Posts tagged ‘bears’
Investors Feast While Bears Get Cooked
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (December 2, 2013). Subscribe on the right side of the page for the complete text.
As I ponder this year’s events with a notch-loosened belt after a belly-busting Thanksgiving gorging, I give thanks for my many blessings this year (see my last year’s Top 10). Investors in the stock market have had quite a feast in 2013 as well, while pessimistic bears have gotten cooked. Just this month, stock indexes reached all-time record highs (16,000 for the Dow Jones Industrial average and 1,800 for the S&P 500). Even the tech-heavy NASDAQ index surpassed 4,000 – a level not seen since 1999. How does this translate in percentage terms? Here’s what the stellar 2013 numbers looks like so far:
- Dow Jones: +22.8%
- S&P 500: +26.6%
- NASDAQ: +34.5%
These results demolish the near 0.0% returns earned on the sidelines, sitting on cash. And worth noting, these gains become even more impressive once you add dividends to the mix. To put these numbers into better perspective, it would take you more than a few decades of your lifetime to achieve this year’s stock gains, if your cash was invested at today’s CD and savings account rates.
For the bears, the indigestion has become even more unbearable if you consider the 2013 bloodbath in gold. The endless mantra of unsustainable QE (Quantitative Easing) hasn’t played out quite as the cynics planned this year (see also QE – Greatest Thing Since Sliced Bread):
- CBOE Gold Index (GOX): -51.5%
- SPDR Gold Shares (GLD): -25.5%
Bonds have been challenging too. Investors and Nervous Nellies have not been able to hide in longer-term Treasury bonds or broader bond indexes without some pain during 2013:
- iShares 20-Year Treasury Bond (TLT): -13.8%
- iShares Total U.S. Bond Market (AGG): -3.3%
As I’ve preached in the past, bonds have a place in most portfolios for income and diversification purposes, and many of my clients own them in their portfolios. But not all bonds are created equally. At Sidoxia (Sidoxia.com), we’ve smoothed out interest rate volatility and even recorded some gains by investing in specific classes of bonds such as short duration, floating rate, and convertible securities.
Why the Turkey High?
Since I invest professionally, inevitably the dinner table conversation switches from stuffing to stock market, or from pumpkin pie to politics. More often than not, the discussion reflects a tone such as, “This market is crazy! We’re due for a crash aren’t we?”
Without coming off as Pollyannaish, or offending anyone, I am quick to acknowledge I too am unhappy with Obamacare (my health insurance coverage was recently dropped due to the Affordable Care Act) and recognize that most politicians are bottom-feeders. Objectively, an argument can also be made by the doubters that a bubble is forming in a sub-segment of the market (see also Confusing Stock Bubbles). While the Yelps (YELP), Twitters (TWTR), and Teslas (TSLA) of the world may be dramatically inflated in price, there are plenty of attractively and reasonably priced areas of the market to opportunistically exploit.
Unfortunately, many people fail to recognize there are other factors besides politics and fad stocks that drive financial markets higher or lower. As the chart below shows (see also Conquering Politics & Hurricanes), the stock market has gone up and down regardless of party politics.
Source: Yardeni.com
Besides politics, there is an infinite number of other factors affecting financial markets. While Obamacare, Iran, Syria, 2014 elections, Federal Reserve QE tapering, etc. may account for many of the concerns du jour, there are other important factors driving stock prices higher.
Here are but a few:
- Record corporate profits
- Near record-low interest rates
- Improving fiscal deficit / debt situation relative to our economy
- Improving housing and jobs picture
- Reasonable stock valuations
- Low inflation / declining oil prices
The stock market feast has been exceptional, but even I acknowledge the pace of this year’s advance is not sustainable. Like an overloading of pie or an unnecessary, extra drumstick, we’re bound to experience another -10% correction, just like a common case of heartburn. For long-term investors however, fear of a temporary upset stomach is no reason to leave the investing dining table. Focusing only on the negatives and ignoring the positives may result in your investment portfolio getting cooked…just like the poor Thanksgiving turkey.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), Yelp (YELP), Twitter (TWTR), and Tesla (TSLA), 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.
