Tuesday, December 28, 2010
Wednesday, December 22, 2010
The Rising Stock Market
All the pieces are coming together and it's clear that the economy is picking up steam. Industrial production is rising and with it capacity utilization, which is at a two-yer high. Retail sales are strong, especially online. The Index of Leading Indicators is rising every month; fourth-quarter GDP could very well top 4.0 percent and 2011 is looking better and better.
Wall Street analysts, money managers and yes, even a few ordinary investors, for months a gloomy group, are discovering reasons to be optimistic and buy stocks. Economists have turned positive as well, boosting their GDP estimates for 2011. That should be good news for stocks, but only to the extent that it's not already reflected in current prices, which are up 90 percent from the March 2009 low. For sure, to some extent the improving outlook is already reflected in prices. How much? No one knows, but I say not nearly enough.
Corporate profits, I should remind you, are the driving forces for stock prices. Not interest rates, not taxes, not politics. Profits are the mother's milk of stocks. The most important variable is the multiple (p-e) investors put on future profits, not on this year's numbers but those for next year and beyond. That multiple will depend on the outlook for rates, the allure of competing investments, and other factors -- some financial, some subjective. The focus on future results is why stocks don't move, as some put it, with "good" or "bad." They move with "better" or worse." Good and bad describe current conditions. Better and worse are clues to the future.
Wall Street analysts, money managers and yes, even a few ordinary investors, for months a gloomy group, are discovering reasons to be optimistic and buy stocks. Economists have turned positive as well, boosting their GDP estimates for 2011. That should be good news for stocks, but only to the extent that it's not already reflected in current prices, which are up 90 percent from the March 2009 low. For sure, to some extent the improving outlook is already reflected in prices. How much? No one knows, but I say not nearly enough.
Corporate profits, I should remind you, are the driving forces for stock prices. Not interest rates, not taxes, not politics. Profits are the mother's milk of stocks. The most important variable is the multiple (p-e) investors put on future profits, not on this year's numbers but those for next year and beyond. That multiple will depend on the outlook for rates, the allure of competing investments, and other factors -- some financial, some subjective. The focus on future results is why stocks don't move, as some put it, with "good" or "bad." They move with "better" or worse." Good and bad describe current conditions. Better and worse are clues to the future.
Wednesday, December 8, 2010
Valuations
Goldman Sachs expects S&P 500 earnings to be $94 next year and $104 in 2012, which gives the index a price-earnings multiple of 13 on 2011's earnings and less than 12 on 2012's estimate. Compare that to the ten-year Treasury, which at a 3.14 percent yield trades for nearly 32 times earnings. And stocks can and will generate more and more income as payouts rise; the ten-year Treasury cannot. Investors looking over the landscape are increasingly turning to stocks, and you can see why. Bonds are going the other way, falling sharply.
Thursday, December 2, 2010
Municipal Bonds
Here is my North Tahoe Bonanza article on municipal bonds:
www. tahoebonanza.com/article/20101130/news/101139990
David Vomund
www. tahoebonanza.com/article/20101130/news/101139990
David Vomund
Monday, November 1, 2010
When Expectations are Too High
This Tuesday and Wednesday are important. Tuesday is the election (people expect a Republican victory) and on Wednesday the Federal Reserve will in all likelihood announce another round of quantitative easing (QE) in which it will purchase Treasury securities in the open market. This much-anticipated round will raise bond prices, lower long-term rates a bit and perhaps boost the economy. The idea is to lower the returns on risk-free investments so much that we'll do something riskier. Another Fed goal is to raise the inflation rate. Investors are beginning to anticipate that and long-term interest rates are edging higher. Again, investors expect action by the Fed.
Expectations are often more important than the here and now. Whether is it good or bad for the country, Fed accommodation and huge Republican gains with an extension of the Bush tax rates expected by nearly everyone. Those are baked in the cake, as they say. But suppose nothing gets done in the lame duck session, which means taxes will be going up on January 1. Suppose the Fed buys fewer Treasurys than the market expects. Maybe Republican gains will not be quite as huge as most foresee. Any or all of those events would rattle the market. Stocks will not do well, at least temporarily. When expectations for important matters are as one-sided as they are today, the stage is set for disappointment.
There is a Wall Street adage, "Buy the rumor, sell the news." That may happen even if investors' high expectations are met. But profit taking would be short lived. Stocks do very well after mid-term elections regardless of the outcome. Ultimately, investing is about future earnings and earnings are strong.
