Out Till Monday.

I have a series of meetings and some client events that I have to attend to over the next two days.  I will most likely post again on Monday.

Circuit Breakers.

24/7 Wall Street on changes to the market circuit breaker rules.  Bet you didn't know there were any!  {Excerpt}

"The Securities and Exchange Commission has announced that the national securities exchanges and FINRA are filing proposals in a move to revise the current stock market circuit breakers in an effort to address extraordinary volatility in the markets. If implemented, the new circuit breakers will halt all exchange-listed securities trading in the U.S. markets. After the Flash Crash of 2010 and with the proliferation of how much the trading machines dominate the markets now, this needed to be done.

The thresholds will lower the broad market decline percentage triggers, shorten the duration of the trading halts, and also change the reference index. The existing market-wide circuit breakers were originally adopted in October 1988 and have only been triggered on one day in 1997.

The basic proposals are as follows:

•Lower the market decline percentage thresholds from 10%, 20%, and 30% down to new levels of 7%, 13%, and 20% from the prior day’s closing price.

•The duration of the trading halts that do not close the market for the day would go from 30 minutes, 60 minutes, or 120 minutes down to 15 minutes.

•Rather than six time periods, the only two relevant trigger time periods would be before 3:25 P.P. and on or after 3:25 P.M.

•The new proposal would strip the Dow Jones Industrial Average as the reference index and would change to the S&P 500 Index as the pricing reference.".......

My comment:  Perhaps it's someplace in the proposal and I just didn't see it but I think the best circuit breaker would be to bring back the uptick rule!

*Long ETFs related to the Dow Jones Industrial Average in client accounts.  Long ETFs related to the S&P 500 in client and personal accounts.

Link:  Circuit Breaker Proposals.

PreMarks 09.27.11

Stocks are looking higher on a belief that there may indeed be some road to resolution to the European debt crisis.  The threat of a government shutdown being averted probably helps today.  Hard to know whether we are really at the end of this nonsense or whether there is one more shoe to drop.  I do know that we were oversold enough in the shortest term we measure yesterday to rally.  I do know that by most metrics stocks look cheap right now especially when measured by yield.  If we don't go into a recession or slow down next year then stocks look really cheap on a 12-18 month basis.

One more thing.  Don't underestimate the pull of both the month's end and the end of the 3rd quarter on stock prices the rest of this week.  A big open like this will likely bring out sellers at some point during the day.

Jobs: Manufacturing

Fortune Magazine article on manufacturing jobs.  {Excerpt with my highlights.}

The president has a very clear vision of how to solve the jobs crisis. The problem is he's completely misguided.  By Geoff Colvin, senior-editor-at-large

FORTUNE -- Even Democrats and Republicans at each other's throats agree on one thing: Jobs are America's No. 1 issue.......{R}ight now the President is the only one in a position to take action on the problem. The bad news for the country is that he seems fixated on an approach that is delusional and doomed.

President Obama is bedazzled by the idea of manufacturing jobs as the way forward......The President is trying to create a narrative in which U.S. manufacturing fell into sad decline over the past decade but can be restored to its former glory and employ legions of Americans in high-paying jobs. ......But that narrative, implying that U.S. manufacturing withered while we bought Chinese products at the mall, is simply wrong. American manufacturing boomed during the expansion. The value of "what we build" increased every year. The problem for the President -- and it's a giant, central problem for him -- is that we did it with fewer workers every year.

This is the overwhelming reality that the President ignores. The great story of manufacturing in America and every place with a market economy is that we continually produce more stuff with fewer workers. The trend is not new. Manufacturing employees were 39% of total U.S. workers at the end of World War II, and that was the peak. The proportion has declined steadily ever since and is now 9%. Looking past percentages, the raw number of U.S. manufacturing workers topped out in 1979. Today it's 11.8 million, about half what it was then, though the country is far larger and richer and manufactures enormously more. For perspective, in 1941, before our entry into World War II, we had more manufacturing workers than we have today.

