Saturday, December 20, 2014

Reitmeister / Zacks 2014

[12/20/14] The 32% gain for the S&P last year was a blessing
and a curse for investors.

A blessing because it padded all of our portfolios.

A curse because the gains came far too easily, making 2014 a brutal environment by comparison.

Yes, the S&P is up on the year, but still many small caps and glamour growth stocks are in the red. Plus the volatility made it like a house of mirrors where you were never quite sure what to make of the investment landscape.

Now we get to put this miserable year behind us as we look ahead to 2015. And after much contemplation, here is my outlook...

It will be exactly like 2014.

(End of Commentary)

[12/12/14] On the Monday after Thanksgiving the market tumbled because of a "supposedly" weak Christmas shopping weekend. I pointed out that this Grinch would be proven wrong in time.

Why?

Because the shape of holiday shopping changes each season as retailers have their big promotions earlier and earlier. Plus the appeal of online shopping continues to grow for consumers who want to save money and avoid the crowds. This delays some shopping til closer to Christmas.

My theory was simple. The improving employment trends, combined with gains in consumer sentiment/confidence readings, would lead to ample growth for retailers this important time of year. On Thursday morning more concrete proof rolled in with a much stronger than expected November Retail Sales report. With that US stocks bounced robustly, especially consumer oriented names.

Now it is time for the Grinch to step aside so Santa can deliver new highs before the curtain closes on 2014.

[and then the Dow proceeds to drop 316 points]

[12/11/14 - after the Dow went down 268 to 17533] Why are stocks going down?

Because they can. (End of statement)

This is to say that the bull market is still firmly in place. Just every now and then investors want to take profits. And that action comes in surging waves as folks don't want to be the last one out the door.

The key is to never have the fear that emanates from short term selling sprees blind you from the real fundamentals that will drive stocks in the future. And as should be clear from the strong economic data in the US, going higher is the only logical conclusion for stocks until the next recession wakes the bear from his hibernation.

Read: Buy the Dip!

[11/6/14] Mid-term election time is historically a boon for stock investors. Going back 80 years, which is 20 mid-term election cycles, the stock market has risen around the election 95% of the time.

This means it has nothing to do with Republicans or Democrats being in charge. It simply has to do with investors hating indecision. So once the election results are finalized, stocks almost always head higher. This time was no exception.

Helping the cause Wednesday were strong economic reports like ADP Employment and ISM Services. This pushed the S&P to a new closing high at 2023. It is becoming more apparent that 2100 will be hit before 1900. So stay bullish.

[10/19/14 Mitch Zacks] Roughly five years from now the S&P 500 should be 25-45% higher than its current value. This is exactly what has occurred historically. We know how the equity investment game ends. It is a roller-coaster ride which ends with the market heading higher at around a 6% annual rate of return above the risk-free rate.

We also know that economies can contract, but that such contractions do not last for more than a few quarters. As a result, a long-term investor should be a buyer of the equity market during a sell-off that is driven by recession fears. All recessions or deflationary environments eventually end.

Here's What You Should Worry About

Beware of buying the market at a valuation level that is too high. But remember that for now stocks remain cheap relative to bonds. The slight selling since mid-September makes stocks more attractive rather than less attractive relative to bonds. And because valuation metrics are reasonable, the recent selling in the market should be seen as a potential buying opportunity.

Selling like we have seen over the past few weeks takes the froth out of the market. What kills investors over time is not the possibility of an economic slowdown or even a recession. It is purchasing stocks in periods of excessive valuations. If you understand that the compression in corporate earnings that occurred in '08 was not an event that is likely to be repeated, the stock market remains attractively valued.

[10/12/14 Zacks Weekly Update] As the economy is not heading into a recession, the current weakness in the stock market presents a buying opportunity for investors. If we project out three to five years from now, interest rates are most likely going to be higher than they are currently and the economy is going to be larger with projected growth of around 3% per year.

However, since we are near 60-year lows on interest rates, my expectation is for interest rates to not increase that dramatically. As a result, equities should continue to perform well over the next few years.

