Posts tagged ‘Cyprus’

Double Dip Expansion?

Ever since the 2008-2009 financial crisis, every time the stock market has experienced a -5%, -10%, or -15% correction, industry pundits and media talking heads have repeatedly sounded the “Double Dip Recession” alarm bells. As you know, we have yet to experience a technical recession (two reported quarters of negative GDP growth), and stock prices have almost quadrupled from a 2009 low on the S&P 500 of 666 to 2,378 today (up approximately +257%).

Over the last nine years, so-called experts have been warning of an imminent stock market collapse from the likes of PIIGS (Portugal/Italy/Ireland/Greece/Spain), Cyprus, China, Fed interest rate hikes, Brexit, ISIS, U.S. elections, North Korea, French elections, and other fears. While there have been plenty of “Double Dip Recession” references, what you have not heard are calls for a “Double Dip Expansion.”

Is it possible that after the initial 2010-2014 economic expansionary rebound, and subsequent 2015-2016 earnings recession caused by sluggish global growth and a spike in the value of the U.S. dollar, we could possibly be in the midst of a “Double Dip Expansion?” (see earnings chart below)

Source: FactSet

Whether you agree or disagree with the new political administration’s politics, the economy was already on the comeback trail before the November 2016 elections, and the momentum appears to be continuing. Not only has the pace of job growth been fairly consistent (+235,000 new jobs in February, 4.7% unemployment rate), but industrial production has been picking up globally, along with a key global trade index that accelerated to 4-5% growth in the back half of 2016 (see chart below).

Source: Calafia Beach Pundit

This continued, or improved, economic growth has arisen despite the lack of legislation from the new U.S. administration. Optimists hope for an improved healthcare system, income tax reform, foreign profit repatriation, and infrastructure spending as some of the initiatives to drive financial markets higher.

Pessimists, on the other hand, believe all these proposed initiatives will fail, and cause financial markets to fall into a tailspin. Regardless, at least for the period following the elections, investors and companies have perceived the pro-business rhetoric, executive orders, and regulatory relief proposals as positive developments. It’s widely understood that small businesses supply the largest portion of our nation’s jobs, and the upward spike in Small Business Optimism early in 2017 is a welcome sign (see chart below).

Source: Calafia Beach Pundit

Yes, it is true our new president could send out a rogue tweet; start a trade war due to a tariff slapped on a critical trading partner; or make a hawkish military remark that isolates our country from an ally. These events, along with other potential failed campaign promises, are all possibilities that could pause the trajectory of the current bull market. However, more importantly, as long as corporate profits, the mother’s milk of stock price appreciation, continue to march higher, then the stock market fun can continue. If that’s the case, there will likely be less talk of “Double Dip Recessions,” and more discussions of a “Double Dip Expansion.”

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing 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.

March 19, 2017 at 12:34 pm Leave a comment

Stock Talk: The Value of Media in Finance

Man Speaking Into Microphones

I recently caught up with 50-year investment veteran Bill Kort to answer his questions regarding the media’s impact on the financial industry. After working for Kidder Peabody, A.G. Edwards, Wachovia, and Wells Fargo, Bill called it quits and decided to retire. Besides enjoying retirement with his wife, children, and grandchildren, Bill now also devotes considerable time to his blog Kort Sessions (www.KortSessions.com).

In a recent interview published on his Kort Sessions blog (KS), here’s what we discussed:

KS: Today, when you recommend a client take on, or increase equity exposure, what are the most common push-backs that you get? Have these changed in the past few years? If so, could you explain.

Wade Slome: “Given the events that have transpired over the last 15 years, I expect to receive a healthy dosage of pushback. Many investors have naturally been scarred from the 2008-2009 Financial Crisis, so convincing certain people that the 100-year flood will not occur every 100 days can be challenging. Regardless of the skepticism I receive, I feel it’s my duty to provide the best possible advice I can to existing clients and prospective clients. I can lead a horse to water, but I believe it’s not my job to force clients into a single investment option. At Sidoxia, we customize investment plans that meet clients’ risk tolerances, time horizons, and overall objectives.

With regard to sentiment changes in recent years, it is true that the tripling in equity market values since early 2009 has changed investor moods. Risk appetites have definitely increased. Nevertheless, cynicism is still rampant. Surveys done by Gallup show that stock ownership is near 15-year lows and despite stocks at or near record highs, ICI fund flow data shows money fleeing U.S. stock funds in 2014. With generational low interest rates, I see many long-term investors being too imprudently conservative. However, on the other hand, my responsibility is to also prevent other clients from taking on too much risk, especially if they have shorter investment time horizons or have limited funds in retirement.”

