new home sales

New home sales rose 9.6% month-over-month (m/m) in January, to an annual rate of 468,000 units-the highest level since July 2008-from December's upwardly revised 427,000 unit pace, from the initially reported 414,000 rate. Economists surveyed by Bloomberg had expected a decline to a 400,000 rate for last month. Within the report, the median home price was up 3.4% y/y but 2.2% lower m/m at $260,100. The inventory of new homes was 23.5% higher y/y, but unchanged m/m, at 184,000 units. This represents 4.7 months of supply at the current sales rate, from 5.2 months in December and 3.9 in January 2013. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings. Regionally, m/m sales were higher across most regions, led by a 73.7% surge in the Northeast, but sales in the Midwest fell 17.2%. Compared to the same period a year ago, sales in the Northeast and South were higher, while sales in the Midwest and West were lower.

Schwab Closing Market View, 2/26/14  

*** [then again, comes this from Credit Suisse..]

Reported new home sales up a questionable 10% in January; inconsistent with actual market trends: The Census Bureau reported new home sales of 468,000 in January, an increase of 10% from 427,000 homes in December (revised up 3% from 414,000 homes originally reported). This is well above our expectation for 385,000 homes and consensus for 400,000 homes, and again points to both the volatility (confidence interval was +/- 18%) and the lack of credibility for this Census Bureau report. Trends in sales typically follow trends in construction, and single-family starts fell 16% in January. Especially amusing is the reported 74% increase in the Northeast, which appears odd given the weather. We would expect January sales to be revised in the coming months.

the Mt. Gox shutdown

The reason that Bitcoin plunged on Mt. Gox was similar to a bank run -- there simply weren't enough Bitcoins in circulation to allow everyone to cash out at the same time. Bank runs usually occur when a bank invests too much of its clients' money elsewhere, leaving so little cash on hand that it can't survive a mass withdrawal.

Mt. Gox's possible insolvency, on the other hand, was rumored to be caused by a hack that resulted in the loss of 744,000 Bitcoins ($409.2 million). This isn't the first time it happened, either -- Mt. Gox was possibly hacked in 2011 for 400,000 Bitcoins (now worth $220 million). Mt. Gox customers have also reported troubles since early February, when CoinDesk reported that 68% of its customers had been waiting for months to withdraw their funds.

Therefore, even though exchanges like Mt. Gox might not be making risky bets with their clients' cash, their doors can be pried open by legions of hackers on the Internet instead. In the case of a bank failure or data breach, a depositor is insured by the FDIC for $250,000. In Bitcoin accounts, no such insurance policy exists.

tips from P.T. Barnum

P.T. Barnum knew how to make money. By the middle of the 19^th century, the master showman had become America's second millionaire, and his estate was valued at over $10,000,000 prior to his death in 1891.

Fortunately for us, Barnum – who is still remembered today for his "greatest show on earth" -- shared his secrets for getting rich. In the short work "The Art of Money Getting" published in 1880, he laid out his rules for creating wealth. After reading them, I was struck by how applicable they remain today. Here are nine golden rules for making money, according to Barnum.

1. Spend less than you earn. Barnum writes that the key to wealth is quite simple: "it consists simply in spending less than we earn." Despite the simplicity of this maxim, he notes, "more cases of failure arise from mistakes on this point than almost any other." [see Andrew Tobias]

2. Take care of your health. Good health is the foundation of success in life and is also the basis of happiness, according to Barnum. Without good health, a person is very unlikely to accumulate a fortune – he'll have "no ambition; no incentive; no force." He recommends avoiding alcohol and tobacco, while also making other healthy choices when possible.

3. Persevere. To illustrate this rule, Barnum shares a line from Davy Crockett, "This thing remember: when I am dead: Be sure you are right, then go ahead."

4. Be cautious and bold. This one appears to be a paradox, but it is not, writes Barnum. He believes "you must exercise caution in laying out your plans, but be bold in carrying them out." A man who is all caution won't take on the risks necessary for success, while a man who is "all boldness, is merely reckless, and must eventually fail."

5. Use the best tools. Barnum believes that workers must always have the very best tools to do their work. As a businessman, he feels there is no tool he should be, "so particular about as living tools." When looking for employees, therefore, one "should be careful to get the best."

