We The Economy

The lines are blurring when it comes to distribution platforms for film and television, and competition is fierce. There’s Netflix versus HBO versus Amazon versus Hulu, to name a very few. But somehow, despite all of this competition, Morgan Spurlock has managed to get more than fifty digital, cable, television, and mobile platforms (and Landmark theatres) to play nice and work together to launch his latest project, We The Economy: 20 Short Films You Can’t Afford to Miss.

They assembled a group of economic advisors and “brilliant economic minds” to help shape the topics for each segment, which led to films about supply and demand, natural resources, government regulation, and the healthcare system. Then they went out to directors on a “first come, first served” basis, says Spurlock. Catherine Hardwicke, Barbara Kopple, Adrian Grenier, Albert Hughes, and Adam McKay (who helmed an animated film about pastel colored alpacas that explores economic inequality) came on board.

The goal is to begin a larger conversation and education of the general American public, but the project could also serve as an example of yet another way to evolve old-school distribution models.

“The window is gone,” says Spurlock. “The window is out the window.”

Francis Chou

Francis Chou immigrated to Canada in 1976 with $200 to his name. Without a college degree, Chou worked as a telephone repairman for Bell Canada, then formed an investment club with co-workers after reading about Benjamin Graham's teachings. Today, Chou is the fund manager of Chou Mutual Funds. Below are his answers to questions from GuruFocus readers.

Who is your all-time favorite investor – and why?

Benjamin Graham is my favorite investor. His 'margin of safety' principle is so profound that it is applicable everywhere. I have bought equity securities of good and mediocre companies in the United States, Canada, Europe, China, Japan, as well as distressed securities such as junk bonds, and they have worked out really well as long as 1) my valuations are accurate and 2) I bought them at a severely discounted price.

You run a very concentrated portfolio. How do you (from an emotional standpoint) deal with large swings in positions that have such heavy weightings? Do you have any tricks to help deal with becoming emotionally attached to a security?

We only look at intrinsic value and what the ratio of the stock price to intrinsic value is. That's all that matters. Everything else is noise.

How do you know if you have enough information to make a purchase decision?

I will make a purchase when I think the odds are 80% in my favor, given all the information provided. You also ask yourself whether you are willing to put 10% of the assets of your fund in that one stock, and if the answer is 'no,' your subconscious mind is telling you that you have strong doubts about your valuation or the company and therefore you need to take a few days off and then come back and reassess the company and your valuation.

How much research do you do before you have conviction to take a position?

For most stocks, I’ve been following them for 30 years, and when it falls within the range of undervaluation, I may then begin to start thinking about buying it. You should always feel like the odds are at least 80% in your favor before taking a position. Don't commit unless you have high certainty.

Vectorvest forecast for 2015

Apparently from Dr. Bart DiLiddo

[too bad I couldn't copy and paste the text from this video.  So type away..]

The Strategist's average prediction for 2015 was that the S&P 500 Index would close at 2,212, up 5% from today's close of 2.089 [this report apparently was written on 12/26/14].  Thomas Lee, the Strategist who made the highest and closest prediction of 2075 for 2014, also was tied for the highest prediction for 2325 for 2015.  Great, but what does VectorVest say?

Our Watchlist of the S&P 500 shows that GRT, Forecasted Earnings Growth, is currently at 9.0%/yr, the same as last year.  However, the Investment Climate Graph shows that the Earnings Trend Indicator has fallen from 1.13 to 1.11 over the last two months.  This is not a serious change.  Therefore, the VectorVest view is that a Bull Market Scenario will prevail in 2015.  However, we must watch the Earnings Trend Indicator very carefully.  Profits in the oil patch are expected to drop by 16.5% over the coming year.  However, I expect profits in the consumer sectors to increase from oil's decrease.  Once again, the stock market should do well in The Year Ahead.

Forbes vs. Oxfam

It’s hardly news at this point, but a new report from British anti-poverty charity Oxfam predicts that the world’s richest 1 percent will soon enough amass wealth that will be greater than half of the world’s total.  If so, those not among the 1 percent (including this writer) should all be giddy with excitement.

Simply put, when the wealth gap widens, the lifestyle gap shrinks.

What’s unfortunate about the report is that rather than celebrating the rewarding of enterprise on the way to global plenty, Oxfam Executive Director Winnie Byanyima seeks “urgent action” to reduce the inequality.  Adding her voice to a chorus of economists offering evidence-free assertions about inequality being the cause of poverty, Byanyima has said that “Failure to tackle inequality will set the fight against poverty back decades.” She adds that “The poor are hurt twice by rising inequality – they get a smaller share of the economic pie, and because extreme inequality hurts growth, there is less pie to be shared around.”

Readers can relax.  What Oxfam presumes about inequality is belied by simple history.  What we’ve actually seen is that inequality and the economic growth that lifts all boats go hand in hand.  Of course they do.

Readers can relax.  What Oxfam presumes about inequality is belied by simple history.  What we’ve actually seen is that inequality and the economic growth that lifts all boats go hand in hand.  Of course they do.

The above is true simply because wealth achieved in the capitalist system is more often than not a function of turning obscure luxuries into ubiquitous goods enjoyed by all.  The great Thomas Sowell has written that before John D. Rockefeller came along, evenings were rather bleak.  Sowell has noted that during the 19th century the phrase “the night cometh, when no man can work” was the sad truth.

