Category Archives: Investing Money

Correction Fears Are Overblown: Buy The Dip

global investingMy Comments: I am both blessed and cursed for almost always believing the glass is half full rather than half empty. Right now, my bias is to say that another correction like we had in 2008-09 is NOT going to happen again during my lifetime. But that’s not to say the business cycle of ups and downs over several years has suddently shifted gears.

We talk about secular movements, which means long term. They can be up or they can be down. Within every one of these, there are what we call cyclical movements, both up and down. One of the programs I favor for my clients is designed to anticipate those cyclical inflexion points, and invest accordingly. It has been very successful.

Earlier blogs of mine have suggested there will be a brief, but significant correction this year. And it’s possible we are seeing that happen now. But it’s not likely to last a long time. So you can elect to ride it out or stay on the sidelines, but I predict by the end of 2014, the market averages will be up, just not as far up as they were in 2013.

By Morgan Myrmo Jan. 26, 2014

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)

“If there weren’t luck involved, I would win every time.” -Phil Hellmuth, Professional Poker Player

The stock market is a lot like poker. You may have a great hand, however, what begets success is a complicated structure that involves other players.

When it comes to the stock market, a great portfolio of stocks is comprised of valuation versus aggregate value and growth metric risk balanced with an understanding of the current political economic outlook.

There are several unknowns however, such as threats to aggregate growth, industry expansion and specific stocks. As in poker, successful investing can be held with a great hand but success is never guaranteed.

Winning poker players, such as Phil Hellmuth and Phil Ivey, understand the metrics of the game and use both odds and a complex understanding of human nature.

Bluffs are when players overplay low-value hand, which is akin to buying over-priced stocks. High-value hands, such as pocket aces, are played in a manner akin to holding high-value stocks.

Just as in holding the nuts (the best hand) pre-flop, uncontrollable circumstances can always change the nature of the game and as such, the most disciplined player would realize the option of holding or folding may be better than increasing the bet or going all-in.

Achieving Discipline In A Rising Market
The stock market’s basic valuation metrics are the price-to-earnings (P/E) ratio as well as projected short-term growth. While momentum always plays a role, disciplined long-term investors place value where value is due and over the years are richly rewarded.

Taking Warren Buffett, for example, the man who said to “Buy America” at the lows of the post-financial crisis bloodbath, while momentum was the market’s enemy, value was there and his discipline has been rewarded by exceptional capital gains.

CONTINUE READING HERE:

The 88-Year History Of U.S. Capital Markets From 1926-2013: What Happened When?

investment-tipsMy Comments: With 2013 now in the rear view mirror, the compelling question is what is likely to happen in 2014. Every projection, mine, yours, experts of every stripe, have only the past available to offer insights for predicting the future. Here is someone who has created tables based on five and ten year results since 1934, the end of the last “great recession”. But I warn you, a detailed analysis of these charts will not give you the answer you are looking for.

By Ronald J. Surz, Target Date Solutions, Inc.

The following table and histograms show the history of risk and return for stocks (S&P 500), bonds (Citigroup high grade), T-bills and inflation. There are many lessons in this table, so it’s worth your time and effort to review these results. Keep this article handy for those questions about the good and bad times in our capital markets. For example, here are a few of the lessons:
1. T-bills paid less than inflation in 2013, earning 0.09% in a 1.4% inflationary environment. We paid the government to use their mattress, as we have for the past ten years, with a 1.64% return in a 2.35% inflationary environment.

2. Bonds were more “efficient,” delivering more returns per unit of risk than stocks in the first 44 years, but they have been about as efficient in the most recent 44 years. The Sharpe ratio for bonds is .45 versus .35 for stocks in the first 44 years, but the Sharpe ratio for both is about the same in the more recent 44 years, at .31 for stocks and .32 for bonds.

3. The past decade has been the third worst for stocks across the past eight consecutive 10-year periods. The decades 1934-1943 and 1964-1973 were slightly worse.

4. Average inflation in the past 44 years has been about 2.5 times that of the previous 44 years: 1.75% in 1926-1969 versus 4.26% in 1970-2013.

5. Long-term high-grade corporate bonds have fared reasonably well in the last five years, earning more than 4% per year above inflation, which is surprising in light of low interest rates. America has benefited from confidence in the U.S. dollar, resulting in decreases in interest rates.

