Archive for October 10th, 2012
What a Difference Five Years Makes
Wednesday, October 10th, 2012
And in more ways than one. Five years ago today, the S&P 500 closed at a peak of 1,565.15. Since then the index has seen a huge decline followed by a huge rally. After all those swings, the S&P 500 has declined 7.9% over the last five years. Annualizing that decline works out to a loss of 1.63% per year.
What some people may not remember, however, is that exactly five years prior to the S&P 500′s all-time high made on October 9th, 2007, the index bottomed out from the 2000-2002 bear market at a level of 776.76. Following the post-Internet bubble low on 10/9/02, the index rallied more than a 100% before dropping more than 50%+ from 2007 to 2009. After bottoming out in March 2009, the index has since rallied more than 100% once again. Netting out those three monster moves, the S&P 500 is currently 85.6% higher today than it was ten years ago. Annualizing that gain over ten years works out to 6.38% per year. For all the talk that the market hasn’t done anything over the last decade, 6.38% is a lot better than many of the options faced by investors today.
Copyright © Bespoke Investment Group
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David Winters: Some Great Global Opportunities Being Overlooked by Investors
Wednesday, October 10th, 2012
Great Investor David Winters, portfolio manager of the top rated Wintergreen Fund, and numerous Renaissance Investments Global Funds (CIBCAM), will explain why he is finding numerous investment opportunities around the globe and why investors shouldn’t believe the bearish view that the “cult of equity is dead.”
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No Manipulation of US Jobs Data, but the Numbers Are Noisy
Wednesday, October 10th, 2012
by Joseph G. Carson, U.S. Economist and Head of Global Research, AllianceBernstein
In the heat of a US election season, the sharp drop in September’s unemployment rate raised some eyebrows. I think it is blatantly wrong to argue that government statisticians manipulated the data. But the jump in household jobs that triggered the drop in the unemployment rate was indeed extraordinary and requires further scrutiny.
According to the household employment survey, 873,000 people found jobs in September and the unemployment rate fell by 0.3 percentage points to 7.8%. The outsized gains in household employment were far above the payroll survey gain of 114,000, and one of the largest gains on record.
There’s no doubt that the huge jump in the number of people finding jobs last month does look odd, as it conflicts with all other labor market indicators as well as assessments of labor market conditions by individuals and businesses. This led some people to question the accuracy of the results and to suggest that the data had been engineered for political purposes.
But it’s simply wrong to argue that government statisticians at the Bureau of Labor Statistics cooked the data. Monthly household jobs data are always very volatile. And this time, the figures may have been influenced by a one-time event that led to an overstatement of the results for the period.
For example, in September, there was a very unusual move in the US workforce for younger workers between the ages of 20 to 24. For the first time since 1961, the number of people in this age group actually working (before seasonal adjustments) increased by 101,000. Typically we would expect a decline of at least 300,000 in September. This age group usually experiences a drop in actual employment levels in September, as many young people who worked in the summer return to college. Although this age cohort only comprises 10% of the workforce, it accounted for 42% of the near-record employment gains in September
What might account for this unusual pattern? One possibility is the timing of the political conventions. For the first time ever, both the Republican and Democratic conventions were held in early September, and since many young people do part-time work for the campaigns, it could have influenced the household employment results. According to my estimates it would take a shift of only several hundred people in the 20 to 24 age group—of the approximately 6,000 surveyed—to trigger an unusual movement in the September jobs data.
Perhaps it’s no coincidence that part-time employment rose sharply in the household employment report. In addition, these jobs did not appear in the payroll survey because they were not part of a traditional business establishment.
None of this suggests that the household employment data for September were wrong. But, given that they may have been influenced by a one-time event, I think a reversal of the 368,000 employment gains in the 20 to 24 age cohort seems likely in October.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Joseph G. Carson is US Economist and Head of Global Economic Research at AllianceBernstein.
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On Dividends (David Merkel)
Wednesday, October 10th, 2012
by David Merkel, Aleph Blog
Dividends are kind of a craze now, as people focus on income in an environment where income with reasonable risk is hard to come by. Now, I used data from S&P to create this graph. I suppose I could go further back in history and use Schiller’s dataset, but the era of high dividend yields on stocks is over, at least for now. I can be taught, but I don’t see a lot of present relevance to pre-1990 dividend yields. The prices of stocks as income vehicles has been bid up, and buybacks absorb much of the free cash flow from mature corporations.
That said looking at 1989 to the present, what do we see? Dividends rose at a rate of 4.72%/year over the period, and people were willing to capitalize dividends at a rate that grew at a rate of 2.07%/year over the period. The total return being 9.47%/year over the period leaves 2.42%/year to be the return from the dividends, and capital gains from reinvested dividends.
