Posts tagged ‘2011’

2011: Beating Batter into Flat Pancake

As it turns out, 2011 can be characterized as the year of the pancake…the flat pancake. While the Dow Jones Industrial Average (Dow) rose about 6% this year (its third consecutive annual gain), the S&P 500 ended the year flat at 1257.6 (-0.003%), the smallest yearly move in more than four decades. Along the way in 2011, there was plenty of violent beating and whipping of the lumpy pancake batter before the flat cake was cooked for the year. With respect to the financial markets, the 2011 lumps came in the form of various unsavory events:

* Never-Ending Eurozone Financial Saga: After Ireland and Portugal sought bailouts, Greece added its negligent financial storyline to the financial soap opera. Whether European government leaders can manage out-of-control deficits and debt loads will determine if Greece and other peripheral countries will topple larger countries like Italy and Spain.

* Credit Rating Downgrade: Standard & Poor’s, the highest profile credit rating agency, downgraded the U.S.’s long-term debt rating to AA+ from AAA due to high debt levels and Congressional legislators inability to hammer out a deficit-reduction plan during the debt ceiling negotiations.

* Japanese Earthquake and Tsunami: Japan and the global economy were rocked by a magnitude 9.0 earthquake and tsunami on March 11, 2011, which resulted in 15,844 people dead and 3,451 people missing. The ripple effects are still being felt through large industries like the automobile and electronics industries.

* Arab Spring Protests: Protesters throughout the Middle East and North Africa provided additional uncertainty to the global political map as demonstrators demanded regime change and more political freedoms. In the long-run, removing oppressive leaders like Hosni Mubarak (Egypt’s leader for 30 years), Muammar Gadaffi (Libya’s leader for 42 years), and Zine al-Abidine Ben Ali (Tunisia’s president for 23 years) should be beneficial for global stability, but in the short-run, how the new leadership vacuum will be filled remains ambiguous.

* Occupy Movement Voices Disapproval: The Occupy Wall Street movement began on September 17, 2011 in Liberty Square in Manhattan’s Financial District, and spread to over 100 cities in the U.S. There has not been a cohesive articulated agenda, but a common thread underlying all the Occupy movements is a sense that 99% of the population is being treated unfairly due to a flawed corrupt system controlled by Wall Street that is feeding the richest 1%.

All these lumps experienced in 2011 were not settling to investors’ stomachs. As a result individuals continued the trend of piling into bonds, in hopes of soothing their investment tummies. Long-term Treasury prices spiked upwards in 2011 (+29% as measured by TLT Treasury ETF) and soaring 10-year Treasury note prices pushed yields (1.87%) below yields on S&P 500 equities (2.1%). Despite a more than 3,400 point increase in the Dow (+39%) since the end of 2008, investors have still poured $774 billion into bonds versus $33 billion yanked from equities, according to EPFR Global. Over-weighting bonds makes sense for some, including retirees on fixed budgets, but many investors should brace for an inevitable reversal in bond prices. Eventually, the sweet taste of safety achieved from bond appreciation will turn to heartburn, once interest rates reverse their 30 year trend of declines.

Syrupy Factors Help Sweeten Pancakes 
 

Although the aforementioned factors lead to historically high volatility and flat flavors in 2011, there are also some countering sweet reasons that make equities look more palatable for 2012. Here are some of the factors:

* Record Corporate Profits: Even with the constant barrage of fear, uncertainty, and doubt distributed via the media channels, corporations posted record profits in 2011, with an estimated increase of +16% over last year (and another forecasted +10% rise in 2012 – Source: S&P).

* Historic Levels of Cash: Record profits mean record cash, and all those riches have been piling up on non-financial corporate balance sheets at historic levels. At the beginning of Q4 the figure stood at $2.12 trillion. Companies have generally been stingy, but as the recovery progresses, they have increasingly been spending on technology, equipment, international expansion, and even the beginnings of hiring.

* Interest Rates at 60 Year Lows: Interest rates are at record lows and home affordability has never been better with 30-year fixed rate mortgages hovering below 4%. Housing may not come screaming back, but the foundation for a recovery is being laid.

* Improving Economic Variables: Whether you’re looking at broader economic activity (Gross Domestic Product up for nine consecutive quarters); employment growth (declining unemployment rate and 21 consecutive months of private job creation), or consumer spending (consumer confidence approaching multi-year highs), all major signs are currently pointing to an improving outlook.

* Near Record Exports: While the U.S. dollar has made some recent gains against foreign currencies because of the financial crisis in Europe, the relative value of the dollar remains historically low versus the major global currencies. The longer-term depreciation of the dollar has buoyed exports of U.S. goods to near record levels despite the global uncertainty.

* Unprecedented Central Bank Support Globally: Ben Bernanke and the U.S. Federal Reserve is committed to keeping exceptionally low levels of lending interest rates at least through mid-2013, while also implementing “Operation Twist” and potential further quantitative easing (QE3). Translation: Ben Bernanke is going to do everything in his power to keep interest rates low in order to stimulate economic growth. The European Central Bank (ECB) has pulled out its lending fire trucks too, with an unparalleled three-year lending program to extinguish liquidity fires in the European banking sector.

* Improving Mergers & Acquisitions Environment: We may not be back to the 2006 buyout “hay-days,” but U.S. mergers and acquisitions activity increased +24% in 2011. What’s more, high profile potential IPOs like an estimated $100 billion Facebook offering may help kick-start the new equity issuance market in 2012.