Consult your financial advisor before purchasing any security.
Expectations are often more important than the here and now. Whether is it good or bad for the country, Fed accommodation and huge Republican gains with an extension of the Bush tax rates expected by nearly everyone. Those are baked in the cake, as they say. But suppose nothing gets done in the lame duck session, which means taxes will be going up on January 1. Suppose the Fed buys fewer Treasurys than the market expects. Maybe Republican gains will not be quite as huge as most foresee. Any or all of those events would rattle the market. Stocks will not do well, at least temporarily. When expectations for important matters are as one-sided as they are today, the stage is set for disappointment.
There is a Wall Street adage, "Buy the rumor, sell the news." That may happen even if investors' high expectations are met. But profit taking would be short lived. Stocks do very well after mid-term elections regardless of the outcome. Ultimately, investing is about future earnings and earnings are strong.
Consult your financial advisor before purchasing any security.
Monday, October 25, 2010
Income Investing
Here is our Tahoe Bonanza article covering how to invest for income in a low interest rate environment:
http://tinyurl.com/2fkym8y
http://tinyurl.com/2fkym8y
Market Update
Since September opportunities to join the rally are few and increasingly far between. We saw one last Tuesday, but you had to act fast. That's been the story for seven weeks, despite the background of a nearly flat economy, high unemployment, a falling dollar, the mortgage mess, etc. Those negatives are being more than offset by the prospect of political change, the improving earnings outlook and more.
Earnings reports, with few exceptions, are coming in better than investors expected just as they did three and six months ago. Across a broad spectrum of American business, companies are doing better and, even more important, they are becoming increasingly optimistic.
Investors and Wall Street have not been sufficiently optimistic They succumbed to the wave of negative data about the economy, data we have been seeing and hearing every day for many months. They forgot that investing is about the future, not about today or last quarter.
While my outlook for the economy and profits is pretty mainstream that doesn't necessarily mean stocks will languish. Because stocks are undervalued relative to earnings and interest rates, and the alternatives remain unattractive, there is ample upside. Add in the buying pressure as more and more investors put cash to work and you will have a recipe for higher prices. That's what lies ahead. Not in a straight line, of course. There will be periods of profit-taking, as we saw last week. Brief ones.
Earnings reports, with few exceptions, are coming in better than investors expected just as they did three and six months ago. Across a broad spectrum of American business, companies are doing better and, even more important, they are becoming increasingly optimistic.
Investors and Wall Street have not been sufficiently optimistic They succumbed to the wave of negative data about the economy, data we have been seeing and hearing every day for many months. They forgot that investing is about the future, not about today or last quarter.
While my outlook for the economy and profits is pretty mainstream that doesn't necessarily mean stocks will languish. Because stocks are undervalued relative to earnings and interest rates, and the alternatives remain unattractive, there is ample upside. Add in the buying pressure as more and more investors put cash to work and you will have a recipe for higher prices. That's what lies ahead. Not in a straight line, of course. There will be periods of profit-taking, as we saw last week. Brief ones.
Thursday, October 14, 2010
It's Okay to Be Optimistic
Here is an article I wrote for today's North Lake Tahoe Bonanza:
http://tinyurl.com/2bzuu59
David Vomund
http://tinyurl.com/2bzuu59
David Vomund
Sunday, October 10, 2010
Jobs and Money
Friday's jobs report underscored how difficult it will be to reduce the unemployment rate. There were 64,000 private-sector jobs created, less than half the number needed to prevent unemployment from rising. The story has been similar month after month. The economy is inching along.
Expect a second round of what's called Quantitative Easing (QE), which means the Fed will purchase more assets (mortgages, Treasurys, etc.), expand its balance sheet and increase the money supply. That would boost bank reserves, but those are close to one trillion now so more wouldn't have much if any effect. The economy doesn't suffer from a lack of capital, cash and reserves. There is plenty. Liquidity is one of the factors driving the market higher.
I know, I know. There are problems such as deficits, the sinking dollar, spending run amok, Social Security and Medicare, to name a few problems. But as investors we needn't fear problems that are well known because they are already reflected in current prices. And to the extent that the well-known problems turn out to be less severe than expected, that will become a positive.