KS: When you speak with clients today, what are prominent worries do they have about their investments: The general level of the market, valuation, the economic backdrop, U.S. political issues or geopolitical concerns (all of the above)? Could you rank or tell me which concerns seem to be paramount.

Wade Slome: “In this 24-hour news cycle society we live in, an avalanche of real-time data gets crammed down our throats daily through our smartphones and Twitter-Facebook pages. As a result, the overwhelming barrage of news gets disseminated instantaneously, which in turn spreads fear like wildfire by word of mouth. In this type of environment it comes as no surprise to me that the general public is on edge. Every molehill is made into a mountain by media outlets for a simple reason…fear sells! Before the internet 20 years ago, virtually no one could find the location of Cyprus, Syria, Ukraine, or Gaza on a map – now we have Google and Wikipedia to show us or the Twitter feed scrolling at the bottom of our television sets reminds us. As far as concerns go, it’s tough to rank which ones are paramount. One day it’s the elections or Iran, and then the other day it’s the stock market crashing or the Ebola virus. Eventually the emotional pendulum will swing from fear and pessimism to optimism and euphoria, it always does. Like a lot of different professions, one of best strengths to have as an investment manager is the experience in knowing what noise to filter out and the ability to identify the relevant factors that drive outperformance.”

KS: Could you share the short-form responses that you might give to your clients when addressing the aforementioned issues.

Wade Slome: “The best advice I can give investors is to ignore the headlines. This principle is just as true today as it was a century or two ago. Mark Twain famously said, “If you don’t read the newspaper, you are uninformed.  If you do read the newspaper, you are misinformed.” This is obviously presented a little tongue-in-cheek, but the main point being is headlines should not drive your investment decisions. It’s perfectly fine to be informed about the economy and politics, but people must realize the stock market often moves independently and in contrarian directions to prevailing media stories. Rather than emotionally react to news flow, it is much more important to create an objective, long-term investment plan that takes advantage of market noise, hype, and volatility.”

KS: Finally, this is a little bit of a leading question that I hope you might run with. Do you find any useful purpose being served by the financial, general or political media that might aid an individual’s investment process?

Wade Slome: “In my view of the financial markets, there are a few underlying principles that drive stock prices over the long-term, and they include such basic factors as earnings, valuations, interest rates, and market psychology. What I would objectively try to argue is that the financial, general, or political media have little to no impact on the first three factors and only modest influence on the last one (market psychology). Part of the reason I have been so constructive on the markets on my Investing Caffeine blog over the last five years is because all these factors have generally pointed in the right direction. I will become nervous when earnings decline, valuations get stretched, interest rates spike, and/or psychology turns euphoric. Right now, I don’t think we are seeing any of that occurring.

With that said, I do believe there are exceptions to the rule that the “media is evil.” If you have the time, interest, and patience to stagger through the endless desert of financial media, you can find a few rare flowers. Although I do consume mass amounts of media, 99% of it ends up in the trash or ignored. I do my best to reserve my media consumption to those successful investors who have lived through multiple market cycles and have a winning track record to back it up. It is possible to find sage investment bloggers; Warren Buffett interviews on CNBC; or newspaper interviews of thriving venture capitalists, if you properly dine on a healthy media diet. Unfortunately there is a lot of junk food financial content out in media land. What should generally be avoided at all costs are rants from economists, journalists, analysts, commentators, and talking heads. No matter how eloquent or articulate they may sound, the vast majority of the people you see on television have not invested a professional dime in their careers, so all you are getting from them are worthless, vacillating opinions. I choose to stick to commentary from the tried and true investment veterans.”

Bill, thanks again for the thoughtful interview questions, and continued success with your Kort Sessions blog!

www.Sidoxia.com

Investment Questions Border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own GOOG/GOOGL, and a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in TWTR, FB, WFC, 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.

August 23, 2014 at 6:57 pm Leave a comment

Stock Market at Record Highs…April Fool’s?

OLYMPUS DIGITAL CAMERA

Article is an excerpt from previously released Sidoxia Capital Management’s complementary April 1, 2013 newsletter. Subscribe on right side of page.

April Fool’s Day has been around for centuries and has provided an opportunity for foolish pranks to be played on the masses around the world. Evidence of the global practice can be found from the bumper spaghetti harvest in Switzerland filmed by the BBC in 1957. The video footage (click here) was so convincing, viewers called and asked how they could grow their own spaghetti.

A cruel prank has also been played on investing skeptics as they have watched the S&P 500 and Dow Jones Industrials indexes catapult to new record highs over the last five quarters (up +25% & +19%, respectively). How can the stock market be setting new records when we have recently experienced a fiscal cliff, sequestration, a deepening European recession, slowing corporate profit growth, anemic GDP (Gross Domestic Product) expansion (0.4% last quarter), and a $13 billion Cyprus bailout?