* Tasty Fat Dividends: Rarely have S&P 500 dividend yields (currently 2.1%) outpaced the interest rates earned on 10-year Treasury note yields, but now happens to be one of those times. Typically S&P 500 stock dividends have averaged about 40% of the yield on 10-year Treasury notes, and now it is 112%. In Q3 of 2011, dividend increases rose +17% and expectations are for nearly a +11% increase in 2012, said Howard Silverblatt, senior index analyst at S&P.

Any way you cut it (or beat the batter), 2011 was a volatile year. And despite all the fear, uncertainty, and doubt, profits continue to grow and sovereign nations are being forced to deal with their fiscal problems. Unforeseen risks always exist, but if Europe can contain its financial crisis and the U.S. recovery can continue into this new election year, then opportunities in the 2012 attractively priced equity markets should sweeten the flat equity pancake we ate in 2011.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, including a short position in TLT, 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.

January 3, 2012 at 1:07 am Leave a comment

2011 Sidoxia – IC Greatest Hits

There was some entertaining dancing going on early in 2011, but for the most part, the year brought a lot of rock ‘n’ roll on its way to what looks like a flattish year on a return basis.  Sidoxia Capital Management and Investing Caffeine (IC) followed everything from the Royal Wedding and Charlie Sheen to the debt ceiling debate and the Arab Spring. Amongst all the celebration and chaos, IC pounded away at the keyboard and reported on the financial markets and the virtues of investing. Out of the 80 or so postings at IC this year, here are my top 11 favorites of 2011:

•  Spoonfuls of Investment Knowledge: Classic investment quotes and tenets.

•  10 Ways to Destroy Your Portfolio: Investment mistakes to avoid.

•  Solving Europe and Your Deadbeat Cousin: Putting the European financial crisis in context.

•  A Serious Situation in Jackson Hole:  The “Situation” meets Ben Bernanke.

•  It’s the Earnings, Stupid: Stock prices and the inextricable ties with earnings.

•  Innovative Bird Keeps All the Worms:  Innovative not first mover gains the prize.

•  Snoozing Your Way to Investment Prosperity: How to invest and sleep well during financial market mayhem.

•  The Fallacy of High P/E’s: Sustainably high earnings growth can trump high P/E ratios.

•  Gospel from 20th Century Investment King: Investment maxims from legend Sir John Templeton.

•  The 10 Investment Commandments: Charles Ellis passes down key laws to investment disciples.

•  Share Buybacks and Bathroom Violators: Pet peeves in the bathroom and share repurchase.

Happy Holidays and Happy New Year from Investing Caffeine and Sidoxia Capital Management!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, 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.

December 24, 2011 at 8:56 pm Leave a comment

August Shakes, Rattles, and Swirls

Shake, Rattle, & Swirl: Category 3 hurricane Irene pounded the eastern seaboard with winds reaching 110 miles per hour, knocking out power in an estimated 8 million homes and businesses. Some analysts estimate the damage to be somewhere between $7 billion and $10 billion. If that wasn’t enough, earlier in the same week, a 5.8-magnitude earthquake rippled from its Virginia epicenter up to Maine rattling both buildings and people’s nerves.

Volatility Spikes in August: Volatility, as measured by the Volatility Index (VIX – a.k.a. “Fear Gauge”), reared its ugly head again in August, reaching a level exceeding 44 (Source: Hays Advisory). This reading has only been experienced nine times in the last 25 years. Historically, on average, these have been excellent buying points for long-term investors.

Steve Jobs Lets Go of Reins: After being Chief Executive Officer of Apple Inc. (AAPL – formerly Apple Computers) for more than 20 years, Steve Jobs passed the CEO reins over to Tim Cook, who has been with the company for 13 years (including interim CEO). Jobs will remain on board as Chairman of Apple and still provide assistance in a more limited capacity.

Buffett Puts Dry Powder to Work: Billionaire Warren Buffett is putting his money where his mouth is. Although he is one of a few wealthy individuals griping about too LOW income taxes (NYT OpEd), at least he is using some of his extra bucks to support the country’s financial system. More specifically, Buffet’s Berkshire Hathaway Inc. (BRKA) is investing $5 billion in troubled banking giant Bank of America Corp.’s (BAC) preferred stock (paying a 6% dividend), with warrants to buy additional stock in the future at a mutually prearranged price.

Google Buys Motorola Mobility: Google Inc. (GOOG) agreed to pay $12.5 billion to buy cellphone maker Motorola Mobility Holdings (MMI) in a move designed to protect the internet giant, and its partners, against patent litigation as it pertains to the Google Android mobile phone operating system. that could shake up the balance of power among among tech rivals. Time will tell whether Motorola’s assets will providing valuable resources for Google’s partners (i.e., HTC, LG Electronics and Samsung Electronics) or whether the acquisition will create competitive conflicts.

ECB Buys some Bonds:The European Central Bank (ECB), Europe’s equivalent of the U.S. Federal Reserve Bank, began buying up billions of dollars in Spanish and Italian bonds last month. The goal of the bond buying program is to stem any potential contagion effect arising from debt crises occurring in countries like Greece, Portugal, and Ireland.

 

Quote of the Month

On Volatility:

“Worry gives a small thing a big shadow.”

Swedish Proverb 

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: For those taking this article seriously, please look up “parody” in the dictionary. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and AAPL, but at the time of publishing SCM had no direct position in BRKA, MMI, HTC,
LG Electronics and Samsung Electronics, 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

September 3, 2011 at 8:32 am 1 comment


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