DETROIT (AP) — For the U.S. auto industry, the recession is now clearly in the rear-view mirror.
New car sales jumped 17 percent to 1.5 million in August, their
highest level in more than six years. Toyota, Ford, Nissan, Honda,
Chrysler and General Motors all posted double-digit gains over last
August.
The full-year sales pace rose above 16 million for the first time
since November 2007, the month before the Great Recession officially
started. Exuberant automakers said sales will likely remain at that pace
for the rest of this year.
U.S. car and truck sales totaled 16 million in 2007, then plummeted
during the recession. They bottomed out at 10.4 million in 2009 and have
been rising ever since. In August, they seemed to pick up speed. Mohatarem said he expects the year to end with sales closer to 15.8
million vehicles, which is higher than GM's official forecast of 15.5
million.
Monday, September 23, 2013
Saturday, September 21, 2013
home sales on the rise?
Existing home sales increased last month to a seasonally adjusted
annual rate of 5.48 million homes. That equates to a 1.7% increase over
July and a 13.2% jump over the same month last year. It's the highest
level in six and a half years.
While many analysts and commentators had feared that the recent rise in interest rates would weigh on the housing recovery, it now seems as if the trend had an opposite effect. "Rising mortgage interest rates pushed more buyers to close deals," said Lawrence Yun, NAR's chief economist.
The news was similarly upbeat when it came to home prices. According to the trade association's data, the national median existing home price for all housing types was $212,100 in August. That equates to a 14.7% increase on a year-over-year basis and was the strongest such gain since October of 2005, when the median rose by 16.6%.
August marked the 18th consecutive month of year-over-year price increases, and the ninth month in a row that they shot up by double-digits.
***
yeah, but what about new home sales?
New home sales plunged 13.4% in July, in one of the first signs that higher mortgage rates may be cutting into home demand.
Sales fell to a seasonally adjusted rate of 394,000 a year, from 497,000 in June, the Census Bureau reported Friday. Analysts' consensus estimate was 487,000.
Sales were 6.8% higher than last July.
The median price was $257,200, up from $249,700 last month, and there were 171,000 homes for sale at the end of July, representing a five-month supply at the current sales pace, Census said.
The report was concerning because sales fell even though more homes were for sale, said Jed Kolko, chief economist at real-estate Web site Trulia.com. Previously, new home sales have stayed well short of pre-recession highs because of a shortage of homes on the market.
While many analysts and commentators had feared that the recent rise in interest rates would weigh on the housing recovery, it now seems as if the trend had an opposite effect. "Rising mortgage interest rates pushed more buyers to close deals," said Lawrence Yun, NAR's chief economist.
The news was similarly upbeat when it came to home prices. According to the trade association's data, the national median existing home price for all housing types was $212,100 in August. That equates to a 14.7% increase on a year-over-year basis and was the strongest such gain since October of 2005, when the median rose by 16.6%.
August marked the 18th consecutive month of year-over-year price increases, and the ninth month in a row that they shot up by double-digits.
***
yeah, but what about new home sales?
New home sales plunged 13.4% in July, in one of the first signs that higher mortgage rates may be cutting into home demand.
Sales fell to a seasonally adjusted rate of 394,000 a year, from 497,000 in June, the Census Bureau reported Friday. Analysts' consensus estimate was 487,000.
Sales were 6.8% higher than last July.
The median price was $257,200, up from $249,700 last month, and there were 171,000 homes for sale at the end of July, representing a five-month supply at the current sales pace, Census said.
The report was concerning because sales fell even though more homes were for sale, said Jed Kolko, chief economist at real-estate Web site Trulia.com. Previously, new home sales have stayed well short of pre-recession highs because of a shortage of homes on the market.
Wednesday, September 18, 2013
Warren Buffett on the estate tax
Buffett made his position on the estate tax clear when he signed a
document stating he believes it is "right morally and economically"
because it "promotes democracy by slowing the concentration of wealth
and power." In short, he says, dropping the estate tax would wrongly
enable the ability to "command the resources of the nation based on
heredity rather than merit."
Tuesday, September 17, 2013
stock performance on the way up
In six weeks, the trailing five-year figures on investments will change dramatically. Today's numbers support the nation's Great Investment Funk.
[For example, U.S. large growth gained 0.70% for the five years ending August 31, 2013]
Once October 2008 disappears off the trailing five-year period, however, the picture will greatly improve. While I can't provide the figures through Oct. 31, 2013 (that would be a neat trick, wouldn't it?), we can measure the first 58 months of the upcoming 60-month period. They have been kind to stock funds.
[For example, U.S. large growth gained 13.07% for the period November 1, 2008 to August 31, 2013.]
Barring a sudden market collapse, all standardized performance time periods for mutual fund advertisements will soon look strong: one year, five years, and 10 years. (The latter remains burdened with 2008 but no longer carries any trace of the 2000-02 bear market.) In other words, it will become much easier to sell stock funds. When the performance numbers are good across the board, they give the overwhelming visual impression of consistent success.
That strikes me as mixed news. On the one hand, investors could use probably use more stock funds (although recent market action has helped to boost their stock exposure.) Also, I am relatively bullish on long-term stock prospects. But I do admit to feeling a bit nervous about embracing stocks now--especially U.S. stocks. It's been a great run, but, I suspect, the stock market may need to catch its figurative breath. I worry that U.S. stock funds will once again be fashionable just as alternative funds finally become the better performers.
[For example, U.S. large growth gained 0.70% for the five years ending August 31, 2013]
Once October 2008 disappears off the trailing five-year period, however, the picture will greatly improve. While I can't provide the figures through Oct. 31, 2013 (that would be a neat trick, wouldn't it?), we can measure the first 58 months of the upcoming 60-month period. They have been kind to stock funds.
[For example, U.S. large growth gained 13.07% for the period November 1, 2008 to August 31, 2013.]
Barring a sudden market collapse, all standardized performance time periods for mutual fund advertisements will soon look strong: one year, five years, and 10 years. (The latter remains burdened with 2008 but no longer carries any trace of the 2000-02 bear market.) In other words, it will become much easier to sell stock funds. When the performance numbers are good across the board, they give the overwhelming visual impression of consistent success.
That strikes me as mixed news. On the one hand, investors could use probably use more stock funds (although recent market action has helped to boost their stock exposure.) Also, I am relatively bullish on long-term stock prospects. But I do admit to feeling a bit nervous about embracing stocks now--especially U.S. stocks. It's been a great run, but, I suspect, the stock market may need to catch its figurative breath. I worry that U.S. stock funds will once again be fashionable just as alternative funds finally become the better performers.
Monday, September 16, 2013
Reitmeister 2013
[12/8/13] Some will argue that stock returns this year are a mirage caused by the
extremely accommodative monetary policy of the Fed, specifically QE.
Many investors seem to think when QE is taken away, the market will tank
and the economy will head back into a recession. I disagree with this
notion, as QE has not done what it was intended to do. Certainly it has
helped with sentiment, which is part of the reason for the stock rally,
but the intent of the Fed was not to just boost sentiment. The purpose
was to increase money supply by keeping interest rates low. However,
that money has not made its way into the economy because QE has had the
effect of flattening the yield curve, which gives banks less incentive
to lend, not more.
I believe the stock market rally this year had more to do with improving fundamentals than QE. Heading into 2014, I remain optimistic on stocks and the direction of the economy. I do not see anything on the horizon that should cause an investor to make wholesale changes to their portfolios, as long as the portfolio in question is a well-diversified, properly constructed portfolio. I do not see any major shifts in leadership in the stock market. So, just because it is a new year, I am not changing my forecast, because the date means nothing to me and it should not to you either.
