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Be Vigilant - not Paranoid - about CyberSecurity
Sony, JP Morgan Chase, Target, Home Depot attacked. Russian, Chinese, North Korean, stateless hackers blamed. Stories about identity theft, e-mail hacks, and elder abuse blanket the news. No wonder many of our clients fear it's just a matter of time before the cyber criminals attack them personally. Fortunately, with a reasonable amount of vigilance, you can avoid becoming a victim.
Curse of the Brilliant Client
What do I say when clients think they know more than I do? At my firm, we work with executive families. Our clients are brilliant; many have advanced degrees from top universities. These clients have ascended to the pinnacles of their careers and are accustomed to being the smartest person in the room.
The 6th Anniversary of 676
On March 9th, 2009, the S&P 500 made an intra-day and 20 year low at 676.53. Millions of Americans drew a straight line from the mid-September 2008 failure of Lehman Brothers through that March low and projected that the S&P 500 would be zero by June. Armed with that projection, average investors liquidated hundreds of billions of dollars in stock investments, never to return. Those investors will never be able to retire.
US Stocks Make 31 Record Highs in 2014, But Investors Panic During 3% Selloff
US stocks as defined by the S&P 500 made 31 record highs in 2014, most recently on July24th. Through Friday afternoon, stocks declined 3.3%, which is to say less than the decline of 4.2% we saw in April of this year, and decline of 5.6% in January.
10 Steps Forward, 1 Step Back! Comments on January Stock Market
US stocks as measured by the S&P 500 delivered a phenomenal 32.4% return in 2013. That was the 6th best year for US stocks since 1940. In January, US stocks fell 3.5%. We dont watch business news anymore, but judging from an increased volume of phone calls from clients, we presume that CNBC, Fox Business, CNN and MSNBC have categorized this modest decline as "an apocalypse." Our "dashboard" shows return numbers for US and International stock markets, commodities, currencies and bond yields. A lot of red YTD 2014, but all green at the end of 2013.
United States Debt Default Averted - For Now
The US Senate passed H.R. 2775 Continuing Appropriation Act, 2014 Wednesday afternoon 81 votes to 18. The House of Representatives passed the bill around 10PM Wednesday night 285 to 144, and the bill was signed into law by President Obama at 12:30 AM Thursday morning. 100% of Democratic Representatives voted for the bill, but only 37% of Republican Representatives in what is widely regarded as a disastrous outcome for the Republican strategy of shutting down the government in order to defund ObamaCare.
House Republicans Determined to Burn Country to the Ground (In Order to Save It!)
Whenever our financial markets commentary strays into the realm of politics, were guaranteed to offend at least half of our clients and readers. So let us state up front that our job is NOT to choose sides but to evaluate how politics will affect the US economy and by extension corporate earnings, which are the bedrock of stock market performance. By that measure, the current tactics of House Republicans to shutdown the non-essential parts of the federal government and block raising the debt ceiling is an unmitigated disaster. Businesses crave predictability and reliabi
Happy Clients; Terrified Prospects
Four years ago, on March 9th, 2009, US stocks collapsed to a 12 year low. A financial crisis rooted in overleveraged purchases of junk (or even fraudulent) securities claimed, in quick succession, Bear Stearns, Lehman Brother, Merrill Lynch (forced into a shotgun marriage with Bank of America) and AIG. Investors panicked, selling good securities at deep discounts to fair value.
If youre a partisan Republican, skip this commentary
In June after stocks slumped over concerns about Europe, we wrote "US stocks however, were a good value a month ago and a better value today. With the weak hands forced out by the recent 10% pullback, we are moving forward with investments in stocks." With two and half months remaining in the year, our "buying panic" forecast is starting to look prescient.
Investors fret about Europe, but US stocks up 8.6% on the year
Investors have flooded back to European and US stocks on the surprise announcement that a single Eurozone wide agency, somewhat akin to the Federal Deposit Insurance Corporation (FDIC), will be established to backstop European banks directly, rather than lending through the respective governments of troubled banks.
May Rout Leads to June Rally
We got three exogenous events in May: Greek credit crisis resumed, with Greece likely to exit the Eurozone this summer. JP Morgan Chase lost $3 billion on Credit Default Swap trading. The FaceBook FacePlant. And on June 1st, the Labor department reported a minimal gain in jobs, which has economists worried anew about the United States returning to recession.
Will I be able to retire ever? Answers to our clients #1 question!
Our clients are divided between those who are at least 65 and already retired (30%) and those clients aged 35-65 for whom retirement seems like an ever receding mirage. In this commentary, we will concentrate on the mechanism that we use to implement a clients retirement income strategy, review how this strategy has performed since January 2000, and review the lessons learned.
2011: The Year in Two Headlines
The volatility of US stocks prices which was average from August 2010 through July 2011 suddenly jumped to levels last seen around the 9/11 attacks.The bottom line is that, in the face of one amorphous gelatinous macro event after the other, the US stock market has managed to trade on either side of unchanged all year long.Meanwhile, another quarter of record earnings are on tap starting the first week of January, inflation remains contained, interest rates remain low, and valuations are compressed.Macro concerns are the lid, earnings are the flame at what point does the pot bubble over?