Expect a second round of what's called Quantitative Easing (QE), which means the Fed will purchase more assets (mortgages, Treasurys, etc.), expand its balance sheet and increase the money supply. That would boost bank reserves, but those are close to one trillion now so more wouldn't have much if any effect. The economy doesn't suffer from a lack of capital, cash and reserves. There is plenty. Liquidity is one of the factors driving the market higher.
I know, I know. There are problems such as deficits, the sinking dollar, spending run amok, Social Security and Medicare, to name a few problems. But as investors we needn't fear problems that are well known because they are already reflected in current prices. And to the extent that the well-known problems turn out to be less severe than expected, that will become a positive.
Friday, October 1, 2010
Market Update
The steady drip of slightly positive or merely "less bad" economic data continues. This week's data showed that second-quarter GDP grew slightly faster than first thought and CPI inflation was less. Housing numbers were better and prices actually rose. First-time jobless claims declined again and purchasing managers are more upbeat. The picture is becoming clearer. The recovery and eventual expansion will be slow, but it's coming.
In our last blog we said that sooner or later stocks would break through the upper end of the trading range that has contained them since the spring. They did so last Friday and the buying has continued. The month of September was the best since 1939. Short covering explains some of it, but the rest of the buying is by people who anticipate earnings growth. That's a good bet.
There are other reasons too. The largest: alternative investments are unattractive. Professionals know that and they're putting money to work but many individuals are still not on board. That explains why people continue to liquidate stock funds in favor of bonds, never mind the yields and risks of the latter. They'll regret it. Bottom line: stocks are going higher.
In our last blog we said that sooner or later stocks would break through the upper end of the trading range that has contained them since the spring. They did so last Friday and the buying has continued. The month of September was the best since 1939. Short covering explains some of it, but the rest of the buying is by people who anticipate earnings growth. That's a good bet.
There are other reasons too. The largest: alternative investments are unattractive. Professionals know that and they're putting money to work but many individuals are still not on board. That explains why people continue to liquidate stock funds in favor of bonds, never mind the yields and risks of the latter. They'll regret it. Bottom line: stocks are going higher.
Monday, September 13, 2010
Trading Range
So much for September historically being the market's worst month. Stocks are doing very well, rising in all but one session in September. The S&P 500 is at its highest level in a month.
Why the renewed interest in stocks after the August sell-off? The economic news, while still grim, is not quite as weak as investors anticipated, so being "less bad" is seen as a positive for the economy and in turn corporate profits. Couple that with the $3 trillion on the sidelines receiving next to no yield, and you can see why the market has rallied.
I should caution that when the S&P 500 has reached the upper end of its range (1130) the market has looked strong and at the bottom (1040) it has looked terrible. The market is testing the upper end of the range today. Traders who sold when stocks looked good at the top and bought when the market was weak at the bottom were right to do so. But someday they will be wrong. We think that day will be in October but it happen as early as tomorrow.
The odds favor a break through the upper end. Here's why: The negatives are well known: Debt, deficits, slow growth, unemployment, etc. That's old news and already in the market. Potential positives are not in the market. The $3 trillion on the sidelines can fuel a rally and the $1.7 trillion in cash on corporate books (other than financial institutions) will at some point be put to work. When investors expect the worst then the surprises are positive. In time the positive events that will drive the market higher will become known. We expect emerging market country ETFs and higher yielding U.S. equities will perform best.
Why the renewed interest in stocks after the August sell-off? The economic news, while still grim, is not quite as weak as investors anticipated, so being "less bad" is seen as a positive for the economy and in turn corporate profits. Couple that with the $3 trillion on the sidelines receiving next to no yield, and you can see why the market has rallied.
I should caution that when the S&P 500 has reached the upper end of its range (1130) the market has looked strong and at the bottom (1040) it has looked terrible. The market is testing the upper end of the range today. Traders who sold when stocks looked good at the top and bought when the market was weak at the bottom were right to do so. But someday they will be wrong. We think that day will be in October but it happen as early as tomorrow.
The odds favor a break through the upper end. Here's why: The negatives are well known: Debt, deficits, slow growth, unemployment, etc. That's old news and already in the market. Potential positives are not in the market. The $3 trillion on the sidelines can fuel a rally and the $1.7 trillion in cash on corporate books (other than financial institutions) will at some point be put to work. When investors expect the worst then the surprises are positive. In time the positive events that will drive the market higher will become known. We expect emerging market country ETFs and higher yielding U.S. equities will perform best.
