One of the biggest dangers when it comes to long-term investing is trying to determine the potential hazards on the horizon. Currently, market sentiment has become extremely positive in the market, driven by strong corporations with lean organizations and plenty of cash.
However, to be successful at long-term investing, we must look past current market sentiment conditions and determine what potential pitfalls could arise. Pension funds within corporations are becoming a serious threat in their potential to dampen market sentiment in the long run.
The deficit for American pension funds—the difference between the amount owed to retired workers and the level of funds in the pension—increased at the end of 2012 to $295 billion, up 17% from year-end 2011, according to Towers Watson. (Source: Badawy, M., “Corporate pension funding down in 2012 on falling interest rates,” Reuters, April 23, 2013.)
While assets within the pension plans have increased, as the stock market has moved higher, interest rates have declined to such a level that it still leaves a huge funding gap. Market sentiment for the current state of corporations might be accurate, but long-term investing is all about what will happen down the road. At some point, these obligations do have to be paid one way or another.
According to Towers Watson, American corporations contributed $45.0 billion in 2012 to their pension plans, the largest amount during the past five years. Since the turmoil in the market in 2008 and 2009, many pension plans have shifted away from equities and toward fixed income. According to Towers Watson, since 2009, the equity portion of the average pension plan has declined by … Read More
One of the most dangerous periods for an investor is when they become too complacent. As the combined view of all investors, market sentiment ends up becoming overly bullish, running far ahead of the fundamentals. This has now occurred in several sectors, but one that investors should be aware of is in bank stocks, especially in Europe.
Bank stocks around the world have risen tremendously, pushed higher by a wave of positive market sentiment. The general consensus is that following the financial crisis over the last few years, the worst is over. I would caution investors that there are still significant hurdles for many global bank stocks.
Recently, the Bank of England stated that many investors are underestimating potential risks. As we all know, the global economy is still weak, yet share prices have soared, including bank stocks. Market sentiment has shifted from massively bearish to extremely positive over the past couple of years.
As the minutes of the Bank of England’s last meeting note, the committee recommended that bank stocks in the U.K. raise an additional $38.0 billion for potential pitfalls related to the euro area as well as their real estate exposure. (Source: Moshinsky, B., “BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stresses,” Bloomberg, April 5, 2013.)
Investors have piled into bank stocks with positive market sentiment on the belief that the worst is over, especially in Europe. Many bank stocks within Europe are closely intertwined with other nations on that continent. As we’ve just seen from the recent Cyprus fiasco, there are still significant pitfalls ahead.
Market sentiment is clearly being pushed upward … Read More
The S&P 500 continues to remain at extremely elevated levels, with many professional and retail investors looking for a market sell-off. What is surprising is that the S&P 500 has risen in spite of general market sentiment that hasn’t become overly bullish.
New data from Bloomberg show that the S&P 500 has moved up towards analysts’ estimates to such a level that the market is approximately five percent away from the mean forecast. This is the closest the S&P 500 has gotten to Wall Street estimates in the last seven years, with the historical difference normally around 14%. (Source: Rupp, L. and Gammeltoft, N., “U.S. stocks fall as American manufacturing index slips,” Bloomberg, April 1, 2013.)
What this means is that the S&P 500 has exceeded the current market sentiment and has continued to rise. At this point, either the S&P 500 has gotten far ahead of the underlying fundamentals, or market sentiment will turn even more bullish, as analysts begin to increase their expectations for this year.
Not only are the pros lagging the market, most retail investors are also underinvested in the market. While there has been a definite shift from cash and money market funds to the S&P 500, the vast majority of investors have not enjoyed the S&P 500’s massive upward move.
Two things will occur: either retail investors will look to buy into the S&P 500 on a correction, or the future pullback will indicate a far greater sell-off, as market sentiment shifts into negative territory.
Fundamentally, recent data continue to show conflicting evidence for the U.S. economy. The Institute for Supply Management’s factory index … Read More
The recent pullback in gold has certainly unnerved long-term investors. It has also seen a dramatic shift in market sentiment. However, recent data shows that this shift in market sentiment has primarily come from shorter-term institutional funds.