6. Be focused. Barnum urges the aspiring entrepreneur to focus on "one kind of business only, and stick to it faithfully until you succeed, or until your experience shows that you should abandon it."

7. Advertise your business. Barnum was a remarkable pioneer in the field of advertising. For one of his promotions, he was able to transform a five-year-old dwarf named Charles Sherwood Stratton into "General Tom Thumb, Man in Miniature." Tom Thumb eventually became a gigantic hit in Europe, and was received by Queen Victoria and numerous other crowned heads-of-state.

Barnum with General Tom Thumb

8. Be polite and kind to your customers. P.T. Barnum actually never said "there's a sucker born every minute." Instead, he had great respect for his customers. He writes, "the man who gives the greatest amount of goods of a corresponding quality for the least sum (still reserving for himself a profit) will generally succeed in the long run."

9. Preserve your integrity. Barnum concludes his work by saying to all men and women, "make money honestly." He sincerely believed that the desire for wealth is laudable as long as the "possessor of it accepts its responsibilities, and uses it as a friend to humanity."

Facebook and the S&P 500

Question: I heard that Facebook (FB) will soon be added to the S&P 500 even though the company went public just last year. What are the rules regarding when a company joins or leaves the index?

Answer: Given the S&P 500's role as one of the most widely used measures of U.S. stock market performance, one might assume that the index's composition doesn't change much from year to year, but that's not necessarily the case. In fact, this year alone [2013] the S&P 500, which tracks the stocks of many of the largest U.S. companies and weights them by market value, has already swapped out 15 constituent companies in exchange for others.

Companies added in 2013 include clothing maker Michael Kors Holdings (KORS), Delta Air Lines (DAL), News Corp (NWSA), oil-services company Transocean (RIG), and Vertex Pharmaceuticals (VRTX). Meanwhile, those leaving the index included Dell, Sprint (S), J.C. Penney (JCP), Dean Foods (DF), and NYSE Euronext. The index will change further Dec. 20 as social-media giant Facebook, marketing and loyalty-program services firm Alliance Data Systems (ADS), and flooring manufacturer Mohawk Industries (MHK) join the index, replacing Teradyne (TER), Abercrombie & Fitch (ANF), and JDS Uniphase (JDSU).

According to the S&P Dow Jones Indices website, the composition of the S&P 500 is maintained by a committee of economists and analysts whose goal is "to ensure that the S&P 500 remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large-cap universe on an ongoing basis."

To be included in the index, companies must meet the following criteria:

• Must be a U.S. company
• Must have a market capitalization of at least $4.6 billion (the limit as of September but subject to change)
• At least 50% of the company must be publicly held
• Must have four consecutive quarters of positive reported earnings
• Stock must be relatively liquid, trading at least 250,000 shares per month for six months
• Company must contribute to the index's sector balance
• Must be listed on the New York Stock Exchange or Nasdaq, or be a non-mortgage REIT or business-development company

Companies may be booted from the index for violating any of the above criteria. For example, J.C. Penney, the struggling department store chain that has seen its market cap plummet from $7.5 billion to $2.6 billion in just two years, got the boot last month (at the same time it was added to the S&P MidCap 400 Index). These criteria also came into play during the late 1990s, when many tech companies saw their stock prices soar, lifting their market capitalizations to well within range of the index. Yet those companies were left out because they didn't meet the index's profitability rules.

The index committee takes into account short- and medium-term historical market-cap trends for a company and its industry before adding it to the S&P 500. The index's methodology states that following an IPO, companies must wait at least six to 12 months before being considered for the index. Members obviously believed that Facebook, with a market cap of around $130 billion, was ready despite its relatively short history as a public company; Facebook's IPO took place in May 2012. Changes to the index are made as needed and not on any set schedule, according to the methodology.

the risk of stocks

Retired investors seeking high income to live off of during retirement face greater challenges today than almost ever before. The days of high yields available from bonds and other fixed income vehicles are long gone. Consequently, generating an adequate level of current income on retirement portfolios is difficult to say the least. This is especially tricky for those investors with a low tolerance for risk.

