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

Weekly Commentary: Stuck in the middle

August 1, 2011


The DJIA declined 4.24% last week to close at 12,143 as the markets reacted to the ongoing drama in Washington and weakening economic news.

“Clowns to the left of me, jokers to the right … here I am stuck in the middle with you” …sound familiar?  Well, Washington finally came to an agreement over the weekend – at the last moment, just as we believed.  The good news is that the United States will continue to pay its bills – at least for the moment.  We suspect, however, that the U.S. debt will likely be put on negative watch by the ratings agencies (not necessarily downgraded).  It remains to be seen whether or not our distinguished senators and congressman will actually put some teeth into upcoming discussions about spending cuts.

Attention will now shift to our weakening economy (where it should have been in the first place). First quarter GDP was revised downward to just 0.4% versus the original estimate of 1.9%. In addition, second quarter GDP came in at an anemic 1.3% … all-in-all, one of the most disappointing economic recoveries since World War II.

Earning reports continue to be decent, yet we’re keeping an eye on earnings reports as more and more companies are beginning to bring down their future growth expectations.  Despite all the bumps in the road we continue to see a muddle-through economy for at least the next few quarters.  We suspect that markets are discounting the challenges that exist today.

Weekly Commentary

July 25, 2011

The heat wave in the Northeast has temporarily been broken, so now the focus shifts to the intransigence inside the beltway.

The debt ceiling is a self-imposed limit on government borrowing.  It is advocated by politicians, who want to at least appear to be fiscally responsible.  But in the last 40 years it has been raised some 38 times, almost always by the Presidential party [which usually has the power and the popularity to get away with it].

Today, debt-ceiling discussions continue, but from an investor’s point of view, remember that:

1) Deal or no deal, Social Security payments will be made.
2) Even without a deal, there will not be a default on US government debt obligations.
3) No one knows how markets will react to stalemate:  some claim catastrophe, while others are unconcerned.  Most with public positions are politically motivated, with little or no understanding of markets and monetary matters.
4) Federal tax collections are higher than expected, so the August 2 “deadline” may be pushed to the right by 7 to 10 days or more].
5) Congress doesn’t want to take advantage of these extra days, because it is cutting into their vacation time.  They want to go home!

We at ND&S are following these machinations closely so that you don’t have to.
There are only 5 more weeks before Labor Day, so please, go to the beach … enjoy what remains of the summer!!

“No man’s house or property is safe when the legislature is in session.”
Daniel Webster

Weekly Commentary

July 18, 2011

It’s the third week of July, we are seeing a continued heat wave across the U.S. and the global markets continue to be volatile. Last week stocks sold off with a few exceptions. China, Indonesia & The Philippines were the only noteworthy exceptions. We can’t help but be reminded of the saying, “the dog days of summer.”
Do you ever wonder what the saying means?
Here is a definition from the Webster dictionary:
1: the period between early July and early September when the hot sultry weather of summer usually occurs in the northern hemisphere
2: a period of stagnation or inactivity

Given the economic data, we continue to believe US GDP is in a temporary period of “stagnate” growth but we believe cooler temperatures of the fall will be accompanied with better GDP data.

“Without selloffs, there are no rallies.”
– Al Frank, The Prudent Speculator