Posts filed under ‘Financial Markets’
The Teflon Market
At the pace of all this head-scratching going on, our population is likely to turn completely bald. One thing is for certain, nothing has scratched this Teflon stock market. If you want to have fun with a friend, family member or co-worker, just ask them how they feel about politics and then ask them how stocks have done this year? You’re bound to get some entertaining responses. Despite a Congress that has a lower favorability rating than cockroaches, lice, root canals, and colonoscopies , the S&P 500 index is up a whopping +22% and the NASDAQ index + 30% this year, both records. The USA Today ran with the Teflon theme and had this to say:
“This year alone the stock market has survived the recent brush with a U.S. debt default. It has also survived a government shutdown. Tax hikes. Government spending cuts. The threat of war. Terror at the Boston Marathon. A spike in interest rates. Plunging Apple shares. Stock exchange glitches. Fears of a less-friendly Federal Reserve. And a narrow escape from going over the “fiscal cliff.” Nothing bad seems to stick.”
The reason nothing is sticking to this Teflon market is because the market is more sensitive to reality rather than perception. Here are some come current discrepancies between these two states:
Perception: The economy is on the verge of a recession. Reality: The economy has grown GDP for 15 of the last 16 quarters. The private sector has added about 7.5 million jobs and the unemployment rate has been cut by about three percentage points.
Perception: Corporations are struggling. Reality: Corporations are actually posting record profits; increasing dividends significantly; buying back stock; and registering record profit margins.
Perception: The Federal Reserve controls the economy. Reality: Federal Reserve Chairman Ben Bernanke has little to no influence on decisions made by companies like Google Inc (GOOG), Facebook Inc (FB), McDonald’s Corp (MCD), Tesla Motors Inc (TSLA), and Target Corporation (TGT) (see also The Greatest Thing Since Sliced Bread). Interest rates are actually higher than when QE1 (quantitative easing) was first implemented, yet growth persists.
These types of mental mistakes occur outside the realm of financial markets as well. For example, most people fail to correctly answer the question, “Which animal is responsible for the greatest number of human deaths in the U.S.?”
A.) Alligator; B.) Bear; C.) Deer; D.) Shark; and E.) Snake
The ANSWER: C) Deer.
Deer colliding into cars trigger seven times more deaths than alligators, bears, sharks, and snakes combined, according to Jason Zweig at the Wall Street Journal (see also Alligators & Airplane Crashes). Other mental disconnects include the belief that planes are more dangerous than cars. In fact, people are 65 times more likely to get killed in your own car versus a plane. Also, misconceptions exist that guns are more dangerous than smoking, or that tornadoes are more dangerous than asthma – both beliefs wrong.
Party Not Over Yet
Long-time followers and readers of Investing Caffeine know that I’ve been an active participant in this bull market that started in 2009, evidenced by my critical views of Armageddonists like Peter Schiff, John Mauldin, Nouriel Roubini, Meredith Whitney, and other doom & gloomers.
I fully recognize there’s no honor in being Pollyannaish or a perma-bull just for the sake of it. However, it’s also very clear that excessive fear exercised by many investors proved very painful as S&P 500 level 666 has exploded to 1,744. The extreme panic that reached a pinnacle in 2009 has now morphed into an insidious skepticism (see Sentiment Pendulum ). Investor emotions continually swing from fear to greed, and with the political shenanigans going on in Washington DC, the skeptical pendulum has a long way before reaching euphoric levels. Or stated differently, the pre-party is over (see my article from earlier this year, Those Who Missed the Pre-Party), but the DJ is still playing and the cops aren’t here to break up the party yet.
I agree that we’ve had a Teflon market for a handful of years. There have been a few minimal scratches and a few hand burns along the way, but for the most part, those investors who have stayed invested and ignored the endless manufactured crisis headlines have been rewarded handsomely. Investing in stocks will always cause some heartburn, but if you don’t want your long-term retirement to get grilled, seared, pan-fried, or flambéed, then you want to make sure you still have some stocks in your Teflon pan.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), AAPL and GOOG, but at the time of publishing, SCM had no direct position in FB, TGT, TSLA, MCD, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Take Me Out to the Stock Game
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (October 1, 2013). Subscribe on the right side of the page for the complete text.
The Major League Baseball playoffs are just about to start, and the struggling U.S. economy is also trying to score some more wins to make the postseason as well. In 2008 and early 2009, the stock market looked more like The Bad News Bears with the S&P 500 index losing -58% of its value from the peak to the trough. The overleveraged (debt-laden) financial system, banged by a speculative housing bubble, swung the global economy into recession and put a large part of the economic team onto the disabled list.
