the fiscal cliff

[2/19/13]  Holding their noses, senators of both parties came together to pass overwhelmingly (89–8) a tax bill that preserves the Bush-era income tax rates for 99% of Americans. After some rumbles, the House of Representatives cleared the measure the next day by a solid bipartisan majority.

I’m not happy with everything in the new law. (It does nothing to alter the 3.8% Obamacare surcharge on high earners’ investment income, for example.) However, I’m pleased that the basic 15% tax rate on dividends and long-term capital gains has been made permanent for most taxpayers. Even the “rich” will pay a lower rate on dividends under Obama than they did under Ronald Reagan!

Far from being an economic disaster, the new tax regime should promote growth, at least marginally, by reducing uncertainty and preserving significant incentives to save and invest.

[Profitable Investing February 2013]

[1/1/13] WASHINGTON (Reuters) - The U.S. Congress approved a rare tax increase on Tuesday that will hit the nation's wealthiest households in a bipartisan budget deal that stops the world's largest economy from falling into a deep fiscal crisis and recession.

By a vote of 257 to 167, the Republican-controlled House of Representatives approved a bill that fulfills President Barack Obama's re-election promise to raise taxes on top earners.

The Senate passed the measure earlier in a rare New Year's Day session and Obama is expected to sign it into law shortly.

The United States will no longer go over a "fiscal cliff" of tax hikes and spending cuts that had been due to come into force on Tuesday but other bruising budget battles lie ahead in the next two months.

It was a reversal for House Republicans, who were in disarray despite winning deep spending cuts in earlier budget fights. But they saw their leverage slip away this time when they were unable to unite behind any alternative to Obama's proposal.

House Speaker John Boehner and other Republican House leaders stayed silent during the debate on the House floor, an unusual move for a major vote.

The deal shatters two decades of Republican anti-tax orthodoxy by raising rates on the wealthiest even as it makes cuts for everybody else permanent.

[12/31/12] WASHINGTON » Squarely in the spotlight, House Republicans were deciding their next move today after the Senate overwhelmingly approved compromise legislation negating a fiscal cliff of across-the-board tax increases and sweeping spending cuts to the Pentagon and other government agencies.

In a New Year's drama that climaxed in the middle of the night, the Senate endorsed the legislation by 89-8 early Tuesday.

It would prevent middle-class taxes from going up but would raise rates on higher incomes. It would also block spending cuts for two months, extend unemployment benefits for the long-term jobless, prevent a 27 percent cut in fees for doctors who treat Medicare patients and prevent a spike in milk prices.

The measure ensures that lawmakers will have to revisit difficult budget questions in just a few weeks, as relief from painful spending cuts expires and the government requires an increase in its borrowing cap.

House Speaker John Boehner met with rank-and-file GOP lawmakers to gauge support for the accord, and an aide said GOP leaders would not decide their course until a second meeting later in the day. That suggested that House voting might not occur early.

*** [11/17/12] What happens if we fall off the cliff?  According to Dan Newman (relaying the CBO):

The deficit would shrink to 0.4% of GDP by 2018 compared to 4.2% (in the alternative scenario where all tax cuts except the payroll tax cut are extended, the alternative minimum tax is indexed for inflation, Medicare payment rates are not cut, and the automatic spending cuts don't happen.)

Debt would go down to 60% of GDP compared to 90%.

Unemployment would rise to 9% compared to 8%, but would go down to about 5% in 2022 in either scenario.

GDP growth would go down to 0.5% compared to about 1.7%.  However by 2022, GDP growth would be about 2.3% compared to about 2.0%.

[So, according to this, falling off the cliff would actually be better in the longer run.]

outflows continue (for actively managed funds)

[6/3/13] The ongoing rally in the U.S. equity markets (with the S&P 500 TR Index up 16.7% since the start of the year) has done nothing to persuade investors to put more capital into actively managed U.S. equity funds, according to the most recent fund flow data provided by Morningstar Direct. Much as we've seen the past five years, the majority of the capital that has been going into equities is being directed at passively managed products--index funds and exchange-traded funds--which have become the default option for investors looking to gain exposure to equities.

Even as the U.S. equity markets gained more ground in the second quarter (with the S&P 500 TR Index up more than 5% since the end of March), investors have reverted to shunning actively managed U.S. equity funds, with January just a blip in what has been a six-year trend of outflows from the category. Flows have been positive for actively managed U.S. equity funds in just 13 out of 72 months, with more than half of those positive flow periods occurring during the first two months of the calendar year. This means that absent the portfolio rebalancing and retirement funding that typically takes place in the first quarter of any given year, the flow picture would be even more dire for managers of actively managed U.S. stock funds.

[2/4/13] At close to $130 billion, 2012 went down as another record year of outflows from actively managed U.S. stock funds, surpassing the $108 billion that flowed out of these funds during 2008 (according to data provided by Morningstar Direct). The results were less dire when excluding the impact of American Funds, which accounted for one third of the total outflows. That said, outflows are now coming from a much wider array of managers overall, with American Funds accounting for more than 40% of total outflows during both 2010 and 2011.

It also should be noted that December was the 22nd straight month of outflows from actively managed U.S. stock funds, with the segment seeing positive flows on only 12 occasions during the past five years: February 2008, April 2008, May 2008, August 2008, January 2009, April 2009, May 2009, June 2009, January 2010, April 2010, January 2011, and February 2011.

While actively managed U.S. stock funds stayed in net redemption mode last year, index funds and ETFs posted their best annual flows since the financial crisis. The biggest winner on the index side of the business continues to be Vanguard Total Stock Market Index, which until the end of last year tracked the MSCI U.S. Broad Market Index and accounted for more than half of the $24 billion that flowed into U.S. stock index funds during 2012.

Even after excluding the impact of net redemptions at American Funds, flows for actively managed international stock funds remained in negative territory during the latter half of 2012. Adjusted flows for the full year looked much better, though, with the more than $12 billion that flowed into the category during April accounting for the lion's share of the $13 billion in inflows that were recorded last year.

Much as we had anticipated, flows into taxable bond funds tapered off enough during November and December to keep 2012 from beating the record level of inflows that was recorded for the category during 2009. Flows into actively managed taxable bond funds of around $239 billion were about $17 billion shy of 2009 levels, while index fund inflows were about $9 billion lower than they were four years ago. Flows into taxable bond ETFs, though, were much stronger last year, with the more than $48 billion that flowed into the category not only $10 billion higher than 2009 levels but $5 billion higher than the record inflows of $43 billion in 2011.

Although 2012 was not a record year for taxable bond inflows, the fact that more than $314 billion flowed into the category last year continues to astound us, given that taxable bond yields remain at extremely low levels and the stock market (as exemplified by the S&P 500 TR Index) was up 16% during 2012. Add flows into tax-exempt fixed-income funds, and total inflows for bond funds overall were $368 billion last year (below the record level of $406 billion that flowed in during 2009), which compares with just over $45 billion in inflows for equities--U.S., sector, and international stock funds combined--during 2012, which is on par with 2009 results.

At this point of the cycle, it looks to us as if investors continue to be lured more by the notion of capital preservation than the potential for capital appreciation.


[12/28/12] While the passing of the elections last month eliminated one of the biggest uncertainties hanging over the markets, it was quickly replaced with concerns about the impending fiscal cliff and the impact that any negotiated deal (or lack of a deal) would have on not only the markets, but also tax rates. Even with all of the uncertainty we've seen in the markets this year, the S&P 500 TR Index was up nearly 15% through the end of November.

But such strong market returns have not translated into positive flows for actively managed U.S. stock funds, which remain in net redemption mode (versus what looks to be a near record year for passive equity flows). The nearly $115 billion that has flowed out of these funds since the start of the year has already surpassed the record $108 billion that flowed out of them during all of 2008.

With just one month left in the year, outflows from actively managed U.S. stock funds had already surpassed the record level of outflows during 2008. At close to $115 billion, outflows during the first 11 months of 2012 are already $6 billion higher than they were during 2008 and more than $14 billion higher than they were last year, which was the second-highest year of outflows on record (according to data provided by Morningstar Direct).

While actively managed U.S. stock funds remain in net redemption mode, index funds and ETFs dedicated to the category are on pace not only to surpass the level of inflows that were seen during 2011, but also post their best year since 2008. The big winner on the index side of the business continues to be Vanguard Total Stock Market Index, which currently tracks the MSCI U.S. Broad Market Index and has accounted for more than 40% of the $29 billion that has flowed into U.S. stock index funds this year.