None of this should be surprising, because we've seen this movie before. Well over 60% of U.S. jobs were in agriculture in the 19th century, and the proportion has been declining ever since. Today it's less than 2%. Back when it was 60%, hunger was a significant worry for much of the population. Today that tiny 2% of workers produce so much food so efficiently that obesity is our gravest national health problem.  Fewer people relentlessly produce more and better stuff, whether it's corn, cars, or any other physical product. The trend isn't going to reverse.

The President's obsession with manufacturing jobs goes deep......And that's fine. Smarter, more sophisticated, higher-technology manufacturing is good for America. But one thing we know for sure is that the more advanced that manufacturing becomes, the fewer people it employs. At a time when the country desperately needs more jobs, manufacturing is obviously not the place to look for them. As the President meets with his Jobs and Competitiveness Council, listen carefully to what he says. A delusional policy for America's No. 1 problem is the last thing we need.

This article is from the September 26, 2011 issue of Fortune.

Link: Fortune: Jobs.

PreMarks 09.26.11

That line in the sand we posted below looks like it's going to hold at least at the open today.  Futures are up across the board on news of a debt package out of Europe.  We'll have to see more of the details before the markets will likely be comfortable that there really is some traction to the resolution of the problems over there.  We also need to remember that stocks are oversold in the short term.  The S&P 500 lost over 6% last week.  That was its biggest weekly decline since the October 2008 when Congress voted down the first TARP proposal. Stocks are lower by almost 10% for the year now.  From its late April highs, the S&P 500 is down 17%.  Given the magnitude of that decline it was likely we'd see some sort of counter-trend rally at the beginning of this week.

Monday morning rallies after a big prior down week are tricky.  Traders will often fade the initial move and we'll have to see which way the wind blows as we start off today.

PS:  Noted above the market's  17% decline from high to low so far this year.  That's actually pretty typical in terms of what we most often see regarding declines during the traditionally weak April-October trading period.  Also I'd say watch Washington this week.  There's again threats of a government shutdown.  That problem could likely gather traction in a negative manner the longer it's allowed to fester.

*Long ETFs related to the S&P 500 in client and personal accounts.

Lines in the Sand. Just Holding!

*Long ETFs related to the S&P 500 in client and personal accounts.

Something Off The Wee Path!

Johnnie Walker-The Man Who Walked Around The World!

an tSionna {09.23.11}

From Chart of the Day regarding the Nasdaq:

"The Nasdaq is currently down 14.5% since putting in a secondary peak 11 weeks ago. For some perspective on the current state of the stock market, today's chart presents the prevailing trend of the Nasdaq. As today's chart illustrates, the Nasdaq has been and continues to trade within its 17-month trend channel. However, the recent selloff has brought the Nasdaq down near support (green line) which is currently being tested."

*Long ETFs related to the Nasdaq in client accounts.

Link:  Chart of the Day: Nasdaq.

A brief note:  I'll have more to say about what has happened with the market next week.  I want to see how today trades out and spend the weekend doing some research on where we might be by the end of the year and by year end 2012.

Tax Progressivity

From Greg Mankiw's Blog: {Highlighted quotes are his.}

With all the rhetoric floating around regarding the "Buffett rule," it might be worth trying extra hard to keep an eye on the facts.  Here is the progressivity of the current tax system, according to the Tax Policy Center.  If you can remember only one fact, make it this one: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.

Link:  The Progressivity of the Tax System

an tSionna {Line in the Sand}

A visual representation of the support level we discussed in the last post.  That is our short term line in the sand.

*Long ETFs related to the S&P 500 in both client and personal accounts.

PreMarks: 09.22.11

Markets are set to open lower in a continuation of selling that began after the Federal Reserve {the Fed} yesterday said it saw "significant risk" to the global economy. In essence the Fed mimicked the International Monetary Fund from a day earlier when it ratcheted down it's global growth rates, citing slowing economies in Europe and the US. The Fed yesterday all but admitted that there was little that it could do to stimulate economic growth at this point. The help the economy needs now are changes in fiscal policy not monetary policy. It also didn't help yesterday that all of this occurred at a time when the shortest term indicator we follow when we analyze money flow had become over bought.

