Posts tagged ‘stock market’
Stocks Winning vs. Weak Competitors
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (June 2, 2014). Subscribe on the right side of the page for the complete text.
Winning at any sport is lot easier if you can compete without an opponent. Imagine an NBA basketball MVP LeBron James driving to the basket against no defender, or versus a weakling opponent like a 44-year-old investment manager. Under these circumstances, it would be pretty easy for James and his team, the Miami Heat, to victoriously dominate without even a trace of sweat.
Effectively, stocks have enjoyed similar domination in recent years, while steamrolling over the bond competition. To put the stock market’s winning streak into perspective, the S&P 500 index set a new all-time record high in May, with the S&P 500 advancing +2.1% to 1924 for the month, bringing the 2013-2014 total return to about +38%. Not too shabby results over 17 months, if you consider bank deposits and CDs are paying a paltry 0.0-1.0% annually, and investors are gobbling up bonds yielding a measly 2.5% (see chart below).
The point, once again, is that even if you are a skeptic or bear on the outlook for stocks, the stock market still offers the most attractive opportunities relative to other asset classes and investment options, including bonds. It’s true, the low hanging fruit in stocks has been picked, and portfolios can become too equity-heavy, but even retirees should have some exposure to equities.
As I wrote last month in Buy in May and Dance Away, why would investors voluntarily lock in inadequate yields at generational lows when the earnings yield on stocks are so much more appealing. The approximate P/E (Price-Earnings) ratio for the S&P 500 currently averages approximately +6.2% with a rising dividend yield of about +1.8% – not much lower than many bonds. Over the last five years, those investors willing to part ways with yield-less cash have voted aggressively with their wallets. Those with confidence in the equity markets have benefited massively from the approximate +200% gains garnered from the March 2009 S&P 500 index lows.
For the many who have painfully missed the mother of all stock rallies, the fallback response has been, “Well, sure the market has tripled, but it’s only because of unprecedented printing of money at the QE (Quantitative Easing) printing presses!” This argument has become increasingly difficult to defend ever since the Federal Reserve announced the initiation of the reduction in bond buying (a.k.a., “tapering”) six months ago (December 18th). Over that time period, the Dow Jones Industrial Average has increased over 800 points and the S&P 500 index has risen a healthy 8.0%.
As much as everyone would like to blame (give credit to) the Fed for the bull market, the fact is the Federal Reserve doesn’t control the world’s interest rates. Sure, the Fed has an influence on global interest rates, but countries like Japan may have something to do with their own 0.57% 10-year government bond yield. For example, the economic/political policies and demographics in play might be impacting Japan’s stock market (Nikkei), which has plummeted about -62% over the last 25 years (about 39,000 to 15,000). Almost as shocking as the lowly rates in Japan and the U.S. and Japan, are the astonishingly low interest rates in Europe. As the chart below shows, France and Germany have sub-2% 10-year government bond yields (1.76% and 1.36%, respectively) and even economic basket case countries like Italy and Spain have seen their yields pierce below the 3% level.
Source: Dr. Ed’s Blog
Suffice it to say, yield is not only difficult to find on our shores, but it is also challenging to find winning bond returns globally.
Well if low interest rates and the Federal Reserve aren’t the only reasons for a skyrocketing stock market, then how come this juggernaut performance has such long legs? The largest reason in my mind boils down to two words…record profits. Readers of mine know I follow the basic tenet that stock prices follow earnings over the long-term. Interest rates and Fed Policy will provide headwinds and tailwinds over different timeframes, but ultimately the almighty direction of profits determines long-run stock performance. You don’t have to be a brain surgeon or rocket scientist to appreciate this correlation. Scott Grannis (Calafia Beach Pundit) has beautifully documented this relationship in the chart below.
