Archive for October 26th, 2012
Money in Your 50s – Eight Moves to Make, and other Weekend Reads
Friday, October 26th, 2012
Here are this week’s reading diversions for your personal enlightement. Have a super weekend!
Happiness: Study Suggests Well-Being, Or Lack Of It, Can Predict Illness and Death
The storyteller Hans Christian Andersen once wrote, “Enjoy life. There’s plenty of time to be dead.” Now a new British study suggests that enjoying life can actually prevent illness and death.
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The Many Types of Milk: Which Is Best for Cholesterol? – Photo Gallery – EverydayHealth.com
There was a time when buying milk was as simple as opening the front door. But you don’t see many milkmen around anymore. Instead, you might find a number of different types of milk at the supermarket, and not all of them come from cows. This can make the dairy aisle pretty confusing for someone worried about cholesterol. All types of cow’s milk are important sources of vitamins A, C, D, and calcium, but what about the fat and cholesterol? And what about other types of milk like soy, rice, coconut, or almond milk? Read on to figure out the best types of milk for your cholesterol.
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Carcinogens in the Home | 7 Ways to Cancer-Proof Your Home | Caring.com
You wouldn’t feed your family a food that you knew caused cancer. But what if you’re spraying a cancer-causing chemical every time you clean your sink? In the past few years, consumer health groups have studied many household products and warned that they contain carcinogens, or ingredients known to cause cancer. Here are the prime products to send packing, along with safer replacements to substitute.
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Milk really does do your body good – Seniors’ Health – C-Health
Calcium is a key component of healthy bones and strong bone mass, and it is a factor in the reduction of bone diseases such as osteoporosis, a disease of the skeletal system that leads to bone fractures in the wrist, hip, and spinal bones.
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Ha! Laughing is good for you! – Women’s Health – C-Health
Kids get it right, too, according to gelotologists. No, that’s not a scholar of gelatin desserts. Gelotology (from the Greek gelos, which means “to laugh”) is the study of laughter and its effects on our body and mind. As it turns out, laughter provides health benefits that are nothing to snicker at.
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Diabetes – Brain Health – C-Health
At first, people with diabetic retinopathy will not notice any symptoms. As the disease gets worse, they may notice blurred vision, black spots or flashing lights. Eventually, it can progress to blindness. Everyone with diabetes is at risk for diabetic retinopathy, and the risk increases the longer you’ve had diabetes.
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Alzheimer’s disease | vs. Normal Aging | onmemory.ca
It’s important for you to know that many commonly used prescription and over-the-counter medications, as well as naturopathic and alternative therapies, can cause side effects that may affect one’s mental abilities. So be sure to discuss medication use with a doctor if you feel that you are seeing abnormal signs.
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12 Foods With Super-Healing Powers | Caring.com
Kiwifruit is often prescribed as part of a dietary regimen to battle cancer and heart disease, and in Chinese medicine it’s used to accelerate the healing of wounds and sores.
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The 7 Best Healthy Snacks | LIVESTRONG.COM
If you’re feeling hungry between meals, a smart snack doesn’t have to be as boring as a bag of carrot sticks. Here are seven easy light bites that will please both your taste buds and your waistline.
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Benefit Of Fresh Figs | LIVESTRONG.COM
A ripe, fresh fig — tender yet chewy and syrupy-sweet — is a heavenly treat that needs no embellishment. Most of the world’s fig crop is dried, because fig season is short — from late summer to early fall — and the fruit only lasts about a week after harvesting. Make an effort to experience this especially delicious and nutritious fruit when it’s in season.
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Robin is the author of A Parent’s Guide to Raising Money-Smart Kids. From piggy banks to paycheques, this book gives parents the information and skills they need to communicate effectively with their children about important money matters. It will also make parents more aware of their own behavior around money and the type of financial role model they are to their kids currently – and the type of role model they can become.
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Neo40: Is it a miracle supplement? – Seniors’ Health – C-Health
Neo40 is a lozenge that contains L-Citrulline, an amino acid derived from protein, vitamin C, beet root and hawthorn, a potent combination that produces nitric oxide. Early in life our bodies manufacture large amounts of nitric oxide (NO). But after age 40 production of NO decreases. This sets the stage for hypertension, kidney dysfunction, diabetes, heart attack or stroke, just to name a few major illnesses. It’s called the “miracle molecule” because it helps so many diverse problems.
