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


Weekly Commentary

July 11, 2011

Climbing the wall of worry? Or not?  Investors seem buffeted (no pun intended) by conflicting economic data making it difficult to understand where we stand.  Case in point is the latest jobs data. Wednesday we learned from ADP that 150,000 jobs were created in June.  Then on Friday the Bureau of Labor Statistics shocked by saying only 18,000 jobs were gained.  One thing we do know is that government jobs are decreasing, which is a trend that has to continue.  And we also know that all these numbers will be revised.

Of course there are more walls to worry us: the debt ceiling negotiations and southern Europe’s worries, especially Greece and Portugal.  As to the debt ceiling and debt reduction, we have to believe that a compromise will happen in time, one that will not make either party particularly happy.

Perhaps we can all benefit from the sage advice handed out in our latest quarterly Newsletter:  “History has shown that investors are better served by following long-term investment plans than by making investment decisions based on the day-to-day noise of the markets.”  To which we say Amen!

“I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.”

– Thomas Jefferson

Weekly Commentary

July 5, 2011

Last week the DJIA gained 5.4%, its best percentage gain since July 2009. Economic reports indicated that the U.S. economy maybe working its way through the recent slowdown. In addition, investor anxiety over the Greek debt crisis eased somewhat.

On Thursday, the Chicago Purchasing Managers Survey for June beat economists’ projections and on Friday the ISM June manufacturing index was reported at 55.3 (50 and above means economic expansion) well above expectations of 49.5.

The big economic news for this week will be the U.S. Labor Department’s jobs report on Friday.  Projections are for 94,000 net new jobs and unemployment to hold steady at 9.1%.

(Click chart for additional information)

“A speculator is a man who observes the future, and acts before it occurs.”
– Bernard M. Baruch


Weekly Commentary

June 27, 2011

Markets were mixed last week, with the S&P and DJIA down less than 1%, while the NASDAQ rose1.4%.

Greece continued to dominate international financial news.  The Greek prime minister and his new cabinet survived a no confidence vote on Tuesday, and then Thursday an intra-day agreement with the EU and the IMF provided additional market support.
Offsetting these Greek developments was the Fed, which lowered its projections for GDP growth for this year and next.  Adding insult to injury, Bernanke admitted that he wasn’t quite sure why the subpar GDP growth was persisting.

Broader eurozone concerns dragged the market down on Friday, with most averages again testing their 200-day moving averages (a technical measurement for analyzing price changes).

Separately, falling energy prices are giving consumers a “tax-cut”.

Also, note that the Fort Calhoun nuclear power plant in Nebraska is handling Missouri River floodwaters with aplomb.  Kudos to the operators and the NRC.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

– Robert G. Allen

Weekly Commentary

June 20, 2011

Despite continued Greece woes, the markets gained last week (albeit a tepid 0.04% gain for the S&P 500) – breaking a six week losing streak.

Yes, economic activity in the U.S. and around the world is slowing.
The most likely culprits are:
– Higher oil prices
– Supply disruptions from Japan

The good news:
– Oil prices have retreated
– Japan is getting back on its feet
– Equity valuations remain quite reasonable, and sentiment is negative

We believe these are constructive factors which will ultimately provide a foundation for a recovery in the markets.
The FOMC meets Tuesday and Wednesday this week.  We suspect that they will downgrade their assessment of the economy; however, the FOMC will point to the transitory nature of the current soft patch.

Summertime has traditionally been a challenging time for the markets, and this summer will likely be no different.  We suggest investors enjoy the good weather and the activities of summer.

“The time of maximum pessimism is the best time to buy.”
John Templeton

Weekly Commentary

June 13, 2011

With the U.S. stock market now down for the sixth week in a row, investors are searching for glimmers of something positive on which to hang their investment hats.  We think the current level of investor sentiment provides such a foundation.  One of the measures of sentiment frequently referred to is the AAII report (American Association of Individual Investors).   When Investors become extremely bearish, it is usually a sign that a rally should occur soon.  The latest numbers are:
24% Bullish vs. Long Term Average, 39%
28% Neutral vs. Long Term Average, 31%
48% Bearish vs. Long Term Average, 30%

A second measure frequently referred to is the put-call ratio which reflects the ratio of bearish options to bullish options written.  Here again we are reaching bearish extremes often associated with market turns.  No guarantees but clearly positive data.

There are plenty of reports this week to measure how the U.S. economy is performing.  The CPI, retail sales, housing starts, leading economic indicators industrial production, and a consumer confidence index will have Wall Streeters busy.  While growth has clearly slowed, we’re hoping the data will at least show slow growth this month.  Stay tuned.

“Be fearful when others are greedy, and be greedy when others are fearful.”
– Warren Buffett