Markets Recoup Their Losses

From Chart of the Day.com showing what percent of their 2007-2008 losses the major indices have recouped.  Below is their chart and their commentary.

"For some perspective on the post-financial crisis rally, today's chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by each of the five major stock market indexes. For example, the Dow peaked at 14,164.53 back in October 9, 2007 and troughed at 6,547.05 back on March 9, 2009. The most recent close for the Dow is 13,954.42 -- it has retraced 97.2% of its financial crisis bear market decline. As today's chart illustrates, each of these five major stock market indices have retraced over 90% of their financial crisis decline. However, it is the S&P 400 (mid-cap stocks), the tech-laden Nasdaq and the Russell 2000 (small-cap stocks) that have recouped all the losses incurred during the financial crisis and currently trade higher than their 2007 credit bubble peak."

*Long ETFs related to the S&P 500 Dow Jones Industrial Average, The Nasdaq and certain smaller and intermediate indices that may correspond to some extent to the S&P 400 and the Russell 2000 in client and certain personal accounts.  

Link:  Chart of the Day.Com: Certain Markets Recoups Their Losses.

Equal Weighting The S&P 500

One of the decisions I made a few years ago was to largely exchange the SPDR S&P 500 ETF Trust {SPY} in our index investment strategies with an equal weighted index.  I have been using the Rydex S&P Equal Weighted Index {RSP}.  So far that has worked out OK. Bespoke Investments is out this morning with a chart comparing the performance of an equal weighted index to the S&P 500 itself.  So far the equal weighted index is winning.   I'll let Bespoke Investments explain: 

  

"As a market cap weighted index, the largest stocks in the S&P 500 have a bigger impact on the movement of the index than the smallest stocks.  This has hurt the S&P 500 quite significantly recently due to the big fall in Apple (AAPL), which is not only the biggest stock in the index, but the biggest stock in the world (as of now).  The S&P 500 is still a few percentage points below its all-time high, but if you look at the index on an equalweighted basis, where all stocks have the same weighting, it just recently made a new all-time high.  

{Above} is a chart showing the performance of the normal cap-weighted S&P 500 versus the S&P 500 equalweighted index since 1990.  As shown, the equalweight S&P 500 has lapped the cap-weighted S&P 500, and it has surged recently as smaller-cap stocks have outperformed largecaps.  

When the stock market peaked in 2000, largecaps were outperforming smallcaps, as a large portion of the gains were coming from a small percentage of largecap tech firms.  When the market peaked in 2007, it was a different story, as smaller caps drove performance throughout the entire bull market run from 2003-2007.  The current rally is more like the 2003-2007 period.

For those interested, there is an ETF that tracks the S&P 500 equalweighted index.  It trades under the ticker RSP. "

*Long indices related to the S&P 500 including RSP and SPY.  Long AAPL in certain client investment accounts through client mandates to own this stock.

Link:  {Bespoke} S&P 500 At New All-Time Highs

Individuals & Their Debt

One of our arguments for the last year has been to ask "What if things are getting better?" {See here and most recently here.} In that category I'll reference this chart below courtesy of The Reformed Broker.com and via Dave Wilson on Twitter as @theonedave.

Dave points out that:

"Consumers have reduced their debt burdens enough to be able to withstand higher taxes and help sustain the U.S. economy’s expansion, according to Pavilion Global Markets Ltd. strategists.

As the CHART OF THE DAY shows, mortgage and consumer-loan payments amount to the smallest percentage of after-tax income since 1983, according to quarterly statistics compiled by the Federal Reserve.

The debt-service ratio was 10.6 percent of disposable income in last year’s third quarter. Five years earlier, the figure peaked at 14.1 percent. Pavilion highlighted the drop yesterday in a report with a similar chart. Household spending is poised to “strongly contribute to growth” this quarter and next, Pierre Lapointe, head of global strategy and research at the Montreal-based firm, and two of his colleagues wrote. Consumers account for about 70 percent of the economy, according to Commerce Department data."

As consumer balance sheets improve capital is freed up for other uses.  Now frankly I think that some of that money is going to go into savings.  The guy that was 40 in 2000 for example is in his 50s now and probably has to make up some time for retirement savings.  But savings dollars get recycled back into the economy in the form of in investment; think stock market, think real estate.   Money also gets recycled back into the economy by spending.  