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Money in your 50s: 8 moves to make – 1 – financial management – MSN Money
People in their 50s are usually in their peak earning years, and more than half no longer have kids at home. They’re paying down debt, and their wealth tends to be higher than it was a decade earlier.
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Healthy Aging: 4 Things You Should Do
Everyone knows by now that eating right, exercising, and shunning smoking and other bad habits increases our chances of having a long and healthy life.
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Benefits of nut consumption for people with abdominal obesity, high blood sugar, high blood pressure
For the first time, scientists report a link between eating nuts and higher levels of serotonin in the bodies of patients with metabolic syndrome (MetS), who are at high risk for heart disease. Serotonin is a substance that helps transmit nerve signals and decreases feelings of hunger, makes people feel happier and improves heart health. It took only one ounce of mixed nuts (raw unpeeled walnuts, almonds and hazelnuts) a day to produce the good effects. The report appears in ACS’ Journal of Proteome Research.
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Discovery Health “You Can Avoid Weight Gain When You Quit Smoking”
Although a modest weight gain (5 to 10 pounds) is common, you can take several simple steps to ward off those extra pounds and improve your general health:
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Sleeping Too Little Promotes Weight Gain
Researchers in the U.S. reviewed 18 studies on sleep deprivation — getting less than six hours per night — published over 15 years.
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Aspirin And Cancer: Pill May Treat Types Of Colon Cancer, Study Finds
Aspirin, one of the world’s oldest and cheapest drugs, has shown remarkable promise in treating colon cancer in people with mutations in a gene that’s thought to play a role in the disease.
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Global Risk Appetites Still on the Rise
Friday, October 26th, 2012
by Sober Look
Global risk appetite continues to improve. The CS index is still below the early 2012 LTRO-induced euphoria, but is on the rise nevertheless. The dotted line indicates “panic” level, which is exactly where the index was a year ago (see post from last December).
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| CS global risk appetite index (source: CS) |
Copyright © Sober Look
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TSX Composite Index Has Finally Started Outperforming S&P500 Significantly
Friday, October 26th, 2012
Pre-opening Comments for Friday October 26th
U.S. equity index futures are lower this morning. S&P 500 futures were down 2 points in pre-opening trade. Index futures are responding to concerns about Hurricane Sandy and its potential impact on the U.S. East Coast.
Third quarter earnings reports continue to pour in. Companies that reported after the close yesterday included Expedia, Amazon.com, Apple, Goodyear Tire, Comcast, Cerner, Merck and Legg Mason.
Index futures recovered following release of U.S. third quarter annualized real GDP. Consensus was growth at 1.8% versus 1.3% in the second quarter. Actual was growth at a 2.0% rate.
Japan announced a $5.3 billion economic stimulation program
Apple added $1.96 to $611.50 after reporting slightly less than consensus third quarter earnings but slightly higher than consensus third quarter revenues.
Expedia added $8.75 to $60.00 after reporting higher than expected third quarter earnings. In addition, Raymond James, Lazard Capital and Benchmark upgraded the stock and RBC Capital raised its target price.
Agnico Eagle added $0.07 to $56.43 following an upgrade by CIBC from Sector Underperform to Sector Perform.
Rogers Communication (RCI.B $43.46 Cdn.) is expected to open higher after Goldman Sachs upgraded the stock from Sell to Neutral.
Target added $0.57 to $63.69 after Buckingham upgraded the stock from Neutral to Buy.
Caterpillar eased $0.30 to $83.23 after Goldman Sachs downgraded the stock from Conviction Buy to Buy.
Technical Watch
Expedia, Inc. (NASDAQ:EXPE) – $60.00 gained 17.1% after announcing higher than expected quarterly results. In addition, Raymond James, Lazard Capital and Benchmark upgraded the stock. The stock has a positive technical profile. Intermediate trend is up. The stock is expected to open just below its all-time high at $60.29. The stock is expected to open above its 20 and 50 day moving averages. Short term momentum indicators are recovering from oversold levels. Strength relative to the S&P 500 Index has been positive since the end of April. Preferred strategy is to accumulate the stock at current or lower prices.
