babylon" by George S. Clason
Originally published: 1926

You probably won't get rich quick, but you'll get rich if you pay yourself first, put that money to work and stick to long-term thinking.

"I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you."

"Rich Dad Poor Dad" by Robert Kiyosaki
Originally published: 1997

Knowing the difference between an asset — something that puts money in your pocket — and a liability — something that takes money out of your pocket — is the most important distinction to recognize if you want to get rich.

"The long-term rich build their asset column first. Then the income generated from the asset column buys their luxuries. The poor and middle class buy luxuries with their own sweat, blood, and children's inheritance."

"The Little Book of Common Sense Investing" by John C. Bogle
Originally published: 2007

The simplest and most efficient investment strategy is to invest in low-cost index funds.

"Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner's game."

 "Rich Habits" by Thomas Corley
Originally published: 2010

What you do every day matters, so if you want to build wealth, start by reevaluating your daily habits.

"The metaphor I like is the avalanche. These habits are like snowflakes — they build up, and then you have an avalanche of success."


Saturday, March 04, 2017

Schwab cuts commissions again to match Fidelity

Charles Schwab announced Tuesday that it will lower its online trade commissions for U.S. stocks and ETFs to $4.95. Almost four weeks ago, the firm lowered its trading fees to $6.95 from $8.95.

The announcement comes after competitor Fidelity announced it lowered trade commissions by $3 to $4.95 on Tuesday.

"We never want commission costs to be a barrier for investors deciding which firm can best serve their needs," said Walt Bettinger, Schwab (SCHW) president and CEO in a statement Tuesday.

The reduction will go into effect on March 3.

Schwab, which has more than 10 million accounts, also said it would reduce options pricing to $4.95 plus 65 cents per contract.

The fee cuts make the two firms' commissions lower than competitors TD Ameritrade (AMTD) and E*Trade.

On Tuesday evening, TD Ameritrade announced it will cut its commissions for online equity and ETF trades to $6.95, down from $9.99, starting March 6.

E*Trade charges $9.99 for online U.S. stocks and ETF trades.

Tuesday, February 21, 2017

the trader vs. Buffett

Let’s imagine that a hotshot trader makes 200% returns every year on his $500,000 account, which would be wild success to say the least. The only caveat is that he has to take his profit out every year because the trades can’t scale up any further. He would make $1 million per year — good money if you can find it. After 30 years he would have $30 million in total profits.

Now let’s imagine we invested that money with Warren Buffett instead. Say that instead of 200% he can make 20%, but he can scale indefinitely. That first year, a $500,000 account would kick off $100,000, not much compared to the hotshot trader’s payday. But after 30 years we wouldn’t have $30 million. Thanks to compound interest, we would have $100 million. And where the hotshot trader would have $50 million after 50 years, we would have $3.8 billion!

That’s the magic of compound interest. And that’s what makes Warren Buffett’s success so incredible: 20% that can scale beats 200% that can’t scale every time.

-- John Roberson, Quora

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Thursday, January 26, 2017

two big mistakes

What was your biggest investment mistake?

Ray Badger, I have been an investor in the stock market since 1972 with a great return.
Written Jan 4

I have had two.

In the 1990’s I bought 100 shares of Apple stock for $ 12.00 a share. About two months later it had gone up to $ 20.00 a share. I told a friend that since they were pretty much a niche computer manufacturer with some following in schools and graphic artists that I was going to sell it the next day. About 30 minutes after I sold he called me and was saying loudly, “DON’T SELL APPLE” Steve Jobs had just announced he was coming back to Apple. I did think about buying it back but just had a hard time buying back a stock at $ 30.00 that I had just sold for $ 20.00.

I still have some of the stocks I bought back then and probably would have held Apple. I sat down a while back and looked up the history of splits and calculated what those shares of stock would be worth if I had held them. The number I came up with was $ 670,000.00

The second mistake was at the depths of the dot com bust. I had around a $ 1,000.00 to invest. I debated between two courses of action. One was to buy a bunch of stocks that had crashed and were at one time high flyers who were selling for about a buck a share. I thought if I bought stock in 10 companies there was a good chance one would turn around.

My second thing I considered was there was a stock in an online book seller that I really liked. I found them to be a great company and the stock was selling for $ 10.00 a share so I debated between 1000 shared divided up in 10 companies and 100 shares in one company and went with the 10 companies. Of course the online book seller was Amazon. I about broke even on the stocks in the 10 companies.


Tuesday, December 27, 2016

stock forecasts: bullish and often wrong

Every December as the holidays approach, Wall Street gurus examine the stock market, and nearly all declare that stocks will rise in the forthcoming calendar year.

The forecasts are still coming in for 2017, but preliminary tallies suggest that — no surprise — strategists are bullish, probably mildly so. Through last year, since 2000, the consensus has always been bullish, holding that the market would rise, on average, about 9.5 percent a year, according to calculations by Bespoke Investment Group. In reality, it rose only 3.9 percent a year, on average, in that period.

So the cheery predictions have often been wrong. Does it really matter? After all, the stock market actually rises most of the time.

But here’s the rub: The stock market sometimes falls, and from time to time, it absolutely tanks. Since the start of 2000, the Standard & Poor’s 500-stock index has ended in negative territory in five calendar years (2000, 2001, 2002, 2008 and 2015) and has been virtually flat once (in 2011). But while a handful of individual forecasters have, from time to time, predicted mildly negative years for stocks, the Wall Street consensus in every single year since 2000 has predicted a rising market.