I believe the stock market rally this year had more to do with improving fundamentals than QE. Heading into 2014, I remain optimistic on stocks and the direction of the economy. I do not see anything on the horizon that should cause an investor to make wholesale changes to their portfolios, as long as the portfolio in question is a well-diversified, properly constructed portfolio. I do not see any major shifts in leadership in the stock market. So, just because it is a new year, I am not changing my forecast, because the date means nothing to me and it should not to you either.
I believe 2014 will be a year of accelerating growth in the economy and
another up year for stocks. Since WWII, the S&P 500 has had 18
annual gains of 20% or more and 78% of the years immediately following
those great years have been positive.
-- Mitch Zacks
[9/20/13] Investors partied all day and into the night on Wednesday thanks to the No Taper Parade. As they woke up Thursday morning they took a couple aspirins, looked in the mirror and decided they would do it all over again. Meaning that no taper = plenty of reason to rally in the short run.
Very little was given back Thursday as investors digested recent gains and are likely building up the energy to move towards 1750. Recent economic reports add to the luster of this rally such as evident in another very low Jobless Claims report and a Philly Fed report more than double its expected level.
Here is my prediction. I expect stocks to rush up to 1800 this year and then go a bit flat next year. Which is not such a bad thing 5 years into a bull rally. We had a flat year like that in 2011 and stock pickers like us did just fine.
Interestingly, there are parts of the globe where stock markets will push ahead 20%, 30%, even 50% next year. And many of the top stocks there will double and even triple that mark. If you have a good track record chasing down these top opportunities around the globe, then you are all set.
[9/16/13] Stocks are up for 8 out of the last 9 sessions including Friday the 13th in the plus column. And this is on top of a bull rally that has been charging ahead since March 2009.
Too often people underestimate how hard it is to turn a bull into a bear. You need much stronger ammo then what is available right now... especially as economic data is pointing to an accelerating economy.
Reity, any worries about the start of QE tapering at the 9/18 Fed meeting?
NO!!!
My guess is the QE taper will be announced at the 9/18 meeting. And given all the forewarning and market movement to date, then there should be NO reaction to the news. My guess is that the slate of Fed Governor speeches on Friday are there just in case investors get the wrong idea about their policy changes. So they will be at the ready to smooth out the message.
As you know I have no problem with the QE taper and continue to have my pedal on the floor as stocks are still the most attractive investment option at this time. Thus, I will be miffed if the weak hands loosen their grip on the bull once again.
Regardless, I am playing the obvious trend in front of me. If further gains get delayed, then I can patiently wait for them to come around.
[8/30/13] Recently strong economic activity has been met with lower stock prices because it meant the QE taper is coming sooner rather than later. Now we all know the taper is on the way. And so we can get back to a more NORMAL reaction to positive economic news as we did with Thursday's gains.
In particular, I am talking about Q2 GDP being revised up from 1.7% to 2.5%. That's a big deal. Also we got another printing of the weekly Jobless Claims under 350K which bodes well for another month of 150-200K jobs added. That will hopefully be on display next week when the key employment reports come out.
With Syria, the debt limit and a new Fed chair still unknowns, the market may not roar higher just yet. That is why choppy, range bound activity is likely in the of fing. But beyond this period of uncertainly lies greater odds for stocks to move higher.
I am 100% long in preparation for whenever other investors want join me in this logical conclusion.
[9/15/13 Mitch Zacks] There are plenty of reasons to believe the bull market that's been in place since March, 2009 is about to come to a crashing end. The market is up almost 150% since hitting a bottom. The earnings growth last quarter was sluggish. The Fed is about to begin the end of its third iteration of Quantitative Easing ( QE ). Energy Prices are rising. The uncertainty surrounding the situation in Syria, which could end without any military action taken against Bashar al-Assad's regime, is still fluid and could escalate further. Even without military intervention from the U.S. or its allies, the Syrian civil war that started in 2011 will continue. Investors pulled more than $20 billion from ETFs in August, the largest monthly outflow since the first ETF was launched 20 years ago. Historically bull markets last five years on average and were not too far away from hitting that mark. The unemployment number is staying stubbornly high.
Pessimism Reigns
Any investor could be forgiven for wanting to sell their stocks and flock to the comfort of cash or short-term treasuries given all the pessimism that abounds right now. But right now might be time to be a contrarian.
The items mentioned above have made for scary headlines, which the media is won't to do. But there are also many positives regarding the economy and global markets that are being ignored, or at least not talked about much in the media. Not to mention the fact that these reasons for the market and economy to crash have been talked and written about for a some time now. At this point, they are most likely already priced into the market.
Overlooked Positives
You'd have a hard time finding the following positive developments in the mainstream media. Europe's economies rose out of a 22-month recession two months ago. July's manufacturing PMIs broke 50, the expansion number. August PMI's were even stronger. Japan's QE has rekindled strong GDP growth. China's +7.5% annual growth is picking up retail and industrial strength. Stock market highs have stimulated discretionary purchasing.
Furthermore, the August JP Morgan Global Composite Output Index rose 1.2 points to 55, hitting a two and a half year high. The August U.S. employment report showed aggregate hours worked rising 2.4% from last year, despite disappointing job creation. The boost in hours worked is consistent with the strength in the U.S. ISM production indices which were the strongest since 2011. U.S. banks are healthy, with strong balance sheets and rising profits. The U.S. is producing its own energy resources and could become energy independent due to new technologies in oil extraction and our huge supply of natural gas. Corporate profits are at all-time highs and continue to rise. In the U.S. and abroad, manufacturing is improving and retail sales are growing. Falling inventories and rising new factory orders suggest growth is poised to continue.
Putting it All Together
At the end of the day, there will always be weakness somewhere in the economy. Right now however, I believe the positives far outweigh the negatives and thus feel the economic expansion and bull market should continue for the foreseeable future. I don't believe a full-blown market crash is imminent, but you should expect more volatility ahead. When we do finally see a correction, the headlines will get even scarier and natural instinct will be to sell your stocks and take a defensive position. It will be difficult but try to deny that urge and stick with your long-term investment plan.
[8/28/13] Just as stocks seemed ready to head back to 1700+, investors got spooked by a new boogeyman... that being a potential armed conflict with Syria. The investment concern of such a venture, would be that oil prices would likely rise creating a burden for the economy. Also a new debt limit debate is starting to escalate.
Add the two together and it decreases visibility, which leads to greater caution, which leads to a pullback as you have seen the past two sessions.
Reity, how low do we go?
I remain long term bullish, but appreciate there is some short term concern. Tuesday's drop could be the end with a bounce coming. However, a quick shot down to 1600 followed by a bounce is probably more likely. If that doesn't hold, then the next serious level of support is the 200 day moving average at 1560. I am not terribly concerned about heading lower than that at this time.
However, as stated in the past... I don't want to bet on that happening. Too often we see the market jump a lot sooner as investors are still generally in a bullish mood (as they should be 4.5 years into a bull market). So I am willing to suffer the potential for some short term loss in my portfolio, just so the market doesn't jump higher without being properly 100% on board.
You can time the market if you like... I just won't be joining you at this stage for the reasons provided above.
[8/15/13] Bass Ackwards
I thought we were done with this backwards thinking. Yet it reared its ugly head again on Thursday as solid economic data means QE taper coming sooner which means that more chumps are bailing out of stocks.
AND WHERE WILL THEY GO?