![clip_image001[1]](http://www.advisoranalyst.com/glablog/goto/http://www.timingthemarket.ca/techtalk/wp-content/uploads/2012/10/clip_image001115.png "clip_image001[1]")
Rogers Communications, Inc. (TSE:RCI.B) – $43.46 Cdn. is expected to open higher after Goldman Sachs upgraded the stock from Sell to Neutral. The stock has a positive technical profile. Intermediate trend is up. The stock popped earlier this week on better than expected quarterly results. The stock remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought. Strength relative to the TSX Composite Index has been positive since the beginning of May. Seasonal influences are positive. Preferred strategy is to accumulate the stock on weakness closer to previous resistance at $41.19.
Rogers Communications Inc. (TSE:RCI.B) Seasonal Chart
Interesting Charts
The TSX Composite Index finally has started to significantly outperform the S&P 500 Index after a period of underperformance during the past year.
The seasonally weak U.S. real estate sector remains under technical pressure.
![clip_image002[4]](http://www.advisoranalyst.com/glablog/goto/http://www.timingthemarket.ca/techtalk/wp-content/uploads/2012/10/clip_image00243.png "clip_image002[4]")
Toronto Money Show Webcast featuring
Jon and Don Vialoux
Jon and Don presented at the Toronto Money Show last Saturday. Following is a link to a copy of the webcast:
Adrienne Toghraie’s “Trader’s Coach” Column
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Why Not You?
By Adrienne Toghraie, Trader’s Success Coach
There are many professions, businesses and avocations that may be out of your reach, because to be successful at them requires that you have an enormous amount of resources. This is not the case in trading. Yes, you do have to have resources but not those of a Herculean or a Mensa intellectual. So why is it so difficult for most?
They think that it takes a complicated strategy to make a great deal of money.
In my experience most of the best traders that I have worked with
had very simple rules.
They believe that it takes a well-educated person.
I have found that too much book knowledge very often gets in the way.
They are convinced that only those with insider’s information really get a shot at trading success.
Insider information is a key factor for the success of many traders, but I have never worked with such people. And I have worked with many successful traders over the past twenty years being in this business.
They think that you have to start out being super rich.
On this one, I would agree that the more money you have, the faster you can become wealthier, but you still have to have the right foundation. Consistently building on a small amount of capital has been the success story for many of my clients.
Another turtle that won the race
Josh started simulated trading when he was sixteen. He did not have money at the time so he asked his parents for gifts of money for his birthday and holidays. With those meager savings and most of the money he earned during the summer, Josh had a base of five thousand dollars to start trading when he was nineteen. That five thousand grew to over ten million by the age of thirty. Here is how he did it:
· Josh treated trading like a computer game and was thrilled when he learned to beat who he thought of as his opponent, the markets.
· He listened to chat rooms and went to local investment clubs as if he were a reporter getting a story.
· Josh learned to build on his success and the lessons he learned from his failures kept him on a winning course of progress.
· Since discipline was a key factor, Josh created discipline in his trading and in the other areas of his life.
· Josh waited to get proven results from simulated trading before trading real money.
· When Josh was steadily showing a profit for six months, he presented the results at a family party. He picked up another twenty thousand to trade.
· After two years of solid profits, he showed the results to a trading group who hired him to be one of their traders.
Many people have asked me over the years who I consider to be my best clients, and who have received the most benefit from my services. Josh is one of the traders that I would put on the top of my list. I met Josh in one of my Webinars when he was ready to take his trading to a new level and he certainly did.
Conclusion
While most people fail trading the markets, there are those who choose to take the right steps and beat the odds. The fastest way to success is to make good choices, learn from your mistakes and be consistent about your discipline.
Free Webinar –Fear in Trading
Presented by Adrienne Toghraie, Trader’s Success Coach
Tuesday, November 6th at 4:30 pm (NY time)
Register at
http://tradingontarget.omnovia.com/registration/pid=11211347638317
iShares Dow Jones US Real Estate (ETF) (NYSE:IYR) Seasonal Chart
Eric Wheatley’s Listed Options Column
Hi everybody,
I had an email conversation recently with someone who wasn’t happy with his covered calls. I’ll keep the details to myself, but basically this experienced investor got nailed with what is the main disadvantage of writing options to reduce volatility.
He had purchased stock XYZ when it was close to $20. It came down to $14.50 soon thereafter. He was still bullish on the stock, so he decided to keep the position open and wrote some 15-strike calls to cover it, which brought in $1.50.
Of course, the stock rallied back up to the $18-$19 range. If he hadn’t written the calls, he would be close to even, but, having placed a ceiling on his gains at $15, he locked-in a loss. He’s a pretty loyal reader, so he wanted me to comment.