Consider the calamity of 2008. If you had money in stocks that year, you would probably remember. The S.&P. 500 fell 38.5 percent in the course of those 12 months. It would have been very useful to have received advance warning that stocks were about to plummet, but the Wall Street consensus did not ring out an alarm. On the contrary, the forecast for 2008 was unusually bullish, calling for a rise of 11.1 percent. Wall Street missed the mark by 49 percentage points that year.

How bad is the industry’s track record in making predictions? I had assumed that the annual forecasts were essentially worthless — no better than flipping a coin. But Salil Mehta, an independent statistician who has blogged about the topic, tells me I’ve been too kind. The forecasters, as a group, are much worse than that.

“It’s not easy to be as bad as they are,” he said in an interview. “They are much worse than random chance alone would predict.”


About every how many years will there be a stock market crash?

Asked on Quora.

Here's one of the answers.

the answer is that there is no set frequency in which crashes occur. It really depends on market conditions, which in turn are driven by sentiment and long-term global economics. If anything, history shows us that crashes come in streaks with long gaps in between the streaks.

Looking at the recent data there are two interesting points to note. The first is that we've had two major crashes in quick succession (2000, 2008) during a 15 year consolidation phase. The second is that market volatility has been very low since 2009 which points to us moving into a much more trending phase of the market once again. If that assessment is correct, then it could mean there won’t be another crash along for quite a while.

As an aside, it’s the availability heuristic and recency bias that leads people to think market crashes must be a regular occurrence, even though the data doesn't appear to support that premise. In fact it’s highly likely people in the 1960s thought that market crashes only happened once in a lifetime, since there hadn't been one for over 30 years.


Thursday, December 15, 2016

what rising interest rates could mean

Stock market.  Stocks typically have performed well in the first year after an initial rate increase [which was last year], and the strength tends to persist in year two, albeit at a lessened pace.

Financial stocks.  A widening gap between what banks pay on deposits and charge on loans can help bank stocks.

Utilities stocks.  Utilities stocks tend to underperform, as investors shift to higher-yielding fixed income investments.

[via Schwab]

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Wednesday, December 14, 2016

4 illusions

Here are some of the more common behaviors that can lead to irrational decisions:

Confirmation Bias
This occurs when people look for information that confirms their beliefs rather than the information that might disprove them. Before making a reasoned decision, a trader or investor should consciously look for disproving evidence.

Gambler’s Fallacy
We can wrongly project that probabilities will revert to long-term averages. Here’s an example: A coin flip has produced 5 heads in a row. We project that tails is the most likely outcome of the sixth flip. This is incorrect. The odds remain 50/50.

Availability Bias
This occurs when we give greater weight to information about a security that is more accessible or readily recalled. Traders and investors should take a step back and look at the big picture, rather than making a decision based on what’s currently happening.

Disposition Effect
We can have an emotional aversion to taking a loss in a security even when doing so might be the best decision. On the other side, we can tend to sell winners simply because they have made profits, possibly missing out on future gains.

Similar biases are prevalent among traders and investors as well. According to Dalbar Inc., a financial services market research firm, behavioral biases have led to poor portfolio decisions.

According to a Dalbar study, the average stock fund investor recorded a 4.67% return over a 20-year period (1996-2015) compared with the 8.19% increase in the S&P 500 over the same period. The difference largely comes because investors jumped in and out of the funds at the wrong time. Many panicked and sold at low prices as the market fell, and they were late to buy as the market recovered. In other cases, they attempted to time the market and missed.

“These biases are leading people to the ultimate trap in managing their portfolio – they’re buying high and selling low,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “They’re moving in and out of the market, where sticking with their plan would have served them well.”

By identifying illusions, we hopefully are better able to counteract them.


Reitmeister/Zacks 2016

[12/14/16] The market continues to rotate on a daily basis with a fresh round of winners and losers. On Tuesday there was a strong bias for larger stocks. And yes, even a return to conservative dividend paying stocks that have been out of favor for quite a while.

This is a funny move on the eve of the Fed meeting announcement where they likely will raise rates for the first time in a year. That's because higher rates typically hurts dividend paying stocks the most.

However, it's not so odd when you realize that investors always look to the future. Meaning that months ago everyone knew the Fed was ready to raise rates. So that is when investors got busy selling defensive income producing stocks like REITs, MLPs, consumer staples and utilities.

Now that those groups have been pounded so heavily some money is starting to rotate back. Yet, I bet that is a short lived phenomenon. 2017 will be growth oriented...and smaller cap oriented. Make sure you stay overweight those groups. And underweight conservative, dividend paying stocks.

[10/12/16] The "test" = the 100 day moving average.

Indeed stocks failed that test with the first close under this important support level since the Brexit vote in late June. As you will remember, stocks quickly rebounded followed by a breakout to all-time highs.

This time we have a four pronged attack on stock prices. First, rates continue to be on the rise as economic data has improved and the Fed players are talking tough again. Second, the increased certainty of a Clinton victory hurt healthcare stocks because the industry has been a target of her scorn. Third, oil gave back some of the recent gains. Fourth, Alcoa got earning season started on the wrong foot. Their shares fell -11.4% on the day hurting many other related companies.