Tuesday, August 10, 2010
Deflation
From time to time we're hearing voices mentioning or even forecasting deflation. While few are predicting deflation now, most admit that the possibility is there and in fact rising. To hedge against that possibility investors are nailing down income-producing vehicles now, figuring that yields will be even lower in the future. We are seeing that with many preferred stocks. Most are at levels they haven't seen in a long time, or in some cases ever. While utility stocks have risen for the same reason and rose on Friday after the initial knee-jerk selling, they should be doing even better. Soon they will.
Although yields have fallen, this continues to be a better time to invest for dividends than it is to invest for capital gains. In a slow-growing economy, stock prices and corporate profits will do only a little better than track nominal GDP growth, so dividends and income will count for a good deal of total return.
I do not share a deep concern about deflation. Unlike our experience in the 1930s and Japan's since the late '80s, the Fed and Treasury have both the tools to combat deflation and the willingness to use them. There are few winners when deflation takes hold, but many losers. Stocks decline and businesses and individuals postpone purchases because prices will be lower later. Deflation feeds on itself. It is in the interests of most to see that it doesn't occur. The Fed is well aware of that. The Fed would prefer modest inflation and it has the tools to bring it about.
After Tuesday's Fed meeting it is clear rates will stay low well into next year. Income investors frustrated with returns and tired of chasing bonds higher and higher will increasingly turn to high yielding stocks, utilities especially. Our Reduced Risk portfolio holds these as well as high quality trust preferreds. It is well positioned for this market environment.
David Vomund
Although yields have fallen, this continues to be a better time to invest for dividends than it is to invest for capital gains. In a slow-growing economy, stock prices and corporate profits will do only a little better than track nominal GDP growth, so dividends and income will count for a good deal of total return.
I do not share a deep concern about deflation. Unlike our experience in the 1930s and Japan's since the late '80s, the Fed and Treasury have both the tools to combat deflation and the willingness to use them. There are few winners when deflation takes hold, but many losers. Stocks decline and businesses and individuals postpone purchases because prices will be lower later. Deflation feeds on itself. It is in the interests of most to see that it doesn't occur. The Fed is well aware of that. The Fed would prefer modest inflation and it has the tools to bring it about.
After Tuesday's Fed meeting it is clear rates will stay low well into next year. Income investors frustrated with returns and tired of chasing bonds higher and higher will increasingly turn to high yielding stocks, utilities especially. Our Reduced Risk portfolio holds these as well as high quality trust preferreds. It is well positioned for this market environment.
David Vomund
Wednesday, July 14, 2010
Market Outlook
We’ve just entered earnings season and investors are reading between the lines in releases from Alcoa and CSX (a large railroad). Alcoa said their customers in China, Europe and elsewhere (here as well) are doing better across all lines and they increased their anticipated growth rate. CSX reported a rise in freight tons, a key indicator of future economic growth. Expect upbeat second-quarter reports from others and more optimism about the near-term future than we have heard for some time. Exports to emerging markets are booming. Capital spending is on the rise. A double-dip recession is really a long shot. Not going to happen.
What is missing is a spurt of new hiring at large companies. Many are understandably cautious about the future primarily due to uncertainty about health-care costs, taxes and regulations.
Despite the drumbeat of gloom and doom in the financial and general media, investors have little choice but to buy stocks as long as interest rates remain low. And they will remain low for the foreseeable future. They have also loaded up on bond funds, preferred stocks and other income vehicles. Longer-term bond funds are not a good bet. Investors have put many hundreds of billions of dollars into long-term bond funds to find income. When rates are so low, the market risk is high. Preferred stocks are attractive, however, and our Reduced Risk income portfolio is taking advantage. This is our best portfolio option in this difficult equity market environment. Receiving 7 percent in dividends is fun in a sideways market!
All that said, let's not get too carried away. There are no catalysts for GDP growth much beyond three or briefly four percent. The headwinds of rising taxes and ten percent unemployment are too strong. Still, the tailwinds of rising exports and surging earnings this year amid a low-rate environment will carry the day to higher prices. I find it very difficult to make a bearish case when prices are historically low and earnings are rising. As I've said many times, stocks are a bet on future earnings. Earnings trump all. The outlook is very good for this year, and fairly so for 2011. What stocks have going for them above all else is valuation. Relative to historical measures and today's returns in alternative investments, stocks are cheap.
