May 14, 2012

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“God could not be everywhere and therefore he made mothers”  - Rudyard Kipling

Happy Belated Mother’s Day

This week’s post is the final in a two part look at both the current bullish and bearish market internals.  This, along with the seasonality trends, could foretell what the 2012 summer/fall season may hold for the markets.

What a difference a week makes. Last week the market internals were definitely favoring the bulls but with one fell swoop of Greece (France, Spain, Italy, Portugal, Ireland …) what was once strongly bullish has become at best, overwhelmingly neutral. One thing to keep in mind is that a week does not a trend make so we will need to keep focus on what transpires in the next few weeks but it is clear the winds of change are currently blowing.  I searched far and wide to find some bullish internals and really found only one of note.  The graph below shows that while the number of stocks above their 200 day moving average dropped more than 10% last week it is still in the bullish territory above 65. As you can see a drop below 65 has been a good forecaster of a weak market that can follow through with some nasty declines.

Since I could not find much additional supporting market, I wanted to include some other economic/ fundamental tailwinds that could help buoy the markets.

  • The University of Michigan Consumer Sentiment Index came in at 77.8, which is the highest reading since January 2008.
  • Consumers have de-levered making more disposable income available to the lowest level since 1985.

 

  • Global injections of central bank liquidity have done a lot to arrest the decline of asset prices. And given that economies are still deleveraging, we’re not seeing the creation of a new bubble … yet.

  • Countries around the globe are trying to keep their currency value low including the United States.  Remember that lower currency values increases the values of other assets (stocks).
  • The Presidential cycle strongly favors higher stocks prices which means the dollar should not rally until November. Remember a rallying dollar will send stocks falling. The greater the rally, the larger the fall.
  • Profits: Corporate profit momentum continues to be positive — the first-quarter profit beat was by over 500 basis points. Historically, this magnitude of upward earnings revisions has been associated with a near-8% rise in the U.S. stock market over the next six month
  • Commodities: Commodity prices are falling year over year. By contrast, a year ago commodity prices were rising. The recent $10-$12 drop in the price of oil should serve as a tax cut for the consumer and will likely buoy corporate profit margins.
  • Investor sentiment: Investors remain risk-averse, and expectations are low. Unlike last year, investors are no longer aggressively positioned toward economic growth or markets. Inflows into domestic equity funds are lower through the first four months in 2012 compared to the beginning of 2011, and hedge funds’ net long exposure is lower this year than a year ago. Volumes are low, indicative of nonparticipation of the retail investor.
  • The Yale Crash Confidence Index, which measures how fearful large investors are of a crash in the next six months.  There’s a general consensus in the financial community that things in the US aren’t nearly as bad now as they were back in ’08 and early ’09, but don’t try and tell the retail investor that. They’re truly spooked. Fortunately, this is a contrarian indicator, which provides a reason to be bullish on the market going forward.
  • The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months is out with its latest survey results shown below.  Keep in mind, since it is counter-intuitive that the more bearish the results the more bullish for the market as this is a contra-indicator

  • Facebook, one of the most anticipated IPO’s will go public soon which should bring in not only the institutions but also the retail investor. This should be very bullish for the market … short term.

So, what does it all mean?  To me it means is that, as usual, there are plenty of both bullish and bearish indicators to support whatever position you want to believe. Me?  I am fantastically neutral but leaning bearish in the intermediate term. In the long run I am bullish and as such am willing to be patient now and wait for an opportunity to buy in at lower prices … which I believe will present themselves this year. Why I am not an outright bear right now is the central banks have been and I believe will continue to use whatever tools (say it with me now “print money” since that is all that is left) they have in their bag of tricks to avoid another financial crisis (unfortunately there are more triggers today for a crisis to occur than any time in history).  My concern is whether or not they will be able to contain it. With today’s low volume, 70+% of the trades being exchanged between high-speed computers holding the stock for less than a millisecond, and little retail involvement stock market, I am very uncomfortable that if a chain reaction begins in prices to the downside, the central banks acting as a containment vessel in a nuclear reaction, will be unable to react fast enough to cool the overheated fuel. Such is the life of a worrier      :-)

Be safe out there as now is not a time to be taking excessive risks.