What should investors do now?

I saw Tuesday's drop as another reason to buy the dip. My Reitmeister Trading Alert portfolio is now up to 86% long from 62% just a week back. Heck, I'll even tell you the stock I chose. Goodyear Tire (GT) which is a Zacks #1 Rank with VGM Score of A in the #1 Ranked Industry...that is a lot of proven advantages in its favor.

[9/13/16]  VectorVest Views Essay: by Dr. Bart DiLiddo 9/2/16


Once upon a time the only spokesperson for the Federal Reserve System was the Chairperson. Responding to a call for more transparency, former Chairman, Dr. Ben Bernanke, allowed the Fed's communication policy to change. Now-a-days, Fed Governors and Presidents of Federal Reserve Banks can say whatever they want regarding matters related to the Fed. Unfortunately, the opinions expressed by these officials have caused more confusion than clarity on what the Fed is likely to do. See my essays of May 20, 2016 and June 17, 2016.

In an August 28th editorial, entitled "The Federal Reserve's Politicians," The Wall Street Journal (WSJ) said, "The Fed's decision making is so ad hoc and arbitrary now that no one has any idea of what the Fed will do in December - including Ms. Yellen."

As I see it, even the WSJ editors are confused. Ms. Yellen knows exactly what she's going to do. She's stirring the pot for a potential interest rate hike in December and will not raise interest rates in September. Ms. Yellen remembers what happened after she raised rates last December. In case you forgot, the dollar got stronger and stock markets plummeted.

Even under the best of circumstances, she wouldn't risk upsetting financial markets around the world prior to the November's Presidential election. Ms. Yellen Is Not Raising Rates In September.

[8/10/16] After hitting a three year low back in April the NFIB Small Business Optimism Index has risen for 4 straight months. This is important because small businesses continue to be the main drivers of growth in the US economy...especially employment growth. So the better they feel about the future...the better we investors should feel about the economy and stock market.

Indeed the stock market did rise Tuesday after this news, but not by much. It was yet another sleepy summer session marked by low volume and low volatility. The key is that the market refuses to fall. So it is fairly safe to assume we will have a rendezvous with 2200 in the near future.

Again, it is the aftermath of that event that is subject of debate. Fly higher or consolidate or tumble from profit taking???

I will put it this way...2200 will likely not be the high this year. So perhaps what happens immediately after 2200 is a moot point. As such, I am the most aggressively long the stock market I have been since January of this year.
[7/25/16]  The breakout above 2135 is now two weeks old and we just keep on trucking to new high after new high. At this stage one does have to contemplate where a top may form to take profits.

2200 has a certain appeal as a near term spot of resistance. However, my sense is that it will not be the high for the year as that is a fairly small 3% breakout above the previous highs.

For a FOMO rally to really work its magic, it needs to keep pressing higher thus forcing most every bear to start buying stocks. Thus, up closer to 2300 is a much more likely peak for 2016.

What will be the all time high before the next bear?

Too early to contemplate that as this low yield, no recession environment could keep the bull chugging along for a lot longer. So let's tackle that further down the road.

For now ...keep riding the bull!  
[6/18/16] The following phrase has lost investors more money than just about any in history:

This time is different

That is because history typically does have a way of repeating itself. Thus, to predict that things will be different this time around is often a fool's errand leading to hefty losses.

Unfortunately every now and then that saying is actually very true, making it all the more difficult knowing whether to heed history or ignore it. That is the crossroads we stand at right now where one path leads to a continuation of the 7 year bull market. The other points to the beginning of a new bear market.

The purpose of this article is to share with you some important facts that may indeed point to why this time may be different. And thus why this bull market stays aloft against all the historical odds. Then I will share the details that will eventually pave the way for the next bear and how to invest during these trying times.

Just the Facts Ma'am

No doubt you have read many articles this past year pointing out all the ways in which the current economic and stock market picture looks quite like the beginning of past bear markets. I have put forward many such comparisons. However, I have to admit that none of those past periods had bond rates this low. In fact, in the past 140 years the 10 year Treasury rate has never been this low for an extended period of time.

Low rates punish those who wish to hold cash. This forces many to take on more investment risk to gain a decent rate of return. The stock market being one of the main beneficiaries.

Long story short, this time may be different allowing stocks to reach higher valuations since they are more attractive than putting money to work in bonds or cash. This relationship will hold up as long as rates stay low and there is no fear of a looming recession. Once either of those concepts comes into question, then stocks will begin to fall in a meaningful way.

The Goldilocks Scenario

If you boil it down investors are still bullish because of the current Goldilocks Scenario. That is where economic activity is slow enough to keep the Fed from raising rates...but not so weak as to worry folks about a looming recession.

The merit of why this is attractive is not readily apparent. So let me spell it out for you.

The simplest way to explain it is to say that bonds are the #1 competitor to stocks for investment dollars. The lower the bond rates, the more attractive stocks become.

Why is that?

This is where the Earnings Yield (EY) comes in (S&P 500 annual EPS divided by S&P 500 price...aka the inverse of PE). The best way to appreciate the validity of the earnings yield is to imagine you buy up every share of S&P 500 stocks and take them private. If that were the case you would no longer care so much about the daily fluctuation of stock prices. Instead you would be concerned about your rate of return, which is the amount of profits the companies pay out relative to the cost of your investment in the companies.