Rockefeller not only made the kerosene that lit up formerly dark evenings a common, low-priced reality, but he eventually did the same with the fuel that powered automobiles.  Henry Ford got exceedingly rich by virtue to turning the once unimaginable-to-own luxury that was the car into something everyone could buy.

More modernly, Michael Dell earned his billions turning once expensive, slow and bulky computers into pedestrian gadgets that a growing number of people own several of, including ones that fit in our pockets thanks to people like the late Steve Jobs.  Bill Gates became the world’s richest man by virtue of designing software that rendered the computer easy to use, while Amazon’s Jeff Bezos made it possible to order the world’s plenty all with a tap on one’s computer, tablet, phone, and according to rumors, soon enough from the timepiece on one’s wrist.

The above examples are so unrelentingly true that it’s almost shooting fish in a barrel to mention them.  But they cannot be denied no matter one’s ideology, or dislike of achievement.  If Gates, Dell, Jobs and Bezos had been layabouts inequality would no doubt be less, but life would be much less enjoyable, and much more uncomfortable.  Thinking of music alone, Paul McCartney is said to be worth billions, but would the class warriors in our midst return the joy he and the Beatles brought the world just to reduce the wealth gap?

To state what is obvious, to look at the Forbes 400 is to see people who’ve made our lives better, healthier, more interesting, and more abundant. Patrick Soon-Shiong is worth billions for having advanced the search for a cure to cancer, Steven Spielberg is a member for having entertained millions, and possibly billions, while Mark Zuckerberg is on the list for connecting us to friends, ideas and conversations around the globe.

Oxfam presumes the need for “urgent action” to fix what isn’t a problem, but implicit in urgent action is that politicians will act as wealth allocators over the color, class and gender blind markets.  In short, what wealth gap worriers unwittingly seek is wealth destruction by politicians over the provision of always limited resources to the most talented.  Thinking about this yet again, readers need only ask themselves who has done more to better the world: Mitch McConnell, Harry Reid and Silvio Berlusconi, or Jerry Jones, Oprah Winfrey and Sergey Brin?

The answer to the above non-riddle stares us in the face every single day.  Politicians invariably get rich when they redistribute the wealth we create, but in ways that do the opposite of improving our lives.  Conversely, when market forces allocate the economy’s resources the wealth gap surely soars, but we’re all made better off.  Again, can any reader say with a straight face that life would be better if Jones, Winfrey and Brin were on the dole?

What can’t be forgotten is that great, inequality inducing fortunes are made and lives beautifully enhanced (in my upcoming book, Popular Economics, I argue that inequality is beautiful) when meritocratic markets are allocating capital instead of politicians.  In that case, we should cheer loudly assuming Oxfam is right.

Indeed, Oxfam says inequality is set to soar.  If so, this can only mean that the economy’s resources are set to be allocated a great deal more by market forces, and a great deal less by politicians.  Inequality is once again beautiful, and a signal of rising lifestyles for those not rich.

All that’s left is to wonder what the rich of the future will make commonplace for all? It says here private jets, self-driving cars and near-instantaneous recovery from knee injuries will be among the advances.  If so, inequality will soar.  Let’s hope.  It’s when the wealth gap is not increasing that we have reason to worry.

***

Surprisingly, I see only one comment (by Sean Durkin). “Are YOU kidding? Is this really theonion.com? Anyone who swallows this propaganda is an idiot.”

More Forbes articles mentioning Oxfam

an average decade?

The past 10 years brought a credit boom and bust, the most damaging financial crisis in decades and $12 trillion in money creation by desperate central banks – all of which made for a pretty average decade.

Rather average, that is, in terms of the returns produced by big U.S. stocks.

Through Dec. 31, the average annual total return for the Standard & Poor’s 500 stock index was 7.6%, according to FactSet. That’s up sharply from negative 1% five years earlier, when the market was winding up a “lost decade.” This measure of the past decade’s gains is now approaching long-term average yearly return.

Since 1926, big American stocks have delivered just over 10% a year, and Jeremy Siegel’s study on stock performance dating back to 1871 pegged the average at 6.8% after inflation, which is slightly above the pace of the past 10 years.

So the market took a messy, dramatic, sometimes scary and then euphoric path to a respectable, if pedestrian, performance since the end of 2004. It barely nosed above its 2000 peak in late 2007, then was cut in half within 18 months, and since the March 2009 low has surged more than 200%.

The question now -- especially for those who haven’t participated in the past few years’ ascent -- is how much life this bull market might have left in it, both in terms of duration and upside.

A glance at this long-term chart of rolling 10-year stock returns would lead many to the conclusion that this uptrend is really just getting in gear. Throughout history, this gauge has spent far more time at levels well above the current one.

Yet it’s worth noting how rapid the upside progress has been in just the past few years -- and how this 10-year measure will keep rising in coming years even if stocks stall out or merely trudge higher. The S&P 500 has appreciated at an average of more than 17% annually the past six years.

Financial advisor and Yahoo Finance contributor Ben Carlson calculates that if stocks stay right where they are for the next four years, the trailing 10-year return will rise to 9.9%; if stocks shuffle ahead by a modest 5% a year over that time, the 10-year average will jump to more than 12% by the end of 2018.