Bonds offer too low of a yield. And their value will slip further as rates rise. NO THANKS.
Cash is still paying nothing. NO THANKS.
Gold is a store of money and with no inflation, then not much reason to rise. NO THANKS.
Real Estate has been tempting some folks out of the wood works. But rising mortgage rates may likely stall the advance in prices and thus dampen the investment returns. Plus not everyone enjoys the complications of this illiquid asset. NO THANKS.
So we are back to stocks being the belle of the investment ball. And when this consolidation is over, expect the bull market to continue with 1700 being a weighing station... not final destination.
[7/9/13] Friday's Government Employment Situation did the trick to get stocks back above their 50 day moving average for the first time since mid-June. And that bullish continued on Monday.
This begs the question: Is the Correction Over?
I believe the answer is YES based upon 3 simple, yet powerful reasons.
1) US economy continues to grow which will aide corporate earnings.
2) Bonds finally losing money with investors moving more money to stocks.
3) The trend is your friend til proven otherwise. Meaning the 4 year bull rally needs to be pushed out of the way for good reason... and that reason doesn't currently exist.
Fight the trend at your own risk.
[6/7/13] There are many ways to access value. But one of best time tested methods is reviewing the earnings yield of stocks versus Treasury bonds.
Traditionally there is a 3% spread between the 10 year Treasury and the earnings yield of the stock market. Right now the 10 year is only at 2.1%. However, I suspect that as QE melts away the rate will float up to more like 3%.
So that would mean that stocks should have a 6% earnings yield, which translates into PE of 16.7 as fair value. Now multiply that by the $115 per share estimate I gave you for next year = 1920 fair value for the S&P 500.
I am not saying it is worth that today. I am saying that is a reasonable target for next year given the likely inputs on earnings and bond rates.
[6/5/13] The see-sawing market continues as we just endured our 7th straight session without stocks moving in the same direction for two consecutive days. Plus the decline on Tuesday marks the end of a 20 week streak of positive gains for stocks. That is the longest such streak since 1900 (not a typo).
Here is what I see happening now. The Fed is being incredibly transparent about their future intentions. Investors are making most of their portfolio changes now so there will be little disruption when the actual QE tapering begins.
When the smoke clears investors will realize that QE will be removed S-L-O-W-L-Y as to insure that each incremental reduction does not derail economic expansion or employment gains. And even with 10 year Treasury rates floating back up to around 3%, stocks will be hard to overlook given a healthy combination of dividend income and capital appreciation. That is why I took Tuesday's dip as an opportunity to get back to 100% long.
Note that the long term bull market is still intact. We are just going range bound for a little while. However, if you focus on stocks with ingredients to outperform (like Zacks #1 Ranks) then you can produce attractive returns while most other investors come away empty handed.
[6/3/13] Kevin Cook here to start the week off for Steve...
Last week I made the argument that all the Fed QE3 "taper talk" would bring enough worry and volatility to equity markets to make June the worst month of the year (so far) for stocks. But this was also in the context of one of the best bull runs ever for the first 5 months.
It seems the last day of May got a jump on June with a 1.4% kerplunk. So does Friday's sell-off and crack of short-term support at 1635 mean the big correction is finally coming? I still don't think so.
There is STILL pent-up demand for stocks in an environment where the US growth story is the best place on the planet for investors' money. This means that a dip to S&P 1600 will be bought aggressively after the weak hands are shaken out.
Bottom line: Yes, there will be more worry and caution as we head into the Fed meeting in 2 weeks. But my bet is that 1560 will mark the lows for the summer and therefore building positions anywhere near 1600 will be a good buy.
[5/28/13] Friday was the second straight session that started in a deep hole. Then tick by tick stocks worked their way back to nearly breakeven. There are 2 ways to interpret this action:
1) Last Throes of this Bull Rally: Often when you have a market that has been on a long bullish run, you will have a couple days just like these. And when the bull has to fight back this hard, it often runs out of steam leading to further declines in the days ahead.
2) Bullish Bias Continues: Sometimes these tea leaves mean that investors REFUSE to become bearish. So they turn every dip into a buying opportunity with more upside on the way.
Reity, which is it?
I have to admit that it's a close call. But if you put a gun to my head and demanded answers I would say 55-60% odds that the bullish bias is the right choice. Unfortunately that means decent odds that we could be in for a more prolonged pullback.
[5/26/13 Mitch Zacks writes] Japanese shares experienced their biggest drop since the Fukushima nuclear disaster in March of 2011. There were two forces spurring the sell-off. Most importantly, Chinese manufacturing data unexpectedly contracted. Additionally, Bernanke indicated that the quantitative easing, like all good things, must eventually come to an end. The result was that the TOPIX Japanese index fell a disconcerting 6.87% in a day.
The magnitude of the selling in Japan shows investors are having trouble
believing in the staying power of the rally. There is nothing that
happened fundamentally in one day to justify a nearly seven percent
downward movement in the Japanese market. With the TOPIX index up around
40% year to date, what essentially happened is that Japanese investors
are nervous because of the run-up and were looking for a reason to sell.
There is an undercurrent of skepticism built into this market. This skepticism extends from institutional investors to individual investors. Almost every investor I come in contact with believes, at some level, that the current rally is not sustainable and that a sell-off is due. My belief is that until this skepticism recedes, the market will continue to move higher. What we saw in Japan on Thursday is this skepticism combined with profit taking. It was not a rational response to what Bernanke said, and it wasn’t a rational response to the Chinese manufacturing data. It was selling based on a catalyst because investors believe the market has come too far too fast.
The wall of worry that has been built using the bricks of the 2008 financial crisis remains strong. This bull market will likely continue to climb this wall of worry until there is an almost euphoria regarding the stock market. We are not even close to being there yet. Bull markets don’t end with a bang but with a whimper. Bull markets, in my experience, end when there is almost universal acceptance that the market is heading higher. For this reason, I am far more concerned by the growing herd of Wall-Street strategists raising their end of the year price-targets than with the Japanese sell-off.
Most substantial bull markets are also accompanied by new theories trying to explain why the market should be hitting all-time highs and why traditional P/E multiples are no longer a valid valuation metric. If you think back to the bull market of the late 90’s there was an attempt to try to find a means of valuing stocks that justified the high prices. Even with the current rally, P/E multiples remain in line with average levels. Although the market is hitting new highs, valuation multiples are not hitting new highs.
As a result, if the economic recovery in the U.S. continues, then the market should continue to appreciate at its annual historical rate of roughly six percent above the risk-free rate of return. While some consolidation would not be unheard of, as trees never grow to the sky, ultimately the selling is relatively healthy and the events in Japan do not change the underlying fundamentals of the U.S. recovery.
[5/20/13] At this stage we would need a clearly negative catalyst to stop the market from advancing to 1700 which is only 2% above Friday's close.
My sense is that stocks will make it there and then a consolidation will ensue with stocks trading in a range between 1600 and 1700. That means you should start taking some trading profits as we approach 1700. Then buy back lower in the range.
[5/5/13] Stocks blasted above 1600 on a strong monthly jobs report. Not only was this month above expectations, but even more impressive, last month was revised higher by 50,000 jobs. This had stocks off to the races.
I know it is hard to fathom how a higher than normal 7.5% unemployment rate translates into stocks reaching record highs. That boils down to the following:
1) The direction of the economy is more important than the absolute strength of the economy. It has been improving for 4 years and that creates a positive investment environment.
2) Don't Fight the Fed: QE has effectively pushed down bond rates to levels that make all other forms of investment more attractive. Namely real estate and stocks.
