Don’t worry, folks, Federal Reserve Chairman Ben Bernanke is not going to take your money away anytime soon; the stock market is safe.
In his testimony to Congress on Wednesday, Bernanke made it clear that the central bank’s current aggressive $85.0 billion in monthly bond purchases will continue to move along.
The stock market surged upward on the news, which is exactly what I would have expected, given that the amazing run-up in stocks this year has largely been due to the flow of easy money into the U.S. economic system. So there’s no need to worry about the stock market and your assets—for now.
Bernanke emphasized the fragility of the jobs market and reinforced his view that it’s still too early to put an end to the stimulus. Allowing rates to creep higher would “carry a substantial risk of slowing or ending the economic recovery,” said Bernanke to Congress. (Source: Chairman Bernanke, B.S., “The Economic Outlook: Before the Joint Economic Committee, U.S. Congress, Washington, D.C.,” Board of Governors of the Federal Reserve System web site, May 22, 2013.)
The end result will see the stock market continue to rally higher to new record highs.
The chart below shows the upward move in the S&P 500 since 1980, shown by the green line, as the effective federal funds rate declines over time. Note the massive gap between the S&P 500 and the effective federal funds rate, shown by the purple oval on the chart.
Chart courtesy of www.StockCharts.com
The reality is that not only is the easy monetary policy flowing in America, it is also flowing across the global economy … Read More
Japan is currently on cloud nine, with exports bursting out of the gate and Japanese stocks flying high. The benchmark Nikkei 225 index in Japan is up a whopping 48% this year.
Fueling the massive climb in the stock market has been the steady decline in the value of the Japanese yen triggered by the significant money printing by Prime Minister Shinzo Abe’s strategy to inject $2.4 trillion into the Japanese economy over the next decade.
It’s the same everywhere you go around the world. Money printing triggered by record-low interest rates and major monetary and fiscal stimulus is driving the economy and spending.
Yet what about the impact on the inflation rate of the importing country?
The devaluation of the yen against the greenback and other major global currencies makes Japanese goods much cheaper for foreigners, but it also creates a higher inflation rate for Japan.
In the chart below, the gap (as indicated by the blue oval) that has developed between the yen (as shown by the red candlesticks) and the U.S. dollar (as reflected by the green line) is clearly shown. In my view, while Japan is currently seeing growth, the country’s strategy is risky.
Chart courtesy of www.StockCharts.com
The widening gap between the two currencies will present problems in the future for the Japanese consumer due to the rising inflation rate.
Let me explain: the weak yen translates into higher prices paid for imports as more yen are required to pay for the same goods now than in the past.
For now, import prices are starting to edge higher—slowly but surely.
Over time, if the yen … Read More
We all know that the stock market has moved up significantly over the past few months. The real question is: is the move up based on the belief that there is enough economic growth available for corporate earnings to continue rising, or is it simply due to a flow of funds?
Let’s analyze this question by taking a look at Wal-Mart Stores, Inc. (NYSE/WMT). Wal-Mart just released its forecast for second-quarter corporate earnings, which was less than most analysts had expected. The company now forecasts corporate earnings on a per-share basis for the second quarter to be $1.22–$1.27, lower than the average estimate by analysts of $1.29. (Source: “Walmart reports a 4.6 percent increase for Q1 EPS of $1.14; U.S. businesses forecast positive comp sales for Q2,” Wal-Mart Stores, Inc. web site, May 16, 2013, accessed May 16, 2013.)
As a sign of the health of America’s economic growth level, Wal-Mart reported that comparable same-store sales dropped by 1.4% between January 26, 2013 and April 26, 2013. Internationally, Wal-Mart is doing better, with sales up 2.9% during the first quarter.
However, corporate earnings suffered during the first quarter due to several reasons, including very cold weather, continuing weak employment levels, and the payroll tax hike. Many businesses that cater to the lower- to mid-level consumer will most likely encounter similar problems due to these issues and general sluggish economic growth.
Recent data have been relatively mixed regarding the potential for economic growth to begin moving upward. However, for Wal-Mart’s corporate earnings, there is the potential for a slightly stronger second half because some of the company’s initial hurdles have been … Read More
There is simply nowhere else to put your money to work, which is why the stock market continues to edge upward to new record highs.
You can earn a yield of 0.23% on a two-year U.S. Treasury, 0.79% for five years, 1.90% for 10 years, and up to 3.13% if you extend it to 30 years. (Source: “United States Government Bonds,” Bloomberg, May 17, 2013.)
Of course, unless you have tens of millions of dollars to invest, I highly doubt you, or anyone for that matter, would be happy with these petty returns on bonds.
You could always go out and buy Spanish 10-year bonds yielding 4.29% as of Friday. Heck, you can do this out of your own kindness and help Spain out of its financial crisis, with an unemployment rate at over 25% and massive debt loads that will hinder the country for decades.
Or you can simply invest in higher-yielding U.S. blue chip companies, such as General Electric Company (NYSE/GE), Johnson & Johnson (NYSE/JNJ), and The Procter & Gamble Company (NYSE/PG), which all offer dividend yields of more than three percent.
The reality is that investors have been rushing into the stock market and not wanting to miss out on the Wall Street party, which appears to be attracting many party goers.
JPMorgan Chase & Co. (NYSE/JPM) is the party organizer and the biggest bull on Wall Street after coming out with a year-end target of 1,715 for the S&P 500. Now with over seven months left in the year and with the index already at 1,660 as of last Friday, another 55 points in this frothy … Read More
If you invested all of your money in the stock market, you would be exposed to extraordinary risk of a market retrenchment.