*** [9/24/12]

Despite gains in the U.S. equity markets, as represented by the S&P 500 Index, during June (up 4.3%), July (up 1.0%), and August (up 2.3%), investors continued to pull money out of actively managed U.S. stock funds last month. This marks the 18th straight month of outflows from the category, leaving 2012 on pace to match the level of investor outflows that were recorded last year, which at $97 billion were second only to the nearly $115 billion that flowed out during 2008.

[see also]

Five surprising winners

We have just a few days to go in 2012, and the S&P 500 is up a refreshingly robust 14% year to date. It may come as a surprise to see the numbers lining up to make this year a slightly better than average year for the markets.

Didn't we have a contentious presidential election? Isn't Europe still a mess? What about this fiscal cliff we keep hearing about?

Well, the market isn't the only surprising climber this year. Let's take a closer look at five well-known companies that are trading nicely higher in 2012.

Apple up 30%

Netflix up 36%

Amazon.com up 49%

Sears Holdings up 39%

Microsoft up 9%

the optimal tax rate

For most of the past six decades, the U.S. government has taken a lenient approach toward taxingfinancial wealth. Dividends from stocks and gains on long-term investments are currently taxed at 15 percent, compared with rates on ordinary income as high as 35 percent. The differential treatment has resulted in such attention-grabbing distortions as Warren Buffett paying a smaller share of his income in taxes than his secretary, and Mitt Romney paying an effective federal rate of only 14.1 percent on $13.7 million in income last year.

In a certain kind of world, such a system makes sense. In the 1970s and 1980s, researchers built models of the economy showing that, if everyone started out with nothing, made money by working and didn’t pass anything on to their children, the optimal rate on investment income would be zero. The logic was that if you tax people once on their labor income, it’s not right to tax them again on the part that they set aside for the future. Doing so would inhibit saving, starving the economy of the investment it needs to grow. Fewer jobs would be created. Everyone would be worse off.

Now consider a different world. Here, some people are born well-off, with inheritances so large that they can live comfortably without working. Most, however, are born relatively poor, with little or no capital at all. In this world, taxing labor income alone would amplify the inequality by putting an outsized burden on people who work. Taxing capital, by contrast, would take some of the pressure off labor, increasing the incentive to work and providing a net benefit to the majority of the population.

The second world closely resembles the present-day U.S. As of 2010, the wealthiest 10 percent of families commanded about 75 percent of all households’ total net worth, while the poorest 50 percent held only 1 percent, according to Federal Reserve data. The distribution of inheritances is similar.

To get a sense of what tax rates should be in such a world, two researchers -- Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley -- built a model of the economy that took into account the vastly divergent financial endowments.

They found that the distribution of wealth makes a big difference: The more it’s concentrated in the hands of a few, the more the benefit of shifting the tax burden off labor income outweighs any potential negative impact on saving. They estimate that in the extremely concentrated case of the U.S., if the aim is to make humanity as a whole better off, the optimal tax rate on capital -- including bequests, corporate profits and investment income -- would be as much as 60 percent.

What does all this mean for the current U.S. tax system? It suggests that if you think the government needs more revenue to reduce its budget deficit, raising taxes on investment income is a good solution.

Grantham is depressing

Last year, legendary investor Jeremy Grantham of GMO published a treatise on exploding commodity prices.  He also offered a startlingly depressing outlook for the future of humanity.

Grantham believes the world has undergone a permanent "paradigm shift" in which the number of people on Earth has finally and permanently outstripped the planet's ability to support us.

Grantham believes that the planet can only sustainably support about 1.5 billion humans, versus the 7 billion on Earth right now (heading to 10-12 billion). For all of history except the last 200 years, the human population has been controlled via the limits of the food supply. Grantham thinks that, eventually, the same force will come into play again.

The headline of the article was what caught my eye.  We're Headed For A Disaster of Biblical Proportions.  But it wasn't Grantham who said it.  It was, of course, Dr. Peter Venkman.

Reitmeister 2012

Profit From the Pros archive

[12/22/12] The evidence here is overwhelming. Consider that the average stock market PE is 15. Now apply that to the $113 per share expected for the S&P 500 next year. That computes to 1695. Even if you say that those earnings projections are too high (which I agree is the case), then trimming it down to a more conservative level of $105 per share still gives us an S&P level of 1575.

Now consider the landscape. The 10 year Treasury is paying a meager 1.75%. Your checking account and CDs are offering even less. Typically the earnings yield on stocks is 3% higher than the treasury rate. Meaning that stocks should be offering investors a 4.75% likely return.

The earnings yield is nothing more than turning the P/E ratio on its head. So when we divide the $105 projected earnings next year by the current S&P reading of 1430, we get a 7.34% earnings yield. Even more abundant proof of the undervalued nature of stocks at this time.

With all the above, I am very comfortable putting out a 2013 target of 1600 for the S&P. That is still only an earnings yield of 6.56%. So if we get towards the end of the year with GDP in healthy shape and no recession on the horizon, then we could even get a good stretch above 1600.

[11/27/12] Stocks rallied for five straight sessions all the way up to 1409. So not surprising that bears wanted to test the 1400 level on Monday.

After getting down to 1397 buyers stepped up en masse with shares rallying up to 1406 at the close. So for now 1400 is providing solid support. However, if we see any weak economic data or any Cliff controversy, then we will likely find ourselves below that mark for a while. That is only the short term picture.

Years of trading have taught me to always be keenly aware of the primary trend of stocks. That has been firmly bullish since March 2009 and should not be so easily tossed aside. Meaning that the market currently has an upward bias and to bet against that is likely unwise.

[11/15/12] Wednesday's decline was all about the Fiscal Cliff. The President upped the ante with talk of $1.6 trillion in tax hikes for the wealthy. This is twice as much as he requested in the past. That was enough to make investors head for the hills.

I don't believe for a second the President really wants to raise taxes by this amount. He is deploying an obvious negotiating trick that serves both parties well.

Say what?

If the President asks for more than he wants, then after negotiations are done he will get an amount closer to what he REALLY expects. Plus the Republicans can brag to their constituents that they bent over backwards to make a deal work for the betterment of the country. Yet were still able to cut the President's demands in half.

Unfortunately that means we are at the point of the process where the rhetoric increases on both sides making it seem like no deal will be made. That is why stocks clearly broke under the 200 day moving average and probably on the way to 1300.

When all is said and done a deal will be reached. There will be no recession. And stocks will sprint higher.

Given what I said above, then traders should expect a touch more weakness down to 1300. But longer term investors should see this as a great time to load up the truck with #1 Ranked stocks trading at attractive discounts.

[11/1/12] The S&P 500 declined 2% in October after four straight months of gains. Now we make way for November. Traditionally this is a good month of the year as the market generally drifts higher into the Holidays. (What many dub the "Santa Claus" rally).

Will Santa pay us a visit this year?

I believe the answer is yes with a good shot to make 1500 to ring in the New Year. Why? Improving economic conditions and lack of other good places to put cash to work means that stocks are the place to be. That is why I just moved to 100% long stocks in my trading account. [So good call.  Lighten the longs on 10/19 when the market plunged from 1460 to 1435.  And back in at about 1412 today.]

Unfortunately not everyone shares this positive view. And, as you already know, we here at Zacks believe it's important for our commentators to independently come to their own conclusions on what happens next. This is much better than for them to falsely follow some company edict that doesn't jive with what their senses are telling them. And much better than us giving you advice that is 100% wrong.

So below you will find Sheraz Mian's market outlook. Compare that to my bullish view and then move forward with what makes the most sense to you. And if you are unsure, then the right answer is to straddle your portfolio between these alternatives to hedge your bets.

Market at a Crossroads

[10/24/12] Previously I thought that 1400 was all that was needed. But now I realize that it's been about five months since we last touched the 200 day moving average. So now seems like a good time to do it again to test investor conviction. That is a healthy process in all bull rallies before pressing higher.

The 200 day rests at 1375. That is where I think we are headed next. And probably will take place before the election. So let's look for a spot under 1400 and relatively close to 1375 to load back up for the next leg higher.

[10/19/12] The clamor of bad news from tech only grew louder on Thursday thanks to a premature press release from Google showing a massive earnings miss. This was followed after hours by disappointing news from Microsoft. When you combine that with poor showings from Intel and IBM it becomes hard to find a silver lining from this news.