In those terms, it might appear that the market doesn’t exactly owe investors much in coming years.

Jim Paulsen, strategist at Wells Capital Management, this week noted that beneath the indexes, the typical stock is now about as expensive as it has ever been.

Sure, the S&P 500 as a whole trades at 18-times the past year’s operating profits, and a bit more than 16-times forecast earnings for 2015 – modestly but not alarmingly above the long-term average. But this aggregate multiple is dragged lower by a relative handful of mega-cap stocks that appear quite cheap statistically, such as Apple Inc. (AAPL), Exxon Mobil Corp. (XOM) and Bank of America Corp. (BAC).

Using an academic screen performed each summer of all New York Stock Exchange issues, Paulsen says the median stock P/E ratio is around 20 -- roughly as high as it’s been since 1950 -- which should make big continued gains for the typical stock challenging.

This, in a way, is the reverse of the market at the height of the tech bubble, when the S&P 500 was fabulously overpriced thanks to richly valued blue chips and nearly all big technology stocks, while the median company sported a multiple no higher than the historical norm.

One of the few ways to escape much concern about how these forces sort themselves out is to have at least a couple of decades to work with. The market has never been down over any 20-year period. Indeed Carlson offers the reminder that the worst trailing annual 20-year return after the crisis was 7.7%.

Patience, then, is a comfort as well as a virtue – for those who enjoy the luxury of lots of time before they’ll need to convert a portfolio into living expenses.

Seven Consecutive Years?

If the stock market closes higher this year, it'll do something it's never done before.

The US stock market has been up for six consecutive calendar years — from 2009 to 2014. If it closes up in 2015 for the seventh year in a row, it'll be the first time this happens ever.

On Tuesday, DoubleLine Funds' Jeffrey Gundlach unveiled his 2015 outlook for the economy and financial markets, during which he included a chart showing that US stocks have never been up for more than 6 consecutive years in a row.

He cited the six-year stock market rally as one of the reasons for his bear-case scenario.

You can see below that the last time stocks closed up six years in a row was over 100 years ago — back in 1893 to 1903. And then the next year saw an 18% downwards price correction.

Gundlach isn't the first to suggest that the rally may not last longer. And last month, Societe Generale's Roland Kaloyan attributed his belief that stocks are going to slide in 2015 to a similar reason.

"Since 1875, we have never seen the S&P rise for seven calendar years in a row, so an eighth year would seem highly unlikely," wrote Kaloyan in a note to investors. "We assume that the S&P 500 will finish the year slightly down as the strengthening of the US dollar and the new tightening cycle offset the strong US GDP growth already priced-in at the start of the year."

Kevin Cook says, "so what?"

Dividend Investing

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Josh Peters. He is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. His portfolios recently crossed the 10-year mark. We're here to take a look back and see how performance has been and what lessons he's learned. Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: Let's start with that performance number. Now that you have 10 years under your belt in running these portfolios, what did those numbers look like versus a broad-based index like the S&P 500?

Peters: I don't normally target trying to beat the market over any short-term interval, like a quarter or a year. I figure you're going to own a very different group of stocks than the market average if you're going to target those high yields, so you shouldn't expect to behave like the market. But having reached the 10-year mark, it's very gratifying to see that without even trying, so to speak, we have beaten the S&P 500. Since inception, our annualized total return is 9.4%, and that compares to 7.7% for the S&P 500.

Glaser: Even though this was a successful strategy, probably looking back there are things that you maybe wouldn't do again or mistakes that you've made. What's the biggest one that you saw over the last decade and that you've tried avoid since?

Peters: When I started, I had very much that traditional bottom-up type of focus that you'd expect from a value investor. And it happened that, by 2007, I had found merit from the bottom up in lots and lots of bank stocks and other financial-services companies--many of whom had dividend yields of 3%, 4%, or even 5% and records of raising the dividend every year, dating back 20 or 30 years. These looked like perfect candidates for the types of total returns I was looking for.

However, to have owned them heading into the housing and mortgage crisis--that terrible time from 2008-09--was bad enough. Frankly, I just loaded up too much; I wasn't thinking top down enough in order to control my risk. I still believe that it's very, very difficult, if not impossible, to start your investment process from the top down--[to ask yourself] how fast is the economy going to grow, how fast is inflation going to run, where are interest rate is going to go, and then devolve that down to selections of individual stocks.

I think it's best to start with those fundamentals, looking for those wide- and narrow-moat companies with good dividend policies that can provide you with good total returns. But you look to the macro factors to control your risk. And frankly, housing prices and the state of the mortgage market, those were risk factors that should have helped me at least limit my exposure to banks back in that period.

Glaser: On the flip side, what positive lessons have you learned over the last decade and how have you benefited from that?

Peters: It's really been about the dividends teaching me, which may sound interesting because I started 10 years ago with the same operating system, the same premise that we have today, which is that I want a large and secure, reliable and growing stream of income from my portfolio holdings. That's what the strategy is all about. But I started out with more of the mindset of a value investor. And it's hard; a value investor is looking for mispriced assets. They are looking to buy the proverbial dollar for 50 cents. And within that, what you hope is that that discounted asset gets marked back up to a more reasonable price. You capture the gain, and then you look to repeat with another situation. It puts a lot of the work back on the investor as opposed to the company to generate the total return. You would expect more turnover in that type of strategy.