We all appreciate that owning any individual company is risky. But owning the bulk of Corporate America is not that much more risky than investment in the US government via treasuries. Thus, the risk premium for owning the S&P 500 should not be that much greater than the 10 year Treasury.

As it turns out the average spread between the 10 year and the S&P 500 earnings yield going back to 1970 is only 0.06%...basically nothing. (This comes from data I pulled from http://www.multpl.com/s-p-500-earnings-yield, which is using a more conservative calculation of earnings than most other sources...but the basic truth remains that the lower bonds rates are, the better it is for stock prices).

According to Multipl.com right now the Earnings Yield is 4.2% while we see that the 10 year stands at 1.5%. The extra return that comes from stocks relative to bonds is why stocks stay aloft at this time. And this relationship is the reason why virtually all other comparisons of this investment landscape to prior periods may be irrelevant.

(Read that last paragraph again...and then one more time so it sticks. Then continue).

Over the last 140 years, the 10 Year Treasury has never been this low. Repeat...it has NEVER been this low. And certainly not this low for such an extended period of time. Thus, all the normal ways we compare this time period with the past to judge if the environment is bullish or bearish may be irrelevant because none of those past periods had rates this low, which tips the scales towards stock ownership.

When Does the Next Bear Market Start?

If all of this is true, then it says the bull market stays in place until bond rates come higher or earnings go significantly lower, thus wrecking the Earnings Yield math advantage over the 10 year yield. That is why slow growth is not an issue because it still keeps earnings high enough to produce better earnings yield than Treasury yield. And that is why every time the Fed seems on hold with moving rates higher is celebrated with a stock rally.

[6/1/16] Tuesday was an interesting session for stocks. On the surface it seems that stocks retreated since the Dow was down -0.5% and the S&P 500 could not stay above 2100 at the close.

However, there truly is more than meets the eye in the Tuesday results when you see that the Nasdaq rallied +0.3% and the small caps in the Russell enjoyed a solid +0.4% session.

Reity, why do you point this out?

Most investment commentators will focus on how the S&P 500 did not breakout above 2100 Tuesday. Yet it is hard to say it was a negative session because the more aggressive/growthy/risky sectors of the market were in the plus column. That "Risk On" mentality is a sign of greater optimism and I sense a leading indicator of more gains ahead.

So yes dear friend, your recently bearish commentator admits that the bulls may be in charge a while longer. Perhaps just to challenge the old highs at 2135 or perhaps pressing to new highs. That is because the #1 ingredient the stock market has going for it right now is pessimism. Yes, pessimism. And according to AAII, pessimism is at a eleven year high.

Remember that the market loves to climb the wall of worry and pessimism is the high octane fuel for that journey. That is because as bears become buyers, that extra demand propels stocks higher. A break above 2100 will certainly add to the upside momentum and I am prepared to ride it for a while all the while looking for signs of the next bear.

Perhaps that is just around the corner. Or perhaps the Muddle Through Economy coupled with ultra low rates creates a unique formula for a historically long bull market that defies most every expectation. I would call that debate a coin toss decision. For now, best to go with the momentum. And a break above 2100 will mean momentum is decidedly to the upside.

[OK, that edges me more in sell mode.  But not screaming sell yet.]

[5/23/16] Saturday May 21, 2016 is the one year anniversary of the last time the S&P 500 made a new high. Whereas most anniversaries are a cause for celebration ...this time is not so pleasant.

Why is that?

Because over the past fifty years there have only been eleven occasions the stock market has gone this long without making a new high. Unfortunately eight of those eleven turned out to be the start of a new bear market (73% of the time).

Yes, that is a small sample and not proof of what is happening now. And as shared in my recent commentary, I truly believe stocks are at a crossroads. Are they ready to break above 2100 and keep running higher or has this rally run out of steam and investors are ready to retest levels below 2000 once again???

Typically I let fundamentals be my guide in predicting that outcome. However, I don't think fundamentals have been part of the investment equation for about three months. Rather, the technicians are in charge. Thus, I will wait for that breakout above 2100 or below 2000 to ride that wave of momentum.

[5/19/16] Even a recent bear like me has to admit that things are not as gloomy anymore. That is not to say we are fully out of the woods, but it does give a nod to the improved economic picture that may keep the next bear market at bay a while longer.

It all boils down to sentiment. Or more specifically, how the stock market often drives sentiment and risk aversion which reverberates into consumer and business economic activity. Indeed the stock market is the leading indicator for the economy which has been proven time and again.

Truly we are at a crossroads for the stock market and the economy. The next breakout move will likely dictate what happens with sentiment and future economic data and therefore the long term trajectory of stocks. Let me be more specific.

If stocks breakout above recent resistance at 2100 it means that concern about the bear have greatly abated. This will continue to heal economic sentiment, which leads to better economic readings, which gives more fuel for even higher stock prices.

However, if stocks break below support at 2000, it will quickly reignite the fears found in the two recent corrections from August/September 2015 and January/February 2016. This would be a damaging blow to economic sentiment with deteriorating fundamentals to follow which will only serve as greater catalysts to the downside. And here I don't mean a retest of the recent low at 1810. I mean a full on bear market sending stocks down a minimum of 20% from recent levels...likely more like 30-40% retreat when all is said and done.