Supporting this concept, profits help support numerous value-enhancing shareholder activities we have seen on the rise over the last five years, which include rising dividends, share buybacks, and M&A (Mergers & Acquisitions) activity. Eventually the business cycle will run its course, and during the next recession, profits and stock prices will be expected to decline. A final contributing factor to the duration of this bull market is the abysmally slow pace of this economic recovery, which if measured in job creation terms has been the slowest since World War II. Said differently, the slower a recovery develops, the longer the recovery will last. Bill McBride at Calculated Risk captured this theme in the following chart:
Despite the massive gains and new records set, skeptics abound as evidenced by the nearly -$10 billion of withdrawn money out of U.S. stock funds over the last month (most recent data).
I’ve been labeled a perma-bull by some, but over my 20+ years of investing experience I understand the importance of defensive positioning along with the benefits of shorting expensive, leveraged stocks during bear markets, like the ones in 2000-2001 and 2008-2009. When will I reverse my views and become bearish (negative) on stocks? Here are a few factors I’m tracking:
- Inverted Yield Curve: This was a good precursor to the 2008-2009 crash, but there are no signs of this occurring yet.
- Overheated Fund Inflows: When everyone piles into stocks, I get nervous. In the last four weeks of domestic ICI fund flow data, we have seen the opposite…about -$9.5 billion outflows from stock funds.
- Peak Employment: When things can’t get much better is the time to become more worried. There is still plenty of room for improvement, especially if you consider the stunningly low employment participation rate.
- Fed Tightening / Rising Bond Yields: The Fed has made it clear, it will be a while before this will occur.
- When Housing Approaches Record Levels: Although Case-Shiller data has shown housing prices bouncing from the bottom, it’s clear that new home sales have stalled and have plenty of head room to go higher.
- Financial Crisis: Chances of experiencing another financial crisis of a generation is slim, but many people have fresh nightmares from the 2008-2009 financial crisis. It’s not every day that a 158 year-old institution (Lehman Brothers) or 85 year-old investment bank (Bear Stearns) disappear, but if the dominoes start falling again, then I guess it’s OK to become anxious again.
- Better Opportunities: The beauty about my practice at Sidoxia is that we can invest anywhere. So if we find more attractive opportunities in emerging market debt, convertible bonds, floating rate notes, private equity, or other asset classes, we have no allegiances and will sell stocks.
Every recession and bear market is different, and although the skies may be blue in the stock market now, clouds and gray skies are never too far away. Even with record prices, many fears remain, including the following:
- Ukraine: There is always geopolitical instability somewhere on the globe. In the past investors were worried about Egypt, Iran, and Syria, but for now, some uncertainty has been created around Ukraine.
- Weak GDP: Gross Domestic Product was revised lower to -1% during the first quarter, in large part due to an abnormally cold winter in many parts of the country. However, many economists are already talking about the possibility of a 3%+ rebound in the second quarter as weather improves.
- Low Volatility: The so-called “Fear Gauge” is near record low levels (VIX index), implying a reckless complacency among investors. While this is a measure I track, it is more confined to speculative traders compared to retail investors. In other words, my grandma isn’t buying put option insurance on the Nasdaq 100 index to protect her portfolio against the ramifications of the Thailand government military coup.
- Inflation/Deflation: Regardless of whether stocks are near a record top or bottom, financial media outlets in need of a topic can always fall back on the fear of inflation or deflation. Currently inflation remains in check. The Fed’s primary measure of inflation, the Core PCE, recently inched up +0.2% month-to-month, in line with forecasts.
- Fed Policy: When are investors not worried about the Federal Reserve’s next step? Like inflation, we’ll be hearing about this concern until we permanently enter our grave.
In the sport of stocks and investing, winning is never easy. However, with the global trend of declining interest rates and the scarcity of yields from bonds and other safe investments (cash/money market/CDs), it should come as no surprise to anyone that the winning streak in stocks is tied to the lack of competing investment alternatives. Based on the current dynamics in the market, if LeBron James is a stock, and I’m forced to guard him as a 10-year Treasury bond, I think I’ll just throw in the towel and go to Wall Street. At least that way my long-term portfolio has a chance of winning by placing a portion of my bets on stocks over bonds.
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.
Buy in May and Tap Dance Away
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (May 1, 2014). Subscribe on the right side of the page for the complete text.