After a number of years managing our strategy for Morningstar DividendInvestor, I realize this isn't really a value strategy. Our best results have been from high-quality companies--sometimes where we paid nearly fair prices, not bargain prices--that have created a tremendous amount of value for shareholders just because they have good management and good assets. Let those companies do the work. Let your winners run. It doesn't mean you take your eye off the ball in terms of valuation; but the best dividend investing, the best management of a stream of income for total return turns out to be very much that buy-and-hold strategy that a lot of people look down on and have some concerns or qualms about these days. Let the companies do the work.

So, I start off every year thinking, "OK, I can see some buys, some sells potentially emerging over the course of the year, but I want the dividends and the companies that pay them to do 99% of the work, generating the returns in our portfolios." They're going to a tremendous amount of effort. Why should I add that much more effort on my part when trading back and forth, especially the shorter your time interval is likely to be, can easily become counterproductive?

rising interest rates and the stock market

[1/19/15] When you examine previous periods in which interest rates have risen and you look at, say, the S&P 500's return during those time periods, what you tend to see is that stocks tend to behave reasonably well during those periods. The key reason is that the stock market is responding mainly to the economic growth that is often precipitating those interest-rate increases. So, that's the main thing that the stock market will respond to--secondarily will be what's going on with rising rates. Of course, how this particular rising-rate environment will unfold is anyone's guess; but when you look over past historical periods, it hasn't been a terrible period for stocks when interest rates have been on the move upward.

Stipp: Lastly, when we do see rates go up, historically something else is usually going up and that's inflation. So, you might be getting a higher rate on some of your fixed-income investments, but you might also be paying more at the grocery store or at the gas pump.

Benz: That's right. So, when interest rates are on the move, it's often when the economy is performing well and inflation is often on the move at that time. So, what the market gives with one hand in the form of higher yields, it may be taking away with the other in the form of inflation. Think back to the period in the mid-80s, for example, when inflation was at a very high level. Yields were very, very high at that point, too; but inflation really was tamping down investors take-home yield because of those higher prices.

[9/24/14] The debate now is over when the rate hike will happen in 2015 -- spring or summer. It's a foolish discussion and impossible to predict, even for people whose livelihood depends on calling Fed turns and market tops.

What’s more important is what the markets will do when the Fed finally gets around to boosting short-term rates and returning them to "normal," whatever that means.

Well, actually, it's more about what will happen before and after rates start rising, because the stock market, as we know, anticipates big economic changes like rate hikes and recessions months ahead.

And there, market history suggests long-term optimism but short-term caution.

Sam Stovall, S&P Capital IQ's U.S. equity strategist, recently tracked Fed interest rate hikes going back to the end of World War II.

"In 13 of the 16 times the Fed raised rates, the market went into a pullback, correction or bear market" in the six months before the rate hikes began, he told me in a phone interview last week.

In the years since 1946, Stovall found six pullbacks (a 5 percent to 10 percent decline), four corrections (when stocks fell from 10 percent to 20 percent) and three bear markets (a drop of 20 percent or more) began in the six months before the Fed started tightening. He used the S&P 500 Index for his research.

The S&P 500 lost 16 percent of its value, on average, during those declines, but it fell slightly less in the six months after rate hikes began.

"We had pullbacks, corrections and bear markets start more often in the six months before [a rate increase] than the six months after," he told me.

Altogether, Stovall wrote last week, "88 percent of the time, the markets were thrown into a pullback or worse when an initial rate hike was a possibility or reality." That means "a very high likelihood that the S&P 500 will begin a decline of 5 percent or more within six months" of the Fed's first hike.

Sounds depressing. Yet if you look at the numbers somewhat differently, the S&P 500 "was back in the black and up an average 1.3 percent" within six months after the first rate increase, Stovall wrote.

The point is that although the prospect of a new Fed rate-tightening cycle brings out the fear in investors' reptilian brains -- and even the great Marty "don't fight the Fed" Zweig believed in selling on the Fed's second rate increase -- it need not lead to long-term losses.

In fact, that fear may cause investors to sell way too early when waiting it out would be a better strategy. It usually is.

The best year to own stocks?

In a couple of months, the raging bull of the stock market will turn six years old. The average bull market only lasts five years, and Jim Cramer is wondering if investors need to start worrying about the health of the bull.

To find the answer, Cramer once again turned to the charts to see what they predict. He has taken a step back with Ed Ponsi to take a good look at the big picture for the averages. Ponsi is a technician and managing director of Barchetta Capital Management, as well as Cramer's colleague at RealMoney.com.

According to Ponsi, this could be one of the best years to own stocks. Why? Because of the U.S. presidential election.

Ponsi stated that according to Jeffrey Hirsch, author of The Stock Trader's Almanac, the year before an election has a cyclical tendency to be the best year to own stocks.

From 1833 to 2012, the stock market has on average rallied 1.9 percent in the first year of a president's term, 4.2 percent in year two and 5.8 percent in the fourth year. Year three is the biggest, and has a return of 10.4 percent market gain in the Dow Jones Industrial average. The only year this didn't occur was in 1931, the height of the Great Depression.

