Thursday, October 30, 2014

Fed ends QE

The Federal Reserve ended its historic easing program Wednesday, ceasing the final $15 billion of monthly bond purchases it had made in an effort to keep the economic recovery going, in a statement that kindled market talk about a more hawkish central bank.

Though it ended the program, the Federal Open Market Committee kept the "considerable period of time" language that investors had considered crucial in the central bank's map for when it would raise interest rates. The "considerable" time refers to when the Fed will begin raising rates after the end of the monthly bond buying.

To that end, it said it would keep its short-term target funds rate anchored near zero until it sees more improvement from the economy.

But it also noted significant economic gains, expressed some doubt that low inflation would continue and struck a tone that some anticipated as a tip toward those on the committee who advocated the Fed start to consider tightening policy.

After some meandering stocks ultimately sold off after the statement. Interest rates moved higher as did the U.S. dollar.

[via facebook]

Monday, October 27, 2014

millionaires on inequality

Most millionaires are concerned about inequality, and nearly half support a higher minimum wage and more taxes on the rich, according to a new survey.

The survey, from PNC Wealth Management, found that 64 percent of millionaires are "concerned" about economic inequality in America, and about half of those millionaires are "extremely concerned."

Yet millionaires see themselves as part of the solution to inequality rather than a cause.

Fully 49 percent support raising the minimum wage, compared with 38 percent who oppose an increase. A surprising 44 percent of them support raising taxes "on the top income earners," versus 41 percent who oppose.

And when it comes to other solutions, 69 percent say they support charities focused on poverty and hunger in the U.S., while 64 percent said they support scholarship and other educational opportunities for low-income children.

"These findings show the wealthy realize that our society is better when everyone is in the game and earning—and that economic inequality can have negative consequences," said Thomas P. Melcher, executive vice president and head of Hawthorn, PNC's family office.

Friday, October 17, 2014

Carter Worth says sell the bounce

[10/17/14] The market has bounced 33% off the low and is hitting resistance.  Sell.

[10/15/14] After a 7 percent drop from the highs, has the S&P 500 bottomed out? The answer may be impossible to know for sure, but historical analysis suggests that stocks may have a bit further to fall.

Carter Worth of Sterne Agee looked back on all the market's corrections of 5 percent or more going back to 1927, in order to get a sense of how long they tend to last, in terms of both time and magnitude. He learned that the average (mean) correction is 12.2 percent, and lasts for 41 sessions. The median correction, which is shallower because it is less affected by outliers, is 8.2 percentage points deep and lasts 22 sessions.

Given that the S&P closed Tuesday just over 7 percent off its highs, Worth takes this information as an indication that there will be more to this selloff.

***

The above analysis seems statistically sloppy because you're skewing the sample.  What if you look at corrections over 4%?  Or over 3%?  Or 2%?  Etc.  The average would always be greater than any cutoff you choose.  No great revelation.

At any point, you would have an average correction greater than your cutoff and so you would always be saying sell.  In other words, the opposite of what you should do (buy low).

Thursday, October 16, 2014

S&P 1775 before 1975

says Kevin Cook (video)

The correction should take another 3 to 6 weeks to work out. And then it could take another 3-6 weeks for the market to recover and make new highs. Since a lot of historical evidence pointed toward a strong Q4 -- especially after a strong 20 months -- this correction process will bring lots of unexpected pain to many investors.

I'm not saying with 75% certainty that we see S&P 1775 Before 1975. But I think 1800 is a pretty good bet. This is not a reason to panic. It's actually a terrific opportunity to pick up bargains on the way down while others are panicking. The economy and earnings will likely be seen as still very good for my target of 2250 next year.

Bottom line: Make your buy lists and set up your "order buckets." Their should be some great bargains out there soon. And don't be fooled by the bounce back above 1900 in October. It will get sold faster than you can say "50-day moving average."