May 7, 2012

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Last week I presented the compelling statistics behind Wall St. adage, “Sell in May and go away”.   As mentioned, while the numbers are convincing, there will always be exceptions to the rule. With this in mind I thought it would be worthwhile to take a look at both sides of the current internals of the market and see if we get some better idea into what lay ahead for 2012.  In the first of a two part post, this week I present the bear case.

Since the bottom in ’09 until then end of the first quarter of 2012, what was good was good and what was bad was good. Meaning, it rarely mattered to the market what news was presented, the market interpreted anything bullishly. This quarter it appears as if the tide may be turning. In this kind of market where stocks (most of which are priced for perfection) are ripe for major corrections if they disappoint analysts and investors. Here are some examples just within the past few weeks

  •  Prudential Financial Inc. shares fell more than 10 percent after first-quarter results missed analyst estimates.
  •  QLogic Corp. shares fell by 16%,on negative reaction to the storage-networking technology company’s quarterly results. Fourth-quarter profits were 29 cents a share, compared with earnings of 34 cents a share in the same period a year ago. Sales fell to $135 million from $146 million in the same quarter last year.
  •  ValueClick Inc saw its shares dropped in excess of 26% giving up all of its increases for the year, following the Internet advertising company failed to meet its revenue estimate for the Q1.Earnings increased 28% for the period, but were lower than projected by analysts.
  • IMAX Shares fell more than 4% following an earnings report that barely missed the Street’s profit expectations.
  • Caribou Coffee shares fell 27% on lower earnings and sales growth guidance. The Minnesota-based coffeehouse chain reported solid growth with net sales rising 11 percent in the quarter.
  • Shares of LED lighting company Cree fell more than 10 percent in the wake of underwhelming quarterly results.  The Durham-based company issued a forecast that fell below Wall Street’s expectations.
  • Estee Lauder reported a solid profit gain for its fiscal third quarter, topping estimates. The company’s third-quarter earnings rose 9% beating Wall Street forecasts.  Shares tumbled 5% fell below their 50-day moving average after they said it expects its next quarter EPS below analyst projections.

With institutions controlling more than 80% of the money, it is important to look into what they are doing.  As you can see in Marty Chenard’s (http://www.stocktiming.com) chart below, you can see that institutional Accumulation/Distribution levels have made lower/highs and lower/lows. This is bad news, because of the clear down-trend for their accumulation.  Although no one knows how long that can go on, or if/when it could turn into a new up-trend later, for now … the trend is a negative and if it continues, it will end up being a serious negative for the stock market.

 

Head-and-shoulders topping patterns have been forming on most US stock indexes. These, of course, are very bearish patterns and can lead to significantly lower prices should the neckline be violated. Below is a current example on the iShares Russell 2000 Index Fund (IWM).  A playout of these patterns we could expect a 12-20% fall in share prices is in our not to distant future.

Insider buying/selling of company owned stock shows net selling – Sellers outnumber buyers by a 5:2 ratio

Bull/bear mutual fund money flow ratio is in overextended territory (bottom graph).  You can see what happens to the market (upper graph) when the ratio has gotten into this area in the past.

When combing the multitude of negative market fundamentals with the backdrop of deteriorating economic fundamentals it makes a compelling argument for 2012 to be a year in which investors should actually ”Sell in May and go away”.

Next week I will look at the bull case and see if it is strong enough overcome the bears who are now awakening from their 6 month hibernation.  The bulls will need to ignore all the headwinds if the markets are to continue to climb the proverbial “wall of worry” and carry-on their impressive bull run of the last two quarters.  Stay tuned

April 30, 2012

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As we close out April and get ready to flip our calendar’s to May our thoughts shift to warmer days, baseball and sun soaked fun with the family.  If you are an investor or trader your thoughts should be zeroed in on the old Wall St adage “Sell in May and go away”.  Why?  Historically, the period between May and November has dramatically underperformed while the period between November and April has excellent returns.