I came up with:
a) You bought a stock, it dropped. Too bad. It happens to everyone. Take it, learn your lesson and don’t dwell on it. It’s happened before and it’ll happen again.
b) When the stock was at $14.50, you made a conscious decision to write a call instead of liquidating the position. You did this because you thought the stock was a good long term hold. You even bought a little more at that price to average your cost basis down (he didn’t buy enough to overcome the loss, but still). As it turns out, you made quite a bit more than if you had taken your losses like the stand-up citizen I know you to be.
c) Writing options comes with the inherent caveat that you’re giving up upside. You’re being compensated for this and, usually, that compensation more than makes up for the gains forgone. In this case however, it didn’t. This happens.
d) Here is where it gets interesting: you like to write longer-dated options. Six months or more. THIS is exactly why that isn’t a great idea.
e)
An option’s time premium erodes at the square root of time. This means that shorter-term options are relatively more expensive than longer-dated options. In practice therefore, selling two three-month calls will bring in more cash than selling one six-month call, notwithstanding transaction and liquidity costs.
The other reason it is better to sell shorter-term options is that the granularity is better. What I mean here is that the valleys as described above won’t be as deep over the long term. There will be occasions when you may get whipsawed, but overall the premiums taken in will smooth out the gaps and you’ll do better.
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A few articles from the Twitter feed from this week:
· The real economic impact of QE3. Aggregate demand, aggregate supply and counterproductive wealth creation.
· A nice historical analysis piece. The lessons of Black Monday 25 years on.
· China’s achilles heel. No matter what happens, this will have to be dealt with sooner or later.
In this week’s French-language blog: gourmet cat food, 99 cents for gas and the problem with the human process of estimation.
Cheers!
Éric Wheatley, MBA, CIM
Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.
eric@jchood.com
514.604.2829;1.855.348.2829
Twitter: @jchood_eric_en
Blogue en français : gbsfinancier.blogspot.ca
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Little knownfact about John Charles Hood #48
John Charles Hood, ummmm, isn’t very interesting this week.
Special Free Services available through www.equityclock.com
Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.
To login, simply go to http://www.equityclock.com/charts/
Following is an example:
Tech Talk’s ETF Column at www.globeandmail.com
Stay tuned tomorrow for an important column focusing on “Buy when it snows, Sell when it goes”. The period of seasonal strength in North American equity markets is approaching. 
Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
Horizons Seasonal Rotation ETF HAC October 25th 2012
Equity Markets Under Obama
Friday, October 26th, 2012
In this Sunday’s New York Times, there was an article titled, “Wall St. May Not Cheer, but Obama’s Been Good for Stocks” by Jeff Sommer that discussed the performance of the Dow Jones Industrial Average (DJIA) during President Obama’s first term in office. The article quoted a report we published in early September that we updated through Friday. The thrust of the story was that although Wall St. and President Obama have had a tenuous relationship since he took office, the stock market has done very well while he has been President. As shown in the chart below, through Friday afternoon the DJIA was up 67.9% since 1/20/09. That qualifies as the fifth best of any US President since 1900. The only four US Presidents who saw a greater return during their first 1,368 days in office were FDR (238.1%), Clinton (88.0%), Coolidge (86.2%), and Eisenhower (68.8%), all of whom were re-elected.
While economic numbers have not seen much improvement under President Obama, the stock market has certainly been working in his favor. While the stock market isn’t a complete reflection of the economy, it is an important indicator, and since we first published this chart, we noted that it is the one chart that Republicans don’t want the public to see (and that Democrats should be highlighting). Unfortunately for the President, though, Wall Street is not very well regarded by the public these days (hence the reason it is so easy for politicians to deride it). As a result of Wall Street’s shortcomings in the category of popularity, there has been little talk of the rally in the stock market under President Obama in any of the prior debates. Given the fact that tonight’s debate is focused on foreign policy, this is most likely to remain the case.
Copyright © Bespoke Investment Group
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Are European Value Stocks Poised for Recovery?
Friday, October 26th, 2012
by Tawhid Ali, AllianceBernstein
October 25, 2012
For the last few years, the sovereign debt crisis in Europe has caused equity investors to flee the continent. Today, that exodus has set up an attractive opportunity for value investors.
