Shares in Asia rose on positive indications about recovery after Japan's government said their economy will expand for the first time in three years and industrial production rose at the fastest pace in six months in November, while China upwardly revised prior growth figures. Japan's Nikkei 225 Index rose 1.3% after it was reported that industrial production rose 2.6% in November versus the 2.5% estimate, despite a bigger drop in large retailer sales than expected at -9.6%. The Japanese government said on Dec. 25 that its 7.2 trillion yen ($78.8 billion) stimulus package unveiled earlier this month would probably boost GDP by 0.7% in 2010 and create about 200,000 jobs.
In China, the estimate of 2008 GDP was upwardly adjusted to 9.6% from 9.0% and the government said this year's previously reported quarterly figures will also increase. Chinese Premier Wen Jiabao reiterated the desire to cool property prices, saying that "property prices have risen too quickly in some areas and we should use taxes and loan interest rates to stabilize them," while maintaining a "moderately loose" monetary policy and a "proactive" fiscal stance, saying it would be a mistake to withdraw stimulus too quickly. Wen added that China will "absolutely not yield" to calls to allow the yuan to appreciate, saying that "Keeping the yuan's value basically steady is our contribution to the international community at a time when the world's major currencies have been devalued." Wen also addressed bank lending, saying "it would be good if our bank lending was more balanced, better structured and not on such a large scale," but that the situation "has been improving in the second half of this year."
Despite the property comments, shares of Chinese property stocks rose, and the Shanghai Composite increased 1.5%. Prices of property were also on the mind of investors in Hong Kong, after the city's government sold two sites at prices below market expectations, and the Hang Seng Index was the only major equity benchmark in Asia to decline, falling 0.2%, while South Korea's Kospi Index increased 0.2% and the Australian market was closed. In equity news, China Mobile (CHL $45) erased early losses and gained 0.3% despite a report that the company's Vice Chairman was being investigated by the government in connection with an unspecified "serious disciplinary breach."
[Schwab Alerts]
Monday, December 28, 2009
Monday, December 21, 2009
the worst decade ever for stocks
The U.S. stock market is wrapping up what is likely to be its worst decade ever.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Journal Community
Vote: Are you better off today than 10 years ago?
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Journal Community
Vote: Are you better off today than 10 years ago?
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
Friday, December 18, 2009
the man who saved the economy (according to Warren Buffett)
Over dinner at the amazing Piccolo Pete's, the Italian restaurant in a working class neighborhood that seems to set aside most of the restaurant just for him, he said the economy had really been in desperate shape last fall.
The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.
If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.
Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.
The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.
If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.
Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.
value investing and longevity
VALUE investing is about buying undervalued securities. It's about looking at parts of the market where nobody is looking. And selling out when everybody starts to get excited.
Value investors have deep convictions on what they think offers value. And to minimise the chances of them being wrong, they allow for a significant 'margin of safety' - that is, the securities they buy into have to be so undervalued that even if things get much worse, there is not much room for them to fall further.
Value investing requires patience. It requires independence of thought. And because value investors have such deep conviction that what they buy is trading at below market value, even if the general market were to plunge, they don't panic. In fact, they would see this as an opportunity to buy more.
As a result of all these factors, value investors are said to sleep better at night. And conceivably, they are not so highly strung. Their stress level would be lower than those who chase after the market and whose mood swings along with it.
Perhaps all this explains why some well-known value investors live much longer than the average person.
Don't believe me? Let's see.
Benjamin Graham, father of value investing and mentor of Warren Buffett, is the author of Security Analysis and The Intelligent Investor. In Security Analysis, he advocated a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard against future adverse developments often encountered in the stock market. A professor at Columbia Business School, he lived until 82.
David Dodd, also a professor at Columbia Business School and co-author of Security Analysis, lived until 93.
John Templeton was noted for borrowing money from family and friends when he was 27, to buy 100 shares of each company trading at less than US$1 (US$15 in current dollar terms) a share in 1939. He made many times the money back in a four-year period. He became a billionaire by pioneering overseas investment funds in the US. He died last year at 95, after devoting many of his later years to philanthropy.
Philip Fisher, author of the still-popular Common Stocks and Uncommon Profits, believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held until his death in March 2004 at age 96.
Another Philip, Philip Carret, the founder of Pioneer Fund, was also a hero of Warren Buffett. In his book A Money Mind at Ninety, he said he inherited his 'money mind'. He died at the age of 101. David Tripple, former chief investment officer of Pioneer Group, said: 'In 101 years, I don't think he ever once got sucked up into a fad or frenzy.'
Now let's look at some of the great value investors who are still active today.
Warren Buffett needs no introduction. He is 79 this year, and is still deploying his billions, most recently a US$26 billion bet on Burlington Northern Santa Fe railroad. He described the purchase as an opportunity to buy a business that's going to be around for 100 or 200 years.
Charlie Munger, vice-chairman of Berkshire Hathaway, has exerted key influence on the success of Mr Buffett's enterprise over many decades. He is 85 this year.
Martin Whitman is founder and portfolio manager of Third Avenue Value Fund. He is a 'buy and hold' value investor. He buys stock in companies he thinks have strong finances, competent management and an understandable business. Also, the company's stock must be cheap. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is over-priced relative to its intrinsic value. He is 85 this year.
Recently, the Financial Times interviewed two active investors who are well past 100. Irving Kahn is the oldest active money manager on Wall Street at 103. Mr Kahn says he ignores market gyrations and typically holds stocks for at least three years and up to 15. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruits, some of which ripen more slowly than others. Mr Kahn incidentally was Mr Graham's first teaching assistant and helped him with Security Analysis. Like Mr Graham, Mr Kahn seeks unloved and obscure stocks, eschewing high fliers.
Roy Neuberger and the company he founded, Neuberger Berman, also subscribe to similar principles. Mr Neuberger retired at 99 and today, at 106, is still consulted regularly by his 68-year-old protege Marvin Schwartz. The latter credits Mr Neuberger with providing appropriate perspective during recent hard times. 'In almost each and every instance, he advised us to buy in what would be a passing negative period,' Mr Schwartz was quoted by FT as saying.
The website Monevator also recently explored whether being a great investor also means you'll live longer. The article postulated why some of them lived to such a ripe old age. Among the reasons given were:
* Job satisfaction - People who are happier and lead productive lives have been shown to live healthier, longer lives. There's no doubt all these investors loved investing.
* Active mentally - Lots of old people in Japan now do brain training to ward off Alzhiemer's disease and other degenerative brain ailments. What could be more testing than trying the impossible - beating the market through stock picking?
* Eustress - the flipside of distress, eustress is a form of positive stress, associated with achieving in life.
* Intelligence, good upbringing and better health care - all the investors enjoyed these.
My take is that their longevity stems from their love of life in general. In a tribute to Philip Carret, the Outstanding Investors Digest wrote: 'Although he died at the age of 101, which many would consider to be a ripe old age, he was as young at heart, vital and as active to the last as anyone we know.'
[via brknews]
Value investors have deep convictions on what they think offers value. And to minimise the chances of them being wrong, they allow for a significant 'margin of safety' - that is, the securities they buy into have to be so undervalued that even if things get much worse, there is not much room for them to fall further.
Value investing requires patience. It requires independence of thought. And because value investors have such deep conviction that what they buy is trading at below market value, even if the general market were to plunge, they don't panic. In fact, they would see this as an opportunity to buy more.
As a result of all these factors, value investors are said to sleep better at night. And conceivably, they are not so highly strung. Their stress level would be lower than those who chase after the market and whose mood swings along with it.
Perhaps all this explains why some well-known value investors live much longer than the average person.
Don't believe me? Let's see.
Benjamin Graham, father of value investing and mentor of Warren Buffett, is the author of Security Analysis and The Intelligent Investor. In Security Analysis, he advocated a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard against future adverse developments often encountered in the stock market. A professor at Columbia Business School, he lived until 82.
David Dodd, also a professor at Columbia Business School and co-author of Security Analysis, lived until 93.
John Templeton was noted for borrowing money from family and friends when he was 27, to buy 100 shares of each company trading at less than US$1 (US$15 in current dollar terms) a share in 1939. He made many times the money back in a four-year period. He became a billionaire by pioneering overseas investment funds in the US. He died last year at 95, after devoting many of his later years to philanthropy.
Philip Fisher, author of the still-popular Common Stocks and Uncommon Profits, believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held until his death in March 2004 at age 96.
Another Philip, Philip Carret, the founder of Pioneer Fund, was also a hero of Warren Buffett. In his book A Money Mind at Ninety, he said he inherited his 'money mind'. He died at the age of 101. David Tripple, former chief investment officer of Pioneer Group, said: 'In 101 years, I don't think he ever once got sucked up into a fad or frenzy.'
Now let's look at some of the great value investors who are still active today.
Warren Buffett needs no introduction. He is 79 this year, and is still deploying his billions, most recently a US$26 billion bet on Burlington Northern Santa Fe railroad. He described the purchase as an opportunity to buy a business that's going to be around for 100 or 200 years.
Charlie Munger, vice-chairman of Berkshire Hathaway, has exerted key influence on the success of Mr Buffett's enterprise over many decades. He is 85 this year.
Martin Whitman is founder and portfolio manager of Third Avenue Value Fund. He is a 'buy and hold' value investor. He buys stock in companies he thinks have strong finances, competent management and an understandable business. Also, the company's stock must be cheap. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is over-priced relative to its intrinsic value. He is 85 this year.
Recently, the Financial Times interviewed two active investors who are well past 100. Irving Kahn is the oldest active money manager on Wall Street at 103. Mr Kahn says he ignores market gyrations and typically holds stocks for at least three years and up to 15. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruits, some of which ripen more slowly than others. Mr Kahn incidentally was Mr Graham's first teaching assistant and helped him with Security Analysis. Like Mr Graham, Mr Kahn seeks unloved and obscure stocks, eschewing high fliers.
Roy Neuberger and the company he founded, Neuberger Berman, also subscribe to similar principles. Mr Neuberger retired at 99 and today, at 106, is still consulted regularly by his 68-year-old protege Marvin Schwartz. The latter credits Mr Neuberger with providing appropriate perspective during recent hard times. 'In almost each and every instance, he advised us to buy in what would be a passing negative period,' Mr Schwartz was quoted by FT as saying.
The website Monevator also recently explored whether being a great investor also means you'll live longer. The article postulated why some of them lived to such a ripe old age. Among the reasons given were:
* Job satisfaction - People who are happier and lead productive lives have been shown to live healthier, longer lives. There's no doubt all these investors loved investing.
* Active mentally - Lots of old people in Japan now do brain training to ward off Alzhiemer's disease and other degenerative brain ailments. What could be more testing than trying the impossible - beating the market through stock picking?
* Eustress - the flipside of distress, eustress is a form of positive stress, associated with achieving in life.
* Intelligence, good upbringing and better health care - all the investors enjoyed these.
My take is that their longevity stems from their love of life in general. In a tribute to Philip Carret, the Outstanding Investors Digest wrote: 'Although he died at the age of 101, which many would consider to be a ripe old age, he was as young at heart, vital and as active to the last as anyone we know.'
[via brknews]
Tuesday, December 08, 2009
Value Line's Samuel Eisenstadt fired
For 63 years, Samuel Eisenstadt was probably Value Line Inc.’s most valued employee. The statistician created an investment strategy that proved successful for decades and was endorsed by none other than Warren Buffett. But today he embarks on something new — unemployment.
Late last Friday afternoon, the firm’s new chief executive, Howard Brecher, called Mr. Eisenstadt and told him that his services were “no longer needed” and he was retiring, effective immediately, according to Mr. Eisenstadt. Yet the 87-year-old, who helped drive the Nazis out of France and Belgium as a member of the U.S Army’s 8th Armored Division, was in no mood to be shoved aside.
“I refuse to accept the explanation that I’m retiring,” Mr. Eisenstadt said. “I’m not retiring, and I don’t plan to retire. My mind is still sharp and wrapped up in my work. This is a very sad ending, and it really hurts.”
[via veryearly1]
Late last Friday afternoon, the firm’s new chief executive, Howard Brecher, called Mr. Eisenstadt and told him that his services were “no longer needed” and he was retiring, effective immediately, according to Mr. Eisenstadt. Yet the 87-year-old, who helped drive the Nazis out of France and Belgium as a member of the U.S Army’s 8th Armored Division, was in no mood to be shoved aside.