Yes, it is confusing...which outcome will it be? Bull or bear?

Instead of sharing with you just one possibility, I want to share with you two separate views of the market. Each detailed in the following special reports now available to Zacks Ultimate trial customers.

[so that's helpful, now he's saying the market could go up or down..]

[4/9/16]  Reity remains bearish...

On February 8, 2016 I officially made my bear market prediction. That sure looked brilliant for the next few days as stocks tumbled to new lows. Since then I have looked quite foolish as the stock market bounced higher.

The question that needs to be answered is...Am I wrong or am I early?

This led me towards an extensive research project to analyze what previous bull market tops and bear market beginnings looked like. That culminated in a 33 slide video presentation shared with Reitmeister Trading Alert customers on Wednesday 4/6/16.

When you boil that presentation down, the 9 slides shared below truly tell the tale of why a bear market is still on the way. The bulk of them show the S&P 500 price chart from the last five bear markets in order to compare it to the current situation...which looks far too similar.

Please give it your full and fair consideration because if I am right, then stocks will likely drop 30-50% from current levels.

When you review the charts below keep the above concepts in mind. Such as, how many times does the market have false rallies that don't take out the old high? And how long does it meander around before finally succumbing to the downward pressure of the new bear market? Those common traits from the last 5 bear markets are telling signs of what is now taking place.

And now our current market situation. Last high made nearly a year ago. Drops to lower lows followed by bounces to lower highs. Not to mention a current Q1 GDP estimate of only +0.4% and earnings growth going negative.

This ninth and final slide above sums it up. This is currently the 3rd longest bull market of the last 25. Thus, long in the tooth. Plus it is showing the same topping formations discovered in the charts of the last 5 bear markets. Plus economic data is lower than when we last made new highs with near recession level GDP estimates for Q1-2016. And earnings growth has gone negative. All wrapped in a stock market that is above historical valuation norms giving little reason to rise more.

Listen folks. I am not a permabear by any stretch. I rode this bull firmly for several years enjoying ample profits along the way.

However, just like night follows day...so too does a bear follow a bull. It is natural and it is time.

[4/1/16] Kevin Cook here for Reity, paying close attention to this morning's ISM survey...

Being overly cautious-to-bearish in Q1 was not a good strategy. I know because it's a trap I fell into. And now we watch several sectors eclipsing their Q4 highs, with Industrials, Materials, and Energy the standouts as the US dollar weakens further.

Here are the four main drivers of the current exuberance for US equities...

1) Earnings Recession Discounted: Investors seem to believe they have seen the worst at -10% growth for Q1 and that things will only get better from here.

2) Yellen's Fed As Dovish As Ever: The US dollar trended lower throughout Q1 on ideas that the Fed couldn't possibly hike at the March meeting. Since then, the "dot plot" and Yellen make the market believe the doves will only allow one hike this year.

3) Manufacturing Bouncing Back: Regional surveys from Richmond, Philly, Dallas, and Chicago all point to the national ISM number this morning getting back above 50.

4) Fund Managers Can't Miss Rallies: Besides the fact that they "have to buy" stocks with the money they are given, there are still few alternatives to US equity markets.

Now that they are done dressing the windows of their portfolios for Q1, I still believe S&P 1950 comes before new highs in Q2. But the first three drivers remain formidable.

Bottom line: No matter how overbought and overvalued the market is right now, these macro forces could combine to make April another green month for US indexes.

[Reity remains a bear though]

[3/22/16] Reity is back:

The October 2015 rally lasted 35 days and rose 13% in that stretch. The February/March 2016 rally is so far a near perfect replica also gaining just over 13% in 36 days.

My guess is that the comparisons between these two rallies will continue a while longer. That being the end of the big upwards moves for the market. Instead stocks will likely meander around in a trading range for a while.

The trading range scenario after that October rally lasted for nearly two months before the next devastating drop to new lows. I suspect here too it could be 1-2 months going sideways before we head lower. And the reason to head lower is that virtually every vital fundamental metric is currently worse now than in October.

[3/21/16] This is Tracey Ryniec filling in for Steve.

The bulls are getting bolder, as they finished last week on a high note, pushing stocks up into the finish. Investors even abandoned utility stocks, previously 2016's darlings, into the close.

If that's not a bullish indicator, I don't know what is.

It's been awhile since we saw the bulls remain in charge into the close on a Friday. This has been a sustained 5 week rally off the February lows. The bulls haven't even paused. The last time a rally was this powerful after stocks had gone into the abyss was in April and May of 2009.

Many of you remember that time. The world was still in the midst of the Great Recession. Things were grim. Millions were out of work. But stocks defied sentiment and moved higher and never looked back.

This week is a shortened trading week as the exchanges will be closed on Good Friday. Will traders finally be cashing in some of their recent profits?

Friday's trading action seems to indicate the answer will be "no" but all eyes will be on crude and the other commodities, which are still driving the rally.

The story of 2016 is changing. It started on a dark note but you know what they say, it's always darkest before the dawn. Stocks are forward looking. After the last 5 weeks, they seem to be indicating that bright times are ahead.

[at last report, Steve is still predicting a bear market]

[3/19/16 Kevin Cook] I am reevaluating my thesis since October that the current earnings recession makes the market more over-valued with each passing week and thus destined to make new correction lows to the S&P 1700-50 area for a more complete valuation re-set.