Of course, you could also make a lot of money, especially with how well things are going in the current bullish stock market that continues to somewhat defy gravity.
Yet this is also the time you need to take some extra precaution and think about where you are at and what your end goal is in the stock market.
You don’t want to risk your entire investing capital on the stock market, in spite of any temptation to do so. This is when you have to fight against the greed that might be in you—the greed that’s in most of us—and it won’t be easy.
Remember what happened after each of the multiyear peaks in the stock market over the past decades, when the stocks retrenched. I’m not saying the stock market is at a peak. In fact, the bulls look like they are in full control and heading higher on the chart.
You just need to be on top of things, and don’t let greed ravage your sensibility toward the stock market.
Chasing dreams is one thing, but being prudent is another.
I’m not going to say you should run for the exit, but you need to be aware of where your capital is being invested and understand the associated risk factors.
The reality is that a sound investment strategy means understanding asset allocation and diversification to increase the risk and return of your portfolio.
By asset allocation, I refer to the asset mix of your portfolio … Read More
The shares of Apple Inc. (NASDAQ/AAPL) have been on a steady climb since plummeting to $385.10 on April 19; but my sense is that the buying has largely been driven by retail investors and not from where it counts with the institutional money, based on my stock analysis.
Insiders and the institutional money are not as supportive of Apple, according to my stock analysis. Over the last six months, insiders have sold Apple in 10 transactions totaling 127,896 shares, while there was only one insider buy of 1,780 shares, according to information by Thomson Financial.
Institutional buying, which I believe is the key to stocks due to their knowledge on the companies, is also refraining from buying Apple, even at the much lower price. My stock analysis indicates that institutions have unloaded 27.8 million shares of Apple with institutional investors’ ownership declining 4.5% on a quarter-to-quarter basis, according to Thomson Financial. Some of the biggest sellers include Capital World Investors (-56.3% in Apple stock), Wellington Management (-48.9%), HSBC Holdings (-62.6%), and BlackRock Advisors LLC (-48.2%). My stock analysis notes that this selling suggests a lack of confidence in the company, even with Apple shares plummeting down more than 40% since the company’s high point.
Based on the lack of buying by the insiders and institutions, I would still be wary of buying Apple at this point. In my view, Apple is more of a trading opportunity than a buy-and-hold.
The reality is that following where the professional money is flowing gives us another tool to evaluate the stock market and get a sense of what is happening.
The concept of … Read More
The Ben Bernanke-driven stock market rally continues in full force and is unabated, but I really question the rate of the advance and believe stocks remain overextended at this juncture.
The S&P 500 made another record high above 1,600 last Friday, but making that move to above the magical level came slowly and cautiously, which makes me feel somewhat uneasy.
The breakout—above the multiyear top near 1,565—is positive, as shown on the chart below, but the move was associated with light volume, which suggests a bearish divergence, based on my technical analysis.
Taking a look at the blue ovals on the stock market chart below, you will notice the possible pullback that has occurred after every six-month rally from November to April over the past three years from 2010 to 2012.
Whether we will see another retrenchment in the stock market this year is unknown, but based on the rate of the gains so far, I feel there is an above-average likelihood of this happening.
Featured below is a stock chart of the S&P 500 Index:
Chart courtesy of www.StockCharts.com
While the stock market continues to show upside potential, I think you should continue to ride the wave upward; however, you also need to be aware of the risk and the reality that the stock market could plummet on bad news, considering how high the gains have been so early in 2013.
Moreover, the Dow Jones Transportation Average is also offering up a red flag on the upward move in the Dow Jones Industrial Average.
The chart below shows that the industrials (as indicated by the green line in the … Read More
As the S&P 500 enters the month of May, many people are worried about their investment strategy, especially in light of the old saying “sell in May and go away.” Does this saying hold any value?
Let’s look at the question from two angles: a historical context and the S&P 500’s currently position.
There are some historical facts that raise a few concerns in my mind regarding an investment strategy in the market during the month of May and early summer—not only in terms of actually selling off, but also in terms of increasing volatility.
A look at the best and worst performances for the month of May since 1928 by Bespoke Investment Group, LLC shows that for the S&P 500, two of the top-10 worst Mays (May 2010 with a 8.2% contraction, and 2012 contracting by 6.27%) and one of the top-10 best Mays (May 2009 with 5.31% growth) occurred during the recent bull market that started in 2009. (Source: “S&P 500’s Best and Worst Months of May Since 1928,” Bespoke Investment Group, LLC web site, April 30, 2013, last accessed May 1, 2013.)
Clearly, volatility in the S&P 500 has increased substantially for the month of May for the past few years over the course of the current bull market, and your investment strategy certainly needs to take that volatility’s timing into account. Additionally, since the bull market’s beginning in 2009, the S&P 500 during the month of May has averaged a decline of 2.64%.
Looking even further back, many investors have continued to alter their investment strategy for the S&P 500 during the month of May—and the … Read More
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More
You can tell a lot about the pulse of the economy by examining the retail sales and restaurant sector. When people are working and making money, they tend to be more confident and want to spend, especially non-discretionary spending.
In the fast-food restaurant sector, the “Best of Breed” is McDonalds Corporation (NYSE/MCD).
The company has numerous rivals and the sector is extremely competitive, but there is no real and valid threat on the horizon for McDonalds that could affect it.
Characterized by its familiar “golden arches,” which are sometimes visible from miles away, the company is a true American icon, just like General Motors Company (NYSE/GM).
Yet McDonalds is also a decent indicator on how the United States and global economy are faring.
The current level and valuation of stocks suggest everything is going well and on target with the global economy.