What does it mean?

This weak earnings season is only getting weaker. The number and variety of companies with lackluster news extends beyond these tech behemoths. It may become hard for the market as a whole to trudge higher at this stage without some stronger catalysts.

Yes, I recently said that stocks were undervalued. That is unchanged. But investors never take a straight path from undervalued to fair valued. Instead we take more of a meandering course with tons of detours and pauses for reflection.

So after moving up towards the highs once again, I think we will sink back lower in the range. And probably will stay there through the election. Afterwards, if the economy is improving as it is now, then we will likely have a Santa Claus rally that gets us to around 1500.

As such, I am lightening up my long positions til early November in my trading account. Then plan on getting back to 100% long with good odds of making new highs to ring in the New Year.

[so his 100% long lasted two weeks - looking at those two weeks the market immediately proceeded down from about 1460 to under 1430, then recovered to 1460.  And he was right to sell before Friday's open as the market plunged.  ... but now it's getting low enough to buy, we'll see when Reitmeister jumps back in.]

[10/5/12] Don't waste your time with any article telling you that stocks spiked Thursday because of Romney's showing at the Presidential debates. Why? If true, then it would mean the outcome of the election is a greater question mark. And since investors loathe uncertainty, then they would never celebrate this outcome.

So why are stocks pressing towards the highs once again?

Simply stated, the economic data is getting better. Employment is perking up. Ditto for improvements in the manufacturing and service sectors (especially the latter given a glowing ISM Services report this week and better than expected retail sales).

No the economy is not soaring. It just clearly shows that the Muddle Through pace from the last few years is intact. No recession on the horizon. And stock ownership ain't such a bad idea in that light. In fact, I went to 100% long Thursday for the first time in many moons as I think we have a real shot at hitting 1500 soon.

[9/26/12] Stocks were looking good early on Tuesday. Continued traction on home prices was part of that mix. Soaring Consumer Confidence reading certainly helped. And just for good measure the Richmond Fed Mfg Index was the 2nd regional report showing strong improvements.

So why did stocks collapse into the close?

Because one of the Fed Hawks, Philly Fed President Charles Plosser, gave a scathing rebuke on the latest round of quantitative easing. He sees little economic benefit in the near term. And higher inflation in the long term.

I happen to agree with him. But for me it doesn't change the Muddle Through shape of the economy. Nor the general attractiveness of stocks at this time.

So there may be a little more downside to shake out recent complacency. Yet on the year I doubt we have seen the highs yet.

Read: Buy the dips.

[9/25/12] Ronald Regan was called the "Teflon President" because nothing bad ever stuck to him. And that same non-stick quality seems to be in place for US stocks these days.

It still has been a good two months since the last real correction. And during that time there have been plenty of days with weak economic reports that could certainly spark the decline. Yet it continues to not happen.

Monday was another session where poor headlines from Europe had our markets deep in the red early on. Amazingly stocks shook off most of that pain by the end of the session. This is generally considered bullish movements as investors are buying every dip.

I still think there is a tad too much complacency amongst investors. So there should be a 3-5% sell off in our future. The main question is whether that will come before or after we take a shot at 1500??? Because I think it's a coin flip call is why I am currently 68% long stocks in my trading account.  [which means the market is high, but could go higher]

[8/16/12] Still many investors scratch their heads at the current height of the stock market. And certainly there are some data points and trends that are disconcerting. Yet when you boil it all down, this is the formula that is holding US stocks aloft.

Earnings Yield > 3% above 10 year Treasury Rates

Earnings Yield is a way that investors consider the general attractiveness of stocks. All you do is flip the PE of the stock market around. Meaning divide the earnings per share of the S&P 500 by the current price. Here is how that adds up:

$102 EPS / 1405 = 7.26% earnings yield

Traditionally the earnings yield for stocks is about 3% above the ten year Treasury rate which currently stands at 1.8%. The spread here is 5.4% which is 80% more attractive than the historical average.

It is for this reason that investors have been buying up US shares. And barring a recession they will continue to do so.

[so says Reitmeister after the market has rebounded near the highs]

[8/15/12] I'm Not So Bearish Anymore [now that the market is higher...]

Tuesday investors discovered that the GDP of the European Union nations came in at -0.2% for the second quarter. And this was worse than the stagnant 0.0% showing for the previous quarter.

So stocks tumbled right?

Nope. They went higher in Europe and breakeven in the states.

Say what???

You heard right. Stocks easily shrugged off the European recession signal because their anemic results were better than the scarier -0.3% drop predicted by economists. (And much better than the severe predictions held by many experts).

Now consider that US Retail Sales strongly bounced back after a 3 month slump. Combine that with other recent, modest improvements to jobs, housing, construction, and ISM Services and its starts to paint the picture that, indeed, this was just a soft patch and the Muddle Through economy stays on track.

Yes, dear friend. I have peeled off some of the bear suit and now back to a more neutral to semi-bullish stance.

[8/6/12] Stocks bolted higher on Friday given solid showings from ISM Services and on the jobs front. However at just 2% off the old highs I would say there is absolutely no discount in place for all the concerns still in our midst (slowing economy, European debt, emerging market growth decline, fiscal cliff, unsettled election... need I go on???).

So forgive me for not jumping on this rally. Because unless memory fails me the same thing happened the previous Friday followed by a 4 day sell off.

What I see is greater odds of range-bound activity until investors are more certain of how all these problems shake out (soft patch vs. recession ahead). I suspect 1400 is the top of the range. Maybe we could see a push up to 1420 getting all the bears sucked in before faltering. The lower end of the range is framed by the 200 day average at 1320.

Given this scenario I am in no rush to buy in so close to 1400. Given another pullback lower in the range, PLUS still unclear whether soft patch vs. recession ahead, then I will pick up some more longs to ride up higher in the range. However, if the odds of recession increase then I will up the ante on my shorts expected to see the underside of the range... and then some. 
[7/26/12] Investors did their best to forget about the surprising Apple disappointment. That was easier to do with an array of "seemingly" strong earnings beats from Caterpillar and Boeing. 

Why do you say "seemingly", Reity?

Let's take CAT for example. Shares were down 30% from the recent highs of $116.95 because of fears of a global slowdown. Lo and behold, they crush earnings with a huge positive surprise. The CEO even got on his soapbox to say that global growth was looking better in the future. (Note he is the only person on record with that view ;-)

Yet even with such low expectations going into the report, coupled with a big beat, shares could only muster a meager +1.4% (in fact they were in the red for a good part of the day).

This means that your average investor is not buying the global growth story. And that is why they are writing off most of the recent earnings beats as statements of the past... not of things to come.

At a minimum the 200 day moving average at 1315 needs to be tested again. And probably so does the psychologically important support level at 1300.

[And the Dow is promptly up 200+ in the morning..]

[7/16/12] Who is the numbskull at Zacks who said things are looking more bearish? 

Oh yeah... that was me ;-)

Yes, stocks soared higher on Friday thanks to a slowing Chinese economy that almost guarantees a strong stimulus response from their government. Yet, I don't see how that changes the picture for Europe, Fiscal Cliff, unsettled Presidential Election or the poor earnings season taking place now.

Remember that my newfound bearishness was not meant to be a perfect timing call. Rather it was that the scales of my fundamental analysis tipped towards a more negative outcome for the economy and the stock market.

This awakening just took place for me and I had to act upon it. Unfortunately it may take other investors longer to come to this same conclusion. The exact timing of which is the great mystery. Yet the odds are very high that it will unfold in the downward direction when other investors do the same cumulative math about the many negative factors weighing against us.

[7/13/12] The market came roaring down early on Thursday even after a better than expected jobless claims report. Could my splash announcement about becoming increasingly bearish cause such a tidal wave???

Not likely. Granted this newsletter reaches nearly 800,000 of my best friends every day. But I do not YET have such universal pull on the market (still working on that ;-)

So what was the primary cause? And why did it bounce back so hard?

The only logical answer is that bulls and bears are fairly evenly balanced at this time. And stocks are getting tossed around as they wrestle for supremacy.

For me, the odds of downside are increasing as problems mount: Europe debt & growth issues, Emerging Market growth concerns, the Fiscal Cliff, unsettled Presidential election and an early earnings season stinking from whiffs of a global slowdown.

I am now 20% net short the market with a portfolio of my favorite longs and inverse ETFs. You may want to seek similar cover if this more bearish argument resonates with you.