Moreover, there’s no question that equity investments technically carry more risk than fixed income investments. This is widely acknowledged, and in the general sense, an unarguable position. However, this begs the question as to exactly how much more risk do equity investments carry versus fixed income investments? In other words, is the risk of investing in equities (common stocks) versus a fixed income instrument (bonds, CDs, etc.) 100% more risky, 50% more risky, 25% more risky, 10% more risky, etc?

These seem like important questions to ask and have answered. However, I have personally not come across any truly cogent analysis that precisely quantifies the greater risk of a stock or equity over a bond or other fixed income instruments. But with this said, my more than 40 years of experience investing in equities lead me to conclude that most people overestimate the greater level of risk that equities possess. This is especially true regarding equities with long histories of paying dividends. Yes, I agree that there is greater risk, but I do not agree that the risk of owning equities is as great as many people contend or believe.

... when evaluating the risk of investing in stocks, many investors are referencing price volatility. And usually, by volatility they mean the risk of the price of the stock dropping. However, I contend that if the price of a high-quality company does drop, but the underlying fundamentals of the business remain strong, that it represents opportunity rather than risk. About a year ago I wrote extensively on the subject found here.

Additionally, I also authored a two-part series on how investors can mitigate the investment risk associated with owning stocks. In part 1 I elaborated more on the concept of volatility risk.

Then, in part 2 I expanded my discussion on risk to include numerous other risks associated with investing in common stocks.

And, for those interested in learning more about the volatility aspect of risk, I authored another article in April 2012.

The primary point I expressed in this last article is my contention that it is not the volatility itself that establishes the risk of owning a stock; rather the greater risk rests in how people react to that volatility. The following excerpts from a comment shared by a regular reader of mine on my most recent article nicely summarizes this point.

“My objective is to earn an income stream that is reliable, predictable and increasing. It's all about the income stream, what I refer to as my pension from Mr. Market. I need to know what that pension is going to pay me in the distribution phase of my life. I can do that with dividend growth investing…

This year has seen the market correct to where it is down for the year. The Dow was down over 5% in January alone. Although the market continues to fall, my pension payment continues to rise. I will establish an all-time high in dividend income this month, and it has nothing to do with share prices. Market falls, I get a pay raise…”

-- Chuck Carnevale

Wall Street analysis vs. asset allocation

The truth is, no one can say for sure when the market will go down or go up. An interesting study by Bloomberg showed that the companies Wall Street analysts said to “sell” outperformed the market by 25 percent, while the stocks they said to “buy” underperformed by 7 percent. In other words, if you had followed the opposite advice of Wall Street professionals, you would have outperformed the S&P 500 by 7 percent!

Then what is the best way to make money in the stock market?

First and foremost, getting out of the market completely is not the answer. The greatest risk facing Americans today is longevity risk – running out of money. Investing in the stock market over the long term is one of the best ways to keep up with inflation and, if invested smartly, reduce your risks while maximizing returns and income.

Here are the steps to follow for long-term success in the stock market.

* Don’t try to pick stocks
* Don’t try to time the market
* Invest in a low-cost portfolio with a diversified asset allocation

According to a study by Ibbotson Associates, a portfolio’s performance is based on:

* Asset Allocation Policy – 91.5 percent
* Security Selection – 4.6 percent
* Market Timing – 1.8 percent
* Other Factors – 2.1 percent

Trying to pick the right stocks and timing the market only make up for only about 6 percent of a portfolio’s performance, yet make up a considerable amount of a portfolio’s losses! You have a greater chance of losing money than making money if you try to actively beat the stock market. In fact, over a three-year period, 90 percent of actively managed mutual funds lag behind the market.

A portfolio’s long-term performance is determined primarily by the percentage of investments in each class: cash, stocks, bonds and alternative investments. This helps protect your assets while maximizing growth potential. This percentage is based on your time horizon, risk tolerance, goals and financial plan.

-- David Chang, MidWeek, January 15, 2014

AAII Asset Allocation Models

why people are awful at managing money

People usually get better at things over time. We're better farmers, faster runners, safer pilots, and more accurate weather forecasters than we were 50 years ago.

But there's something about money that gets the better of us. If you look at the rate of personal bankruptcies, financial crises, bubbles, student loans, debt defaults, and savings rates, I wonder whether people are just as bad at managing money today as they were in previous generations, maybe even worse. It's one of the only areas in life we seem to get progressively dumber at.