Stocks are going to have an ugly open if the futures are any indication. The latest sell off has taken us back to the mid-level of the trading range we've been in since the market found some equilibrium back in mid-August. Today's opening trades will likely take us back near the lows. We will take our cues from how stocks react to that support level. Areas of focus will be higher dividend paying ETFs and areas of the economy that could do well in a lower growth environment.

Net Market Neutral

To  reflect certain actions taken in the past few days we will move our shortest term rating down a notch to Net Market Neutral.  You can go here for a definition of this term.

an tSionna {09.21.11}

This from Bespoke Investment Group:  "Charts like the one {above} are never the type of pattern that bulls want to see. After rallying early on in the day on Tuesday, the S&P 500 peaked just below its 50-day moving average and finished at the lows of the day. Downtrends in the market are often characterized by rallies that fail at or near key moving averages like the 50-day, so bulls are hoping that today's pullback is not the start of a longer term trend."

Link:  Stymied by the 50 day.

*Long ETFs related to the S&P 500 in client and personal accounts.

Something A Bit Different

A Day Made Of Glass

an tSionna {09.20.11}

*Long ETFs related to the S&P 500 in client and pesonal accounts.

Dividends.

Bespoke Investment Advisors on dividend yields: 

"...Following the August decline in equities, the yield on the entire S&P 500 actually surpassed the yield on the 10-Year US Treasury. Historically this has been an incredibly rare event.  Looking at individual stocks, the number of companies that have a higher dividend yield than the 10-year is almost mind-boggling. As of {September 14, 2011}, 233 (46%) of the stocks in the index have a higher yield than the 10-year, and more than sixty pay out a yield of more than twice the 10-year.

In this environment of relatively high dividend yields, the important question for investors to consider is whether or not the dividends are safe. A lot of dividend yields are high for a reason and indicate increased risk. Often times if a stock has a high yield, the market is probably not too confident in the company's prospects of being able to pay out that dividend.....

What makes the current period somewhat unique is that to this point it seems as though there have been more dividend increases than decreases.....Dividend increases like this are not the type of behavior you would expect to see if companies were concerned about their ability to pay dividends in the future."

My Comment:  Of course one of the ways to mitigate against single stock risk is to purchase higher dividend paying ETFs.  We have been actively pursuing this strategy since the market corrected in early August.  I'm not going to mention names here because I don't want to be seen as being in the stock or ETF touting business.  What I can say is that we have purchased ETFs with what we believe are solid growth prospects yielding between 3-5%.  A two year treasury yields something like 19 basis points {.19%} and a ten year yields just a bit over 2%.  Bonds have little potential appreciation value at this point as well.  That ten year could face losses over time though if {perhaps I should say when} interest rates start moving higher.  {Bond prices fall when interest rates go higher.} 

Of course there is no free lunch.  ETFs can decline in value and will obviously trade in line with the normal volatility of the markets.  Also there is no law that says the companies underlying an ETF won't cut their dividends at some point.  But I think with markets still 12-15% off of their highs you are being compensated for that risk.  The inverse of this risk is also true.  An ETF for example that goes up 10% over the next year that pays say 3% give you a 13% total return during that period.  There are many dividend ETFs that we believe have the potential to do that in the next 12-18 months.

One final thing.  You buy a ten year treasury for that bit over 2% right now you are saying the following.  You have so little confidence in economic growth in both the United States and the world over the next 10 years that you are willing to own an investment that will likely on a tax basis {unless held in a non-taxable account} and an inflationary basis lose money.  In that regard I'll take the vaguaries that are associated with dividend ETFs any day.

*Long many dividend paying ETFS in client and personal accounts.  Long ETFS related to the S&P 500 in client and personal accounts.  The quoted Bespoke article mentions Phillip Morris {MO}.  While we hold no personal position in MO it is a major componenet of certain ETFs we own both personally and for clients.

