Monthly Archives: July 2013

Heads Up!

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Investors can boost their outcome by resisting behavioral pitfalls, avoiding hyped stocks, and looking for underappreciated signals. 

How to Avoid–and Benefit From–Common Behavioral Mistakes
In the portfolio, I would say there are three classic errors. The first is individuals often own too much of their own company stock, and that’s due to a familiarity bias that comes from the affect of, you like things you’re more familiar with. People do this: They tend to buy more stocks that are centered in their hometown. They tend to buy stocks that are in their states, stocks that are in their own country. And in particular they often buy the stocks that they themselves work for. That can be very dangerous. First of all, your human capital is intimately tied up with the success of that stock, but also it can lead to a lack of diversification.


The second classic error is known as the endowment effect, and that is, people tend to value things they have more than the things that they might get. … There is some research on this, many classic experiments, but where it applies in the stock market is that perhaps people inherited something from when their grandmother passed away, perhaps they’ve had a stockholding that’s grown to be a very large percentage of their portfolio, and they don’t get rid of it because they fell like, well, I have it, and they’re overly attached it, and that can lead to very lopsided portfolios as well. You can see how that could interact with the company stock also.


The third classic error in portfolios is the disposition effect. That is holding on to losers too long, and the reason is, people don’t like acknowledging a mistake, and they sort of think incorrectly that if they just never sell it, they don’t have to book the loss. Conversely, people tend to not hold on to their winners long enough. They like to be able to say, I checked the box, I made a profit, that’s good. And that’s something that people need to watch out for. I might add that the disposition effect goes completely against tax-planning as well. People actually would benefit perhaps from selling some of their losers, but they don’t because of this emotional reason (Source: Morningstar interview of Fuller & Thaler director of research Raife Giovinazzo). 

The “Heat Map”

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Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors:



CONSUMER SPENDING:  I grade this factor a C (neutral).



THE FED AND ITS POLICIES:  I continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.  The FED’s Open Market Committee meets this week.  The stock and bond markets will watch the meeting’s press release very closely for the timing of future interest rate increases.




BUSINESS PROFITABILITY:  I graded this factor an A (very favorable).   Many companies will be reporting their profits to the public shareholders in the next 3 weeks – companies reporting their earnings last week exceeded expectations, on average.  We will continue to monitor this very closely for the next 3 weeks.

The Economy

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The majority of economic reports released last week indicated the economy continues to grow and strengthen.  And, University of Michigan’s consumer sentiment survey registered its highest level in 6 years.

On the negative side, some real estate industry reports indicate the recent rise in interest rates is creating a negative effect on its activity. If rates resume their upward trend, more damage to the real estate recovery could occur.

The Numbers

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Last week, Foreign Stocks increased, Bonds decreased, and U.S. Stocks were little changed.  During the last 12 months, STOCKS outperformed BONDS.



LAST WEEK -Here is a look the cause of the volatility created this week by hedge funds, institutions, and those we call “traders.”





































Returns through 5-17-2013

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years


Bonds- BarCap Aggregate Index

  -.2

-2.2

-1.9

  3.4

 5.4

4.7


US Stocks-Standard & Poor’s 500

  0.0

20.0

27.2

17.4

 8.5

7.6


Foreign Stocks- MS EAFE Developed Countries

    .3

  8.4

23.0

  5.8

-1.8

5.1



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.

“Your Financial Choices”

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“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP, AEP.  This week Rod Young CPA, CFP of Valley National will be guest host.  He will discuss: “Current issues in financial planning.”


Rod will take your calls on this topic and other inquiries this week.  This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet.  For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org. 

Personal Notes

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One of these days I will put it all together.  My golf game, that is.  I play infrequently so my game is inconsistent.  On any given day, I can drive the ball well.  But, not every day.  I can say the same about my putts.  And the same for  chipping with my short irons around the green.  Yesterday, I drove the ball well, chipped well, but I just could not sink a putt!  I am going to keep trying because the next time out, it could be THE day.

The Markets This Week

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The stock market finished little changed last week on a dearth of directional news other than earnings reports. Technology stocks rose, but investors mainly marked time in anticipation of next week, which is laden with potentially market-moving news: A Federal Open Market Committee (FOMC) meeting, the release of second-quarter gross domestic product (GDP) figures, and July nonfarm payroll data.


There were plenty of second-quarter earnings results last week, some good and some less so, but none moved the broad market. In general, says Kate Warne, investment strategist at Edward Jones, S&P 500 company earnings “came in at a reasonable rate…nothing so good to drive the market higher, and nothing so worrisome to change the view that it is a solid but unspectacular second quarter.”


According to Zacks Investment Research, for the 240 S&P 500 companies that reported results as of Thursday, earnings are up 4.1% and revenue 3.8%.


The Dow Jones Industrial Average staged a 150-point intraday comeback Friday, finishing at 15,558.83, up 0.1% on the week, and inches from an all-time high set last Monday. It’s up 18.6% this year. The Standard & Poor’s 500 index, however, fell marginally, down less than a point, to 1691.65. The tech-heavy Nasdaq Composite index bucked the tide and rose 26 points, or 0.7%, to 3613.16.


Next week’s data could go a long way in determining what the market does in August, when many participants are on vacation.


So far the market has generally seemed relieved at the pace of earnings, Warne says, adding that next week’s data and FOMC meeting have the potential to set up a weak August. She’s expecting second-quarter GDP to show “a little less than 1% growth.” That, combined with a possible revision of first-quarter GDP to less than 2%, suggests investor sentiment about the U.S. economy could turn gloomy quickly. Throw in a Fed potentially talking up a tapering of its bond buying, and it isn’t a particularly auspicious backdrop for stock prices during a typically quiet month like August.


“We are vulnerable to a meaningful decline,” concurs Jeffrey Saut, chief investment strategist for Raymond James. It’s a traditionally weak point in the calendar, and he thinks there could be a short-term 10% or so decline in the period leading up to mid-August.

“You’ve got the second-in-command on the trading desk and the orders left are: ‘Don’t be a hero. Follow the market’s lead, whether it sells or buys,’ ” Saut says (Source:  Barrons Online).



Heads Up!

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As we forecasted in the last three issues of The Weekly Commentary, the FED’s Chairman, Ben Bernanke, calmed the bond market using wording in his Congressional testimony that pressured the bond market to reduce interest rates.  We suspect this tactic will continue with the end result of interest rates on mortgages, bonds with a maturity of 5 or more years, and intermediate/long term bond funds will decline for the next 1 to 3 weeks. This tactic which I call “jawboning” can work for only a limited time period until economic reality sets in again at which time interest rates could move higher.  Our interest rate forecast is for interest rates on the above mentioned securities will generally decline for 1 to 3 weeks or longer, but rise over the next 5 to 10 years.

The “Heat Map”

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Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors:


CONSUMER SPENDING:  I grade this factor a C (neutral).



THE FED AND ITS POLICIES:  I continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.  FED Chairman Bernanke appeared this week in front of Congress to testify the economic conditions were still not strong enough to cease the current favorable policy.

BUSINESS PROFITABILITY:  I graded this factor an A (very favorable).   Many companies will be reporting their profits to the public shareholders in the next 3 weeks – companies reporting their earnings last week exceeded expectations, on average.  We will continue to monitor this very closely for the next 3 weeks.