Behavioral Finance (Why Watching CNBC Wont Make You Rich)
The current confluence of strong and rising earnings, low stock price valuations and exceptionally low interest rates presents one of the best stock buying opportunities in 50 years. Most Americans will not take advantage of that opportunity because most invest with their hearts, not with their heads, and right now their hearts are filled with fear! To help our clients invest with their heads, we present this commentary on behavioral finance.
Visualize Your Personal Balance Sheet
We conclude that stocks are at the cheapest valuations in 50 years. We thought US stocks would close out 2011 with a gain of at least 8%. On a valuation basis stocks should be 15-25% higher. However, investors dont care until the situation in Greece is resolved, and that wont be until the New Year at the earliest. So rather than obsess we need to stay focused on the final destination. Of course we can deliver a 50 page financial plan, but sometime a simple picture is worth a 1000 words. Thus we present a basic tool for visualizing your assets via a pie chart.
Talking Our Way to Recession!
The Europeans do not yet have a political structure for engineering a rescue, and that will be the over-hang in Europe. They will figure it out - eventually. The risk remains whether Italy, Spain, Portugal, Ireland will require equivalent rescues. The largest unknown risk is: of all the banks and hedge funds that sold Credit Default Swaps on Greek bonds, do any have enough capital to pay off their exposure. Remember that the US Treasury directed $62 billion to AIG to cover CDS exposure at that firm in 2009. We doubt that the European central banks are prepared to do the same.
Driving Buffalo over a cliff
Who wins from the volatility of last week? High frequency trading firms that can effectively manipulate the markets by placing thousands of one sided trades on individual stocks, or even more effectively on thinly traded ETFs, to force the market one way or the other. There are no uptick rules and no margin requirements preventing these firms from setting up an initial position, manipulating the market in the right direction, and closing out the trades with a profit a few minutes later. Who loses?Pension plans, endowments, mutual funds, individual investors and corporations.
Buy Stocks Like Cans of Tuna Fish!
Following the positive jobs report today, stock prices swung between gains and losses, and closed at the low for the year. Where have we seen this before? April-July 2010. In that time frame, stocks fell 15.6%, erasing all the gains of that year, but still closed out 2010 with a gain of 15.1%. Our forecast for 2011 remains at plus 8%, which would be 13.7% above current levels. So what are we doing this week and next? Buying stocks!
Data Points from Nantucket Island
Why do we find Nantucket so interesting? Generally speaking the families that summer on Nantucket represent the top 1% of incomes and assets of any families in the entire country. In the summer of 2009, these decision makers were so frightened that families with $10 million in the bank were afraid to buy a T-shirt on Main Street. In the summer of 2010, families unwound a bit and actually went out to dinner, though the reduced patronage put a number of island restaurants and retail stores out of business. This summer things are growing again.
High net worth families still ?scared to death? of stocks
US earnings reports start the second week of July. Research in Motion?s negative pre-announcement this week is the only earnings miss worth mentioning. Earnings among financial service stocks are under pressure. Without junky mortgage backed securities to sell, not much profit on Wall Street these days. Excluding financials, earnings are expected to grow 11% in Q2, though year over year revenues are expected to be flat. Most economists expect GDP growth to accelerate in the second half of the year as the Japanese supply chain issues are sorted out and commodity prices moderate.
What is the greatest investment risk? The risk that money won?t be there when you need it!
Stocks rallied in April, closing at the high for the year and the highest level in three years. With stocks up 9.1% through April 30th versus our 2011 forecast of 8%, we see stocks as fully to slightly overvalued. In fact, given the lack of substantial ?new? news to push stocks one way or the other, we expect a 10% trading range that could last through the summer and into the fall. On February 28th, David Edwards commented on Bloomberg Radio that ?the S&P 500 could fall 10% in the next six months,? but that he wouldn?t change his strategy because he expected a 20% rally on the other side.
Backgammon as a model for stock investing
So if we couldn?t predict either the Libyan civil war or the Japan earthquake, how did we ?know? that the two year rally in US stocks would falter? Quick answer is that we didn?t ?know? anything. But we do have a good sense of when stocks are fairly or over-valued. Consider the game of backgammon, which comprises a board, 15 pieces per side, and dice. For a given configuration of the pieces and a given roll of the dice, there is only 1, or possibly 2 or 3 optimal moves that a player can make. It is so simple that if two experienced players played 100 times each to win about 50 games.
Why the US employment situation matters more than any other indicator right now
Americans are in a tough spot, but American business is in great shape with record profits, strong balance sheets and solid revenues from international operations. The stock market is getting frothy, as typified by increasing M&A activity. In 5weeks, the S&P 500 is up 5% on the year, and our forecast for the whole year is 8%, which gives us that ?walking on thin ice? feeling. We?re not in the position to jump out of the market. We would turn bullish if we got sustainable job growth of 250K/month or better.
Financial markets scarily ?normal? ? what can we expect in 2011?