A consumer feeling better about their personal finances could take some of the drag off the fiscal impact of the higher medicare taxes that became low in January and the higher social security taxes we are all paying now.  This and lower energy prices could be a positive surprise in the early part of 2013.

Link:  The Reformed Broker: Household Deleveraging, Illustrated.

Ray Dalio On Investing

Ray Dalio is the founder of the investment firm Bridgewater Associates, one of the largest hedge funds in the world.  Business Insider featured a piece yesterday, running an excerpt of an interview Dalio gave at Davos about individual investors.  I'm posting part of that article from yesterday because I really think if most investors would focus on the points he makes below their investment experience would often be much different.  {Excerpt with my highlights.}

"Dalio explained to CNBC's Andrew Ross Sorkin the biggest mistake investors make:

The question in the markets is how events transpire relative to what is discounted.

Too many investors are reactive decision-makers. If something has gone up, they say, "Ah, that's a good investment." They don't say, "That's more expensive."

And so, that's the most common mistake in investing. You have to look ahead and say, "What is the transaction? What will be determining the buyer and seller?"

Dalio went on to explain the most important thing an investor can do:

I think the important thing here if I'm an investor is that the most important thing you can have is a good strategic asset allocation mix. 

In other words, you're not going to win by trying to get what the next tip is – what's going to be good and what's going to be bad. You're definitely going to lose.

So, what the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments.

When pressed about making bets on different markets – which Sorkin surmised must be how Dalio and his peers are so successful – Dalio said investing was a lot like poker. 

Here is the key takeaway:

The bets are zero-sum, right? In order for you to beat me in the game, it's like poker – it's a zero-sum game.

We have 1500 people who work at Bridgewater. We spend hundreds of millions of dollars on research and so on, we've been doing this for 37 years, and we don't know that we're going to win. In other words, we work that. We have to have diversified bets. We have a lot of diversified bets, and so on.

So, it's very important for most people to know when not to make a bet, because if you're going to come to the poker table, you're going to have to beat me, and you're going to have to beat those who take money.

So, the nature of investing is that a very small percentage of the people take money, essentially, in that poker game, away from other people who don't know when prices go up whether that means it's a good investment or if it's a more expensive investment.

Wise advice – and actually very apt, since poker players should know who's at the table before sitting down. Avoidance is a key skill."

My comment:  The main difference between investing and game of chance like poker is that each bet in a gambling game is a binary event.  You either win or lose.  Investors should avoid binary events.  Investing if done correctly allows you to double down on a bet when the odds are in your favor and if you are disciplined know roughly what your downside will be.  

Link:  Businessinsider.com Ray Dalio's Poker Analogy

Another Measure

In another measure of how overbought we have become, here is a chart from Bespoke Investment Group showing the Percentage of stocks trading above their 50 day moving averages.  

According to Bespoke, "90% of the stocks in the S&P 500 are currently trading above their 50-day moving averages.  This is the highest reading we've seen over the last year, and it's only the sixth time we've crossed the 90% barrier since the bull market began in 2009.   Six of ten S&P 500 sectors have readings at 90% or greater as well.  The Industrials sector has the highest percentage of stocks above their 50-days at 97%, followed closely by Financials at 96%.  Technology, Energy, Utilities and Materials are the other four sectors with readings above 90%.  Telecom and Consumer Discretionary have the lowest percentage of stocks above their 50-days at 63% and 78%, respectively."

 Link:   Percentage of Stocks Above 50 Day Moving Averages

On The Run {01.24.13}

Just a quick note between conference calls this am.  All financial news today is dominated by Apple {AAPL}.  That stock has been telling you something has been wrong for months and yesterday's conference call where their results were just so-so is final confirmation that things are a little off kilter there.  From my perspective the quarter wasn't the disaster that many analysts seem to think it was.  But AAPL is a high expectation company.  In that kind of environment you had better not only beat earnings expectations but guide earnings higher.  AAPL did neither of those things yesterday.  