In one sense, the blue line above gives a fair statement of the crisis we have gone through. Profits got smashed in 2008-2009, much more than in 2002. (Note that financials were the core of the recent crisis but were in good shape in 2002.) In both cases, dividends came back.
In another sense, the blue line is not indicative of the crisis. Labor force participation has dropped incredibly. The unemployment rate may be low, but only because many have given up on finding jobs.
My only counsel here is not to seek dividends for their own sake, but accept them if offered in a firm that offers good prospective returns. I do not look for dividends, but 31 out of my 34 holdings pay dividends, and the average dividend (including non-payers) is 0.7% higher than the S&P 500 dividend yield at 2.75%.
I don’t so much believe that dividends have value, as many companies that pay dividends have value. Free cash flow is valuable, and results in dividends, buybacks, and reinvestment in the business. Find those firms that produce free cash flow, and dividends will typically follow.
Copyright © Aleph Blog
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Is The Volatility Index Really That Low? (Roche)
Wednesday, October 10th, 2012
Guest Contribution by Cullen Roche, Pragmatic Capitalism
One thing we keep seeing all over the place is how the VIX (volatility index) is so low and that this means the market is extremely complacent and therefore on the verge of a decline. This might be true, but I think it’s important to provide some perspective when using an indicator like the VIX. To get a better idea of the VIX it can be helpful to look at more than merely the front month contract. In a recent research note analysts at Societe Generale elaborated on the current environment and the story behind the current VIX levels:
“the most striking aspect of the current situation is the historical steepness of the vol contango, meaning that mid/long-term volatilities are much more expensive (in vol point and historically) than short-term vols. If we try to translate this into a market sentiment analysis, we can say that the market is pretty confident in the short-term outlook but extremely cautious on the longer-term outlook.”
Without getting bogged down in the details, that basically means traders are complacent in the near-term, but extremely cautious in the long-term. So you kind of have a mixed reading here from a sentiment perspective. The VIX is useful in gauging perspective, but this is a good example of the mixed messages it can send at time.
Copyright © Pragmatic Capitalism
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Our Story in Two Minutes / Notre Histoire en Deux Minutes
Wednesday, October 10th, 2012
Our [Hi]Story in Two Minutes
Source: Marc Brecy
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70 Second Market Outlook – Metals, Dollar, Bonds, Stocks, Energy
Wednesday, October 10th, 2012
70 Second Market Outlook – Metals, Dollar, Bonds, Stocks, Energy
By Chris Vermeulen, Market Shadows
Over the past year some really interesting things unfolded in the market. Investing or even swing trading has been much more difficult because of the wild economic data and daily headline news from all over the globe causing strong surges or sell-offs almost every week.
For a while you could not hold a position for more than a week without some type of news event moving the market enough to either push it deep in the money or trigger a stop loss. This has caused a lot of individuals to give up on trading which is not a good sign for the financial market as a whole.
The key to navigating stocks which everyone thinks are overbought is to trade small position sizes and focus on the shorter time frames like the 4 hour charts. The 4 hours charts are my secret weapon. They provide large price swings which daily chart traders focus on while also showing clear intraday patterns for spot reversals or continuation patterns with precise entry/exit points.
While I could ramble on about why the stock market is primed for major long term growth, I will keep things short and simple with some 4 hour and daily charts for you to see what I’m thinking should unfold moving forward.
Keep in mind, the most accurate trading opportunities that happen week after week are the quick shifts in sentiment which only last 2-5 days at most, which is what most of my charts below are focusing on…
Dollar Index – 4 Hour Chart
This chart shows a mini Head & Shoulders reversal pattern and likely target over the next five sessions. The dollar index has been driving the market for the past couple years so a lower dollar means higher stock and commodity prices.
Dollar Index Trading
Bond Futures – 4 Hour Chart
Money has been flowing into bonds for the past couple weeks with most traders and investors expecting a strong correction in stocks. As you can see the price of bonds hit resistance this week and as of Thursday has started selling off. Money flowing out of this “Risk Off” asset means money will move to the “Risk On” investments like stocks and commodities.
Bond Futures Trading
Gold Futures – Daily Chart
Gold is stuck in both categories. It is a “Risk Off” safe haven when people are scared of falling stock prices, and it is also a “Risk On” speculative investment when people are feeling good about the market. Gold has been trading at key resistance for a couple weeks and looks as though it’s starting its next rally.