If large investors can envision the worst already and see light at the end of the tunnel, then you don't want to stand on the tracks of that bull train. Instead, you want to tactically play the new trading range up to the June Fed meeting between S&P 1900 and 2100.

"Don't fight the Fed" was never more true. The Fed is your ally, if not your friend, in the current macro storms. This week they proved they are still fully committed to supporting the US economy, despite global tremors, and especially during a volatile election year.

You now have the answers to the only two questions that matter currently. And I will continue watching the earnings estimate data closely to see if we could be building a significant bottom in the outlook. 

I believe that's what is getting priced-in and driving stocks higher. And that could mean new highs for the S&P this year, possibly by Q3. 

But in the short-term, I am seeing a cycle top in stocks that should unfold when the last short-covering and late-bull chasing is over. The result could carry the market up to S&P 2080 and back down to 1920 in a matter of weeks.

[2/12/16] The Battle of 1812

Oh, did you think I meant the Battle of 1812 between the US and Great Britain? Sorry, I am referring to the stock market low of 1812 made back in mid-January. We retested that support level today and it stood firm.

Helping the cause was some rumor that OPEC may cut production to bring relief to oil prices. However in the final hour most people realized that was bogus and got right back in a selling mood.

While stock investors sell everything in sight, bond investors are downright giddy with buying. This Risk Off trade has pushed the 10 year Treasury rate all the way down to 1.57%. That is the lowest rate since the summer of 2012.

One could say that is bullish for stocks given the more attractive earnings yield. Or they could look at the low rates as a measure of fear which predicts more pain ahead for stocks...I am in the latter camp.

There may be a little more bounce up from this test of 1812 before testing it again. Sooner or later I expect that support will crumble with a much more important test around 1708 (which marks the official bear market territory of -20% for the S&P 500).

Even if this proves to be nothing more than a nasty correction, I would still be shocked if we didn't test 1708. So do keep that in mind even if you are currently bullish.

[Personally, I would be surprised if it gets that low.  It hasn't been that low since 2013.  Well, we shall see.]

[2/10/16] Bear Market Roll Call

Here is the roll call of world markets already in bear territory:

-21.0% England

-23.2% Japan

-24.3% France

-28.3% Germany

-32.5% Hong Kong

-46.7% China

I know what you are saying. The US is healthier than these other guys. So let me show you what US stock indices are already in bear market mode.

-24.1% Dow Jones Transportation

-25.6% Russell 2000

-26.1% KBW Nasdaq Bank Index

So yes, the S&P 500 is only down -13.2% from the peak. However, the bearish waves from abroad keep hitting our shores and some indices are already drowning. I suspect the S&P 500 is not that far behind. Time to grab a life preserver.

[If he's right, I'll be having more opportunities to nibble.  The problem is how much to nibble.  You don't want to run out of money long before the bottom.]

[2/9/16] Reity's Bear Market Manifesto

There are permabulls who never see the next bear market coming given their unwarranted eternal optimism.

Then there are permabears who are proudly pessimistic even in the midst of a 200% bull rally. The joke is that these types have called 19 of the last 3 bear markets correctly ;-)

Investors should stay as objective as possible to profitably align their portfolios with the prevailing trend. This approach will rarely lead to calling a perfect top or bottom...but you won't be left that far behind as conditions change.

My investment track record shows the ability to go both long and short the market depending on the evidence in hand. And over this past weekend I put the pieces of the puzzle together to realize we are indeed rolling towards the next recession and bear market.

This prompted me to write a 14 page commentary providing the evidence to support my new bear market view and, more importantly, the specific picks to profit in this environment. This was shared early Monday morning with Reitmeister Trading Alert and Zacks Ultimate customers.

Obviously a 14 page commentary is too long to cut and paste below. And it's a bit too valuable to share with free customers as it really is reserved for our paying subscribers. However, I think it's really important that you read this document at this crucial time. So here is the best compromise.

Just start a $1 trial to Zacks Ultimate now which gives you access to the Reitmeister Trading Alert and this vital commentary from Monday morning. Plus it gives you access all our other private portfolios, commentaries and recommendations.

If you cancel within 30 days there will be no further cost to you. Even better, if you truly don't think my bear market commentary was worthwhile, then we will even refund the $1 you paid for the trial.

[1/24/16 Mitch Zacks] Corrections (drops in the 10% - 20% range) are normal, natural occurrences within bull market cycles. Plain and simple. In fact, since 1980 the market has suffered an average intra-year decline of -14.2%. Think about that… -14.2%! Nobody wants to experience that type of decline, but it’s almost always been a part of the investment experience. It comes with the territory. For patient investors, though, positive rewards also come with the territory – in 27 of the 36 years, since 1980, the market finished positive.

To be sure, the knowledge that pullbacks are frequent and normal does not make enduring them any easier. Investors dislike losses more than twice as much as they enjoy gains, so to see a drop in the value of a nest egg is gut-wrenching. I understand that completely. To make matters worse, corrections are almost always sharp, scary declines accompanied by what seems like catastrophic news. In this case, the potentially huge fallout from a slowing China and falling oil prices.

But, both of those are old stories - re-runs from fears we saw emerge throughout the last year. Neither of them should have the power to outright reverse the economic and earnings growth we expect this year. In fact, lower oil prices should ultimately help more sectors than it hurts – it just takes some time for the benefits to flow through.