Wednesday, October 15, 2014

The Fear and Greed Index

[10/12/14] After a series of large point drops in the DJIA, S&P 500 and Nasdaq indices, CNN reported this week that their 'Fear & Greed Index' was registering its highest anxiety reading in a very long time. One month ago, with the indices near all-time peaks, investor sentiment was dead neutral. One year earlier, the mood was quite downbeat ahead of what turned out to be a decent 12-month advance.

Casual observers might not realize that those negative vibes typically accompany great buying opportunities. Don’t take my word for that. Judge for yourself.

I’ve reproduced CNN’s Fear & Greed chart going back three full years, to the fall of 2011. Then I added the same time period for the S&P 500 ETF (SPY). Not one of the eleven most high-anxiety periods should have been sold.

100% of those nerve-wrecking moments reversed within weeks, leaving many investors stopped out of great positions simply due to temporarily lower share prices.

-- Dr. Paul Price, 10/3/14

Note: Price wrote this on 10/2/14, when the Dow closed at 16,801.05.  It is now at 16,544.10 (even cheaper).  The Fear & Greed Index is currently at 1 (on a scale of 1 to 100).

[10/15/14] Fear and Greed index hits zero today.

Tuesday, October 14, 2014

why is the stock market acting so crazy?

It’s not your imagination: the stock market has gone a little bonkers lately. This week alone the Dow Jones Industrial Average (^DJI) plummeted 272 points on Tuesday, rocketed back 274 points Wednesday and sank more than 330 points today. October has already recorded five days where stocks moved more than 1%. That’s as many 1% moves as we saw in the prior five months combined.

So why are stocks so crazy? There’s no set answer but here are three of the most obvious explanations making the rounds on Wall Street.

It’s October

I know it sounds crazy but October is almost by tradition the most volatile month of the year. Whether it’s because of the upcoming holidays, the end of the fiscal year for mutual funds or because we hold elections every other November, October sees far and away the most 1% moves of any month. Remarkably since 1970 nearly one third of every trading day in October has seen the price of stocks change by 1% or more. It's also worth noting that historically bad days like the 1929 crash and 1987's Black Monday crash both took place in October.

Global concerns
The world is always crazy but right now things seem to be rockier than normal. Government officials in Europe are arguing over the best way to ward off an impending recession, growth is slowing to a relative crawl in China and Japan is tipping into a recession. That’s never good for companies driven by exports like General Motors (GM) or McDonalds (MCD).

For their part the Federal Reserve acknowledged these global concerns yesterday and suggested they would be very cautious about raising interest rates because of such worries. That sentiment sent stocks surging, just the latest bit of evidence that investors pay very close attention to every word uttered by the Federal Reserve.

Bad news outbreak

It’s not just overseas. The Ebola outbreak has some investors worried that the U.S. economy, which hasn’t been great to begin with, could freeze. Despite good headline data on employment many economists point out that wage growth in the U.S. has been almost non-existent. The fear may be overblown but this time of year traders tend to sell first and ask questions later.

So what should you do? Probably nothing. If you’re like most investors you’re not looking at your portfolio more than once a month unless or until you see bold headlines about stocks plunging. That can make the prospect of opening up those statements pretty daunting.

The truth is trying to time the market is always a sucker’s game and that’s especially true during volatile times. Days like this aren’t a good time to radically change your long-term strategy.

Professional traders would love to see you panic into dumping some quality blue chips. Don’t be that person. Take a long-term view and if you’re in doubt make an appointment to meet with your financial planner.

Monday, October 13, 2014

not to be alarming, but..

Reuters Stock market blogger "Jesse Livermore" is sounding the alarm on the stock market. 

"Jesse Livermore," who pseudonymously blogs at Philosophical Economics, predicted on the eve of the Alibaba IPO that the market would put in its yearly high in the first hour of trading on that day. He nailed that trade to the hour, and since then the S&P 500 is down more than 6%.  (Jesse Livermore is a famed stock market trader who made and lost millions of dollars shorting the stock market in the early 20th century — the modern day Twitter user operates under this cover.) 