[Then the Dow promptly shoots up 200 points.]

[7/12/12] I have been long term bullish while short term bearish/moderate for the last few months. That dose of caution was well founded and led to some profitable defensive trading. Unfortunately I see the landscape getting rockier with greater odds of long term downside. 

No, this is not a recession call. Or a bear market call. This is a statement that the odds of future upside are now diminished which increases the odds of downside.

Why?

This math equation should put it in perspective.

Current Muddle Through Economy + Future European recession + Slowing Emerging Market Growth + Fiscal Cliff in 2013 = Stall Speed for the economy (0% growth).

The problem is that investors don't believe that stall speed is a long term phenomenon... and they may be right. Instead, they believe it is simply the rest stop you reach before arriving at a recession. So as this economy decelerates, most investors will assume the worst case scenario (recession) until proven otherwise.

Now toss in an unclear Presidential Election and you have all the makings of a sideways to negative stock environment.
[7/2/12] There is not a single person on the planet who will say that we can stop worrying about Europe. It's not sown up by any stretch of the imagination. 

So why did the market explode higher on Friday?

Because there are strong signs of progress. Simply, expectations were very low for what would emerge from the European Summit. Yet amazingly they did put forward a plan that was far reaching enough to show that that they get the gravity of the current situation and will likely take the next steps to contain this mess. If true, then stocks have seen bottom and will be pushing towards the recent highs of 1420 before long.

The bears have a good case too. They will say that putting out a far reaching, but partially ambiguous plan, is easy. The real trick is getting 17 nations to agree to it AND implement it with no hiccups. Any fumbling of the execution going forward will lead to an instant and painful correction. And many bears believe that "All the Kings horses and all the Kings men couldn't put the Eurozone back together again".

All those claiming they are 100% sure of the outcome are 100% full of it!

The best each of us can do is weigh the odds and implement an investment strategy that is in sync with the likely outcomes. In the long run I believe there is a 85-90%+ chance that Europe contains their debt problems. But in the short run it is more like 50-60% odds that they can do it without any serious fumbles.

Because of that I believe that being 50-60% long stocks is the right call. It allows you to join in if the breakout continues to unfold. Plus your neck is not so far out as to get chopped off if the Europeans start to botch things up for a while.

Each of you needs to conduct your own weighing of the odds. And then make sure that your portfolios match that sentiment.

[6/25/12] Stocks broke under the 200 day moving average at the start of June. Then bounced higher. 

And last week they tried to breakout above the 50 day moving average. That failed too.

Result = range bound market between 200 day moving average at 1295 and 50 day at 1346.

Yes, that is a tight range. However, until there is a clear catalyst then it will be hard for stocks to breakout for good in either direction.

[6/15/12] The market rising on the potential for more Quantitative Easing {QE} is kind of scary.

Yes, normally you don't fight the Fed. Meaning that the more accommodation they provide, the merrier for the economy and stock market.

Yet when US bond rates are already at historic lows, then they don't have much more ammo to work with. So let's hope they don't feel the need for more QE. Because after the initial buzz wears off, then more investors may read it as a serious red flag about what lies ahead.

The solution is simple. World leaders need to solve the problems in Europe. Once done, then the US economy will stay on its Muddle Through course and stocks will go higher. Because if Europe implodes, then we are all up the creek without a paddle.

Given that the solution for Europe is perhaps off in the distance, that is why I added more shorts to my portfolio today as I think the odds are greater of more downside in the near term.

I know there are some long term investors out there who may be wondering why I keep discussing every little turn in the market. That's because our primary focus here at Zacks is on the short run. And that's because we have the best stock rating system available, the Zacks Rank, which happens to be focused on a 1 to 3 month time horizon. So I think it is best for the commentary to match the primary use of our rating system.

Just as a reminder to the long term investors. I still believe that the problems in Europe will be contained at some point leading to a continuation of the 3 year bull rally. What happens between now and then is the greater mystery... with odds pointing towards more short term weakness.

[6/11/12] Yes, in the long run I am still bullish on the US economy and stock market. However, I just am having a hard time giving merit to the rally this past week. It just seems to me that one pass at the 200 day moving average is not enough. An important level like that needs to be given a more thorough test.

Plus, here are 3 fundamental reasons to call the recent rise into question:

1) Key European bond rates continue to move higher. Friday saw Spain go up to 6.22% and Italy up to 5.77% (a little too close to 6% for my comfort).

2) Oil, copper and other key commodities on the decline. The movement of their prices usually coincides with investor sentiment about the global economy. So the further drop of commodity prices on Friday does not correlate well with the “risk on” nature of a rising stock market.

3) US Bond rates went down again. This is a flight to safety move which is antithetical to a rise in stocks.

These 3 things don't add up to an environment that is conducive to higher stock prices because they all speak of fears of a global slowdown. And a flight to safety. So rising stock prices are not a logical extension. And that is why I am not clamoring to get more long the market even as stock prices had another positive session.
[6/7/12] Wednesday capped a second straight day of substantial gains for stocks as they leapt above the 200 day moving average and 1300 in a single bound. So the question that must be asked now...

Is bottom in or is this a sucker's rally?

I strongly contend that this is a sucker's rally. Simply there are no concrete plans in Europe to calm investors' nerves as of yet. This fear can more clearly be seen with the bond rates in Spain and Italy still at alarmingly elevated levels.

The recent lows of around 1266 on the S&P need to be tested again. And likely they will with Greek elections and the European Summit still looming later this month.

[6/4/12] Friday's -2.46% slashing of the S&P cannot be blamed on the Europeans this time around. This was a home grown problem. Specifically it was the May Employment Situation report which came in 54% light of estimates. And lower than last month. And had negative revisions for the past two months.

This event had us flirting with the 200 day moving average all day long. In the final hours, shares closed a notch below at 1278. So far this correction has nearly erased all of the 13% gains we had in our clutches earlier this year.

None of this should be a surprise to you if you are a regular reader of this commentary. And hopefully you added some shorts to your portfolio to be generating some trading profits at this time.

Is it time to buy this dip?

Yes and No. Looking out the next 6-12 months I see the market as being higher than it is now. In fact, I would bet that it will be above the previous high of 1420 a year from now.

But in the short run it's a bad environment with 50/50 odds of breaking out below the 200 day moving average of 1284. And if so, that could create another 5-10% of downside before we discover the errors of our ways (like we did last Fall).

So I am not buying this current dip now. Yet I do have a watch list of great stocks I'd like to buy when the timing feels better than it does now. Likely as we get more clarity out of Europe later this month. And when we can get some better economic data in the US to counteract the damage done by Friday's employment report.

[5/15/12] The equation for what is happening now is fairly straight forward.

Big market rally + no fresh economic data + new European debt concerns = Correction

We saw this freight training coming for a while. That's why we prodded you to get more defensive in your portfolios. Hopefully your shorts and inverse ETF positions are showing some nice profits at this time.

The key question now is this: Where is the stock freight train headed?

I believe we are going to hit 1300 for sure. Probably see a little support there. But time and time again the market finds its way back to the 200 day moving average. That is a notch lower at 1277. From there it is a bit more of a mystery to me.

If European problems keep escalating + US economic data softens = stocks head even lower.

If European situation improves + US economic data stays solid = rebound.

At this time I am not giving up the long term stance that we will hit 1500 this year. However, I am open to the possibility that the European situation may be worse this time around and that US stocks will suffer as a consequence. For now, the above lays out the game plan.

[5/10/12] Yesterday I talked about the "good sign" that investors kept buying on every dip. However, today I see it differently. And that's because the situation in Europe has gotten worse.

The Greek government is in shambles. And likely whatever political coalition emerges from that rubble will try and renegotiate their debt deal with the Eurozone. I believe that Germany and others may very well not agree to such a deal, potentially leading to Greece being ousted from the 17 member group.

This is a new wave of uncertainty for the Europe that once again saw key bond rates soaring. Most notably Spain is up above the 6% level once again. This sent another wave of fear into the US markets which now puts stocks under key support levels.

This reminds me of a fighter on the ropes. There is always great excitement when they punch their way back from the brink. But usually a fighter on the ropes is at a disadvantage that if it lasts too long it usually ends up in defeat.

Meaning that I suspect that the previous level of support around 1360 has been breached. So now we are likely on a collision course with a new support around 1300 or perhaps 1280 where the 200 day moving average resides.