Link:  Bespoke: Yields 

Market Swings

Follow this link to a CNBC article on volatility by way of the New York Times.  {Excerpt with my highlights and a brief comment at the end.}

Market Swings Are Becoming New Standard       Published: Monday, 12 Sep 2011 10:59 AM ET  

 By: Louise Story and Graham Bowley

The stock market just can’t seem to make up its mind.  Day after day, stocks swing sharply by hundreds of points. Last week they tumbled 3 percent in the first 90 minutes of trading on Tuesday morning, then on Wednesday closed nearly 3 percent higher and dropped almost 3 percent on Friday. All of this on the heels of unusual back-to-back 4 percent leaps and dives in one week in August....All of this anxiety has caused experts to ask whether there are new forces at work in the stock market that make trading permanently more erratic.  In fact, big price moves are more common than they used to be.

It has become more likely for stock prices to make large swings — on the order of 3 percent or 4 percent — than it has been in any other time in recent stock market history, according to an analysis by The New York Times of price changes in the Standard & Poor’s 500-stock market index since 1962.

Some experts see volatility as a problem because it can scare investors away from the markets, make companies reluctant to go public and undermine confidence in the economy, causing further drops in shares. But another viewpoint is that stocks are rightly volatile now because there is so much uncertainty about where the economy is heading — and canny investors could profit from the big swings, or simply sit them out until the market eventually finds equilibrium....

So what’s causing the rise in the big bounces?  It’s hard to know for sure, but market analysts point to new types of souped-up computerized trading and extraordinary global economic turmoil — from protests over a second bailout for Greece to the downgrade of United States debt.  It is also possible that stocks simply move faster today because of the quicker pace of news and trading, and so drops and surges in prices that might have been spread over days in past times are now condensed within hours......

.....The Times looked at two sorts of historical data — the closing prices of the S.& P. 500-stock index as well as the highest and lowest points the index reached during each trading day. Both measures, from 1962 through the end of this August, painted similar pictures of the market — it rises and falls more now in greater size.

Since the start of this century, The Times found, price fluctuations of 4 percent or more during intraday sessions have occurred nearly six times more than they did on average in the four decades leading up to 2000. The price swings today may feel even more notable because the 1990s represented a relatively calm time for trading. In contrast, price fluctuations of 1 percent and more during intraday trading were more common in the 1970s and 1980s.....

...Some analysts shrug off the big swings, saying all that matters is where prices land in the longer run, not each day. After all, the S.& P. 500 index is roughly where it was a year ago and, after the roller coaster of August, finished less than 6 percent down....."The best thing people could have done last month is nothing,” said Alec Young, an equity strategist at Standard & Poor’s Equity Research. “We don’t think that it’s a smart way to manage to be taking the temperature every day because you’ll be trading your portfolio till the cows come home.”

And volatility may not herald dips in prices — a study by Sam Stovall, a strategist at S.& P. Equity Research, found that markets since 1950 have typically been calm just before the highest consecutive price declines. But, he found, volatility goes up after prices start going down and the markets can remain nervous while prices recover.  Some longtime market observers attribute the skittishness to aftershocks of the 2008 financial crisis.“When there is uncertainty in the world, there is uncertainty in the market,” said James J. Angel, a professor of finance at Georgetown University. “After a big shock, it takes years for the markets to settle down.”

*Long ETFs related to the S&P 500 in client and personal accounts.

My comment:  While markets are more volatile in the short run, I believe that for most individual investors the best approach is to continue to take a longer term perspective.  This can give you the ability to use volatility opportunistically to add to positions at lower prices than you might have seen in an earlier period.  For all the noise over stock prices in the past month or so, once the initial drop occurred at the beginning of August, stocks have traded essentially flat.  There are also ways to stop the stomach churning plunges if the SEC would be willing to bring back a circuit breaker approach to the downside.  A simple method would be to bring back the uptick rule when markets have declined be a certain percentage {maybe a 2% decline} on any given day.