6. The 8.59% standard deviation of monthly stock returns in 2013 is less than half the historical average of 19%. It was a year that went up month after month, with only a couple exceptions in June and August. High return with low risk.

Use this table(s) to find the best and worst 5-year and 10-year periods, or to locate periods in the past that are similar to the current. (Rather than incorporate his charts and tables into this blog post, I’m giving you active links to the images that are on his post. – TK)

Image 1:

Image 2:

Find 2013 in this picture — it’s one of the best years. Compare it to 2008, one of the worst. Note also that there are plenty of years with returns in excess of 30%, as well as returns less than -20%. Contrast these to bond returns.

Image 3:

A bond return above 30% in any one year is a rarity; it only happened once, in 1982. But there have been several years with losses greater than 10%.

Image 4:

You’ll find that the table and histograms above are a handy reference for researching questions about the history of U.S. capital markets. For example, you can look for previous 5-year periods that are like the most recent 5 years, and observe what happened next.

The Danger Overlooked By Most Long-Term Investors

global investingMy Comments: I often tell my clients that if I did have a crystal ball, we’d not be having this conversation as I would probably be vacationing in the south of France. Or somewhere warm.

So going into 2014, there are lots of the usual questions including the memorable one in the media these days, namely “…will 2014 be as good for stocks as was 2013?” And the answer is… a resounding silence

All any of us can do is attempt to have an intelligent diversification with an emphasis on what most of us think is likely to happen.

By Eric Parnell | Jan. 9, 2014

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

U.S. stocks enjoyed a memorable year in 2013. And this advance was just the latest in an impressive string of virtually uninterrupted gains for the stock market since bottoming amid crisis in early 2009. While impressive on the surface, the resoundingly positive results from last year are unfortunately built upon a fragile foundation. And these gains have come at a juncture in the market cycle that may now be subjecting long-term investors to far greater risk on the horizon than they may realize.

Overall, the U.S. stock market as measured by the S&P 500 Index (SPY) advanced by +30% last year. These robust returns took place in an environment where corporate revenue and earnings growth were virtually non-existent. This is problematic due to the fact that year-over-year trailing earnings growth is highly correlated with year-over-year stock market returns.

Continue Reading HERE...

The Five Phases of a Bubble

question-markMy Comments: This is a little more from Jeffrey Dow Jones, the writer who started a conversation recently about a bubble no one had yet heard about.

Many of us in the investment world are expecting a market correction soon. The overwhelming question is when and how severe. But there is little question that it will happen. So here are some thoughts about bubbles and how to identify and manage them.

Nov 07, 2013 | Jeffrey Dow Jones | Cognitive Concord

Unsurprisingly, I’ve had a lot of pushback on what I wrote recently about our beloved U.S. blue chips. But there’s been a bit of support as well. Seems I’m not the only one out there who’s intrigued by what’s going on. This exercise has revealed an unexpected and unexpectedly passionate debate.

Because this is a “big picture” blog, today let’s take a step back and talk a little about bubbles more generally.

First, some background. When it comes to bubbles, investors return in droves, generation after generation, to the ur-text on bubbles, Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds.

This book was originally published in 1841. 1841! Investors have been fascinated by market bubbles for pretty much as long as markets have been around. There’s no reason why you shouldn’t pick up a copy of this book, it’s only $0.99 on Amazon and you can probably find it somewhere out there in the public domain for free. But even if you don’t read it, the fact that somebody published a book about market bubbles 170 years ago ought to tell you that these things are general in nature and are caused by primal market forces and the whimsy of human nature.

The other bible on the topic is Charles Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises. Kindleberger is something of the modern master on the topic of bubbles. But it bears mention that Hyman Minsky has done a lot of significant work in this area as well and Shiller’s Irrational Exuberance is probably one of the more approachable works on the subject.

Those guys are all smarter than I am. The below is basically a boiled-down version of some of their major points.

The Five Phases of a Bubble

1. Displacement. All of these bubbles are born in reality. Many times it has to do with technology, and in this case the now-ubiquitous term “disruptive” could also serve as substitute for “displacement.” The reason why “disruptive” is such a sexy term these days is because it’s one of the common denominators. Everybody wants to catch the assets that eventually turn into bubbles and, more often than not, the ones that do are the ones that have made a meaningful impact on the world around them.