When considering gold as an investment, one must consider the timeframe as well as the underlying participants in the market. Market sentiment for every asset class oscillates from overly optimistic to overly pessimistic. The goal for the long-term investor is to use this volatility to accumulate during overly pessimistic times and take profits during overly optimistic times.
According to Barclays PLC (NYSE/BCS), gold-based exchange-traded funds (ETFs) are set to record the weakest month on record. Barclays notes that during the period of February 20–25, the net outflow of gold from exchange-traded products (ETPs) totaled 10 metric tons per day. The vast majority of gold redemptions stem from the SPDR Gold Shares (NYSEArca/GLD) ETF, with a decline of 58 metric tons for the month of February. (Source: Saefong, M., “Gold ETP flows set for weakest month on record: Barclays,” MarketWatch, March 1, 2013.)
While physical gold continues to remain in demand (as we’ve seen central banks around the world, including Russia and China, continuing to accumulate), market sentiment for paper gold has recently become negative.
The net level of institutions investing in long-term gold at the Comex is the lowest since December 2008, and new funds are going to short the gold market. This is becoming a classic battle between the bulls and bears regarding market sentiment for the gold market.
Physical gold is a slower, more long-term market than paper gold. Institutions favor … Read More
When it comes to making contrarian investments, going against market sentiment might be difficult at first. But the key is to focus on long-term fundamentals with the thesis that corporate earnings will move substantially higher as long as fundamentals strengthen.
One sector that has had quite a bit of negative market sentiment for the past couple of years has been uranium and nuclear power. Following the Fukushima disaster in Japan, nuclear power was put on halt for many nations around the world.
This negative market sentiment was reflected in lower uranium prices and significant hits to corporate earnings for companies in this sector.
However, recent information shows that nuclear power is once again gaining favor, and market sentiment could begin to shift earlier than many people believe, with corporate earnings benefiting from higher demand.
China is by far the leader in construction of nuclear power plants. In 2010, Chinese nuclear power plants had 10 gigawatts of capacity; it is now estimated that officials want this capacity increased to 130–140 gigawatts by 2030. (Source: The Economist, January 19, 2013, last accessed February 28, 2013.)
Following the Japanese disaster, China halted further nuclear construction. However, in October 2012, the Chinese State Council once again approved a number of projects. With over 25 nuclear reactors under construction, China’s nuclear power program is by far the largest in development by any nation.
Corporate earnings in the nuclear power sector have suffered due to the negative market sentiment following the Japanese disaster. The loss of life was truly tragic.
The current Chinese administration realizes that with the massive amount of pollution occurring in metropolitan areas, … Read More
The positive jobs report last week and the revision for the previous months might be leading the latest sentiment numbers in the retail sector. A study just came out from BDO USA, LLP, stating that chief marketing officers (CMOs) surveyed within the retail sector expect a 3.7% increase in comparable sales this holiday season.
This represents the largest comparable sales increase since 2007. In comparison, the CMOs within the retail sector expected a decline of -2.7% for the 2008 holiday season, and in 2009, they only expected a small 1.6% increase. Clearly, the market sentiment for the retail sector has increased substantially over the last couple of years. (Source: “U.S. Retailers Forecast 3.7% Increase in Holiday Comparable Store Sales,” BDO, November 5, 2012.)
The report cites that the CMOs within the retail sector expect strong market sentiment for electronics, specifically for tablets. The report comes from over 100 CMOs within the retail sector. Another point revealed by the study that is quite interesting is that inventory levels will not be massively increased, despite optimistic market sentiment for this year’s holiday season. The report states that CMOs forecast a total approximate increase in inventory of one percent. This will certainly keep the retail sector lean and prevent overstocking, which would lead to massive discounting post-holiday and, in turn, a significant reduction in profit margins.
Obviously jobs and unemployment are key figures in the retail sector. Market sentiment has rebounded within the last year, as we’ve seen some improvement. Clearly the economy is nowhere near potential gross domestic product (GDP) levels, but in the last couple of months, the trends have improved … Read More
Having been relegated to the history books, the Cold War between the West and the East appears to be heating up again. On one side, we have increasing tensions with China; U.S. politicians claim that China is a currency-manipulator and China has massively increased its spending in defense, which is threatening the security in that part of the world. If we look to the Middle East, tensions are now rising with Russia.