But, sorry to break it to you: the path to sustained economic renewal is still filled with potholes.
As I’ve previously written in these pages, the global economy and performance of the stock markets have been built by the easy money injected into the global monetary system by the world’s central banks, including our friends at the Federal Reserve.
So when I begin to see slowing at some of the key multinational companies, I wonder about the condition of the global economy.
McDonalds is a decent barometer on the global economy and, based on what I’m seeing, I sense there’s some stalling in the global economy.
In the first-quarter earnings season, McDonalds reported a marginal one-percent rise in its consolidated revenues due to the slowing in Europe and … Read More
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
When I read the newswires each morning, I scour for trading opportunities; but the one thing that I have been noticing lately is the lack of moderate revenue growth among the reporting companies. I’m not saying that I would like to see revenues growing at 30%–40% or more, but even growth in the low double digits would suffice at this point, given the global stalling.
The market is all giddy about the first-quarter earnings season early on, but I really don’t understand why investors are that happy. I’m clearly not seeing the same things.
As of Monday, about 104 S&P 500 companies have reported during the earnings season, and their results have been in line with the previous quarters, in which about 67.3% beat earnings-per-share (EPS) estimates, according to Thomson Financial.
Again, the first-quarter earnings are encouraging—but not exactly something to get euphoric about.
The reality is that while two-thirds of the S&P 500 companies are beating estimates during the earnings season, the revenues side is another story—a story that I feel is being ignored by investors.
Companies are beating the earnings estimates assigned by Wall Street. In some cases, the earnings estimates are lower than previous estimates; in this regard, the companies are, in some cases, actually only meeting or beating reduced estimates during this earnings season.
Moreover, we are also seeing legitimate earnings manipulation by companies that want to please Wall Street and investors. This is not illegal and can often return business intelligence (BI) for shareholders.
By pursuing aggressive cost cutting and containment, companies can reduce the cost side and present a much better earnings picture, even … Read More
Apple Inc. (NASDAQ/AAPL) finally broke below $400.00 last Thursday, an occurrence that I recently discussed in Investment Contrarians. As I said, the short term will generate volatility for the stock, but I continue to believe there is still hope the company can turn around going forward.
The problem with a momentum company like Apple is that with its rapid rise in share price to over $700.00, there’s immense risk for investor mistakes to occur if the company does not consistently deliver. And I’m not talking about delivering just average results; momentum companies such as Apple have to deliver exceptional results to the market and please investors.
In the case of Apple, soft growth over the last several quarters has proved devastating to the stock and can cause investor mistakes.
After beating Thomson Financial earnings-per-share (EPS) estimates by 22.5% in the fiscal 2012 second quarter, Apple came back and offered up three straight dismal quarters in which the company fell short on earnings in two of the three quarters and barely beat in the most recent. Ignoring these falls inevitably led to investor mistakes, as demonstrated by the share price.
The same is said for the overall stock market. Traders gave investors strong gains in the first quarter, but that has not been the case in April, as global growth concerns are surfacing. The aftermath has been selling pressure and the greater likelihood of more selling down the road.
The two cases of Apple and the overall stock market demonstrate the need to be careful with momentum stocks to avoid potential investor mistakes.
The reality is that once the market euphoria … Read More
I think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.
With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.
I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.
We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.
FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.
I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.
I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.
And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More
Stocks are at their record highs, driven by a soaring stock market rally. The housing market is well off its lows, with sales and home prices edging higher.
The end result is that the overall wealth and optimism in America is higher.
According to the “CNBC All-America Economic Survey,” 33% of Americans felt the price of their homes will ratchet higher, up nine points since the previous survey in November 2012 and the high point since December 2007. The survey in March also suggested 48% of Americans believed it was a good time to invest, given the stock market rally; this number is up from 31% in November and it’s the highest since December 2009. (Source: Liesman, S.,“CNBC, American Dream Is Back; CNBC All-America Economic Survey,”CNBC, March 26, 2013.) So all is good, right?
As I previously commented, the stock market rally has made more people rich. A total of 300,000 newly minted millionaires werecreated from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “CNBC, US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 14, 2013.)
But hold on. The reality is that there continues to be a mass of Americans collecting food stamps, around 48 million, according to USDebtClock.org, and they don’t care about the stock market rally.
While the media’s headlines are commenting on how America is becoming richer, it’s a myth, of course—unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
In my view, the growing disparity between the rich … Read More
One of the most often stated arguments for the current aggressive monetary stance by the Federal Reserve has been that if asset prices can begin to recover, this will help the overall economy.
With the spectacular rise in the stock market over the past couple of years, it would be natural to think that many Americans have seen an increase in their wealth, leading to an increase in corporate earnings for companies that cater to people who might be investors.
The jewelry market sector is a good indication of this sentiment for clients who might have seen their wealth increase through asset appreciation. However, corporate earnings in this market sector do not appear to follow this logic.
Tiffany & Co. (NYSE/TIF) recently came out with its corporate earnings, which revealed some interesting information regarding the jewelry market sector.
For the Americas, total sales rose only two percent, with its flagship New York store seeing a three percent drop in sales. The New York store for Tiffany makes up approximately eight percent of the company’s total business. Tiffany’s stores in Japan, another country that has seen a recent rise in the stock market due to an aggressive monetary policy stance, also witnessed sales declining by six percent. (Source: Warner, M. and Talley, K., “Tiffany Projects a Rough Start but a Brighter Finish for Its Year,” Wall Street Journal, March 24, 2013.)