I continue to see the market heading higher from its current level into the last quarter of 2014. Yes, October has traditionally been a weak month for equities, and although I do not put much faith in calendar anomalies, we certainly were overdue for a bit of selling. Once investors finish digesting the end of QE3 and see that the economic expansion is on track the market should begin to trend higher

[10/10/14] As Mama always said...

"If you have nothing nice to say, then best not say anything at all".

Given my fundamental disagreement with market direction of late, then I am going to take Mamas advice today. Hopefully this change of pace will induce a better outcome for stocks. If not, then I will end my silent treatment and get back to the usual market commentary.

[didn't work]

[10/8/14] The US stock market fell -1.5% on Tuesday. Why? Mostly become of shockingly weak economic news out of Germany, which is considered the bellwether European nation.

In the simplest possible terms, this is why this sell off is ridiculous.

EU GDP in 2012 was -0.4%. That's terrible, but US GDP that year was a quite healthy +2.8 allowing the S&P 500 to rise +16%. So no harm done by Europe.

EU GDP in 2013 was +0.1%. Anemic growth for sure, but US GDP ratcheted up another +1.9% while the S&P 500 soared +32%. Again, the US was immune to Europe's economic disease.

I think the point should be clear from above. Until the US economy shows any real damage from European economic malaise, then US stock investors should pay it no mind.

Buy the dip is still the order of the day.

[10/3/14] Thursday provided a roller coaster ride for stock investors. Some were excited and wanted to ride again. While others decided to take a pass as they were slumped, head first, into a garbage can ;-)

The best news on the day was that the Russell 2000 actually gained 1%. This could be the long awaited sign that folks are ready to get back into riskier stocks, which would lead to a resumption of the bull rally.

As you know, I already got back to 100% long on Wednesday's dip. That is because the fundamentals say there is more room to run to the upside than downside at this time. Bolstering this case was the continued decline of weekly Jobless Claims. In fact, we now have the lowest number of people getting unemployment checks in the past eight years.

Today brings two other market moving announcements: September Employment Situation and ISM Services. If good news, then Thursday's bounce should gain more speed. If bad news, then 1900 will be tested soon.

Place your bets!

[10/2/14]  Correction: In yesterday's commentary I mistakenly said the S&P closed under its 100 day moving average. Actually I meant to say it closed under the 50 day. Sorry for any confusion.

Yet Wednesday we did indeed close under the 100 day moving average. The reasons for the continued decline are laughable and provide a great chance to buy the dip (which is exactly what I did in the Reitmeister Trading Alert portfolio when I put the 25% cash position back to work and now 100% long stocks.)

Reity, why is this drop laughable?

Look no further than the economic data on tap yesterday. ADP Employment showed 202K jobs added last month and this month rose to 213K. This proves the continued improvement of the jobs market.

Next up was ISM Manufacturing. The 56.6 reading was the 3rd best showing this year. If you went back 12, 18, 24, even 36 months to share both of these readings with investors they would be drooling over themselves with bullish giddiness.

So yes, the previous month's reading of 59.0 was higher...but it was not at a realistically sustainable level. Now we are just reverting to a more comfortable mean which still provides ample growth for the economy and corporate earnings and stock prices.

By the way, the forward looking New Orders component is still red hot at 60.0. That means manufacturing will be in growth mode for a lot longer.

Yes, stocks could go lower for a while just because irrational behavior has no specific expiration date. But looking out on the horizon, buying this dip will be the more profitable move than running for the hills like so many others.

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Considering his near-perfect track record of predicting economic events long before they occur, you need to take action to protect yourself now.

[9/26/14] Stocks broke down under the 50 day moving average Thursday in a nasty day of selling. I don't think there is a sound fundamental reason for this move. I just sense that investors have become too complacent and need to get shaken up a bit more. As such I think we will probe a little further below.

Without a sound fundamental basis for a decline, then probably the 100 day moving average at 1954 will provide ample support. If not, then perhaps it is time to once again test the 200 day moving average at 1896 (but soon will be 1900 which is formidable support).

When stock gains become too easy, this is just Mr. Market's way to provide a wake up call that investments do involve risk. Once the lesson is learned, then it will pave the way for stocks making new highs once again.