"It's not just that the market tends to rise during the year before a presidential election. It's the consistency of this pattern that is so impressive," said the "Mad Money" host.

And there is more, the stars have aligned politically as well, assuming all political beliefs are put aside.

According to the average performance of the Dow industrials from 1949 to 2011, a Democrat president with a Republican Congress is good news. Since 1949, the average Dow return with this political combination was 19.5 percent. Wowzer!

Additionally, Ponsi sees that there is a pattern in decades that will help the averages as well. As strange as it sounds, the stock market tends to have top performance in years that end in the number five. Like, let's say… 2015. The Dow Jones has seen an average gain of 28.9 percent for years ending in 5, going back to 1895.

[via roy]

Dogs of the Dow

[1/2/15]  Zacks presents Dogs of the Dow for 2015.

 Below we present five stocks from the Dow with the highest dividend yields, each of which also has a favourable Zacks Rank.

AT&T, Inc. (T) is likely to witness strong momentum in both its Wireline and Wireless businesses. Continued strength in the smartphone business owing to the mobile share plan is driving the wireless business. Further, AT&T is the leading provider of WiFi (wireless broadband) connectivity, which is also a key growth driver. The company also expects to complete its LTE deployment by 2014, which could add to its network strength.

AT&T has a Zacks Rank #3 (Hold) and a dividend yield of 5.4%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.47.

Verizon Communications Inc.’s (VZ) consistent market share gains, strong LTE (Long Term Evolution) sales and the rollout of FiOS Internet are key contributors to the company’s growth trajectory. Further, robust additions of tablets and Wi-Fi devices are increasing the number of gadgets per customer, driving revenues higher. The acquisition of the remaining stakes in Verizon Wireless should continue to boost cash flow for the company.

Verizon has a Zacks Rank #3 (Hold) and a dividend yield of 4.6%. It has a P/E (F1) of 13.93.

Chevron Corporation (CVX) is one of the largest integrated energy companies in the world with an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.

Chevron has a Zacks Rank #3 (Hold) and a dividend yield of 3.8%. It has a P/E (F1) of 11.27.

General Electric Company (GE) reported strong third quarter 2014 results. The company is realigning the corporate strategy to a manufacturing-based entity and intends to shrink its finance business by 2015 to reduce credit risks.

General Electric has a Zacks Rank #3 (Hold) and a dividend yield of 3.6%. It has a P/E (F1) of 15.56.

Pfizer Inc.’s (PFE) focuses on the development and commercialization of a wide range of products including human and animal biologic and small molecule medicines and vaccines, as well as consumer health care products. Pfizer has committed more resources towards the development of treatments in the fields of oncology, cardiology, metabolic disorders, neuroscience, immunology, inflammation and vaccines.

Pfizer has a Zacks Rank #3 (Hold) and a dividend yield of 3.3%. It has a P/E (F1) of 13.93.

[1/6/07] The idea didn't work in 2005, yet did very well in 2006. Over a longer time frame though, the numbers statistically support the theory. From the early 70's, the average annual return on this theory would have been 17.1%. That's significantly better than the Dow's average annual gain of 10.9%.

[9/6/06] Proponents of the “Dogs of the Dow” investment strategy
have a lot to cheer about right now.

The strategy, which is hinged partly on the hope that blue
chips that did poorly in the preceding year will make a recovery,
is proving to be a profitable one for 2006.

The Dogs of the Dow method involves investing in the 10
components of the Dow Jones Industrial Average with the highest
dividend yield and holding those stocks for about a year.

The dividend yield is calculated by dividing a company’s dividend
by its stock price. So, many of the Dow components with
the highest dividend yields have seen their share price decline
during the preceding year, making them the supposed underdogs
of the stock market.

By the end of August the so-called Dogs had total returns
of about 21% for 2006, according to data from Dow Jones
Indexes. That was well above returns of about 7.9% from the
industrial average as a whole.

The largest companies have received less attention over the
last few years as investors tried to profit from a lengthy rally in
the small-cap sector. But over the last few months uncertainty
about economic growth has been leading investors to seek safety
in larger, better-known names. So, large stocks with relatively
cheap share prices appear more attractive.

At the end of 2005, General Motors Corp. (GM), Verizon
Communications Inc. (VZ) and Merck & Co. (MRK) were
among the Dow industrials with the highest dividend yields,
making them all Dogs of the Dow. All three stocks were beaten
down sharply in 2005 for reasons related to their individual
businesses or industries. Verizon lost roughly 26%, General
Motors fell about 52%, while Merck declined a far more modest
1%. All three are bouncing back with vengeance this year.
Verizon has gained about 18% so far in 2006, and Merck has
added about 29%. [Tomorrow's News Today]

7 Keys to Managing Risk

"that will put your portfolio on the road to steady, predictable growth!"

-- courtesy of the folks from VectorVest

Here are the 7 keys:

1. Diversify
2. Dollar weight
3. Keep commissions low
4. Market follow through
5. Step-in
6. The 50% rule
7. The 1% rule

time in the market

Investor Nick Murray once said, "Timing the market is a fool's game, whereas time in the market is your greatest natural advantage." Remember this the next time you're compelled to cash out.

Definitely. In fact, a growing body of research is finding that chasing returns is a killer for many investors.

