Friday, August 3rd, 2012
by Mark Gongloff, Huffington Post
People hate stocks more than at any time in the past quarter century. That could mean it’s a decent time to buy them. Wall Street’s optimism about the stock market is the lowest it has been since at least 1985, according to a research note on Wednesday by Bank of America’s stock strategist Savita Subramanian. The bank measures market agita by tallying how much stock strategists are recommending their clients buy stocks.
In the Bank of America chart at the bottom of this post, you can plainly see that sentiment has absolutely plunged this year. Stock-market strategists are almost always bullish on the stock market, in part because if nobody is buying stocks, then there’s not much point in having stock-market strategists, is there? They’d have to go home and sit on their couches. But today, these same strategists are so spooked by the European debt crisis and the fiscal cliff and whatever else — Obama, or something — that they are recommending clients sell stocks, more than they did even during the financial crisis or the dot-com bubble bursting or after the 9/11 terrorist attacks.
Typically, you’re going to get some pretty good bargains in stocks when you’ve got so little competition for them, Subramanian writes. She would be one of the dwindling breed of bullish strategists: “Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism.” Speaking of contrarian indicators, on Tuesday Pimco founder Bill Gross, manager of the world’s biggest bond mutual fund, declared, “The cult of equity is dying.” He warned that carnival barkers promising you annual returns of 6 percent to 7 percent every year in stocks were lying to you, that you should get those people out of your lives immediately. This is the same Bill Gross that predicted interest rates would soar last year (spoiler: they didn’t) and then put his money where his mouth was, taking a big hit to his fund’s performance and his reputation in the process.
Copyright © Huffington Post
Tags: 9 11 Terrorist Attacks, Agita, Bank Of America, Barkers, Buying Stocks, Couches, Debt Crisis, Decent Time, Financial Crisis, Founder Bill, Good Bargains, Huffington Post, Market Strategists, Obama, Optimism, PIMCO, Quarter Century, Savita Subramanian, Stock Market, Strategist
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Friday, July 20th, 2012
July 19, 2012
by Mark Eidem, CMT, CFA, Active Trader Market Manager, Charles Schwab
- Learn how to execute a short sale and the risks involved.
- Find out how to research short sale candidates using StreetSmart Edge®.
- Understanding short sale mechanics may help you enhance your ability to identify changes in stock trends.
A common saying on Wall Street is: The bulls ride the escalator and the bears ride the elevator—meaning that markets tend to decline faster than they rise. Short selling is a technique that traders can use to profit during these periods when the markets in general or a stock in particular declines.
Here, we’ll take a look at how short selling works, as well as the risks involved. We’ll also discuss how to research potential short sale candidates using the tools in StreetSmart Edge.
What is short selling?
Many traders focus only on buying stocks, which is also referred to as “buying long,” because the shares are said to be held “long” in their account. In this scenario, the goal is to buy low and sell high.
Selling short is the same concept, but with the sequence reversed. Traders identify a stock that they think may decline. Then, they borrow the stock from their brokerage firm and sell it with the expectation of buying it back later at a lower price and thereby realizing a profit.
The mechanics of short selling
As we mentioned, in order to sell a stock short, the trader must be able to borrow shares of that stock from his brokerage firm to deliver to the buyer of those shares. As a result, short selling may only be accomplished in a taxable, margin-enabled account. Selling short may not be done in retirement accounts, where margin borrowing agreements are prohibited by IRS regulations.
Any short sale must be marked as such on the order entry ticket in order to distinguish short-sold shares from shares sold long from a trader’s account. For example, review the order entry in the StreetSmart Edge trading window below.
Order Entry: Sold Short
Source: StreetSmart Edge.1 See disclosures below.
In order to close out a short sale, or “cover” a short position, a trader would simply buy shares of the stock. There’s no distinction between buying to cover a short position and buying to initiate a new long position.
The risks of short selling
It’s important to know the risks of short selling. The most obvious risk is that instead of declining the stock might rise, forcing the trader to buy it back at a higher price than the short sale was initiated, resulting in a loss of capital. On the surface, this seems no different than buying the stock with the expectation it will rise in value, only to see it decline instead. However, with short selling there’s a catch.
When you are long a stock, if it declines to zero, the most you can lose is 100% of your investment. If you are short a stock, the stock price can theoretically rise an unlimited amount, potentially resulting in more than a 100% loss.
This is the first of several reasons why I believe short selling is more difficult than buying long.
Now let’s turn our attention to the not-so-obvious risks of short selling. The first is that shares may be unavailable to borrow in order to sell short and the trader may not be able to initiate a short sale. In this case, shares are said to be “hard to borrow.”
Another not-so-obvious risk is that once shares have been borrowed and a short sale has been initiated, a trader can receive a “forced buy-in.” This means that the original owner of the shares borrowed through the margin account wishes to sell them, and no other shares are available to lend. The trader who shorted the borrowed shares is then forced to buy those shares back and cover his short position so that the original owner is not inconvenienced. The short seller has no control over this event and it may occur at any time.