[9/11/14] Kevin Cook is bullish, so says keep buying the dips (video)

[9/8/14 Reity] I want to thank the US government for their typical incompetence in providing reliable economic data. I have ZERO doubt that the 142,000 job additions reported Friday morning is completely wrong and will be revised upward in the future.

The best part about this report is that the Fed will consider it a dose of caution as to not raise rates too soon. Again, their two stated goals are to achieve maximum employment and keep inflation in check. At 6.1% unemployment (and a ton of underemployment) then they will not raise rates too quickly...which is good news for stock valuations.

This is truly a Goldilocks report for investors as most everything else points to acceleration in GDP and corporate earnings while the Fed stays on the sidelines. I'm happy I got back to fully long Thursday just in time for the breakout.

[8/21/14 Reity] The S&P is less than five points away from the all-time high of 1991. Unfortunately right after we reached that summit last time, stocks started to sell off. Within just a couple weeks stocks fell to as low as 1905. And rolling back to many of the previous times a new record was made was not so glorious in the days following.

Reity, what will happen this time around?

Obviously the exact chain of events is unknown and unknowable. So here is my best guestimate.

•  Stocks have no problem taking out the previous high of 1991.

•  Then keep running to hit 2000 and even just a shade above.

•  And just when almost everyone gets sucked into thinking that a breakout above 2000 is taking place is exactly when the Market Gods pull the rug out. Meaning a pullback commences and then we consolidate under 2000 for a while.

This view explains why I am starting to pocket some trading profits on the move up to 2000. I will reallocate that cash into my favorite stocks after a pullback because the long term bull market is still in full effect until there are greater fundamental reasons to turn bearish.

[8/10/14 Mitch] The most important issue facing the market right now is not whether the economy will grow and earnings will expand. The data shows that this is the likely near-term outcome. The major issue is not if the economy expands but rather whether the expansion will be accompanied by inflation.

Inflation data is extremely important with respect to the S&P 500's performance over the next six months. Here's why: The degree of price inflation is going to determine when and to what extent the Federal Reserve hikes rates. Right now, we are looking for the QE3 to end in the second half of 2014 and for the first rate hike to materialize in the second quarter of 2015.

If inflation comes in higher than expected, the Federal Reserve will need to tighten sooner and the market will be under pressure. But if inflation is lighter than the Federal Reserve expects, the market will strengthen for the remainder of the year.

The current 10-year treasury yield is 2.42%. If there was any whiff of inflation, the ten-year treasury yield would likely be above 3% and closer to 5%. Thus, the bond market is telling us that the Federal Reserve is not going to be hiking interest rates as soon as the masses believe. If this were not the case, the ten-year yield would be higher.

How Should You Approach the Market Now?

As I told an individual client Friday morning, when you consider the market's returns over the past two years common sense seems to indicate that we are overdue for some type of market correction. I think it is prudent to psychologically prepare for some degree of selling in the market.

The ten-year yield must return at some point to its long-term average of 5.2%. When the rates go up P/E multiples will fall and stocks should come under some pressure.

However...

Bond investors are talking with their dollars and telling us something else entirely. They are saying that the Federal Reserve has the wiggle room to keep rates lower for longer than most equity investors currently are expecting. This would seem to signal that the market can move higher in the short-term.

[6/8/14 Mitch] the U.S. stock market is hitting new highs not on growth prospects but rather on the belief that worldwide interest rates are not going much higher. The reason is the Europeans.

Europeans – due to World War II – have a pre-occupation with preventing inflation almost built into their DNA. This concern about inflation is so great that one of the unstated goals in forming the European Union was to take monetary policy away from the European periphery countries. As a result of this obsession regarding inflation, the Europeans were reluctant following the '08 crisis to loosen monetary policy for concerns of causing inflation.

If you remember, in the U.S. we increased spending and engaged in monetary stimulus in response to the '08 crisis. The Europeans for the most part preached austerity (cutting fiscal spending and raising taxes) and were slow to engage in monetary stimulus. Fast forward a few years and the U.S. is beginning to pull back its monetary stimulus so as not to stoke the flames of inflation. But European policy makers are now completely focused on deflation and show no signs of pulling back the monetary stimulus anytime soon.

This is good for the stock market in the short-run as it means interest rates will remain lower for longer than previously anticipated. This explains why the market is hitting new highs while corporate earnings remains lackluster.