You may want to adjust your portfolios accordingly.

[4/9/12] Mr. Reitmeister returns to Washington. [Didn't know Reitmeister was such a big shot.]

[3/30/12] Why was the S&P in the red for the 3rd straight day? It started back in Europe, once again, because key bond rates were on the rise. This led to profit taking in stocks with most of their markets down 1-2%.

Interestingly each of these three days saw a late session rally dramatically trimming losses. So like I said in the past, this is a sign that the market still has an upward bias because every dip is an opportunity to buy into this rally.

Next week offers plenty of meaty economic reports that could move stocks like both ISM reports and monthly employment numbers. If good, it could give us one final surge before earnings season.

I would say 60% odds of that happening. And 35% odds of going sideways into earnings. That leaves a paltry 5% chance of a correction at this time.

[3/1/12] The +8.7% gain for the S&P to date makes it the best two month start since 1991. However, we had an impressive start to 2011 as well. Next thing you know the market is in the tank and we were lucky to crawl back to a breakeven finish.

Why might this year be different... you ask?

GDP is picking up speed. The Q4 revision up to +3% certainly helps. The Fed acknowledged such gains in their Beige Book report. Also today's Chicago PMI was surprisingly strong with forward looking indicators screaming of greater gains ahead.

Then consider that a year ago the 10 year Treasury was at 3.4% and now it is still under 2%. With another year of earnings growth under their belts it makes US stocks that much more attractive (especially when you add the nearly 2% dividend for the S&P 500 into the return equation).

The short term fluctuations of the market will always be a mystery. However, there is strong reason to believe we have not yet reached the top for this year. Being so close to 1400, it's pretty much a given we can make it that far. However, I will stick my neck out and say that 1500 is closer to the high in 2012 than 1400.

[2/24/12] Kevin Cook here, watching the sleeping bull for one more day until Steve returns. I think he went to the White House again to talk some sense into the President about this dividend idea.

One of my favorite bull market environments - besides over-emotional corrections [2010] and unwarranted recession panics [2011] - is the slow grind higher that everyone doubts can keep going. Today's market looks a lot like parts of 2006, 2009, and 2010 where the ground game ruled. In other words, the market fights for every first down with a low-key running game that averages 3 yards per carry.

This is because lots of portfolio managers are UNDER-INVESTED and why we don't get even a 3% pullback to buy, let alone a 5% one. They are not rotating out of stocks up here at S&P 1,360. They are building positions for the next leg higher, afraid to be left behind. And there is just enough doubt and money on the sidelines to keep this going, oh, until May.

Steve has talked about this before in terms of the market that doesn't seem like it's rallying, but when you take a look every few weeks you notice your portfolio is up 1-2% more than it was last time. And I frame it as a market that fights with disbelief more than a wall of worry. I explain it in more detail in my reply to today's Real-Time Insight, "The S&P 500 Looks Cheap."

Think of it this way: If lots of investors and PMs are holding extra cash, waiting for the correction that never comes, what happens when the S&P hits 1,400? That money will start to move in, sort of like an "upside capitulation." However this unfolds, it will be extremely fun to watch. Especially if you have good positions now and profits to take later.

[2/17/12] Once again, those who doubt this rally continue to get punished as 2 of the 3 major US stock indices made new closing highs Thursday. And the S&P 500 is on the doorstep of joining them at record heights.

What caused this new surge? Signs that a Greek bailout deal is moving ahead. Plus a trifecta of good economic news on the home front:

• Jobless Claims now down to 348K. Much better than expected.
• Housing Starts 699K vs. 675K expectation. Plus previous month revised 32K higher.
• Philly Fed Survey shows a surge in regional activity nicely topping estimates.

I think it's fair to assume that the S&P will touch their highs at 1370 in the not too distant future. But then what???

Here is what I said on that subject a few days back which still holds true today:

"I believe the market will keep pushing higher to 1400 before we have any correction worth talking about (greater than 3%). This is probably a 6 to 8 week process of slowly trudging our way up to that point.

The biggest battle will be when we hit the old highs at 1370. That hurdle may take a couple weeks to clear. Once above, we should be able to make new highs around 1400. At that point a correction of 5-10% is likely to test investor convictions before making an assault on new highs."

[1/27/12] Quite often the immediate reaction of day traders is mitigated the next day after longer term investors had a chance to contemplate what things really mean. Such is the case with the market turnaround on Thursday.

Upon further inspection I suspect that many long term investors said to themselves: "The only reason we need such severe Fed action is if they are truly concerned about the health of the economy". That is the backlash we were seeing on Thursday even with quality showings from the Durable Goods and Jobless Claims.

This fits in with my call for the market to take a pause at this time and digest some of the recent gains. We may even find ourselves retracing a few percentage points down to the 200 day moving average at 1253 on the S&P. After this consolidation period I suspect stocks will get back on the offensive as we have not yet seen the highs for 2012.

[1/26/12] End of America

Kiss America Goodbye?

European Crisis Can Still Cripple US

Is Europe Throwing Us into a 1930's Moment?

How the US Debt Downgrade Will Change Your Life

Confusing Gradual Bankruptcy with Economic Recovery

Up to 308,127,404 Americans Could Be in Serious Trouble

This is just a sample of the commentary headlines and marketing messages from around the investment world this morning. And it's the same basic formula these folks have been pitching since the Great Recession started in 2008. As they say "fear sells".

The problem is that fear doesn't always produce the best results for your investment portfolio. That's because the economy and stock market started rebounding back in March 2009. Since then the S&P 500 has basically doubled.

Those following the ill-advised fear based messages have not enjoyed any of the benefit of the very real economic recovery and rise of stock prices. Unfortunately those peddling the fear did benefit by getting you to buy more of their subscription services.

[1/9/12] This is a classic Wall Street saying. And gladly there is some decent data to back it up.

According to the Stock Trader's Almanac the last 37 times that stocks went up the first 5 days of the New Year has resulted in full year gains 31 times. That is an astonishing 84% accuracy rate with an average annual gain of +13.3% across all 37 years. I would certainly take an average result for 2012... how about you?

I'm guessing that many of you are still a bit unsure about the market moving higher. All the talk of Europe, China, Debt etc. is unsettling. And I don't want to diminish it at all as they could jump up to bite us in the posterior. However, I think the odds are better on the 2.5 year Muddle Through economy extending into 2012. And the economic data supports that notion at this time... maybe even a notch better than that. This is what is driving stocks higher.

When that primary positive trend becomes in greater question we will likely see the signs and recommend that you get more defensive. For now, appreciate that the US economy is doing well. And that US stocks beat the heck out of any other investment alternative. That is why I am back in the bullish camp once again. I hope you entertain that notion as well before the market gets too much higher.

[1/6/12] Stocks broke above their 200 day moving average with conviction on Tuesday.

On Wednesday they gave back a little early in the session before rallying into a breakeven close...and the 2nd close above the 200 day.

Thursday is a near repeat of Wednesdays action with heavy selling early on followed by a massive rally into slightly positive territory. That makes 3 in breakout territory.

That's the technical picture. On the fundamental front take your pick of:

ISM Manufacturing showing expansion
ISM Services showing expansion
ADP showing a WHOPPING 325K jobs added in December
Jobless claims under 400K again and again.
Q4 GDP estimates of 3.5 to 4% are quite common
Less negative headlines out of Europe (or at least we are becoming immune to them)
Improvement in Chinese economic #s (they ain't dead yet)
All of the above

I will go on record as a firm believer in this breakout for stocks. The speed and final destination are a mystery, but up is the direction for now.

I expect the US economy to continue to Muddle Through and that is good enough for corporate earnings growth. Right now earnings projections for the S&P 500 next year are around $106 per share. That means the market is only trading at a paltry PE of 12. Well below the historical norms of 14-15.

As people worry less about Europe and China then it will create a tractor beam pull towards stocks. I can easily see the market getting to 1400 on the S&P 500 which equates to a PE of just 13.2.

I think the groups that will do the best in 2012 are the ones that did the worst in 2011. And those are cyclical and growth oriented groups that got pounded down when the recession fears took hold. This also means that the defensive positions that served us well in 2011 will underperform if people become less risk adverse as they are now.

[1/5/12] Stocks corrected early on Wednesday morning, yet rallied back into the close. This makes a 2nd straight day above the 200 day moving average. Thursday scoring above that mark would seem to confirm the breakout for stocks.