Additionally, if the stock pays a dividend, the short seller is responsible for paying the dividend, which adds to the cost of a short sale and reduces the potential return.
The short selling process
In previous articles, we discussed trading as a four-step process:
- Screen: Look for new companies to consider
- Research: Analyze these companies using both fundamental and technical analysis
- Execute: Plan and execute your trade
- Monitor: Evaluate if the trade is still valid and adjust as needed
We can also apply this process to short selling, but we’ll be looking for companies possessing the opposite characteristics of those we would want to buy long. When we screen for new short sale candidates, we look for companies with poor and deteriorating business fundamentals and stocks in confirmed downtrends.
As we research these companies with an eye toward short selling, our mission is to confirm that the characteristics we spotted in the screen are, in fact, negative.
Then, as we plan to execute our trades, we need to identify entry points, price targets for potential profit, and most importantly—stop-loss points for exit. However, in the case of short selling our stop-loss exit is above our entry price and our price target is below. We must be mindful that the stock in question can potentially rise much more than it can potentially decline.
In monitoring short sales, traders must watch for any trend change back to an uptrend.
Short selling in action: StreetSmart Edge tools
Let’s take a more in-depth look at the second step in the process—research. StreetSmart Edge’s tools can help you streamline your trading and quickly evaluate both fundamental and technical data.
When you click on the “Launch Tools” button below, you can see a list of the tools in StreetSmart Edge. Here, we’ll look at the “Research” and “Chart” tools to help you understand the fundamental picture of a company and the technical prospects of its stock.
Source: StreetSmart Edge.
Let’s first review the Research tool, which can help us evaluate how a company is performing as a business—often referred to as “fundamental analysis.” While there are many metrics in fundamental analysis, perhaps one of the most important is the earnings per share (EPS) growth. Eventually, a stock’s price is likely to move in the same direction as the company’s EPS—higher or lower. A closely related fundamental metric is, “sales growth over the past year and/or quarter.” When looking for short sale candidates, traders should consider companies with negative EPS growth and sales growth rates.
The Research tool has four tabs of fundamental analysis data and in the screenshot below, the “Metrics” tab has been selected. Please note that this is a partial screenshot and that more data is available on this screen.
In the example of Hewlett-Packard (HPQ) shown below, EPS growth has declined by over 36% year-over-year (yoy) and sales have declined by 3% both for the quarter and for the year. These are the attributes of a potential short sale candidate but before placing the order, we need to evaluate the trend in price, which is part of technical analysis.
Look at the Fundamental Metrics
Source: StreetSmart Edge.1 See disclosures below.
While fundamental analysis looks at the business performance of the company, technical analysis can help evaluate how the stock itself is performing. Even if the fundamentals are poor, the stock could still be in an uptrend, especially in a bull market. Selling short into an uptrend is exactly the same problem as buying a stock that is in a downtrend—fighting the trend!
Another common problem that can make short selling more difficult is when the stock has already declined significantly. In this case, because the stock can only fall to zero, much of the move may have already happened. Remember that a stock will only go to zero in the case of total bankruptcy. But it can often limp along at low prices for years.
A short sale should be placed early in the downtrend or not at all. Remember the adage that, “Bears ride the elevator.” Downtrends tend to be sharper and steeper than uptrends and if you miss the early part of the move after the trend changes, your best bet may be to avoid a short sale.
This is exactly the case for Hewlett-Packard (HPQ), as shown in the chart below. The stock has dropped by half since the trend changed to down in March 2011, but the majority of the decline occurred within the first six months of the downtrend.
Look at the Trend
Source: StreetSmart Edge.
Short selling can be an interesting way to potentially profit in declining markets, but it’s important to understand the risks. In addition, I believe that as traders understand the concept of short selling and how to apply it, they may be able to improve their overall results by enhancing their ability to identify changes in stock trends.
Until next month, good luck and good trading!
1. All stock and option symbols and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.
Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.
Schwab does not recommend the use of technical analysis as a sole means of investment research.
Past performance is no guarantee of future results.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.
The information presented does not consider your particular investment objectives or financial situation, and does not make personalized recommendations. Any opinions expressed herein are subject to change without notice. Supporting documentation for any claims or statistical information is available upon request.
Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk. For more information please refer to your account agreement and the Margin Risk Disclosure Statement.
Schwab’s StreetSmart Edge® is available for Schwab Active Trading clients. To qualify as a Schwab Active Trading client, you must commit to making a minimum of 36 online equity or options trades per year. Call 888-245-6864 to qualify. Access to Nasdaq TotalView® quotes is provided for free to non-professional clients who have made 120 or more equity and options trades in the last 12 months, or 30 or more equity and options trades in either the current or previous quarter, or who maintain $1 million or more in household balances at Schwab. Schwab Active Trading clients who do not meet these requirements can subscribe to Nasdaq TotalView quotes for a quarterly fee. Professional clients may be required to meet additional criteria before obtaining a subscription to Nasdaq TotalView quotes. This offer may be subject to additional restrictions or fees, and may be changed at any time. The speed and performance of streaming data may vary depending on your modem speed and ISP connection. Access to electronic services may be limited or unavailable during periods of peak demand, market volatility, systems upgrades or maintenance, or for other reasons.