The Single Most Important Feature of a Market Correction 

Everything I’ve written above you’ve read before in some form. I’ve consistently made my views clear that I think we are still within a bull market cycle and that I see any pullbacks as temporary disruptions. But, in the context of the current downside volatility, I want you to think about it from another angle: if you were to come to me and ask, “Mitch, when would you say is the very best time to invest in equities? My answer would be that, in my experience, the best time to buy stocks is when economic fundamentals are strong and earnings are growing, but no one notices because fear dominates the headlines. Sound familiar? 

If I see red all over the screen, notice an uptick in client calls and find that CNBC is non-stop calling for doomsday – yet nothing has changed with the fundamental outlook for the U.S. or global economy (which we still expect to see grow in 2016) – it makes me even more bullish. The ‘wall of worry’ grows when market activity and investor sentiment divorce themselves from the fundamentals, and that’s precisely what we are seeing now. 

So, with that all being said, what is the single most important feature of market corrections? It’s that, by definition, corrections are short, sharp declines in the market that tend to emerge from redundant fears not associated with earnings and economic fundamentals. Call me crazy, but that is exactly what I see right now. 

Bottom Line for Investors 

Looking back on my personal history as an asset manager, I cannot show you a single time when market volatility didn’t cause clients to worry and want to change their asset allocations. In 1998 the market fell 19% mid-year because of the Long Term Capital Management implosion, yet the market finished up 27%. In 2010 and 2011 the market dropped sharply (-16% and -19%, respectively) on account of fears over the European sovereign debt crisis, yet the bull market pressed-on. History gives us dozens and dozens of similar examples, and in every single one there are investors who give-in to the fear-inducing headlines and abandon their long-term approach. We think a similar action in this environment would be the wrong course of action. 

Of course, I can’t say with certainty that the bull market will work its way through this downside volatility. No one can ever forecast the direction of the market with certainty. But I also cannot imagine anyone convincing me to be bearish in the midst of a sudden and sharp decline when fears are dominating headlines and yet the fundamental outlook for growth, earnings, inflation, and interest rates remain favorable. That, to me, is about as far from bearish as it gets.

[1/21/16] The Reitmeister Nausea Index

The time was 12:53pm ET on Wednesday. The S&P was down a whopping -3.5% causing me to send out the following message to members of the Reitmeister Trading Alert . I thought it was worth sharing with the rest of you as well:

"Long time RTA members may remember my infamous Reitmeister Nausea Index . It truly is a "gut feeling" I get from extreme market sell offs. And when it triggers, we are usually very close to a capitulation point.

Another way to look at it is to say that this sizeable drop is making me sick because it is beyond my rational understanding of what should happen. Historically this gut reaction has been triggered within 1-2 sessions from when a meaningful bounce occurs. Hopefully history repeats itself now.

Unfortunately, what happens after a potential bounce is a bit more of a mystery. Is risk aversion already so high that it will tilt the US into recession with a bear market as the natural outcome? Or do we shake this off and continue to bounce higher given that the solid state of current economic fundamentals?

[1/17/16 Mitch Zacks] China’s wild volatility is back. Investors were greeted in the New Year with a replay of last summer’s Chinese markets drama and big single day downswings in the first week of trading.

It would be unfair to dismiss the effect of China’s volatility on global and U.S. stocks. The impact is real, and the volatility is contagious. But, last summer the market shook it off quickly and I think we’ll see a replay this time around again. It is easy for investors to get swept up in the emotionality of media coverage and the ‘red on the screen,’ but don’t let that drive your investment strategy. Ask yourself: has China’s episode somehow changed the outlook for U.S./global growth, inflation, corporate earnings, or interest rates? Not for us it hasn’t. The impact of this kind of rapid fire volatility is almost always short-term, and the downside ends just as quickly as it begins. Stay steady.

China does not currently correlate very closely with the world. China has experienced three bear markets since 2009 (the world has experienced zero) and its economy has continued to grow throughout. Bear markets with no recessions?! Welcome to China! A big part of the issue is government intervention, but there’s also the fact that China’s main stock market is essentially closed-off from foreign participation. It’s almost entirely traded by Chinese nationals who buy and sell on margin and were influenced into the market through propaganda. In that sense, the Chinese stock market isn’t a great barometer for the Chinese economy, and it’s a worse indicator for the direction of global stocks and the global economy. We think the global economy will do just fine this year and we see this China hysteria as a replay of last year. If anything, it adds a few more bricks to the wall of worry – a good thing.

[1/12/16] What if This is Not Bottom?

After support was broken at 1950, the next important level was 1900 according to most technicians. That level was tested twice on Monday from which shares did bounce higher into a slightly positive finish at 1923.

If 1900 is not bottom, then the next logical support level is 1870, which marked the lows found in late August and once again in late September. That second test proved to be strong support followed by a 13% rally all the way up to 2116.

If stocks cut through 1870 like butter, then it will likely pay for everyone to get more defensive. That is because panic could truly start to set in, which can bring about a whole host of negative consequences on the fundamental side of the ledger.

I am referring to how business executives are part of the investor class. If their fears from stock market losses leaks over into more risk averse business decisions, then what was nothing more than a technical stock problem could become a fundamental one. Meaning that what I describe above is often the chain reaction that can lead to a recession and bear market.