The proverbial Wall Street adage that urges investors to “Sell in May, and go away” in order to avoid a seasonally volatile period from May to October has driven speculative trading strategies for generations. The basic premise behind the plan revolves around the idea that people have better things to do during the spring and summer months, so they sell stocks. Once the weather cools off, the thought process reverses as investors renew their interest in stocks during November. If investing was as easy as selling stocks on May 1 st and then buying them back on November 1st, then we could all caravan in yachts to our private islands while drinking from umbrella-filled coconut drinks. Regrettably, successful investing is not that simple and following naïve strategies like these generally don’t work over the long-run.
Even if you believe in market timing and seasonal investing (see Getting Off the Market Timing Treadmill ), the prohibitive transaction costs and tax implications often strip away any potential statistical advantage.
Unfortunately for the bears, who often react to this type of voodoo investing, betting against the stock market from May – October during the last two years has been a money-losing strategy. Rather than going away, investors have been better served to “Buy in May, and tap dance away.” More specifically, the S&P 500 index has increased in each of the last two years, including a +10% surge during the May-October period last year.
Nervous? Why Invest Now?
With the weak recent economic GDP figures and stock prices off by less than 1% from their all-time record highs, why in the world would investors consider investing now? Well, for starters, one must ask themselves, “What options do I have for my savings…cash?” Cash has been and will continue to be a poor place to hoard funds, especially when interest rates are near historic lows and inflation is eating away the value of your nest-egg like a hungry sumo wrestler. Anyone who has completed their income taxes last month knows how pathetic bank rates have been, and if you have pumped gas recently, you can appreciate the gnawing impact of escalating gasoline prices.
While there are selective opportunities to garner attractive yields in the bond market, as exploited in Sidoxia Fusion strategies, strategist and economist Dr. Ed Yardeni points out that equities have approximately +50% higher yields than corporate bonds. As you can see from the chart below, stocks (blue line) are yielding profits of about +6.6% vs +4.2% for corporate bonds (red line). In other words, for every $100 invested in stocks, companies are earning $6.60 in profits on average, which are then either paid out to investors as growing dividends and/or reinvested back into their companies for future growth.
Source: Dr. Ed’s Blog
Hefty profit streams have resulted in healthy corporate balance sheets, which have served as ammunition for the improving jobs picture. At best, the economic recovery has moved from a snail’s pace to a tortoise’s pace, but nevertheless, the unemployment rate has returned to a more respectable 6.7% rate. The mended economy has virtually recovered all of the approximately 9 million private jobs lost during the financial crisis (see chart below) and expectations for Friday’s jobs report is for another +220,000 jobs added during the month of April.
Source: Bespoke
Wondrous Wing Woman
Investing can be scary for some individuals, but having an accommodative Fed Chair like Janet Yellen on your side makes the challenge more manageable. As I’ve pointed out in the past (with the help of Scott Grannis), the Fed’s stimulative ‘Quantitative Easing’ program counter intuitively raised interest rates during its implementation. What’s more, Yellen’s spearheading of the unprecedented $40 billion bond buying reduction program (a.k.a., ‘Taper’) has unexpectedly led to declining interest rates in recent months. If all goes well, Yellen will have completed the $85 billion monthly tapering by the end of this year, assuming the economy continues to expand.
In the meantime, investors and the broader financial markets have begun to digest the unwinding of the largest, most unprecedented monetary intervention in financial history. How can we tell this is the case? CEO confidence has improved to the point that $1 trillion of deals have been announced this year, including offers by Pfizer Inc. – PFE ($100 billion), Facebook Inc. – FB ($19 billion), and Comcast Corp. – CMCSA ($45 billion).
Source: Entrepreneur
Banks are feeling more confident too, and this is evident by the acceleration seen in bank loans. After the financial crisis, gun-shy bank CEOs fortified their balance sheets, but with five years of economic expansion under their belts, the banks are beginning to loosen their loan purse strings further (see chart below).