Tags: Brokerage Firm, Bulls, Buying Stocks, Charles Schwab, Declines, Elevator, Entry Ticket, Expectation, Focus, Irs Regulations, Margin Account, Mechanics, Periods, Retirement Accounts, Stock Trader, Stock Trends, Wall Street
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Wednesday, April 4th, 2012
Courtesy of Lee Adler of the Wall Street Examiner
In today’s conomic news, the mainstream media focused on the disappointment surrounding the FOMC Minutes, the massaged and sanitized fairy tale about what the participants said at last month’s FOMC confab. The market was shocked! SHOCKED! that most of the members saw no need for additional QE, unless things got worse. I had concluded that a couple of months ago based on the fact that every time QE speculation arose, not only did stocks rally, but so did energy and other commodity prices. The commodity vigilantes, I thought, would tie the Fed’s hands. That and the fact that the conomic data was coming in relatively perky, at least in terms of the headline data, made it highly unlikely that the Fed would do any more money printing.
But here’s the thing. The minutes are fake. They are fabricated, false, phony, and sterilized garbage, designed for public consumption. To put it bluntly, they’re propaganda. They are what the Fed and Wall Street casino owners want you to think. They are a blatant attempt to manipulate the behavior of market participants through the use of clever turns of phrase. The Fed wants the market to go higher, but it doesn’t want commodities to go with it, so its story line is that the conomy is healthy enough to continue growing without more QE. That gives traders reason to continue buying stocks, and no reason to buy commodities, which everyone “knows” go up when the Fed prints, in spite of Bernanke’s denials. And besides, commodities are up for other reasons, not anything Ben did, according to Ben.
That’s what these “minutes” are about, self justification and market manipulation. We won’t know the real story until February 2018 when the Fed will release the transcripts of this year’s FOMC meetings. Why do they hold them back for at least 5 years? Because the Fed thinks that you can’t handle the truth. The problem is that you can and they just don’t want you to know what it is, because if you did, you’d be able to make informed investment decisions. The decisions the Fed wants you to make are to buy stocks, bay and hold Treasuries, and sell commodities. They tailored the minutes accordingly, so that the headlines would elicit the desired response. They think that they’re Pavlov, and we’re the dogs.
Admittedly, I have not yet read the minutes (I will for this weekend’s Fed Report), but I have read the news headlines. Those headlines are what the Fed-Wall Street-Media-Industrial Complex wants you to think, so you really don’t need to read the minutes. Rest assured that the Fed got the propaganda it wanted. The market reaction it wanted it hasn’t yet gotten, yet, but the Fed is betting that it will, and therein lies the rub. The Fed doesn’t always get what it wants. If traders decide to sell the Dow off 200 points in response to this news, then the next morning, the Fed’s ventriloquist dummy, Jon Hilsenrath, will float another QE3 trial balloon in the Wall Street Urinal.
So we’ll just have to see how traders respond. As for what the Fed really thinks, sorry, that will have to wait 6 years.
Meanwhile, the other datapoint the conomists focused on today was February Factory Orders. This is an item based on a Census Bureau monthly survey of a tiny sampling of US manufacturers that extrapolates that sample into a total dollar estimate of new orders and other metrics. The Bureau reports both the seasonally adjusted result and the actual result, also known as not seasonally adjusted. The only number the pundits and media pay attention to is the seasonally adjusted, fictional number. That’s just wrong, but that’s the way it is. It gives us the opportunity to look at the actual data and know what’s really going on, rather than the smoothed fiction that the Wall Street mouthpieces present on a silver platter as if it’s the grail.
The headline number for February was a 1.3% month to month increase, seasonally smoothed. That was a miss. The conomic consensus was for a gain of 1.5%. But this is a minor item in the conomic firmament–durable goods orders out the week before are more important–and the pundits managed to spin it as bullish anyway. The bullishness is wild and universal, nary a contrarian to be found in the pages of the Murdoch, Bloomberg tout sheets.
The headline number isn’t always wrong or misleading, and as it turns out, the actual, not seasonally adjusted gain in February was impressive, up 4.7% from January and up 10.6% over February 2011, both in real terms adjusted by CPI inflation. The 4.7% monthly gain compared with a decline of 0.7% in February 2011. Over the prior 10 years, monthly changes in February ranged from last year’s -0.7% to a high of +4.9% in February 2004. Any way you slice it this was a good number. Did the warm weather in February have anything to do with that? Certainly, but it’s impossible to say how much. If it pulled demand forward from March and April, we’ll see that in the next month or two.
I thought it would be interesting to overlay the ISM’s not seasonally adjusted New Orders Index on the chart of new factory orders. I am using the factory orders not seasonally adjusted data, but adjusted for inflation in order to see the real change in unit volume over time. The ISMsurvey should lead the Factory Orders. The ISM data is for March. It turns out that the correlation with the between the ISM New Orders Index, and the 12 month rate of change in the Commerce Department’s New Factory Orders data is pretty close. Lately, however, the ISM data suggests greater weakness than has been showing up in the government data. Who’s right? I don’t know, but as with the ISM and the 50 line on its chart, an annual change in factory orders of more than 1 to 2%, tends to correlate with an ongoing uptrend in stocks. It will be time to start worrying when the growth rate closes in on zero. That has correlated with a topping process in stocks.
