Author Archives: The Weekly Commentary

The Markets This Week

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Obviously, the bulls went to the beach last week, leaving the markets in the grip of the bears.


Wall Street turned in its worst week since late June amid extremely light trading, dropping on four of five days, as investors’ preoccupation with all that could go wrong come autumn dominated the action.


The Dow Jones Industrial Average dropped 232.85 points, or 1.5%, on the week, to close at 15,425.51, ending a six-week winning streak. The Standard & Poor’s 500 fell 18.25, ending at 1691.42. The Nasdaq lost 29.48 points, or 0.8%, finishing at 3660.11.


From concerns stoked by two Federal Reserve regional presidents suggesting that the nation’s central bank would move sooner than expected to rein in its longtime efforts to stimulate the economy, to worries about another round of possible budget cuts under the so-called sequester as fiscal year 2014 looms, to a dismal outlook for back-to-school retail sales, investors grew more uneasy with the stock market’s recent record-setting levels.


Adding to the fretfulness, August’s claim to fame among traders is that it historically has been the worst-performing month since 1987, with the weakest results occurring in its first nine trading days, according to Stock Trader’s Almanac editor-in-chief Jeffrey Hirsch. On average, the Dow has declined 1% in August, while the S&P 500 has slid 0.8%.


Despite last week’s weakness, the S&P 500 rose 0.34% in the first nine trading days of August, defying the historical seasonality and reflecting the strength underpinning the market. In the past 21 years, there have been 11 positive starts in August; all but three preceded full-month gains.


The broad market averages wobbled early in the week before rebounding slightly Thursday, getting a lift from trade data from China that suggested its economy could be stabilizing after two quarters of declining growth. The data sparked a rally in materials stocks, such as Cliff’s Natural Resources (ticker: CLF) and Newmont Mining (NEM), as China is the biggest consumer of raw materials.


How sustainable the demand from China is remains uncertain. Chinese exports jumped 2% in July from the previous month’s total, but are still well below their January 2013 peak.


By Friday, jitters set in again, and investors chose to overlook the fact that of the 446 companies in the S&P 500 that reported quarterly results, 68% exceeded expectations, slightly more than the 67% of the past four quarters, according to Thomson Reuters (Source:  Barrons Online).

Heads Up!

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The Tornado – Is It Safe to Come Out Yet?
 
WHAT SCARES THE INDIVIDUAL INVESTOR SO?  What has investors quaking in their boots is the bewildering uncertainty pervading everything they see – high unemployment, confusing healthcare changes, higher food and energy prices while the FED insists inflation is not a problem, and the unimpeded government borrowing – to name a few.  Additionally, stock market investors, as the financial world grapples with the unknown – have fresh memories of the severe losses suffered in 2007 – 2009.


Our recommended course of action is to think in terms of 5 to 10 years with your stock market investments and keep an eye on the three factors reported on weekly in The “Heat Map.”  Think of the three factors in The “Heat Map” as “pillars’ that support the stock market over the long run.  Watching these three factors will lead to the right decision on stock market investing (over 5 to 10 years) in the vast majority of cases.  The cases in which The “Heat Map” may not work well are when the orderly functioning of the financial markets is disrupted by high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history and finance (often referred to as “Black Swans”).  We remain vigilant in search for Black Swans and intend to report on them to you in future issues of The Weekly Commentary.

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 met last week and reiterated its intent to keep a lid on interest rates (short term rates that they can control directly) for an extended period of time.


 

BUSINESS PROFITABILITY:  I graded this factor an A (very favorable).   Many companies have reported their profits to the public shareholders in the next 5 weeks.  Companies exceeded expectations, on average, sufficient to maintain a grade of A.

The Economy

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Not all economists and economic experts believe the U.S. economy is improving.  For example Comstock Partners has this to say:


 


Although the market celebrated today’s releases on weekly unemployment claims and the ISM Manufacturing Index, the trajectory of this weak economic recovery has probably not changed.  Both of these indicators are affected by the difficulty the government has in gauging the seasonal adjustment factors in this part of the year as a result of the timing of the annual auto industry shutdowns for re-tooling.  In our view, the 1st and 2nd quarter GDP results offer a much more representative outlook for an economy that seems to be losing steam rather than picking up as most observers believe.


 


The GDP results for the first half are a more accurate indicator of how weak the economic recovery has become.  An unexpectedly large rise in inventories accounted for 24% of 2nd quarter growth, while consumption was up only 1.2%, compared to a still anemic 1.5% in the prior quarter.  Final demand was up only 1.3% in the 2nd quarter and 0.3% in the 1st.  The need to work off the excess inventories will tend to impede second half growth.  In addition government spending was down less than expected, indicating that further layoffs related to the sequester are still ahead. 


 


My observation is that I am not sure whether Comstock is correct or not.  But, it does seem our economy is growing but growing at a slower pace than during economic rebounds in the past.

The Numbers

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Last week, U.S. Stocks and Foreign Stocks increased, and Bonds decreased.  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

  -.1

-2.3

-1.9

  3.3

 5.2

4.9


US Stocks-Standard & Poor’s 500

  1.1

21.3

28.1

17.4

 8.7

7.9


Foreign Stocks- MS EAFE Developed Countries

  1.4

  9.9

24.4

  5.1

-1.2

5.4


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 Laurie will discuss: “Helpful websites for your financial education.”

Laurie 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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Every American, I feel, should visit 3 places in Pennsylvania:



  • Independence Hall


  • Gettysburg battlefield, memorial and museum


  • Yeungling, America’s oldest brewery (in Pottsville) – the company is a tribute to 5 generations of family perseverance and their steadfastness to deliver a quality product without government help or support.

The Markets This Week

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The Goldilocks economy is back. Soft job news Friday wasn’t enough to dent another big week for equities, with the major indexes setting new highs Friday—again. The continuing excitement has come on generally “just good enough” data from the U.S. economy, from second-quarter corporate earnings, and even from the jobs arena.


In many cases, bullish data—such as Thursday’s lower jobless-benefit filings—came with ancillary figures or revisions that undercut the trend, like Friday’s weaker-than-expected hiring data. Yet the combination didn’t set off investor fears the reports would sway the Federal Reserve Board to speed up an eventual withdrawal of monetary stimulus.


In general the economic figures “were nothing great, but nothing too bad,” says Dan Morgan, a portfolio manager at Synovus Trust.


The Dow Jones Industrial Average rose almost 100 points to 15,658.36, up 0.6%, a new high and up 19.5% this year. The S&P 500 index gained 18 to finish at 1709.67, also a record high, the 25th this year. The tech heavy Nasdaq Composite index jumped 2%, or 76 points, to 3689.59.


In the way of technical indicators, the market shows strong underpinnings: The number of stocks making new 52-week highs remains firm, those over their 50-day moving average hover around 80%, and breadth is strong.


It does seem as if the Goldilocks economy is back, says Stephen Massocca, a managing director at Wedbush Equity Management. Older readers remember that the 1995-1996 stock rally came amid U.S. domestic-product growth that was neither too fast to set off inflation fears nor too slow to ignite earnings-growth worry. “It’s a bumbling, stumbling recovery,” Massocca says of today’s U.S. economy.


Investors are again wrestling with whether they want a stronger economy or not. Slower growth means the Fed’s punch bowl remains available but that corporate earnings increases, now a tepid 4%, could ease even more. Faster economic expansion would help profits—and therefore stocks—but investors fear the early withdrawal of central-bank stimulus, a big propellant of this year’s hefty gains (Source:  Barrons Online).

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).