Since the lows of 2009, S&P 500 stocks have skyrocketed +152%, including an +18% gain in 2013, and a +3% jump in September alone. With that incredible track record, one might expect a euphoric wave of investors pouring into the stock market stadium, ready to open their wallets at the financial market concession stand. Au contraire. Despite the dramatic winning streak, investors remain complacent skeptics, analyzing and critiquing every political, economic, and financial market movement and gyration.
Unfortunately, as stock prices have scored massive gains, many market followers have been too busy eating peanuts and drinking beer, rather than focusing on the positive economic statistics in the scorebook, such as these:
15/16 Quarters of Positive GDP Growth:
 |
| Source: Crossing Wall Street |
Precipitous Drop in Unemployment Claims: The lowest level since 2007 (7.5 million private sector jobs added since employment trough).
 |
| Source: Bespoke |
All-Time Record Corporate Profits:
 |
| Source: Ed Yardeni |
Financially Healthier Consumer – Lower Debt & Higher Net Worth:
 |
| Source: Scott Grannis |
Improving Housing Market:
 |
| Source: Scott Grannis |
While you can see a lot of financial momentum is propelling Team USA, there are plenty of observers concerned more about potential slumps and injuries emanating from a lineup of uncertainties. Currently, the fair-weather fans who are sitting in the bleachers are more interested in the uncertainty surrounding a government shutdown, debt ceiling negotiations, Syrian unrest, Iranian nuclear discussions, Obamacare defunding, and an imminent tapering of the Federal Reserve’s QE bond purchasing program (see Perception vs. Reality). The fearful skepticism of the fans has manifested itself in the form of a mountain of cash ($7 trillion), which is rapidly eroding to inflation and damaging millions of retirees’ long-term goals (see chart below). The fans sitting in the bleachers are less likely to buy long-term season tickets until some of these issues are settled.
 |
| Source: Scott Grannis – $3 trillion added since crisis. |
The aforementioned list of worries are but a few of the concerns that have investors biting their nails. While there certainly is a possibility the market could be thrown a curve ball by one of these issues, veteran all-star investors understand there are ALWAYS uncertainties, and when the current list of concerns eventually gets resolved or forgotten, you can bet there will be plenty of new knuckle-balls and screw-balls (i.e., new list of worries) to fret over in the coming weeks, months, and years (see Back to the Future I, II,& III). Ultimately, the vast majority of concerns fade away.
Yoooouuuuuu’rrrreee Out!
The politicians in Washington are a lot like umpires, but what our country really needs are umpires who can change and improve the rules, especially the silly, antiquated ones (see also Strangest Baseball Rules). The problem is that bad rules (not good ones) often get put in place so the umpires/politicians can keep their jobs at the expense of the country’s best interest.
When umpires (politicians) cannot agree on how to improve the rules, gridlock actually is the next best outcome (see Who Said Gridlock is Bad?). The fact of the matter is that deficits and debt/GDP ratios have declined dramatically in recent years due in part to bitter political feuds (see chart below). When responsible spending is put into action, good things happen and a stronger economic foundation can be established to cushion future crises.
 |
| Source: Scott Grannis |
There is plenty of room for improvement, but the statistics speak for themselves, which help explain why patient fans/investors have been handsomely rewarded with a homerun over the last four years. October historically has been a volatile month for the stock market, and the looming government shutdown and $16.7 trillion debt ceiling negotiations may contribute to some short-term strike-outs. However, if history proves to be a guide, stocks on average rise +4.26% during the last three months of the year (source: Bespoke), meaning the game may just not be over yet. With plenty of innings remaining for stocks to continue their upward trajectory, I still have ample time to grab my hot dog and malt during the 7th inning stretch.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in TSLA, PBI, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Sidoxia’s Slome Hits Airwaves
Sidoxia’s President & Founder Conducts Series of Radio Interviews Spanning Topics Ranging from the Stock Market & Syria to Financial Planning & Government Debt
Click on Interview Links Below:
Memphis
Memphis
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. Radio interviews included opinions of Wade Slome – not advice. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Perception vs. Reality: Interest Rates & the Economy
There is a difference between perception and reality, especially as it relates to the Federal Reserve, the economy, and interest rates.
Perception: The common perception reflects a belief that Quantitative Easing (QE) – the Federal Reserve’s bond buying program – has artificially stimulated the economy and financial markets through lower interest rates. The widespread thinking follows that an end to tapering of QE will lead to a crash in the economy and financial markets.
Reality: As the chart below indicates, interest rates have risen during each round of QE (i.e., QE1/QE2/QE3) and fallen after the completion of each series of bond buying (currently at a pace of $85 billion per month in purchases). That’s right, the Federal Reserve has actually failed on its intent to lower interest rates. In fact, the yield on the 10-year Treasury Note stands at 2.94% today, while at the time QE1 started five years ago, on December 16, 2008, the 10-year rate was dramatically lower (~2.13%). Sure, the argument can be made that rates declined in anticipation of the program’s initiation, but if that is indeed the case, the recent rate spike of the 10-year Treasury Note to the 3.0% level should reverse itself once tapering begins (i.e., interest rates should decline). Wow, I can hardly wait for the stimulative effects of tapering to start!