The coast is never completely clear. As always, there are plenty of things to worry about. If it’s not Ukraine, it can be slowing growth in China, mid-term elections in the fall, and/or rising tensions in the Middle East. However, for the vast majority of investors, relying on calendar adages (i.e., selling in May) is a complete waste of time. You will be much better off investing in attractively priced, long-term opportunities, and then tap dance your way to financial prosperity.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE, CMCSA, and certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in FB 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.
Stock Market: Shrewd Bet or Stupid Gamble?
Trillions of dollars have been lost and gained over the last five years. The extreme volatility strangled investment portfolios, and as a result millions of investors capitulated by throwing in the towel and locking in losses. Melted 401ks, shrunken IRAs, and beat-up retirement accounts bruised the overarching psyche of Americans to the point they questioned whether the stock market is a shrewd bet or stupid gamble?
The warmth and safety of bonds provided some temporary relief in subsequent years, but the explosive rebound in stock prices to new record highs in 2013 coupled with the worst year in a decade for bonds still have many on the sidelines asking whether they should get back in?
As I’ve written many times in the past (see Timing Treadmill), timing the market is a fruitless effort. Elementary statistics, including the “Law of Large Numbers” will demonstrate that blind squirrels can and will beat the market on occasion, but very few can consistently beat the stock market indices for sustained periods (see Dart-Throwing Chimps).
However, there have been some gun-slinging hedge fund managers who have accumulated some impressive track records. Because of insanely high management fees, many overpaid hedge fund managers will swing for the fences by using a combination of excessive leverage and/or concentration. If the hedge funds connect with lucky returns, the managers can take the money and run. If they swing and miss…no problem. Close shop, hang out a shingle across the street, change the hedge fund’s name, and try again. Of course there are those successful hedge fund managers who have learned how to manipulate the system and exploit information to their advantage, but many of those managers like Raj Rajaratnam and Steven Cohen are either behind bars or dealing with the Feds (see fantastic Frontline piece on Cohen).
But not everyone cheats. There actually are a minority of managers who consistently beat the market by taking a long-term approach like Warren Buffett. Long-term outperforming managers are like lifetime .300 hitters in Major League Baseball – the outperformers exist, but they are rare. In 2007, AssociatedContent.com did a study that showed there were only 12 active career .300 hitters in Major League Baseball.
Another legend in the investment industry is John Bogle, the founder of the Vanguard Group, a firm primarily focused on passive, index-based investment strategies. Although it is counter-intuitive to most, just matching the market (or index) will put you in the top-quartile over the long-run (see Darts, Monkeys & Pros). There’s a reason Vanguard manages more than $2,000,000,000,000+ (yes…trillion) of investors’ money. Even at this gargantuan size, Vanguard remains a fraction of the overall industry. Regardless, the gospel of low-cost, tax-efficient, long-term horizons is slowly leaking out to the masses (Disclosure: Sidoxia is a devoted user of Vanguard and other providers’ low-cost Exchange Traded Funds [ETFs]).
Rolling the Dice?
Unlike Las Vegas, where the odds are stacked against you, in the stock market the odds are stacked in your favor if you stay in the game long enough and don’t chase performance. Dr. Ed Yardeni has a great chart (below) summarizing stock market returns over the last 85 years, and what the data highlights is that the market is up (or flat) 69% of the time (59/86 years). The probabilities are so favorable that if I got comparable odds in Vegas, I’d probably live there!
Source: Dr. Ed’s Blog
Unfortunately, rather than using this time arbitrage in conjunction with the incredible power of compounding (see A Penny Saved is Billions Earned), many individuals look at the stock market like a casino – similarly to betting on black or red at a roulette wheel. Speculating about the direction of the market can be fun, and I’ve been known to guess on occasion, but it’s a complete waste of time. Creating a long-term plan of reaching or maintaining your retirement goals through a diversified portfolio is the way to go – not bobbing in out of the market with cash and bonds.
At Sidoxia, we don’t actively trade and time individual stocks either. For the majority of our client portfolios, we follow a growth philosophy similar to the late T. Rowe Price:
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”
Nobody knows the direction of the stocks with certainty, and irrespective of whether the market goes down this year or not, history has proven the stock market has been a shrewd, long-term bet.