Bears Hibernate During Melt-Up
Source: Photobucket
Here we are 719 days from the market bottom of March 2009, and the S&P 500 has more than doubled from its index low value of 666 to 1343 today. Noticeably absent during the meteoric rise have been the hibernating bears, like economist Nouriel Roubini (aka “Dr. Doom”) or Peter Schiff (see Emperor Schiff Has No Clothes), who blanketed the airwaves in 2008-2009 when financial markets were spiraling downwards out of control. The mere fact that I am writing about this subject may be reason enough to expect a 5-10% correction, but with a +100% upward move in stock prices I am willing to put superstition aside and admire the egg on the face of the perma-bears.
Shape of Recovery
After it became clear that the world was not coming to an end, in late 2009 and throughout 2010, the discussion switched from the likelihood of a “Great Depression” to a debate over the shape of the alphabet letter economic recovery. Was the upturn going to be an L-shaped, V-shaped, square root-shaped, or what Roubini expected – a U-shaped (or bathtub-shaped) recovery? You be the judge — does six consecutive quarters of GDP expansion with unemployment declining look like a bathtub recovery to you?
Chart Source: Yahoo Finance
This picture above looks more like a “V” to me, and the recently reported Institute for Supply Management’s (ISM) manufacturing index figure of 60.8 in January (the highest reading in seven years) lends credence to a stronger resurgence in the economy. Apparently the PIMCO bear brothers, Mohamed El-Erian and Bill Gross, are upwardly adjusting their view of a “New Normal” environment as well. Just recently, the firm raised its 2011 GDP forecast by 40-50% to a growth rate of 3-3.5% in 2011.
The Bears’ Logic
Bears continually explain away the market melt-up as a phenomenon caused by excessive and artificial liquidity creation (i.e., QE2 money printing, and 0% interest rate policy) Bernanke has provided the economy. Similar logic could be used to describe the excessive and artificial debt creation generated by individuals, corporations, and governments during the 2008-2009 meltdown. Now that leveraged positions are beginning to unwind (banks recapitalizing, consumers increasing savings rate, state and government austerity and tax measures, etc.), the bears still offer little credit to these improving trends.
Are we likely to experience another +100% upward move in stock prices in the broader indexes over the next two years? Unlikely. Our structural government debt and deficits, coupled with elevated unemployment and fiercer foreign competition are all factors creating economic headwinds. Moreover, inflation is starting to heat up and a Federal Funds rate policy cannot stay at 0% forever.
The Shapes of Rebounds
To put the two-year equity market recovery in historical perspective, the Financial Times published a 75-year study which showed the current market resurgence (solid red line) only trailing the post-Great Depression rebound of 1935-1938.
Source: Financial Times
Although we are absolutely not out of the economic woods and contrarian sentiment indicators (i.e., Volatility Index and Put-Call ratio) are screaming for a pullback, the foundation of a sustainable global recovery has firmed despite the persisting chaos occurring in the Middle East. Fourth quarter 2010 corporate profits (and revenues) once again exceeded expectations, valuations remain attractive, and floods of itchy retail cash still remain on the sidelines just waiting to jump in and chase the upward march in equity prices. Although the trajectory of stock prices over the next two years is unlikely to look like the last two years, there is still room for optimism (as I outlined last year in Genesis of Cheap Stocks). The low-hanging equity fruit has been picked over the last few years, and I’m certain that bears like Roubini, Schiff, El-Erian, Gross, et.al. will eventually come out of hibernation. For those investors not fully invested, I believe it would be wise to wait for the inevitable growls of the bears to resurface, so you can take further advantage of attractive market opportunities.
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Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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.
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