Market sentiment has always been wary of the Middle East in relation to oil prices, partly because of the level of supplies generated within that region, and partly because of the traffic routes for transporting oil around the world. Oil prices are extremely sensitive to any disruption to either supply or transportation routes, as the world is increasingly run on just-in-time deliveries. Any disruption will certainly cause massive spikes in oil prices and volatility in market sentiment.
The recent hostilities between Turkey and Syria are now putting U.S.–Russian relations in the spotlight. Essentially, America is supporting the Syrian rebels and looking to oust their leader, believing this will free the Syrian people of the tyrant. Russia has been a long-term supporter of Syria, and has continued to provide military weapons to suppress the uprising.
In a recent interview in German newspaper Der Spiegel, Vladimir Yukanin, who is a close confidant of Russian President Vladimir Putin, made some remarks that certainly will affect market sentiment. (Source: “Russia and the West are Drifting Apart,” Der Spiegel, October 11, 2012.)
While Yukanin states that there are many common problems between Russia and America, he was extremely critical of U.S. support in … Read More
When it comes to technology stocks, I don’t think any one firm can match the massive growth in both the company and the share price that Apple Inc. (NASDAQ/AAPL) has experienced over the past decade. Some people might forget, but at one time the market sentiment on Apple was so bad that some people might have even thought it was going to go bankrupt. Obviously, Apple has been able to not only turn things around, but it has also been able to set a new standard for technology stocks.
This is where things get interesting. After being a company that only sold “Mac” computers, Apple introduced the “iPod.” The iPod was not the first MP3 player, but it did revolutionize the industry as a slick product along with the introduction of “iTunes.” The iTunes ecosystem allows Apple to lock users into its operating system, a unique strategy at the time among technology stocks. Right now, the only other ecosystem for mobile devices is “Android” from Google Inc. (NASDAQ/GOOG).
Looking back, market sentiment became gradually more bullish on Apple until the last year when it has increased substantially to almost a frenzied state. I would say that even some institutions that don’t include technology stocks in their mandate are long on Apple shares. I pose one question: is the stock priced to perfection? That doesn’t seem possible, as we’re now seeing some cracks in the market sentiment.
The new “iPhone 5” is another strong product offering from Apple. Approximately two-thirds of the company’s corporate earnings come from iPhone sales. The iPhone 5 is lighter, bigger, and more powerful, and it runs … Read More
We all know that politicians are willing to do anything to get into the limelight, gain favor among the citizens, and then use this leverage for their own gain. The latest lawsuit against JPMorgan Chase & Co. (NYSE/JPM) is so stupid and ridiculous that it would be funny if it weren’t going to cost taxpayers millions of dollars to pay for all of the lawyers involved.
To begin with, we all know that for an attorney general to move up the rungs of the political ladder, to Governor for example, they need a high-profile case to catch the public attention. With bank stocks being Public Enemy Number One, New York Attorney General Eric Schneiderman has decided to use the public’s anger against bank stocks to his favor. The New York Attorney General’s office has just filed a civil lawsuit against The Bear Stearns Companies, Inc., now a unit of JPMorgan, for alleged fraud.
When bank stocks were in the middle of the financial crisis several years ago, market sentiment for the group was extremely poor. No one was willing to lend or help out other bank stocks with such a negative market sentiment. The federal government essentially forced JPMorgan to take over Bear Stearns. Initially JPMorgan balked, stating that it didn’t have enough time to conduct due diligence. The federal government essentially said, “Don’t worry; we’ll cover you.”
Now that the political tide on bank stocks has shifted with market sentiment, the bull’s-eye is on the back of JPMorgan, among other bank stocks. Obviously, this is a lesson: if you are a business leader, you can never trust the word … Read More
While the financial crisis continues to unfold across Europe, far deadlier tensions are rising in the Middle East. The market sentiment for oil prices should be bearish, given the current economic conditions; however, continued statements by leading members of Israel’s government about concerns regarding the potential for Iran to gain nuclear weapons has once again pushed up oil prices. The higher oil prices go, the harder it hits the average consumer.