Gladly there is more than just a technical story here. There is growing belief in European debt containment. Their recent bond sales and stock market gains are testament to this understanding. Plus there are signs that predicting China's demise is a bit premature.

And back in the States we have a slew of economic reports touting an improving economy. The latest projection I saw for Q4 GDP is +3.4%. Wouldn’t that be nice!

[12/30/11] Reitmeister's 2012 Outlook & Strategy

Truths about investing

Morgan Housel lists 50 of them.  Here are a few:

1. Saying "I'll be greedy when others are fearful" is much easier than actually doing it.

3. Markets go through at least one big pullback every year, and one massive one every decade. Get used to it. It's just what they do.

4. There is virtually no accountability in the financial pundit arena. People who have been wrong about everything for years still draw crowds.

5. As Erik Falkenstein says: "In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves."

12. The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn't -- his are much bigger.

20. The market doesn't care how much you paid for a stock. Or your house. Or what you think is a "fair" price.

32. The best investors in the world have more of an edge in psychology than in finance.

34. For most, finding ways to save more money is more important than finding great investments.

35. If you have credit card debt and are thinking about investing in anything, stop. You will never beat 30% annual interest.

39. Twelve years ago General Motors (NYSE: GM  ) was on top of the world and Apple (Nasdaq: AAPL  ) was laughed at. A similar shift will occur over the next decade, but no one knows to what companies.

47. And what Marty Whitman says about information: "Rarely do more than three or four variables really count. Everything else is noise."

50. The most boring companies -- toothpaste, food, bolts -- can make some of the best long-term investments. The most innovative, some of the worst.

no more Twinkies?

NEW YORK (CNNMoney) -- Hostess Brands -- the maker of such iconic baked goods as Twinkies, Drake's Devil Dogs and Wonder Bread -- announced Friday that it is asking a federal bankruptcy court for permission to close its operations, blaming a strike by bakers protesting a new contract imposed on them.

Hostess' nearly 18,500 workers will lose their jobs as the company shuts 33 bakeries and 565 distribution centers nationwide, as well as 570 outlet stores. The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union represents about 5,000 Hostess employees.

"We deeply regret the necessity of today's decision, but we do not have the financial resources to weather an extended nationwide strike," said CEO Gregory Rayburn in a statement.

Hostess will move to sell its assets to the highest bidder. That could mean new life for some of its most popular products, which could be scooped up at auction and attached to products from other companies.

Hostess filed for bankruptcy in January, its second trip to bankruptcy court since 2004. It previously emerged from restructuring in 2009 after a four-and-a-half year process. The company is now controlled by a group of investment firms, including hedge funds Silver Point Capital and Monarch Alternative Capital.

Frank Hurt, president of the bakers' union, called the liquidation "a deep disappointment" but said his members weren't the ones responsible, blaming the various management teams in place at Hostess over the past eight years for failing to turn the firm around.

Hostess had annual sales of about $2.5 billion. The company said it had been making 500 million Twinkies and 127 million loaves of Wonder Bread annually before Friday's shutdown.

LNG Highway

So, for a few years Clean Energy Fuels has slowly built a network of buses and local truck fleets that run on natural gas, demonstrating lower costs and reliable service. But now the company is setting its sights on a much larger prize, a nationwide natural gas highway.

Clean Energy Fuels is building what it calls America's Natural Gas Highway in an effort to move liquefied natural gas (LNG) and compressed natural gas (CNG) forward. Through October the company has built 48 LNG stations, primarily at Flying J stations around the country, in an effort to build over 100 stations to serve the heavy duty trucking market. By the middle of next year it thinks there will be enough infrastructure to support this new market.

That's about the same time that an 11.9-liter engine built by Cummins, based on technology from Westport Innovations, will hit the road.

To serve this growing market, Clean Energy Fuels just signed a deal with GE to build two ecomagination MicroLNG plants that GE will finance for up to $200 million. These two plants will add 500,000 gallons of LNG capacity with the ability to expand to 1-million gallons each, adding to the 260,000 gallons of capacity the company currently has.

GE and Chesapeake Energy have a partnership that will install 250 CNG stations around the country as well, adding to the more than 300 CNG stations for Clean Energy Fuels. Chesapeake is even working on a home fueling "appliance" with the help of GE and Whirlpool. Imagine fueling your car before you leave for working the morning.

All of this build-out is meaningless for Clean Energy Fuels, GE, Chesapeake, and others unless there are vehicles on the road that use their fuel. So this is the next big step.

As I mentioned above, the heavy duty Cummins Westport engine is coming to the market next year and will be the big driver of future domestic LNG demand. According to Clean Energy Fuels, LNG is currently priced up to $1.50 cheaper than gasoline or diesel -- for trucking fleets that becomes a huge cost savings tool.

The passenger market is less likely to be a driver of LNG or CNG demand in the near future, but we're seeing some progress. Honda makes a natural gas version of the Civic. GM offers Chevy Silverado and GMC Sierra in CNG options as well.

If the trucking fleet makes a quick conversion to natural gas in 2013 you can expect a steady trickle of passenger vehicles to follow. Fueling stations are clearly influencing adoption rates, and if natural gas remains a significantly less expensive fuel source, then there's a big incentive to make the switch.

wealthy selling

For many of the wealthy, 2012 is becoming a good year to sell.

Fearing an increase in capital gains and dividend taxes, many of the rich are unloading stocks, businesses and homes before the end of the year.

Wealth advisers say that with capital-gains taxes potentially going to 25 percent from 15 percent, and other possible increases in the dividend tax, estate tax and other taxes, many clients are selling now to save millions in taxes.

"Under almost any scenario, it makes sense to take the gains this year," said Gregory Curtis, chairman and managing director of Greycourt & Co. "Clients aren't selling willy nilly. But if they can and they have a huge gain, they're selling now."

psst...

Don't tell anybody you heard it from me, but here's the latest report from earningswhispers.com...

Since the black line remains above the gold line on the chart, and the gold line is most likely going lower this week, we see little reason to believe the S&P 500 has stopped dropping from its mid-September high. There is evidence that we are still weeks away from a buying opportunity too in our chart of the S&P 500 below.

the objective of the indicator is to identify when too many investors are betting too heavily in one direction, which tells us it is time to begin trading in the opposite direction. Over the past 12 months, it seems we've found a spot where the number of put options relative to calls places just such a floor in the stock market. Our put/call oscillator is currently a long way from reaching that level.

a simple investing lesson

Those who buy stocks at low valuations will very likely do well over 10-year periods, while those who buy expensive stocks very likely won't. Forget the crapshoot; we can now put the odds firmly in (or against) our favor.

The lesson here is simple, but it's probably the most important in all of investing. To reasonably assure success:

• You have to buy stocks when they're cheap.
• You have to hold them for a long time.

[Well you don't have to.  But if you do, you have a good shot of making money.  Oh yeah, you have to know what to buy.]

unemployment report

[11/6/12] The economy added 171,000 jobs last month, and the previous two months were revised higher by a combined 84,000 jobs. This was better than nearly any analyst expected, supporting the view that the economy is in a slow recovery. 2012 is shaping up to be the best year for jobs growth since 2005 and the fourth-best since 2000.

That's the good news.

The bad news is that the hole left by the financial crisis makes decent employment numbers woefully inadequate. Assuming jobs growth continues at the current pace, it will be almost 2016 before we see a 6% unemployment rate. If we get lucky and jobs growth jumps to 200,000 a month, unemployment won't drop below 6% until 2015. It is just ugly: Only five years after the recession began, there are few reasonable scenarios in which we will see a normal, healthy unemployment rate within the next two years. And the longer people remain out of work, the harder it is for them to re-enter the labor market, making this mess all the more dire.

A few other trends stick out:

• A lot of the new jobs created over the last three years have been in low-wage industries like food service (which is at an all-time high) and temporary help. Millions of Americans are out of work. Millions more are working part-time. And millions upon millions more are working for a paycheck that barely gets them by.

• Private payrolls have risen by 4.7 million since 2010, while government employment has declined by 480,000. This is the opposite of the last recession: From 2002 to 2004, government employment increased by 201,000, and private employment declined by 316,000. Falling government employment, most of which has occurred at the state and local level, explains a lot about why the labor market is slower to rebound than in past recessions.