This does not bother the Federal Reserve because the people are made wealthier as the stock market rises. When people have more assets they tend to buy more things. In other words, this wealth effect helps contribute to economic growth. Driving the stock market upward in value causes people to begin to buy more stuff.

The problem, of course, is that rates are about as low as they can go. Or so we thought. What happened in Europe last week is that the European Central Bank actually lowered what is called the deposit rate to below zero for the first time ever. This means that the European Central Bank will actually charge member banks for keeping their deposits at the central bank.

We could be entering a period in which a recession occurs and at the same time interest rates rise. At times like these the stock market generates the majority of its losses. My concern is that the constant monetary easing by multiple central banks around the world is creating a situation where this bad scenario is becoming more and more likely to materialize.

Don't get me wrong. The central bank activity in the U.S. has been instrumental in spurring the economy to recover from the last recession. The problem is that when a central bank effectively buys bonds they are borrowing from the future. It is a means of essentially pulling economic growth from the future into the current period. The net result is that the future growth must be muted. This is exactly what we are seeing in the U.S., and it is also what we are seeing worldwide.

My concern is this:

The bond buying that central banks are engineering across the world to prop up financial markets and spur economic growth through a wealth effect will eventually have a bill come due. That bill in my mind very clearly comes due when the next recession hits the central banks and they will not be able to provide monetary stimulus to the same extent as before. Additionally, if inflation starts to materialize at the same time a recession hits, watch out below.

Right now as an equity investor you have the benefit of every major central bank across the world engaging in some form of monetary easing. As the saying goes, you don't fight the Fed and the best bet is to continue to look for market appreciation. However, the longer a correction is put off the more severe the correction will be when it materializes. This bull market in the short-term will likely continue to climb the wall-of-worry, but when the correction materializes it will be far more violent.

We must always remember that the potential for a sell-off exists every single day in the stock market. So while the market may be going higher in the short run, eventually interest rates must rise. When they do, the market is going to come under pressure.

[5/25/14 Mitch] With the S&P 500 hitting new highs it is very important not to become complacent. As I have said numerous times before, when the market hits new highs it is generally an indication that more new highs are in store. Nevertheless, I am becoming concerned about the low levels of expected risk across the market.

Last week, the VIX index reached its lowest level since before the eve of turmoil in 2007 that preceded the crash of ’08. Should we be cheering? Doesn’t this indicate that market participants view the S&P 500 as being less risky – or less volatile going forward? Doesn’t the low VIX level indicate that investors do not expect the S&P 500 to bounce around that much in the future?

The answer is yes, that is exactly what the option markets are telling us. The problem is that what has historically happened is the opposite.

You see if you track the VIX over time you find that the index is very definitely mean-reverting. Statistical analysis clearly shows the VIX follows a mean-reverting time series.

So periods of low expected volatility are often followed by periods of high realized volatility and vice versa. Looking at the VIX over the past ten years, I see that when the VIX gets too low it often shoots up in the future. Similarly, when the VIX gets too high it often falls.

My conclusion is that we are overdue for a spike like we saw in’08, ’10 , and ’11. It comes back to the belief that things have been too calm for too long in the equity markets. We are due for a spike in volatility which almost always accompanies selling in the market.

Now is not the time to be chasing high-beta stocks. It is better to be buying Wal-Mart( WMT) than Facebook( FB) as Wal-Mart is going to hold up much better when volatility spikes than Facebook.

[WMT is currently at 75.61.  FB is currently at 61.35.]

[5/11/14 Mitch Zacks] When Zacks Investment Management was a much smaller company we used to have our holiday parties around a table. Ben Zacks, my uncle and the other primary portfolio manager at Zacks, would go around the table and ask everyone which way they thought the market was headed. Based on whatever was happening in the market that month and the fact that people who worked at an asset management firm were being asked to state where the market was headed, most people wound up agreeing the market was heading in a given direction. Ben, after hearing everyone’s view would then pronounce that the market was headed in the other direction. The whole thing usually elicited a chuckle, but the exercise contained a very important lesson. When everyone believes the market is headed in a given direction that belief is reflected in market prices. As a result the market actually is more likely to head in the opposite direction.