This time, Prime Minister Benjamin Netanyahu is raising the stakes by potentially alienating U.S. President Barack Obama. Over the past few days, the political climate between Israel and the U.S. has certainly cooled. Among the verbal volleys are statements by the Israeli prime minister that no country, including the U.S., had the moral right to prevent a strike by Israel. Additionally, Israeli officials also came forward in denouncing what they see as lackadaisical U.S. foreign policy with regards to Iran.
Market sentiment regarding oil prices is naturally on the edge with any scenario that occurs in the Middle East. That region has been and will continue to be a powder keg; any spark could set off a massive spike in oil prices. This lightning-fast response by oil prices to any comment by political leaders is the reason many participants monitor the market sentiment very close.
The relationship between Israel and the U.S. has generally been quite close and mutually beneficial. However, the current Israeli prime minister appears to be frustrated by the lack of motivation from the current American administration in supporting an attack on Iran. The U.S. doesn’t have many allies in that region; helping Israel does make … Read More
An embarrassing turn of events continues to unfold after the recent initial public offering (IPO) of Facebook Inc. (NASDAQ/FB). Talk about a roller coaster of market sentiment changes. Prior to the IPO, it seemed as if everyone wanted a piece of one of the hottest technology stocks in recent memory. Yes, Facebook’s user growth has been tremendous over the past few years, but questions are arising about everything related to the company, including questions from its underwriter Morgan Stanley (NYSE/MS).
When technology stocks go public, the underwriter will try to sell one basic idea to investors: the stock’s future growth is huge. Market sentiment was built up to a frenzy, yet it appears that the environment for technology stocks in this social media space is changing at a rapid pace, faster than Morgan Stanley expected. Morgan Stanley lowered its price forecast for Facebook, just a few months after its IPO. This is quite a surprise, not just for technology stocks, but for any company. The lead underwriter should know everything there is to know about the company. For changes to occur so soon after an IPO, it certainly causes some eyebrows to be raised.
Market sentiment has, of course, drastically shifted from overly bullish to quite negative, with shares near the year’s lows. With a high of $45.00 and a low of $17.55, this extreme shift in market sentiment cannot give investors much assurance as to the type of investors involved in this stock. Yes, many investors in technology stocks are shorter term and, thus, cause increased levels of volatility. But if the underlying strength of the company is that … Read More
While there are still many pockets of weakness in the housing market, there are now some positives beginning to emerge. We’ve seen plenty of companies reporting that the higher end of the housing market is certainly rebounding strongly. Last week, Toll Brothers, Inc. (NYSE/TOL) reported quarterly earnings that were the highest since 2008. The company’s CEO stated that it is currently seeing the most sustained demand since 2008.
Many are worried about the market sentiment for the lower end of the sector, the distressed housing market. With millions of homes left to be foreclosed, will prices continue to drop? It appears not, as investment funds are scooping up real estate at an exceedingly fast pace.
RealtyTrac Inc. reported that the prices of homes in the process of foreclosure are seeing the biggest annual increase since 2006. In a related story, Bloomberg interviewed many in the housing market industry who essentially said that there is not enough supply in many markets, which is pushing up market sentiment and prices. Market sentiment is clearly shifting in the housing market; the key point is that it’s not coming from the individual home buyer. This is where many analysts are getting it wrong, looking at such metrics as consumer confidence. Most of the buying is actually coming from institutions, large investors, and hedge funds.
One of these funds is The Blackstone Group L.P. (NYSE/BX). The Bloomberg article noted that Blackstone, along with several other funds, is planning to deploy several billion into the housing market. The way funds work is that, if they see firms making money, other funds will step into the space. … Read More
The recent ruling in the patent lawsuit in favor of Apple Inc. (NASDAQ/AAPL) against Samsung Electronics Co. Ltd. (KRX/005930) is seen by some as a big blow to Samsung. Technology stocks are constantly innovating, and I think market sentiment is missing the picture in this case. While Samsung did infringe against Apple and it is going to have to pay over $1.0 billion as part of the penalty, let’s take a look at technology stocks in this sector and see if there are any opportunities due to mispriced market sentiment.
First off, let’s not overthink the situation. Apple is a clear beneficiary among the technology stocks in the mobile phone sector. Market sentiment is, of course, extremely bullish of Apple, which makes entering a new position at these lofty levels quite dangerous. Stock price aside, technology stocks might approach research and development in a slightly more conservative manner now that they know how litigious Apple will be. Market sentiment will continue to remain positive, but I would wait for a pullback and a more attractive entry option in Apple.