What is missing is a spurt of new hiring at large companies. Many are understandably cautious about the future primarily due to uncertainty about health-care costs, taxes and regulations.
Despite the drumbeat of gloom and doom in the financial and general media, investors have little choice but to buy stocks as long as interest rates remain low. And they will remain low for the foreseeable future. They have also loaded up on bond funds, preferred stocks and other income vehicles. Longer-term bond funds are not a good bet. Investors have put many hundreds of billions of dollars into long-term bond funds to find income. When rates are so low, the market risk is high. Preferred stocks are attractive, however, and our Reduced Risk income portfolio is taking advantage. This is our best portfolio option in this difficult equity market environment. Receiving 7 percent in dividends is fun in a sideways market!
All that said, let's not get too carried away. There are no catalysts for GDP growth much beyond three or briefly four percent. The headwinds of rising taxes and ten percent unemployment are too strong. Still, the tailwinds of rising exports and surging earnings this year amid a low-rate environment will carry the day to higher prices. I find it very difficult to make a bearish case when prices are historically low and earnings are rising. As I've said many times, stocks are a bet on future earnings. Earnings trump all. The outlook is very good for this year, and fairly so for 2011. What stocks have going for them above all else is valuation. Relative to historical measures and today's returns in alternative investments, stocks are cheap.
Friday, May 7, 2010
Yesterday's Market Plunge
The Dow was off 998 points at its worst level yesterday, but that was not valid. The 30 Dow stocks did not fall anywhere near that much on the NYSE. For example, Procter and Gamble was 61 on the NYSE when the exchange slowed trading for 90 seconds to keep an orderly market. Electronic exchanges continued trading, but since there are few bids under current prices in those markets automated selling programs kept hitting the bids again and again. In the case of PG, in 90 seconds it fell to 39. When trading re-opened on the NYSE 90 seconds later, PG was 60 or so. That 21-point slide to 39 in one stock took between 160 and 200 points off the Dow. The same happened to MMM, another Dow stock. Many of those trades will be broken. During those few minutes there were eight stocks that traded down to one penny. Accenture fell from 41 to zero. So did Centerpoint Energy and Excelon. The SEC will look into this. The NYSE performed well; the electronic markets did not. Rules don't apply to them. That has to change.
The Dow's closing level (off 347) was legitimate and reflects to some degree a concern for foreign debt and where we're headed, but that is a convenient excuse. It was mostly profit-taking. The panic -- to the extent that is the right word -- was in the bond market. I saw it begin the day before. Most bank trust preferreds trade lightly, so a little selling with market orders can knock prices for a loop. For example, the JPMorgan issue (J) fell from 25.15 to 19.28 before rebounding to 23.50. Most fell 10-15 percent at their worst. All then rallied, some even closing higher for the day. TEI, the Templeton Emerging Market Income fund, fell a point from 14, but in electronic markets the low was 6. The NYSE low was 11. Again, the electronic markets with little liquidity did not perform well. Many of those trades should be broken.
We have not heard the end of this. Late yesterday there was a report that a trading firm sold 16 billion index futures contracts instead of the intended 16 million. That caused the 15-minute slide of 700 points, mostly away from the NYSE where markets were orderly. Something has to be done to put people back in charge, not computers. Firms that do high-frequency trading can enter between 10,000 and 20,000 orders in the time it is taking me to type one character on this e-mail. Chaos ensued yesterday. We'll see it again. It was a similar story in 1987 on what was the best buying opportunity of our lifetimes, one created by program selling.
Yesterday's lows, to the extent that they are trades that hold up (many won't), will be at prices not likely to be seen again. That is surely the case for P&G, Accenture, Centerpoint and others. Also true for income vehicles.
The long-lasting impact of what happened yesterday is to further turn off ordinary investors, many of whom believe the deck is stacked against them in an insider's game. Just what they'll invest in remains to be seen. For now many are buying bond funds. Not a good idea. Others are buying Treasurys and selling the euro and pound. Treasurys are not a good bet at all. They are rallying as a safe haven, that's all.
The Dow's closing level (off 347) was legitimate and reflects to some degree a concern for foreign debt and where we're headed, but that is a convenient excuse. It was mostly profit-taking. The panic -- to the extent that is the right word -- was in the bond market. I saw it begin the day before. Most bank trust preferreds trade lightly, so a little selling with market orders can knock prices for a loop. For example, the JPMorgan issue (J) fell from 25.15 to 19.28 before rebounding to 23.50. Most fell 10-15 percent at their worst. All then rallied, some even closing higher for the day. TEI, the Templeton Emerging Market Income fund, fell a point from 14, but in electronic markets the low was 6. The NYSE low was 11. Again, the electronic markets with little liquidity did not perform well. Many of those trades should be broken.