Here are 77 reasons why people are awful at managing money.

3. You suffer from the Dunnig-Kruger effect, lacking enough basic financial knowledge to even realize that you're making mistakes. People's lack of understanding about things like compound interest and inflation can lead them to believe they're making good financial decisions when in reality they're tripping over themselves with failure.

4. For every $1 raise you receive, your desires rise by $2 or more.

5. You spend lots of money on material stuff to impress other people without realizing those other people couldn't care less about you. You'd be shocked at how few people care where your purse was made or how much noise your car makes.

13. The single largest expense you'll pay in life is interest. You'll spend more money on interest than food, vacations, cars, school, clothes, dinners out, and all forms of entertainment. You do this because you don't save enough and demand a lifestyle you can't actually afford. The future owns your income.

14. You're thrilled that the credit card you're paying 22% interest on offers 1% cash back on all purchases.

15. You spent the last five years arguing why Keynesian/Austrian economists were all wrong. The S&P 500 (SNPINDEX: ^GSPC  ) spent the last five years rallying 177%.

16. You think dollar-cost averaging is boring without realizing that the purpose of investing isn't to minimize boredom; it's to maximize returns.

17. Your work in a stressful job in order to make enough money to have a stress-free life. You see no irony in this.

18. You're a pessimist in a world where far more people wake up in the morning trying to make things better than wake up thinking we're all doomed.

19. You try to keep up with the Jonses without realizing the Jonses are buried in debt and can probably never retire.

21. You associate all of your financial successes with skill and all of your financial failures with bad luck.

22. Rather than admitting and learning from your mistakes, you ignore them, bury them, make excuses for them, and blame them on others.

23. You anchor to whatever price you bought a stock for, without realizing that the market neither knows nor cares what you think is a "fair" price.

27. You say you'll be greedy when others are fearful, then seek the fetal position when the market falls 2%.

30. You let confirmation bias take control of your mind by only seeking out information from sources that agree with your pre-existing beliefs.

31. You think you're too young to start saving for retirement when every day that passes makes compound interest a little bit less effective.

32. You spend a month researching the best washing machine, then invest twice as much money in a penny stock based solely on a tip from a person you don't know and shouldn't trust.

33. You're investing for the next 50 years but get stressed when the market has a bad day.

34. You're willing to work hard for $15 an hour, but too lazy to spend four minutes to fill out your company's 401(k) paperwork that could result in thousands of dollars of free money from matching contributions.

39. You don't respect the idea that "do nothing" are two of the most powerful words in investing.

41. You feel especially smart after last year's 30% market rally without realizing that you had nothing to do with it.

42. You surround yourself with 18 hours a day of live market TV in a game that requires decades of doing almost nothing but waiting.

45. You think financial news is published because it has useful information you need to know. In reality, it's published only because the publisher knows you'll read it.

46. You forget that the single most valuable asset you have as an investor is time. A 20-year-old has an asset Warren Buffett couldn't dream about.

50. You think it's impossible to live on less than $35,000 a year without realizing that literally 99% of the world does, even adjusted for purchasing power parity.

51. Your definition of a middle-class lifestyle is a 3,000-square foot home, more bathrooms than family members, three SUVs, private colleges, annual trips to Hawaii and Vail, Evian water, and yoga lessons. (Seriously, just stretch in your own living room.)

52. You can't acknowledge the role luck plays when making the occasional successful investment. (Also true when worshiping investors who made one big call that happened to be right.)

53. You suffer from hard-core belief bias. It's the tendency to accept or reject an argument based on how well it fits your pre-defined beliefs, rather than the objective facts of the situation. Pointing out that inflation has been low for the last five years is still met with suspicion by those who believe the Federal Reserve's actions must be causing hyperinflation.

56. You think the stock market is too risky because it's volatile, without realizing that the biggest risk you face isn't volatility; It's not growing you assets by enough over the next several decades.

57. You've never been to a poor country, robbing you of the realization that the world doesn't care how entitled you feel, what you think is "fair," or what a real financial hardship is.