It doesn’t always have to do with technology, though. The real estate bubble is still relatively fresh in our minds. Many factors contributed to that one, but the biggest was an environment of historically low mortgage rates and historically lax lending standards. If you want to call a subprime CDO a disruptive technological innovation that helped inflate an asset bubble, I certainly won’t argue you.

Policy can cause bubbles, too. Low interest rates, anyone? The point is that all bubbles are born in reality and the notion of reshaping the way everything functions around them.

2. Boom. Displacement attracts sophisticated investors. Like sharks in the Tasman Sea, they swarm for a piece of the kill. If the kill is large enough i.e. the disruptive asset has the power to displace a meaningful chunk of the economy, it will attract more and more investment. Prices go up, and the very act of prices going up creates momentum to go up even further and attract even more investors from more locales. It’s a virtuous cycle of awesome, and the positive psychology of this phase of the bubble creates its own feedback loops and halo effects. Other (non-disruptive) assets can get swept up in the boom.

This is where the fear starts to develop. But it isn’t a fear of loss or a bursting of the bubble. It’s a fear of missing out. Disruptive technologies, businesses, and events have an inherent “once in a lifetime” quality to them. We knew that the birth of the internet economy in the late 90′s was only going to happen once. During the housing bubble, we were afraid that we’d never again be able to buy a house with 0% down and a 0% introductory APR. I know that there’s the old maxim about how the markets are driven by fear and greed, but really, I think that fear is the only one that matters. It’s not just in the markets, either. Before you go to bed today, take a moment to reflect on your day. Ask yourself how much of what you did was motivated by fear.

Disruption is powerful. Fear is powerful. These might even be two of the most powerful forces on earth, or certainly those connected to economies and markets. They are the reason why bubbles are never to be trifled with.

3. Euphoria. This is phase in which the bubble has fully permeated the culture. This is when your cab driver was talking to you about his .com stocks. This is when Flip this House premieres. It’s when you meet your buddies for drinks at the club and realize that everyone is talking about one thing and one thing only: how much money they’re making.

The psychology of this is incredible. Nobody wants to get left behind. Nothing makes us want to mow, fertilize, and water our lawn more than seeing how green our neighbor’s lawn is. Nothing makes us want to drive a BMW more than watching our coworkers roll into the parking lot with their luxury cars. And nothing makes us want to invest in a bubble asset more than watching our friends do it and get rich in the process.

In a technical perspective, this is where valuations really get out of hand. And this is also where the critics come out of the woodwork. “The PE of the market is 30x! It’s way too expensive,” shout the critics. “Whatever,” says the market, as valuations rise to 35x, 40x, and then 45x. Most interestingly, this is where you see all sorts of new metrics created to justify the action of the bubble asset. These new metrics don’t matter. In the euphoria phase, psychology is the only thing that matters. We humans have this bit of code in our psychologies where we feel a need to have a chain of reasoning that explains why things are the way they are and why they’re doing the things they’re doing. Our brains are wired to rationalize. Euphoria is the phase where rationalizations get creative.

4. Profit taking. Unfortunately, the euphoria phase doesn’t last long. Since that’s the stage during which the largest numbers climb aboard, the price increases are the sharpest. Profit taking eventually starts to take place. And just as most participants missed out on the early days of the asset bubble, most participants miss out on the early days of profit taking. Sometimes there are specific events that can catalyze this phase. A bad earnings call, an untimely rate hike, or even a broader economic contraction can all act as pins. The pricking of the bubble isn’t always obvious, either.

This is where prices start to go down and this is where psychology starts to change. Our fear of missing out transforms into denial. Denial is the only appropriate response for our backwards psychologies. Accepting that prices may go down and that the old regime may be over and that everything we knew during the euphoria phase may be totally wrong is far too painful to deal with. We need time to process those emotions, and unfortunately, time is the one thing we don’t have as bubbles begin to burst.

5. Panic, Revulsion, and Despair. This is where everything completely reverses. Psychology becomes relentlessly bearish. News headlines are non-stop negative. All of the crazy new metrics we dreamed up to justify the bubble valuations die quiet deaths, replaced by stories of rampant fraud and abuse. We start blaming other people — our brokers, the Big Banks, Alan Greenspan. We invent new narratives for why we invested in the bubble in the first place.