“I refuse to accept the explanation that I’m retiring,” Mr. Eisenstadt said. “I’m not retiring, and I don’t plan to retire. My mind is still sharp and wrapped up in my work. This is a very sad ending, and it really hurts.”
[via veryearly1]
Friday, November 27, 2009
Jim Rogers on gold and Geithner
Maria Bartiromo interviews Jimmy Rogers
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
[via maverick@investwise]
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
[via maverick@investwise]
Tuesday, November 24, 2009
existing home sales surge
Existing-home sales surged 10.1% month-over-month (m/m) to an annual rate of 6.10 million units in October. That was significantly better than expected as economists had only forecast a 2.3% gain to 5.70 million. At the same time, last month's data was revised lower, with September data now showing an 8.8% increase to 5.54 million units. Even the National Association of Realtors was surprised at the size of the gain with NAR's chief economist reporting "Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November." Similarly, the NAR warned "With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer."
The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 - 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. "In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive," the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.
The stabilization of the housing market is one factor that could get the US consumer back on its feet sooner than expected. As Schwab's Director of Sector and Market Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Scaling Back, there are multiple reasons to be concerned about the health of the American consumer, but there are also reasons to be optimistic. Among the negative factors are an unemployment rate which is likely to move higher and the need for consumers to repair their personal balance sheets. Tighter credit conditions will also likely reduce consumers' ability to spend. However, Americans have a propensity to consume and have defied predictions of their shopping demise many times before. In addition, at the end of a year when American consumers have shown restraint in spending, it is not too difficult to imagine some pent-up demand being released during this time of the year-resulting in the potential for upside surprises. In the end, after taking into account all of these factors as well as the strong rally in cyclical areas of the market since March and resulting valuation of stocks in the sector, Brad feels a Marketperform rating of consumer stocks is appropriate. Read more at www.schwab.com/marketinsight.
[via Schwab Alerts]
The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 - 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. "In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive," the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.
The stabilization of the housing market is one factor that could get the US consumer back on its feet sooner than expected. As Schwab's Director of Sector and Market Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Scaling Back, there are multiple reasons to be concerned about the health of the American consumer, but there are also reasons to be optimistic. Among the negative factors are an unemployment rate which is likely to move higher and the need for consumers to repair their personal balance sheets. Tighter credit conditions will also likely reduce consumers' ability to spend. However, Americans have a propensity to consume and have defied predictions of their shopping demise many times before. In addition, at the end of a year when American consumers have shown restraint in spending, it is not too difficult to imagine some pent-up demand being released during this time of the year-resulting in the potential for upside surprises. In the end, after taking into account all of these factors as well as the strong rally in cyclical areas of the market since March and resulting valuation of stocks in the sector, Brad feels a Marketperform rating of consumer stocks is appropriate. Read more at www.schwab.com/marketinsight.
[via Schwab Alerts]
China a paper dragon?
The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It’s China’s turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
[via maverick@investwise]
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
[via maverick@investwise]
Saturday, November 21, 2009
unemployment rate hits double digits
The unemployment rate has hit double digits for the first time since 1983 — and is likely to go higher. The 10.2 percent jobless rate for October shows how weak the economy remains even though it is growing. The rising jobless rate could threaten the recovery if it saps consumers' confidence and makes them more cautious about spending as the holiday season approaches.
The October unemployment rate — reflecting nearly 16 million jobless people — jumped from 9.8 percent in September, the Labor Department said Friday. The job losses occurred across most industries, from manufacturing and construction to retail and financial.
Economists say the unemployment rate could surpass 10.5 percent next year because employers are reluctant to hire.
President Barack Obama called the new jobs report another illustration of why much more work is needed to spur business creation and consumer spending. Noting legislation he's signing to provide additional unemployment benefits for laid-off workers, Obama said, "I will not rest until all Americans who want work can find work."
The October unemployment rate — reflecting nearly 16 million jobless people — jumped from 9.8 percent in September, the Labor Department said Friday. The job losses occurred across most industries, from manufacturing and construction to retail and financial.
Economists say the unemployment rate could surpass 10.5 percent next year because employers are reluctant to hire.
President Barack Obama called the new jobs report another illustration of why much more work is needed to spur business creation and consumer spending. Noting legislation he's signing to provide additional unemployment benefits for laid-off workers, Obama said, "I will not rest until all Americans who want work can find work."
Friday, November 20, 2009
back at 1100
The S&P 500 is back at 1100 more than 11 years after it first reached that level.
The biggest winners in that time frame were RIMM and Apple. The biggest losers were AIG and Eastman Kodak.
[via Free Speech]
The biggest winners in that time frame were RIMM and Apple. The biggest losers were AIG and Eastman Kodak.
[via Free Speech]
Saturday, November 14, 2009
the recession is over (?)
The United States has emerged from the longest economic contraction since World War II.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department.
But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department.
But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
Tuesday, October 27, 2009
Zacks on growth and value
* Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
Saturday, October 24, 2009
lessons from the bear market
Jason Zweig's latest book, Your Money and Your Brain, looks at how the brain responds when making real-life financial decisions. In an interview that appeared on Morningstar.com last week, Zweig, who writes The Intelligent Investor for The Wall Street Journal, shared some tips for overcoming your brain's worst impulses. In part two of that interview, he shares some wisdom for making good decisions during times of financial crisis.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Roubini on gold
I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
[via bdparts]
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
[via bdparts]
Friday, October 16, 2009
jobless claims
[10/15/09 Schwab Alerts] Weekly initial jobless claims fell by 10,000 to 514,000, versus last week's figure that was upwardly revised by 3,000 to 524,000. The Bloomberg consensus called for claims to reach 520,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 9,000 to 531,500. Continuing claims also fell, declining by 75,000 to 5,992,000, versus the forecast of 6,000,000.
[10/8/09 Schwab Alerts] Weekly initial jobless claims fell by 33,000 to 521,000, versus last week's figure that was upwardly revised by 3,000 to 554,000. The Bloomberg consensus called for claims to reach 540,000. The four-week moving average, considered a smoother look at the trend in claims, decreased by 9,000 to 539,750. Continuing claims also fell, declining by 72,000 to 6,040,000, versus the forecast of 6,105,000.
[10/8/09 Schwab Alerts] Weekly initial jobless claims fell by 33,000 to 521,000, versus last week's figure that was upwardly revised by 3,000 to 554,000. The Bloomberg consensus called for claims to reach 540,000. The four-week moving average, considered a smoother look at the trend in claims, decreased by 9,000 to 539,750. Continuing claims also fell, declining by 72,000 to 6,040,000, versus the forecast of 6,105,000.
Wednesday, October 14, 2009
Dow breaks 10,000
The Dow Jones Industrial Average ($INDU) closed above 10,000 today for the first time in about a year, as all three major indexes hit new highs for 2009.
The rally was prompted by strong earnings from banking giant JPMorgan Chase (JPM) and Intel (INTC), and it reflects a strongly held view that an economic recovery is emerging in the United States and around the world.
The Dow finished up 145 points, or 1.5%, to 10,016. That is its best finish since Oct. 3, 2008, in the midst of last year's financial collapse. The Standard & Poor's 500 Index ($INX) was up 19 points, or 1.8%, to 1,092, also the best finish for the broad-based index since Oct. 3, 2008. The Nasdaq Composite Index ($COMPX) was up 32 points, or 1.5%, to 2,172. That's the best finish for the index since Sept. 26, 2008.
The Dow is now up 53% since bottoming on March 9. The S&P 500 is up 61%, and the Nasdaq
has soared 71%. The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, is up 68%.
Bernanke to tighten (at some point)
Federal Reserve Chairman Ben Bernanke spoke yesterday evening at a Board of Governors conference in Washington, giving an update on the Fed's balance sheet. The Fed Chief reiterated the Federal Open Market Committee's (FOMC) latest policy statement last month that its accommodative policies will likely be warranted for an extended period. But Bernanke pointed out that, "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."
[Schwab Alerts, 10/9/09]
[Schwab Alerts, 10/9/09]
Wednesday, October 07, 2009
gold at record high
Gold surged again today, hitting a record $1,049.70 an ounce before falling back to $1,044.40. The intraday hight and the close topped Tuesday's record of $1043.45 an ounce.
Demand for gold has been rising as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates at record lows near zero percent. A weak dollar has also contributed to gold's recent surge.
Despite the record price of gold, the commodity is still well below its inflation-adjusted record of about $2,200, set in January 1980, when gold hit $850 an ounce.
Demand for gold has been rising as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates at record lows near zero percent. A weak dollar has also contributed to gold's recent surge.
Despite the record price of gold, the commodity is still well below its inflation-adjusted record of about $2,200, set in January 1980, when gold hit $850 an ounce.
Tuesday, October 06, 2009
Three Bears
Oct. 5 (Bloomberg) -- New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.
U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”
“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
[via bdparts]
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.
U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”
“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
[via bdparts]
Saturday, October 03, 2009
Living Legends
No phony newsreel footage is necessary to convey the wisdom of two living legends who thrived through the granddaddy of them all, the Great Crash of 1929. Both Irving Kahn, the oldest active money manager on Wall Street at 103, and 106 year-old Roy Neuberger, saw the recent shakeout in global markets as just another opportunity to buy good companies cheaply while competitors a third their age rushed for the exits.
Kahn says he ignores market gyrations and typically holds stocks for at least three years, sometimes as much as 15, until value is realised. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruit, some of which ripen more slowly than others. If that sounds suspiciously like the father of value investing, Benjamin Graham, it is no accident – Kahn was Graham’s first teaching assistant and helped him with his 1934 classic Security Analysis. Like Graham, Kahn seeks out unloved and obscure stocks, eschewing highfliers.
“Never buy popular stocks, except maybe in a depression,” he warns.
Neuberger, and the firm he founded, Neuberger Berman, hew to similar principles. He retired at age 99 and is now too frail to be interviewed. His 68-year-old protégé Marvin Schwartz, who joined the firm in 1961, consults with him regularly though and credits Neuberger with providing appropriate perspective in hard times such as these.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” says Schwartz.
Shareholders of Berkshire Hathaway hoping that the 79-year-old Oracle of Omaha will achieve longevity on par with Messrs Kahn and Neuberger have cause for cheer. Optimistic value-seekers have remarkable staying-power. Philip Carret and Philip Fisher, two of Buffett’s key influences aside from Graham and among the most successful investors of all-time, died at age 101 and 96, respectively. Another legendary investor, Sir John Templeton, remained active until his death last summer at age 95 and is credited with two of the great contrarian investing quotes: “Invest at the point of maximum pessimism” and “the four most dangerous words in investing are ‘it’s different this time.’”
[via iluvbabyb]
Kahn says he ignores market gyrations and typically holds stocks for at least three years, sometimes as much as 15, until value is realised. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruit, some of which ripen more slowly than others. If that sounds suspiciously like the father of value investing, Benjamin Graham, it is no accident – Kahn was Graham’s first teaching assistant and helped him with his 1934 classic Security Analysis. Like Graham, Kahn seeks out unloved and obscure stocks, eschewing highfliers.
“Never buy popular stocks, except maybe in a depression,” he warns.
Neuberger, and the firm he founded, Neuberger Berman, hew to similar principles. He retired at age 99 and is now too frail to be interviewed. His 68-year-old protégé Marvin Schwartz, who joined the firm in 1961, consults with him regularly though and credits Neuberger with providing appropriate perspective in hard times such as these.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” says Schwartz.
Shareholders of Berkshire Hathaway hoping that the 79-year-old Oracle of Omaha will achieve longevity on par with Messrs Kahn and Neuberger have cause for cheer. Optimistic value-seekers have remarkable staying-power. Philip Carret and Philip Fisher, two of Buffett’s key influences aside from Graham and among the most successful investors of all-time, died at age 101 and 96, respectively. Another legendary investor, Sir John Templeton, remained active until his death last summer at age 95 and is credited with two of the great contrarian investing quotes: “Invest at the point of maximum pessimism” and “the four most dangerous words in investing are ‘it’s different this time.’”