Manufacturing activity lags stock prices. By the time new factory orders go negative, stocks will have already gone through their first leg down. Consumers and businesses take their cues from the stock market, and the stock market takes its cues from the Fed.
Everybody thinks that Dr. Bernankenstein’s monster alphabet soup experiments, and Henry Paulson’s TARP saved the world from conomic collapse. The fact is that they caused, or at least exacerbated the conomic collapse. Take the manufacturing orders data as an example of how that unfolded.
The manufacturing conomy was doing just fine until Bernanke stopped feeding the Primary Dealers and actually starved them out early in 2008. He did that by paying for his crazy alphabet soup programs with cash from the Fed’s System Open Market Account. In selling and redeeming Treasuries from the SOMA he radically shrank the cash levels in Primary Dealer accounts, rendering them unable to maintain orderly markets. The dealers are, after all, not just market makers in Treasuries. They run all the markets, stocks, bonds, commodities, futures, options, everything. They are the big mahoffs of all the markets, and Ben is their banker and bagman.
So manufacturing was doing just fine in 2007 and 2008 until stocks broke down. Stocks broke because of the combination of the Fed starving out the Primary Dealers in late 2007 and the first half of 2008, followed by Henry Paulson’s bravura panic performance before House and Senate committees, convincing Congress to fund the $700 billion TARP. Bernanke was best supporting actor at those hearings.
Faced with the testimony of the two dynamite strapped suicide extortionists, Congress caved, and the Treasury raised that money in a few short weeks in September and October 2008. That forced the dealers (and others) to absorb $100-200 billion a week of new Treasury supply at a time when the Fed had already cut their balls off. They were in no position to absorb anything. The Fed had taken their manhood and all their cash.
In order to perform their function as Primary Dealers and absorb that part of the new Treasury supply not purchased by others, the dealers had no choice but to liquidate stocks. Because most economic units, both individual consumers and businesses, base their purchase decisions on the stock market, when it cratered that was their signal to consumers and business to be scared, be very scared, and hunker down in fear in their mental bunkers.
Manufacturing orders were still very strong in June 2008. They didn’t collapse until after Bernanke and Paulson triggered the panic. In October 2008, they collapsed on the heels of the Bernanke-Paulson Panic.
The Fed finally figured it out in February 2009, and it started a radical program of pumping hundreds of billions into the accounts of the Primary Dealers with QE1. The stock market and manufacturing orders rebounded almost immediately. When the Fed experimented with withholding funds in mid 2010, stocks plunged and manufacturing activity stalled. Double dip fears exploded and the Fed resumed pumping cash into dealer accounts.
Flash forward to today and the Fed is again on hold, although its MBS replacement purchase program helps to keep the dealers liquid. The effect of that program on dealer accounts is not reflected in the SOMA, but it does send cash to dealer accounts. The effects of the program on stock prices are clear.
The issue now is when will the Fed make its next catastrophic blunder. Just by tapping the brakes on the SOMA, it is creating conditions for another swoon. It is trying to hold back commodity prices while getting the benefit of conomic growth. The problem is that that growth is a second order bubble effect of the rising stock market. If they don’t feed the market, they won’t get their conomic growth. If they do feed the market, commodity prices will explode upward, and that will eventually put a stake in the heart of growth. For now, manufacturing activity is on a growth track. On the surface it appears that the Fed’s propaganda and manipulation is working, but in truth Bernanke has laid the groundwork for the Fed’s next blunder, panic move, and massive dislocation.
Copyright © 2012 The Wall Street Examiner. All Rights Reserved. This article may be reposted with attribution and a prominent link to the source The Wall Street Examiner.
Tags: Bernanke, Blatant Attempt, Buying Stocks, Casino Owners, China, Commodities, Commodity, Commodity Prices, Conomy, Denials, Fairy Tale, Fomc Meetings, Fomc Minutes, Lee Adler, Mainstream Media, Market Manipulation, Market Participants, Money Printing, Public Consumption, Qe, Self Justification, Street Casino
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Tuesday, April 3rd, 2012
by Peter Tchir, TF Market Advisors
So when will retail investors start buying stocks? One of the final legs propping up this rally is the belief that retail investors will finally pile into stocks. There is hope that all this “money on the sidelines” will find its way into the stock market. The S&P at 1,350 was supposed to do the trick. Certainly 1,400 on the S&P was going to be enough to chase retail investors into stocks. Basically the argument that retail will capitulate and finally invest in stocks is based on the assumption that higher prices increase demand – aka, a Giffen Good.
Is it realistic to assume that investors will decide to purchase more of something just because the price has gone up? They did it in 2000 with internet stocks, that infatuation ended badly. They did it with housing in the mid 2000′s, which ended even worse. If anything, Americans have become more focused on buying things on sale and getting things at a bargain. Why shouldn’t that apply to stocks as much as it applies to anything else?