These are the trends that matter. It doesn't mean that stocks will go up every day or week or month. And yes, this bull may tire soon. But with the evidence in hand, then I will not be selling this May. Nor will I be walking away. I am here for the stay.
[4/10/13] The S&P 500 climbed to its third highest close in history in eager anticipation of Q1 earnings. Making new highs should be a good thing, but why am I still so uneasy?
• Soft Economic Reports: Last week provided a Royal Flush of 5 soft economic reports including services, manufacturing and, most importantly, jobs.
• Every Bull Must Rest: The market is up 10% year to date. Yet earnings growth will only be in the mid-single digits. Yes, stocks can go up by more than earnings growth as long as PE's expand. But there is only so much elasticity in that equation.
• History Repeating Itself: In 2010, 2011 and 2012 the market raged higher up til April earnings season only to get thwarted. And here we are in April 2013 sitting on a fat 10% gain. It is eerily too similar to the recent past.
• Large Caps Leading the Way: That is not a positive sign. Rather it says investors are more interested in safety than risk taking. That is often a harbinger of a bearish turn on the way.
This is my short term view of a consolidation or modest correction in the midst of a long term bull rally. Get ready to buy on forthcoming dips.
[2/7/13] Breakeven is Better Than ... Down.
That is the lesson from Wednesday's breakeven showing for US stocks. Even better is that shares were actually down a good spot early in the session before rising to the second highest close since the Great Recession.
What it tells you is that investors can’t find many good reasons to sell stocks. Even when they have rallied almost continuously for the last 3 months. The natural outcome of shares not wanting to go down is that they will probably keep heading higher.
1500 is becoming solid support. Next stop is likely the all-time highs at 1565. At that time I suspect stocks will be ready to rest.
[2/4/13] Friday provided a Royal Flush of economic data to push stocks to a new closing high at 1513. Most important of the bunch was impressive revisions to November and December job adds that proves to be a very positive trend. Then ISM Mfg told a tale of a re-accelerating manufacturing sector.
Simply the bears are finding fewer reasons to stay committed to their ill-fated cause. Plus fresh investor money is starting to come off the sidelines. This likely spells more upside.
We are only 3.4% away from the all-time highs at 1565. There seems to be a tractor beam pulling us in that direction. Yet when we do arrive, expect serious resistance and a likely good spot to take profits.
[1/16/13] Stocks started in the dumps Tuesday thanks to bad news from across the Atlantic. There we find that Germany is not immune to the economic malaise happening in the rest of Europe. Yes, their economy contracted -0.5% in the most recent quarter.
US investors saw the red from overseas' markets and decided that was the place to start for the States. Yet as the day progressed, stocks moved back into the black. And now we find ourselves just 2 S&P points away from the highs.
Typically a market that fights back from the red intraday is often on its last legs. Then add in the uncertainty coming down the pike from the Cliff 2 debt debates and it makes a case for a consolidation or contraction period. As such, I started taking some profits on Tuesday.
Note this is just my short term read for the market. I still expect the long term bull rally to continue once we get through the debt debates. Trade accordingly to your investment time horizon.
[1/11/13] On Thursday we enjoyed the highest close since the Great Recession at 1472.12. That's just a smidge below the intraday high made on September 14th of 1474.51. We'll be there, and above, soon enough.
So Reity, it's just up and up and up from here?
Not so fast my friends. The next round of concerns will come when the Fiscal Cliff 2 debates heat up in a couple weeks. That being the government cost cutting measures, we should have tackled already, and hitting the debt ceiling once again.
I suspect we will have more of the same kind of kerfuffle as with the Cliff 1 discussions. That being a lot of faux anger and mock gnashing of teeth by both political parties. Then in the final hours a deal will be struck. During this "play fight" investors may get a little spooked with a modest pullback in the works.
Likely stocks will continue their rise towards 1500 in the short run. Then we might want to lighten the load a notch as the Cliff 2 theatrics commence. And then we buy the dips with full expectation for the 4 year bull market to continue on its merry course.
[1/3/13] Stocks soared to start off the New Year thanks to a Cliff deal finally being in hand. The basic construct seems like a reasonable compromise between the desires of the two parties. For me the spending cuts are too light, hopefully we can see the appropriate level of belt tightening in the next round of discussions.
All in all, this deal allows the US economy to stay on its Muddle Through course. That, in conjunction with the attractive valuation of stocks, should equate to more upside in 2013. That's because the market will keep on the long term bull run until a recession is on the horizon or stocks become overpriced.
[9/20/13] Investors partied all day and into the night on Wednesday thanks to the No Taper Parade. As they woke up Thursday morning they took a couple aspirins, looked in the mirror and decided they would do it all over again. Meaning that no taper = plenty of reason to rally in the short run.
Very little was given back Thursday as investors digested recent gains and are likely building up the energy to move towards 1750. Recent economic reports add to the luster of this rally such as evident in another very low Jobless Claims report and a Philly Fed report more than double its expected level.
Here is my prediction. I expect stocks to rush up to 1800 this year and then go a bit flat next year. Which is not such a bad thing 5 years into a bull rally. We had a flat year like that in 2011 and stock pickers like us did just fine.
Interestingly, there are parts of the globe where stock markets will push ahead 20%, 30%, even 50% next year. And many of the top stocks there will double and even triple that mark. If you have a good track record chasing down these top opportunities around the globe, then you are all set.
[9/16/13] Stocks are up for 8 out of the last 9 sessions including Friday the 13th in the plus column. And this is on top of a bull rally that has been charging ahead since March 2009.
Too often people underestimate how hard it is to turn a bull into a bear. You need much stronger ammo then what is available right now... especially as economic data is pointing to an accelerating economy.
Reity, any worries about the start of QE tapering at the 9/18 Fed meeting?
NO!!!
My guess is the QE taper will be announced at the 9/18 meeting. And given all the forewarning and market movement to date, then there should be NO reaction to the news. My guess is that the slate of Fed Governor speeches on Friday are there just in case investors get the wrong idea about their policy changes. So they will be at the ready to smooth out the message.
As you know I have no problem with the QE taper and continue to have my pedal on the floor as stocks are still the most attractive investment option at this time. Thus, I will be miffed if the weak hands loosen their grip on the bull once again.
Regardless, I am playing the obvious trend in front of me. If further gains get delayed, then I can patiently wait for them to come around.
[8/30/13] Recently strong economic activity has been met with lower stock prices because it meant the QE taper is coming sooner rather than later. Now we all know the taper is on the way. And so we can get back to a more NORMAL reaction to positive economic news as we did with Thursday's gains.
In particular, I am talking about Q2 GDP being revised up from 1.7% to 2.5%. That's a big deal. Also we got another printing of the weekly Jobless Claims under 350K which bodes well for another month of 150-200K jobs added. That will hopefully be on display next week when the key employment reports come out.
With Syria, the debt limit and a new Fed chair still unknowns, the market may not roar higher just yet. That is why choppy, range bound activity is likely in the of fing. But beyond this period of uncertainly lies greater odds for stocks to move higher.
I am 100% long in preparation for whenever other investors want join me in this logical conclusion.