At various points along the way, investors capitulate. Eventually every last participant throws their hands up in the air and says, “I quit.” We each have our own pain thresholds and when the pain of having lost all that money finally outweighs the pain of admitting that we were wrong, we sell. When enough people have finally done this, the bubble asset bottoms out.

This phase can last a while or it can happen quickly. The one thing that every bubble and bubble-bursting has in common is that by the end of this phase, the price declines overshoot fair value. Just as markets go too far on the upside they fall too far on the downside. There are technical factors that exacerbate this as well. Not every bubble involves leverage, but most do. Unwinding that debt, whether it’s a margin call from your brokerage or negative equity on your house, tends to be forced rather than performed at the investor’s leisure. Many investors who sell during this phase have no choice but take whatever prices that the market is giving them on the day they get that phone call. By definition, in a market with extensive forced selling there are fewer buyers. These factors and categorical revulsion are what send asset prices irrationally low.

That Bubble in Blue Chips

To the extent that certain blue chip U.S. equities are in a bubble, I think it’s safe to say that, along these guidelines, there’s still a little ways to go.

Let’s look at these phases one by one.

Displacement — There is zero question that, fundamentally, there was major displacement surrounding these specific companies. A variety of factors have come together in the post crisis years to lay a foundation upon which these companies can legitimately outperform for tangible reasons. Low interest rates, low taxes, a massive psychological shift in the market. Remember that scene in The Goonies when Mikey says, “down here, it’s our time. It’s our time down here.” Right now, it’s blue chip time. The market and the economy have changed in real ways during the last few years, to the great benefit of a certain collection of firms. It’s all over if policymakers reel up their bucket.

Boom — There is also no question that these blue chips are booming. First it was people like me singing their praises in the early years of 2009-2011. Since 2012, more investors have climbed out of their shells and back on board.

Euphoria — Blue chips may have displaced the economy and the market and they may be booming, but there probably isn’t a state of euphoria in these things yet. It’s possible, I suppose. If there is indeed a bubble here, it certainly isn’t a systemic one. Investors may be euphoric about blue chips relative to the market as whole. But they clearly are not euphoric about either in an absolute sense.

Profit Taking — There may be some of this going with certain stocks. But other blue chips are still making new highs every day, not just in terms of price but valuation. Either way, this definitely is not happening across the board. If it does — and it could — it’s hard to imagine it won’t take place in a fairly measured way, especially given the fact that euphoria hasn’t fully taken hold.

Panic, Revulsion, and Despair — Still a long way off and difficult to envision at this point without a broader “risk off” style market shock.

What this means is that we’re now at a fork in the road.

PATH ONE — Blue chip stocks continue to soar, real euphoria ignites the market. If euphoria does truly take hold, you can better believe that stages 4 and 5 will follow. The bubble will be pricked, a few investors will take some profits, and it’ll all eventually end in panic and despair. Who knows where it peaks along the way.

PATH TWO — Euphoria never develops and it becomes clear that these things won’t travel along the latter stages. Here, investors are faced with the awkward notion of treating these businesses like any other i.e raw functions of earnings growth, cash flow, and price. When you cover up the names of some of these stocks and just look at the fundamentals, how much better are some of these businesses than others that aren’t as big or have less-ubiquitous ticker symbols?

Look, if you’re betting on these unquestionably expensive blue chips right now, you’re betting that the psychological boom continues. You’re not betting that they’re in a bubble, per se, but rather that they soon will be. This could very well happen! Years ago I loaned my crystal ball to an upstart hedge fund manager and he never gave it back. I’m in the dark here just like you.

If you own these expensive blue chips and you don’t think that a series of progressively greater fools will come along and continue to pay higher and higher prices (and higher multiples of earnings/sales/cash flow/assets/etc.) for these companies, then why do you own them? Do you own them because they’ve outperformed the market?

Maybe you’re a really long term investor and maybe you just believe that these companies are still good bets to do well over long cycles of time. That’s totally cool, and for the record, I do agree with you that extremely-expensive, historically-boring stocks like Disney, Home Depot, Johnson & Johnson are great businesses to bet on for the long run. But can you handle a prolonged period of underperformance? Do you truly believe that, in the cycle of the next few years, today is as cheap as it’s ever gonna get for these companies?

Let me ask you an uncomfortable question: are you afraid you’re going to miss out while these blue chips climb higher still?