I don't own AAPL directly although many of the ETFs I own for clients have APPL in their indices.  A few clients own it on their own volition and I'm going to have to decide what yesterday means for them with the stock.  My gut is that when the dust settles AAPL may be in a better place for purchase as expectations have now been lowered and the froth is definitely off this name.  Problem is I don't know from what level the dust settles.  At the end of the day the company made a ton of money this quarter and on a fundamental basis it's cheap assuming earnings hold out.  We'll have to see how this shakes out in the coming weeks.  

The bigger concern I have is whether AAPL is now a catalyst for some sort of stock market correction.  Stocks have rallied 10% since their lows on 11.16.12 and are now overbought in most of the time frames we measure.  That by itself does not always imply a correction as stocks can stay overbought {and oversold for that matter} for longer periods of time.  What does concern me is that the percentage of stocks trading above both their 40 and 200 day moving averages is now at levels from which corrections typically develop.  The 40 day stands at 84.62% of stocks trading above its level and the 200 day is at 81.27%.  Anytime you get extremes like this,  the probability of an opposite reaction increases.  In this case that opposite reaction would be a correction in either time {churning market}, price {market sell off} or a bit of both.

I'm going to take some time today to evaluate what I think all of this means for the portfolio.  I think a change in the short term indictor may be coming soon.  Will let you know.

*See above highlights in red for my disclosure on AAPL.

The Dow

The Dow Jones Industrial Average is having its best January in 17 years.  Chart of the Day has some perspective on the Dow's current rally.

"The Dow just made another post-financial crisis rally high. To provide some further perspective to the current Dow rally, all major market rallies of the last 112 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow with the majority of rallies referred to by a label which states the year in which the rally began. For today's chart, a rally is being defined as an advance that follows a 30% decline (i.e. a major bear market). As today's chart illustrates, the Dow has begun a major rally 13 times over the past 112 years which equates to an average of one rally every 8.6 years. It is also interesting to note that the duration and magnitude of each rally correlated fairly well with the linear regression line (gray upward sloping line). As it stands right now, the current Dow rally that began in March 2009 (blue dot labeled you are here) would be classified as well below average in both duration and magnitude. However, when compared to the most recent post-major bear market rally (i.e. the rally that began in 2002), the current rally has already surpassed it in magnitude and required less time to do so."  

Link:  Chart of the Day: The Dow.

*Long ETFs related to the Dow Jones Industrial Average in certain client accounts.

On The Run 01.22.13

I've a lot on my plate.  The biggest time consumer today {and the rest of the week for that matter} is listening to a wide assortment of earnings conference calls.  This is likely the most important week for earnings this cycle and this may be the most important earnings cycle in a few years so posting may be a bit light for awhile.  The reason this week is highlighted is that we may get some economic clarity regarding earnings.  

There has been a big debate in the Wall Street community regarding earnings and economic growth.  Optimists are looking for earnings growth this year of between $111-113 on the S&P 500.  Pessimists sighting slowing economic growth and among other things the hit to consumers from this January's Federal tax increases think earnings will come in somewhere in the $100-105 range.  So far the pessimists seem to be winning.  While earnings are coming in OK right now, consensus estimates for 2013 have been trending down.  This tends to be problematic for higher stock prices.

For the record our current cone of probability sees 2013 S&P 500 earnings between $102 and $112 and a current midpoint of $106.50.  I think I'll be able to narrow that range in the next two weeks.  Obviously what companies say in these next two weeks will likely have important implications for stock pricing going forward.  

In the meantime stocks have started the year with something like a 4% gain which is a pretty good move in a very short period of time and mirrors a similar move in the same time period last year.  Against expectations stocks continued rising through March of last year so we'll see how it turns out.

Away from the market the grand economic pundits, political gurus and hangers on convene in Davos this week, Japan goes all in on economic stimulation and is seeing a spat over some barren islands that it has been having with China looking like it has the potential to be something more on the international event horizon.  Stay tuned....

60 Minutes and Robots

One of the things I think that is impacting job growth is the increasing use of robotics.  The reason I think this is a big deal is that robots are increasingly taking entry level or lower skilled jobs that people used to fill.  To that end go watch a feature story last night about robots on 60 Minutes.  Take a look at the part where robots work in a fulfillment center.  The manager of that center estimates each robot is the equivalent of 1.5 works.  If my math is correct {and I havent' gone back to review the show} then each center has passed on about 100 jobs that used to be done by people.  Multiply that across the country and that's a big number.

