The stock market appears to be suffering from a bipolar condition. That is, it is being torn between two extremities.
On one hand, the US economy just finished a solid 4th quarter – consumer spending was equal to or better than expectations, corporate profits look OK and the FED continues to be very favorable toward stock investors.
On the other extreme, there are a number of red flags waving in Europe. They are large enough to dominate the attention of the stock market. For example, on a day like Friday, with a great jobs report, the Dow Jones dropped instead of soaring 100 or 200 points as we would have expected in normal conditions.
Italy has borrowed too much (way too much!) in order to keep their system afloat. They owe $2 Trillion or more. If Italy goes the way of Greece, then the Italian Government bond holders will lose enormous amounts. Italian and French banks own a big portion of these bonds. They could become insolvent. This possibility makes investors very concerned because no one knows what will happen if this occurs.
I carefully watch the yield on the 10 year maturity Italian Government Bond – an uptrend in the yield means investors are getting more and more nervous about the ability of Italy to service its debt. Many economists believe a yield of over 7% is unsustainable. This bond yield has risen each day this year and is now 7.13% .
Here is a link to the Bloomberg quote so you can observe its trend. There is reason to be cautious until the nervousness and yields in Europe start to decline.
All this nervousness and red flag waving could evaporate at the drop of a hat IF the Germans pledged some of their impressive reserves to back up the European banking system, the ECB, or the stabilization fund. If that occurred, the stock markets would soar, in my view.
I refinanced my home mortgage last year; and, I paid 2 points (2% of the mortgage balance) in order to reduce the mortgage rate. Are the points I paid deductible on my income tax return?
Answer:
Yes, but not all in one year. The deduction of the points is spread evenly over the life of the mortgage. For example, if the new mortgage is a 20 year mortgage, then only 1/20 of the points are deductible in each year. NOTE: points paid on a mortgage used to BUY the house are fully deductible in the year the house was purchased.
“If it doesn’t matter who wins or loses, then why do they keep score?”
–Vince Lombardi
This accurately explains my feeling after watching the Steelers’ season ending loss. I’m saddened but not depressed. The Steelers, in their injury riddled condition, would have had a small chance of defeating New England this week. Good luck to Tebow and the Broncos.
Investors blew off the uncertainty of 2011 and plowed into the new year of 2012 with gusto, sending stock prices up almost 2% in the first week of trading. Volumes, though, remained light in a holiday shortened week.
Although stocks dropped Friday, traders said they were heartened by the market’s ability to hold on to the big gains made early in the week, particularly after a volatile 2011, in which such early-week gains often disappeared by Friday.
The Dow Jones Industrial Average rose 142.6, or 1.2%, on the week, to close at 12359.92. The Nasdaq Composite gained 2.7%, to end at 2674.22. The biggest rises were seen Tuesday, the first day of trading in 2012.
“The fact that, coming out of the gate, we have been able to hold on to Tuesday’s big gain is constructive,” notes Michael Marrale, head of U.S. sales trading for RBC Capital Markets. Now that the calendar page has turned, hedge funds, many of which sat out much of 2011, might be induced to return to buying stocks, particularly if there is another 1% to 2% gain relatively soon, he says. Fears of missing out on a rally will increase, and they won’t want to start the year already 2% to 4% in the hole, he adds.
There was some evidence of rally-chasing already, he says, since some of the stocks that did the best last week were “2011 losers,” or among the poorest performers of 2011: Bank of America (ticker: BAC); Alcoa (AA); JPMorgan Chase (JPM) and Netflix (NFLX). Meanwhile, some of the worst stock performers last week, mainly defensive stocks, were among the best of 2011.
In particular, Bank of America stock rose strongly, as rumors circulated that the White House was contemplating some kind of large mortgage-refinancing program, which the government denied. Its stock rose 11% on the week.
Meanwhile, U.S. economic data were “consistently better than expected,” says Peter Kenny, an institutional-sales trader at Knight Capital Americas. That helped fuel the week’s gains. And Friday, the Labor Department said the unemployment rate fell to nearly a three-year low of 8.5%, from 8.7% in November—the fourth consecutive monthly decline.
Despite the pretty good week, one trader says investors should be concerned with some overly bullish sentiment, at least for the short term. A surfeit of such emotion seems to have gotten the upper hand of late, particularly among individuals, and this trader suggests a reversal—albeit perhaps a mild one—could be expected next week.
Bullish sentiment among individual investors rose to 49%, from 40.6% for the week ended Wednesday, according to the most recent weekly online survey of members of the American Association of Individual Investors. Bearish sentiment fell to 17%, from 31%. Both cases, the trader adds, represent extremes of sentiment not seen in a while.
Press reports circulated last week that Eastman Kodak (EK) is teetering on bankruptcy, while Sears Holdings (SHLD) appointed a chief merchandising manager to combat six straight years of declining same-store sales. Both firms—former Dow Industrial Average components—are more than 100 years old, and were once the big kahuna in their respective industries.
Such news is a sobering reminder that capitalism’s creative destruction can bring even great companies—and their shareholders—to their knees. That’s just as relevant to America’s current crop of world beaters, like Apple (AAPL), Google (GOOG) and the closely held Facebook, among others.
Capitalism has a way of humbling even the most high. As technology progresses at ever-dizzier rates, the possibility that a dominant company can stumble appears to be quickening. Nokia (NOK) went from the uncontested king of mobile phones to flat on its back in less than a decade, even as mobile-phone use has exploded.
There is always somebody in a garage somewhere working on a better mousetrap. And the bigger and fatter the company and its margins, the more likely that’s true (Source: Barrons Online).
Last week, U.S. Stocks increased while Bonds and Foreign Stocks decreased. During the last 12 months, BONDS outperformed STOCKS.
Returns
through 1-6-2012
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds-
BarCap Aggregate Index
-.1
-.1
8.1
6.8
6.4
5.8
US
Stocks-Standard & Poor’s 500
1.7
1.7
2.4
13.4
.2
2.9
Foreign
Stocks- MS EAFE Developed Countries
-.4
-.4
-14.7
3.6
-7.3
1.8
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