[9/15/13 Mitch Zacks] There are plenty of reasons to believe the bull market that's been in place since March, 2009 is about to come to a crashing end. The market is up almost 150% since hitting a bottom. The earnings growth last quarter was sluggish. The Fed is about to begin the end of its third iteration of Quantitative Easing ( QE ). Energy Prices are rising. The uncertainty surrounding the situation in Syria, which could end without any military action taken against Bashar al-Assad's regime, is still fluid and could escalate further. Even without military intervention from the U.S. or its allies, the Syrian civil war that started in 2011 will continue. Investors pulled more than $20 billion from ETFs in August, the largest monthly outflow since the first ETF was launched 20 years ago. Historically bull markets last five years on average and were not too far away from hitting that mark. The unemployment number is staying stubbornly high.
Pessimism Reigns
Any investor could be forgiven for wanting to sell their stocks and flock to the comfort of cash or short-term treasuries given all the pessimism that abounds right now. But right now might be time to be a contrarian.
The items mentioned above have made for scary headlines, which the media is won't to do. But there are also many positives regarding the economy and global markets that are being ignored, or at least not talked about much in the media. Not to mention the fact that these reasons for the market and economy to crash have been talked and written about for a some time now. At this point, they are most likely already priced into the market.
Overlooked Positives
You'd have a hard time finding the following positive developments in the mainstream media. Europe's economies rose out of a 22-month recession two months ago. July's manufacturing PMIs broke 50, the expansion number. August PMI's were even stronger. Japan's QE has rekindled strong GDP growth. China's +7.5% annual growth is picking up retail and industrial strength. Stock market highs have stimulated discretionary purchasing.
Furthermore, the August JP Morgan Global Composite Output Index rose 1.2 points to 55, hitting a two and a half year high. The August U.S. employment report showed aggregate hours worked rising 2.4% from last year, despite disappointing job creation. The boost in hours worked is consistent with the strength in the U.S. ISM production indices which were the strongest since 2011. U.S. banks are healthy, with strong balance sheets and rising profits. The U.S. is producing its own energy resources and could become energy independent due to new technologies in oil extraction and our huge supply of natural gas. Corporate profits are at all-time highs and continue to rise. In the U.S. and abroad, manufacturing is improving and retail sales are growing. Falling inventories and rising new factory orders suggest growth is poised to continue.
Putting it All Together
At the end of the day, there will always be weakness somewhere in the economy. Right now however, I believe the positives far outweigh the negatives and thus feel the economic expansion and bull market should continue for the foreseeable future. I don't believe a full-blown market crash is imminent, but you should expect more volatility ahead. When we do finally see a correction, the headlines will get even scarier and natural instinct will be to sell your stocks and take a defensive position. It will be difficult but try to deny that urge and stick with your long-term investment plan.
[8/28/13] Just as stocks seemed ready to head back to 1700+, investors got spooked by a new boogeyman... that being a potential armed conflict with Syria. The investment concern of such a venture, would be that oil prices would likely rise creating a burden for the economy. Also a new debt limit debate is starting to escalate.
Add the two together and it decreases visibility, which leads to greater caution, which leads to a pullback as you have seen the past two sessions.
Reity, how low do we go?
I remain long term bullish, but appreciate there is some short term concern. Tuesday's drop could be the end with a bounce coming. However, a quick shot down to 1600 followed by a bounce is probably more likely. If that doesn't hold, then the next serious level of support is the 200 day moving average at 1560. I am not terribly concerned about heading lower than that at this time.
However, as stated in the past... I don't want to bet on that happening. Too often we see the market jump a lot sooner as investors are still generally in a bullish mood (as they should be 4.5 years into a bull market). So I am willing to suffer the potential for some short term loss in my portfolio, just so the market doesn't jump higher without being properly 100% on board.
You can time the market if you like... I just won't be joining you at this stage for the reasons provided above.
[8/15/13] Bass Ackwards
I thought we were done with this backwards thinking. Yet it reared its ugly head again on Thursday as solid economic data means QE taper coming sooner which means that more chumps are bailing out of stocks.
AND WHERE WILL THEY GO?
Bonds offer too low of a yield. And their value will slip further as rates rise. NO THANKS.
Cash is still paying nothing. NO THANKS.
Gold is a store of money and with no inflation, then not much reason to rise. NO THANKS.
Real Estate has been tempting some folks out of the wood works. But rising mortgage rates may likely stall the advance in prices and thus dampen the investment returns. Plus not everyone enjoys the complications of this illiquid asset. NO THANKS.
So we are back to stocks being the belle of the investment ball. And when this consolidation is over, expect the bull market to continue with 1700 being a weighing station... not final destination.
[7/9/13] Friday's Government Employment Situation did the trick to get stocks back above their 50 day moving average for the first time since mid-June. And that bullish continued on Monday.
This begs the question: Is the Correction Over?
I believe the answer is YES based upon 3 simple, yet powerful reasons.
1) US economy continues to grow which will aide corporate earnings.
2) Bonds finally losing money with investors moving more money to stocks.
3) The trend is your friend til proven otherwise. Meaning the 4 year bull rally needs to be pushed out of the way for good reason... and that reason doesn't currently exist.
Fight the trend at your own risk.
[6/7/13] There are many ways to access value. But one of best time tested methods is reviewing the earnings yield of stocks versus Treasury bonds.
Traditionally there is a 3% spread between the 10 year Treasury and the earnings yield of the stock market. Right now the 10 year is only at 2.1%. However, I suspect that as QE melts away the rate will float up to more like 3%.
So that would mean that stocks should have a 6% earnings yield, which translates into PE of 16.7 as fair value. Now multiply that by the $115 per share estimate I gave you for next year = 1920 fair value for the S&P 500.
I am not saying it is worth that today. I am saying that is a reasonable target for next year given the likely inputs on earnings and bond rates.
[6/5/13] The see-sawing market continues as we just endured our 7th straight session without stocks moving in the same direction for two consecutive days. Plus the decline on Tuesday marks the end of a 20 week streak of positive gains for stocks. That is the longest such streak since 1900 (not a typo).
Here is what I see happening now. The Fed is being incredibly transparent about their future intentions. Investors are making most of their portfolio changes now so there will be little disruption when the actual QE tapering begins.
When the smoke clears investors will realize that QE will be removed S-L-O-W-L-Y as to insure that each incremental reduction does not derail economic expansion or employment gains. And even with 10 year Treasury rates floating back up to around 3%, stocks will be hard to overlook given a healthy combination of dividend income and capital appreciation. That is why I took Tuesday's dip as an opportunity to get back to 100% long.
Note that the long term bull market is still intact. We are just going range bound for a little while. However, if you focus on stocks with ingredients to outperform (like Zacks #1 Ranks) then you can produce attractive returns while most other investors come away empty handed.
[6/3/13] Kevin Cook here to start the week off for Steve...
Last week I made the argument that all the Fed QE3 "taper talk" would bring enough worry and volatility to equity markets to make June the worst month of the year (so far) for stocks. But this was also in the context of one of the best bull runs ever for the first 5 months.
It seems the last day of May got a jump on June with a 1.4% kerplunk. So does Friday's sell-off and crack of short-term support at 1635 mean the big correction is finally coming? I still don't think so.
There is STILL pent-up demand for stocks in an environment where the US growth story is the best place on the planet for investors' money. This means that a dip to S&P 1600 will be bought aggressively after the weak hands are shaken out.
Bottom line: Yes, there will be more worry and caution as we head into the Fed meeting in 2 weeks. But my bet is that 1560 will mark the lows for the summer and therefore building positions anywhere near 1600 will be a good buy.
[5/28/13] Friday was the second straight session that started in a deep hole. Then tick by tick stocks worked their way back to nearly breakeven. There are 2 ways to interpret this action:
1) Last Throes of this Bull Rally: Often when you have a market that has been on a long bullish run, you will have a couple days just like these. And when the bull has to fight back this hard, it often runs out of steam leading to further declines in the days ahead.