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.
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
What’s Going on with This Crazy Market?!
The massive rally of the stock market since March 2009 has been perplexing for many, but the state of confusion has reached new heights as the stock market has surged another +2.0% in May, surpassing the Dow 15,000 index milestone and hovering near all-time record highs. Over the last few weeks, the volume of questions and tone of disbelief emanating from my social circles has become deafening. Here are some of the questions and comments I’ve received lately:
“Wade, why in the heck is the market up so much?”; “This market makes absolutely no sense!”; “Why should I buy at the peak when I can buy at the bottom?”; “With all this bad news, when is the stock market going to go down?”; “You must be shorting (betting against) this market, right?”
If all the concerns about the Benghazi tragedy, IRS conservative targeting, and Federal Reserve bond “tapering” are warranted, then it begs the question, “How can the Dow Jones and other indexes be setting new all-time highs?” In short, here are a few reasons:
You hear a lot of noise on TV and read a lot of blathering in newspapers/blogs, but what you don’t hear much about is how corporate profits have about tripled since the year 2000 (see red line in chart above), and how the profit recovery from the recent recession has been the strongest in 55 years (Scott Grannis). The profit collapse during the Great Recession was closely chronicled in nail-biting detail, but a boring profit recovery story sells a lot less media advertising, and therefore gets swept under the rug.
II.) Reasonable Prices (Comparing Apples & Oranges):
Source: Dr. Ed’s Blog
The Price-Earnings ratio (P/E) is a general barometer of stock price levels, and as you can see from the chart above (Ed Yardeni), current stock price levels are near the historical average of 13.7x – not at frothy levels experienced during the late-1990s and early 2000s.
Comparing Apples & Oranges:
At the most basic level of analysis, investors are like farmers who choose between apples (stocks) and oranges (bonds). On the investment farm, growers are generally going to pick the fruit that generates the largest harvest and provide the best return. Stocks (apples) have historically offered the best prices and yielded the best harvests over longer periods of time, but unfortunately stocks (apples) also have wild swings in annual production compared to the historically steady crop of bonds (oranges). The disastrous apple crop of 2008-2009 led a massive group of farmers to flood into buying a stable supply of oranges (bonds). Unfortunately the price of growing oranges (i.e., buying bonds) has grown to the highest levels in a generation, with crop yields (interest rates) also at a generational low. Even though I strongly believe apples (stocks) currently offer a better long-term profit potential, I continue to remind every farmer (investor) that their own personal situation is unique, and therefore they should not be overly concentrated in either apples (stocks) or oranges (bonds).
Source: Dr. Ed’s Blog
Regardless, you can see from the chart above (Dr. Ed’s Blog), the red line (stocks) is yielding substantially more than the blue line (bonds) – around 7% vs. 2%. The key for every investor is to discover an optimal balance of apples (stocks) and oranges (bonds) that meets personal objectives and constraints.
III.) Skepticism (Market Climbs a Wall of Worry):
Source: Calafia Beach Pundit
Although corporate profits are strong, and equity prices are reasonably priced, investors have been withdrawing hundreds of billions of dollars from equity funds (negative blue lines in chart above – Calafia Beach Pundit). While the panic of 2008-2009 has been extinguished from average investors’ psyches, the Recession in Europe, slowing growth in China, Washington gridlock, and the fresh memories of the U.S. financial crisis have created a palpable, nervous skepticism. Most recently, investors were bombarded with the mantra of “Selling in May, and Going Away” – so far that advice hasn’t worked so well. To buttress my point about this underlying skepticism, one need not look any further than a recent CNBC segment titled, “The Most Confusing Market Ever” (see video below):
Source: CNBC
It’s clear that investors remain skittish, but as legendary investor Sir John Templeton so aptly stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” The sentiment pendulum has been swinging in the right direction (see previous Investing Caffeine article), but when money flows sustainably into equities and optimism/euphoria rules the day, then I will become much more fearful.