As the first 5 days of January go, so goes January! As January goes, so goes the year! That?s the theory, anyway. US stocks gained 1.2% in the first week of the new year, on top of the 6.7% gained last month. That?s a year?s return in 6 weeks, which makes us think ?too far, too fast.?
Pessimism was not the Winning Bet in 2010
The easy money has been made, particularly in certain economically sensitive sectors. Returns in bonds could be flat or even negative over the next several years. We?ve substantially increased our exposure to boring old consumer staples, utilities, REITs and telecomm stocks, which offer dividend yields starting at 4% and ranging up to 12%. We expect US GDP growth to range between 2-3% over the next 4 quarters. In that environment, we would forecast gains in the S&P 500 of 8-10%, but now we wonder whether December?s 6.9% gain has already accounted for most of 2011?s stock market returns.
Investment Lessons from the 1983 Diana Ross Concert Riot
We?ve been trying to understand what makes the market psychology schizophrenic, and we remember, of all things, the Diana Ross concert in Central Park in July 1983. Over 500,000 people gathered on the Great Lawn for an annual free concert (Simon & Garfunkel, the Beach Boys, the B-52?s were acts in other years.) About 15 minutes into the performance, a terrible thunderstorm blew in, the sky turned black, lightning split the sky and over 2 ? of rain fell in the next 30 minutes, which quickly turned the meadow into a swamp.
Narratives vs. Facts: Why U.S. Stocks are Surging Despite Anemic Economic News
Investors chasing yields have bid up the prices of corporate bonds and preferred stock, while Treasury bonds, near post-war lows, barely yield more than inflation. Emerging markets stocks and bonds are doing well, but the high returns of 2008 are unlikely to happen again. Indeed, after a decade of pariah status, perhaps the only asset class that offers a reasonable risk-adjusted return is U.S. stocks. Even so, expect no more than 8 percents returns including dividends until the debt deflation process is complete in another 5-10 years.
Financial Markets Commentary
With federal tax credits for housing done, housing sales plummeted 26 percent in August. To soak up excess capacity in construction, the Obama administration just proposed a $50 billion infrastructure spending plan. Whether such a stimulus can be approved by a recalcitrant Congress two months before midterm elections is of course a big question. There already should be another round of excellent earnings in October, however, as well as an 8 percent year-end return in the S&P 500.
Housing, State Spending and Jobs ? Bogeymen for Rest of 2010
The time to buy stocks is when the economic forecast is grim. If you wait until the forecast looks good, stock prices have already moved higher. Fears of a double-dip recession have kept a lid on stock prices since April. The stock market, however, now feels like a pressure cooker on the boil, with earnings growth as the heat source. Short-covering rallies, meanwhile, are usually explosive to the upside. Heron therefore continues moving cash into stocks, as there are plenty of companies with great prospects and reasonable valuations.
It's Always Darkest Before the Dawn (of Earnings Reports)
The gold market looks like yet another bubble. Over the last three years gold gained 85 percent while the broader Commodities Index declined 19.8 percent. The current surge, however, is related to 'fear factor' trade compounded by huge hedge buying of gold futures. Meanwhile, even after the rally of the last week, stocks still look cheap. The S&P 500 should close out 2010 with a gain of 8 percent, which is 9 percent higher than current levels. Corporations flush with cash and with surging revenues and earnings are a buy.
The Parable of the Lifeboat
Many investors are hesitant to add to their stock allocations due to negative returns over the past decade. The problem is that alternative investments have performed just as badly, if not worse. Ten thousand appears to be a hard floor for the Dow, despite investors' fears. Markets are thinner and more easily manipulated during the summer time, but July earnings reports should paint a rosy picture. NASDAQ is implementing expanded 'circuit breakers' to sideline stocks with unusually large moves - anything to reduce volatility and get investors interested in stocks again.
Brushwood is to Forest Fires as Leverage is to Financial Crises
Leverage ratios are way down since the financial crisis. The issuance of leveraged securities such as collateralized debt obligations, collateralized loan obligations and commercial mortgage-backed securities is nearly completely halted, and so the 'brushwood' necessary to stoke the next financial crisis is almost entirely absent. Heron also comments on the significance of Greece, Thursday's 'flash-crash,' the weakness of financial regulation, technicals vs. fundamentals, and investment strategy.
Useful Frameworks For Investment Analysis
The S&P 500 rallied in March to an 18 month high, but is still below pre-recession levels. The daily volatility of the stock market has declined to levels not seen since the summer of 2006. The overall stock market, however, is still slightly overvalued. Corporate earnings and Federal Reserve policy over the next year will determine whether current levels are sustainable, and whether the U.S. avoids another double-dip recession. Sound frameworks for investment analysis will be crucial.
Trust, Illusion, Values and the Death of 'Common Sense'
Heron Financial Group president David Edwards says the 6.9 percent decline in the S&P 500 since January 19 was a normal market correction, and he expects positive returns in the S&P by the end of the year. He proposes several regulatory reforms to discourage "negative sum" products and restore investor trust.
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