Source: Calafia Beach Pundit
Fact or Fiction? QE Helps Economy
Taken from a slightly different angle, if you consider the impact of the Federal Reserve’s actions on the actual economy, arguably there are only loose connections. More specifically, if you look at the jobs picture, there is virtually NO correlation between QE activity and job creation (see unemployment claims chart below). There have been small upward blips along the QE1/QE2/QE3 path, but since the beginning of 2009, the declining trend in unemployment claims looks like a black diamond ski slope.
Source: Calafia Beach Pundit
Moreover, if you look at a broad spectrum of economic charts since QE1 began, including data on capital spending, bank loans, corporate profits, vehicle sales, and other key figures related to the economy, the conclusion is the same – there is no discernible connection between the economic recovery and the Federal Reserve’s quantitative easing initiatives.
I know many investors are highly skeptical of the stock market’s rebound, but is it possible that fundamental economic laws of supply and demand, in concert with efficient capital markets, could have something to do with the economic recovery? Booms and busts throughout history have come as a result of excesses and scarcities – in many cases assisted by undue amounts of fear and greed. We experienced these phenomena most recently with the tech and housing bubbles in the early and middle parts of last decade. Given the natural adjustments of supply and demand, coupled with the psychological scars and wounds from the last financial crisis, there is no clear evidence of a new bubble about to burst.
While it’s my personal view that many government initiatives, including QE, have had little impact on the economy, the Federal Reserve does have the ability to indirectly increase business and consumer confidence. Ben Bernanke clearly made this positive impact during the financial crisis through his creative implementation of unprecedented programs (TARP, TALF, QE, Twist, etc.). The imminent tapering and eventual conclusion of QE may result in a short-term hit to confidence, but the economy is standing on a much stronger economic foundation today. Making Ben Bernanke a scapegoat for rising interest rates is easy to do, but in actuality, an improving economy on stronger footing will likely have a larger bearing on the future direction of interest rates relative to any upcoming Fed actions.
Doubters remain plentiful, but the show still goes on. Not only are banks and individuals sitting on much sturdier and healthier balance sheets, but corporations are running lean operations that are reporting record profit margins while sitting on trillions of dollars in cash. In addition, with jobs on a slow but steady path to recovery, confidence at the CEO and consumer levels is also on the rise.
Despite all the negative perceptions surrounding the Fed’s pending tapering, reality dictates the impact from QE’s wind-down will likely to be more muted than anticipated. The mitigation of monetary easing is more a sign of sustainable economic strength than a sign of looming economic collapse. If this reality becomes the common perception, markets are likely to move higher.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
QE: The Greatest Thing Since Sliced Bread*
Quantitative easing (QE), or the Federal Reserve’s bond buying program, has been a spectacular success. Arguably, the greatest innovation since sliced bread. Don’t believe me? I mean, if you listen to many of the experts, strategists, economists, and blogosphere pundits, the magical elixir of QE can be the only explanation rationalizing the multi-year economic recovery and stock market boom. Don’t believe me? Well, apparently many of the bearish pros make sure to credit QE for all our financial/economic positives. For example…
- QE is the reason the stock market is near all-time record highs.
- QE created seven million jobs in the U.S. over the last four years.
- QE turned around the housing market.
- QE turned around the auto market.
- QE weakened the U.S. dollar, resulting in flourishing exports.
- QE has lowered borrowing rates, thereby cleansing consumer balance sheets through deleveraging.
- QE is the reason Facebook Inc. (FB) hired 1,323 employees over the last year.
- QE is the reason Google Inc. (GOOG) has spent $7.8 billion on R&D over the last year.
- QE explains why McDonald’s Corp. (MCD) plans to open more than 1,400 stores this year.
- QE explains why Warren Buffett and 3G capital paid $28 billion to buy Heinz.
- QE is the reason Elon Musk and Tesla Motors (TSLA) invented the model S electric vehicle.
- QE exhibits why Target Corp. (TGT) is expanding outside the U.S. into Canada.
- QE is the reason why S&P 500 companies are expected to pay $300 billion in dividends this year.
- QE is the reason why S&P 500 companies were buying back shares at a $400 billion clip this year.
- QE is the basis for corporations spending billions on efficiency enhancing cloud-based services.
- QE led to a record number of new FDA drug approvals last year.
- QE has caused a natural gas production boom in numerous shale regions.
Wow…the list goes on and on! Heck, I even hear QE can take the corrosion off of a rusted car battery. Given how incredible this QE stuff is, why even consider tapering QE? Financial markets have been volatile on the heels of tapering the 3rd iteration of quantitative easing (QE3), but why slow QE3, when the FED could add more awesomeness with QE4, QE10, QE 100, and QE 1,000?