I don’t mean to pick on Big Orange. Home Depot is an awesome company and a great business. I’ll still be buying stuff there in 2023. But do you really believe that the price of their stock justifies a valuation that’s 50%-100% more expensive by nearly every metric than it was during the peak of the housing boom? Analysts project nearly a doubling of earnings by 2017. Hey, could happen. The market is counting on it happening, though. There’s no margin for error. As of this morning HD trades at nearly 14x the 2017′s earnings which are nearly double what they are today. To put that into perspective, that’s close to how Facebook was priced at their IPO. Surely we will not have had a recession by 2017!

Why are we so attracted to these things? Is this simply a natural function of the types of places we want to go when we are simultaneously afraid that the world will fall apart and that we’ll miss out on the party in the meantime? Is that why we’re willing to pay for quality at any price?

I honestly don’t know. And it’s cool if we disagree on these blue chips. But let’s not disagree that there are tons of other stocks in the market (and foreign markets) that may not be as widely followed and beloved but are just as good and, when you break down the fundamentals, even better quality in some cases.

As long as there’s no euphoria in those names there’s opportunity with a better balance of risk and reward.

3 Weird Reasons to Be Bullish That Will Shock You

global investingMy Comments: A couple of weeks ago I sent out an email from this writer that suggested there was a bubble out there that no one was talking about. He described this bubble as a real and potential threat to us as investors. He suggested that while many stocks are historically overpriced these days, those in the DOW were really overvalued and looking more and more like a bubble.

I sent it to many friends and clients alike since all of us would like to be ahead of the curve when it comes to investing money. Will that bubble burst? I have no idea, but you have at least been warned.

His comments this week suggest reasons to be optimistic and not pessimistic. The images attached to his post are a little weird but the message is not. At the bottom of my post is a link to his article. In the meantime, here is a sampling of his comments:

Oct 31, 2013 | Jeffrey Dow Jones | Cognitive Concord

Businesses will always evolve and adapt. They’ve been doing this in this country for over two centuries. Betting against this intrinsic quality is sheer folly. Yet we do it. We just did it!

We lose our faith when the path out isn’t clearly illuminated. American business always finds a path, though. I don’t want to wax philosophical about the virtues of a capitalistic economy, but we have the right framework in this country to allow for this sort of thing.

Betting against cycles is also folly. Corporate profits may not crash back to their historical mean, but they will find a new mean in a more competitive, more globalized market.

They’ll oscillate around that level. “Global GDP” is perhaps the single most important concept of the next century. (That’s assuming we don’t have any colonies on the moon by then.)

Another of the things I write about over and over again is that our expectations for the future are based on our experiences in the past. The problem is that nothing behaves linearly, at least not for very long. This is why when we get lost in the economic woods, we get nervous. We can’t see the path ahead and all we do is look behind us at our footsteps.

Our footsteps are the only thing we know. We lack the vision to hack a new path. But when economies slow down, they always recover. Even Greece is recovering! When we’re afraid in the woods we act as though they never will.

Because of the Long Boom, it became ingrained in our heads that the economy should always be expanding. Every year. This psychology flies in the face of hundreds of years of economic data. I’m not saying that we shouldn’t have some sort of counter-cyclical fiscal & monetary policy in this country. We should. I just think our expectations still haven’t been appropriately recalibrated.

Part of me wonders if one of the things our cultural/economic psychology needs is a couple of quarters of modestly negative GDP. Perhaps we need to fall off the horse simply to remember that it’s not so hard to get back on. The next recession won’t be fun. Stocks will go down 20-40%. Unemployment will rise.

It won’t be anywhere near as bad as last time, though. And since that’s the most recent data point in our memories, far too many of us are worried that the next slowdown will be another catastrophe. It won’t be. Markets have a sneaky way of doing exactly what you’d least expect. Who out there expects a market that slowly goes down over a 1 or 2 year span — no crash, no crisis, no inflationary apocalypse — just 4 or 5 quarters of sub 1% or sub 0% GDP and a sad-but-not-suicidal S&P? THAT would shock ME!

The reason why this matters is because these expectations are affecting our behavior in the present. We’re not stocking up for a simple little snowstorm. We’re all hunkered down for a blizzard. Study the cycles of history, and you’ll see that a second blizzard is a bad thing to bet on.

Here’s his full article: Cognitive Concord 10/31/2013 Continue Reading HERE...