[via iluvbabyb]
Tuesday, September 29, 2009
home price declines slowing
Home prices in 20 major markets fell 13% in July from a year earlier, but, increasingly, it appears that bottoms were established in those markets in April.
The S&P/Case-Shiller 20-city home price index report was better than economists' expectations of a 14.2% decline from a year earlier, and the smallest decline in 17 months. The index has fallen every month since January 2007.
Home prices in the 20 markets actually moved up 1.6% in July from June, the fourth month of gains, the report said. But don't forget: July is one of the strongest months of the year.
Homebuilding stocks moved higher on the news.
The S&P/Case-Shiller 20-city home price index report was better than economists' expectations of a 14.2% decline from a year earlier, and the smallest decline in 17 months. The index has fallen every month since January 2007.
Home prices in the 20 markets actually moved up 1.6% in July from June, the fourth month of gains, the report said. But don't forget: July is one of the strongest months of the year.
Homebuilding stocks moved higher on the news.
Peter Schiff on G20
As another G20 meeting rolls around, this time on home soil, the time comes once again for the economically curious but politically unconnected to wonder what is really happening behind closed doors.
Everyone agrees that the principal agenda item in Pittsburgh will be the need to rein in the 'global imbalances' that created the late economic crisis. Everyone also agrees that these imbalances involve too much spending and borrowing by Americans and too little of both by the Chinese and other developing nations. In his remarks this week at the United Nations, President Obama used his peerless rhetorical skill to frame the issues clearly and plainly. Noting that a return to pre-crisis economics is impossible, the president assured the world that his administration will pursue policies to increase savings and decrease spending at home and challenged his Chinese counterparts to enact measures with the opposite effect in their own country.
While this is roughly what needs to happen, President Obama is actually doing everything in his power to prevent it. In point of fact, every policy move undertaken by his administration has exacerbated the very imbalances he supposedly wants to curtail. To so seamlessly profess one goal while simultaneously undermining it is an impressive piece of political theater.
What exactly are the federal fiscal stimuli other than deliberate, but clumsy, efforts to get people, companies, and governments to spend money they don't have? Programs like tax credits for new homebuyers or 'cash for clunkers' are intended to encourage consumers to spend money that they otherwise might have saved.
In 2009, despite the tilted playing field, the American people have heroically managed to increase their savings (although clearly not as much as they would have in a free market). But President Obama's runaway deficit spending is undermining their efforts. The simple truth is that government debt is our debt. So if a family manages, at some cost to their lifestyle, to squirrel away an extra $1,000 in saving this year, but the government adds $20,000 in new debt per household (each family's approximate share of the $1.8 trillion fiscal 2009 deficit), that family ends up owing $19,000 more than they did at the beginning of the year!
So much for our end of the bargain. How about on the other side of the Pacific? Will the Chinese restore balance by increasing their spending? How can they while they are lending us all their money? Remember, any money the Chinese spend is money they cannot loan to us. So, if China really wanted to spur domestic consumption, the best way to do so would be to stop buying our debt. Even better, they could sell Treasuries they already own and distribute the proceeds to their citizens to spend.
However, the Obama administration is heavily lobbying the Chinese to get them to step up to the plate and buy record amounts of new Treasury debt. Obama cannot have it both ways. He cannot claim he wants the Chinese to spend more, but then beg the Chinese government to take money away from Chinese consumers and loan it to the United States Treasury.
In the end, Obama will get precisely what he publicly claims to desire but privately dreads. The Chinese government will come to its senses and stop buying Treasuries. This will cause the U.S. dollar to collapse, but it will also allow Chinese citizens to fully enjoy the fruits of their labor.
Once the Chinese begin consuming more of their own products, those products will no longer be available to Americans. Once they start spending more of their incomes on themselves, those funds will no longer be available for us to borrow. Unfortunately, that is when our real economic crisis will begin.
-- Peter Schiff [via pbo@chucks_angels, 9/27/09]
Everyone agrees that the principal agenda item in Pittsburgh will be the need to rein in the 'global imbalances' that created the late economic crisis. Everyone also agrees that these imbalances involve too much spending and borrowing by Americans and too little of both by the Chinese and other developing nations. In his remarks this week at the United Nations, President Obama used his peerless rhetorical skill to frame the issues clearly and plainly. Noting that a return to pre-crisis economics is impossible, the president assured the world that his administration will pursue policies to increase savings and decrease spending at home and challenged his Chinese counterparts to enact measures with the opposite effect in their own country.
While this is roughly what needs to happen, President Obama is actually doing everything in his power to prevent it. In point of fact, every policy move undertaken by his administration has exacerbated the very imbalances he supposedly wants to curtail. To so seamlessly profess one goal while simultaneously undermining it is an impressive piece of political theater.
What exactly are the federal fiscal stimuli other than deliberate, but clumsy, efforts to get people, companies, and governments to spend money they don't have? Programs like tax credits for new homebuyers or 'cash for clunkers' are intended to encourage consumers to spend money that they otherwise might have saved.
In 2009, despite the tilted playing field, the American people have heroically managed to increase their savings (although clearly not as much as they would have in a free market). But President Obama's runaway deficit spending is undermining their efforts. The simple truth is that government debt is our debt. So if a family manages, at some cost to their lifestyle, to squirrel away an extra $1,000 in saving this year, but the government adds $20,000 in new debt per household (each family's approximate share of the $1.8 trillion fiscal 2009 deficit), that family ends up owing $19,000 more than they did at the beginning of the year!
So much for our end of the bargain. How about on the other side of the Pacific? Will the Chinese restore balance by increasing their spending? How can they while they are lending us all their money? Remember, any money the Chinese spend is money they cannot loan to us. So, if China really wanted to spur domestic consumption, the best way to do so would be to stop buying our debt. Even better, they could sell Treasuries they already own and distribute the proceeds to their citizens to spend.
However, the Obama administration is heavily lobbying the Chinese to get them to step up to the plate and buy record amounts of new Treasury debt. Obama cannot have it both ways. He cannot claim he wants the Chinese to spend more, but then beg the Chinese government to take money away from Chinese consumers and loan it to the United States Treasury.
In the end, Obama will get precisely what he publicly claims to desire but privately dreads. The Chinese government will come to its senses and stop buying Treasuries. This will cause the U.S. dollar to collapse, but it will also allow Chinese citizens to fully enjoy the fruits of their labor.
Once the Chinese begin consuming more of their own products, those products will no longer be available to Americans. Once they start spending more of their incomes on themselves, those funds will no longer be available for us to borrow. Unfortunately, that is when our real economic crisis will begin.
-- Peter Schiff [via pbo@chucks_angels, 9/27/09]
how the market works
Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.
The villagers seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching
monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."
The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!
Now you have a better understanding of how the stock market works.
[Duke@chucks_angels, 2/24/09]
The villagers seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching
monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."
The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!
Now you have a better understanding of how the stock market works.
[Duke@chucks_angels, 2/24/09]
Friday, September 25, 2009
existing home sales fall
Existing home sales fell 2.7% month-over-month (m/m) to an annual rate of 5.1 million units, breaking a four-straight monthly streak of increases, and the report was disappointing relative to the 2.1% increase to an annual rate of 5.35 million units expected by a survey of economists conducted by Bloomberg. Positively, this marks the second month of year-over-year increases, at 3.4% for August. Single-family home sales decreased 2.8%, while multi-family sales fell 1.6%. Distressed properties and the shift to the low-end of the market continue to weigh down the median existing-home price, which fell 12.5% year-over-year (y/y) in August to $177,700, but the pace of price declines has been moderating in recent months.
[Schwab Alerts, 9/24/09]
***
Later in morning action, August existing home sales will be released, and are forecast to increase 2.1% to an annual rate of 5.35 million units, extending the upward trend to five months. July data showed the first year-over-year increase since November 2005, and the first four-straight monthly rise in five years.
[Schwab Alerts, 9/24/09]
***
Later in morning action, August existing home sales will be released, and are forecast to increase 2.1% to an annual rate of 5.35 million units, extending the upward trend to five months. July data showed the first year-over-year increase since November 2005, and the first four-straight monthly rise in five years.
Wednesday, September 23, 2009
growth stocks in the last decade
When you ask most investors for their favorite stocks, you'll rarely hear them share a blue-chip name like Johnson & Johnson, Kraft Foods or Wal-Mart. Instead they will tell you about some amazing growth stock that will be the next Google, Microsoft or Apple.
These investors believe that by simply buying stocks with the greatest earnings growth potential they will make money. Sadly, our research clearly shows this not to be true...not even close.
our research details beyond a shadow of a doubt the vast underperformance of growth stocks over the past decade. Here are the results.
Stocks with the lowest projected growth rates actually generated the highest return of +5.4% per year. Yes, I know that doesn't sound like much, but remember the average return of the S&P 500 over that stretch was an anemic -3.3% thanks to 2 ferocious bear markets.
Each level of additional earnings growth came with decreasing levels of profits for investors. As we look at the most aggressive growth stocks, with 30%+ expected earnings growth, we find an embarrassingly low -9.7% return.
[Yeah, but how did they do in the previous decades? And overall??]
These investors believe that by simply buying stocks with the greatest earnings growth potential they will make money. Sadly, our research clearly shows this not to be true...not even close.
our research details beyond a shadow of a doubt the vast underperformance of growth stocks over the past decade. Here are the results.
| Projected Earnings Growth Rate | *Annualized % Return |
| 0 - 10% | 5.4% |
| 10 - 20% | 2.6% |
| 20 - 30% | -0.2% |
| 30%+ | -9.7% |
| S&P 500 | -3.3% |
*The study had a 12-week rebalancing of stocks between 1/1/2000 and 9/11/2009
Stocks with the lowest projected growth rates actually generated the highest return of +5.4% per year. Yes, I know that doesn't sound like much, but remember the average return of the S&P 500 over that stretch was an anemic -3.3% thanks to 2 ferocious bear markets.
Each level of additional earnings growth came with decreasing levels of profits for investors. As we look at the most aggressive growth stocks, with 30%+ expected earnings growth, we find an embarrassingly low -9.7% return.
[Yeah, but how did they do in the previous decades? And overall??]
Tuesday, September 22, 2009
James Grant: From Bear to Bull
As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don't know, and can't. The future is unfathomable.
Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can't predict, I can guess. No, not "guess." Let us say infer.
Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can't predict, I can guess. No, not "guess." Let us say infer.
Thursday, September 17, 2009
hedge funds in 2008
How'd they do?
2008 was a rough year for hedge funds, as evidenced by their year-end performances listed below.
[via B Johnson, 2/19/09]
2008 was a rough year for hedge funds, as evidenced by their year-end performances listed below.
[via B Johnson, 2/19/09]
Monday, September 14, 2009
Doug Kass' 20 Surprises for 2009
Though continuing on CNBC, Jim "El Capitan" Cramer announces his own reality show that will air on NBC in the fall. At the time his reality show premieres, he also writes a new book, Stay Mad for Life: How to Prosper From a Buy/Hold Investment Strategy. Dr. Nouriel Roubini continues to talk depression, but the price of his speaking engagements are cut in half. He writes a new book, The New Depression: How Leverage's Long Tail Will Result in Bread Lines. "Kudlow & Company's" Larry Kudlow proclaims that it's time to harvest the "mustard seeds" of growth and, in an admission of the Democrats' growing economic successes, officially leaves the ranks of the Republican party and returns to his Democratic roots. Yale's Dr. Robert Shiller adopts a variant and positive view on housing and the economy, joining the bullish ranks, and writes a new book, The New Financial Order: Economic Opportunity in the 21st Century.
Dow 14000 (in three years says Markman)
It's been exactly a year since the government kicked a smoldering financial crisis into a roaring blaze by letting Lehman Brothers (LEHMQ, news, msgs) collapse. Observers this week are memorializing the mistake, but investors need to look forward -- and what they should see is that the government's later reaction to its error may have actually laid the groundwork for the greatest bull market of the decade.
For while it seems unlikely and irrational in the context of all the lousy economic news you see right now, stocks are well on their way to recovering from the Lehman jolt and ambling with all deliberate speed toward all-time highs. And they don't really care if you believe it or not.
Dow 14,000? Maybe not next week. But in three years? Not a problem.