58. You think blowing money on frivolous stuff impresses people, when in reality it makes you look like an insecure, pompous, jerk. (This is particularly common among young people who come into money for the first time.)

59. You're unable to realize that a 10% return for 20 years generates more money than a 20% return for 10 years. Time can be a more important factor than return when building wealth -- and it's the one thing you have control over.

60. You don't respect the mountains of evidence showing that once basic needs are met, the amount of happiness each additional dollar of income provides diminishes quickly. This causes you to spend most of your life chasing "the number" you think will make you happy, but probably won't.

62. You think of the stock market as numbers that go up and down rather than an ownership stake in real businesses with real assets.

63. You think renting a home is throwing money away when for many it's one of the smartest financial decisions they can make.

64. Your investment decisions are guided by what the economy is doing, when the two really have very little correlation.

66. You're unable to have a good time going for a hike, a bike ride, a swim, reading a book, or anything else that's free (or cheap). Having cheap hobbies is a large, yet hidden, asset on your personal balance sheet.

68. To paraphrase Carl Richards, you ignore history, basing your actions on your own very limited experience.

71. You think that not changing your opinion about markets, the economy, and your investments is somehow noble, when it's really just shutting your brain off to the reality that things are always changing.

72. You ignore that how elderly Americans who have seen it all view money is almost the opposite of how most young Americans view money. This goes back to not learning vicariously.

74. You underestimate how fast a company can go from "blue chip" to bankrupt.

75. You don't realize that when you say you want to be a millionaire, what you probably mean is that you want to spend a million dollars, which is literally the opposite of being a millionaire.

76. You're unaware that the business models of the vast majority of financial companies rely on exploiting the fears, emotions, and lack of intelligence of its customers.

77. You nodded along to all 77 of these points without realizing I'm talking about you. That goes for me, too.

dividends in America

AIG nearly went out of business in 2008. In nine months, the world's largest insurance company lost more money than it made in the previous 18 years combined.

But something strange happened: During most of this meltdown, AIG kept raising its dividend payout. Three times, in fact. In a year that erased nearly two decades of profits, AIG paid its shareholders $2.1 billion in dividends. It wasn't until the company was taken over by the U.S. Treasury that dividends finally ceased, by congressional order.

"We are being asked why we raised the dividend," former CEO Martin Sullivan said during a conference call in May 2008, after reporting a record loss. "The answer is that the dividend increase is a reflection of ... management's long-term view of the strength of the company's business."

I'm picking on AIG, but this kind of thinking isn't unusual among CEOs. Companies will jump through hoops to avoid cutting their dividends. In aggregate, there's only one clear trend in dividends: They usually go up. Since 2004, S&P 500 companies have raised their quarterly dividends 2,854 times, cut them 168 times, and stopped paying them just 46 times, according to Standard & Poor's. Forty one S&P 500 companies raised their quarterly dividends last month. One company cut its dividend.

This behavior oddly unique to America. Deutsche Bank published a report last decade asking global CEOs how they thought about dividends. Most managers from Europe, Asia, and South America took a pragmatic approach to dividends, and were more than willing to adjust payouts when their earnings were volatile. But American managers responded overwhelmingly that cutting a dividend was to be avoided at almost all costs.

It's also a new phenomenon. While reading old finance books, I kept coming across references to investors dealing with the ups and downs of dividends. Yale economist Robert Shiller's database of historical stock returns shows that dividends were wildly volatile. From 1871 through 1920, aggregate dividends fell in more than one-third of all months. From 1920 to 1950, dividends were cut in 23% of all months. Since 1980, they've declined in less than 10% of all months. The era of stable dividends is unique to the last 30 years.

the market p/e multiple

Since 1950, the P/E multiple of the S&P 500 has been on average 16.3x trailing twelve month earnings and the median value has been 16.6x earnings. Looking at the historical valuation multiples clearly shows that the market is neither expensive nor cheap relative to historical levels.

P/E multiples hit a monthly low in March of 1980 at 7.1 times earnings. P/E multiples hit a high of 29.9x historical earnings in June of 1999, roughly nine months before the dot.com bubble burst. These two time periods correspond very closely to periods of absolute pessimism and absolute optimism in the market. It is clear that sentiment drives valuation multiples. The more excited investors are about the future the higher the P/E multiple and the more pessimistic investors are about the future the lower the valuation multiple. Currently, sentiment is neither bullish nor bearish with many investors doubting the recent rally.