Beware the Obama Stock Bubble

profit-loss-riskMy Comments: I recently shared a link with a lot of friends and colleagues about a bubble that might or might not happen. It was called “The Bubble No One Is Talking About.”

Bubbles are known to pop. And when its an investment bubble, it has the potential to make life hard for most of us. Intellectually, we all know were going to have another one, and we’re quite sensitive, given all the pain that happened in 2008-2009.

Fortunately, there are ways for you to mitigate your risk. Click on the image above left for an idea I like.

Alexei Bayer, President Kafan Information Services \ October 28, 2013

Ronald Reagan’s presidency will be remembered for many achievements, one of which was to break the so-called Tecumseh’s Curse.

Starting in 1840 with President William Henry Harrison—who some years previously had fought in a battle in which the great Native American chief was defeated—every American president elected in a year ending in zero died in office. Seven such presidents later, Reagan—who, at nearly 70 years of age, became the oldest man to move into the White House, and survived an assassination attempt—nevertheless completed his two terms. Since then, George W. Bush, elected in 2000, also served eight years, confirming that the old spell had been broken.

But Reagan may have started a new curse that dogged him and then every other president elected for two terms thereafter. Every two-term president since Reagan has followed the same pattern, assuming the presidency in a business downturn or even severe recession inherited from his predecessor, then presiding over a recovery or strong economic boom and ending up with a financial bubble that burst not long before he left office. Barack Obama is now in danger of following in their footsteps.

Early Warning
When Reagan was elected president, inflation was running at a double-digit pace with little precedent in U.S. economic history. It was combined with the highest rate of unemployment in the post-World War II era and, to use Jimmy Carter’s words, a “crisis of confidence” (in what is remembered as the “malaise speech”).

Economic reforms implemented during the Reagan era jump-started the economy and freed it of excess government regulations and oversight. The stock market, which had been in hibernation throughout the 1970s, took off. Starting below 800 in mid-1982, the Dow Jones industrial average broke through the 2,000 mark in early 1987, representing a 150% gain for investors in four and a half years.

Then, almost a year before the 1988 presidential election, the Dow suffered its largest one-day drop in history, falling 22.6% on Oct. 19, 1987. It was a carnage that raised the specter of 1929, and many analysts feared a rerun of the Great Depression scenario. However, the seemingly catastrophic market drop proved to be a non-event as far as the real economy was concerned. Alan Greenspan, recently appointed chairman of the Federal Reserve, pumped extra liquidity into the markets. The bottom held, economic activity didn’t stall and by early 1988 shares began to recover. Even though it took two years for the Dow to return to its pre-Black Monday’s levels, the market meltdown had no major impact on the U.S. or global economy.

However, it proved a harbinger of events to come, presaging the boom-bust pattern in financial markets that has bedeviled two-term presidents ever since. After George Bush, president 41, failed to win a second term, Bill Clinton’s presidency began in the midst of an economic downturn, though it was milder and less entrenched than what Reagan had faced.

Dot-com Debacle
Once again, the economy righted itself under a new president. The technology revolution created what was then known as a “new economy,” resulting in an entrepreneurial boom on the Internet and a labor shortage. On the strength of this economic performance, Nasdaq rose sevenfold in only six years, to over 5,000. But after reaching a peak in March 2000, the dot-com bubble burst spectacularly in the final year of Clinton’s presidency. The tech index went down to nearly 1,000 by late 2002. By then, the Dow had also come off the boil, ending the market’s longest bull run.
Continue Reading HERE...

A look at U.S. Equities: Record Profits – Where do we go from here?

global investingYou may think you have an insight but if you are anything like me, you don’t really trust it. However, I do have resources that are very talented and articulate and make coherent arguments that most everyone can follow. To that end, here is a report from J. P. Morgan that you can download and read at your leisure.

Here is the overview from the minds of Joseph S. Tanious, CFA and Anthony M. Wile, authors of the report.

Overview

• After record-setting earnings in the first two quarters of 2013, the S&P 500 is on
track to hit another historic high in profits for 3Q13. If this occurs, the first three
quarters of this year will have been the most profitable ever in the 56-year history of the S&P 500.

• Future earnings growth through margin expansion seems unlikely, as an
improving labor market and higher interest rates will most likely squeeze
margins. However, stable revenue growth, share buybacks and the additional use
of debt financing should support modest earnings gains in the year ahead.