By the end of September, European stocks were trading at a 16% discount to global equities based on price/book value, well below their average of the last 24 years. On price/forward earnings, the euro area discount is about 13%—not as provocative but still worthy of attention.
For value investors, the opportunity looks especially compelling. Spreads between the cheapest and most expensive euro-area stocks are wider than at any time in the last four decades except the tech bubble in 2000. The chart below shows the gap between the cheapest 20% and most expensive 20% of the stocks in the MSCI Europe index. In the past, when valuations have moved back towards their long-run average levels and this spread has narrowed, attractively valued stocks have outperformed strongly. Wide valuation spreads can be found in almost every sector, which means you don’t have to concentrate holdings in specific areas (such as cyclically sensitive stocks) in order to position a portfolio for a value recovery.
What’s more, the quality of attractively valued stocks in Europe might surprise you. While we remain wary of troubled companies in so-called peripheral countries, when you exclude Greece, Italy, Spain and Portugal, our research shows that the cheapest quintile (20%) of non-financial stocks has a net debt to equity ratio of 70%. That’s 32% lower than its 30-year average. For these stocks, free cash flow is also surprisingly strong, ranking in the top quintile of the last three decades.
Equity investors in Europe have long been waiting for something to spark a sustainable stock-market recovery. Today I think it’s easier to see the catalysts for a potential rebound. The threat of a sovereign debt default has been alleviated by recent European Central Bank moves, along with the progress (albeit slow) made at various European Union summits in recent months. And with more than €1 trillion deployed to support bank liquidity, the euro-area banking system is also looking much more secure.
Of course, structural reform is the trickiest part. But given that we’ve seen significant progress on the first two components of reviving confidence, I think that further progress on structural reform in the periphery may be catalysts for a recovery in equities. Against this backdrop, I think the time is right to hunt for attractively valued opportunities with strong underlying fundamentals.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
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.
Tawhid Ali is Director of Research, AllianceBernstein European Value
Copyright © AllianceBernstein
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How Risky are Safe Stocks?
Friday, October 26th, 2012
October 24, 2012
by John Wightkin, Director of Equity Research Applications, Schwab Center for Financial Research
Key Points
- Stocks with higher dividend yields and lower price volatility are often thought of as “safe” stocks, but in the current environment, that may no longer be the case.
- In a quest for investment income, investors have pushed the valuation of higher-yielding stocks to their priciest levels in years.
- Valuation concerns could also be surfacing in several of the more-defensive sectors, such as utilities.
Stocks with higher dividend yields and lower price volatility are often thought of as “safe” stocks—especially stocks in defensive sectors such as utilities. It’s not surprising that these types of stocks have been popular over the past few years, given still-fresh memories of the severe bear market, low interest rates and uncertainty surrounding the US economy and the European sovereign debt crisis.
In this search for yield and less price variability, however, a new risk could potentially develop: valuation risk. This may yield unpleasant surprises for investors. Think of a popular restaurant: from the outside, it may appear to be a blessing to the owner. However, crowded tables and long wait times might introduce other problems for the owner and employees that aren’t obvious to patrons.
Let’s examine valuation risk in a bit more detail and see how we might manage it.
Valuation matters
Valuation risk is an investment tenet investors sometimes misunderstand or ignore. It occurs when a stock becomes overvalued relative to its underlying fundamentals, which can increase the likelihood of it underperforming less-expensive stocks going forward.
Research we conducted has shown that stocks with price/earnings (P/E) ratios in the top 20% of all stocks underperformed, on average, stocks with P/E ratios in the lowest 20% by close to 4% annually.1
So historically, paying up for stocks has often led to disappointments.
Dividend valuations
What does this mean for dividend-paying stocks? Plenty. In a quest for investment income, investors have pushed the valuation of higher-yielding stocks to their priciest levels in years.
To illustrate this point, we divided the top 1,500 stocks by market capitalization into five segments based on their current dividend yield. We then measured the median P/E (based on trailing 12-month earnings) for each segment. We conducted this analysis for each month from January 1990 to July 2012.
The chart below shows the ratio of the median P/E for the highest-yielding stock segment (High Yield) to the median P/E for the market (the top 1,500 stocks ranked by market cap). A reading of 0.8, for example, means that the P/E for High Yield is 80% of the market; that is, it trades at a 20% valuation discount. A higher ratio also indicates a richer relative valuation for the highest-yielding stocks.