We have not heard the end of this. Late yesterday there was a report that a trading firm sold 16 billion index futures contracts instead of the intended 16 million. That caused the 15-minute slide of 700 points, mostly away from the NYSE where markets were orderly. Something has to be done to put people back in charge, not computers. Firms that do high-frequency trading can enter between 10,000 and 20,000 orders in the time it is taking me to type one character on this e-mail. Chaos ensued yesterday. We'll see it again. It was a similar story in 1987 on what was the best buying opportunity of our lifetimes, one created by program selling.
Yesterday's lows, to the extent that they are trades that hold up (many won't), will be at prices not likely to be seen again. That is surely the case for P&G, Accenture, Centerpoint and others. Also true for income vehicles.
The long-lasting impact of what happened yesterday is to further turn off ordinary investors, many of whom believe the deck is stacked against them in an insider's game. Just what they'll invest in remains to be seen. For now many are buying bond funds. Not a good idea. Others are buying Treasurys and selling the euro and pound. Treasurys are not a good bet at all. They are rallying as a safe haven, that's all.
Monday, May 3, 2010
Overview of the Economy and Market Conditions
Here is a video on the economy and market conditions:
http://www.etfportfolios.net/videos050310/
David Vomund
http://www.etfportfolios.net/videos050310/
David Vomund
Thursday, April 22, 2010
Market Environment
It is Earth Day, so here is a short video on the environment (the stock market environment that is)
http://www.etfportfolios.net/videos042210/
The above video makes of a video created in March 2009. For your reference, here is that video
http://www.etfportfolios.net/videos032009/
David Vomund
http://www.etfportfolios.net/videos042210/
The above video makes of a video created in March 2009. For your reference, here is that video
http://www.etfportfolios.net/videos032009/
David Vomund
Monday, March 29, 2010
It's a Bull Market
In “Reminiscences of a Stock Operator,” believed to be the autobiography of Wall Street trader Jesse Livermore under the pen name Edwin Lefevre, there’s a story of how a shred old-timer was asked by a newcomer for some investment wisdom. He said “it’s a bull market,” again and again that’s all he would say. The newcomer expected the sage to say “buy Union Pacific” or “short U.S. Steel.” The newcomer was disappointed until another investor told him he received the most valuable advice the sage could give. True.
So it is a bull market. Never mind those who insist that it shouldn’t be a bull market, or it isn’t really if you look at this or that. They are in denial. This is a bull market with a powerful, earnings driven tailwind. It has more room to run.
Why are stocks rallying? The reasons are rising earnings in a growing economy, relatively low interest rates, and literally trillions of dollars, pounds and euros looking for a better return than money-market funds provide. There are more reasons too.
Credit conditions are improving (bond issuance has soured) and we’ll soon hear that jobs are once again being created and GDP is growing at a good pace early in the year. Corporate America planned for a recession, or in some cases a depression. They slashed production, cut payrolls and postponed all but essential capital expenditures. This is reflected on the bottom line. Rising profits trumps all. That is driving stocks higher.
So it is a bull market. Never mind those who insist that it shouldn’t be a bull market, or it isn’t really if you look at this or that. They are in denial. This is a bull market with a powerful, earnings driven tailwind. It has more room to run.
Why are stocks rallying? The reasons are rising earnings in a growing economy, relatively low interest rates, and literally trillions of dollars, pounds and euros looking for a better return than money-market funds provide. There are more reasons too.
Credit conditions are improving (bond issuance has soured) and we’ll soon hear that jobs are once again being created and GDP is growing at a good pace early in the year. Corporate America planned for a recession, or in some cases a depression. They slashed production, cut payrolls and postponed all but essential capital expenditures. This is reflected on the bottom line. Rising profits trumps all. That is driving stocks higher.
Tuesday, February 16, 2010
The Dollar
There is currently an inverse relationship between the dollar and the stock market. When the dollar rises the market falls. The opposite is true when the dollar falls. There is also talk that a strengthening dollar will also put the U.S. back in recession. While it is true that a rising dollar hurts exports, it is wrong to conclude that a continually falling dollar is good for our country.