Gold Futures Trading
Silver Futures – Daily Chart
Silver is in the same boat as gold though it carries much more volatility than gold. Expect 2-4% swings regularly and sloppy chart patterns in this metal.
Silver Futures Trading
SP500 Futures – Daily Chart
As much as everyone hates to buy stocks up at these lofty prices I hate to say it but I think they are going to keep going up and they could do this for a long time yet. If the dollar index continues to break down then I expect the SP500 to rally another 3% from here (1500) in the next 1-2 weeks.
SP500 Futures Trading
Crude Oil Futures – 4 Hour Chart
I have not been paying much attention to crude oil in the past few months. While it has had big price action, many of those big days took place on news causing an instant price movement making this extra dangerous to trade. I continue to watch rather than engaging.
Crude Oil Futures Trading
Natural Gas Futures – Daily Chart
Natural gas has been a great performer for us in the past 6 months as all the short positions were slowly covered. I just closed out my natural gas ETF trade this week with a 31.9% gain and plan on getting back in once the chart provides another low risk setup.
Natural Gas Futures Trading
Trading Conclusion:
In short, the dollar index along with bonds should will correct over the next few weeks. That will trigger buying in stocks and commodities. Natural gas dances to its own drum beat. The dollar does not have much affect on its price, and most of the time, natural gas is doing the opposite of the broad market.
Get My Pre-Market Trading Analysis Video and Intraday Chart Analysis EVERY DAY, www.TheGoldAndOilGuy.com. ~ Chris Vermeulen
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Market Shadows (http://s.tt/1pmc7)
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Tuesday Humor: A Badly Lip Read Presidential Debate
Wednesday, October 10th, 2012
You saw the original, then you saw the mock version, now from BadLipReading, comes the…. well… farce of the original farce? Considering that Big Bird is now the marginal figure in “the most important presidential election ever” it is only fitting that the entire presidential election process is nothing but one big joke.
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Beyond the Fiscal Cliff: the Dollar At Risk?
Wednesday, October 10th, 2012
by Axel Merk, Merk Funds
Looking beyond the fiscal cliff, we are afraid the greenback may be at risk no matter who wins the election. We examine the risk to the U.S. dollar in the context of the likely policies pursued under either an Obama or Romney administration.
Some context: The budget deficit as a percentage of Gross Domestic Product (GDP) in the U.S. is worse than that of some of the weak Eurozone countries (Portugal, Italy); the Eurozone as a whole has a far lower deficit. If the “fiscal cliff” were to take place – that is, if the tax hikes and government spending cuts were to take effect as currently scheduled – the U.S. would still face a deficit exceeding 3% of GDP before factoring in any economic slowdown as a result of the cliff. The fiscal cliff the U.S. is facing would impose Eurozone style austerity measures and – just as in the Eurozone – not eliminate the deficit.
Why does it matter? Unlike the Eurozone, the U.S. has a significant current account deficit. The current account deficit is exactly the amount foreigners must buy in U.S. dollar denominated assets to keep the dollar from falling. As a result, the U.S. dollar may be vulnerable should foreigners reduce their appetite for U.S. bonds. In contrast, the fallout from the Eurozone debt crisis has had a limited effect on the Euro because the Eurozone as a whole does not need inflows from abroad to keep the currency stable.
U.S. bond market at risk: Foreigners don’t need to sell U.S. bonds for there to be a risk to the U.S. dollar: they simply need to include fewer Treasuries in their purchases going forward. Should the decades old bull market in U.S. bonds turn into a bear market, foreigners might be inclined to deploy fewer of their reserves into U.S. Treasuries. We see three primary scenarios that could lead to a sell-off in the U.S bond market:
- A return to normal times
- Strong economic growth
- A crisis of confidence in U.S. bonds
Normal times: Why would “normal” times be a threat to the U.S. bond market? In our analysis, one of the best bubble indicators is below-average volatility in an asset or asset class. When tech stocks seemingly went nowhere but up in the late 1990s, when housing prices seemingly went nowhere but up last decade, when we had the hallmarks of a “goldilocks” economy – respective asset price volatilities were below their historic norms. The 2008 crisis was triggered by a return of risk to the markets: as investors had to price in rising volatility – for no apparent reason – banks had to de-lever to make their sophisticated value-at-risk models work; similarly, as investors more broadly pared down their risk, the credit bubble burst. With regard to the bond market, we only need to return to historic levels of volatility for there to be a potentially rather rude awakening: we have had many yield chasers going out ever further on the yield and credit curves (buying longer-dated and less creditworthy securities) that might run for the hills as volatility picks up in the bond market.