High-Yield P/E Divided by Larger Market P/E
Source: Schwab Center for Financial Research, data from January 31, 1990 through July 31, 2012. Larger market defined as top 1,500 stocks by market capitalization.
Normally, as the graph demonstrates, High Yield has traded at close to a 30% valuation discount to the overall market. The reason is that higher-yielding stocks are usually associated with more-mature, slower-growing companies that the market has historically valued at lower P/E ratios.
At the end of August, the discount shrunk to 10%, a valuation level not reached anytime in the past 22 years. At these valuation levels, investors seeking higher yields might want to exercise some caution.
Buying stocks just for their higher yields could leave you disappointed with your stocks’ total returns going forward. For example, if the relative valuation were to drop back to historical averages, all else being equal, a high-dividend-yield portfolio would experience close to a 20% loss relative to the market. For a portfolio yielding 5%, it could take close to four years of income to recoup this loss.
Sector valuations
Valuation concerns could also be surfacing in several of the more-defensive sectors, such as utilities, as a result of investors seeking higher yields and lower price swings. To see the evolution of this risk, we calculated the monthly median P/E for the stocks in each of the 10 sectors from January 1990 to July 2012. We then compared the median P/E for the utilities sector to that of the market (defined again as the top 1,500 stocks ranked by market cap).
As the chart below shows, the utilities sector normally trades at a 20–40% valuation discount to the market—not surprising given the sector’s slower-growth companies. Recently, though, investors have been willing to pay relatively more for the higher yields and relatively lower price variability historically associated with utility stocks.
Utility Sector P/E Divided By Larger Market P/E
Source: Schwab Center for Financial Research, data from January 31, 1990 through July 31, 2012. Larger market defined as top 1,500 stocks by market capitalization.
Utility stocks, in aggregate, are currently not only trading at a median P/E greater than the market, but at the highest relative valuation level in the past 22 years. During that time, utilities traded at premium valuation to the market only one other time—the start of the economic crisis in late 2008 and early 2009.
Although this historically high valuation level can continue for a while, the increased chance of underperforming going forward should give pause. All else being equal the valuation may fall back to its historical average and we think utility stocks could lose a third of their value to the market.
Lower volatility valuations
A final area of potential concern is the current high valuation of low-beta stocks—those with lower price variability relative to the market.
In the chart below, we show the median P/E of low-beta stocks relative to the median P/E for the highest-beta stocks. Using the same group of 1,500 stocks, we defined the lowest-beta stocks as the 20% with the lowest beta, and the highest-beta stocks as the 20% with the highest beta.
Low-Beta P/E Divided by High-Beta P/E
Source: Schwab Center for Financial Research, data from January 31, 1990 through July 31, 2012. Top 1,500 stocks by market capitalization.
Our research indicates that since 1990, low-beta stocks have usually traded at a P/E 30-40% lower than higher-beta stocks because they were associated with slower-growing firms that the market has valued at lower P/E ratios.
Currently, low-beta stocks are trading at a P/E 25% greater than the high-beta P/E! Again, the only time we saw higher valuations for low-beta stocks was during the recent economic crisis. It was right after this period that the market bottomed and low-beta stocks underperformed their higher-beta brethren.
At these valuation levels, investors appear to be paying up for low-beta stocks with little regard for the potentially higher earnings growth opportunities historically associated with higher-beta stocks. Should relative valuations fall back to historical averages, low-beta stocks could lose close to half their value relative to high-beta stocks.
Managing the valuation risks
Collectively, investors appear to have pushed valuations levels of “safe” high-yield and low-beta stocks to high levels that are unprecedented, positioning their portfolios for possible future disappointment. However, knowing which valuations are cause for concern should help you better navigate these risks.
Here are some guidelines on how you might be able to better manage these risks:
- Pay attention to the valuations you’re paying for any investment—valuations at the high end of a stock’s historical range could be a warning sign.
- Be aware of your sector allocations; try not to overweight sectors where valuations may be stretched. Many stocks with higher dividends or lower price variability can be found in more-defensive sectors, which tend to be overrepresented in some low-volatility exchange-traded funds.
- If you still want to own more-defensive-type stocks, try to favor those with higher-quality financial statements and more reasonable valuations. Clients can find some of them using our online stock screener and screening for A and B rated stocks with higher yields and lower beta.
- Take a contrarian approach and consider investing in more-cyclical stocks that have higher beta. Again using the screener, you can screen for A and B stocks with betas greater than one.