Now, Livermore is warning that we might be at the cusp of something worse. 

"I don't mean to be alarming, but this is 1987-esque," he tweeted.

Monday was the third straight day of losses for the major stock indexes, and the second time in three days that the Dow fell more than 200 points while the S&P 500 just had its worst three-day plunge since November 2011.

[Here's the full tweet: 

I don't mean to be alarming, but this is 1987-esque. But, doesn't mean it will end that way. Could have already ended, for all we know.]

Monday, October 06, 2014

it sounded good on paper..

There have now been twelve significant (5% or greater) interim declines in the Standard & Poors 500 since the final bottom was made on March 9, 2009. The worst of them took place during the summer of 2010 (-15.99%) and in late 2011 (-19.39%) while the debt-ceiling crisis played out. The late 2012, "Fiscal Cliff" debacle also led to a moderately uncomfortable almost 8% decline.

On each of those occasions the predominant media recommendation was to sell into the panic. CNBC's talking heads gleefully reminded everyone of the final (-56.7%) damage from the October 2007, peak through the March 2009 nadir. I remember hearing and reading repeatedly that, "after a 50% drop, stocks would need to double, just to get even.”

What the pundits failed to mention was the historical tendency of beaten up shares to accomplish that feat, and more. On Sep. 25, 2014, five and a half years after 2009’s low, the S&P 500 index had gained 197.3% plus dividends.

12 out of 12 of the previous greater than 5% sell-offs preceded new all-time records on the S&P 500 and the DJIA. In retrospect, every one of those mentally taxing times was actually a buying opportunity.

Bad memories of 2008 led to huge net equity fund redemptions on virtually every major sell-off and after many rallies as well. Most Americans simply wanted out due to painful, relatively fresh memories of the Great Recession's market action.

It took a better than 32% rise in 2013 to finally attract a modicum of net purchasing. Once again the old adage to “Buy low and sell high” sounded good on paper but was ignored when real money was on the line.

Smart investors welcome the chance to buy good quality shares at cheap prices. They love overvalued periods for the opportunity to exit at high prices.

The biggest risk you can take for the long term is being out of the market, not being in it.

Study market history. Invest accordingly.

-- Dr. Paul Price

why most traders lose money

Most traders have heard the statistics…”95% of traders lose money,” “Only 5% of traders can make a living at it,” or  “Only 1% of traders real make money.” Whatever the particular number is from recent studies, the fact is, many traders will lose money and it simply cannot be avoided.  All sorts of reasons are given for it, such as money management mis-haps, bad timing, bad government policy, poor regulation or a poor strategy. These are all well and good…and some of those do definitely play a role in individual trading success…but there is a deeper reason. A deeper reason as to why most traders will lose regardless of what methods they employ. I purport, that even if all traders knew how (keep in mind knowing, and doing are two very different things) to trade successfully based on current conditions, still most traders would lose over the long run.

When markets are understood, the idea that everyone can make money is not only inaccurate, but  impossible and laughable. Everyone making money means there is no market, because who would be taking the other side of the trade?

When all your friends are buying stocks and talking about oil going $200 (or whatever the number of the day is) and analysts are all over TV saying it is so, it is hard to take a contrarian view. After all, if you make a bet against everyone else and you are are wrong, your friends laugh at you because they are thinking their paper profits which continue to expand are going to be cashable at the bank soon. You experience regret for missing out on making some money and also may feel some social sheepishness. And heaven forbid you are right and people hate you because you just made money while they lost their shirt. Sound ridiculous?

It is very easy to say “I will follow the crowd and then know when to get out.” Actually doing it is something entirely different…which is why crowds move together.  This could largely be due to the human tendency to Extrapolate Trends. Trend extrapolation is the tendency to project current conditions into the futures, often assuming all else will remain equal.