While it is true that Tiffany’s Asia-Pacific division did well, as sales rose 13%, the real question is: if this recent rise in the stock market in America, which has been far larger than many had predicted, is failing to … Read More
There is a potential financial crisis brewing in Cyprus, and no one in the U.S. really seems to be that concerned. Just like our out-of-control national debt, sequestration, and growing number of unemployed and poor. Stocks continue to move higher, and it appears as though nothing can stop them.
There is clearly a financial crisis in the eurozone, which I feel traders in the U.S. have largely pushed aside during the American stock market rally.
In Cyprus, we all know the government tried to place a tax on all bank deposits in an attempt to raise $7.6 billion in capital as part of the country’s bailout deal. The strategy was turned down; so here we have the tiny island of Cyprus in the Mediterranean Sea where the estimated gross domestic product (GDP) of $22.45 billion in 2012 (source: International Monetary Fund) would be ranked dead last amongst the U.S. states, finishing behind Wyoming with just over $25.0 billion in GDP in 2011 (source: U.S. Department of Commerce).
So what’s the deal with Cyprus, and why should you be concerned?
While Cyprus is tiny and pretty well insignificant as far as its economic clout goes, a financial crisis, especially within the country’s fragile banking system, could drive widespread mistrust and confidence issues throughout the eurozone. This is the concern; that Cyprus could foreshadow a deeper financial crisis in the problematic regions of Italy, Spain, and Portugal.
Greece went through its financial crisis roller coaster, including two bailouts, and it is currently surviving on loans and credit. It’s going to take decades for Greece to recover from its financial crisis.
The fear … Read More
As the stock market in America continues to move upward into elevated territory, the Federal Reserve and its monetary policy program of creating an abundance of liquidity and cash in the financial system deserve much of the credit.
However, the average American has not participated in this giant creation of wealth over the last few years and they are extremely concerned about their future retirement plans.
The problem with the Federal Reserve’s monetary policy program is that it cannot solve inherent structural issues prevalent in America today. Monetary policy initiatives can help only a certain section of America, namely the financial markets.
Many Americans over the last few years have seen wages stagnate while costs continue rising. This has left the average American with far less money available to invest, if at all. The net result is that millions of Americans do not have any investment in the stock market, leaving them to sit on the sidelines of the recent boom created by the Federal Reserve through its monetary policy initiatives.
Additionally, many retirees have their money in bonds. Because of the Federal Reserve’s monetary policy program of keeping interest rates low and aggressively buying bonds, this has left real yields extremely low; in some cases, they’re essentially nothing.
This means that retirees who do have some cash available to invest in a relatively safe investment can’t generate any income, because the Federal Reserve is so aggressive in its monetary policy stance.
According to the Employee Benefit Research Institute (EBRI), a survey reported that 57% of American workers had less than $25,000 in total household investments and savings, not including … Read More
The Dow is at a record high, and there is rejoicing on Wall Street in reaction to the stock market rally. In fact, the stock market rally appears to have made more people rich. A total of 300,000 newly minted millionaires were created from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 19, 2013.) This is great news for the new members of the $1.0-million club (excluding primary residence), but the reality is that there continues to be a mass of Americans collecting food stamps—around 48 million according to USDebtClock.org—and they have not reaped any rewards from the stock market rally.
The headlines commenting on how America is becoming richer are myths; that is, unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
What is also alarming is the low saving rate, which shouldn’t be a surprise, given that income levels have flattened out and declined over the past decade. According to the Employee Benefit Research Institute (EBRI), a staggering 57% of workers surveyed said they had less than $25,000 in combined household savings and investments, aside from their homes. (Source: Greene, K. and Monga, V., “Workers Saving Too Little to Retire,” Wall Street Journal, March 19, 2013.) The survey also reported that 28% of respondents expressed no confidence that they would have sufficient money to retire in a comfortable manner. Trust me when I say this group doesn’t care about the stock market … Read More
When it comes to long-term investing, one factor that needs to be considered is that the dividend yield can provide a large portion of the total return. While everyone likes to pick the highflier that will move up a tremendous amount, the truth is that having a portfolio of stocks that continually increase their dividend yield can help increase total returns of a portfolio.
It is expected that for 2013, S&P 500 companies will pay out at least $300 billion in dividends. This is an even higher amount than the $282 billion paid in dividends for 2012. (Source: Demos, T., Russolillo, S., and Jarzemsky, M., “Firms send record cash back to investors,” Wall Street Journal, March 7, 2013.)
Long-term investing that incorporates companies issuing a stable and increasing dividend yield over time can help mitigate the gyrations of the market.
Not only are corporations flush with cash and looking to pay an attractive dividend yield as compared to U.S. Treasuries, but companies are also buying back record levels of shares.
According to Birinyi Associates Inc., in February, corporations announced a total of $117.8 billion in share buybacks, the highest monthly total since 1985.
Generally speaking, both share buybacks and issuing a dividend yield are positive for long-term investing. However, I do worry that companies are buying back shares at levels that are elevated.
I think it would be far more beneficial for long-term investing if corporations had a flexible approach regarding paying back cash. Meaning, when the stock price declines, corporations should then accelerate share buybacks, and when their share prices are up significantly, corporations should increase their dividend yields…. Read More
The Dow Jones Industrial Average is firing on all cylinders, trading at a record high. The S&P 500 is also close to its all-time record. Technology and small-cap stocks are blazing along. The amount of new stock market wealth created in the first week of March and in 2013 has been great. Add in the better-than-expected jobs numbers and a decline in the unemployment rate to 7.7%, and you would think that the U.S. economy is back, loaded and ready to go. But we may be closer to a financial crisis than most think.