I know that sounds ominous. But remember how many nasty corrections we have endured during this 7 year bull market that did NOT create the negative domino effect noted above. So do not assume that will happen now. I am simply opening your mind to the possibility of why it could be prudent to get more defensive under 1870. Hopefully we find a lasting bounce before we get there.

[1/7/16] In less than a week investors have taken on 3 fresh fears that have caused the market to head lower:

•  More soft economic data from China
•  Increased tensions between Saudi Arabia and Iran
•  North Korea bomb testing.

Really there is nothing new about any of these stories. Investors have been worried about China's economy for three years and yet they continue to grow and the world spins on. And truly, when has there not be tensions in the Middle East? And when has North Korea not done some ludicrous sabre rattling?

Above is my rational response to explain away these issues. However, fear is wholly irrational in nature and thus hard to judge how long, or how deep, its affects. Meaning things could get uglier before better.

In time my rational view should become the norm allowing stocks to rise back up given that GDP continues to expand and bond rates are low, which keeps the long term bull market alive.

[1/5/16] First Day Farce

We are told that Chinese manufacturing data ruined the first trading day of the New Year. That is patently false. Their numbers were in the same ballpark that they have been for several months.

So what caused their 7% stock decline?

As it turns out, this is just chickens coming home to roost on another gross manipulation of markets by the Chinese government. I am referring to the policies they put in place six months ago during the previous market collapse. One such ruling stopped large shareholders (5% ownership or more) from selling their positions in listed companies. That party ends this Friday and thus some Chinese investors are trying to get out ahead of the potential stampede.

History shows us that the Chinese stock market is pretty disconnected from the actual economy. So this is another "Boy Who Cried Wolf" event like we've had many times over the last several years. Meaning it is a temporary dip caused by unnecessary fear that is followed by a bounce in the market. That is likely why traders rushed in at the end of the US session to bid up stocks 1% into the close.

[1/3/16 Mitch Zacks]  2015 was a fairly disappointing year for most investors with flattish returns and a sizable summer correction that jarred sentiment. To be sure, we weren’t expecting much to begin with for stocks on the year – modest single digit returns that would, perhaps, move in-line with aggregate earnings growth. Therein lied the problem – the year didn’t produce aggregate earnings growth!

The issue, of course, was the Energy sector. We expected weakening earnings with falling crude prices. But, the extent of the damage in the sector was more than substantial given that crude oil prices fell much faster and farther than anyone could have anticipated. The end result is that the Energy sector tugged the aggregate S&P 500 earnings numbers into negative territory, which looks bad on paper but also masks strengths in other areas of the economy.

When 2015 is all said and done, we expect earnings to have fallen 0.3% on the year, and the market’s performance simply to reflect that.

Are There Reasons to be Hopeful Going Forward?

There are plenty. Perhaps the biggest one is that, if you strip away the Energy sector from aggregate S&P 500 earnings, you’ll find that earnings growth was nicely positive on the year for just about every other sector. Additionally, we think the lion’s share of the big losses in Energy are already on the books. Now, it’s a matter of the strong surviving and earnings in the sector leveling-off as crude oil prices do the same.

For the broader S&P 500, consensus has earnings growth for 2016 at +7.8%, which I’d even say is a little too optimistic. I’m looking for earnings more in the 4%-5% range, and I think stock prices could mimic that number just like they did in 2015.

Another big part of looking ahead to 2016 is recognizing the forces that held stocks back in ’15. Earnings growth (ex-Energy) was healthy, so we think it’s safe to assume that there’s a ‘lane’ open for stocks to rise through. Aside from Energy, we think some of the other forces restricting stocks in 2015 should fade in the coming year.

Europe has started to turn the corner into a growth cycle, and the efforts by the European Central Banks to stimulate the broad economy using quantitative easing have largely been effective. But, there were pesky issues holding Europe back from a comfortable growth pattern – there were issues with Russia and the Ukraine, a humanitarian crisis with Syrian refugees seeking asylum, more Greek bailouts and an awful terrorist attack. The good news is that all of those headwinds we see as temporary and surmountable and, beneath the surface, Europe is gaining real strength. It will start to show once those issues fade and could be a boon to global stocks.

Another factor was China’s slowing growth and fears that it is slowing too fast. We see these fears as overblown. China is intentionally making moves to restructure its economy, and a marked slowdown in manufacturing and state investment is the expected collateral damage. It’s weighing on growth, but the media’s fixation on the 7% number seems silly. China’s contribution to global GDP is still enormous if growth falls to 6.5% or even 6%, which seems unlikely.

The recent upwelling of attention on the high yield market also has some worried, with spreads rising and some defaults occurring at the margin. But, again, we have Energy in large part to blame. Junk only comprises about 25% of the total corporate bond market anyhow, and it’s not like the entire junk bond market is doomed. When you look at the aggregate credit picture, the troubled area is just a piece of a piece of the debt market. And that piece is really small.

Bottom Line for Investors

If you take these three headwinds together, what you actually create is that lovely “wall of worry” that stocks yearn to climb. And, that adds to our bullishness. Investors are actively looking for things to fear, and I think this will persist throughout 2016. If it does, and an earnings recovery takes hold in earnest, we expect stocks to do just fine.

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