The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements and in corporate revenue trends. You don't need to be a statistician or an insider to see them, but you do need to keep an open mind to see why the 30 goliaths of the Dow Jones Industrial Average ($INDU), companies such as Caterpillar (CAT, news, msgs), Intel (INTC, news, msgs), Bank of America (BAC, news, msgs) and Boeing (BA, news, msgs), could see their stocks rise 15% a year for three years.
For while it seems unlikely and irrational in the context of all the lousy economic news you see right now, stocks are well on their way to recovering from the Lehman jolt and ambling with all deliberate speed toward all-time highs. And they don't really care if you believe it or not.
Dow 14,000? Maybe not next week. But in three years? Not a problem.
The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements and in corporate revenue trends. You don't need to be a statistician or an insider to see them, but you do need to keep an open mind to see why the 30 goliaths of the Dow Jones Industrial Average ($INDU), companies such as Caterpillar (CAT, news, msgs), Intel (INTC, news, msgs), Bank of America (BAC, news, msgs) and Boeing (BA, news, msgs), could see their stocks rise 15% a year for three years.
Thursday, September 10, 2009
What's the deal with Dennis Kneale?
What's the deal with Dennis Kneale's hair? He always look to me like he just woke up.
(Then again, I should talk..)
(Then again, I should talk..)
Tuesday, September 01, 2009
are you richer than average?
If all the money in the world were redistributed so that everyone had the same amount, what would it be?
The global money supply is about $60 trillion. (Economists call this figure the M3 value; it includes much more than currency.) Say that we take it all—which means that you and Bill Gates would have nothing in the bank—and then distribute it equally among every individual in the world, about 6.8 billion people. Each man, woman, and child would receive about $9000. So, if your household now has less than $9000 per person, you would gain. If you have more, you would lose.
-- Ask Marilyn
The global money supply is about $60 trillion. (Economists call this figure the M3 value; it includes much more than currency.) Say that we take it all—which means that you and Bill Gates would have nothing in the bank—and then distribute it equally among every individual in the world, about 6.8 billion people. Each man, woman, and child would receive about $9000. So, if your household now has less than $9000 per person, you would gain. If you have more, you would lose.
-- Ask Marilyn
pluralistic ignorance
Psychologists have an explanation for why crowds are prone to do stupid things at crucial moments. It can be action or inaction. But studies show people look to the actions of others to determine what the correct course of action is in an uncertain situation. It's called social proof. You don't want to look like an idiot, so you wait to see what everyone else is doing and go along.
If everyone's running up the street bashing windows, you'll experience pressure to join in. On the other hand, if, say, everyone is buying stocks because no one appears to be concerned that they are expensive, you'll experience subtle pressure to do the same.
In evolutionary terms, doing what other people are doing is generally a good strategy. It saves you the time and energy of thinking about the decision yourself. And you have to assume that they probably wouldn't be doing it if it didn't promote their survival in some way.
The shrinks call this phenomenon "pluralistic ignorance." We were reading about it last night over cocktails at Barney Allen's, right next door to our new head quarters in the heart of St. Kilda. It made a lot of sense, at least if you're trying to explain why so many people do so little when they have so much to lose.
[via investwise]
If everyone's running up the street bashing windows, you'll experience pressure to join in. On the other hand, if, say, everyone is buying stocks because no one appears to be concerned that they are expensive, you'll experience subtle pressure to do the same.
In evolutionary terms, doing what other people are doing is generally a good strategy. It saves you the time and energy of thinking about the decision yourself. And you have to assume that they probably wouldn't be doing it if it didn't promote their survival in some way.
The shrinks call this phenomenon "pluralistic ignorance." We were reading about it last night over cocktails at Barney Allen's, right next door to our new head quarters in the heart of St. Kilda. It made a lot of sense, at least if you're trying to explain why so many people do so little when they have so much to lose.
[via investwise]
pending home sales
pending home sales jumped again, rising 3.6% in July to the highest level since June 2007, well above the 1.5% forecasted rise, and June's 3.6% increase was left unrevised. Pending home sales typically lead existing home sales by a month or two and have gained ground for a sixth-straight month. The momentum in pending home sales has not translated fully to a similar increase in existing home sales, but existing home sales have posted four-straight months of increases to suggest a bottom in the housing sector-a key cog in the recovery machine-adding to the argument the economy may be in recovery mode. Treasuries remain mixed but have moved lower on the mid-to-long end of the curve following the manufacturing and housing data.
[via Schwab Alerts]
[via Schwab Alerts]
Thursday, August 27, 2009
A mathematician, an accountant and an economist
A mathematician, an accountant and an economist apply for the same
job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules, 1/30/09]
job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules, 1/30/09]
Saturday, August 22, 2009
existing-home sales rise
Existing-home sales rose for the fourth-straight month in July, rising 7.2% month-over-month (m/m) to an annual rate of 5.24 million units, higher than the forecast of 5.0 million and an increase of 2.1%, and June figures were unchanged from the 4.89 million unit rate initially reported. Single-family home sales increased 6.5%, while multi-family sales rose 12.5%. Distressed properties continue to weigh down the median existing-home price, which fell 15.1% year-over-year (y/y) in July to $178,400.
The release is impressive in many aspects, posting the first year-over-year increase since November 2005, and the first fourth-straight monthly rise in five years. And despite a 7.3% increase in inventories to 4.09 million existing homes available for sale, the months of supply of homes remained constant at 9.4 months from a month ago. Within single-family homes, the months of supply fell to 8.6 months from 8.9 months in June, while multi-family rose to 15.1 months from 13.1 months in June.
Sales at the low-end of the market have benefited from tax incentives for first-time buyers and are a disproportionate percentage of sales. The low-end doesn't face the obstacles of the higher-end of the market, which include difficult financing and lack of a trade-up market due to the large number of homeowners who are underwater in their mortgages. As unemployment rises, those homeowners who are underwater on their mortgage and lose their jobs become increasingly at risk of entering foreclosure.
As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector and Market Analysis, Brad Sorensen, CFA, note in their bi-weekly "Schwab Market Perspective: Inside the Recovery Story", while home prices are still declining, they are falling at a slower pace, and combined with high home affordability and government incentives, buyer confidence has improved. Pent-up demand, seasonality and tax incentives have been able to stimulate sales in recent months. However, entering a seasonally weaker period and bumping up against the November 30 expiration of the $8,000 government incentive will test the sustainability of sales increases. To read the rest of the article, go to www.schwab.com/marketinsight.
[Schwab Alerts]
The release is impressive in many aspects, posting the first year-over-year increase since November 2005, and the first fourth-straight monthly rise in five years. And despite a 7.3% increase in inventories to 4.09 million existing homes available for sale, the months of supply of homes remained constant at 9.4 months from a month ago. Within single-family homes, the months of supply fell to 8.6 months from 8.9 months in June, while multi-family rose to 15.1 months from 13.1 months in June.
Sales at the low-end of the market have benefited from tax incentives for first-time buyers and are a disproportionate percentage of sales. The low-end doesn't face the obstacles of the higher-end of the market, which include difficult financing and lack of a trade-up market due to the large number of homeowners who are underwater in their mortgages. As unemployment rises, those homeowners who are underwater on their mortgage and lose their jobs become increasingly at risk of entering foreclosure.
As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector and Market Analysis, Brad Sorensen, CFA, note in their bi-weekly "Schwab Market Perspective: Inside the Recovery Story", while home prices are still declining, they are falling at a slower pace, and combined with high home affordability and government incentives, buyer confidence has improved. Pent-up demand, seasonality and tax incentives have been able to stimulate sales in recent months. However, entering a seasonally weaker period and bumping up against the November 30 expiration of the $8,000 government incentive will test the sustainability of sales increases. To read the rest of the article, go to www.schwab.com/marketinsight.
[Schwab Alerts]
Wednesday, August 19, 2009
too many bulls?
In the US there’s a weekly poll of stock newsletter writers called the Investors Intelligence survey. This has a great track record as a gauge of investor sentiment. The latest reading shows the lowest level of gloom since the market peaked in October 2007, coupled with the highest level of optimism since January 2008 – just before markets plunged. What’s more, says the FT, another survey of individual investors’ optimism is near its highest point in over a year.
These are classic signals to contrarians like us that prices are about to crack. As David Rosenberg of Glusken Sheff puts it: “it’s highly unlikely that 90% of the economic community can be right on the same thing at the same time”.
These are yet more signs that most investors are gambling on the market rising. And that creates the contrarian’s second sign of a market top.
[via investwise]
And... the Ned Davis Research's NDR Crowd Sentiment Poll recently jumped just into the extreme optimism zone (which is generally bearish for the market).
These are classic signals to contrarians like us that prices are about to crack. As David Rosenberg of Glusken Sheff puts it: “it’s highly unlikely that 90% of the economic community can be right on the same thing at the same time”.
These are yet more signs that most investors are gambling on the market rising. And that creates the contrarian’s second sign of a market top.
[via investwise]
And... the Ned Davis Research's NDR Crowd Sentiment Poll recently jumped just into the extreme optimism zone (which is generally bearish for the market).
Saturday, August 08, 2009
surviving the end of civilization
In his 2008 bestseller, "Wealth, War and Wisdom," hedge fund manager Barton Biggs warns that investors must "assume the possibility of a breakdown of the civilized infrastructure."
And to prepare for a breakdown of civilization, "your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc." Bloomberg Markets suggested that by "etc." he meant guns, as Biggs added "a few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage."
That warning's not from a hippie radical. Biggs was a respected Wall Street guru at Morgan Stanley for 30 years. As the chief global strategist Institutional Investor magazine put him on its "All-America Research Team" 10 times. Smart Money said: "Biggs is without question the premier prognosticator on the international scene and a mover of markets from Argentina to Hong Kong."
Behavioral economists have answers. But your gut's also good at predicting. So here's what you'll likely do:
You'll go see the new disaster film, "2012" about the end of the Mayan calendar. After all, it's by the same director who "destroyed" the earth in "The Day After Tomorrow," "Independence Day" and "Godzilla." No new investment strategies, but a must-see film, a great catharsis and distraction.
What will Main Street investors do? Here again, even with the planet's survival threatened, they'll go watch "2012," be entertained, experience a catharsis, feel relieved, and afterwards, have dinner, slip back into denial. And later, they'll vote against anything that offers solutions to future problems, especially if it raises taxes.
Why? Very simple: Our "Brains Aren't Wired to Fear the Future," writes New York Times columnist Nicholas Kristof. We're wired to respond to crises, while pushing off the real big problems (health care, Social Security, etc.)
That's basic behavioral economics: Over tens of thousands of years, evolution has programmed our brains so that collectively we will behave counter-productive with the future, making an "End of Civilization" scenario inevitable, a foregone conclusion, a self-fulfilling prophecy ["Mr. Anderson"]. Why? Because our brains are handicapped, we are literally incapable of acting soon enough to solve the problem.
[via pbo]
And to prepare for a breakdown of civilization, "your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc." Bloomberg Markets suggested that by "etc." he meant guns, as Biggs added "a few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage."
That warning's not from a hippie radical. Biggs was a respected Wall Street guru at Morgan Stanley for 30 years. As the chief global strategist Institutional Investor magazine put him on its "All-America Research Team" 10 times. Smart Money said: "Biggs is without question the premier prognosticator on the international scene and a mover of markets from Argentina to Hong Kong."
Behavioral economists have answers. But your gut's also good at predicting. So here's what you'll likely do:
You'll go see the new disaster film, "2012" about the end of the Mayan calendar. After all, it's by the same director who "destroyed" the earth in "The Day After Tomorrow," "Independence Day" and "Godzilla." No new investment strategies, but a must-see film, a great catharsis and distraction.
What will Main Street investors do? Here again, even with the planet's survival threatened, they'll go watch "2012," be entertained, experience a catharsis, feel relieved, and afterwards, have dinner, slip back into denial. And later, they'll vote against anything that offers solutions to future problems, especially if it raises taxes.
Why? Very simple: Our "Brains Aren't Wired to Fear the Future," writes New York Times columnist Nicholas Kristof. We're wired to respond to crises, while pushing off the real big problems (health care, Social Security, etc.)