[via roy]

This is also misconception no. 8 from from Chapter 1 in Chuck Price's book Investing Simplified: What You Don't Know Can Hurt You.

Allan Mecham, the 400% Man

[2/19/12] On a fall day in 2010, half a dozen wealthy investors and portfolio managers converged on an office in midtown Manhattan. These were serious Wall Street moneymen; in aggregate, they handled more than a billion dollars. They had access to the most exclusive hedge funds and investment partnerships and often rubbed shoulders with the elite of New York, Greenwich and Palm Beach.

But on this day, they had turned out to meet an unknown college dropout from Utah -- and to find out how he was knocking them all into a cocked hat.

The unknown, Allan Mecham, had been posting mind-bogglingly high returns for a decade at a tiny private-investment fund called Arlington Value Management, and the Wall Streeters were considering jumping on board.

Over a 12-year stretch, through the end of 2011, Mecham, now a mere 34 years old, has earned an astounding cumulative return of more than 400 percent by investing in the stock of U.S. companies -- many of them larger ones like Philip Morris, AutoZone and PepsiCo. That investment performance leaves the stock market indexes and most mutual funds trailing far in the dust. Of the thousands of mutual funds in America, only a smattering of stock-oriented funds have done better, according to Lipper. Arlington, which is structured like a hedge fund, has put most firms in that category deep in the shade as well. It even managed to turn a profit during the crash of 2008, when Standard & Poor's 500-stock index fell nearly 40 percent. And Mecham has done this mostly while sitting in an armchair, in an office above a taco shop, in downtown Salt Lake City.

His investment approach will be familiar to anyone who has been even a casual follower of Buffett. Mecham looks for businesses with great long-term prospects, great management, strong cash flow and big defensive "moats," or barriers to entry for potential competitors. And he stresses the importance of sitting still and doing nothing. "Activity is the enemy of returns," says Mecham. "If I find two new ideas a year, that's phenomenal."

[via libertarians_2000]

***

[3/23/12] Mecham, whose stellar returns were highlighted in the March edition of Smart Money, tells his investors that last year he levered up the fund and has invested half the money in Warren Buffett's Berkshire Hathaway.

"Able to borrow at around 1.5%, we levered (Berkshire) into a 50%+ position," he wrote in his annual letter to shareholders. "Though not advocates of leverage, we believe the low cost and modest amount, combined with [Berkshire's] iron-clad safety and cheap price, makes our action sensible."

There is some method to the madness. Mecham, a long-term Buffett disciple, argues that Berkshire Hathaway stock, on its own, "provides ample diversity, with exposure to disparate businesses (more than 70), sectors, and asset allocations." Berkshire's assets include a ton of cash-generative businesses, a book of blue-chip public stocks valued at more than $75 billion, and nearly $40 billion in cash, he says.

Short-term gains are irrelevant, but Mecham built up the huge Berkshire Hathaway position before the announcement, last September, that Berkshire would start buying back stock.

Since then stock has zoomed about 16%, from around $105,000 to $122,000.

***

[12/27/14] This weekend I came across a link to an excellent Manual of Ideas interview with Allan Mecham that I've read before, but I decided to read through it again. There are a few key points that Mecham brings up that I think are really worth repeating, so I thought I’d highlight them here.

Understand what you are buying

The first is the concept of understanding a business like an owner.

Mecham said something interesting when asked how he generates ideas:

“Mainly by reading a lot. I don’t have a scientific model to generate ideas. I’m weary of most screens. The one screen I’ve done in the past was by market cap, then I started alphabetically… Over the past 13+ years, I’ve built up a base of companies that I understand well and would like to own at the right price. We tend to stay within this small circle of companies, owning the same names multiple times. It’s rare for us to buy a company we haven’t researched and followed for a number of years—we like to stick to what we know.”

Unforced Errors

Speaking of unforced errors, Mecham references the importance of reducing them when answering a question on mistakes investors tend to make:

“Patience, discipline, and intellectual honest are the main factors in my opinion. Most investors are their own worst enemies—buying and selling too often, ignorning the boundaries of their mental horsepower. I think if investors adopted an ethos of not fooling themselves, and focused on reducing unforced errors as opposed to hitting the next home run, returns would improve dramatically. This is where the individual investor has a huge advantage over the professional; most fund managers don’t have the leeway to patiently wait for the exceptional opportunity.”

Beware the Lottery Ticket Investments

The concept of focusing on the downside brings me to a tangential topic that I'd like to briefly talk about, and that is the allure of the “lottery ticket” investment. This is the type of investment that has long odds of paying off but could result in a huge payday if it works. For example, let’s say investment has a 40% chance of making 5 times your money, and a 60% chance of going to 0. In theory, this investment has a high expected value, and should be taken (if you could make this investment 10 times, 4 times out of 10 you’ll make 5 times your money, which far more than compensates for the 6 times your investment went to 0). In other words, if you bet $1 on a situation like this 10 times, you’d end up with $20 on a $10 total investment.

One thing I’ve observed over time is that market participants tend to overestimate the probability of the favorable outcome. It’s very easy to do this for a number of reasons: one, we are generally optimistic beings. Two, we naturally want to find a situation with high expected value like the one described above.