Here’s the problem: the creation of stock market wealth is heavily weighted with the institutional money and the top one to five percent of the wealthiest Americans. (I use the wider range of the top earners, since you have to be doing fairly well to be in this group.)
There’s an old saying—“Money makes money.” But let me put it another way: making money on $1.0 million is a lot easier than making money on $1,000. Earn two percent on $1.0 million, and you’d have an extra $20,000. Make two percent on $1,000, and you only have $20.00, just enough for a dinner for two at McDonald’s Corporation (NYSE/MCD). All I’m saying is don’t be fooled by the new headlines talking about how well America is doing, as a financial crisis is still possible.
The housing market is booming, but we all know that the rally in prices is partially due to rich investors and institutions buying cheap properties from those who had to sell or be foreclosed on due to a lack of funds to … Read More
The latest monthly employment data had a positive headline; a stronger than expected job creation number. However, looking at the core information, there remain significant concerns regarding the U.S. economic recovery and job creation specifically.
For February, job creation for non-farm related payrolls totaled 236,000. This number was far higher than expected, giving a boost to the stock market. (Source: “Employment situation summary,” Bureau of Labor Statistics, March 8, 2013, accessed March 8, 2013.)
One might tend to think the economic recovery is going full steam ahead. I would urge caution, however.
To begin with, job creation data from the Bureau of Labor Statistics is notorious for large revisions. This latest report shows just how volatile this job creation data really is.
The Bureau of Labor Statistics has revised job creation data for January from 157,000, down to only 119,000. That is a huge revision in percentage terms, creating difficulties when calculating whether or not an economic recovery is occurring.
My biggest worry for a sustained economic recovery is the continued decline in the participation rate. This is the number of people who are active in the employment market. People who have given up looking for work drop out of this data, which is why this level continues to decline.
The current seasonally adjusted participation rate of working age people is 63.5%. This is the lowest level since September 1981. (Source: “Payrolls Surge as U.S. Jobless Rate Falls to Five-Year Low,” Bloomberg, March 8, 2013, accessed March 8, 2013.)
This means that a huge amount of people have given up looking for work and are not active participants in the … Read More
Today, all eyes will be focused on the February non-farm jobs numbers report. I will be keenly watching to see if the economy can churn out jobs in spite of the somewhat sluggish recovery in America and the weak demand from the European and Chinese economies.
The private Automatic Data Processing (ADP) Employment Change, which is more closely correlated with the more important non-farm jobs numbers reading, was positive at 198,000 new jobs created in February, but not overwhelming versus the upwardly revised 215,000 in January. The number beat the Briefing.com estimate of 150,000 jobs, but it was the lowest reading since October 2012. In fact, the ADP jobs numbers have declined in the last three straight months, which is not exactly a good sign.
The market needs to see the jobs numbers steadily improve. While we likely are far away from the 500,000 or so new jobs needed each month that indicate a healthy economy, we still need to see jobs growth to continue at close to the current level and for the unemployment rate to hold below eight percent in order to offer any hope of a sustained jobs recovery.
Chart copyright Lombardi Publishing Corporation 2013; data source: Automatic Data Processing web site, last accessed March 7, 2013
Yet the reality is the jobs numbers are not good. There are roughly 22.3 million or so Americans looking for work that are unemployed or underemployed and about 12.3 million fully unemployed. The fact is that these are not good jobs numbers, as many of these people are taking minimal wage jobs just to fight off the creditors and put … Read More
The American economy, as with most developed nations, is based primarily on consumer spending. With the collapse in the housing and stock markets several years ago, a big chunk of wealth evaporated overnight. This hurt consumer sentiment, which resulted in a significant slowdown in economic growth.
For economic growth to regain momentum, consumer spending needs to increase, but it needs to be based on a solid footing. It’s one thing if consumer spending was increasing due to higher disposable income, but it’s quite another if consumer spending was increasing due to higher levels of debt, which would lead to fragility when it comes to long-term economic growth.
New data from the Commerce Department stated that personal income declined by 3.6% in January, far worse than economists had expected. However, personal consumption increased by 0.2% in January. (Source: Sparshott, J. and Morath, E., “U.S. Incomes Fall, Spending Rises,” Wall Street Journal, March 1, 2013.)
The higher payroll tax is clearly hurting disposable income for most Americans. Disposable income, which is the amount of income left after taxes, decreased by four percent in January. According to the United States Department of Commerce, this is the largest decline on record. With economic growth being extremely weak, this type of decrease in income has the potential to severely impact consumer spending for some time.
This information was collected prior to sequestration. If budget cuts are to be enacted without revisions, it will be difficult to see how economic growth will accelerate through the remainder of the year. Consumer spending will most likely suffer at some point, because incomes are not growing, taxes are rising, … Read More
When it comes to long-term investing, many focus solely on revenues and earnings. While clearly these are extremely important fundamentals when conducting a stock analysis, one rarely mentioned but critical variable is pension liabilities.
Pension liabilities are, by definition, crucial to long-term investing, as costs are spread out over many years. Many investors conduct a stock analysis on a very short-term basis—quarter to quarter. Successful long-term investing means conducting a stock analysis on the next five, 10, even 15 years.
Pension liabilities are a huge issue for many companies. A pension liability is the difference between the amounts of funds the company has in reserves versus the expected payments to retirees. At the end of 2012, American businesses had an estimated combined pension deficit of $347 billion, according to JPMorgan Asset Management. (Source: Monga, V., “Why the corporate pension gap is soaring,” Wall Street Journal, February 25, 2013.)