Samsung is not traded in North America, but among technology stocks, it is clearly building a huge amount of momentum. It will appeal the ruling, no doubt, but even if it is not successful, I think the market sentiment if far overdone in this case. This patent case was for older handsets of Samsung. It does not include the best-selling Galaxy SIII. Older models have seen a huge fall-off in sales anyway, so the real hit is far less than market sentiment is indicating. If the current ruling holds, Samsung will … Read More
With the recent string of weak economic data worldwide, one would think that the market sentiment for oil prices would be negative. Even the International Energy Agency (IEA) is expecting lower demand for oil next year due weaker worldwide economic growth. So why are oil prices moving up and is this market sentiment here to stay?
As with many areas of investing, the market sentiment for oil prices is very complex. End-user demand is obviously very important. Over the last decade, we’ve seen the massive growth of emerging nations like China. The country’s increased use of oil has increased global demand with the end result that oil prices have moved up sharply. This market sentiment is now being thwarted with a slowdown in the Chinese economy. This can be best seen by the fact that China is importing oil at the lowest level in nine months, yet oil prices still remain elevated.
Oil is one of the commodities most sensitive to geopolitical events in the Middle East. Following last weekend, Israeli Prime Minister Benjamin Netanyahu stated, once again, that the biggest threat to Israel is Iran developing nuclear weapons. Recent reports that Iran is increasing its nuclear armament progress have increased investors’ market sentiment towards oil prices once again. With worries about a potential war, oil prices have once again started moving up, as the market sentiment is getting scared of not being caught short in this commodity.
Will Israel launch an attack on Iran’s nuclear facilities? No one can know that answer except the Israeli leaders, but we can see from the chart of oil prices that investors are … Read More
One of the common investor mistakes that occur quite often is trying to catch the bottom in a stock… or trying to catch a falling knife, as some might say. Many companies go through periods of being up and down financially, with the market sentiment causing stocks to rise and fall. Investor mistakes occur when people believe a rebound might occur when there are significant hurdles for the companies to overcome. A great example of trying to predict a change to the market sentiment before the time is right and of investor mistakes along the way involves two cell phone makers, Research In Motion Limited (NASDAQ/RIMM) and Nokia Corporation (NYSE/NOK).
Nokia recently announced layoffs of approximately 10,000 people in an effort to try to change the market sentiment of the company. Nokia used to be the largest cell phone maker in the world, but has seen a massive fall from grace and is now incurring losses. With the cash pile being burned on an increasing basis, it appears that if things don’t change, the company could run out of cash by the end of 2013. Many have made common investor mistakes like buying Nokia earlier in the year purely based on the dividend yield. However, they would have lost a lot of money, as we’ve seen a continued fall in the stock. In fact, it’s now trading at just over $2.50, down from a 52 week high of $7.38. Back in 2007, the stock was trading over $41.00.
Research In Motion (RIM) has gone through a period in which it had over 40% market share of the smart phone market. … Read More
An interesting new study shows just how much work is needed for market sentiment to change, as consumer confidence remains in a deep hole. Done by the Federal Reserve, the study looked at the median net worth of the average American family. The median net worth dropped from $126,400 in 2007 to $77,300 in 2010, a decline of 38.8%!
For consumer confidence to remain strong, we must have a sense that the wealth accumulated is going up, not down. It’s no wonder the economy has been slow to recover; market sentiment is reflecting the hesitation by the average American to spend in the way they did before. With so much wealth lost, consumer confidence will remain down for some period of time. Millions of Americans certainly don’t feel secure when over 38% of their wealth has been wiped out in just a few short years.
Market sentiment is of course made up of many parts. The stock market has performed very well since the bottom in March 2009. But the magnitude of the drop in household wealth is truly amazing; this appears to be keeping the market from continuing its move upwards. While most of the loss in wealth is associated with the drop in real estate values, the effect this has on consumer confidence cannot be understated. For people who have saved and believed they were doing the “right” thing, it appears this strategy now seems to have backfired. With consumer confidence low, this translates into low confidence amongst business leaders in regards to what they see for the future. This in turn is reflected by fewer jobs being … Read More