Anyway go watch the segment here.  It's worth about 20 minutes of your time.

Some Questions I Ask Myself.

These are the questions I ask myself as I've taken a look at most of the 2013 forecasts that Wall Street's put out.  

New Taxes:  Much has been made of the new Obamacare taxes and the higher FICA taxes that will be paid by individuals in 2013.  I think I saw a post over on CNBC last week that said for individuals ,every $25,000 in income means an additional $500 of taxes up to around $100,000.  People focus on the regressive nature of these taxes and the cumulative loss in purchasing power to the economy.  Nowhere have I read anything noting that the cost of energy is down significantly in the past year.  My December heating bill was nearly $150 dollars lower than last year, a combination of lower energy costs and a so far mild winter.  I'm paying between 30 and 40 cents less at the pump each time I fill the car {In my case the scooter}.    Assuming the nation at large is also a beneficiary of these trends, how much does these savings offset the drag of higher taxes to the average American family?  

In regards to gasoline.  Via  Gasbuddy.com I've looked at historical gas prices over the past 8 years.  Since the summer of 2007 average gas prices traded in a about a dollar range, roughly  between $3.11and $4.12.  See here. What happens if the current energy bonanza means gas prices remain range bound in either this or a lower range over the next few years?  What is the impact on that?   Has anybody tried to quantify that impact on the economy?

What if when we look under the economic hood and step back from the day to day information overload we find out that things are getting better, perhaps much better than most currently think?  What if economy grows this year better than 2% which is so far a number most don't expect to see happen.  Is that a multiple expanding event for stocks?

And about stocks, just a note.  While stocks have had a pretty good run of late, from my perch they have instead been in a trading range since September.  By my work as I noted Monday, stocks are  overbought and probability from that means that at some point equities should take a breather.  Stocks are up about 3% so far in January.  Worst case scenario I've seen so far for 2013 is that earnings remain flat with this year.  Say that's the case.  That would seem to imply that stocks end the year somewhere where we are about now.  That would imply about a 5% total return in 2013 when you add in dividends.  Not great but not the worst we've ever seen either.  Probably means though we are looking at some point a correction of 10-15% from these or even higher levels before we claw back to that level if earnings do come in flat which right now would imply a soft first half of the year.  

But let's just say that some of the points I bring up above mean the consumer isn't as constrained this year as we think and let's just throw out a possible $108 EPS number for the S&P 500 then here's what I see.

@ 108.  {About a 5% estimated earnings increase}

13 PE is 1,404 and a 7.6% earnings yield.  

14 PE is 1,512 and a 7.1% earnings yield.

15 PE is 1,620 and a 6.7% earnings yield.

16 PE is 1,728 and a 6.2% earnings yield.

The earnings yield for most of the time I've been in business has been about 5-6%.  That was from an interest rate level much higher than it is today.  A mid-range of that historic level {around 5.5%} puts the S&P 500 around 2,000.  I don't believe that a 2,000 print on the S&P 500  that's going to happen anytime soon but I'll throw the number out there because that's what historical records imply.  

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

Ritholtz: 10 Trends For 2013

Barry Ritholtz over at the Big Picture also publishes what I believe is a weekly business column for the Washington Post.  Last weekend he did a column called 10 Trends to Watch in Finance for 2013.  Barry summarized his column over at his blog on Monday and I'm reprinting them here with a few comments from me where appropriate.  

According to Barry, the ten overall trends are:

1. ETFs are eating everything.  {ETFs in my opinion are still in about inning three of what I think will bring at least a decade of growth and change ito the investment management business.  2012 is the first year that I think the mutual fund industry really took note of this.}
2. Financial sector continues to shrink (advisers leaving large firms)  {This point is well taken.  I run my firm with one person besides me.  I can outsource virtually everything else that at one point I would have required an employee to do.}  
3. Increased pressure on fees and commissions.  
4. Hedge fund troubles (legal + performance) {Hedge funds increasingly going to have a hard time justifying a 2% management fee plus 20% of the profits when index based strategies can be had for pennies on the dollar.}
5. Dispersal of financial news away from MSM.  {Example is CNBC where the quality of the programming has declined substantially.  I wouldn't advertise on it unless it was free.  Most people that have it on like me have the volume muted for most of the day.  Advertisers don't like that.}
6. Demographics = huge driver.
7. The death of Buy-&-Hold has been greatly exaggerated.   {Not sure I agree with Barry on this point.  Prefer Jim Cramer's mantra of Buy and Homework instead.}
8. What Hyper-Inflation?
9. Has Bond Bull Market Ended? Are Rates Spiking?
10. The Fed (+ other Central Banks) still hold the system together.