JPMorgan estimates that, on average, companies have promised $100.00 to retirees, yet they only have $81.00 in reserves. That is a massive gap that needs to be taken into account when conducting a stock analysis for long-term investing.
This is an unintended side effect of the low interest rate environment created by the Federal Reserve. While companies can take advantage of low interest rates when borrowing, they can also end up having a shortfall in the long-term returns on their investments.
Companies are attempting to bridge the gap by adding funds to make up the shortfall. If interest rates stay low for a number of years, as expected, a stock analysis must take into account the increased provisions of cash used to … Read More
Apple Inc. (NASDAQ/AAPL) was trading at $705.07 on September 21, 2012, and there were talks of the tech giant becoming the first trillion-dollar company in the world. That was then. The stock has since made a steady decline down to below $500.00, hitting a low of $435.00 on January 25; it’s trying hard to hold on and instill investor confidence. The sell-off was driven largely by concerns of soft “iPhone 5” sales. My stock analysis suggests that the profit-taking in Apple shares is not a surprise, given the stock’s enormous run-up in share price and the fact that rivals are clawing at the door.
My stock analysis indicates that ownership by institutional investors shows a 0.76% net sale of Apple stock over the last quarter-to-quarter, representing 4.8 million net shares sold by institutions, according to information by Thomson Financial.
Even CEO Timothy Cook sold some of his shares in Apple during the run-up, as my stock analysis notes. On March 9, 2012, he sold 17,322 shares for $545.17 per share, followed by another 20,178 shares for $547.80–$551.51 each a few days later on March 11, 2012. Two weeks later, on March 25, Timothy Cook sold 106,640 shares for $595.96–$606.80 a share for a total $64.1 million, according to data from Thomson Financial. If he had waited until September, he could have got $705.00 per share sold. Perhaps Cook was a bit nervous of the stock’s rocketing share price and wanted to reap some of the rewards. Maybe Cook needed the $85.0 million he received from his sales to invest in something a bit less frothy than Apple stock.
In fact, … Read More
One of the stock market’s most perplexing moves for both professional and retail investors is when the market, best represented by the S&P 500, moves in a direction that might be contrary to current conditions regarding economic growth.
This is one of the most difficult concepts to understand; that the S&P 500 does not represent current economic growth conditions, but what the market believes is highly probable for the future.
We have recently witnessed a substantial move upward in the S&P 500, yet only recently have we seen some positive signs that economic growth may be slightly improving. I stress “slightly,” because no one really expects economic growth for 2013 to be massive.
While jobs growth has been relatively weak, there have been some signs that suggest economic growth is resuming. However, with much of the data, there can be quite a lot of noise that can distort the underlying strength or weakness of economic growth.
One example of a data set that does point to renewed economic growth, though the fundamentals may not be quite as strong, is the recent HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit Economics. In January, the China Manufacturing PMI came in at 51.9—a two-year high, up from 51.5 in December. The January China Manufacturing Output Index was 52.2—a 22-month high, up from 51.9 in December. (Source: “HSBC Flash China Manufacturing PMI™: Operating conditions improve at the quickest pace in two years,” Markit Economics web site, January 24, 2013.)
Initially, this seems to signal that economic growth in China is starting to resume, which would be bullish for the S&P 500. … Read More
The S&P 500 is at a crux, following its recent move to 1,502 on Thursday, the first time it was above 1,500 since December 2007. The index is up nearly 12% since July 24, 2012. The fear is that the index may be testing its third top at 1,500 since 2000, something I have discussed in the past.
The overall U.S. stock market is trending higher. About 75.2% of U.S. stocks are above their respective 200-day moving averages (MAs), versus 59.3% a month earlier. On a short-term basis, 86.2% of U.S. stocks are above their respective 50-day MAs, versus 63.6% a month earlier.
Take a look at the upward move of the S&P 500 stocks to above the 200-day MA; the move represents an 86% increase as of January 24, versus the 47% level in mid-November.
Chart courtesy of www.StockCharts.com
And there could be more to come, based on the seasonal trends. The November–April period has resulted in the biggest gain for the S&P 500, according to the Stock Trader’s Almanac. In the near term, watch to see if the S&P 500 can hold at 1,500 and move toward its record of 1,565 on October 9, 2007.
The chart indicates some concerns, in my opinion. Since its first top at 1,500 in 2000, the S&P 500 made another top in 2007; now we are precariously at a possible third top. The moving average convergence/divergence (MACD), as shown on the chart, shows a downward trend. Volume has also been declining, so we are seeing a bearish divergence between a higher S&P 500 and declining volume.
Chart courtesy of www.StockCharts.com
Technology has … Read More
On January 1, 2000, the world breathed a collective sigh of relief that the over-hyped Y2K fiasco dissipated without even a whimper after years of ballyhoo.
Some things never change.
As expected, at the last moment, Democrats and Republicans came together in joyous union and resolved the so-called fiscal cliff. Nervous investors around the world joined together with rapturous optimism and jumped back into the markets.
On January 1, 2013, the House approved the new deal by a 257 to 167 margin. The bill increases the income tax rate from 35.0% to 39.6% for individuals earning more than $400,000 a year and couples taking home more than $450,000 combined. Everyone else will continue to see income tax cuts.
None of this should be a surprise to anyone, since Obama, in his bid for re-election, said he would increase the tax rates on the wealthy, though his definition of “wealthy” has changed, climbing from earnings of $200,000 for individuals and $250,000 for families.
While both sides are unhappy about what they didn’t get, they should be unhappy about how they treated the global population.
For almost a year, inept politicians in Washington sat around, worrying about their chances for re-election; ignoring the impact the unresolved fiscal cliff was having on the international investing community and global economy.