All of this QE talk is so wonderful, but unfortunately, according to all the bearish pundits, QE has created an artificial sugar high, thus creating an asset bubble that is going to end in a disastrous cratering of financial markets.
I know it’s entirely possible that QE may have absolutely nothing to do with the financial market recovery (other than a bid under Treasury & mortgage backed security prices), and also has no bearing on why I buy or sell stocks, but I guess I will need to hide in a cave when QE3 tapering begins. Although the end of dividends, share buybacks, housing/auto recoveries, acquisitions, expansion, innovation, etc., caused by QE tapering sure does not sound like a cheery outcome, at least I still have a loaf of sliced bread to make a sandwich.
*DISCLOSURE: For those readers not familiar with my writing style, I have been known to use a healthy dose of sarcasm. Call me if you want a deeper explanation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE II : Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and GOOG, but at the time of publishing, SCM had no direct position in FB, TSLA, MCD, BRKA, TGT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page
Stocks Take a Breather after Long Sprint
Like a sprinter running a long sprint, the stock market eventually needs to take a breather too, and that’s exactly what investors experienced this week as they witnessed the Dow Jones Industrial Average face its largest drop of 2013 (down -2.2%) – and also the largest weekly slump since 2012. Runners, like financial markets, sooner or later suffer fatigue, and that’s exactly what we’re seeing after a relatively unabated +27% upsurge over the last nine months. Does a -2% hit in one week feel pleasant? Certainly not, but before the next race, the markets need to catch their breath.
By now, investors should not be surprised that pitfalls and injuries are part of the investment racing game – something Olympian Mary Decker Slaney can attest to as a runner (see 1984 Olympic 3000m final against Zola Budd). As I have pointed out in previous articles (Most Hated Bull Market), the almost tripling in stock prices from the 2009 lows has not been a smooth, uninterrupted path-line, but rather investors have endured two corrections averaging -20% and two other drops approximating -10%. Instead of panicking by locking in damaging transaction costs, taxes, and losses, it is better to focus on earnings, cash flows, valuations, and the relative return available in alternative asset classes. With generationally low interest rates occurring over recent periods, the available subset of attractive investment opportunities has narrowed (see Confessions of a Bond Hater), leaving many investing racers to default to stocks.
Recent talk of potential Federal Reserve bond purchase “tapering” has led to a two-year low in bond prices and caused a mini spike in interest rates (10-year Treasury note currently yielding +2.83%). At the margin, this trend makes bonds more attractive (lower prices), but as you can see from the chart below, interest rates are still relatively close to historically low yields. For the time being, this still makes domestic equities an attractive asset class.
Source: Yahoo! Finance
Price Follows Earnings
The simple but true axiom that stock prices follow earnings over the long-run is just as true today as it was a century ago. Interest rates and price-earnings ratios can also impact stock prices. To illustrate my argument, let’s talk baseball. Wind, rain, and muscle (interest rates, PE ratios, political risk, etc.) are factors impacting the direction of a thrown baseball (stock prices), but gravity is the key factor influencing the ultimate destination of the baseball. Long-term earnings growth is the equivalent factor to gravity when talking about stock prices.
To buttress my point that stock prices following long-term earnings, consider the fact that S&P 500 annualized operating earnings bottomed in 2009 at $39.61. Since that point, annualized earnings through the second quarter of 2013 (~94% of companies reported results) have reached $99.30, up +151%. S&P 500 stock prices bottomed at 666 in 2009, and today the index sits at 1655, +148%. OK, so earnings are up +151% and stock prices are up +148%. Coincidence? Perhaps not.
If we take a closer look at earnings, the deceleration of earnings growth is unmistakable (see Financial Times chart below), yet the S&P 500 index is still up +16% this year, excluding dividends. In reality, predicting multiple expansion or contraction is nearly impossible. For example, earnings in the S&P 500 grew an incredible +15% in 2011, yet stock prices were anemically flat for that year, showing no price appreciation (+0.0%). Since the end of 2011, earnings have risen a meager +3%, however stock prices have catapulted +32%. Is this multiple expansion sustainable? Given stock P/E ratios remain in a reasonable 15-16x range, according to forward and trailing earnings, there is some room for expansion, but the low hanging fruit has been picked and further double-digit price appreciation will require additional earnings growth.
Source: Financial Times
But stocks should not be solely looked through a domestic lens…there is another 95% of the world’s population slowly embracing capitalism and democracy to fuel future dynamic earnings growth. At Sidoxia (www.Sidoxia.com), we are finding plenty of opportunities outside our U.S. borders, including alternative asset classes.