Link:  Ritholtz:  10 Biggest Trends in Finance Today.   

Earnings: Current Consensus.

We put out a preliminary earnings forecast for 2013 yesterday, using a midpoint earnings range of $108 on the S&P 500 for 2013.  Dr. Ed Yardeni notes over at his blog last week that the consensus operating earnings estimates for 2013 and 2014 are $112.98 and $125.91respectively.  I think these numbers are way too high but if they are anywhere close to being correct and the market's PE is stuck permanently at 14 then stocks would be worth $1,582 in 2013 and  $1,763 by the end of 2014.  

Again I think both of these numbers are going to come down a lot in the next few months.  Markets don't like earnings revisions lower so that could be an excuse for a breather in the current rally.  But it does show that valuations are perhaps not as stretched as some assume.

Earnings: A First Cut At 2013

I'm using a cone of probability for S&P 500 earnings in 2013 between 102 and 112.  It is hard for me to narrow this range because there are so many variables in play right now for this year.  I will use a midpoint right now of 106.50.  For the record we were looking for a midpoint earnings estimate of 103.75 and a midpoint S&P 500 estimate of 1475 for 2012.  

I will use a range for the S&P 500 in 2013 of between 1325 and 1650.  That's a big range but I think we could see a year with bigger moves going forward than what we've seen over the past year.  Keep in mind that 2012 was the first year since 2007 that we didn't see one of those big down gut wrenching weeks where stocks declined something like 5% in a very short period.  I think there's a possibility that kind of trading returns at some point.    I will start using as a midpoint for 2013 1,575.  That's a potential price return of about 7% from current levels and about 11% from where we closed 2012.   

I'll detail how I think we might get there and a few things that concern me in a future post.  One thing I'm pretty sure about is that there's not much return in bonds this year.  I'll detail why I think that soon.

One last thing stocks are overbought short term.

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

How The Mutual Fund Industry Eats Your Lunch.

And since we've spent time this week discussing how mutual funds are hearing the foot falls of ETFs in the distance I've come across this timely article from Canada's Globe & Mail:  {Excerpt with my highlights.  One note here.  The author is talking in the article about mutual funds sold in Canada.  However most of the principles discussed here apply to the US as well.}

 ....Securities regulators have opened a discussion on the fees investors pay advisers who sell them mutual funds, and this presents a perfect opportunity to raise overall fee awareness.

One way to do this is to analyze the current extent to which investors understand and engage on the cost of investing. There are two themes at play here, one of them being the way in which the mutual fund industry has infantilized investors by hiding the cost of investing. The other is the willingness of investors to uncritically accept the fund industry’s fictional world of zero-cost investing. This is pure laziness and it borders on negligence.

The mutual fund industry dines off your ignorance. It has created a structure where the fees charged to run mutual funds include a very large chunk that is directed by fund companies to advisers who sell funds and their firms. All fund fees are scooped off the top of fund returns, and the net amount is what appears in fund company literature and on third-party data websites like Globeinvestor.com.....

The fund industry turned advisers into their sales arm, and rewarded them with a compensation system that kept inattentive investors from ever encountering fees. But advisers sold their souls in this transaction. In allowing people to think there’s no cost to advice, they made it possible to also think there’s no value to it......

....Advisers themselves are another obstacle to greater fee transparency, although more and more are moving on their own to professionalize what they do by improving fee disclosure and integrating financial planning into their practices. Laggards should ultimately lose the right to call themselves advisers.

Still another hurdle is you, the investor. You can be half to two-thirds excused for your fee ignorance because of the way you’ve been manipulated by the investing industry. But let’s get real. Do you really imagine that advisers, with all the costs of running a business, can afford to handle your financial affairs for nothing? Have you found any accountants that do your taxes for free, or any lawyers who do the legal work on home sales and purchases at no cost?