But why put your hard-earned time and effort into resolving the fiscal cliff when you might not be re-elected? Maybe because it’s part of your job? You’d be forgiven for thinking it was otherwise. After all, during the eternal run up to the Presidential elections, the fiscal cliff wasn’t even a major talking point. … Read More
The fiscal cliff is causing a drag on the economy and, in particular, consumers’ desire to spend, due to the uncertainty of how the budgetary cuts and tax increases will impact income. If the fiscal cliff is allowed to proceed—and it will to some degree—the reality is that taxes will rise. I’m not sure if the middle class and those who earn less than $250,000 will be spared, but I do feel there will be a compromise made on the income tax increases.
In the meantime, consumers are likely to be hesitant to spend in the retail sector. The headline retail sales reading rose 0.3% in November, which was below the Briefing.com 0.6% estimate but up from -0.3% in October. The ex-auto reading was flat, lower than the Briefing.com 0.2% estimate. While the November numbers don’t translate into December, I’m sensing the uncertainty of the fiscal cliff will impact consumer spending in this key shopping season for the retail sector.
We are heading into the heart of the holiday shopping season. I’m sure the retail sector is anxiously praying for consumers to spend. A strong shopping season in the retail sector will also go a long way to helping the economic recovery, while also giving the stock market good news.
The two recent jobs reports added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive and stronger job creation going forward to instill some confidence in shoppers. In the best-case scenario, if job creation rises, this would likely translate into higher … Read More
The historic and unprecedented action by the Federal Reserve in enacting extremely loose monetary policy is an attempt to stimulate the economy. I’ve always felt that a central bank should have one mandate: the stability of the currency. The Federal Reserve has a dual mandate; in addition to keeping inflation in check, the American central bank also is attempting to lower the unemployment rate through monetary policy, a task not easily achieved.
Over the last couple of years, we have clearly seen that, while the economy has started to improve, it is far below potential gross domestic product (GDP) growth levels. Even with the historic monetary policy initiatives, the Federal Reserve is limited in what it can and cannot do. While the Federal Reserve may have good intentions, there are serious consequences due to unintended outcomes.
Through monetary policy action the Federal Reserve is attempting to increase the wealth effect by increasing asset prices. The thinking is that the wealthier people become through the increase in their assets, the more likely it is that they’ll be willing to spend. This action is one reason why we’re seeing gold prices go up, as well as the stock market and home prices since 2009.
Recently published data show that at least this part of the plan by the Federal Reserve is working, as the net financial wealth for Americans increased by $1.7 trillion to $64.8 trillion for the third quarter 2012. According to the Federal Reserve, this is the highest level of net worth by U.S. households since 2007. (Source: “U.S. household wealth rises to near 2007 high,” Reuters, December 6, 2012.)… Read More
I just took a look at my friend’s Samsung “Galaxy III” smartphone and must admit that it looks pretty impressive compared to my “iPhone” by Apple Inc. (NASDAQ/APPL). However, the applications available for the iPhone are what will keep me from switching, at least for the time being.
Apple was trading at $705.07 on September 21, but the stock made a steady decline down to the $505.00 level on November 16 prior to rallying back to the current price of $578.00. Based on my stock analysis, there’s profit-taking in Apple shares, which is not a surprise, given the enormous rip-up in the share price.
My stock analysis tells us that institutional ownership shows a 0.76% net sale of Apple stock over the last quarter-to-quarter, representing 4.8 million net shares sold by institutions, according to information from Thomson Financial.
In fact, my stock analysis shows that technology and growth stocks have been the focus of the market selling so far in 2012. The NASDAQ is down four percent as of Monday, versus a 0.07% advance by the S&P 500 and blue chips.
What I’m getting at is that growth stocks are being sold by institutions.
Following where the professional money is flowing helps gives us another tool to evaluate the stock markets and get a sense of what is happening.
Behind the concept of following the money of institutional investors is the belief that these experts are likely to understand the company’s situation more than anyone outside of the executive management group. My stock analysis is that, by looking at the flow of money from institutional investors and monitoring what stocks … Read More
The only people crying “Y2K” back in 1999 were information technology (IT) professionals looking for job security. Even without their help, disaster was averted, the rising sun greeted the world on January 1, 2000, and life was good.
Fast-forward to 2012, and the doomsayers are at it again. Except this time, it’s the members of the U.S. government wailing about an “economic Armageddon” if the fiscal cliff isn’t averted come January 1, 2013. Unlike Y2K, the fiscal cliff is a real issue that needs to be addressed; but the end result will be the same: at the last second, disaster will be averted.
Unfortunately, as we make our way to the end of the calendar year, indecisiveness and political jockeying are spooking the global investing community and wreaking havoc on the markets. At a time when the international community needs the U.S., the world’s largest economy, to show confidence, it’s the political infighting capturing the spotlight.
In spite of all the wailing and gnashing of teeth, the fiscal cliff will be avoided and life as we know it will continue. And that’s when the real problems begin. With the centric fiscal cliff stealing all the limelight, it’s been tough for investors to focus on the fact that America’s economic rebound is contingent on a financially strong international community. Domestic economic growth cannot be stimulated in isolation.
In January 2013, investors will see that the real underlying factor affecting the stock market is the global economy and its impact on corporate earnings.
On November 15, it was announced that the collective economies of the eurozone fell by 0.1% between July and … Read More
We are heading toward the key Thanksgiving “Black Friday” to “Cyber Monday” retail sales period, and if all goes well, there could be some quick profits to be made in the market.