What is really interesting is that while a hedge fund may make an average of 20%/year over the last 20 years, the average investor in that fund has a high propensity to make far less than that.  Why? Because they invest and pullout their funds at the wrong points, just as they do in the market

... Also consider this. In order for the glory stories to happen..such as traders making a 100%.. 500%…2000% returns (whether in one day, one year or several) how many traders must lose their shirt (or give up profits) for that to happen? Lots! Look at it a different way. That day trader that made $6,000,000 last year got that money from somewhere. Since small retail traders compose most of the total number of traders (high in number, small in worth compared to professionals) it was likely that $6,000,000 was taken right from those retail traders several thousand dollars at at a time. Someone lost money (giving it to this successful trader) or gave up profits (allowing the successful trader to profit). For a day trader to make $6,000,000 in a year, that means about 1200 people lost $50,000 each and/or gave up $50,000 each in potential profit!

In other words, the very thing which lures people in droves to the markets (big returns) ironically means that most of those people will be on the losing end of that exchange.

Sunday, October 05, 2014

how the game ends

 Here Is What You Should Do

The answer is the same in a bull or a bear market. Try and keep the asset allocation in-line with your individual risk level and try to continue to hold equities at the highest level you can bear. I think the best analogy is baseball. We are in the second half of the bull market. I am not clear if it is the sixth inning or the ninth inning. All I know is that the bull market is more than halfway over.

We still have not seen the euphoria phase of a bull market when caution is thrown to the wind and investors see equities as being risk-free. That stage is still coming and we all know what stage comes after. Despite our knowledge that future market corrections are in the cards, the correct course of action is to hold the stock market.

Additionally, most valuation models -- historical P/E multiple valuation, the FED model, a dividend discount model -- show that the market is very clearly not excessively expensive. Also the market is below its inflation adjusted highs reached in 2000. My gut feeling remains that the bull market has farther to run.

The Next Correction

Thus, my advice is that investors should continue to hold equities but psychologically prepare themselves for a major sell-off. When that sell-off materializes, it is extremely important that you maintain your current equity exposure.

We know how the game ends. It ends with the stock market moving higher over multiple years. In fact, the market will likely double over the next decade. But on the upward trend over the next decade the market must experience some corrections. As I have said many times before, we are overdue for some selling, so don't be surprised when it materializes and do not panic. Continue to hold stocks for the long-run.

I know that ten years from now the S&P 500 will be substantially higher than its recent high because a decade from now corporate earnings will in aggregate be much larger than they are currently. The P/E multiple placed on those aggregate earnings bounces around but remains relatively constant trading within a historical range over time.

As a result, an investor with a time horizon that is greater than a few years should see the recent selling as a buying opportunity. Warren Buffett apparently was buying stocks this past Wednesday and you should be doing so as well. The reason is, of course, that you know how the game ends. The market will march higher over the long-term.

-- Mitch Zacks, ZIM Weekly Update

Thursday, October 02, 2014

Buffett was buying

Billionaire investor Warren Buffett told CNBC on Thursday he bought stocks in Wednesday's big selloff.

He won't name names or whether he was adding to positions of his current holdings. But he did describe them in a "Squawk Box" interview as "names you'd recognized."

Buffett said he likes to buy stocks when they go down, not when they go up. He added that trying to time the market by buying and selling individual names is a "fool's game."

Any investor who's owned a cross section of American business has done really well over the past 10 or 20 years, he said. Over time, values do appreciate—not for every stock, he said, adding the Dow Industrial Average (.DJI) was under 100 during his lifetime.

With all the talk on Wall Street about when and by how much the Federal Reserve might start increasing interest rates, Buffett said the central bank's moves have no bearing on his investment strategies. "I really don't care about whether the Fed is going to raise interest rates."

He said he buys businesses that he thinks will be good for the next 50 years—such as the deal he announced on CNBC Thursday that he's buying the nation's largest privately held car dealership group, Van Tuyl Group.