I think in general, it’s much better to simply focus on simple situations that you understand very well—good businesses at bargain prices—and patiently keep building out your circle of competence while waiting for the proverbial fat pitch. Home runs will help increase long term returns, but they don’t need to come from swinging at really difficult pitches that are outside the strike zone.

*** [12/27/14]

Is this the next Warren Buffett?

*** [1/6/15]  The 400% Man

two important points

You've probably seen the headlines: New York magazine admits to being conned. The biweekly published a story of a brilliant New York high school student--Stuyvesant High School, naturally--who had made $72 million, or something near that amount (he was coy), from stock trading. In truth, he had made nothing. The student's stock market experience consisted of simulated trades at Stuyvesant's investment club, where, he claims, performance was "incredible," as his portfolio "outperformed the S&P 500."

(Note that the quote equates "incredible" with beating a market index. Oh, how active management has fallen ...)

You might wonder how the story got into the magazine. The obvious answer is that journalistic standards have badly slipped. That is how the story has been reported.

While correct in its way, that reason glides over two other important points.

One is that people are bad in math. For example, when I was in junior high school, a syndicated newspaper column stated that if two dice were rolled 100 times, the average sum would be 638. (The column was marketed as a "Grab Bag" of little-known facts. True enough: That the dice would sum to 638 was indeed little known.) That rather basic error escaped the writer, his syndication editor(s), and the local newspaper's staff. As the column never ran a correction, it seems that the mistake escaped many others as well.

To cite another example, in the 1990s the Beardstown Ladies had convinced themselves (through bad math, ironically) that their amateur stock portfolio had grown an annualized 23% for the decade from 1984-93. That was scarcely credible, as the S&P 500 had gained less than 15% per year, only two U.S. diversified stock funds had beaten 18%, and the Ladies followed a stolid investment strategy of buying and holding blue chips. Where on earth could they generate so much extra alpha?

Nowhere on this planet, it turned out. The Ladies' claims went unchallenged for several years. Eventually somebody realized that the Ladies couldn't possibly have been correct. The portfolio's actual annualized gain after costs, it turned out, was only 9%.

The too-good-to-be-true stories have a second essential prop: naivete. Those who do not invest tend to grossly overestimate what actual investors can accomplish. My father, for example, would have fervently believed the New York story. He invested only occasionally--just enough to "learn" that those in the know reaped fabulous gains, while he sadly did not. (He was skilled at accumulating tax-loss carryforwards but less adept at generating gains against which to offset them.)

My father was undeterred by the math of the improbable. For one, he wouldn't do the work. He wasn't about to calculate that even if a teenage boy somehow got $1 million to invest when entering high school, the youth would have needed to make more than 300% annually over the next three years to achieve his claims. But even more, he didn't wish to know the answer. He liked his fantasies. He relished dreaming of when he would crack the code, so that he, too, could make the easy money.

In that he was not alone. Famously, Discover Brokerage Direct ran a 1999 commercial featuring a truck driver who owned a private island, courtesy of day trading. While the ad was not meant to be taken literally, neither was it intended as a complete joke. The company selected an amateur actor to play the role of the truck driver, so as to make the ad feel more like a documentary. It wished for viewers to believe that the most ordinary of Americans could become investment geniuses.

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.

*** meanwhile, here's a sponsor message from the same email...

World-renowned economist Harry Dent now says, "We'll see an historic drop to 6,000... and when the dust settles – it'll plummet to 3,300. Along the way, we'll see another real estate collapse, gold will sink to $750 an ounce and unemployment will skyrocket... It's going to get ugly."

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.

compound interest

Tony Robbins, in an interview with Warren Buffett, asked his secret to wealth. Buffett replied, “No. 1, it’s being born in America. No. 2 is good genes, so I live long enough. And No. 3, it’s compound interest. Compound interest — people have no idea the power that it really has.”

The best time to invest may have been in the past, but the second-best time to invest is today! Everyone, regardless of income, can take advantage of the power of compound interest. Einstein called it the “Eighth Wonder of the World.” Compound interest is the interest you earn on the initial amount you invested and the interest you already earned. It is basically “interest on interest.” The growth becomes exponential the more time you have.

Of Buffett’s $63 billion net worth, approximately $60 billion came after his 50th birthday, and $57 billion after his 60th. While you can always work to get more money, invest wisely to get a higher return — you can never get more time. Since the power of compound interest comes from time, you need to get started as soon as possible.

How not to invest

I thought I posted this before but I can't find it, so I'll post it again (assuming I posted it the first time).

What we are about to present is one of the most shared and coveted charts on StockTwits.

It shows the mistakes that traders and investors of all skill levels can make.

Two of the greatest attributes any market participant can have are discipline and a plan of action. Without either of those you may find yourself subject to a vicious journey like this:

[via roy]

The CAPE ratio

The CAPE ratio is currently around 27, which makes the following fact all the more worrisome: Before this year, the CAPE ratio has been higher than 25 in only three periods – the years clustered around 1929, 1999, and 2007.

You don't have to be a stock market historian to know what those years featured – market peaks followed by big bear markets. When framed that way, it seems that a CAPE ratio above 25 should be an automatic warning sign.