Additionally, bull markets rarely end at P/E multiples that are average. Historically, what has happened is that the optimism in the market during a bull market pushes the S&P 500 to higher than average valuation multiples before ending.

--- by Mitch Zacks, Senior Portfolio Manager, ZIM Weekly Update, 2/9/14

***

The current P/E multiple (according to this article) is 16.6.  So it doesn't appear the the bull market is over.

*** [2/26/14]

Stock valuations today are substantially higher
than historical averages. Wall Street’s pitchmen
work overtime to devise ingenious ways of proving
that the market is reasonably valued or even
“cheap.” However, nearly all these schemes rest on
the proposition that today’s record corporate profit
margins will persist indefinitely.

Plotted below is a far more objective and accurate
gauge for projecting long-term equity returns. The
Price-to-Sales Ratio takes the price of the Standard
& Poor’s 500 index and divides it by the sales (not
profits) of the companies making up the index. By
disregarding profit margins, the P/S ratio tunes
out the wild fluctuations that occur in companies’
reported earnings as the business cycle migrates
from boom to bust and back to boom again.

As you can see [if you have access to the newsletter], the P/S now stands at its highest level of the past decade—and about 65% above its average since 1950.

- Profitable Investing March 2014

*** [2/26/14]

TSLA is acting like a dot.com stock of 15 years ago.  Is the bubble back?

What's the Nasdaq's PE? At year-end 1999, it was about 200, according to analyst Brian Rauscher of Morgan Stanley Dean Witter. Growth companies--with prospects for above-average increases in profits--might be expected to have above-average PEs. Sure. In the late 1980s, the Nasdaq's PE fluctuated between 20 and 25. By 1991, it was about 40. In late 1998, it neared 100 and then doubled in the next year.

According to wsj, the current P/E of the Nasdaq 100 is 21.69.  A year ago it was 16.60.  Forward P/E is 18.76.  Surprisingly, the current P/E of the Russell 2000 is 84.68.  A year ago, it was 32.56.  Forward P/E though is a more reasonable 18.90.

What about TSLA?  TSLA has yet to turn a profit, but it's expected to be profitable this year and the forward P/E is "only" 72.5.

suggestions for long-term investors

And then there’s the business news. Serious business news that lacked sensationalism, and thus ratings, has been replaced by a new genre: business entertainment (of course, investors did not get the memo). These shows do a terrific job of filling our need to have explanations for everything, even random events that require no explanation (like daily stock movements). Most information on the business entertainment channels — Bloomberg Television, CNBC, Fox Business — has as much value for investors as daily weather forecasts have for travelers who don’t intend to go anywhere for a year. Yet many managers have CNBC, Fox or Bloomberg on while they work.

You may think you’re able to filter the noise. You cannot; it overwhelms you. So don’t fight the noise — block it. Leave the television off while the markets are open, and at the end of the day, check the business channel websites to see if there were interviews or news events that are worth watching.

Don’t check your stock quotes continuously; doing so shrinks your time horizon. As a long-term investor, you analyze a company and value the business over the next decade, but daily stock volatility will negate all that and turn you into a trader. There is nothing wrong with trading, but investors are rarely good traders.

Numerous studies have found that humans are terrible at multitasking. We have a hard time ignoring irrelevant information and are too sensitive to new information. Focus is the antithesis of multitasking. I find that I’m most productive on an airplane. I put on my headphones and focus on reading or writing. There are no distractions — no e-mails, no Twitter, no Facebook, no instant messages, no phone calls. I get more done in the course of a four-hour flight than in two days at the office. But you don’t need to rack up frequent-flier miles to focus; just go into “off mode” a few hours a day: Kill your Internet, turn off your phone, and do what you need to do.

Investing is not an idea-­per-hour profession; it more likely results in a few ideas per year. A traditional, structured working environment creates pressure to produce an output — an idea, even a forced idea. Warren Buffett (Trades, Portfolio) once said at a Berkshire Hathaway annual meeting: “We don’t get paid for activity; we get paid for being right. As to how long we’ll wait, we’ll wait indefinitely.”