The investment race continues, and taking breathers is part of the competition, especially after long sprints. Rather than panic, enjoy the respite.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Markets Soar and Investors Snore
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (August 1, 2013). Subscribe on the right side of the page for the complete text.
If you haven’t been paying close attention, or perhaps if you were taking a long nap, you may not have noticed that the stock market was up an astounding +5% in July (+78% if compounded annualized), pushing the S&P 500 index up +18% for the year to near all-time record highs. Wait a second…how can that be when that bald and grey-bearded man at the Federal Reserve has hinted at bond purchase “tapering” (see also Fed Fatigue)? What’s more, I thought the moronic politicians were clueless about our debt and deficit-laden economy, jobless recovery, imploding eurozone, Chinese real estate bubble, and impending explosion of inflation – all of which are expected to sink our grandchildren’s grandchildren into a standard of living not seen since the Great Depression. Okay, well a dash of hyperbole and sarcasm never hurt anybody.
This incessant stream of doom-and-gloom pouring over our TVs, newspapers, and internet devices has numbed Americans’ psyches. To prove my point, the next time you are talking to somebody at the water cooler, church, soccer game, or happy hour, gauge how excited your co-worker, friend, or acquaintance gets when you bring up the subject of the stock market. If my suspicions are correct, they are more likely to yawn or pass out from boredom than to scream in excitement or do cartwheels.
You don’t believe me? Reality dictates the wounds from the 2008-2009 financial crisis are still healing. Panic and fear may have disappeared, but skepticism remains in full gear, even though stocks have more than doubled in price in recent years. Here is some data to support my case there are more stock detractors than defenders:
Record Savings Deposits
 |
| Source: Calafia Beach Pundit |
Although there are no signs of an impending recession, defensive cash hoarded in savings deposits has almost increased by $3 trillion since the end of the financial crisis.
Blah Consumer Confidence
 |
| Source: Calafia Beach Pundit |
As you can see from the chart above, Consumer Confidence has bounced around quite a bit over the last 30+ years, but there is no sign that consumer sentiment has turned euphoric.
15-Year Low Stock Market Participation
 |
|
Source: Gallup Poll
|
There has been a trickling of funds into stocks in 2013, yet participation in the stock market is at a 15-year low. Investors remain nervous.
Lack of Equity Fund Buying
 |
| Source: ICI & Calafia Beach Pundit |
After a short lived tax-driven purchase spike in January, the buying trend quickly turned negative in the ensuing months. Modest inflows resumed into equity funds during the first few weeks of July (source: ICI), but the meager stock fund investments represent < 95% of 2012 positive bond flows ($15 billion < $304 billion, respectively). Moreover, these modest stock inflows pale in comparison to the hundreds of billions in investor withdrawals since 2008. See also Fund Flows Paradox – Investing Caffeine.
Decline in CNBC Viewership
In spite of the stock market more than doubling in value from the lows of 2009, CNBC viewer ratings are the weakest in about 20 years (source: Value Walk). Stock investing apparently isn’t very exciting when prices go up.
The Hater’s Index:
And if that is not enough, you can take a field trip to the hater’s comment section of my most recent written Seeking Alpha article, The Most Hated Bull Market Ever. Apparently the stock market more than doubling creates some hostile feelings.
JOLLY & JOVIAL MEMO
Keeping the previous objective and subjective data points in mind, it’s clear to me the doom-and-gloom memo has been adequately distributed to the masses. Less clear, however, is the dissemination success of the jolly-and-jovial memo. I think Ron Bailey, an author and science journalist at Reason.com (VIDEO), said it best, “News is always bad news. Good news is simply not news…that is our [human] bias.” If you turn on your local TV news, I think you may agree with Ron. Nevertheless, there are actually plenty of happier news items to report, so here are some positive bullet points to my economic and stock market memo:
16th Consecutive Positive GDP Quarter*
 |
| Source: Quartz.com |
The broadest measure of economic activity, GDP (Gross Domestic Product), was reported yesterday and came in better than expected in Q2 (+1.7%) for the 16th straight positive reported quarter (*Q1-2011 was just revised to fractionally negative). Obviously, the economists and dooms-dayers who repeatedly called for a double-dip recession were wrong.
40 Consecutive Months & 7 Million Jobs
Source: Calculated Risk
The economic recovery has been painfully slow, but nevertheless, the U.S. has experienced 40 consecutive months of private sector job additions, representing +7.2 million jobs created. With about -9 million jobs lost during the most recent recession, there is still plenty of room for improvement. We will find out if the positive job creation streak will continue this Friday when the July total non-farm payroll report is released.
Housing on the Mend
 |
| Source: Calafia Beach Pundit |
New home sales are up significantly from the lows; housing starts have risen about 40% over the last two years; and Case Shiller home prices rose by +12.2% in the latest reported numbers. The housing market foundation is firming.