The short answer is the economy continues to improve at a steady pace; stock prices are attractive; and gloomy headlines sell more advertisements in newspapers, magazines and on television. Is this wealth explosion a practical joke, or how can we help better explain this surprising phenomenon?

1) Record Corporate Profits

Source: Scott Grannis

Source: Scott Grannis

Corporate profits are at record levels. After the worst financial crisis in a generation, companies have become mean and lean. They are hiring cautiously to maintain healthy profit margins, but also investing into productivity-improving technology and equipment.

2) Record Dividends and Share Buybacks Galore

Source: WSJ

Source: WSJ

Annual dividend payments have reached a record level of more than $300 billion for S&P 500 companies, and there are no signs of this trend slowing down. This is occurring just as interest rates on bonds have been continuing to decline. Tack on a few hundred billion dollars in share buybacks to boost stock prices, and you get a recipe investors are enjoying.

3) Housing on the Comeback Trail

Source: Calculated Risk

Source: Calculated Risk

Housing accounts for a significant portion of our economy. After several years of depression-like activity, this sector is on the comeback trail. In fact, the S&P/Case-Shiller index, that measures home prices in 20 major metropolitan cities, rose by +8.1% in the most recent reported figure. This increase was the largest gain in six-and-a-half years. This is important because the improvement in housing filters through to other major sectors of the economy, such as retail (e.g., furniture), banking (e.g., mortgages), and government (e.g., property taxes).

4) Consumer Spending Can’t be Killed

Source: Scott Grannis

Source: Scott Grannis

Like a cockroach, the consumer is tough to exterminate. Consumer spending accounts for roughly 70% of the economy’s goods and services, and as you can see from the chart above, people are still shopping – despite domestic and international challenges.

The net result of all these trends is that the economic picture continues to improve and consumers and investors alike are beginning to feel better about themselves. And how could they not? As evidenced by the chart below, household net worth has reached a record level of about $66 trillion dollars, thanks to rallies in the stock market and home process, combined with a renewed conviction of keeping debt in check.

Source: Scott Grannis

Source: Scott Grannis

Cyprus Side Notes

April 2013 Cyprus

Over the last month, an avalanche of headlines, relating to the dire financial condition of Cyprus and Cypriot banks, has cascaded across the major media outlets. In analyzing the situation, there were two major questions I wanted answered:

Question #1: What is going on in Cyprus?

As it relates to this tiny island, approximately the size of Puerto Rico (east of Greece and south of Turkey), the first thing I learned is that the Cyprus situation is another example of a country’s financial sector gone wild. By some estimates the size of Cypriot bank deposits were more than 4x’s the size of its GDP. A key driving force behind the oversized banking industry is Russian depositors, who make up about 1/3 of overall Cypriot banking deposits. Cyprus acted as a sort of Cayman Islands in the Mediterranean for these wealthy Russians, who moved billions of dollars to the island after the Soviet Union broke apart in the early 1990s. The main attraction for the Russians were the lax banking laws and generous tax advantages.

In order to clean up this financial mess, the so-called adults or Troika, made up of the European Central Bank (ECB), International Monetary Fund (IMF), and European Commission (EU legislative body), approved a $13 billion bailout for Cyprus on the condition they restructured their main banks (Laiki Bank to be merged into Bank of Cyprus). The end result is that Cyprus (like Greece) chose to take the harsh medicine and stay in the eurozone by combining/closing banks and instituting significant losses on those depositors with more than $130,000 in their accounts (with some depositors expected to lose -60% of their money).

Question #2: Should I care?

The short answer is “No”. With a population of about 850,000 people, Cyprus is home to about the same number of folks who live in Birmingham, Alabama. Moreover, the size of Cyprus’ economy is barely 0.2% of euro-land GDP. Many pessimistic bears acknowledge the infinitesimal size of the Cypriot economy, but position the country as the domino about to topple the rest of Europe, including the much more important countries of Spain and Italy. The fact that private depositors are feeling a larger brunt of the pain rather than public taxpayers is actually a healthy long-term trend that will force more responsible behavior by other European financial institutions outside Cyprus.

In the face of the noisy Cyprus sideshow and endless economic/political worries, our corporate profit machine continues to churn out escalating profits,
as our stock markets set new record highs and our economy gains momentum. Today may be April Fool’s Day, but don’t become bamboozled by silly diversions, this stock market is no joke.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

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 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.

April 1, 2013 at 9:50 am Leave a comment


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