Being a successful investor or a farmer is a tough job. I’ll stop growing apples when my overly optimistic customers beg for more apples, and yields on oranges also improve. In the meantime, investors need to remember that no matter how confusing the market is, don’t put all your oranges (bonds) or apples (stocks) in one basket (portfolio) because the financial markets do not need to get any crazier than they are already.
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.
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.
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
Dow Déjà Vu – Shining Rainbow or Bad Nightmare?
Excerpt from Free January Sidoxia Monthly Newsletter (Subscribe on right-side of page)
The Dow Jones Industrial Average is sitting at 11,577 points. Dick Fuld is still CEO of Lehman Brothers, AIG is still trading toxic CDS derivative contracts, and the $700 billion TARP bailout is a pre-idea about to be invented in the brain of Treasury Secretary Hank Paulson. Oops, wait a second, this isn’t the Dow 11,577of September 2008, but rather this is the Dow 11,577 of December 2010 (+11% for the year, excluding dividends). Was the -50% drop we experienced in the equity markets during 2008-2009 all just a bad dream? If not, how in the heck has the stock market climbed spectacularly? Most people don’t realize that stocks have about doubled over the last 21 months (and up roughly +20%-25% in the last 6 months) – all in the face of horrendously depressing news swirling around the media (i.e., jobs, debt, deficits, N. Korea, Iran, “New Normal,” etc.). Market volatility often does not make intuitive sense, and as a result, many market observers have been caught flat-footed.
Here are a few basic factors that average investors have not adequately appreciated:
1) Headlines are in Rearview Mirror: News that everyone reads in newspapers and magazines and hears on the television and radio is all backward looking. It’s always best to drive while looking forward through the windshield and try to anticipate what’s around the corner – not obsess with backward looking activity in the rearview mirror. That’s how the stock market works – tomorrow’s news (not yesterday’s or today’s) is what drives prices up or down. As the economy teetered on the verge of a “Great Depression-like” scenario in 2008-2009, investors became overly pessimistic and stocks became dramatically oversold. More recently, news has been perking up. Previous recessions have seen doubters slowly convert to believers and push prices higher – eventually stocks become overbought and euphoria slows the bull market. I believe we are in phase II of this three-part economic recovery.
2) Ignore Emerging Markets at Own Peril: We Americans tend to wear blinders when it comes to focusing on domestic issues. We focus more on healthcare reform and political issues, such as “Don’t Ask, Don’t Tell,” rather than the billions of foreigners chasing us as they climb the global economic ladder. Citizens in emerging markets are more concerned about out-competing and out-innovating us through educated workforces, so they can steal our jobs and buy more toasters, iPods, and cars – things we Americans have already taken for granted. The insatiable appetite of the expanding global middle class for a better standard of living is also driving ballooning commodity prices – everything from coal to copper and corn to cotton (the 4 Cs). This universal sandbox that we play in offers tremendous opportunities to grasp and tremendous threats to avoid, if investors open their eyes to these emerging market trends.
3) Capital Goes Where it’s Treated Best: Many voters are fed-up with the political climate in Washington and the sad state of economic affairs. The great thing about the global capitalistic marketplace we live in is that it does not discriminate – capital flows to where it is treated best. On a macro basis, money flows to countries that are fiscally responsible, support pro-growth initiatives, harbor educated work forces, control valuable natural resources, and honor the rule of law. On a micro basis, money flows to companies that are attractively priced and/or capable of sustainably growing earnings and cash flow. Voters and politicians will ultimately figure it out, or capital will go where it’s treated best.
Today’s Dow 11,577 is no bad dream, but rather resembles the emergence of a bright shining rainbow after a long, cold, and dark storm. The rainbow won’t stick around forever, but if investors choose to ignore the previously mentioned factors, like so many investors have overlooked, portfolio performance may turn into an ugly nightmare.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, and an AIG derivative security, but at the time of publishing SCM had no direct position in GS, 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.