That's basic behavioral economics: Over tens of thousands of years, evolution has programmed our brains so that collectively we will behave counter-productive with the future, making an "End of Civilization" scenario inevitable, a foregone conclusion, a self-fulfilling prophecy ["Mr. Anderson"]. Why? Because our brains are handicapped, we are literally incapable of acting soon enough to solve the problem.
[via pbo]
unemployment rate dips, stock market goes up
The American economy has shed 6.7 million jobs since the start of the recession, but workers got a bit of good news this morning: the unemployment rate dipped for the first time in more than a year. It now stands at 9.4 percent, down from 9.5 percent. The U.S. Department of Labor reported this morning that employers still cut payrolls in July, but the total job losses were far lower than expected: 247,000.
"The worst may be behind us," President Barack Obama said outside the White House today.
The Dow Jones industrial average climbed 113 points to close at 9,370, closing off another straight up week on Wall Street.
The Standard & Poor's 500, the broadest index of the nation's corporate economy, rose 1.3 percent to close at 1,010, a 10-month high. The Nasdaq rose 1.37 percent today to close at 2,000.
With the pop Friday, the S&P 500 index is up 14.9 percent in only four weeks and 49.4 percent from a 12-year low in early March.
* * *
So I'm guessing if the unemployment rate resumes rising on the next report, expect a market dip.
"The worst may be behind us," President Barack Obama said outside the White House today.
The Dow Jones industrial average climbed 113 points to close at 9,370, closing off another straight up week on Wall Street.
The Standard & Poor's 500, the broadest index of the nation's corporate economy, rose 1.3 percent to close at 1,010, a 10-month high. The Nasdaq rose 1.37 percent today to close at 2,000.
With the pop Friday, the S&P 500 index is up 14.9 percent in only four weeks and 49.4 percent from a 12-year low in early March.
* * *
So I'm guessing if the unemployment rate resumes rising on the next report, expect a market dip.
Thursday, August 06, 2009
The Lottery Effect
One way optimism in security selection is evidences is by the lottery effect. Investors seem driven to investments as having the potential for large gains, such as biotech companies working on cancer cures or mutual funds investing in developing countries. Behavioral researchers have found their decision-makers tend to overweight the strength of information signals (i.e. return potential) and underweight their probability of occurrence (i.e. likelihood of success).
Simply stated, investments perceived as having high return potential tend to be overvalued.
-- Greg Forsyth, OnInvesting, Summer 2007
Simply stated, investments perceived as having high return potential tend to be overvalued.
-- Greg Forsyth, OnInvesting, Summer 2007
Monday, August 03, 2009
federal tax revenues plummetting
WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
Friday, July 31, 2009
Now comes August
The Dow Jones Industrial Average ($INDU) had its best monthly performance -- up 8.6% -- since October 2002 and its best July since 1989.
The Standard & Poor's 500 Index ($INX) and the Nasdaq Composite Index ($COMPX) were up 7.4% and 7.8%, respectively -- their best July performances since 1997.
Now comes August, which can be a problematic month, which is followed by the always dangerous September. Since 1987, August has been one of the stock market's weakest months of the year, the Stock Trader Almanac says. August also typically sees low volume as many traders and investment professionals go on vacation.
August 2008, however, was benign: The Dow was up 1.5%, with the S&P 500 up 1.2% and the Nasdaq up 1.8%. But the market literally crashed in September 2008.
The Standard & Poor's 500 Index ($INX) and the Nasdaq Composite Index ($COMPX) were up 7.4% and 7.8%, respectively -- their best July performances since 1997.
Now comes August, which can be a problematic month, which is followed by the always dangerous September. Since 1987, August has been one of the stock market's weakest months of the year, the Stock Trader Almanac says. August also typically sees low volume as many traders and investment professionals go on vacation.
August 2008, however, was benign: The Dow was up 1.5%, with the S&P 500 up 1.2% and the Nasdaq up 1.8%. But the market literally crashed in September 2008.
Thursday, July 30, 2009
The Cheshire Multiple
When a growing number of people buy stocks—and from one another, remember—prices are driven up because buyers outnumber sellers. And as brokerage statements indicate the last selling price of the stock, investor portfolios become inflated.
The economy can get into big trouble this way. You can’t buy the same stock back and forth numerous times, inflating its price, and think that you’re creating real dollars. Yet that’s just how many investors behave.
To illustrate, say that 10 million investors each own 100 shares of stock in a company. Then I pay $1 more than the last fellow for a share. As a result, the stock price goes up by $1, and all 10 million shareholders see their portfolios rise by $100. But did I create $1 billion of wealth, the total of that increase? Of course not.
This apparent $1 billion was generated by what I call the “Cheshire multiple” (after the disappearing cat in Lewis Carroll’s Alice’s Adventures in Wonderland). It exists mostly in the imagination.
Only a small percentage of investors can sell their shares at the price on their brokerage statements. As soon as sellers outnumber buyers, the price will fall and portfolios will shrink due to that same multiple. It works both ways. So most of this so-called money simply vanishes. No one gets it.
The economy can get into big trouble this way. You can’t buy the same stock back and forth numerous times, inflating its price, and think that you’re creating real dollars. Yet that’s just how many investors behave.
To illustrate, say that 10 million investors each own 100 shares of stock in a company. Then I pay $1 more than the last fellow for a share. As a result, the stock price goes up by $1, and all 10 million shareholders see their portfolios rise by $100. But did I create $1 billion of wealth, the total of that increase? Of course not.
This apparent $1 billion was generated by what I call the “Cheshire multiple” (after the disappearing cat in Lewis Carroll’s Alice’s Adventures in Wonderland). It exists mostly in the imagination.
Only a small percentage of investors can sell their shares at the price on their brokerage statements. As soon as sellers outnumber buyers, the price will fall and portfolios will shrink due to that same multiple. It works both ways. So most of this so-called money simply vanishes. No one gets it.
Tuesday, July 21, 2009
cash still king
NEW YORK (AP) — That old saying "cash is king" certainly rings true these days. Investors can't seem to get enough of it, which ultimately could be bad news for the stock market and the economy.
In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead.
But the shock of the financial crisis — which have made leverage and risk-taking dirty words — may be changing all that. Even with today's minuscule returns, cash seems to have become a sought-after asset class among investors who intend to keep it as a part of their portfolios for the long term.
Historical data he has crunched shows that whenever assets in money market mutual funds — which are low-risk, highly liquid investments — exceeded 25 percent of the market capitalization of the Standard & Poor's 500 index, stocks have rallied over the following two years.
This ratio jumped to an almost-unheard of level of more than 60 percent on March 9, almost triple the median level in the early years of this decade, for two reasons. Money market fund totals have surged 30 percent since the stock market peaked in October 2007, and by early March the S&P 500's market cap had plunged 57 percent from its high point in 2007.
Today, that ratio has narrowed to about 45 percent, primarily because of a recent rebound in stocks. There is $3.7 trillion sitting in money market mutual funds right now, and the market cap of the S&P 500 is about $8 trillion, up from a March low of $5.9 trillion.
In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead.
But the shock of the financial crisis — which have made leverage and risk-taking dirty words — may be changing all that. Even with today's minuscule returns, cash seems to have become a sought-after asset class among investors who intend to keep it as a part of their portfolios for the long term.
Historical data he has crunched shows that whenever assets in money market mutual funds — which are low-risk, highly liquid investments — exceeded 25 percent of the market capitalization of the Standard & Poor's 500 index, stocks have rallied over the following two years.
This ratio jumped to an almost-unheard of level of more than 60 percent on March 9, almost triple the median level in the early years of this decade, for two reasons. Money market fund totals have surged 30 percent since the stock market peaked in October 2007, and by early March the S&P 500's market cap had plunged 57 percent from its high point in 2007.
Today, that ratio has narrowed to about 45 percent, primarily because of a recent rebound in stocks. There is $3.7 trillion sitting in money market mutual funds right now, and the market cap of the S&P 500 is about $8 trillion, up from a March low of $5.9 trillion.
Monday, July 20, 2009
Q&A with Joel Greenblatt
(GuruFocus, June 30, 2009) Back in early June, when we became aware of Investment Guru, Joel Greenblatt became the strategist for the money management firm FormulaTrading.com, we reached out and requested an opportunity for our users to ask Joel questions. To our delight, the good professor (Joel is also an Adjunct Professor with Columbia University) agreed.
* * *
Comments on the interview
* * *
Steve Forbes interviews Greenblatt
Expanding the Magic Formula
* * *
Comments on the interview
* * *
Steve Forbes interviews Greenblatt
Expanding the Magic Formula
Thursday, July 16, 2009
anchoring bias
In a famous paper from 1974, behavioral scientists Tversky and Kahneman describe this bias in the following manner:
Now, how does this bias manifest itself in the investing world? I think the main way in which investors can fall prey to this pitfall is by paying too much attention to the past prices of securities. The two most prevalentnumbers that people seem to anchor to are the 52 week high and 52 week low for a stock. Setting aside technical analysis, in my young career I have observed a marked tendency for people to assume that a stock has potential to get back to its 52 week high but not breach its 52 week low. I think this is a reflection of the eternal optimism that exists in the market. On some level even short sellers believe that the market’s trajectory over the long run is more likely to be up than down. The problem with this thought process is that it assumes that those numbers are an indication of value and are not just random outcomes based on the whims of the market. In the end the value of a stock should be based on its earnings potential, a value that at certain times may have absolutely nothing to do with the current stock price. A quick look at the ride the Nikkei Stock Exchange has had over the past 20 years provides a sobering reminder that previous highs may never be reached again and stocks can stay at low nominal values for a protracted period.
* * *
I dunno. Since anchoring exists, technical analysis must work too. In the sense that people do look at previous levels which must act as some form of resistance and support, regardless of the fundamentals.
In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient That is, different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring.Tversky and Kahneman observed this behavior in a number of experiments conducted in the early 1970s. In the most well-known of these studies, the researchers asked participants to estimate the percentage of African countries in the United Nations. The results indicated that people anchored their answer to completely arbitrary numbers presented by the researchers. For example, the median estimate of people who were given 10% as a starting point was 25% and the median estimate of people who were given 45% as a starting point was 65%. Specifically, people became anchored to the percentage suggested to them by the question even though that number had nothing to do with the actual percentage of African countries in the UN. Having no knowledge of the exact percentage, people subconsciously took their cues from the numbers presented in the questioning despite the fact that those numbers were randomly generated.
Now, how does this bias manifest itself in the investing world? I think the main way in which investors can fall prey to this pitfall is by paying too much attention to the past prices of securities. The two most prevalentnumbers that people seem to anchor to are the 52 week high and 52 week low for a stock. Setting aside technical analysis, in my young career I have observed a marked tendency for people to assume that a stock has potential to get back to its 52 week high but not breach its 52 week low. I think this is a reflection of the eternal optimism that exists in the market. On some level even short sellers believe that the market’s trajectory over the long run is more likely to be up than down. The problem with this thought process is that it assumes that those numbers are an indication of value and are not just random outcomes based on the whims of the market. In the end the value of a stock should be based on its earnings potential, a value that at certain times may have absolutely nothing to do with the current stock price. A quick look at the ride the Nikkei Stock Exchange has had over the past 20 years provides a sobering reminder that previous highs may never be reached again and stocks can stay at low nominal values for a protracted period.
* * *
I dunno. Since anchoring exists, technical analysis must work too. In the sense that people do look at previous levels which must act as some form of resistance and support, regardless of the fundamentals.
The 0% Tax Rate Solution
The federal income tax code is now so mangled that we can probably increase federal revenues with a 0% income tax rate for a majority of Americans.
Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes. Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues.
This actually resulted from Republican tax policy going all the way back to the EITC, which was first proposed by Ronald Reagan in his historic 1972 testimony before the Senate Finance Committee on the success of his welfare reforms as governor of California. Besides calling for workfare, Reagan proposed the EITC to offset the burden of Social Security payroll taxes on the poor. As president, Reagan cut and indexed income tax rates across the board and doubled the personal exemption. The Republican majority Congress, led by former House Speaker Newt Gingrich, adopted a child tax credit that President George W. Bush later expanded and made refundable, while also reducing the bottom tax rate by 33% to 10%.
