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Vice Tightens for Those Who Missed the Pre-Party

The stock market pre-party has come to an end. Yes, this is the part of the bash in which an exclusive group is invited to enjoy the fruits of the festivities before the mobs arrive. That’s right, unabated access to the nachos; no lines to the bathroom; and direct access to the keg. For those of us who were invited to the stock market pre-party (or crashed it on their own volition), the spoils have been quite enjoyable – about a +128% rebound for the S&P 500 index from the bottom of 2009, and a +147% increase in the NASDAQ Composite index over the same period (excluding dividends paid on both indexes).

Although readers of Investing Caffeine have received a personal invitation to the stock market pre-party since I launched my blog in early 2009, many have shied away, out of fear the financial market cops may come and break-up the party.

Rather than partake in stock celebration over the last four years, many have chosen to go down the street to the bond market party. Unlike the stock market party, the fixed-income fiesta has been a “major-rager” for more than three decades. However, there are a few signs that this party has gotten out-of-control. For example, crowds of investors are lined up waiting to squeeze their way into some bond indulgence; after endless noise, neighbors are complaining and the cops are on their way to shut the party down; and PIMCO’s Bill Gross has just jumped off the roof to do a cannon-ball into the pool.

Even though the stock-market pre-party has been a blast, stock prices are still relatively cheap based on historical valuation measurements, meaning there is still plenty of time for the party to roll on. How do we know the party has just started? After five years and about a half a trillion dollars hemorrhaging out of domestic funds (see Calafia Beach Pundit), there are encouraging signs that a significant number of party-goers are beginning to arrive to the party. More specifically, as it relates to stocks, a fresh $10 billion has flowed into domestic equity mutual funds during this January (see ICI chart below). This data is notoriously volatile, and can change dramatically from month-to-month, but if this month’s activity is any indication of a changing mood, then you better hurry to the stock party before the bouncer stops letting people in.

Source: Investment Company Institute (ICI)

Vice Begins to Tighten on Party Outsiders

Many stock market outsiders have either been squeezed into the bond market, hidden in cash, or hunkered down in a bunker with piles of gold. While some of these asset classes have done okay since early 2009, all have underperformed stocks, but none have performed worse than cash. For those doubters sitting on the equity market sidelines, the pain of the vice squeezing their portfolios has only intensified, especially as the economy and employment picture slowly improves (see chart below) and stock prices persist directionally upward. For years, fear-mongering stock skeptics have warned of an imploding dollar, exploding inflation, a run-away deficit/debt, a reckless money-printing Federal Reserve, and political gridlock. Nevertheless, none of these issues have been able to kill this equity bull market.

Source: Calafia Beach Pundit

But for those willing and able investors to enter the stock party today, one must realize this party will only get riskier over time. As we exit the pre-party and enter into the main event, you never know who may join the party, including some uninvited guests who may steal money, get sick on the carpet, participate in illegal activities, and/or ruin the fun by clashing with guests. We have already been forced to deal with some of these uninvited guests in recent years, including the “flash crash,” debt ceiling debate, European financial crisis, fiscal cliff, and lastly, sequestration is about to arrive as well (right after parking his car).

New investors can still objectively join the current equity party, but it is necessary to still be cognizant of not over-staying your welcome. However, for those party-pooping doubters who already missed the pre-party, the vice will continue to tighten, leaving stock cynics paralyzed as they watch additional missed opportunities enjoyed by the rest of us.

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 HLF, Japanese 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.

February 9, 2013 at 11:38 pm 6 comments

Sidoxia Debuts Video & Goes to the Movies

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

The red carpet was rolled out for the stock market in January with the Dow Jones Industrial Average rising +5.8% and the S&P 500 index up an equally impressive +5.0% (a little higher rate than the 0.0001% being earned in bank accounts). Movie stars are also strutting their stuff down the red carpet this time of the year as they collect shiny statues at ritzy award shows like the Golden Globes and Oscars. Given the vast volumes of honors bestowed, we thought what better time to put on our tuxes and create our own 2013 nominations for the economy and financial markets. If you are unhappy with our selections, you are welcome to cast your own votes in the comments section below.