We have hit multi year highs, yet most people seem to shrug it off. If the retail investor was about to increase their allocation to stocks, do you not think there would be more hype in the media about how well stocks have done? Expecting “the masses” to buy just because something is already up 20% seems a little silly, if not downright arrogant. The retail investors are not stupid. They can also see that the stock market has decoupled from the economy. While professional investors can easily accept that, retail investors still have some level of conviction that the stock market should reflect economic activity and not just central bank printing and government spending. Retail investors can see that the U.S. debt has continued to grow and that in spite of lip service to deficit reduction, we are creating a bigger deficit. They are nervous about what will happen when finally the spending gets pulled in. They are also very nervous (as are many professional investors) that they will be the last purchase of stocks before the central banks stop pumping fresh money into the system in their never ending attempt to inflate asset prices.
If there is one sector where the upward price movement is sucking in more money it is amongst corporations themselves. The number and size of buyback announcements seems to be increasing. That makes sense, since if any group has shown an ability to buy high and sell low, it is corporations themselves. In 2007 and the first half of 2008, companies, including AIG, were buying back their own stock aggressively. From the second half of 2008 and all of 2009, most companies couldn’t afford to buy back shares and many had to issue. It is just wrong to expect individuals to be as frivolous with their money as corporations are.
I continue to believe that retail is reasonably allocated to equities, under the new allocation model. The new allocation model takes into account debt before determining what is investible. Then there is an actual allocation to ultra-safe “rainy day” money. That “investible” money is then allocated at a much more realistic percentage to equities and fixed income and “other investments”. A myriad of new investment vehicles have helped make it easier for investors to participate in the fixed income market and other asset classes, helping to ensure that the allocation to those remains higher than it was through the 90′s and the first part of this century.
I do not believe stocks are a Giffen good, at least when it comes to retail, so expecting “dumb” money to come in and take out the “smart” money may be just as paradoxical as a Giffen good.
The market is a little weaker again this morning, so I better type quickly, since the “Europe went home” rally now starts before Europe goes home.
Chinese service PMI came in strong, but no one really cares about China as a service economy, so that news was largely shrugged off.
Eurozone PPI came in slightly higher than expected and last month was revised slightly higher as well. Nothing too earth shattering, but rising inflation with falling employment makes for a very bad combination.
Spanish bond yields are once again under pressure – as they should be. Italy is also feeling weaker again. In 10 years Spain is back to 5.40% and Italy is at 5.15%, out by 5 and 7 bps respectively. We have seen support, whether normal market support, or central bank purchase support around the 5.20% and 5.45% levels in the past few days, so need to keep a close eye on these levels. Spain is underperforming more noticeably in the 5 year sector, but still trades at 4.19% compared to Italy at 4.32%. Yes, Spain yields more in 10 years than Italy, but less in 5 years. Spanish 5 year CDS is at 436, but Italian 5 year CDS is at 388. So the 5 year bond inversion is clearly an anomaly and a function of supply and demand and an obvious sign of how inefficient bond prices are. There are so many “technicals” at work in the bond market that it is extremely hard to separate what part of price is reflecting risk as perceived by the market and what part is influenced by other non market factors. That is one reason CDS is so popular – it is fungible and not constrained by who holds what issue.
CDS indices are all a little bit better today. European ones were largely catching up to the afternoon move tighter here. IG18 is trading even richer to fair value. This shows a lack of conviction in the rally by the market as a whole since it looks like investors want to set their longs in the most liquid product giving them the greatest ability to exit if necessary. At 7 bps rich with a spread of 90, investors are overpaying for that liquidity. Look for IG18 to continue to lag.
Other anecdotal evidence of this tentative conviction can be seen in the bond markets, where once again, new issue trading is dominating daily flows. Investors have their core longs in bonds, add beta via the index, and look for alpha on new issue allocations and flipping. While not bad in of itself, it is not a sign of a truly healthy market. The ETF’s continue to get some inflows, but the pace has slowed dramatically and much of it can be accounted for by dividend re-investment and “arb” activity. While the ETF’s remain at a premium, “arbs” are buying the bonds that the ETF is willing to accept and exchanging them for new shares, which they then sell into the market. That form of share creation is far less indicative of strength in the market, than when people are truly just buying shares and leaving dealers and ETF managers scrambling to find bonds. That is a subtle, but important difference.
Copyright © TF Market Advisors
Tags: Amp, Assumption, Buying Stocks, China, Conviction, Deficit Reduction, Economic Activity, ETF, ETFs, Giffen Good, Giffen Goods, Hype, Infatuation, Internet Stocks, Invest Stocks, Lip Service, Mining, Professional Investors, Retail Investor, Retail Investors, Sidelines, Spite, Stock Market, Tf
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Tuesday, March 20th, 2012
by Jeffrey Saut, Chief Investment Strategist, Raymond James
March 19, 2012
“Poor Grenville runs a fund, one of a group of funds, and he is in charge of $100 million or so.
… I asked Charley why Grenville was suddenly Poor Grenville.
‘Poor Grenville,’ said Charley, ‘has gotten caught with twenty-five million in cash. It’s a disaster. How would you like to have twenty-five million in cash with the Buy Signals you’ve just seen? Poor Grenville has to lose his cash, right away.’
I know it sounds little funny that having $25 million in cash is a disaster. It sounds just as funny to me as the phrase ‘lose cash.’ When it isn’t your cash in the first place and all you are doing is taking the cash – somebody else’s – and buying stocks with it. But professional money managers love to say, ‘We lost five million in cash this afternoon,’ meaning they bought stocks with it. I guess it sounds professional.
… As to why Poor Grenville’s $25 million in cash was a major disaster that is more comprehensible. Grenville should have all $100 million fully invested if the market is coming off the floor; his fund is ‘performance-oriented,’ trying for big capital gains. If Poor Grenville has $25 million in cash he guessed dead wrong at the bottom of the market, and in one career you don’t get too many chances like that. Poor Grenville had gotten himself all ready for a big drop in October and now in January the market turned around and ran away without him. He has to make it up in a hurry.”
… The Money Game, by Adam Smith 1967
Can you imagine all the “Poor Grenvilles” out there desperately trying to “lose cash” as the S&P 500 (SPX/1404.17) broke out to a new reaction high last week? To be sure, the 2011 year-end “bear boos” about how bad the first half of 2012 was going to be caused many of the Grenvilles to raised cash expecting stocks to sag further in the coming year. Much to their consternations, the SPX is off to its eighth best start of the year; and, according to the sagacious folks at Bespoke Investment Group (as paraphrased by me):
“In the tables below, we highlight the prior ten best starts for the S&P 500 and look at the performance of the index over the rest of the year. As shown, most of the time when the index starts off strong, it also traded higher for the rest of the year. In seven out of the ten prior best starts, the S&P 500 saw gains from March through year end.”
Of course such alluring metrics, combined with the underinvested Grenvilles of the world, raise the question, “Could we get a ‘melt up’ into the end of the quarter?” While anything is possible, I would be surprised to see such a move. Admittedly, after being extremely bullish at the October 4, 2011 “undercut low” of 1075 basis the SPX, and constructive on equities coming into the new year, I turned more cautious (but not bearish) when the “buying stampede” ended on January 26, 2012. Accordingly, I could be biased about not expecting a “melt up.” Nevertheless, the equity markets haven’t really done much since January 26th – that is until last Tuesday – when J.P. Morgan (JPM/$44.57/Strong Buy) surprisingly raised its dividend right before the release of the Fed’s Bank Stress Test. The result produced a Dow Wow of ~218-points, 128 of which came in the final hour of trading, vaulting the senior index to a new reaction high. Similarly, the positive “stress test” news drove the KBW Banking Index (BKX/$49.74) to new reaction highs as most of the bank stocks “danced” higher on the tape. Meanwhile, that same day, yields across the entire yield spectrum broke out of massive basing formations, and are now challenging the yield yelps of last October, as can be seen in the nearby chart of the 10-year T’note.
Recall, one of the reasons for last October’s “undercut low” was a rise in the interest rates. And if I had to pick THE singularly most important chart of last week, it would be the chart of the 10-year T’note and its concomitant price collapses (read: higher interest rates). Therefore, I have not changed my cautionary stance of the past four weeks believing that all the good news is on the table. Moreover, while the overbought condition referenced weeks ago has been corrected to a more neutral position, the equity market’s “internal energy” is now completely used up according to my studies. In economic terms, the recent data is regrettably becoming more mixed. Of the 18 reports released last week, seven came in stronger than expected, eight were weaker, and three were inline. As the prescient folks at FWFI-Gallup write:
“The rapid decline in the jobless rate in the past few months has defied expectations; some economists argue that the widely-followed seasonally-adjusted numbers may be too good to be true. Some suspect the government’s formulas for smoothing out seasonal factors may be inadvertently inflating the numbers. Gallup chief economist Dennis Jacobe figures that, without those seasonal adjustments, the jobless rate has actually been rising for the past three months, hitting 9.1 percent in January. ‘We think that the improvement over the last few months dramatically overstates the underlying improvement,’ said Goldman Sachs economist Andrew Tilton. ‘You will not see that rate of improvement going forward’.”
Those comments sparked this insight from the brilliant editor of Zero Edge, Tyler Durden, who remarked:
“Earlier we described why it is clear that the Fed will need to print exponentially to fill the void of the crunch in consolidated credit money but why does Bernanke remain so hedged and guarded in his optimism when the market is tearing bears’ arms-and-legs off and every talking head from here to Tokyo is claiming we have reached the nirvana of self-sustaining recovery. It’s the data stupid. Simply put, as the chart below shows (see chart), the strength of trend of key US data over the past three months has been disappointing in aggregate and the worrying similarities between 2011 is only too real a problem for Ben and his buddies if they take away the Kool-Aid too early once again and let us drink our own stale sugar-free water.”
The call for this week: Study the chart from the good folks at Zero Hedge. There is a remarkable similarity to the divergence that took place between stock prices and U.S. Economic Data Trends in April 2011 right before the SPX shed 8%. Take that in concert with what happened to interest rates last week, a dearth of internal energy for the equity markets, a S&P 500 that is 2 standard deviations above its 50-day moving average, rumors Operation Twist is over, Chinese consternations, regulators gone wild, rising gasoline prices, massive corporate insider selling, and my sense that in the short run all of the good news is on the table, and it appears as if the easy money has been made. That said, I still would not get too bearish because I do expect stocks to be higher by year end. Moreover, last Tuesday’s upside breakout turned out to be the first 90% Upside Day of this year meaning that 90% of total volume traded came in on the upside as did 90% of total points traded. To negate that action would require a sell-off on heavy volume that results in a closing price below the previous rally’s closing high of 1374.09 on the SPX. Still, the stock market may have enough “forereach” (a term for you nautical types) to tag 1420, but in my opinion the game’s not worth the candle. For investors not sharing my cautionary counsel, I continue to like the strategy of buying stocks that have recently declined for “one-off” reasons where the bullish fundamental story is still intact. Names along this line, which have a Strong Buy rating from our fundamental analysts, include: Acme Packet (APKT/$27.55), Nuance (NUAN/$26.15), and Vocus (VOCS/$13.04). For further information please see our analysts’ recent comments.
Copyright © Raymond James
Tags: Adam Smith, Amp, Boos, Buy Signals, Buying Stocks, Capital Gains, Chief Investment Strategist, Grenville, Hurry, jeffrey saut, Major Disaster, March 19, Money Game, One Of A Group, Phrase, Professional Money Managers, Raymond James, Saut, Spx, Year End
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Wednesday, October 12th, 2011
Well at least they are transparent about it. Chinese stocks of the banking kind, shot up overnight as an investment arm of the Chinese government, came into the market to buy buy buy. At this point one has to wonder with the Fed intervening in bonds and herding savers into risk assets, various EU countries with short bans on financials, the Japanese central bank buying REITs and such, and now the Chinese outright buying stocks, where there is any price discovery happening on the globe. All artifical, all the time – paper printing prosperity reigns.
More importantly, this appears to be more fallout of the massive Keynesian plan to flood the economy with stimulus during the global financial crisis. We asked back then if China was simply following the Greenspan policy of kick the can down the road [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?]- usually we are early on these things, asking the question two years ahead of the fallout. And just like Greenspan’s (and now Bernanke’s) policy, eventually the can kicks back. [Jun 2, 2011: China Now Beginning to Feel Hangover from Lending Boom of 08/09 - Government May Assume Some Local Debt] So all you can do as a central bank and government is simply pour more steroids on the problem.
- China is moving to support its state-run banks and financial markets, with a government investment arm purchasing shares in the four biggest lenders as worries mount over debt and slowing growth.
- Central Huijin Investment Ltd., an arm of the sovereign wealth fund China Investment Corp., announced it bought shares in the four big banks after the benchmark Shanghai Composite Index closed at its lowest level in more than two years on Monday.
- The news initially boosted Shanghai shares by 0.8 percent but the benchmark ceded most of those gains in the afternoon, closing only 0.2 percent higher at 2,348.52.
- Chinese share prices have languished despite the country’s still robust growth, weighed down by Europe’s debt crisis, Beijing’s credit tightening, and potentially high levels of bad loans at Chinese banks after a lending surge that helped China rebound from the global financial crisis.
- The government intervention in the stock market is also meant to counter growing concern over a debt crisis among China’s small- and medium-sized businesses at a time when bank liquidity is stretched by central bank requirements to hold record levels of reserves to help counter inflation.
- Central Huijin is the major shareholder in China’s big state-run banks. The company said in a brief announcement on its website Monday that it bought shares in the Industrial & Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank and that it would continue its market-support operations. It gave no details about the amount of shares purchased.
- Given its continued concern over inflation, which has been hovering near three-year highs but is expected to moderate further in coming months, China is focusing on local bailouts and credit easing to help smaller companies but is unlikely to announce new stimulus spending anytime soon, analysts say.
- The banks’ Hong Kong-listed shares showed significant gains. ICBC climbed 6.7 percent, Agricultural Bank shot up 12.8 percent, Bank of China gained 7.7 percent and China Construction Bank added 5.8 percent. Gains on the Shanghai index were more modest.