2) Bullish Bias Continues: Sometimes these tea leaves mean that investors REFUSE to become bearish. So they turn every dip into a buying opportunity with more upside on the way.
Reity, which is it?
I have to admit that it's a close call. But if you put a gun to my head and demanded answers I would say 55-60% odds that the bullish bias is the right choice. Unfortunately that means decent odds that we could be in for a more prolonged pullback.
[5/26/13 Mitch Zacks writes] Japanese shares experienced their biggest drop since the Fukushima nuclear disaster in March of 2011. There were two forces spurring the sell-off. Most importantly, Chinese manufacturing data unexpectedly contracted. Additionally, Bernanke indicated that the quantitative easing, like all good things, must eventually come to an end. The result was that the TOPIX Japanese index fell a disconcerting 6.87% in a day.
There is an undercurrent of skepticism built into this market. This skepticism extends from institutional investors to individual investors. Almost every investor I come in contact with believes, at some level, that the current rally is not sustainable and that a sell-off is due. My belief is that until this skepticism recedes, the market will continue to move higher. What we saw in Japan on Thursday is this skepticism combined with profit taking. It was not a rational response to what Bernanke said, and it wasn’t a rational response to the Chinese manufacturing data. It was selling based on a catalyst because investors believe the market has come too far too fast.
The wall of worry that has been built using the bricks of the 2008 financial crisis remains strong. This bull market will likely continue to climb this wall of worry until there is an almost euphoria regarding the stock market. We are not even close to being there yet. Bull markets don’t end with a bang but with a whimper. Bull markets, in my experience, end when there is almost universal acceptance that the market is heading higher. For this reason, I am far more concerned by the growing herd of Wall-Street strategists raising their end of the year price-targets than with the Japanese sell-off.
Most substantial bull markets are also accompanied by new theories trying to explain why the market should be hitting all-time highs and why traditional P/E multiples are no longer a valid valuation metric. If you think back to the bull market of the late 90’s there was an attempt to try to find a means of valuing stocks that justified the high prices. Even with the current rally, P/E multiples remain in line with average levels. Although the market is hitting new highs, valuation multiples are not hitting new highs.
As a result, if the economic recovery in the U.S. continues, then the market should continue to appreciate at its annual historical rate of roughly six percent above the risk-free rate of return. While some consolidation would not be unheard of, as trees never grow to the sky, ultimately the selling is relatively healthy and the events in Japan do not change the underlying fundamentals of the U.S. recovery.
[5/20/13] At this stage we would need a clearly negative catalyst to stop the market from advancing to 1700 which is only 2% above Friday's close.
My sense is that stocks will make it there and then a consolidation will ensue with stocks trading in a range between 1600 and 1700. That means you should start taking some trading profits as we approach 1700. Then buy back lower in the range.
[5/5/13] Stocks blasted above 1600 on a strong monthly jobs report. Not only was this month above expectations, but even more impressive, last month was revised higher by 50,000 jobs. This had stocks off to the races.
I know it is hard to fathom how a higher than normal 7.5% unemployment rate translates into stocks reaching record highs. That boils down to the following:
1) The direction of the economy is more important than the absolute strength of the economy. It has been improving for 4 years and that creates a positive investment environment.
2) Don't Fight the Fed: QE has effectively pushed down bond rates to levels that make all other forms of investment more attractive. Namely real estate and stocks.
These are the trends that matter. It doesn't mean that stocks will go up every day or week or month. And yes, this bull may tire soon. But with the evidence in hand, then I will not be selling this May. Nor will I be walking away. I am here for the stay.
[4/10/13] The S&P 500 climbed to its third highest close in history in eager anticipation of Q1 earnings. Making new highs should be a good thing, but why am I still so uneasy?
• Soft Economic Reports: Last week provided a Royal Flush of 5 soft economic reports including services, manufacturing and, most importantly, jobs.
• Every Bull Must Rest: The market is up 10% year to date. Yet earnings growth will only be in the mid-single digits. Yes, stocks can go up by more than earnings growth as long as PE's expand. But there is only so much elasticity in that equation.
• History Repeating Itself: In 2010, 2011 and 2012 the market raged higher up til April earnings season only to get thwarted. And here we are in April 2013 sitting on a fat 10% gain. It is eerily too similar to the recent past.
• Large Caps Leading the Way: That is not a positive sign. Rather it says investors are more interested in safety than risk taking. That is often a harbinger of a bearish turn on the way.
This is my short term view of a consolidation or modest correction in the midst of a long term bull rally. Get ready to buy on forthcoming dips.
[2/7/13] Breakeven is Better Than ... Down.
That is the lesson from Wednesday's breakeven showing for US stocks. Even better is that shares were actually down a good spot early in the session before rising to the second highest close since the Great Recession.
What it tells you is that investors can’t find many good reasons to sell stocks. Even when they have rallied almost continuously for the last 3 months. The natural outcome of shares not wanting to go down is that they will probably keep heading higher.
1500 is becoming solid support. Next stop is likely the all-time highs at 1565. At that time I suspect stocks will be ready to rest.
[2/4/13] Friday provided a Royal Flush of economic data to push stocks to a new closing high at 1513. Most important of the bunch was impressive revisions to November and December job adds that proves to be a very positive trend. Then ISM Mfg told a tale of a re-accelerating manufacturing sector.
Simply the bears are finding fewer reasons to stay committed to their ill-fated cause. Plus fresh investor money is starting to come off the sidelines. This likely spells more upside.
We are only 3.4% away from the all-time highs at 1565. There seems to be a tractor beam pulling us in that direction. Yet when we do arrive, expect serious resistance and a likely good spot to take profits.
[1/16/13] Stocks started in the dumps Tuesday thanks to bad news from across the Atlantic. There we find that Germany is not immune to the economic malaise happening in the rest of Europe. Yes, their economy contracted -0.5% in the most recent quarter.
US investors saw the red from overseas' markets and decided that was the place to start for the States. Yet as the day progressed, stocks moved back into the black. And now we find ourselves just 2 S&P points away from the highs.
Typically a market that fights back from the red intraday is often on its last legs. Then add in the uncertainty coming down the pike from the Cliff 2 debt debates and it makes a case for a consolidation or contraction period. As such, I started taking some profits on Tuesday.
Note this is just my short term read for the market. I still expect the long term bull rally to continue once we get through the debt debates. Trade accordingly to your investment time horizon.
[1/11/13] On Thursday we enjoyed the highest close since the Great Recession at 1472.12. That's just a smidge below the intraday high made on September 14th of 1474.51. We'll be there, and above, soon enough.
So Reity, it's just up and up and up from here?
Not so fast my friends. The next round of concerns will come when the Fiscal Cliff 2 debates heat up in a couple weeks. That being the government cost cutting measures, we should have tackled already, and hitting the debt ceiling once again.
I suspect we will have more of the same kind of kerfuffle as with the Cliff 1 discussions. That being a lot of faux anger and mock gnashing of teeth by both political parties. Then in the final hours a deal will be struck. During this "play fight" investors may get a little spooked with a modest pullback in the works.
Likely stocks will continue their rise towards 1500 in the short run. Then we might want to lighten the load a notch as the Cliff 2 theatrics commence. And then we buy the dips with full expectation for the 4 year bull market to continue on its merry course.