• New housing construction is beginning to rebound in a big way, up 34% in the last year. Pay close attention to that; it could be the biggest driver of employment growth over the next few years. As Warren Buffett said last year: "We will come back big-time on employment when residential construction comes back. You will be surprised, in my view, how fast employment changes when that happens."

presidential election strategies

[8/17/12] But it's worth asking how changing investing strategies because of a presidential election has worked in the past.

We have plenty of examples.

During the 1996 election, market commentators recommended following a time-tested trend. "Investors would be wise to adjust their portfolios, depending on who wins the presidency in November," The News Tribune wrote that year. It continued:

Studies have shown that small stocks usually fare better under Democratic administrations and bigger stocks fare better under the Republicans. Research by Tacoma's Frank Russell Co. and Liberty Financial Cos. of Boston has drawn the same conclusion. So, the message is clear: If Bill Clinton wins, think small; if Bob Dole wins, think big.

How'd it work? In the four years following President Clinton's win, small-cap stocks underperformed large caps by more than half. In the succeeding eight years of Republican President George W. Bush's time in office, small-cap stocks outperformed by a factor of two. Anyone following the advisors' strategy would have dramatically underperformed a broad index for more than a decade -- and that's before trading fees.

It gets worse from there.

During the 2000 presidential election, Newsweek wrote that a win by George W. Bush and the ensuing tax changes could "help banks, brokers and other investment firms." By the end of Bush's second term, the KBW Bank Index had dropped almost 80%.

Another analyst from The Money Channel gave a bullish endorsement of airline stocks if Bush won the election, noting that "a broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest U.S. airlines were in bankruptcy.

"There's an [easy] way to put your money on the November contest: buy some stocks," another Newsweek article counseled before the 2000 election. "The U.S. stock market hasn't lost money in a presidential-election year since 1940." But then it did in two of the next three election years.

Analysts lined up in 2008 to offer their recommendations before election day. Mad Money's Jim Cramer wrote: "An Obama victory would also be good for solar and wind power. My No. 1 solar pick would be First Solar [ (Nasdaq: FSLR  ) ], the only company in the field with a product that's commercially viable." The bulk of solar stocks have since collapsed, with First Solar down 93%.

If Obama won, Cramer went on to caution, "because of all the negative rhetoric, you'd have to trim both the major oils, like ExxonMobil [ (NYSE: XOM) ] and Chevron [ (NYSE: CVX) ], and the big drillers, like Schlumberger [ (NYSE: SLB) ] and Transocean [ (NYSE: RIG) ]." A basket of the four has gained more than 60% since Obama took office.

He wasn't alone. The idea that an Obama presidency would be a boon to green energy and a strike to big oil was nearly universal. Reality, as it has a tendency of doing, has proven quite the opposite.
Jimmy Carter warned in 1980 that Ronald Regan's tax policies would hurt the economy. Instead, it boomed.

Ronald Reagan warned in 1993 that Bill Clinton's tax policies would hurt the economy. Instead, it boomed.

You can go on and on. When it comes to presidential elections and your investments, there's only one constant: Those who make specific predictions about the effects of policy tend to lose.

***

[11/6/12] You're going to see more versions of "If X wins the election tomorrow, here's what stocks will do" over the next 24 hours than you can shake a stick at.

Try as hard as you can to ignore it all. History makes one thing clear: There is little correlation between elections and stock performance -- particularly in the short run.

what's wrong with the economy?

Henry Blodget tells the story in charts.

P.S.  The answer is Medicare, Medicaid, Social Security.

And Blodget's solution.

Have the corporations give their employees more money.  (Somehow I don't see that happening.)

Weekly unemployment claims

The finance blog Calculated Risk puts the recent decline in initial unemployment claims in historic context.

(Clicking on the chart shows that the current unemployment situation shows similarites to the 1982 recession.)

only 5 matter

The Dow is up 885 points year to date. While there are 30 stocks in the Index, only five really matter to this 7.3% advance on the year. They are Home Depot (NYSE: HD) (164 points), Wal-Mart (NYSE: WMT) (107 points), Disney (NYSE: DIS) (103 points), Travelers (100 points) and JP Morgan Chase (NYSE: JPM) (58 points) ...

These five stocks represent 60% of the Dow's gain this year. The other 25 names are the remaining 40%, but these are the stocks that have the outsized returns (24 to 47% YTD) and sufficiently large stock price to push the Dow Jones Industrial Average higher. Bank of America (NYSE: BAC) is up 68% on the year, but because it is a low-priced stock at $9, its influence on the Dow is just 45 points.

U.S. stocks on top for first time since 1995

U.S. stocks are beating every major asset class for the first time in 17 years even as economic growth weakens and profits rise at the slowest rate since 2009.

The Standard & Poor’s 500 Index has rallied 14 percent in 2012, beating Treasuries, corporate bonds, commodities, the dollar and equities in Asia and Europe, data compiled by Bloomberg show. The last time that happened, in 1995, the S&P 500 was posting the biggest annual advance of the last five decades. With a price-earnings ratio close to today’s level, the index gained another 93 percent in the next 2 1/2 years.

For all the concern about unemployment and manufacturing growth, the best assets this year remain American companies after unprecedented steps by the Federal Reserve to support growth. Forecasts for a rebound in the U.S. economy and the central bank’s pledge to keep interest rates near zero for years convinced bulls the S&P 500 will extend gains. Bears say political gridlock will drag down prices after monetary stimulus wears off.

The bull market will last another year as individuals regain confidence and return to equities after withdrawing money since 2007, according to Laszlo Birinyi, the president of Birinyi Associates Inc. in Westport, Connecticut. Investors have pulled about $100 billion from U.S. stock funds this year and added $250 billion to bond funds, according to data from the Investment Company Institute in Washington.

“I don’t think you’ve seen the signs of a frothy, toppy market,” Birinyi, who traded equities at Salomon Brothers Inc. in the 1980s, said in an Oct. 17 phone interview. “People are realizing that the stock market is not all that bad. It’s been telling us that the economy and companies are in better shape than people think.”

Wall Street strategists tracked by Bloomberg predict the S&P 500 may surpass its all-time high next year. The benchmark may end 2013 at 1,585, according to the median forecast of five analysts polled by Bloomberg News, 1.3 percent higher than a record in October 2007.

do tax cuts help the economy?

A new study by Ernst & Young concludes that increasing taxes on higher-income Americans will hurt economic growth and lead to 710,000 fewer jobs being created.

The study was commissioned by four business groups that are opposed to this tax increase, which will go into effect Jan. 1 under current law.

This study should give these groups more ammunition in their fight to ward off this tax hike. They have an uphill battle as far as public opinion is concerned: A new Pew Research Center poll found that 44 percent of Americans think raising taxes on households with more than $250,000 in income would help the economy, while only 22 percent said it would hurt the economy.

Most small businesses are flow-through entities, where profits are taxed at the individual owner. The study found that taxpayers in the top two brackets earn more than $576 billion in flow-through business income, through S corporations, partnerships, limited liability companies and sole proprietorships.
Subjecting this business income to higher taxes is a bad idea if we want to encourage economic growth, business groups argue.

***

The one idea that is almost certain not to jump-start this economy is a tax cut.

Why can we be sure of this? Because that is what we have done for the past three years. For those who think President Obama’s policies have done little to produce growth, keep in mind that the single largest piece of his policies — in dollar terms — has been tax cuts. They actually began before Obama, with the tax cut passed under the George W. Bush administration in response to the financial crisis in 2008. Then came the stimulus bill, of which tax cuts were the largest chunk by far — one-third of the total. The Department of Transportation, by contrast, got 6 percent of the total to fix infrastructure.

That wasn’t the end of it. There was the payroll tax cut, the small business tax cut, the extension of the payroll tax cut, and so on. The president’s Twitter feed boasted: “President Obama has signed 21 tax cuts to support middle class families.” And how has that worked out?

In the wake of a financial crisis caused by excessive debt, tax cuts are highly unlikely to lead to increased economic activity. People use the money to pay down their debts rather than shop for cars, houses and appliances.

- Fareed Zakaria, MidWeek, 6/13/12

***

One of the most pernicious economic falsehoods you'll hear during the next seven months of political campaigning is there's a necessary tradeoff between fairness and growth. By this view, if we raise taxes on the wealthy the economy can't grow as fast.

Wrong. Taxes were far higher on top incomes in the three decades after World War II than they've been since. And the distribution of income was far more equal. Yet the American economy grew faster in those years than it's grown since tax rates were slashed in 1981.