Currently, there is a widespread belief throughout the media and individual investors that the market has come too far for too long. The crashes of ’08 and ’00 loom extremely large in investors’ minds and as a result while bullish sentiment is rising, it is not anywhere near the levels we usually see during a bull-market.

As a result most investors seem to see the market as overdue for a correction. I am not immune to the current zeitgeist. In my quarterly commentary for the first quarter of 2014 I also was looking for a pull-back or market correction. To some extent there is currently too much worry, too much concern about the stock market. Caution has not been thrown to the wind, as soon as speculative social media stocks rally they are immediately brought back down to earth. It is not the behavior we tend to see at the top of the bull market - cab drivers are not talking about owning Netflix ( NFLX) stock and telling me I am crazy for preferring Johnson and Johnson ( JNJ). Basically, too many people in the market are looking for a correction, there is some speculation but not what should be occurring after a five-year bull market.

Surprise: The Market does not pull-back over the next few months but instead the bull-market continues to climb the wall of worry.

[4/6/14 Mitch Zacks] I and many others have been saying this for quite some time, that there will be a correction at some point. The market has experienced drops of 10% or more many, many times and come back to finish the year strong. In market conditions like the one we find ourselves in, it’s always best to remember what ultimately drives share prices. It’s not the weather or a geopolitical crisis that will seem much worse than it actually is at the time it starts, but rather, fundamentals that drive the market.

Don’t base decisions on a quarter-by-quarter basis, or certainly not on a monthly or weekly basis. Focus on the long-term. Look for companies that have the best potential for earnings growth, because when you buy a stock, you are buying part of a company’s future earnings stream and profits.

I know some might say this market looks like it did in 2000, when people just kept buying stocks, driving the markets ever higher. However, now is nothing like then. The fact that investors, pundits and analysts are even talking about a bubble tells me we aren’t in a stock bubble that’s ready to burst. The biggest difference between now and then though, is the fact that back then, valuations were out of control. Anything that even remotely had to do with the internet was being bid up to ridiculous prices even when these companies had no business plan or any foreseeable way of turning a profit. Today, stocks are, for the most part, fairly valued and should the economic growth, and, in turn earnings, begin to grow at an accelerated pace, there is no reason this bull market can’t go on for at least a few more years. I certainly don’t see it ending in 2014.


[3/13/14] Kevin Cook looking at S&P 2500 in two years

[3/9/14] It was five years ago today that the S&P 500 hit bottom when it reached 667 approximately. March 9, 2009 is a day most investors won’t forget. I know I won’t. It marked the end of the second largest financial crisis in the history of our country and in absolute terms, due to the size of the global economy at the time, it can be classified as the biggest financial disaster since early humans began bartering for goods and services.

Bull markets, on average last five years, but that’s just an average. A bull market can be defined as a period where an index gains 20% or more without a decline of 20% or more. The current bull market we are in currently ranks as the 6th longest. We are still a far cry away from the longest bull market in history that started just after the crash in 1987 and ended with the tech bubble in 2000.

So far this bull market has gained 177% as of this writing, that makes it the fourth strongest in history. That’s pretty good when you think back to March 9th, 2009 when otherwise intelligent individuals were so panicked they truly thought the U.S. was going to become a third-world country.

The question is: Can this bull market continue or is it getting a little long in the tooth? My answer is yes, it can certainly continue. Markets don’t follow a calendar. Stocks don’t know if it March 10th, 2009 or March 9, 2014. It’s completely irrelevant. The fact remains, despite some weather-related soft economic data, we are heading for more global growth. Anything lost during the winter will just be pushed out into the Spring and Summer. We are also in an election year which means there is almost zero chance of the government passing anything substantial since many politicians are in campaign mode and don’t want to stick their neck out on anything close to controversy. Earnings have also been beating expectations by a lot. A vast majority of the companies in the S&P 500 beat the consensus.


Additionally, should growth pick up, which most believe it will this year and next, more jobs will be created. People sometimes forget that growth begets jobs, jobs don’t beget growth. It’s an unfortunate, but true fact that the last thing to recover from any recession is employment. I feel as QE3 really starts to wind down, we will begin to see growth pick up and jobs along with it. QE3 has helped sentiment, but that’s about it. It has kept interest rates low and taken away any incentive for banks to lend. If banks aren’t lending the velocity of money falls off a cliff and we don’t really see the intended effect of QE.