Important Disclosures
Schwab Equity Ratings use a scale of A, B, C, D and F, and are assigned to approximately 3,200 US-traded stocks headquartered in the United States and certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Schwab’s research outlook is that A-rated stocks, on average, will strongly outperform, and F-rated stocks, on average, will strongly underperform the equities market during the next 12 months. Schwab Equity Ratings are not personal recommendations for any particular investor. Before buying, investors should consider whether the investment is suitable for themselves and their portfolio. Schwab Equity Ratings should only constitute one component in your own research to evaluate stocks and investment opportunities. From time to time, Schwab may update the Schwab Equity Ratings methodology.
The information provided is for general informational purposes only and should not be considered as an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results.
The Schwab Center for Financial Research is a division of Charles Schwab and Co., Inc.
Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co. may in its sole discretion re-set the vote count to zero or remove the modules used to collect feedback and votes.
Copyright © Schwab Center for Financial Research
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FOMC in Denial
Friday, October 26th, 2012
by Axel Merk, Merk Funds
October 25, 2012
The FOMC has crossed the Rubicon: our analysis suggests that the Federal Open Market Committee is deliberately ignoring data on both growth and inflation. At best, the FOMC’s intention might have been to not rock the markets two weeks before the election. At worst, the FOMC has given up on market transparency in an effort to actively manage the yield curve (short-term to long-term interest rates):
- On growth, economic data, including the unemployment report, have clearly come in better than expected since the most recent FOMC meeting. FOMC practice dictates that progress in economic growth is acknowledged in the statement. Instead, the assessment of the economic environment is verbatim. Had the FOMC given credit to the improved reality, the market might have priced in earlier tightening. The FOMC chose to ignore reality, possibly afraid of an unwanted reaction in the bond market.
- On inflation, the FOMC correctly points out that inflation has recently picked up “somewhat.” However, it may be misleading to blame the increase on higher energy prices, and then claim that “longer-term inflation expectations have remained stable.” Not so, suggests an important inflation indicator monitored by the Fed and economists alike: 5-year forward, 5-year inflation expectations broke out when the Fed announced “QE3”, its third round of quantitative easing where the emphasis shifted from a focus on inflation to a focus on employment. This gauge of inflation measures the market’s expectation of annualized inflation over a five year period starting five years out, ignoring the near term as it may be influenced by short-term factors:
The chart shows that we have broken out of a 2 standard deviation band and that the breakout occurred at the time of the QE3 announcement. In our assessment, the market disagrees with the FOMC’s assertion that longer-term inflation expectations have remained stable. At best, the FOMC ignores this development because they also look at different metrics (keep in mind that the Fed’s quantitative easing programs manipulate the very rates we are trying to gauge here) or has a different notion of what it considers longer-term stable inflation expectations. At worst, however, the FOMC is afraid of admitting to the market that QE3 is perceived as inflationary.
In our assessment, inflation expectations have clearly become elevated. Ignoring reality by ignoring growth and inflation may not be helpful to the long-term credibility of the Fed. Fed credibility is important, as monetary policy becomes much more expensive when words alone don’t move markets anymore.
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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 opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Merk Investments LLC makes no representation regarding the advisability of investing in the products herein. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice and is not intended as an endorsement of any specific investment. The information contained herein is general in nature and is provided solely for educational and informational purposes. The information provided does not constitute legal, financial or tax advice. You should obtain advice specific to your circumstances from your own legal, financial and tax advisors. As with any investment, past performance is no guarantee of future performance.
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SIA Stock Bulletin: Mastercard (MA) (October 26, 2012)
Friday, October 26th, 2012
SIA Charts Daily Stock Report (siacharts.com)
Mastercard (MA) - After a short stint in the Neutral zone in the SIAS&P100 Report, Mastercard (MA) has had an impressive February now in the 8th spot. Having now moved through its last target resistance point at $408.60, the next resistance level is at $451.12. Support is now at $385.03 and again at $335.19.
*** Although Mastercard did move down into the Neutral zone it did not trigger our technical stops and remained a valid holding.
Since we last looked at Mastercard (MA) 3 weeks ago, MA has moved onto new highs and is getting closer to its next target resistance at $505.46. Support is now at $440.03 and again at $390.74.
Green – Favoured Zone
Yellow – Neutral Zone
Red – Out of Favour Zone
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