The saying goes back to the days when London stock brokers took the summer off to launch their “gels” into high society and enjoy the sporting season of Ascot, Cowes, Henleyand so forth, ending with the St Leger flat race over the second weekend in September. With professional investors away racing and shooting over the summer, October to April came to be seen as the serious months for investing, when markets would rise strongly.

The charts below provide an historical perspective of what $10,000 invested in the SP500 would have returned since 1950 during the two periods, May-Oct and Nov-Apr.

Of course, like all sayings that have survived so long, there are exceptions. For instance, in 2007, the markets saw the summer months gaining more than 4% and the winter/fall months declining almost 10%.  So while certain years may provide exceptions, the strategy over the long run, as you can see, is undeniably powerful.

So what should you do?  Its all about your willingness to take on risk. For me, if I have cash that is not invested, it will stay in cash awaiting a lower price buying opportunity that I think lay ahead. For the money I already have invested, as long as cash yields next to nothing, it is less likely that it will be able to outperform stocks, even on a risk-adjusted basis in the traditionally weak period for stocks that lasts from May to October. And with positive, albeit low, inflation present in the economy currently, you will actually lose money in real terms sitting in cash for six months of the year. So rather than selling stocks and sitting in cash until November I will stay invested unless and until the Federal Reserve’s overly accommodative monetary policy goes away

 

April 23, 2012

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In our continuing effort to mine for investments that will allow our clients to participate in future growth trends, I found the following list of the top 10 fastest and dying industries quite fascinating.  The data comes from a just released, special report from IBISworld who are recognized as a trusted independent source of industry and market research.  I look over the list and am amazed not so much by the dying industries but what are being identified as the fastest growing …. Hot sauce production comes in at #8 (Hot sauce! Really?)

The top 10 fastest-growing US industries
1. Generic pharmaceuticals
2. Solar panel manufacturing
3. For-profit universities
4. Pilates and yoga studios
5. Self-tanning product manufacturing
6. 3-D printer manufacturing
7. Social network game development
8. Hot sauce production
9. Green and sustainable building construction
10. Online eyeglasses sales

The top 10 dying US industries
1. Photofinishing
2. Newspaper publishing
3. Appliance repair
4. DVD, game, and video rental
5. Money market and other banking
6. Recordable media manufacturing
7. Hardware manufacturing
8. Shoe and footwear manufacturing
9. Costume and team uniform manufacturing
10. Women’s and girls’ apparel manufacturing

April 16, 2012

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As a retirement planning specialist, I’m always interested in new reports regarding the outlook of near-retirees and retirees. In the latest findings from the Insured Retirement Institute’s survey, it appears Boomers’ continue to hold a negative attitude when it comes to their retirement, even as the news is filled with reports of the recovering economy and strong market performance. This view does match my not-so-scientific observation, as I have seen an increase in clients who have pushed out their retirement date after running the numbers.

Take a look at the statistics and see if they align with your perspective:

  • Only about one in three Boomers (36%) are confident that they will have enough money to live comfortably in retirement, virtually unchanged from the 37% who felt confident last year.
  • Single and middle-income Boomers — those earning between $30,000 and $75,000 annually — are especially worried about their ability to retire. Nearly three in four single Boomers (72%) and 70% of middle-income Boomers say they are pessimistic that they will have a comfortable retirement, according to the report.
  • Most are uneasy about the economy, with more than six in 10 (62%) saying that they believe their personal financial situation will be the same or worse five years from now. The majority (60%) believes their financial security will be about the same or worse than that of their parents.
  • More Boomers expect to delay their retirement and rely on post-retirement employment to supplement their income. Approximately two-thirds (64%) expect wages from jobs taken after retirement to be a source of income, up from 57% last year. More than one-third (35%) plan to retire after 66, up from 28% the year before. More than one in five (23%) expect to work into their 70s.
  • Boomers are beginning to see employer-sponsored defined contribution plans as being just as important as social security as a source of retirement income. More than four in 10 Boomers (42%) expect workplace retirement plans to provide a major source of retirement income, up from 36% last year. As many rely on social security as a significant income source.