[1/3/13] Stocks soared to start off the New Year thanks to a Cliff deal finally being in hand. The basic construct seems like a reasonable compromise between the desires of the two parties. For me the spending cuts are too light, hopefully we can see the appropriate level of belt tightening in the next round of discussions.
All in all, this deal allows the US economy to stay on its Muddle Through course. That, in conjunction with the attractive valuation of stocks, should equate to more upside in 2013. That's because the market will keep on the long term bull run until a recession is on the horizon or stocks become overpriced.
Friday, September 13, 2013
why be an optimist?
The 2002 book Bringing Down the House told the true story of
how six MIT math geniuses mastered blackjack card counting and took Las
Vegas for millions. It had money, sex, drugs, and power. People loved
it.
But part of the story often went misunderstood. The card-counters didn't win every hand of blackjack, or anything close to it. The casino normally has a slight edge over players. The MIT crew's strategy tipped those odds just barely in their favor. That meant they still lost a lot of bets. "Even the most complex systems seemed to aim at an overall edge of around 2 percent," author Ben Mezrich wrote.
But that tiny edge was all the crew needed to succeed, provided they played long enough. When the odds are even slightly in your favor, you will win over time, even if you lose often in between.
That's why I'm an optimist on the economy and the market. Maybe even a permanent optimist.
Take a look at this chart, showing GDP per capita adjusted for inflation since 1850:
Do you know what happened during this period?
Being an optimist doesn't mean I don't think bad things will happen. They will. Like the MIT players, I'm going to lose a lot of hands. But also like them, I'm confident that the long-term odds are in my favor.
"Count the perma bears on the Forbes 400 list or the amount of pessimists who run companies in the Fortune 500," Josh Brown writes, "You will find none."
***
Warren Buffett had this wonderful take in the midst of the 2008 crash when everyone around him was losing their minds and preparing for the end of capitalism as we know it:
Buffett was busy buying stocks as he wrote those words in the depths of the crisis and sowing the seeds for huge future gains. What were you doing?
But part of the story often went misunderstood. The card-counters didn't win every hand of blackjack, or anything close to it. The casino normally has a slight edge over players. The MIT crew's strategy tipped those odds just barely in their favor. That meant they still lost a lot of bets. "Even the most complex systems seemed to aim at an overall edge of around 2 percent," author Ben Mezrich wrote.
But that tiny edge was all the crew needed to succeed, provided they played long enough. When the odds are even slightly in your favor, you will win over time, even if you lose often in between.
That's why I'm an optimist on the economy and the market. Maybe even a permanent optimist.
Take a look at this chart, showing GDP per capita adjusted for inflation since 1850:
Do you know what happened during this period?
- 1.3 million Americans died while fighting nine major wars.
- Four U.S. presidents were assassinated.
- 675,000 Americans died in a single year from a flu pandemic.
- 30 separate natural disasters killed at least 400 Americans each
- 33 recessions lasted a cumulative 48 years.
- The stock market fell more than 10% from a recent high at least 97 times.
- Stocks lost a third of their value at least 12 times.
- Annual inflation exceeded 7% in 20 separate years.
- The words "economic pessimism" appeared in newspapers at least 29,000 times, according to Google.
Being an optimist doesn't mean I don't think bad things will happen. They will. Like the MIT players, I'm going to lose a lot of hands. But also like them, I'm confident that the long-term odds are in my favor.
"Count the perma bears on the Forbes 400 list or the amount of pessimists who run companies in the Fortune 500," Josh Brown writes, "You will find none."
***
Warren Buffett had this wonderful take in the midst of the 2008 crash when everyone around him was losing their minds and preparing for the end of capitalism as we know it:
During the Depression, the Dow hit
its low, 41, on July 8, 1932. Economic conditions, though, kept
deteriorating until Franklin D. Roosevelt took office in March 1933. By
that time, the market had already advanced 30 percent. Or think back to
the early days of World War II, when things were going badly for the
United States in Europe and the Pacific. The market hit bottom in April
1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks
was when inflation raged and the economy was in the tank. In short, bad
news is an investor’s best friend. It lets you buy a slice of America’s
future at a marked-down price.
Over the long term, the stock market
news will be good. In the 20th century, the United States endured two
world wars and other traumatic and expensive military conflicts; the
Depression; a dozen or so recessions and financial panics; oil shocks; a
flu epidemic; and the resignation of a disgraced president. Yet the Dow
rose from 66 to 11,497.
Buffett was busy buying stocks as he wrote those words in the depths of the crisis and sowing the seeds for huge future gains. What were you doing?
Philip Fisher's other list
If you spend enough time scrolling through the various value investing
blogs, you are bound to come across a few lists time and time again; one
of those lists is Phil Fisher’s “Fifteen Points to Look for in a Common
Stock” (they’re even outlined on Wikipedia here). However, Fisher has also supplied investors with another list that I’ve never seen profiled on these blogs.
1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
2. Focus on buying these companies when they are out of favor; that is, when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling at prices well under what it will be when its true merit is better understood.
3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole. Only in the most exceptional circumstances, if ever, sell because of forecasts as to what the economy or the stock market is going to do, because these changes are too difficult to predict. Never sell the most attractive stocks you own for short-term reasons.
1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
2. Focus on buying these companies when they are out of favor; that is, when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling at prices well under what it will be when its true merit is better understood.
3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole. Only in the most exceptional circumstances, if ever, sell because of forecasts as to what the economy or the stock market is going to do, because these changes are too difficult to predict. Never sell the most attractive stocks you own for short-term reasons.
Tuesday, September 10, 2013
3 changes to the Dow
It doesn't happen often that the folks who bring us the Dow Jones Industrial Average ($INDU +0.85%) bring in three new components.
But there's a reason for the fresh players: They're growing and have less of a chance to be sunk by global forces they can't possibly control.
Those coming in on Sept. 23: investment bank Goldman Sachs (GS +3.54%), athletic equipment maker Nike (NKE +2.17%) and transaction company Visa (V +3.38%).
Saying goodbye to the Dow after Sept. 20 are Alcoa (AA -0.31%), a Dow component for 54 years; Bank of America (BAC +0.90%), which has struggled mightily since the 2008 crash; and Hewlett-Packard (HPQ -0.40%), a tech giant from the 1970s on and inventor of the laser printer.
But there's a reason for the fresh players: They're growing and have less of a chance to be sunk by global forces they can't possibly control.
Those coming in on Sept. 23: investment bank Goldman Sachs (GS +3.54%), athletic equipment maker Nike (NKE +2.17%) and transaction company Visa (V +3.38%).
Saying goodbye to the Dow after Sept. 20 are Alcoa (AA -0.31%), a Dow component for 54 years; Bank of America (BAC +0.90%), which has struggled mightily since the 2008 crash; and Hewlett-Packard (HPQ -0.40%), a tech giant from the 1970s on and inventor of the laser printer.
Sunday, September 01, 2013
wars and the stock market
The U.S. and its allies are under increasing pressure to take some action other than humanitarian aid ever since the chemical attack took place. However, overthrowing Syrian President Bashar al-Assad could create a vacuum that Al-Qaeda or some other hard line Islamist group would be happy to fill. Any military action could be a show of force to punish, rather than remove al-Assad. Nobody in the West wants the Syrian civil war to spill over into other countries, which could lead to a much larger conflict and cause oil prices to spike. This in turn would be a negative for the market and for corporate earnings.
Equity Returns Following Wars
I don’t mean to sound callous about any of this but my job is to look at it from an economic perspective. The historical performance of the market following the outbreak of both major and minor wars seems to indicate that, regardless of the actions taken by the U.S. or UN forces, there will likely not be a lasting effect on global equity markets.