In 2011, strong retail sales on Black Friday gave a boost to the stock market, as the S&P 500 climbed nearly nine percent between November 25 and December 7, 2011.
The same could happen this year, except we still need to deal with the pending fiscal cliff.
Yet I feel that a strong showing in retail sales during the four-day key selling period beginning on Friday could help to attract some buying from Wall Street—a near-term boost, at the least, for a market that is full of uncertainties.
Let me first say that this holiday retail sales season will be critical for retailers.
Retail sales have increased for three straight years, according to the National Retail Federation (NRF), and the hope is for a fourth year of increases.
The NRF is optimistic and estimates that this holiday retail sales season will generate sales of $586.1 billion, up from $563.0 billion in 2011 (Source: “Holiday FAQ,” National Retail Federation, accessed November 19, 2012.)
There is also optimism for those shoppers who choose to shop from the comfort of their homes or convenience of their mobile devices. I know I’m in that group.
According to Adobe Systems Incorporated (NASDAQ/ADBE), online sales on Cyber Monday, the Monday following Thanksgiving, are estimated to rise 18% year-over-year to $2.0 billion. (“Adobe Predicts Online Sales Will Reach $2 Billion This Cyber Monday, Growing by 18 Percent Over 2011,” Daily Finance via Business Wire, November … Read More
The market is moving lower, and there’s nothing that appears to be supporting it. The S&P 500 has lost nearly eight percent since its peak of 1,465 in September.
The fact that the S&P 500 failed to hold above 1,400 was not a surprise, based on my technical analysis. In May, the break at 1,400 was the S&P 500’s fourth top above 1,400 since 2008.
Since the election, the market has edged lower in six of seven sessions due to heightened stock market risk.
On average, only about 37% of U.S.-listed stocks are trading above their respective 200-day moving averages (MAs), versus 61% a month ago. The short-term weakness is even more prevalent with about 19% of stocks above their respective 50-day MAs, versus 61% a month ago.
What happened to what were supposed to be the best six months of the year for investment gains?
Based on historical records, investing in the six months from November to May has produced the best returns for stocks versus the June to October period, according to the Stock Trader’s Almanac.
So far, November has been horrible, with the key stock indices down more than four percent. But as I said when I previously discussed this pattern, things could be different this time around, given the abundant stock market risk, including the financial crisis in the eurozone, a stalling economy in China, tension in the Middle East, and the presidential election and upcoming fiscal cliff in the U.S.
We are seeing some selling capitulation in the market because of the abundant stock market risk and lack of any positive news that would encourage … Read More
The NASDAQ is up 20% this year, as stocks continue to edge higher to multi-year highs. Blue chips are at their highest level since December 2007. Small-cap stocks are hot, up a sizzling 3.1% in September following a 3.3% advance in August. The S&P 500 is at a five-year high, and while the index has held above 1,400, the possibility of the multiple top formation concerns me, based on my technical analysis.
Now is the time to make sure that your portfolio is not overly vulnerable to a stock market correction if one were to surface. Of course, you should always take some profits off the table, a key for stock market success.
In my view, a critical investment strategy includes asset allocation, diversification, and the addition of small-cap stocks to maximize the expected return of your portfolio and increase your stock market success.
The concept of asset allocation should be a key part of any prudent investment strategy, as it will increase your stock market success.
Asset allocation refers to the asset mix of your portfolio, which is divided into the three major asset classes—cash, fixed income, and equities. Too much equities and you are vulnerable to selling. Too much cash and you could miss out of a stock market rally.
As the macro and micro factors change, you should rebalance your asset mix and modify your investment strategy, thereby increasing your stock market success.
A great investment strategy for stock market success is the use of Put options as a hedge against weakness.
The more risk assumed, the higher the expected rate of return; albeit, this is not … Read More
With the recent move by Mitt Romney to choose Paul Ryan as his running mate for the upcoming election, I believe this sends a strong message to the American people and the rest of the world that the U.S. is finally going back to its roots by getting on the path to reducing the budget deficit and preventing a financial crisis.
A financial crisis usually stems from a lack of confidence. If the lenders feel that a borrower can’t pay, they sell their securities and refuse to lend unless the rates are extremely high. This is how the financial crisis in Europe is unfolding, as the budget deficit for many nations remains high. They are continuing to spend more money than they earn. Running a budget deficit for a short period of time might be okay, if a surplus is eventually generated to reduce the overall debt. This has not occurred for many years in dozens of nations, including the U.S.
Ryan understands that the real victims are the American people if a budget deficit is continually generated. This puts the country at greater risk of a financial crisis, as investors begin to lose credibility in the nation as a whole. The U.S. is fortunate that so many other nations are also poorly managed, running up a huge budget deficit and cresting on the edge of a financial crisis.
One of Ryan’s ideas is reducing government spending by 2015 to 20% of gross domestic product (GDP) and a long-term target of 15% of GDP. Reducing government expenditures is a needed step in reducing the budget deficit. Such a move will … Read More
Since the bursting of the tech bubble in March 2000 and before the recent financial and credit crises struck, at least three sectors have managed to post significant gains: bonds, real estate, and small-caps. For some reason, however, gold remained under the radar for most investors. Yet, since the stock market peak, prices have climbed past many psychological marks. The shares of companies that mine the metal have gone along for the ride.
The perennial question for any gold investor is whether to buy bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.
While favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM), in particular, as one of the best stocks in gold, because I believe this stock will add value to your portfolio for years to come.
I’ll go even so far as to say that this stock is the only one you will need to own for the next decade, with its good price appreciation potential and dividend.
Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs.
Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future, and it is certainly not exposed to politically unstable regions.
In that regard, the risk … Read More