• Given average valuations, return expectations in U.S. equities should be tempered However strong corporate fundamentals and stock prices that are not tempered. However, fundamentals, yet overly expensive, signal that U.S. equities still have room to run.

Download the full report as a PDF document HERE.

Yardeni Sees Bull Market Intact As Roubini, Mauldin Surrender

global investingMy Comments: This morning I had breakfast with an old friend and among his questions of me was what was going on with the stock market. My short answer was that it was expensive, which means there is growing downside potential, but that it was going to keep running up for a while.

His response was to the effect that sooner or later, we could expect a severe correction. And that’s essentially correct. As always, there is a recognition that life does not move in a straight line. And it leads folks like me to try and understand where we are in the market cycle, and then to match up our findings with where the client is in their life cycle. Only when you have a fair understanding of those variables can you make an intelligent recommendation.

What follows is the thinking of accepted giants in the world of market analysis. That they too have no real idea of what is likely to happen, and when, is confirmation that none of us has a crystal ball. But if you watch the message behind the image to the left, you can gain some insight too.

October 24, 2013 • Evan Simonoff

Market strategist Ed Yardeni sees the secular bull market continuing as various bears like Nouriel Roubini and John Mauldin either are turning optimistic on equities or adjusting their endgame scenarios. Yardeni told attendees at the third annual Fiduciary Investment Research Managers Summit (FIRMS) in Boston that he thought by applying a forward price/earnings multiple of 15.4 to the S&P 500, the index could rise to 2014 by the end of 2014.

Nonetheless, his biggest fear is a “melt up” in equity prices. Former Federal Reserve Board chairman Alan Greenspan’s remark on Bloomberg television earlier this week that stocks were still cheap only confirmed that worry.

Bears like Roubini and Mauldin are highly intelligent people with great insights, but they have been been way too bearish, says Yardeni. Roubini recently turned modestly bullish and called U.S. stocks the best place for global investors, while Mauldin’s commentary has refocused on breakthroughs in technology and health sciences. The “whole trick to this bull market has been to hang on for dear life and not get off” when things look scary, he said.

“We’ve had some nasty corrections,” Yardeni noted. In 2010, the possibility of the Euro falling apart was not remote. That occurred again in 2011, when it looked for a while like the United States might not pay its debt.

But “the end game is clearly wrong” because the three “richest” men on earth — Fed Chairman Bernanke, European Central Bank Chairman Draghi and Bank of Japan Chairman Kuroda — won’t let it happen.

The trauma that the global economy experienced in 2008 is “critically important” to understanding where we are today, Yardeni said. Businesses are increasing dividends and buying back stock to the tune of $2.6 trillion since the Great Recession ended.

While the bears like to point to the correlation between the Fed’s QE programs and the rises and dips in stock prices since 2009 as an explanation for an artificial surge in equities, Yardeni said the correlation between prices, buybacks and dividends is just as compelling.

This whole “searing mentality” is great for stock prices, but not for the economy or labor market, Yardeni acknowledged, because corporate managers believe there could be another endgame. The current thinking pervading corporate America’s boardrooms is: “If you want to hire somebody, don’t; hire a temp or better yet, a consultant,” Yardeni said.

Yardeni conceded that the coordinated central bank experiment going on since 2008 may not end well, but “so far it hasn’t.”

Even though analysts keep lowering earnings forecasts, they reduce their estimates to “pretty high” levels. “Analysts never see a recession coming,” Yardeni conceded.

Yardeni’s own estimates call for the earnings of the S&P 500 to reach $110 in 2013, $120 in 2014 and $130 in 2015. He admits a partiality to nice round numbers.

Investors are understandably suffering from “anxiety fatigue” with all the antics in Washington. “There is no difference between Democrats and Republicans. They are all corrupt,” he said.

“All they care about is money,” so they manufacture crises to raise money. At one point, “[Texas Senator] Ted Cruz was raising about $2 million an hour.” Paraphrasing Mark Twain, Yardeni said, “We have the best politicians money can buy.”

Why Mutual Funds Can’t Protect Against a Stock Market Crash

profit-loss-riskMy Comments: At last! Someone else who thinks like me with but with better writing skills!

This explanation is right on target. For comfirmation of these thoughts, click on the word “risk” just to the left and spend a few minutes watching the presentation.