Auto Sales Rebound
 |
| Source: Calafia Beach Pundit |
Auto sales remain on a tear, reaching an annualized level of 15.9 million vehicles, the highest since November 2007, and up +12% from June 2012. Car sales have almost reached pre-recessionary levels.
Record Corporate Profits
 |
| Source: Dr. Ed’s Blog |
Optimistic forecasts have been ratcheted down, nonetheless corporate profits continue to grind to all-time record highs. As you can see, operating earnings have more than doubled since 2003. Given reasonable historical valuations in stocks, as measured by the P/E (Price Earnings) ratio, persistent profit growth should augur well for stock prices.
Bad Banks Bounce Back
Europe on the Comeback Trail
 |
| Source: Calafia Beach Pundit |
There are signs of improvement in the Eurozone after years of recession. Talks of a European Armageddon have recently abated, in part because of Markit manufacturing manager purchasing statistics that are signaling expansion for the first time in two years.
Overall, corporations are achieving record profits and sitting on mountains of cash. The economy is continuing on a broad, steady recovery, however investors remain skeptical. Domestic stocks are at historic levels, but buying stocks solely because they are going up is never the right reason to invest. Alternatively, bunkering away excessive cash in useless, inflation depreciating assets is not the best strategy either. If nervousness and/or anxiety are driving your investment strategy, then perhaps now is the time to create a long-term plan to secure your financial future. However, if your goal is to soak up the endless doom-and-gloom and watch your money melt away to inflation, then perhaps you are better off just taking another nap.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Hammering Heads with Circular Conversations
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (July 1, 2013). Subscribe on the right side of the page for a complete monthly update.
Deciphering what is driving the markets on a day-to-day, week-to-week, or month-to-month basis can feel like repeatedly hammering your head. In order to grasp the reasons why financial markets go up and down, one must have a conversation with your brain explaining that good news can be bad for asset prices, and bad news can be good for asset prices. Huh…how can that be? These circular conversations are what keep newspapers, magazines, media commentators, and bloggers in business… and what baffle many investors.
For example, headlines often reflect sentiments such as these:
- “Unemployment Figures Disappoint…Dow Jones Rallies +200 Points on QE3 Continuation Hopes”
- “Unemployment Figures Delight…Dow Jones Tanks -200 Points on QE3 Discontinuation Fears”
- “Economic Figures Revised Lower by -0.2%…Dow Jones Skyrockets +200 Points as Lower Interest Rates Propel Stock Prices.”
- “Economic Figures Revised Higher by +0.2%…Dow Jones Plummets -200 Points as Higher Interest Rates Deflate Stock Prices.”
On rare occasions these headlines make sense, but often online media outlets are frantically changing the headlines as the markets whip back and forth from positive to negative. News-producing editors are continually forced to create ludicrous and absurd explanations that usually make no sense to informed long-term investors.
It’s important to recognize that if the financial markets made common sense, then investing for retirement would be simple and everyone would be billionaires. Unfortunately, financial markets frequently make no sense in the short-run. Stocks are volatile (often times for no rational reason), which is why stocks offer higher returns over the long-run relative to more stable asset classes.
Explaining the latest spike in stock/bond price volatility has been exacerbated in recent weeks as a result of the nation’s banker (the Federal Reserve) and its boss, Ben Bernanke, attempting to explain their future monetary policy plans. In theory, bringing light to a traditionally mysterious, closed-door Washington process should be a good thing…right?
Well, ever since a few weeks ago when Ben Bernanke and the FOMC (Federal Open Market Committee) disclosed that the stimulative bond buying program (QE3) could be slowed in 2013 and halted in 2014, financial markets globally experienced a sharp jolt of volatility – stock prices dropped and interest rates spiked. Counter-intuitively, Bernanke’s belief that the economy is on a sustained recovery path (expected GDP growth of +3.25% in both 2014 & 2015) spooked investors. More specifically, in the month of June, the S&P 500 index declined -1.5% in June; Dow Jones Industrial Index -1.4%; and the 10-year Treasury note’s yield jumped +0.3% to 2.5%. Greedy investors, however, should not forget that the stock market just posted its 2nd best quarter since 2009 – the S&P 500 climbed +2.4%. What’s more, the S&P 500 is up +13% and the Dow up +14% in the first half of 2013.
Bernanke Threatening to Take Away Investor Lollipops
Another way of looking at the recent volatility is by equating investors to kids and stimulative QE bond buying programs (Quantitative Easing) to lollipops. If the economy continues on this improvement trajectory (i.e., unemployment falls to 7% by next year) and inflation remains benign (below 2.5%), then Bernanke said he will take away investors’ QE lollipops. But like a pushover dad being pressured by kids at the candy store, Bernanke acknowledged that he could continue supplying investors QE lollipops, if the economic data doesn’t improve at the forecasted pace. At face value, receiving a specific timeline given by the Fed should be appreciated and normally people are happy to hear the Chairman speak rosily about the economy’s future. However, the mere thought of QE lollipops being taken away next year was enough to push investors into a “taper tantrum” (see also Investing Caffeine – Fed Fatigue article).