Psychology-The Investor Way

I saw this over at The Big Picture's 10 afternoon reads  yesterday.  It came to them by way of  Jeffrey Saut's investor page over at the Raymond James Web site.  I've seen versions of this before but I think this is as good a rendition as any in explaining investor psychology.  Red line indicates the approximate location where I think we are right now.  {Just a guess folks!  Don't take my word for it!}

PreMarks: Down on Europe

Markets are looking to be lower by 1-2% on European concerns over a Greek default.  Bloomberg is telling you all you need to know about it here. {Germany Readies Surrender Over Greece.}   {Excerpted}

"Germany may be getting ready to give up on Greece, as measures in the credit markets signal growing concern about the smaller nation’s ability to repay investors. Yields on Greek two-year notes rose above 60 percent today for the first time......

After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default.....Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets, and as investors raised bets on a default.

Protecting their banks and a hardening of rescue terms risk isolating Germany and unnerving global policy makers already fretting that the region’s political tussles are roiling markets and threatening growth.... Investors have doubts about whether Greece will implement austerity moves fast enough to get a sixth payment from last year’s 110 billion-euro ($150 billion) bailout.....The Greek government’s top priority is “to save the country from bankruptcy,” Prime Minister George Papandreou said in a Sept. 10 speech in the northern Greek city of Thessaloniki. “We will remain in the euro” and this “means difficult decisions,” he said. More evidence of rifts at the heart of policy making was exposed with the unexpected Sept. 9 announcement that Juergen Stark, a German, will quit the European Central Bank’s executive board over his opposition to the ECB’s purchases of bonds from debt-laden countries.   "Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” said Julian Callow, chief European economist at Barclays Capital in London. “This could complicate Germany’s involvement in additional bailout programs.” ....

...Among banks outside Greece, German lenders were the biggest holders of Greek government bonds, with a total of $14.1 billion at the end of March, according to consolidated banking statistics from the Bank for International Settlements. French banks followed with $13.4 billion. The German figure includes loans given by government-owned Kreditanstalt fuer Wiederaufbau as part of the first Greek rescue program.  The aim of the contingency plan is to shield German banks from losses from a possible Greek default, which has a more-than 90 percent chance of happening within five years, prices for insurance against default show.

The plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next portion of Greece’s bailout is withheld, said the three officials, who declined to be identified because the deliberations are being held in private. The successor to the government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.  

“Germany is preparing for the worst, which is that the crisis in the euro zone is going to be much bigger for everyone,” Erixon said.  German lawmakers, who are scheduled to vote Sept. 29 on a second Greek aid package and revamped rescue fund, stepped up their criticism of Greece after an international mission to Athens suspended its report on the country’s progress two weeks ago......With a loss in her home state of Mecklenburg-Western Pomerania, Merkel’s coalition has been defeated or lost votes in all six state elections this year as voters reject putting more taxpayer money on the line for bailouts. Merkel has also antagonized markets and fellow leaders by initially holding out against aid for Greece and demanding investors pay a share of the assistance....Fifty-three percent of Germans oppose further aid for Greece and wouldn’t save the country from default unless it fulfills terms of the rescue agreement, Bild am Sonntag reported, citing an Emnid poll of 503 respondents conducted Sept. 8."

My thoughts:  Looks like the Germans have finally had enough and figured out that it's cheaper to bail out their own banks than the Greeks. 

an tSionna {09.09.11}

S&P 500 technicals are trending in a new upward biased channel as noted by the fellows over at BeSpoke Investment Group.  Here's what they have to say:  "The S&P 500 is currently up a little more than 7.5% since hitting its 2011 intraday low on August 9th. While the market continues to be volatile, the S&P has formed a new short-term uptrend channel since that low point was reached. The top of that uptrend channel is right at the index's 50-day moving average, so that will be a key resistance level to watch if the market manages to get there in the coming days/weeks."

*Link:  Bespoke: S&P 500 Trending.

*Long ETFs related to the S&P 500 in client and personal accounts.

PreMarks: 09.07.11

Stocks are looking to head higher, continuing a rebound that began shortly after yesterday's open.   I'm told that this is the worst start ever for a September. At yesterday's open stocks had lost something like 4% in the first three trading days of the month.  I don't know what to make of that report.  While those decline numbers may be accurate we also need to take into account that stocks were goosed higher pretty hard into the end of August.  