By Roccy DeFrancesco on October 21, 2013

I recently saw that the stock market was crashing due in part to the government shutdown and the looming debt-ceiling extension, and I thought it was the perfect excuse to talk about how it’s nearly impossible to protect money from a crash if it’s invested in most mutual funds.

The fact of the matter is that most Americans use mutual funds for some part of their investment portfolio. This, of course, is because we have a broker-dealer-driven industry.

If you’ve been reading my recent articles, you know I’ve been trying very hard to change the discussion in our industry from using historical rate of return to investments to asking the following much more important question: What risks are you taking to achieve your expected rate of return?

Mutual funds stay invested in stocks, even when the market is crashing

Most investors don’t know that most mutual funds stay invested in stocks even when the stock market is crashing (and most advisors who sell mutual funds don’t seem to think about the ramifications).

Don’t believe me? Go to www.finance.yahoo.com and look up the symbols of two of the more popular mutual funds. On the profile page, you can find the percentage (%) of how much each fund is invested in the market. I’ve listed it for these two funds.
-FBGRX (Fidelity Blue Chip Growth) -  80 percent invested

-AEPGX (American Funds EuroPacific Gr A) -  80 percent invested

The by-product of being invested in the market with 80 percent of the fund’s assets is that when the stock market crashes, so does the mutual fund. In other words, the fund managers will not go to 50 percent, 75 percent, or 100 percent cash, even if they know the stock market is crashing. It’s proven true by the numbers. Look how each of the above funds did during the crash years of 2008, 2002, 2001, and 2000:
-FBGRX: 2008 = -38.60%; 2002 = -25.32%; 2001 = -16.55%; 2000 = -10.54% Total losses = -91.01%

-AEPGX: 2008 = -40.53%; 2002 = -13.61%; 2001 = -12.17%; 2000 = -17.84% Total losses = -84.15%

It’s crazy to think that these and many other mutual funds would stay invested in the market when it’s crashing, but that’s the reality — a reality that most clients are unaware of.

Because the mutual funds themselves do not protect clients when the market is crashing, who does that leave to protect the client? The local financial planner. Is it realistic for a local advisor to recommend that clients go to all cash? That would be nice, but most think they already did their job by picking the “best” mutual funds.

Using tactically managed strategies

How would your clients have liked the following returns during the crash years?
2008 = +8.03%; 2002 = +7.04%; 2001 = +7.55%; 2000 = +2.07% Total returns in crash years = +24.69%

These returns look a lot better than the negative returns of the above-listed mutual funds. Would it help you to know that the tactically managed strategy with the above listed returns has not had a down year in the last 21 years and has had an average net rate of return in excess of 9 percent?

If this article doesn’t make you wonder if mutual funds are the best place for your client’s money and consider learning about truly tactically managed strategies, then I have failed.

Alternatives to mutual funds

What are the logical alternatives to growing wealth with mutual funds?

1. Tactically managed investment strategies — These are strategies that are managed to limit downside risk and capture gains in up markets. One of my favorite managers has a 21-year audited track record of no down years and net returns in excess of 9 percent. So, for the money a client should have “in the market,” being in a tactically managed strategy is the way to go.

2. Equity indexed universal life insurance (EIUL) — As many of you know, this is one of my favorite wealth-building tools for clients under the age of 55. Gains are locked in, no downside risk due to negative markets, tax-free loans, etc.

3. Fixed indexed annuities (FIAs) — I don’t like to say FIAs are a replacement for a market driven portfolio; it’s comparing apples to oranges. However, especially for clients 55 and old, using an FIA (especially those with guaranteed income riders) can be a much more prudent decision than using what most financial planners would recommend — an asset allocated portfolio.

Bottom line

Mutual funds will not protect your clients’ money during stock market crashes. They need to know this so they can make informed decisions about whether to use them or whether they should seek out other tools to grow their wealth in a truly protected manner.

J.P. Morgan Weekly Market Recap – October 14, 2013

My original idea was to post these every week or so. Many people like to make their own investment decisions and this recap is a great way to gain insight into what is going on globally. This weekly broadcast from J. P. Morgan will give you some insights as to what is going on right now.

Click on the blue CONTINUE READING HERE and it will open a page from which you can download the current information. Enjoy…
Continue Reading HERE...