President Bill Clinton expanded the EITC in 1993. But it was primarily Republicans who abolished federal income taxes for the working class and almost abolished them for the middle class. Now Mr. Obama has led enactment of a refundable $400 per worker income tax credit and other refundable credits, which probably leaves the bottom 60% paying nothing as a group on net.
* * *
I find this hard to believe since everybody I know pays income tax. Since I actually pay income tax, does that mean I make more than 40% of Americans? Or more like I have less exemptions than they.
[Just supposing] I'm trying to look at it as a closed system where money is circulating from producers to consumers back to producers etc. The minority rich become rich because in general they're getting money from the majority poor (or middle-class). In other words, the poor are consuming the products of the rich. That's the way a capitalist society works (in my mind anyway).
But you don't want the poor to become too poor, otherwise they become a burden to society. You want them to be functional so they can continue to circulate money to keep the system running.
The problem is how to do this. How? By taking (taxing) the rich to supplement the poor. Like welfare? Which doesn't seem to be working too well. Or buy lowering taxes on the rich so that they can expand their business and provide jobs to the poor.
But one might ask how making the rich richer can make the poor richer too, when there's only so much money to go around. I think the idea is that it'll increase the velocity of money so it'll circulate better.
I don't know (obviously). But I think most people think of these things on one level and not as a system. If they think about it at all.
Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes. Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues.
This actually resulted from Republican tax policy going all the way back to the EITC, which was first proposed by Ronald Reagan in his historic 1972 testimony before the Senate Finance Committee on the success of his welfare reforms as governor of California. Besides calling for workfare, Reagan proposed the EITC to offset the burden of Social Security payroll taxes on the poor. As president, Reagan cut and indexed income tax rates across the board and doubled the personal exemption. The Republican majority Congress, led by former House Speaker Newt Gingrich, adopted a child tax credit that President George W. Bush later expanded and made refundable, while also reducing the bottom tax rate by 33% to 10%.
President Bill Clinton expanded the EITC in 1993. But it was primarily Republicans who abolished federal income taxes for the working class and almost abolished them for the middle class. Now Mr. Obama has led enactment of a refundable $400 per worker income tax credit and other refundable credits, which probably leaves the bottom 60% paying nothing as a group on net.
* * *
I find this hard to believe since everybody I know pays income tax. Since I actually pay income tax, does that mean I make more than 40% of Americans? Or more like I have less exemptions than they.
[Just supposing] I'm trying to look at it as a closed system where money is circulating from producers to consumers back to producers etc. The minority rich become rich because in general they're getting money from the majority poor (or middle-class). In other words, the poor are consuming the products of the rich. That's the way a capitalist society works (in my mind anyway).
But you don't want the poor to become too poor, otherwise they become a burden to society. You want them to be functional so they can continue to circulate money to keep the system running.
The problem is how to do this. How? By taking (taxing) the rich to supplement the poor. Like welfare? Which doesn't seem to be working too well. Or buy lowering taxes on the rich so that they can expand their business and provide jobs to the poor.
But one might ask how making the rich richer can make the poor richer too, when there's only so much money to go around. I think the idea is that it'll increase the velocity of money so it'll circulate better.
I don't know (obviously). But I think most people think of these things on one level and not as a system. If they think about it at all.
Tuesday, July 14, 2009
stocks underperform bonds
As of June 30, U.S. stocks have underperformed long-term Treasury bonds for the past five, 10, 15, 20 and 25 years.
Still, brokers and financial planners keep reminding us, there's almost never been a 30-year period since 1802 when stocks have underperformed bonds.
These true believers rely on the gospel of "Stocks for the Long Run," the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania that was first published in 1994.
Using data assembled by other scholars, Prof. Siegel extended the history of U.S. stock returns all the way back to 1802. He came to two conclusions that became articles of faith to millions of investors: Ever since Thomas Jefferson was in the White House, stocks have generated a "remarkably constant" average return of nearly 7% a year after inflation. (Adding inflation at 3% yields the commonly cited 10% annual stock return.) And, declared Prof. Siegel, "the risks of holding stocks decrease over time."
There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid.
* * *
[7/15/09] Jeremy Siegel responds (sort of).
The short answer is that stocks are still the best long-term investments. As bad as the past decade has been, there have been other 10-year periods during which stocks have recorded even bigger losses. Yet over periods of 20 years or longer, stocks have never lost money, even after inflation. Including the latest bear market, stock returns have averaged 7.8% per year over the past 20 years and 11% annually over the past 30.
After periods of sluggish returns, stocks tend to regain their oomph. Stock returns over the past five and 10 years have fallen to the bottom quartile when measured against all five- and 10-year periods since 1871. But history shows that after reaching such a low, stocks' average return for the next five years has been almost 9.5% annually after inflation.
Furthermore, once stocks have plunged 50% from their highs, which they have done during the current bear market, investors have always been rewarded with winners over the next five years -- and that includes the Depression decade of the 1930s. In December 1930, stocks were 50% off their highs of September 1929. Yet, over the next five years -- when the economy was experiencing the greatest contraction in its history -- investors were rewarded with an annual return of 7% after inflation.
Still, brokers and financial planners keep reminding us, there's almost never been a 30-year period since 1802 when stocks have underperformed bonds.
These true believers rely on the gospel of "Stocks for the Long Run," the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania that was first published in 1994.
Using data assembled by other scholars, Prof. Siegel extended the history of U.S. stock returns all the way back to 1802. He came to two conclusions that became articles of faith to millions of investors: Ever since Thomas Jefferson was in the White House, stocks have generated a "remarkably constant" average return of nearly 7% a year after inflation. (Adding inflation at 3% yields the commonly cited 10% annual stock return.) And, declared Prof. Siegel, "the risks of holding stocks decrease over time."
There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid.
* * *
[7/15/09] Jeremy Siegel responds (sort of).
The short answer is that stocks are still the best long-term investments. As bad as the past decade has been, there have been other 10-year periods during which stocks have recorded even bigger losses. Yet over periods of 20 years or longer, stocks have never lost money, even after inflation. Including the latest bear market, stock returns have averaged 7.8% per year over the past 20 years and 11% annually over the past 30.
After periods of sluggish returns, stocks tend to regain their oomph. Stock returns over the past five and 10 years have fallen to the bottom quartile when measured against all five- and 10-year periods since 1871. But history shows that after reaching such a low, stocks' average return for the next five years has been almost 9.5% annually after inflation.
Furthermore, once stocks have plunged 50% from their highs, which they have done during the current bear market, investors have always been rewarded with winners over the next five years -- and that includes the Depression decade of the 1930s. In December 1930, stocks were 50% off their highs of September 1929. Yet, over the next five years -- when the economy was experiencing the greatest contraction in its history -- investors were rewarded with an annual return of 7% after inflation.
Zacks Strategies
[an ad from Zacks]
Zacks Investment Research specializes in the coverage of corporate earnings. And more importantly, how to profit from this information. So, today I'm going to share with you 3 proven strategies to profit from earnings announcements.
Strategy 1: Four Leading Indicators of Positive Earnings Surprises
I figured its best to get the most obvious strategy out of the way first. The 4 leading indicators I refer to are the 4 factors of the Zacks Rank. Before you skip this section, let me share some information with you that you may not have known.
In the mid-1970s, Len Zacks took his mathematical skills to Wall Street, where his job was to discover stock picking strategies that would beat the market. He had a simple theory that was the precursor to what became the Zacks Rank.
Len focused his research on finding stocks that were more likely to have a positive earnings surprise and jumping on the news. The journey led him to what we know as the 4 factors of the Zacks Rank. Each individually increases the odds of owning stocks that will enjoy a positive earnings surprise. However, when you combine them together inside the Zacks Rank, it becomes an almost obscene advantage for investors. (Learn more about 4 Factors of the Zacks Rank, in this video.)
Strategy 2: Stop the Bleeding
This second strategy is so simple, yet so hard for most investors to do. So, I'm going to beat it into your head...for your own good of course ;-)
Yes, sell it immediately. Even after it falls at the open. Even if it is for a substantial loss. Why? Better to take a 10-20% loss in the short run than a 20 to 40% loss in the long run.
Strategy 3: Buy High and Sell Higher - Most Profitable Strategy
I saved the best for last. This strategy has proven to be the most profitable way to harness earnings surprises. This proprietary metric is called the Price Response Indicator, or PRI.
The PRI is amazingly accurate at saying which stocks will rise in the days following an earnings announcement and which won't. Proving the truism "Buy High and Sell Higher."
The scoring system for the PRI correlates the percent earnings surprise and short-term price reaction preceding the announcement. The model scores stocks from A to E with A's and B's being the most likely to increase in price in the days following the surprise. These signals are produced by our systems within hours after the company reports earnings.
At this time, the daily feed of PRI signals is only made available to our institutional clients. However, the Zacks Surprise Trader service filters down all the PRI signals with additional variables to find the 2% that have historically provided the best returns. From there we hand pick the signals, turning down 5 out of every 6 to provide our subscribers with a phenomenal opportunity to beat the market.
How phenomenal? Since inception in May 2006, Surprise Trader has generated a +16.0% return versus a devastating loss of -24.1% for the S&P 500. Just imagine how well it will perform when we finally leave this bear market behind.
Today is the perfect time to learn more about the Surprise Trader. Why? First, earnings season is coming into full swing. Second, the service has grown so popular that it closed to new members. We've reopened it briefly to give Zacks.com investors one more chance to get in. But we're closing the service again at midnight Saturday, July 11, 2009. This is your chance to avoid the Waiting List and also enjoy a substantial savings.
Learn more about Surprise Trader special offer >>
[closed to new subscribers]
Zacks Investment Research specializes in the coverage of corporate earnings. And more importantly, how to profit from this information. So, today I'm going to share with you 3 proven strategies to profit from earnings announcements.
Strategy 1: Four Leading Indicators of Positive Earnings Surprises
I figured its best to get the most obvious strategy out of the way first. The 4 leading indicators I refer to are the 4 factors of the Zacks Rank. Before you skip this section, let me share some information with you that you may not have known.
In the mid-1970s, Len Zacks took his mathematical skills to Wall Street, where his job was to discover stock picking strategies that would beat the market. He had a simple theory that was the precursor to what became the Zacks Rank.
Len focused his research on finding stocks that were more likely to have a positive earnings surprise and jumping on the news. The journey led him to what we know as the 4 factors of the Zacks Rank. Each individually increases the odds of owning stocks that will enjoy a positive earnings surprise. However, when you combine them together inside the Zacks Rank, it becomes an almost obscene advantage for investors. (Learn more about 4 Factors of the Zacks Rank, in this video.)
Strategy 2: Stop the Bleeding
This second strategy is so simple, yet so hard for most investors to do. So, I'm going to beat it into your head...for your own good of course ;-)
Sell All Companies with a Negative Earnings Surprise
Yes, sell it immediately. Even after it falls at the open. Even if it is for a substantial loss. Why? Better to take a 10-20% loss in the short run than a 20 to 40% loss in the long run.
Strategy 3: Buy High and Sell Higher - Most Profitable Strategy
I saved the best for last. This strategy has proven to be the most profitable way to harness earnings surprises. This proprietary metric is called the Price Response Indicator, or PRI.
The PRI is amazingly accurate at saying which stocks will rise in the days following an earnings announcement and which won't. Proving the truism "Buy High and Sell Higher."
The scoring system for the PRI correlates the percent earnings surprise and short-term price reaction preceding the announcement. The model scores stocks from A to E with A's and B's being the most likely to increase in price in the days following the surprise. These signals are produced by our systems within hours after the company reports earnings.
At this time, the daily feed of PRI signals is only made available to our institutional clients. However, the Zacks Surprise Trader service filters down all the PRI signals with additional variables to find the 2% that have historically provided the best returns. From there we hand pick the signals, turning down 5 out of every 6 to provide our subscribers with a phenomenal opportunity to beat the market.
How phenomenal? Since inception in May 2006, Surprise Trader has generated a +16.0% return versus a devastating loss of -24.1% for the S&P 500. Just imagine how well it will perform when we finally leave this bear market behind.
Today is the perfect time to learn more about the Surprise Trader. Why? First, earnings season is coming into full swing. Second, the service has grown so popular that it closed to new members. We've reopened it briefly to give Zacks.com investors one more chance to get in. But we're closing the service again at midnight Saturday, July 11, 2009. This is your chance to avoid the Waiting List and also enjoy a substantial savings.