This wasn't a post-war aberration. Bill Clinton raised taxes on the wealthy in the 1990s, and the economy produced faster job growth and higher wages than it did after George W. Bush slashed taxes on the rich in his first term.

If you need more evidence, consider modern Germany, where taxes on the wealthy are much higher than they are here and the distribution of income is far more equal. But Germany's average annual growth has been faster than that in the United States.

You see, higher taxes on the wealthy can finance more investments in infrastructure and education, which are vital for growth and the economic prospects of the middle class.

Higher taxes on the wealthy also allow for lower taxes on the middle -- potentially restoring enough middle class purchasing power to keep the economy going.

As we've seen in recent years, when disposable income is concentrated at the top, the middle class doesn't have enough money to boost the economy.

What we should have learned over the last half century is that growth doesn't trickle down from the top. It percolates upward from working people who are adequately educated, sufficiently rewarded, and who feel they have a fair chance to make it in America.

-- Robert Reich (see article comments for opposing views)

***

Many are convinced that tax increases have little or no damaging impact on the economy. We hear over and over again that notions of damaging effects from higher taxes are merely based on “trickle down” theory, which has been proven false.

This is not true. There exists robust empirical evidence that taxes impede economic activity. In conventional economics, only the magnitude of the negative impact of taxes on economic output is debated, not the existence of such an effect.

Let us focus on one such negative impact, the effect of taxes on the activity of business owners, an important segment of the economy. Business owners account for 40 percent of American capital, while firms with less than 500 employees employ half the private sector workforce.

The argument that taxes do not negatively affect small and medium-size business tends to rely on a number of fallacies. One example is an article by Berkeley economics professor Laura Tyson, a member of Obama’s advisory board, which was published in the New York Times. In the article, she claims that “the relationship between tax rates and economic activity, even though it has superficial appeal, is not supported by the evidence.”

The most common fallacy repeated by Tyson is that taxes do not matter because the economy was booming during the Clinton years even though taxes went up. But tax increases are not the only economic event associated with the Clinton years, and therefore cannot be claimed to cause all events that took place in his presidency. The Clinton years also contained entry into NAFTA, welfare reform, and recovery from the 1992 recession. Most importantly though, the Clinton years included the IT boom, which dramatically raised productivity growth in the United States as well as in other developed countries. It would strain the imagination to believe that Clinton’s moderate marginal tax increase somehow caused the PC and Internet Revolution.

Instead of picking one historic event that happens to fit your preferred theory, a more reasonable approach is to investigate all historical periods where taxes increased or decreased. This has been done by former Obama advisor Christina Romer and her husband David Romer. They also take into account the causes of tax increases.¹ They find that tax increases tend to reduce economic growth, stating that “tax increases appear to have a very large, sustained, and highly significant negative impact on output,” as “an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.” Similar results have been obtained by Harvard economist Alberto Alesina using a different methodology.

the 1987 crash (25 years ago)

The 23% Dow decline in 1987 hasn't been equaled since, not even during the 2008 crash. What was remarkable about the 1987 event was that the averages still ended 1987 with a gain. The market recovered all of its losses in about 15 months.

The Dow and the S&P 500 are still 6% and 8% below their 2007 peaks. The Nasdaq, however, is 5% over its 2007 high -- thanks especially to gains for Apple and Google.

The Dow's 508-point loss wasn't exceeded until Oct. 26, 1997, when the Dow fell 554 points as a financial panic in Asia hit markets. On Sept. 17, 2001, the first day of trading after the Sept. 11, 2001, terror attacks, the Dow fell 685 points.

The two largest one-day plunges occurred in the fall of 2008 after the Lehman Bros. collapse.

Today's problems are quite different from the 1987 crash, when the market fell due to program trading that fed upon itself throughout the day. Also, interest rates had been rising in the spring and summer.An overheated market ultimately fell over. There were worries about tax increases and a slowing economy as well.

***

[see also five years ago]

a loser's game

the idea that trading adds value contains an economic fallacy that can be seen using a simple exercise described by Jack Bogle in a 2009 interview with The Motley Fool.

In this exercise, he suggests imagining that half the shares outstanding of all the stocks in the S&P 500  Index are owned by long-term investors and the other half by traders. By definition, the long-term holders who own half the shares and do not trade them will earn the market return. The traders on the other hand are trading with each other because the long-term investors are not trading with them.

As Jack concludes, “It follows as the night to the day that the traders will lose by the amount of money paid to the intermediaries, the croupiers in the middle [as well as to the IRS!]. It therefore follows logically and mathematically that buying and holding is a winner’s game and buying and trading is a loser’s game. Simple as that. No way around it.”

scary earnings

Autumn is in the air, and it's not just the leaves that will be losing their green in the coming weeks.
The Wall Street Journal is reporting that -- for the first time in nearly three years -- companies in the S&P 500 are expected to post an overall decline in profitability.

Thomson Reuters sees a 2.9% decline in earnings. S&P Capital IQ sees a slightly smaller deficit. However, both analyst trackers do see companies, on average, posting lower net income this time around.

In other words, earnings season has never been this scary.

Buffett Rule fails to pass Senate

[4/16/12] Senate Republicans on Monday blocked President Barack Obama's "Buffett Rule" legislation, which would have put a 30-percent minimum tax on millionaires, in a debate that is likely to resonate through the November general election.

Democrats, as expected, failed to garner the 60 votes needed in the 100-member Senate to move to a full debate and vote on the bill aimed at getting more tax revenues out of the wealthy.

"Tonight, Senate Republicans voted to block the Buffett Rule, choosing once again to protect tax breaks for the wealthiest few Americans at the expense of the middle class," Obama said in a statement.

Fifty-one senators voted for the bill, while 45 senators voted no, effectively killing it. Republican Senator Susan Collins voted for the tax hike, while Democratic Senator Mark Pryor voted against it.

famous last words

What are investors thinking when they make mistakes? What's going through their heads? The frame of mind that guides the biggest investment fumbles might be best summed up with a list of famous last words.

"I thought I was getting guaranteed high returns."
Everyone wants that, so no one will get it. Any legitimately "guaranteed" investment will attract so much money that returns will be pushed down to zero -- and negative after inflation. You aren't entitled to anything you're not willing to pay for.

"I want to get in now before I miss more of the upside."
One of the fastest roads to poor results. Buy businesses, not regrets.

"This was a one-in-a-million event."
Maybe it was. Or maybe you severely miscalculated the odds. Reality is almost always the latter.

"You can't afford not to own this stock."
As close as it gets to ringing a warning bell at the top of a bubble.

"I'm going to wait on the sidelines until there's more clarity."
The easiest way to ensure you'll miss the bulk of bull markets.

"It's different this time."
A cliche among famous last words, but easily the most important. Risk will never be eliminated, growth will never be limitless, and markets are never fully efficient. When it comes to big, basic principles of investing, it's never different this time. This truth explains the majority of investment blunders.

[I don't care, I'm still buying Apple.]

2012 To-do list

In a normal year, I would say there's no reason to hustle to rebalance your portfolio before year-end. But this year is different because a host of Bush-era tax rates that were favorable to investors are set to expire at the end of December, barring Congressional action. Top of mind for rebalancers? Long-term capital gains taxes, which are set to rise from 15% currently to 20% for those in the highest tax brackets, and to 10% from 0% for those in the 15% tax bracket or below. (This article summarizes some of the key investment-related tax changes that will kick in next year.)

If your portfolio review indicates that it makes sense to lighten up on a winning position that you've held for more than a year--either because its valuation seems high or because it's too large a piece of your portfolio--it's a layup to do so this year, at today's low capital gains rates. After all, tax rates may stay the same, but no one's talking seriously about them going any lower than they are right now. On the other hand, there are risks in going overboard in an effort to lock in low long-term capital gains rates. If you don't have a convincing fundamental impetus for selling a security and tax rates stay the same, unloading it now will trigger a gain that you might have otherwise deferred. This article provides an overview of key tips and traps to bear in mind if you're considering selling something preemptively.

Yet another maneuver that's worth putting on your radar between now and the end of 2012 is converting traditional IRA assets to Roth, a tack that would have multiple benefits in a higher-tax climate. First, the taxes due upon conversion would be based on 2012's relatively low income tax rates. Second, Roth assets will be even more valuable if income tax rates rise in the future because Roth withdrawals are tax-free. Finally, Roth assets aren't subject to the new Medicare surtax going into effect in 2013, which I discussed in this article.