With scary headlines constantly circulating, a large proportion of investors are sitting on their hands (and cash) while staring like deer in headlights at these developments. Rather than a distracted driver texting, investors should be watching the road and mapping out their future investment destinations – not paying attention to irrelevant diversions. Astute investors realize that uncertainty surrounding Greece, Cyprus, fiscal cliff, sequestration, presidential elections, Iran, N. Korea, Syria, Turkey, taxes, QE3, etc., etc., etc., have been a constant. Regrettably the fear mongers paying attention to these useless headlines have witnessed their cash, gold, and Treasuries get trounced by equity returns since early 2009 (the S&P 500 index is up about +150%, including dividends). Optimists and realists, on the other hand, have seen their investment plans thrive. While the aforementioned list of concerns has dangled in front of our noses over the last year, we will have a complete new list of concerns to decipher over the coming weeks, months, and years. That’s the price a long-term investor pays if they want to earn higher returns in the volatile equity markets.
As strategist Don Hays points out, “Nothing is certain. Good investors love uncertainty.” Rather than getting consumed by fear with the endless number of changing uncertainties, the real risk for investors is outliving your savings. Paychecks are being stretched by inflationary pressures across all categories (e.g., healthcare, gasoline, utilities, food, movies, travel, etc.) and entitlements like Social Security and Medicare will likely not mean the same thing to us as it did for our parents. Unless investors plan on working into their 80s as greeters at Wal-Mart, and/or enjoy clipping Top Ramen coupons in a crammed apartment, then they should do themselves a favor by taking a deep breath and turning off the television, so they can be insulated from the constant doom and gloom.
So as intimidating, circular conversations about good news being bad news, and bad news being good news continue to swirl around, focus instead on building a diversified investment plan that can adjust and adapt to the never-ending list of uncertainties. Your head will feel a lot better than it would after repetitive hammer strikes.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and WMT, but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Fed Fatigue Setting In
Uncle…uncle! There you have it – I have finally cried “uncle” because I cannot take it anymore. I don’t think I can listen to another panel or read another story debating about the timing of Fed “tapering”, or heaven forbid the Fed actually “tighten” the Federal Funds rate (i.e., increasing the targeted rate for inter-bank lending). Type in the words “Bernanke” and “tapering” into Google and you will get back more than 41,000,000 results. The build up to the 600-word FOMC (Federal Open Market Committee) statement was almost deafening, so much so that live coverage of Federal Reserve Chairman Ben Bernanke was available at your fingertips:
Source: Yahoo! Finance
Like a toddler (or a California-based, investment blog writer) going to the doctor’s office to receive an inoculation, the anxiety and mental anguish caused in anticipation of the event is often more painful than the actual injection. As I highlighted in a previous Investing Caffeine article, the 1994 interest rate cycle wasn’t Armageddon for equity markets, and the same can be said for the rate hikes from 1.0% to 5.25% in the 2004-20006 period (see chart below). Even if QE3 ends in mid-2014 and the new Federal Reserve Chairman (thank you President Obama) raises rates in 2015, this scenario would not be the first (or last) time the Federal Reserve has tightened monetary policy.
Source: Wikipedia
Short Memories – What Have You Done for Me Lately?
People are quick to point out the one-day -350 Dow point loss earlier this week, but many of them forget about the +3,000 point moon shot in the Dow Jones Industrial index that occurred in six short months (November 2012 – May 2013). The same foggy recollection principle applies to interest rates. The recent rout in 10-year Treasury prices is easily recalled as rates have jumped from 1.5% to 2.5% over the last year, however amnesia often sets in for others if you ask them where rates were a few years ago. It’s easy to forget that 30-year fixed rate mortgages exceeded 5% and the 10-year reached 4% just three short years ago.
Bernanke: The Center of the Universe?
Does Ben Bernanke deserve credit for implementing extraordinary measures during extraordinary times during the 2008-09 financial crisis? Absolutely. But should every man, women, and child wait with bated breath to see if a word change or tonal adjustment is made in the eight annual FOMC meetings?
Like the public judging Ben Bernanke, my Sidoxia clients probably give me too much credit when things go well and too much blame when things don’t. I love how Bernanke gets blamed/credited for the generational low interest rates caused by his money printing ways and QE punch bowl tactics. Last I checked, the interest rate downtrend has been firmly in place over the last three decades, well before Bernanke came into the Fed and worked his monetary magic. How much credit/blame are we forgetting to give former Federal Reserve Chairmen Paul Volcker, Alan Greenspan, and other government policy-makers? Regardless of what happens economically for the remainder of 2013, Bernanke will do whatever he can to solidify his legacy in the waning sunset months of his term.