Learn more about Surprise Trader special offer >>
[closed to new subscribers]
Cap and Trade
Warren Buffett carries plenty of weight in any debate -- even when he gets it wrong.
So as the Senate digs into the climate-change bill that passed the House of Representatives last month, it’s worth taking a hard look at how Buffett’s views on the bill went off course.
[via iluvbabyb]
So as the Senate digs into the climate-change bill that passed the House of Representatives last month, it’s worth taking a hard look at how Buffett’s views on the bill went off course.
[via iluvbabyb]
Wells Fargo sues itself
You can't expect a bank that is dumb enough to sue itself to know why it is suing itself.
Yet I could not resist asking Wells Fargo Bank NA why it filed a civil complaint against itself in a mortgage foreclosure case in Hillsborough County, Fla.
In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.
As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.
"The primary reason is to clear title and ownership interest in a property to prepare it for sale," Waetke said in an email exchange. "So it really is not Wells Fargo vs. Wells Fargo."
Yet court documents clearly label "Wells Fargo Bank NA" as the plaintiff and "Wells Fargo Bank NA" as a defendant.
[via chucks_angels]
Yet I could not resist asking Wells Fargo Bank NA why it filed a civil complaint against itself in a mortgage foreclosure case in Hillsborough County, Fla.
In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.
As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.
"The primary reason is to clear title and ownership interest in a property to prepare it for sale," Waetke said in an email exchange. "So it really is not Wells Fargo vs. Wells Fargo."
Yet court documents clearly label "Wells Fargo Bank NA" as the plaintiff and "Wells Fargo Bank NA" as a defendant.
[via chucks_angels]
Wednesday, July 01, 2009
Toyota vs. Ford
A Japanese company (Toyota) and an American company (Ford Motors) decided to have a canoe race on the Missouri River. Both teams practiced long and hard to reach their peak performance before the race.
On the big day, the Japanese won by a mile.
The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action.
Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 207 people steering and 2 people rowing.
Feeling a deeper study was in order; American management hired a consulting company and paid them a large amount of money for a second opinion.
They advised, of course, that too many people were steering the boat, while not enough people were rowing.
Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 2 area steering superintendents and 1 assistant superintendent steering manager.
They also implemented a new performance system that would give the 2 people rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program,' with meetings, dinners and free pens for the rowers. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses. The pension program was trimmed to 'equal the competition' and some of the resultant savings were channeled into morale boosting programs and teamwork posters.
The next year the Japanese won by two miles.
Humiliated, the American management laid-off one rower, halted development of a new canoe, sold all the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses.
The next year, try as he might, the lone designated rower was unable to even finish the race (having no paddles,) so he was laid off for unacceptable performance, all canoe equipment was sold and the next year's racing team was out-sourced to India.
Sadly, the End.
Here's something else to think about: Ford has spent the last thirty years moving all its factories out of the US, claiming they can't make money paying American wages.
TOYOTA has spent the last thirty years building more than a dozen plants inside the US. The last quarter's results:
TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses.
Ford folks are still scratching their heads, and collecting bonuses.
IF THIS WEREN'T SO TRUE IT MIGHT BE FUNNY
[via chucks_angels, 12/3/08]
On the big day, the Japanese won by a mile.
The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action.
Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 207 people steering and 2 people rowing.
Feeling a deeper study was in order; American management hired a consulting company and paid them a large amount of money for a second opinion.
They advised, of course, that too many people were steering the boat, while not enough people were rowing.
Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 2 area steering superintendents and 1 assistant superintendent steering manager.
They also implemented a new performance system that would give the 2 people rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program,' with meetings, dinners and free pens for the rowers. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses. The pension program was trimmed to 'equal the competition' and some of the resultant savings were channeled into morale boosting programs and teamwork posters.
The next year the Japanese won by two miles.
Humiliated, the American management laid-off one rower, halted development of a new canoe, sold all the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses.
The next year, try as he might, the lone designated rower was unable to even finish the race (having no paddles,) so he was laid off for unacceptable performance, all canoe equipment was sold and the next year's racing team was out-sourced to India.
Sadly, the End.
Here's something else to think about: Ford has spent the last thirty years moving all its factories out of the US, claiming they can't make money paying American wages.
TOYOTA has spent the last thirty years building more than a dozen plants inside the US. The last quarter's results:
TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses.
Ford folks are still scratching their heads, and collecting bonuses.
IF THIS WEREN'T SO TRUE IT MIGHT BE FUNNY
[via chucks_angels, 12/3/08]
What Makes Fidelity Tick?
Fidelity's culture is defined by paradox. It invests heavily in its investment capabilities, but it's also a marketing machine. It's a leviathan, yet it encourages individuality. It hires some of the best and brightest analysts and managers, but it too frequently shifts them from fund to fund, making it difficult for investors to benefit from their talents.
Ultimately, Fidelity's greatest strength is its individualistic ethic. It's not a place where you'll find many cookie-cutter personalities. Instead of imposing rigid, one-size-fits-all constraints, Fidelity managers have latitude to implement their own investment strategies. And unlike many overly buttoned-down investment organizations, Fidelity tolerates offbeat, and even eccentric, personalities--so long as they put up the numbers. While more buttoned-down investment organizations might push conformity, Fidelity encourages creativity. It could well be that the reason that great investors like Peter Lynch, Will Danoff, and Joel Tillinghast emerged from Fidelity is because they had the freedom to think and invest differently.
Ultimately, Fidelity's greatest strength is its individualistic ethic. It's not a place where you'll find many cookie-cutter personalities. Instead of imposing rigid, one-size-fits-all constraints, Fidelity managers have latitude to implement their own investment strategies. And unlike many overly buttoned-down investment organizations, Fidelity tolerates offbeat, and even eccentric, personalities--so long as they put up the numbers. While more buttoned-down investment organizations might push conformity, Fidelity encourages creativity. It could well be that the reason that great investors like Peter Lynch, Will Danoff, and Joel Tillinghast emerged from Fidelity is because they had the freedom to think and invest differently.
Thursday, June 18, 2009
TARP Payback
The banks that got the green light to pay back their Troubled Asset Relief Program funds aren't wasting time returning money to the government.
Capital One Financial (COF, news, msgs) late Wednesday confirmed that it paid back the $3.75 billion it received last fall amid the financial market turmoil. JPMorgan Chase (JPM, news, msgs) repaid $25 billion, and Goldman Sachs (GS, news, msgs) and Morgan Stanley (MS, news, msgs) each paid back $10 billion.
BB&T (BBT, news, msgs) said it paid back $3.1 billion in loans it received from the government. The bank now has "a singular focus on the business of serving clients," Chief Executive Officer Kelly King said in a statement.
American Express (AXP, news, msgs) returned $3.4 billion, U.S. Bancorp (USB, news, msgs) paid back $6.6 billion, State Street (STT, news, msgs) refunded $2 billion, Bank of New York Mellon (BK, news, msgs) gave back $3 billion, and Northern Trust (NTRS, news, msgs) paid back $1.6 billion.
"Over the long term . . . this is a very promising sign that things are getting back to normal," Uri Landesman, of ING Investment Management, told The Wall Street Journal.
Combined, the 10 banks are repaying $68 billion in TARP funds less than nine months after the Treasury Department introduced the $700 billion fund.
But the banks still have to deal with the warrants the government holds -- the banks want to buy them back. The warrants had given the Treasury the right to buy common stock in the banks for up to 10 years, in the hopes that they could benefit from a rebound in their stock prices.
Earlier this month, Treasury said that banks can buy back the warrants at "fair market value"; an announcement on how they will be priced is expected Friday.
Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs), which each received $45 billion in government loans, have not yet received Treasury's clearance to pay their funds back.
Capital One Financial (COF, news, msgs) late Wednesday confirmed that it paid back the $3.75 billion it received last fall amid the financial market turmoil. JPMorgan Chase (JPM, news, msgs) repaid $25 billion, and Goldman Sachs (GS, news, msgs) and Morgan Stanley (MS, news, msgs) each paid back $10 billion.
BB&T (BBT, news, msgs) said it paid back $3.1 billion in loans it received from the government. The bank now has "a singular focus on the business of serving clients," Chief Executive Officer Kelly King said in a statement.
American Express (AXP, news, msgs) returned $3.4 billion, U.S. Bancorp (USB, news, msgs) paid back $6.6 billion, State Street (STT, news, msgs) refunded $2 billion, Bank of New York Mellon (BK, news, msgs) gave back $3 billion, and Northern Trust (NTRS, news, msgs) paid back $1.6 billion.
"Over the long term . . . this is a very promising sign that things are getting back to normal," Uri Landesman, of ING Investment Management, told The Wall Street Journal.
Combined, the 10 banks are repaying $68 billion in TARP funds less than nine months after the Treasury Department introduced the $700 billion fund.
But the banks still have to deal with the warrants the government holds -- the banks want to buy them back. The warrants had given the Treasury the right to buy common stock in the banks for up to 10 years, in the hopes that they could benefit from a rebound in their stock prices.
Earlier this month, Treasury said that banks can buy back the warrants at "fair market value"; an announcement on how they will be priced is expected Friday.
Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs), which each received $45 billion in government loans, have not yet received Treasury's clearance to pay their funds back.
Tuesday, June 02, 2009
The bankruptcy of General Motors
General Motors (GM $0.60) filed for bankruptcy this morning and is the third-largest in US history and the largest-ever US manufacturing failure, according to Reuters. GM will receive an additional $30 billion in taxpayer funds to aid the restructuring of the 100-year-old automaker and the government plans to convert most of its $50 billion in loans to assume a 60% stake in the company. GM will be put through a "fast-track bankruptcy," which is expected to result in a new company in about 60 to 90 days. The Canadian government will contribute $9.5 billion in aid in exchange for a 12.5% stake in the automaker. GM plans to close 11 facilities and idle another 3 plants. President Barack Obama is set to speak on the announcement at 12 p.m. ET.
Following the bankruptcy of GM, two of the "big three" automakers will be in court-ordered restructuring and yesterday a bankruptcy judge approved the sale of nearly all of the US assets of privately-held Chrysler to a group led by Italian automaker Fiat (FIATY $11).
In related news, General Motors and Citigroup (C $4) have been removed from the Dow Jones Industrial Average and will be replaced with insurer Travelers Companies (TRV $42) and tech bellwether Cisco Systems (CSCO $19). Shares of TRV and CSCO are nicely higher. Additionally, the New York Stock Exchange said trading in GM shares will be suspended prior to the opening of trading tomorrow.
[Charles Schwab Midday Market View, 6/1/09]
Following the bankruptcy of GM, two of the "big three" automakers will be in court-ordered restructuring and yesterday a bankruptcy judge approved the sale of nearly all of the US assets of privately-held Chrysler to a group led by Italian automaker Fiat (FIATY $11).
In related news, General Motors and Citigroup (C $4) have been removed from the Dow Jones Industrial Average and will be replaced with insurer Travelers Companies (TRV $42) and tech bellwether Cisco Systems (CSCO $19). Shares of TRV and CSCO are nicely higher. Additionally, the New York Stock Exchange said trading in GM shares will be suspended prior to the opening of trading tomorrow.
[Charles Schwab Midday Market View, 6/1/09]
Friday, May 29, 2009
Super Rich Friends
Warren Buffett and his friend Bill Gates reportedly joined with David Rockefeller Sr. to invite a group of the world's richest people to gather in one room earlier this month.
The agenda wasn't world domination. It was making philanthropy more effective.
Among the other well-known, and very wealthy names, attending the meeting on May 5 in New York City: Michael Bloomberg, Peter Peterson, George Soros, Ted Turner, and Oprah Winfrey.
Former Gates Foundation Chief Executive Patty Stonesifer tells the Seattle News:
"It wasn't secret. It was meant to be a gathering among friends and colleagues. It was something folks have been discussing for a long time. Bill and Warren hoped to do this occasionally. They sent out an invite and people came... This was about philanthropy and this group sharing their passions their interests. They each learned from each other about what could really make a difference."