Kass: Triple Lindy Redux
About a year ago, I wrote about Doug Kass (founder and president of Seabreeze Partners) and his attempt at pulling off the famous “Triple Lindy” dive, which was made famous in the classic movie Back to School starring Rodney Dangerfield. If I were a judge, I would say Kass’s landing wasn’t a perfect 10, but rather closer to a 6.5. After successfully nailing the bear market in 2008, and subsequently declaring the “generational low” of March 2009, Kass became cautious in June 2009. At the time, Kass pulled in his horns by pronouncing a consumer-led double dip in late 2009 or in the first half 2010 from a consumption binge hangover, while declaring his previous 1050 S&P 500 index target as overly ambitious. What actually transpired is the S&P 500 went from around 942 to 1220 over the next ten months, or up about +30%.
Today, Kass is trying to make another large splash, but now he is reversing course and once more calling for a rally…at least a mini one. Rather than speaking in terms of his previous generational low (S&P 666), Kass sees the recent lows around 1,010 being the “bottom for the year” and his new 2010 target is based on climbing to positive territory for the year, implying a +10% to +12% move from the beginning of July.
View Doug Kass Interview and Prediction
Kass is not your traditional investor, and he admits as much:
“I’m not a perma-bear, I’m not a perma-bull. I try to be flexible and eclectic in my view, and this is especially necessary in a market, which is so volatile as it’s been for the last several years.”
In explaining his upbeat rationale, Kass highlights nuanced aspects to employment data, payroll growth, moderate economic expansion, and an attractive valuation for the overall market:
“I’m not technically based, therefore I’m not sentiment based, I’m fundamental based….The markets are traveling on a path of fear and share prices have significantly disconnected from fundamentals.”
Even if Kass didn’t nail the “Triple Lindy,” he still deserves special attention as a practitioner, in addition to his side job as a market prognosticator. Additional recognition is warranted solely based on the potshots he aimed at rent-a-strategists like Nouriel Roubini, CNBC celebrity, (see Roubini articles #1 or #2) and Robert Prechter, long-running technician who is currently predicting Dow destruction to unfathomable level of 1,000. I’m not in the business of predicting short-term market gyrations, but I’ll enjoy watching Kass’s next dive to see whether he’ll make a splash or not.
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 positions 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.
Colombia: The Hidden Latin American Gem
Judging by the all the volatility in the markets and the gloomy headlines blanketing business periodicals, one would think the global walls of capitalism and democracy were crumbling into oblivion. That’s why it’s a nice diversion to discover a diamond in the rough, shining through the darkness in the form of the Colombian stock market. How special is this South American gem? An +1,845% return over 10 years sounds pretty exceptional to me. Those are the results that Professor Dr. Mark J. Perry from the University of Michigan calculated in a posting he recently wrote about the MSCI Colombia stock market index in his blog, Carpe Diem.
Source: Carpe Diem
Fueling the surge in the equity markets has been a right-leaning, free market government with a hawkish defense stance, led by President Álvaro Uribe for the last eight years. The voters voted to continue Uribe’s mandate by voting in his former defense minister, Juan Manuel Santos, who promises to keep the disruptive guerilla forces operating under Revolutionary Armed Forces of Colombia (FARC) in check.
Colombia has been a close ally of the United States, thanks to their support of a joint crackdown on drug smuggling into the U.S. In return for their support, Colombia has received a nice fat $600 million check from the U.S. each year. What would even make our relationship tighter is an approval stamp placed on an awaiting U.S.-Colombia free trade agreement, which Congress has inexplicably kept on the backburner.
The U.S. and Colombia also agree on something else…their mutual disdain for Venezuelan leader, Hugo Chavez. Mr. Chavez poses a threat to the region, but Santos and the wave of free market leaders in the territory are more likely to wreak havoc on the Venezuelan leader according to Investor’s Business Daily:
“But Santos is probably most dangerous for Chavez, because Colombia’s rags-to-riches success story is so dramatic — showing that any beat-up nation can drag itself out of misery through markets — and because Venezuela and Colombia are such close neighbors. Word gets out about how well things are going in Colombia and it spreads fast in Venezuela. Santos need never fire a shot at Venezuela to slay Chavez’s revolution because the power of the markets will do it for him.”