But that's only half the story. A closer look at the data shows that the market can do quite well even when CAPE ratios exceed 25:

Year	CAPE Ratio (on January 1)	S&P 500 Return
1997	28.33	+31.01%
1998	32.86	+26.67%
1999	40.57	+19.53%
2004	27.66	+8.99%
2005	26.59	+3%
2006	26.47	+13.62%
2007	27.21	+3.55%

Shiller himself admits the limitations of CAPE as a forecasting tool, in his article he plainly states that "the ratio has been a very imprecise indicator" and that it was "never intended to indicate when exactly to buy and sell."

With the CAPE ratio hovering around 27 now, it's certainly not something to completely ignore. But we also know that stocks can remain "overvalued" for several years before reverting to the mean.

-- ZIM Weekly Update, 12/7/14

Connor Bruggemann

It was just a few weeks into the new school year when Connor Bruggemann decided to play sick. He holed up in his bedroom, shut the door, and opened his laptop. Over the summer his father had opened an Etrade account for him, using around $10,000 Bruggemann had saved up over two years working as a busboy and waiter at a local BBQ joint.

At first Bruggemann had used that cash to buy some big, well-known stocks: Apple, Verizon, and a few others. But today was different. One by one he liquidated those positions and put almost everything he had into American Community Development Group Inc, ticker sign ACYD, a penny stock selling for $.003 a share.

Over the next year Bruggemann would turn that $10,000 into more than $300,000, principally trading penny stocks, a practice rife with risk, fraud, and wild swings of fortune. He took off school that day, but for most of the time when Bruggemann was trading, he was also a 16-year-old high school junior in Wyckoff, New Jersey. With his iPhone in hand, Bruggemann would buy and sell six figures of stock from his lunch table, the bathroom, and, occasionally, on the sly while sitting at his desk.

ACYD was Bruggemann’s first big trade. It’s a manufacturer of industrial grade wireless equipment for municipal Wi-Fi systems. He had listened to a conference call where the CEO announced it would buy back shares of the company to try and spur the price towards 1 cent a share. Four days later, Bruggemann accumulated a position of several million shares at the price of roughly one-third of a penny each. Four days after that, the company officially announced its share buyback program, and the price began to climb.

By the end of September those shares had reached a price of a little over a penny each, and Bruggemann’s portfolio was worth more than $50,000. By October, the price of ACYD shares had risen to around 6 cents, 20 times what Bruggemann paid for them. His portfolio was suddenly worth just under $200,000. He sold off most of that position by the end of the December, by which time the stock was down to 4 cents.

By March, ACYD was down to a penny, and today it sits at $.0036 a share, almost exactly where it was when Bruggemann got started. It’s a reminder to him that trading such volatile stocks is a dangerous game.

"I guess the rule of thumb is, when you invest in a penny stock, expect to lose every dollar you put in. So there is always that risk," he told me. "There have been several times where I put every dollar I’ve had on the line, and fortunately it's worked out almost every time." He stops, then corrects himself. "Every time! Or else I’d have nothing."

[via facebook]

humans finally defeat monkeys!

The New York Times on Friday ran an article on how investors sabotage their long-term goals by making decisions based on short-term results. It carried a quote by Suzanne Duncan, global head of research at State Street’s Center for Applied Research: "Morningstar gives us false comfort," she said. "There's some truth to Morningstar's ratings. But there is untruth. Dart-throwing monkeys outperform market-cap-weighted indices."

All right, that passage requires some explaining.

That final sentence certainly does. If dart-tossing monkeys can reliably beat a stock market index, then monkeys would seem to have investment skill--and surely are worth the cost of zookeepers, cages, and bananas to employ as portfolio managers. The catch is in the adjective "market-cap-weighted." As Research Affiliates' Rob Arnott (presumably the original source of the quote) has argued, if small and value stocks outperform over time, as they have done historically, then any random stock-selection system would have a higher expected return than the S&P 500. This holds true regardless of the primate.

Thus, the monkey analogy does not support Duncan's previous sentences, which concern the usefulness of fund research. Rather, it argues that equal-weighted portfolios will outperform those that are cap-weighted.

Conventionally, the mutual fund industry's performance is equal-weighted. Morningstar.com tells me today that specialty health care has the highest returns of any fund category over the past three years, at 31.02% annually. That result was calculated by averaging the totals for each specialty health-care fund over that time period, counting the whales and minnows equally.

Asset weighting, on the other hand, goes where the money is; if a single whale outweighs all the minnows, then that whale’s numbers count for more than those of all the minnows combined. Thus, asset weighting indicates how investors have fared at fund selection. If funds’ asset-weighted gains are larger than their equal-weighted gains, the big funds have beaten the small, indicating that investors have selected wisely. If the figures are similar, investors did neither worse nor better. And if the equal-weighted performance is higher, then investors were dumber than monkeys. They would have been better off growing bananas than conducting fund research.

The asset-weighted figures for the past 12 months--



The story looks pretty good for investors. However, the numbers contain a lot of noise.

Things settle considerably when looking at a full decade--



Once again, investors fare pretty well. For sure, these results should not be considered conclusive. All fund research is time-period dependent. Sample another decade and the pattern may look weaker or possibly disappear altogether. Nonetheless, at least for the past 10 years, humans have comfortably bested the monkeys.

***

To check, I looked at RSP which is the equal-weighted S&P 500.  For one year, it has returned 17.02% to the S&P 500's 16.86%.  For ten years, it returned 9.37% to 8.06%.  Monkeys win.