John Berman at ABC's Good Morning America light-heartedly compared the event to a gathering of cartoon super heroes, specifically the Saturday morning "Super Friends" of the 1970s and 80s.
[via brknews]
The agenda wasn't world domination. It was making philanthropy more effective.
Among the other well-known, and very wealthy names, attending the meeting on May 5 in New York City: Michael Bloomberg, Peter Peterson, George Soros, Ted Turner, and Oprah Winfrey.
Former Gates Foundation Chief Executive Patty Stonesifer tells the Seattle News:
"It wasn't secret. It was meant to be a gathering among friends and colleagues. It was something folks have been discussing for a long time. Bill and Warren hoped to do this occasionally. They sent out an invite and people came... This was about philanthropy and this group sharing their passions their interests. They each learned from each other about what could really make a difference."
John Berman at ABC's Good Morning America light-heartedly compared the event to a gathering of cartoon super heroes, specifically the Saturday morning "Super Friends" of the 1970s and 80s.
[via brknews]
Saturday, May 23, 2009
The Zen of Investing
Once upon a time, there was a man. Like many men, he held some shares in a few companies. Every week, he would gather with his friends at a local diner.
Thursday, May 21, 2009
Grantham was buying in March
JG: We think a fair price for the S&P 500 index is 900. By sheer divine intervention we bought into the market on Mar. 6, the day it hit the recent low of 666. It’s likely, but far from certain, that we’ll go back and make a new low. You aren’t going to get to buy at the absolute low unless you have a time machine.
SM: Anything else besides U.S. stocks?
JG: U.S. stocks were nicely cheap, and frankly, the rest of the world was even cheaper. In early March, when we bought, we invested only in stocks we thought would have a 10 to 14 percent average annual return after inflation. That’s magnificent. We haven’t seen anything like that in 20 years. It was somewhat disappointing that prices moved up so fast in just a couple of weeks. The odds are a bit more than 50-50 that we will go back and test that low.
SM: So you’ve made a quick buck. Now what?
JG: You have a set of possibilities. First, if the market nosedives, it’s easy: You buy. The second is confusing, when the market just goes sideways, between 700 and 800. The market is irritatingly cheap then, but not supercheap. The longer that goes on, the less probability we will set a new low, so we’ll ultimately put money each month into the market.
SM: What if stocks keep rallying?
JG: If the market goes higher, above 950, and then starts moving sideways, between 950 and 1050, we probably do very little. Then the market is moderately overpriced.
[via twitter]
SM: Anything else besides U.S. stocks?
JG: U.S. stocks were nicely cheap, and frankly, the rest of the world was even cheaper. In early March, when we bought, we invested only in stocks we thought would have a 10 to 14 percent average annual return after inflation. That’s magnificent. We haven’t seen anything like that in 20 years. It was somewhat disappointing that prices moved up so fast in just a couple of weeks. The odds are a bit more than 50-50 that we will go back and test that low.
SM: So you’ve made a quick buck. Now what?
JG: You have a set of possibilities. First, if the market nosedives, it’s easy: You buy. The second is confusing, when the market just goes sideways, between 700 and 800. The market is irritatingly cheap then, but not supercheap. The longer that goes on, the less probability we will set a new low, so we’ll ultimately put money each month into the market.
SM: What if stocks keep rallying?
JG: If the market goes higher, above 950, and then starts moving sideways, between 950 and 1050, we probably do very little. Then the market is moderately overpriced.
[via twitter]
10 Who Will Be Missed
Memorial Day is a time of remembrance for those who gave their lives in the name of their country—often on battlefields thousands of miles away from the towns they called home. These observances can be traced back over 140 years to the Civil War. Over time, however, the holiday has evolved for many Americans into a chance not only to honor fallen heroes, but also to pay respect more broadly to family members, friends and colleagues who have passed away.
In that spirit, SmartMoney presents this look at some prominent figures in the financial world who died over the past year.
Sir John Templeton / Investor, Philanthropist
Betty James / President, James Industries
Bill Seidman / Former chairman, FDIC; Television commentator
Jack Nash / President, Oppenheimer & Co.; Founder, Odyssey Partners
Rocky Aoki / Founder, Benihana
Irvine Robbins / Co-Founder, Baskin-Robbins
Kenneth Macke / Former chairman, Dayton Hudson (forerunner of Target)
George Keller / Former CEO, Chevron
Helen Galland / Former president, Bonwit Teller
Jack Dreyfus / Founder, Dreyfus Fund
In that spirit, SmartMoney presents this look at some prominent figures in the financial world who died over the past year.
Sir John Templeton / Investor, Philanthropist
Betty James / President, James Industries
Bill Seidman / Former chairman, FDIC; Television commentator
Jack Nash / President, Oppenheimer & Co.; Founder, Odyssey Partners
Rocky Aoki / Founder, Benihana
Irvine Robbins / Co-Founder, Baskin-Robbins
Kenneth Macke / Former chairman, Dayton Hudson (forerunner of Target)
George Keller / Former CEO, Chevron
Helen Galland / Former president, Bonwit Teller
Jack Dreyfus / Founder, Dreyfus Fund
Monday, May 18, 2009
India up 17%
India's stock market surged an unprecedented 17 percent, forcing trade to close for the day, after the Congress Party's definitive victory in national elections set the scene for long-delayed economic reforms.
In just seconds of trading, the Bombay Stock Exchange's benchmark Sensex vaulted 2,110.79 points, or 17.3 percent, to 14,284.21, triggering the historic shutdown Monday.
[5/18/09, posted 6/6/09]
In just seconds of trading, the Bombay Stock Exchange's benchmark Sensex vaulted 2,110.79 points, or 17.3 percent, to 14,284.21, triggering the historic shutdown Monday.
[5/18/09, posted 6/6/09]
Sunday, May 17, 2009
The worst decade
investors have suffered through the second worst decade for stocks on record — a record that includes the Crash of 1929 as well as the Great Depression. In fact, even if the market produces satisfactory returns for 2009 (and it is certainly not off to a good start), it is highly likely that the 10 year period ending this coming December will prove to be the worst decade ever, as it will no longer include the 21% return of 1999. Given that the market has lost 3.6% per year for the last nine years versus the 1.7% annual loss suffered between 1928—1938, currently the worst decade on record, this is not a bold prediction.
Saturday, May 16, 2009
the pattern of recession
The economic events of 2008 were unusually severe, but they fit a historical pattern. Since 1945, the U.S. economy has experienced 12 recessions—about one every five and a half years1—and each recession has been followed by a period of expansion.
Painful as they may be, recessions help set the stage for the recoveries that follow. Economic contractions typically serve to correct issues that become problematic during periods of growth. For example, American companies took on huge amounts of debt during the 1990s as the U.S. economy enjoyed nearly a decade of strong growth. The economy slid into recession in 2001—and the Federal Reserve responded by cutting short-term interest rates to 40-year lows. Lower interest rates allowed companies to refinance debt, improve balance sheets, and position themselves for growth as the economy strengthened.
Similar forces are at work in the current recession. During the last economic expansion, burgeoning global growth led to enormous demand for energy and raw materials, causing prices to skyrocket. Oil prices, most notably, which had bottomed out at $10 a barrel in 1998, soared to $147 a barrel by early July 2008. Oil is an essential expense for most businesses, so higher prices squeezed profits for companies ranging from pizza delivery chains to airlines. But the current recession has acted as a pressure-release valve for oil and materials prices. Demand for oil has dropped, pushing prices down to $50 a barrel as of mid-March. While businesses face a host of challenges in this recession, high costs for energy and materials are not among them for the moment.
The current economic crisis also is forcing corporations to clean up their balance sheets, much as the 2001 recession did. Companies across the country are becoming more efficient and eliminating unprofitable lines of business. Those that can’t compete are being absorbed by competitors or simply going out of business—a Darwinian process known as “creative destruction” that eventually makes the economy more efficient.
Financial markets historically have responded to recessions in relatively consistent ways. Stocks typically have turned down before recessions, continued falling during recessions’ early stages, and rebounded strongly before the recessions ended.
When investors anticipate a recession, they tend to sell shares of economically sensitive companies while holding on to shares of firms that provide essentials such as food, electricity, household staples, and health care. This trend held true in the fourth quarter of 2008, when defensive sectors declined the least, as shown in the chart below. “When the going gets tough, people tend to eat, drink, smoke, and go to the doctor,” says Sam Stovall, chief investment strategist for Standard & Poor’s. “Industrials, technology, financials, and consumer discretionary shares generally take the biggest hit.”
Just as stocks usually start declining in advance of a recession, they typically rise well before the recession ends, as investors start anticipating a recovery. Indeed, in 10 of the last 11 complete recessions, the market rebounded before the recession’s end.6 (The exception: the bear market between 2000 and 2002, which had to work through extreme valuations and the bursting of the Internet bubble, in addition to economic weakness.) “The market trends up when things still feel really awful to a casual observer,” Hofschire says.
Recessionary rebounds tend to be dramatic. Stovall notes that the S&P 500 has gained 46%, on average, during the first 12 months of a bull market. As the economy turns around, investors typically gravitate back into economically sensitive equities, he says—in particular small cap stocks and cyclicals such as industrials, technology, financials, and consumer discretionary sectors. “Investors anticipate that things will improve, so they seek out the areas that are likely to improve the most,” says Stovall. Likewise, an improving economy typically draws investors away from bonds and toward the greater growth potential of equities.
Painful as they may be, recessions help set the stage for the recoveries that follow. Economic contractions typically serve to correct issues that become problematic during periods of growth. For example, American companies took on huge amounts of debt during the 1990s as the U.S. economy enjoyed nearly a decade of strong growth. The economy slid into recession in 2001—and the Federal Reserve responded by cutting short-term interest rates to 40-year lows. Lower interest rates allowed companies to refinance debt, improve balance sheets, and position themselves for growth as the economy strengthened.
Similar forces are at work in the current recession. During the last economic expansion, burgeoning global growth led to enormous demand for energy and raw materials, causing prices to skyrocket. Oil prices, most notably, which had bottomed out at $10 a barrel in 1998, soared to $147 a barrel by early July 2008. Oil is an essential expense for most businesses, so higher prices squeezed profits for companies ranging from pizza delivery chains to airlines. But the current recession has acted as a pressure-release valve for oil and materials prices. Demand for oil has dropped, pushing prices down to $50 a barrel as of mid-March. While businesses face a host of challenges in this recession, high costs for energy and materials are not among them for the moment.
The current economic crisis also is forcing corporations to clean up their balance sheets, much as the 2001 recession did. Companies across the country are becoming more efficient and eliminating unprofitable lines of business. Those that can’t compete are being absorbed by competitors or simply going out of business—a Darwinian process known as “creative destruction” that eventually makes the economy more efficient.
Financial markets historically have responded to recessions in relatively consistent ways. Stocks typically have turned down before recessions, continued falling during recessions’ early stages, and rebounded strongly before the recessions ended.
When investors anticipate a recession, they tend to sell shares of economically sensitive companies while holding on to shares of firms that provide essentials such as food, electricity, household staples, and health care. This trend held true in the fourth quarter of 2008, when defensive sectors declined the least, as shown in the chart below. “When the going gets tough, people tend to eat, drink, smoke, and go to the doctor,” says Sam Stovall, chief investment strategist for Standard & Poor’s. “Industrials, technology, financials, and consumer discretionary shares generally take the biggest hit.”
Just as stocks usually start declining in advance of a recession, they typically rise well before the recession ends, as investors start anticipating a recovery. Indeed, in 10 of the last 11 complete recessions, the market rebounded before the recession’s end.6 (The exception: the bear market between 2000 and 2002, which had to work through extreme valuations and the bursting of the Internet bubble, in addition to economic weakness.) “The market trends up when things still feel really awful to a casual observer,” Hofschire says.
Recessionary rebounds tend to be dramatic. Stovall notes that the S&P 500 has gained 46%, on average, during the first 12 months of a bull market. As the economy turns around, investors typically gravitate back into economically sensitive equities, he says—in particular small cap stocks and cyclicals such as industrials, technology, financials, and consumer discretionary sectors. “Investors anticipate that things will improve, so they seek out the areas that are likely to improve the most,” says Stovall. Likewise, an improving economy typically draws investors away from bonds and toward the greater growth potential of equities.