Colombia’s Gross Domestic Product (GDP) is not overly large relative to some more developed neighbors, but the World Bank estimated the country’s 2008 GDP at $244 billion, almost triple the figure from five years earlier. The explosive economic growth explains how this market was the highest returning market in the world over the last decade, even eclipsing white hot markets like China, Russia, Brazil, Peru, India, and Turkey, among many others.
How does one invest in this Colombian gem? One way to gain exposure is through an exchange traded fund (ETF): Global X/InterBolsa FTSE Colombia 20 ETF (GXG). This particular ETF is concentrated into 20 positions, with heavy weightings in financial, energy, and industrial stocks. So, as you continue to read about the so-called inevitable “double-dip” recession and collapse of the U.S. dollar as the global reserve currency, please do not forget there are some brilliant free market economies, like Colombia, that are growing brilliantly and producing sparkling returns.
Read Professor Perry’s complete article on the Colombia market
Read the WSJ article written on the subject
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 positions in GXG, 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.
Money Goes Where Treated Best
“The world is going to hell in a handbasket” seems to be a prevailing sentiment among many investors. Looking back, a lack of fiscal leadership in Washington, coupled with historically high unemployment, has only fanned the flames of restlessness. A day can hardly go by without hearing about some fiscal problem occurring somewhere around the globe. Geographies have ranged from Iceland to Dubai, and California to Greece. Regardless, eventually voters force politicians to take notice, as we recently experienced in the Massachusetts vote for Senator.
Time to Panic?
So is now the time to panic? Entitlement obligations such as Social Security and Medicare, when matched with a rising interest payment burden from our ballooning debt, stands to consume the vast majority of our country’s revenues in the coming decades (if changes are not made). It’s clear to most that the current debt trajectory is not sustainable – see also Debt: The New Four-Letter Word. With that said, historical debt levels have actually been at higher levels before. For example, during World War II, debt levels reached 122% of GDP (Gross Domestic Product). Since promises generally garner votes, politicians have traditionally found it easier to legislate new spending into law rather than cutting back existing spending and benefits.
Money Goes Where it’s Treated Best
If our government leaders choose to ignore the growing upswell in fiscal discontent, then the global financial markets will pay more attention and disapprove less diplomatically. As the globe’s reserve currency, the U.S. Dollar stands to collapse if a different direction is not forged, and interest costs could skyrocket to unpalatable levels. Fortunately, the flat world we live on has created some of these naturally occurring governors to forcibly direct sovereign entities to make better decisions…or suffer the consequences. Right now Greece is paying for the financial sins of its past, which includes widening deficits and untenable debt levels.
As new, growing powers such as China, Brazil, India, and other emerging countries fight for precious capital to feed the aspirational goals of their rising middle classes, money will migrate to where it is treated best. Speculative money will flow in and out of various capital markets in the short-run, but ultimately capital flows where it is treated best. Meaning, those countries with policies fostering fiscal conservatism, financial transparency, prudent regulations, pro-growth initiatives, tax incentives, order of law, and other capital-friendly guidelines will enjoy their fair share of the spoils. The New York Times editorial journalist Tom Friedman coined the term “golden straitjacket” in describing this naturally occurring restraint system as a result of globalization.
Push Comes to Shove
Push will eventually come to shove, but the real question is whether we will self-impose fiscal restraint on ourselves, or will the global capital markets shove us in that direction, like the markets are doing to Greece (and other financially strapped nations) today? I am hopeful it will be the former. Why am I optimistic? Although more government spending has typically lead to more votes for politicians, cracks in the support wall have surfaced through the Massachusetts Senatorial vote, and rising populist sentiment, as manifested through the “Tea Party” movement (previously considered a fringe group).
Political gridlock has traditionally been par for the course, but crisis usually leads to action, so I eventually expect change. I am banking on the poisonous and sour mood permeating through the country’s voter base, in conjunction with the collapse of foreign currencies, to act as a catalyst for financial reform. If not, resident capital and domestic jobs will exodus to other countries, where they will be treated best.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including emerging market-based ETFs), but at time of publishing had no direct positions in securities mentioned 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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