Another forgotten fact I like to point out: There is more than one central banker living on this planet. If you haven’t been asleep over the last few decades, our financial markets have increasingly become globally interconnected with the assistance of technology. I know our 10-year Treasury rates are hovering around 2.50%, and our egotistical patriotism leads us to hail Bernanke as a monetary god, but don’t any other central bankers or government officials around the world deserve any recognition for achieving yields even lower than ours? Here’s a partial list (June 22, 2013 – Financial Times):
- Japan – 0.86%
- Germany – 1.67%
- Canada – 2.33%
- U.K. – 2.31%
- France – 2.27%
- Sweden – 2.15%
- Austria – 2.09%
- Switzerland – 0.92%
- Netherlands – 2.07%
Although it may be fun to look at Ben Bernanke as our country’s financial Superman who is there to save the day, there are a lot more important factors to consider than the 47 words added and 19 subtracted from the latest FOMC statement. If investing was as easy as following central bank monetary policy, everyone would be continually jet setting to their private islands. Rather than wasting your time listening to speculative blathering about direction of Fed monetary policy, why not focus on finding solid investment ideas and putting a long-term investment plan in place. Now please excuse me – Fed fatigue has set in and I need to take a nap.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and GOOG, but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
U.S. Small-Caps Become Global Big Dog
With the emerging market currencies and financial markets under attack; Japan’s Nikkei index collapsing in the last three weeks; and the Federal Reserve hinting about its disciplinarian tapering of $85 billion in monthly QE3 bond purchases, one would expect higher beta small cap stocks to get hammered in this type of environment.
Before benchmarking results in the U.S., let’s take a closer look at some of the international carnage occurring from this year’s index value highs:
- Japan: -19% (Nikkei 225 index)
- Brazil: -22% (IBOVESPA index)
- Hong Kong: -12% (Hang Seng index)
- Russia: -19% (MICEX/RTS indexes)
Not a pretty picture. Given this international turmoil and the approximately -60% disintegration in U.S. small-cap stock prices during the 2007-2009 financial crisis, surely these economically sensitive stocks must be getting pummeled in this environment? Well…not necessarily.
Putting the previously mentioned scary aspects aside, let’s not forget the higher taxes, Sequestration, and ObamaCare, which some are screaming will push us off a ledge into recession. Despite these headwinds, U.S. small-caps have become the top dog in global equity markets. Since the March 2009 lows, the S&P 600 SmallCap index has more than tripled in value ( about +204%, excluding dividends), handily beating the S&P 500 index, which has advanced a respectable +144% over a similar timeframe. Even during the recent micro three-week pullback/digestion phase, small cap stocks have retreated -2.8% from all-time record highs (S&P 600 index). Presumably higher dividend, stable, globally-diversified, large-cap stocks would hold up better than their miniature small-cap brethren, but that simply has not been the case. The S&P 500 index has underperformed the S&P 600 by about -80 basis points during this limited period.
How can this be the case when currencies and markets around the world are under assault? Attempting to explain short-term moves in any market environment is a hazardous endeavor, but that has never slowed me down in trying. I believe these are some of the contributing factors:
1) No Recession. There is no imminent recession coming to the U.S. As the saying goes, we hear about 10 separate recessions before actually experiencing an actual recession. The employment picture continues to slowly improve, and the housing market is providing a slight tailwind to offset some the previously mentioned negatives. If you want to fill that half-full glass higher, you could even read the small-cap price action as a leading indicator for a pending acceleration in a U.S. cyclical recovery.
2) Less International. The United States is a better house in a shaky global neighborhood (see previous Investing Caffeine article), and although small cap companies are expanding abroad, their exposure to international markets is less than their large-cap relatives. Global investors are looking for a haven, and U.S. small cap companies are providing that service now.
3) Inflation Fears. Anxiety over inflation never seems to die, and with the recent +60 basis point rise in 10-year Treasury yields, these fears appear to have only intensified. Small-cap stocks cycle in and out of favor just like any other investment category, so if you dig into your memory banks, or pull out a history book, you will realize that small-cap stocks significantly outperformed large-caps during the inflationary period of the 1970s – while the major indexes effectively went nowhere over that decade. Small-cap outperformance may simply be a function of investors getting in front of this potential inflationary trend.
Following the major indexes like the Dow Jones Industrials index and reading the lead news headlines are entertaining activities. However, if you want to become a big dog in the investing world and not get dog-piled upon, then digging into the underlying trends and market leadership dynamics of the market indexes is an important exercise.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including emerging market ETFs, IJR, and EWZ, but at the time of publishing, SCM had no direct position in Hong Kong ETFs, Japanese ETFs, Russian ETFs, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Investing Caffeine 