At this point, it doesn’t really matter what caused such a large crisis. It happened, the markets have soared to new heights and the global economy is growing. Yes, there are some weak spots, but that can be said of any time period, good and bad. The economy is much more resilient than most give it credit for. Remember, when you own a stock, you own a piece of a company. These companies own hard assets like machine equipment, real estate and patents. The market can never go to zero because eventually people will start buying at very depressed levels and another cycle is born. I believe we’re in the middle of this economic cycle and believe this bull market could turn out to be just as historical as the drop and for the global economy to keep chugging along.

-Mitch Zacks 

[2/4/14] Most investors were not truly worried about the modest -3.6% pullback for stocks in January. It was easy to say this was nothing more than a normal round of profit taking and stocks would soon bounce. 

However, on Monday things got a bit more serious. Why? Because it may no longer be a problem outside the US borders.

Meaning that over the past few years we have heard many investment commentators "cry wolf" over some international concern that in the end did not amount to much... nor really affect the US economy. Unfortunately on Monday we got much weaker than expected manufacturing data from the monthly ISM report. It came in at 51.3 versus a consensus estimate of 56.0.

Reity, are you worried?

Not really. But I under stand why others are concerned as it brings the problems closer to home. Thus it pays to be a touch more defensive now until the bull rally resumes (which is why my Reitmeister Trade Alert portfolio is only about 60% long the stock market and making money on volatility ETF).

My guess is that we now test the 200 day moving average down around 1706. That drop will scare most investors into a capitulation which often marks bottom. Meaning if we get down there, then scoop up stocks with both hands... and feet.


[1/5/14] Almost every calendar year brings with it shocks that could temporarily cause the market to correct or even reach full-blown bear market territory. Some things are just unforeseeable. But even with the problems that could arise, I’m still very optimistic for 2014. Growth should pick up, which in turn should help earnings, unemployment and stocks prices. We have too many tail winds for 2014 not to be another good year in the economy and stock market. Yes, there will probably be surprises along the way and we could see that correction that never came in 2013, but our economy is strong enough to handle some relatively small events. Remember, investing is always going to be two steps forward and one step back. We took a few steps forward in 2013 so expect more volatility but ultimately, when it’s all said and done, we should be ringing in a happy new year next year as well. [Mitch Zacks]

[1/3/14] No matter how you slice it, 2013 was a terrific year for stock investors. The +32% return for the S&P 500 was the third best showing since 1970. However, this success breeds two very different responses from investors as they look out at the new year.

1) Elation that the good times will continue.

Vs.

2) Fear that it has been too good and now we are due for a fall.

In this article I will review the investment landscape for the year ahead. This will include a target price for the S&P 500 along with some potential pitfalls.

The economic picture continues to improve as GDP growth is accelerating from the previous Muddle Through pace of just 1-2% growth. So right now there is no threat of a recession, which is Public Enemy #1 for stocks.

The main issue at this stage revolves around valuation. Those who point to a historical average PE of 15 say the market is fully valued at this time given expected S&P 500 earnings per share of $120 this year.

This is a short-sighted view. First, that 15 average PE concept goes back too far in time when investors did not properly appreciate the risk/reward relationship of stocks versus bonds. Since then 16-17 PE has been more the norm.

Second, a maturing bull market will always have higher valuations than average. That is the difference between fair value and fully valued.

Third, valuation is also about the attractiveness of stocks versus other investment alternatives. Cash continues to be trash with ultra-low interest rates. Bond funds are losing money as rates go higher. Real estate has stalled out (also thanks to higher rates). Gold is going nowhere. And please let's not waste our time talking about bitcoins.

Add it all up and this points to another year of gains for stocks.

The S&P is up 53% the past two years and +177% since March 2009. Thus, the easy money has been made and we should not expect such robust returns in 2014.

More likely stocks will provide a more modest gain of +8 to 10%. That would create a target range of 2000 to 2040 on the S&P, which is a fully valued market around 17 times current year earnings estimates.

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