On a seperate note:  I've often said that the last shoe to drop would be the forced right-sizing of governments at every level in terms of employees, costs and benefits {see this}.  Two headlines along these lines caught my eye in the past few days. 

1.  Illinois Gov. Says Legislatures Budget Forcing Him To Make Reductions

2.  US Postal Office Nears Default  {We've written about the post office before here }.

Jobs: Underemployment & The Unemployed

U-6:  Unemployed plus those marginally employed.  Not pictured in this report that these same statistics runs in the 20%'s for African-Americans.

Source:  The Big Picture: Massive Employment Chartfest

Net Market Positive

Reflecting some things we did yesterday, we'll move our shortest term market rating back up to Net Market Positive.  You can click here  for a definition of that term.

Jobs: Trendline

Another look at jobs.  This comes to us from Chart of the Day.  Here's what they say:

"{Last Friday}, the Labor Department reported that nonfarm payrolls (jobs) were unchanged in August. Today's chart provides some perspective on the US job market. Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). During the current cycle, nonfarm payrolls have pulled away from its 40-year trend (from 1961-2001) by a record amount (see bottom chart). In fact, the current number of US jobs is well below its 2001 peak."

Link:  Jobs: Trendline.

Told Ya!

Notre Dame’s 23-20 loss to USF stopped twice by storms!

Football

We'll take a time out from our regular fare to note that they start playing college football this weekend.  Actually the football season began Thursday but as far as I'm concerned the season begins 2:30 Central Daylight Time when the Irish begin their season against The University of South Florida {USF}.  The Irish have the potential to be a pretty good football team this year but to be honest I think there is a real possibility that they lose this game.  Skip Holtz {son of ND coaching legend Lou} is USF's head coach and this is just the sort of scenario that the football gods tend to look unfavorably towards the Irish.  Hope I'm wrong.  Usually it tends to be for a reason when I get that bad football tingle and I have it now!  Irrespective I think the Irish have the potential to go 9-3 or 10-2 this year.  I just hope this weekend isn't one of those 2 or 3 losses!

Link:  an hÉireannaigh Throdacha

Labor Day

Happy Labor Day weekend!  Always bittersweet as this marks the traditional end of summer.  Most of us find anymore that summer ends mid-August because schools seem to start earlier each year!  Anyway given the holiday schedule and some business commitments, I won't be posting until sometime midweek.  I'm working on a longer piece that will take a look where we might be by the end of the year.  I want to warn you that I am likely to take the expected price ranges that we've been using in our end of the year valuation analysis for the markets down a notch in that report.  I think I'll be lowering those expected valuation targets for both this year and next based on what we've learned over the last month.  I'm thinking that we'll look at S&P 500 price targets of 1250-1350 for the end of this year and 1400-1450 for end of 2012.  I'll caution you that these are my preliminary ideas and I'll need to think about that a bit more over the holiday!

Look for that piece sometime after the President speaks next week.  I want to see what he proposes and how both the opposition and the markets react.  Irregardless, I'll be back on my regular posting schedule next week.  See you on Tuesday!

*Long ETFs related to the S&P 500 in client and personal accounts.

PreMarks: Labor Day.

Markets are set to open lower {as in ugly lower} on less than stellar economic data and the fact that we had such a big move in the past two weeks.  Some of us might think that they ran the markets this week and last into the end of the month.  Gotta make those statements look as good as possible!  Market was overbought in the short term so some sort of profit taking should have been expected.  Chart above shows a different look than what we normally publish here.  It shows a set of moving averages which the market {as represented by the S&P 500 ETF, SPY} is trading under.  I've also imposed some of our support/resistance levels for reference.  These lines represent resistance that the market is going to need to trade through in the next few weeks if stocks are going to move higher. 

*Long ETFs related to the S&P 500 in client and personal accounts.

Net Market Neutral

To reflect certain actions taken in portfolios over the past several days, I will move our shortest term market view down one notch to NET MARKET NEUTRAL.  This is for our shortest time frame that we measure and reflects the fact that stocks have had a pretty decent move in the past 10 or so trading days.  You can find a definition of what that means here.