The survey was based on telephone interviews with 803 Americans between the ages of 50 and 66. The interviews were conducted from February 26 through March 12, 2012 by Woelfel Research Inc., on behalf of IRI.

Source: http://www.financial-planning.com/news/boomers-uneasy-about-their-retirement-2678302-1.html?portal=rethinking_retirement&id=2678302&sponsor_info=299

April 9, 2012

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It’s that time of year again when we find ourselves scrambling around in an attempt to complete our tax forms in time. In that have just put the finishing touches on at least 9 different tax filings this year (included in this total are both personal and corporate requirements) it overwhelmed me when I stepped back and took a tally on not only the amount but also the different taxes/fees I actually have paid. I am not sure I have captured them all but the following is a pretty good representation of a majority:

  • Medicare
  • Social Security
  • California Use Tax
  • Alameda County Business Property tax
  • California Franchise Tax
  • California unemployment tax
  • Federal unemployment tax
  • California Employment training tax
  • SEC Section 31 Transaction tax
  • Gasoline tax
  • California Income tax
  • Federal Income tax
  • Pleasanton Business Tax
  • Alameda county property tax
  • Alameda county district tax
  • Federal Alternative minimum tax
  • Capital gains tax
  • Sales tax
  • Telephone surcharge tax
  • Workers compensation tax
  • Property transfer tax
  • Public utilities tax

In that it is an election year we hear a lot of politico jawboning about what to do with tax rates going forward to find a way to raise revenue to fund our profligate (past and future) spending.  There are a number of plans that have been proposed but nothing has yet gained enough traction (regardless of the party in charge) to move beyond the debate stage.  Mind you, it’s not that I am against taxes.  In fact this is not the case at all. I want to pay my fair share. The problem I have is that this year I spent well over 100 hours preparing them.  There has to be a more productive and efficient way to do this.  Would those that tax, collect and spend prefer I devote 100+ hours preparing taxes (thereby generating nothing other than more paper) or spend that same 100+ hours being more productive at earning and therefore increasing their tax revenue? If we are expected to compete in today’s dynamic global economy, there is no time like the present to overhaul the system and get back to allowing those that do produce to be more productive.

In trying to find the silver lining in all of this, here is a list of taxes we don’t (at least for now) have to worry about:

Beard Tax
Hairless faces were all the rage in Europe in 1705, so, wanting to make his country more “fashionable,” Peter I of Russia decided to tax the beard. The fee for being follicular could be as much as 100 rubles for nobility, but as little as 1 kopek for the “lesser classes.” The law was later changed to tax only beards with two or more week’s growth. Think being an accountant is boring these days? Back then you had to watch beards grow.

Wallpaper Tax
Britain had a tax on the painted, printed, and patterned wallpaper from 1712 to 1836. Wallpaper was taxed up to 1 shilling per square yard of wallpaper. Adjusted for inflation and converted to real money, that’s about $4.52 in today’s currency. Per square yard. We’re guessing that a lot of people at that moment realized that painted walls didn’t look that bad, all things considered.

Soap Tax
England (yes, again!) started taxing soap in 1711. By the time the tax was repealed in 1853, it was raking in around $125 million in today’s money! People were already interested in getting clean, but the tax repeal made soap even more popular. If it would mean an end to the inane Axe Body Wash ads, we might be all for its reinstatement.

Tea Tax
In 1773, Colonial America was seen as a great way to unload a huge surplus of tea that the British East India Company found themselves with. The Tea Act was going to ensure that colonials bought the tea and submitted to England’s taxation rules in one fell swoop. (Two birds with one Earl Grey, if you would.) Of course, young Americans balked at it, dressed up, and threw some of that tea into Boston Harbor. And because of that, we now have a Starbucks on every corner.

Pee Tax
In ancient Rome (c. 69-79), urine was a necessity in both tanneries (where they made leather) and in laundries (yes, where they cleaned your clothes with it). It’s worth noting, though, that the government taxed those who bought the urine, not those that produced it.