Yes, there are pluses from a declining dollar, but the country won’t benefit and you and I won’t be well served over the long term. I am not aware of a single instance where a country’s declining currency led to rising standards of living and sustainable economic growth. On the contrary, capital flows to countries with economic growth and relatively low taxes, and investors and foreign businesses buy that country’s currency, pushing it up and depressing the one they’re selling. Capital goes where it is treated best.
Yes, there are pluses from a declining dollar, but the country won’t benefit and you and I won’t be well served over the long term. I am not aware of a single instance where a country’s declining currency led to rising standards of living and sustainable economic growth. On the contrary, capital flows to countries with economic growth and relatively low taxes, and investors and foreign businesses buy that country’s currency, pushing it up and depressing the one they’re selling. Capital goes where it is treated best.
Wednesday, January 27, 2010
Market History
Because of two bear markets, the 2000-09 decade was the market’s worst performer, surpassing the miserable 1930s. Despite this, the market ended on a high note with a dramatic turnaround from the 2007-09 bear market.
The turnaround is stunning. Emerging market stocks had their worst year on record in 2008 (down 53%) and their best year on record in 2009 (up 79%). High yield corporate bonds had their worst year on record in 2008 (down 26%) and their best year on record in 2009 (up 58%).
Compared with 13 bear market recoveries since 1929, the 2009 stock market rebound is one of the most robust ever. The S&P 500’s 65% rise from March 9 to December 31, 2009, is more than a third higher than the average 46% rebound in the first year of new bull markets. The 2009 rally even beats the average two-year return of 57% in prior bull market recoveries.
Despite the 2009 rally, the S&P 500 remains 29% below its level prior to the start of the bear market. That is similar to prior large bear markets. A year after the 1937-1942 downturn, the S&P 500 was still 39% below its pre-crash high. A year after the 1973-74 bear market, the S&P was down 29% from its prior high.
No one knows what will happen in 2010 and past performance does not guarantee future results. But historically, in 12 out of 13 bear-bull cycles, gains continued during the second year of the recovery, just at a slower pace. Let’s hope so.
The turnaround is stunning. Emerging market stocks had their worst year on record in 2008 (down 53%) and their best year on record in 2009 (up 79%). High yield corporate bonds had their worst year on record in 2008 (down 26%) and their best year on record in 2009 (up 58%).
Compared with 13 bear market recoveries since 1929, the 2009 stock market rebound is one of the most robust ever. The S&P 500’s 65% rise from March 9 to December 31, 2009, is more than a third higher than the average 46% rebound in the first year of new bull markets. The 2009 rally even beats the average two-year return of 57% in prior bull market recoveries.
Despite the 2009 rally, the S&P 500 remains 29% below its level prior to the start of the bear market. That is similar to prior large bear markets. A year after the 1937-1942 downturn, the S&P 500 was still 39% below its pre-crash high. A year after the 1973-74 bear market, the S&P was down 29% from its prior high.
No one knows what will happen in 2010 and past performance does not guarantee future results. But historically, in 12 out of 13 bear-bull cycles, gains continued during the second year of the recovery, just at a slower pace. Let’s hope so.
Monday, January 4, 2010
Independent Firms
Here is an interesting Wall Street Journal article on the turmoil within the big name brokerage firms. Brokers are switching from firm to firm, and many are leaving to use our independent model:
http://online.wsj.com/article/SB126256739671014281.html
I especially like the Morgan Stanley Smith Barney spokesman that says, “The majority of departures have been people with below-average revenue production.” Keep in mind they are talking about their own revenue instead of how well their clients are doing. With these firms, it’s all about commissions.
Independent firms like our own don't have a conflict of interest. We don't make money from trading commissions. Our fee-only system is based on assets under management, so the more we grow client portfolios the more we (and our clients) are rewarded.
David Vomund
http://online.wsj.com/article/SB126256739671014281.html
I especially like the Morgan Stanley Smith Barney spokesman that says, “The majority of departures have been people with below-average revenue production.” Keep in mind they are talking about their own revenue instead of how well their clients are doing. With these firms, it’s all about commissions.
Independent firms like our own don't have a conflict of interest. We don't make money from trading commissions. Our fee-only system is based on assets under management, so the more we grow client portfolios the more we (and our clients) are rewarded.
David Vomund
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