By award category, here are Sidoxia’s 2013 selections:

Best Drama (Government Shutdown & Debt Ceiling): Washington D.C. has provided no shortage of drama, and the upcoming blockbusters of Shutdown & Debt Ceiling are worthy of its Best Drama nomination. If Congressional Democrats and Republicans don’t vote in favor of a new “Continuing Resolution” by March 27th, then our United States government will come to a grinding halt. At issue is Republican’s desire for additional government spending cuts to lower our deficit, which is likely to exceed $1 trillion for the fifth consecutive year. If you like more heart pumping drama, the Senate has just passed a Debt Ceiling extension through May 18th…mark those calendars!

Best Horror Film (Sequestration): Most people have already seen the scary prequel, The Fiscal Cliff, but the sequel Sequestration deserves the horror film honors of 2013. This upcoming blood-filled movie about broad, automatic, across-the-board government cost cuts will make any casual movie-watcher scream in terror. The $1.2 trillion in spending cuts (over 10 years) are so gory, many viewers may voluntarily leave the theater early. If you are waiting for the release, Sequestration is coming to a theater near you on March 1st, unless Congress, in an unlikely scenario, cancels the launch.

Best Director (Ben Bernanke): Federal Reserve Chairman Ben Bernanke’s film, entitled, The U.S. Economy, had a massive budget of about $16 trillion dollars, based on estimates of last year’s GDP (Gross Domestic Product). Nevertheless, Bernanke managed to do whatever it took (including trillions of dollars in bond buying) to prevent the economic movie studio from collapsing into bankruptcy. While many movie-goers were critical of his directorial debut, inflation has remained subdued thus far, and he has promised to continue his stimulative monetary policies (i.e., keep interest rates low) until the national unemployment rate falls below 6.5% or inflation rises above 2.5%.

Best Foreign Film (China): Americans are not the only people who produce movies globally. A certain country with a population of nearly 1.4 billion people also makes movies too…China. In the most recently completed 4th quarter, China’s economy experienced blockbuster growth in the form of +7.9% GDP expansion. This was the fastest pace achieved by China in two whole years. To put this metric into perspective, compare China’s heroic growth to the bomb created by the U.S. economy, which registered a disappointing -0.1% contraction at the economic box office. China’s popularity should bring in business all around the globe.

Best Special Effects (Japan): After coming out with a series of continuous flops, Japan recently launched some fresh new special effects in the form of a $116 billion emergency stimulus package. The country also has plans to superficially enhance the visual portrayal of its economy by implementing its own faux money-printing program modeled after our country’s quantitative easing actions (i.e., the Federal Reserve stimulus). As a result of these initiatives, the Japanese Nikkei index – their equivalent of our Dow Jones Industrial index – has risen by +29% in less than 3 months to a level of 11,138.66 (click here for chart). But don’t get too excited. This same Nikkei index peaked at 38,957 in 1989, a far cry from its current level.

Best Action Film (Icahn vs. Ackman): This surprisingly entertaining action film features a senile 76-year-old corporate raider and a white-haired, 46-year-old Harvard grad. The investment foes I am referring to are the elder Carl Icahn, Chairman of Icahn Enterprises, and junior Bill Ackman, CEO of Pershing Square Capital Management. In addition to terms such as crybaby, loser, and liar, the 27-minute verbal spat (view more here) between Icahn (his net worth equal to about $15 billion) and Ackman (net worth approaching $1 billion) includes some NC-17 profanity. The clash of these investment titans stems from a decade-old lawsuit, in addition to a recent disagreement over a controversial short position in Herbalife Ltd. (HLF), a nutritional multi-level marketing firm.

Best Documentary (Europe): As with a lot of reality-based films, many don’t receive a lot of attention. So too has been the commentary regarding the eurozone, which has been relatively peaceful compared to last spring. Despite the comparative media silence, European unemployment reached a new high of 11.8% late last year. This European documentary is not one you should ignore. European Central Bank (ECB) President Mario Draghi just stated, “The risks surrounding the outlook for the euro area remain on the downside.”

Best Original Song (National Anthem): We won’t read anything politically into Beyonce’s lip-synced rendition of The Star-Spangled Banner at the presidential inauguration, but she is still worthy of the Sidoxia nomination because music we hear in the movies is also recorded. I’m certain her rapping husband Jay-Z agrees whole-heartedly with this viewpoint.

Best Motion Picture (Sidoxia Video): It may only be three minutes long, but as my grandmother told me, “Great things come in small packages.” I may be a little biased, but judge for yourself by watching Sidoxia’s Oscar-worthy motion picture debut: