Weekly Commentary: Whipsaw

October 17, 2011


Whipsaw – A condition where a security’s price heads in one direction, but then is followed quickly by a movement in the opposite direction. The origins of the term is derived from the push and pull action used by lumberjacks to cut wood with a type of saw with the same name.
– Investopedia

Through the first two weeks of October, stocks have bounced back significantly from the recent lows of the 3rd quarter. The S&P 500 has increased ~ 8% this month following last quarter’s loss of ~ 14%. We have been experiencing this level of whipsawing since August; however the S&P 500 has essentially been flat over this time period. I was always taught to keep my eyes on the horizon when I felt seasick, investors should do the same.

This week will be full of earnings reports as earnings season kicks into gear. We will focus on the strength of the previous quarter as well as management’s tone about the future. We suspect they will be a bit less sanguine than in recent quarters as storm clouds linger.

“A smooth sea never made a skilled mariner”
– English Proverb

Weekly Commentary: Jobs & Great Opportunities

October 11, 2011


Last Friday the jobs report for September showed employers added 103,000 jobs which was better than consensus expectations although 45,000 of that was due to the return of striking Verizon workers. On a positive note August jobs were revised up by 57,000 from zero. The unemployment rate remained at 9.1%.

According to most estimates employers need to add 125,000 jobs per month just to keep up with population growth and 200,000 per month to bring the unemployment rate down.

This week look for the start of earnings reporting season beginning with Alcoa on Tuesday followed by PepsiCo, Google and J.P. Morgan Chase. In July analysts expected companies in the S&P 500 to post earnings growth of + 17%. As of last week that had been revised down to + 12.6% which may give companies an opportunity to exceed expectations and lend support to last week’s rally. As a reminder the 4th quarter has been the best quarter for the stock market with an average return of 4.5%.

“We are all faced with a series of great opportunities brilliantly disguised as impossible situations.”
– Charles R. Swindoll

Weekly Commentary: Stocks & Bones?

September 28, 2011


This week marks the end of the 3rd quarter and the month of September. The markets have been extremely volatile over this time period and as we mentioned previously, September has lived up to its historical position as (hopefully) the worst month of the year. Stocks continue to be whipsawed depending on the macro views of Greek default/European insolvency or the hope of a European solution. There is no doubt these extreme price changes are testing the nerves of individuals and investment professionals alike. We are not sure when the markets will calm down, however diversification has certainly helped mitigate the day-to-day swings.

At the risk of being obvious, we would like to mention a few opportunities:

  1. Falling commodity prices will help ease the strain of your wallets at the grocery store and the gas pump.
  2. Review your current mortgage rate as current interest rates have come down potentially opening the door to refinancing.

“For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

– Winston Churchill


Weekly Commentary: The Behavior Penalty

September 19, 2011


Last week investors experienced volatility on the upside with the DJIA posting a 4.7% gain as concerns ebbed over the European debt crisis. Year-to-date the DJIA is down 0.6% though most people “feel” as though the markets are much lower.

This week’s calendar is quite busy. Below are some of the highlights we’ll be following:

  1. President Obama’s deficit reduction program which will include the “Buffet Rule” of taxing the rich.
  2. Several updates on the state of the housing industry; none of which are expected to be positive as we continue to work through excess inventories and tight credit.
  3. FOMC meeting
  4. Leading economic indicators

Over the past four months, U.S. equity funds have experienced net outflows to the tune of $75 billion. This outflow already supersedes the redemptions experienced during the months following Lehman Brother’s collapse.

As this chart highlights, the average investor lets emotions dictate his decision making process and therefore continues to buy high and sell low. Take a moment, revisit your goals and time frames, and minimize such costly errors of short term emotionally driven investing.

“In the middle of difficulty lies opportunity.”
– Albert Einstein

Weekly Commentary: Economy, Life & Topography

September 12, 2011


Last week the DJIA declined 2.2% again weighed down by concerns over the European debt crisis. This week the credit ratings for France’s largest private banks may be cut by Moody’s putting further downward pressure on the Euro.

This week look to Thursday for reports on the CPI and industrial production for August. CPI should show some easing of inflation concerns as lower commodity prices result in a reading of +0.2% down from +0.5% in July.

However, industrial production, which accounts for less than 20% of US GDP, is expected to be flat versus a +0.9% reading in July – further evidence that the U.S. economy continues to struggle with slower growth.

“Life is like topography, Hobbes. There are summits of happiness and success, flat stretches of boring routine, and valleys of frustration and failure.”
– Calvin & Hobbes

Weekly Commentary: The Cruelest Month

September 6, 2011


September is historically the worst month for stock returns, and this September is not off to a good start.  The DJIA and the S&P 500 lost ground last week as investors grappled with spotty and conflicting economic and geopolitical news.

Friday’s U.S. jobs report showed that no new net jobs were added in August.  Unemployment remained at 9.1%.  Businesses were reluctant to bring-on new hires due to lack of confidence in the future (regulatory overhang, lack of leadership in Washington, European sovereign debt issues, etc…).

Consumers, interestingly enough, continued to spend at a decent rate during July.  Consumer spending increased 0.8% in July – the fastest pace in five months.  The ISM manufacturing number came in at 50.6 against an expectation of 48.5.  The ISM non-manufacturing number for August came in at a better-than-expected 53.3.  The ISM numbers are consistent with GDP growth of close to 2%.

Talks of a recession loom large.  No doubt, the odds of a recession have risen over the past month or so, but we still believe that the U.S. economy will be able to limp along while avoiding an outright recession.  The good news is that the markets seem to be discounting much worse.

The week ahead includes a G-7 finance meeting, a meeting of the ECB, and President Obama’s speech on jobs and deficit reduction.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

– Winston Churchill

Weekly Commentary: Bernanke’s Hot Potato

August 30, 2011


Hurricane Irene, which thankfully had weakened to tropical storm intensity [less than 74 mph] by the time it reached New England’s shores, caused much less damage than anticipated.  The same can be said about the summer’s “Bear Market”, which rallied by 4.7% last week.

Although second quarter GDP was revised downward to +1.0% [+1.1% expected vs. 1.3% preliminary], Bernanke’s Jackson Hole speech implied that the value of the dollar is somewhat important [!!] when the Fed is deciding monetary policy.  Moreover, he threw the “stimulate growth” hot potato to the congress and the administration.

The rally pushed further ahead on Monday [this is a hurricane-delayed update] based on some progress in resolving the Greek financial crisis coupled with better July consumer spending.  Upcoming data points this week include Fed minutes, unemployment claims and nonfarm payrolls.

Weekly Commentary: Fear vs. Logic

August 22, 2011


Last week was another challenging week for investors as most global stock markets continued to sell off.  Year-to-date the Dow Jones, S&P 500, the Nasdaq, and the Russell 2000 are down 6.6%, 10.7%, 11.7% & 16.8% respectively.

Investors have been flocking to U.S. treasuries which continue to exhibit their safe-haven status regardless of Standard & Poor’s recent downgrade. A good barometer for the bond market is the Barclays US Aggregate Bond Index which is up 6.42% year-to-date…diversification is not dead!

This week is relatively quite regarding economic and corporate related news. Therefore our focus will be on Friday’s GDP report and the Jackson Hole speech by Ben Bernanke. Consensus believes we’ll see 2nd quarter GDP revised to 1.1% following the preliminary estimate of 1.3%.

“However, while fear is the greatest factor in the investment environment today, history shows that it is those who invest based on logic, rather than emotion, who fare best in the wake of financial panic.”
Dr. David Kelly

Weekly Commentary: The more things change…

August 15, 2011


“The more things change, the more they stay the same.” What we are thinking of is human behavior and how we swing between fear and greed, or as another commentator put it – panic and euphoria.  Veteran market watchers have seen the swings over and over.  We can understand these swings and aid our portfolios in the process.  Several indicators can help us in the analysis-activity of corporate insiders buying and selling, behavior of the average investor as measured by the AAII index, and changes in the ratio of put to call options on stocks.

One of the better indicators is insider transactions- a pickup in their buying their own stock is bullish.  As far as the average retail investor, a significant pickup in selling both stocks and mutual funds can be an indicator of fear or panic setting in.  The so called put/call ratio is more bullish when extreme levels of put activity or bets a stock or a market going down will occur…the chart below illustrates the S&P 500 (black line) vs. the equity put/call ratio (green line).

Whatever the sentiment, most important is knowing the value of your investment and your willingness to buck the trend when inefficiencies in pricing occur.  The classic value investor Warren Buffet recently commented that the underlying value of the market is good.  He has a rather good track record!

Weekly Commentary: S&P Downgrades U.S.

August 8, 2011


Last week the DJIA declined 5.75% reflecting concerns about the strength of the U.S. economic recovery and the continuing worries over European debt and global economic strength.  On Friday, the July jobs report was better than expected with a total of 117,000 jobs created.  Nonetheless the current rate of job creation is not sufficient to bring down the unemployment rate which remains above 9%.

The big news on Friday was the S&P downgrading of the U.S. debt credit rating from AAA to AA+ stating that “the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

Despite the downgrade U.S. treasury prices strengthened as they continue to be regarded as a safe haven in uncertain times. Hopefully, this downgrade will put pressure on Washington to get our financial house in order.

The stock market has entered a correction with a decline of more than 10% from its previous highs in April of this year. For long-term investors this presents an opportunity to rebalance portfolios and add to quality stocks. The DJIA currently sells at 11.5 X next year’s earnings and yields 2.65% versus the 10-year U.S. treasury yield of 2.5%.

To refer to a personal taste of mine, I am going to buy hamburgers for the rest of my life. When hamburgers go down in price, we sing ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

– Warren Buffett