For the moment, assume these recent developments drag the U.S. into the middle of another civil war in the region and ground forces are brought in to stop the killing of Syrian civilians. History teaches us that wars are not harbingers of bear markets. Certainly in the short run conflicts can cause the market to drop as people fear the worst and investors’ risk aversion tends to increase.
However, when you look at historical equity returns following the outbreak of a war, you’ll find the wars seem to have a slightly positive impact on the equity markets. There are many examples of this throughout history. One year after the start of WWI in 1914, the Dow Jones Industrial Average (the Dow) dropped 0.98%. Five years after the start of the war to end all wars, the Dow was up 25.54%. From the start of WWII on September 1, 1939, the Dow increased 11.95% after the first month and five years after the outbreak of WWII the Dow was up 8.81%.
These were the two biggest wars of the century and the market shrugged them off and continued higher, although at an annualized rate of appreciation that was lower than the historical average. If you look at some of the smaller wars, the return of the market following the start of fighting is more positive.
In a small conflict the increase in government spending likely helps push GDP growth and corporate earnings higher and is generally positive for the market.
After the start of the Korean War, which like the Vietnam War, was a proxy conflict between the United States and the U.S.S.R, the Dow was up 4.17% after 3 months, 7.36% after 6 months, 15.13% after one year and 110.30% after 5 years. The time period following the start of the Vietnam War in 1962 was not a particularly good time for stocks but not terrible either. Six months after it began, the Dow decreased by 17.56%, but after one year the market was down only 5.15%. Five years after the conflict began the Dow was up 20.11%.
Recent Conflicts
The results are similar for more recent wars. One year following the start of the first Gulf War on August 2, 1990, the Dow was up 4.95% and five years after the start it had increased 63.73%. One year after the start of the war in Afghanistan on October 8, 2001 the Dow had decreased 17.27%, but that had more to do with the tech-led bear market than the war. Five years after the start, it was up 30.77%. The start of the Iraq War in March, 2003 didn’t rattle the market at all as we were in the early stages of a five-year bull market. One year after the start, the Dow was up 23.24% and five years after the start it was up 43.46%.
Since a ground assault at this point seems unlikely, the most similar situation we can compare it to is the Yugoslavian Civil War. When I say similar, I am referring to the military action taken by the U.S., not the reason for the initial conflict. The Civil War started in 1991 but didn’t end until NATO forces ended the war with an air campaign designed to destroy the Yugoslav military infrastructure in 1999. If you’ll recall, 1999 was a great year to be invested in stocks with the Dow rising 25.22%. As I stated earlier, any military action taken against Syria will most likely be a targeted bombing campaign, and based on the historical data it appears that even when the conflict has the potential to drive oil prices higher as was the case in the Gulf Wars, the market does not necessarily perform poorly in the five years following the start of the conflict.
Putting it All Together
It is still unknown how world governments will respond to the tragedy happening in Syria. There is always the possibility that the conflict could lead to a large scale confrontation, with Russia and China intervening on behalf of their commercial ally Syria. Such an event would be a worst-case scenario and would cause the market to sell-off. I feel though that such a scenario is highly unlikely to occur as it is in no country’s best interest for the conflict to escalate. In the current globally interconnected world, no country benefits from the higher oil prices that result from instability in the Mid-East.
I do believe some form of military action will almost assuredly be taken against al-Assad’s regime. If the goal of such action is to punish Assad or just take out his chemical weapons facilities, it will most likely be a non-event as far as the stock market is concerned. I remain far more concerned about the lack of robust corporate earnings growth than the fallout from increased military actions in Syria.
-- Mitch Zacks, ZIM Weekly Update
Equity Returns Following Wars
I don’t mean to sound callous about any of this but my job is to look at it from an economic perspective. The historical performance of the market following the outbreak of both major and minor wars seems to indicate that, regardless of the actions taken by the U.S. or UN forces, there will likely not be a lasting effect on global equity markets.
For the moment, assume these recent developments drag the U.S. into the middle of another civil war in the region and ground forces are brought in to stop the killing of Syrian civilians. History teaches us that wars are not harbingers of bear markets. Certainly in the short run conflicts can cause the market to drop as people fear the worst and investors’ risk aversion tends to increase.
However, when you look at historical equity returns following the outbreak of a war, you’ll find the wars seem to have a slightly positive impact on the equity markets. There are many examples of this throughout history. One year after the start of WWI in 1914, the Dow Jones Industrial Average (the Dow) dropped 0.98%. Five years after the start of the war to end all wars, the Dow was up 25.54%. From the start of WWII on September 1, 1939, the Dow increased 11.95% after the first month and five years after the outbreak of WWII the Dow was up 8.81%.
These were the two biggest wars of the century and the market shrugged them off and continued higher, although at an annualized rate of appreciation that was lower than the historical average. If you look at some of the smaller wars, the return of the market following the start of fighting is more positive.
In a small conflict the increase in government spending likely helps push GDP growth and corporate earnings higher and is generally positive for the market.
After the start of the Korean War, which like the Vietnam War, was a proxy conflict between the United States and the U.S.S.R, the Dow was up 4.17% after 3 months, 7.36% after 6 months, 15.13% after one year and 110.30% after 5 years. The time period following the start of the Vietnam War in 1962 was not a particularly good time for stocks but not terrible either. Six months after it began, the Dow decreased by 17.56%, but after one year the market was down only 5.15%. Five years after the conflict began the Dow was up 20.11%.
Recent Conflicts
The results are similar for more recent wars. One year following the start of the first Gulf War on August 2, 1990, the Dow was up 4.95% and five years after the start it had increased 63.73%. One year after the start of the war in Afghanistan on October 8, 2001 the Dow had decreased 17.27%, but that had more to do with the tech-led bear market than the war. Five years after the start, it was up 30.77%. The start of the Iraq War in March, 2003 didn’t rattle the market at all as we were in the early stages of a five-year bull market. One year after the start, the Dow was up 23.24% and five years after the start it was up 43.46%.
Since a ground assault at this point seems unlikely, the most similar situation we can compare it to is the Yugoslavian Civil War. When I say similar, I am referring to the military action taken by the U.S., not the reason for the initial conflict. The Civil War started in 1991 but didn’t end until NATO forces ended the war with an air campaign designed to destroy the Yugoslav military infrastructure in 1999. If you’ll recall, 1999 was a great year to be invested in stocks with the Dow rising 25.22%. As I stated earlier, any military action taken against Syria will most likely be a targeted bombing campaign, and based on the historical data it appears that even when the conflict has the potential to drive oil prices higher as was the case in the Gulf Wars, the market does not necessarily perform poorly in the five years following the start of the conflict.
Putting it All Together
It is still unknown how world governments will respond to the tragedy happening in Syria. There is always the possibility that the conflict could lead to a large scale confrontation, with Russia and China intervening on behalf of their commercial ally Syria. Such an event would be a worst-case scenario and would cause the market to sell-off. I feel though that such a scenario is highly unlikely to occur as it is in no country’s best interest for the conflict to escalate. In the current globally interconnected world, no country benefits from the higher oil prices that result from instability in the Mid-East.
I do believe some form of military action will almost assuredly be taken against al-Assad’s regime. If the goal of such action is to punish Assad or just take out his chemical weapons facilities, it will most likely be a non-event as far as the stock market is concerned. I remain far more concerned about the lack of robust corporate earnings growth than the fallout from increased military actions in Syria.
-- Mitch Zacks, ZIM Weekly Update