Strong economic growth: Some argue that we can outgrow our challenges, but the looming explosion of entitlement spending makes relying on growth unfeasible. However, our concern is with the fallout higher growth might have on the bond market. We got a glimpse of that earlier this year as a couple of economic indicators came in better than expected, leading to a sharp selloff in the bond market. Good luck to the Federal Reserve in containing fallout in the bond market if indeed we get the sort of growth Fed Chairman Ben Bernanke is advocating.
Crisis of confidence: If there is one lesson to be taken from the Eurozone debt crisis, it is that the only language policy makers appear to be listening to is that of the bond market. Policy makers decide between the political cost of acting versus the political cost of not acting. As such, we are not very optimistic that we will implement true entitlement reform unless and until the bond market forces us to. As indicated, however, should that happen, the risk to the U.S. dollar might be significant.
Obama versus Romney: A key difference promoted between Obama’s and Romney’s view of the world is the level of government spending. But independent of our political preferences, any level of government spending must be financed through revenue and borrowing. And that’s where we have a problem:
Obama’s slowing spending growth: Listening to budget experts in support of Obama’s policies, we hear a lot about how spending growth has slowed since 2008. The problem with that argument is that spending levels at the outset of President Obama’s administration were unsustainably high. Trillion dollar deficits are simply not good enough, even if the rate of growth of such deficits is low. When quizzed on the sustainability of the deficit considering the risk to the bond market, we hear that the U.S. dollar is a reserve currency and, as such, we have plenty of time to get to a more sustainable path. We certainly don’t have a crystal ball and we know that it may be all but impossible to time if and when the U.S. bond market will tell the government that enough is enough. Forecasting when the tech or housing bubbles would burst was also extremely difficult, although the warning signs were there for all to see. However, relying on the bond market behaving is, in our view, bad policy. Any policy maker that agrees that there’s a potential risk should set policy to mitigate that risk sooner rather than later. Conversely, any investor that agrees that there’s a risk to the bond market should consider taking it into account in his or her portfolio allocation now.
Romney’s sustainable budget: Supporters of a Romney presidency are quick to point out how a Romney/Ryan budget leads to a sustainable budget over time. Indeed, the most positive aspect of the proposal is that it puts a budget on healthcare. Many are not aware that the current healthcare system in the U.S. does not have a budget – it simply lists entitlements: not surprisingly, costs are exploding. One can argue about how one goes about introducing a budget, but the fact that Romney wants to introduce a healthcare budget is extremely important for long-term fiscal sustainability. Because kid you not: Medicare as we know it won’t be around in twenty years – it’s mathematically impossible – there aren’t enough rich folks out there to tax to make it work. But the Romney/Ryan budget plan has a key flaw: we believe it’s most unlikely to be implemented (before those opposing a Romney/Ryan budget breathe a sigh of relief, please re-read the section on Obama’s spending growth). Our pessimism is based not on current polls favoring an Obama/Biden administration, but on the likely stalemate in Congress. Good luck getting a budget through Congress without it being watered down rather severely. But even if Romney/Ryan principles were to prevail, Romney has already made so many concessions, from continued subsidization of student loans to preserving defense spending that a Romney/Ryan budget is at risk of looking very much like the sort of budget we see anywhere in the world: one that replaces the faces, cuts “wasteful” spending and replaces it with “worthy” spending; clearly, what is “wasteful” and “worthy” is in the eye of the beholder; but don’t worry, as in four years, citizens have the opportunity to vote for change yet again. Unfortunately, we might replace the faces, but the deficits may remain.
Real wages haven’t gone anywhere over the past decade. Voters are frustrated. In such an environment, politicians able to distill their message into a Tweet may have a better chance of being elected. That is, we believe more populist politicians may increasingly become members of Congress. In that context, the rise of the Tea Party on the right, as well as Occupy Wall Street on the left is no coincidence. As far as policies are concerned, however, the implication may be that real entitlement reform – key to making our budgets sustainable – remains elusive. In the U.S., just as in the Eurozone, we may be tempted to “kick the can down the road” until the bond market forces us to tackle our problems. Until then, we believe inflation is the path of least resistance: the government nominally delivers on promises made, but the real value of entitlements received is eroded. We just point to the most recent debt ceiling discussion where both Democrats and Republicans appeared open to changing the definition of the Consumer Price Index (CPI) to do just that. Investors may want to consider these risks in their portfolio allocation. For a broader discussion on how global dynamics affect the U.S. dollar and currencies, please join us for our Webinar on Thursday, October 18. Please also sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.
Axel Merk is President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds.
This report was prepared by Merk Investments LLC, and reflects the current opinions of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice.
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