Tags: Alan Greenspan, Bonds, Buying Stocks, China Investment, Chinese Government, Chinese Stocks, Eu Countries, Fallout, Financial Markets, Global Financial Crisis, Government Investment, Hangover, Investment Arm, Japanese Central Bank, Paper Printing, Price Discovery, Reits, Shanghai Composite Index, Steroids, Stimulus, Time Paper
Posted in Bonds, Brazil, Markets | Comments Off
Monday, September 12th, 2011
Jack Bogle: Why Mark Cuban Is Wrong on Investing, Wall Street Journal Video
Buying and holding stocks and bonds for the long term and maintaining a diversified portfolio are still the smartest strategies for the average investor, says Vanguard founder Jack Bogle in answer to Mark Cuban and other critics of these traditional approaches. In the Big Interview with Journal columnist Jason Zweig, Bogle takes aim at the culture of market speculation. Betting on long odds, he says, “doesn’t pay off very often.”
h/t: Dan Richards, ClientInsights.ca
Tags: Aim, Bonds, Buying Bonds, Buying Stocks, Diversified Portfolio, Investing, Investor, Jack Bogle, Jason Zweig, Journal Columnist, Long Odds, Mark Cuban, Market Speculation, Stocks And Bonds, Stocks Bonds, Traditional Approaches, Vanguard, Wall Street, Wall Street Journal
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Tuesday, December 8th, 2009
Referring to the lofty valuations of the US benchmark indices, the quote du jour today comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “Long-term profits depend largely on your original buy price. Today, as I write, stock valuations are extremely high. For instance, the price-earnings (PE) ratio for the Dow is now 18.02. The dividend yield for the Dow is a thin 2.67%. For the S&P 500 the PE is 86.20; the dividend yield is a mini 1.96%. In the face of these valuations, the odds of building impressive profits over the next decade are very poor (unless, of course, there’s a crash and a new bull market).
“The great fortunes in stocks are made by buying stocks at true bear market lows. At today’s bloated values, profits in stock over the coming decade will probably not be any better than the percentage increase (if any) in the GDP over the same time period.”
What can one expect as far as future returns are concerned?
A good way of looking at valuation levels, and cutting through the uncertainty of having to forecast earnings, is by means of Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE), effectively muting the impact of the business cycle by averaging ten years of earnings. Using rolling ten-year reported earnings, my research (based on Shiller’s methodology, but including some refinements) shows that the “normalized” PE ratio of the S&P 500 Index is currently 20.4. This compares with a long-term average of 16.4 and implies an overvaluation of 24%. The graph below show data since 1950, but the actual calculations date back to 1871.
As a next step, the PEs and the corresponding ten-year forward real returns were grouped in five quintiles (i.e. 20% intervals) as shown below.
The cheapest quintile had an average PE of 8.5 with an average ten-year forward real return of 11,0% per annum, whereas the most expensive quintile had an average PE of 22.6 with an average ten-year forward real return of only 3.1% per annum.
Based on the above, with the S&P 500 Index’s current ten-year normalized PE of 20.4, investors should be aware of the fact that the Index is by historical standards in expensive territory. As far as the stock market in general is concerned, this argues for unexciting long-term returns for quite a number of years to come, providing support for Richard Russell’s statement above.
Tags: Bear Market, Benchmark, Business Cycle, Buying Stocks, Dividend Yield, Dow Theory Letters, Fortunes, Future Returns, Intervals, Lows, Pe Ratio, Percentage Increase, Price Earnings Ratio, Quintile, Richard Russell, Robert Shiller, Same Time Period, Stock Valuations, Term Profits, Valuation Levels
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Tuesday, November 3rd, 2009
Lindsay Whipp of the Financial Times sits down with Jim Rogers in Tokyo for a four-part interview covering the US dollar, China, commodities and crisis-related issues.
Part 1: Rogers sees brief dollar rally
He says he has increased his dollar holdings in anticipation of a rally in the US currency, but the dollar is still broadly set for a lasting decline.
Click here or on the image below to view the video clip.
Part 2: Rogers still a China bull
He says he’s not buying Chinese stocks, but sees the renminbi rising despite its effective peg to the dollar.
Click here to view the video clip.
Part 3: Rogers backs commodities for the long run.
He says he’s fully expecting another leg up in commodities, and that real assets represent the best hedge against future inflation.
Click here to view the video clip.
Part 4: Rogers on the “bigger picture”.
He says he fully expects more pain in the financial sector, with many of the problems at the heart of the crisis simply being “papered over”.
Click here to view the video clip.
Tags: Advertisement, Anticipation, Buying Stocks, China, China Crisis, Chinese Stocks, Commodities, Decline, Emerging Markets, Financial Sector, Financial Times, Heart, Image, inflation, Jim Rogers, November 2, Peg, Rally, Real Assets, Renminbi, Tokyo, Us Currency, Video Clip, Whipp
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Thursday, October 15th, 2009
Jeremy Siegel is professor of finance of the Wharton School at the University of Pennsyilvania. But he is perhaps best known for his 1994 book Stocks for the Long Run, in which he explained why he believes buying and holding stocks is the best approach to investing.
In Part 1 of an interview with John Authers, investment editor of the Financial Times, Siegel is asked whether he got it wrong against the backdrop of last year’s market crash.
Click here or on the image below to view the video.
In Part 2, Siegel explains why the ageing populations in developed countries mean investors need to put money into emerging markets, or risk losing out.
Click here or on the image below to view the video.
Tags: Backdrop, Book Stocks, Buying Stocks, Developed Countries, Emerging Markets, Finance, Financial Times, Investors, Jeremy Siegel, John Authers, Market Crash, Money, Money Markets, Populations, risk, S Market, Video Advertisement, Video Source, Wharton School
Posted in Emerging Markets, Markets | Comments Off