Expect to pay for good financial advice, whether it’s through trailing commissions, through a percentage fee based on your account size or through a flat or hourly fee. The flat or hourly fee model is the ultimate in transparency, but it won’t get serious traction in the marketplace until people stop being gobsmacked by the very sensible idea of paying out of pocket for financial advice......

For more personal finance coverage,  you can follow the author on Twitter (@rcarrick) and Facebook (Rob Carrick).

Link:  How the Mutual Fund Industry Eats Your Lunch.

Five ETF Trends

AdvisorOne says these are the five mega trends that will affect the ETF universe in 2013:  {Abridged and some comments from me.}

1.  Proprietary indexes from bigger ETF firms:  "....In October, the Vanguard Group turned heads when it said it was switching index funds and ETFs with aggregate assets of $370 billion to new benchmarks developed by the University of Chicago's Center for Research in Security Prices (CRSP).

Vanguard’s abandonment of MSCI indexes in favor of alternative benchmarks is paving the way for a new direction. Because of sharp reductions in ETF expense ratios, fund providers have no choice but to cut index-licensing fees to keep assets from fleeing to lower-cost competitors."  

2.   Mutual fund providers enter the ETF market:  To me this is inevitable.  Billions of dollars are fleeing the mutual fund complex and headed to ETF land.  The mutual fund industry isn't going to just sit around and do nothing while this happens.  Whether they'll be successful at it is another matter.  No where the same kind of juice in ETFs that mutual funds command.  

3.   More Active ETFs:  See above, number 2.

4.   Fiduciaries running ETF retirement plans.

5. Continuation of fee wars:  Cutthroat investment management fees have been a blessing for investors, and in 2012, we saw sharp fee cuts in ETF expense ratios from Charles Schwab, iShares, PowerShares, Vanguard and others.  This theme will continue into 2013, especially as fund providers shift to eliminate or reduce their index-licensing fees.  Furthermore, commission-free ETF trading has intensified the battle. 

Finally the author notes at an ongoing effort to push ETFs inside 401{K} plans.  This is already happening.  It's something we are starting to work with now.  More on this at a later date.

Link:  5 ETF Megatrends For 2013

Doug Kass: Lessons Learned.

Over at the street.com, Doug Kass today discusses {in the context of delivering his 15 surprises for 2013} five core lessons he has learned over the course of his investing career:

• how wrong conventional wisdom can consistently be;
• that uncertainty will persist;
• to expect the unexpected;
• that the occurrence of black swan events are growing in frequency; and
• with rapidly changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns.

Another Chart Above Its 2007 Highs

From Chart of the Day:

They note that the Russell 2000 which is a small cap stock index rallied from late 2002 into the mid-2007 and then effectively gave all of that back during the financial crisis.  The index  recovered all its losses from that bear market in a little over two years.   So far in 2012, the Russell 2000 has broken above resistance (red line) and made a new record high.  The Russell joins other indices such as the Nasdaq 100 {QQQ} in now having broken above its 2007 highs.

*Long ETFs related to the Nasdaq 100 in both client and personal accounts.  Long ETFs related to the Russell 2000 in certain client accounts.

Postmortem

The Irish lost big tonight. I won't sugarcoat that  and I won't take back anything of what I wrote earlier today.   Nobody thought in August this team would finish where they did.  The loss is a bitter pill to swallow but less of a dreg when one considers the body of their work through this entire year.

2013 beckons.  Next year I'll place that pennant on my grandmother Marie's grave!

Play Like A Champion

Welcome back from the holiday season!  Well actually there's one event left of it.  Tonight the Irish play for the national championship against the Crimson Tide of Alabama.  Alabama is a ten point favorite as this is being written and not many of the college football world gives Notre Dame much of a chance to win.  The outcome however will be written on the field and as they say out in the world "That's why they play the games" so we'll see.  

The Irish have been written off all year. This was especially true given the performance of the team  in the last years of the Charlie Weis era and the overall record during Brian Kelly's first two campaigns.  The nadir  of Kelly's  tenure may have been the 31-17 beat down that USC administered to the Irish  on October 22 of last year. Certainly nobody expected the Irish to be where they are today back on September 1st when they throttled Navy 50-10 in Dublin.  Michigan State, Michigan, Stanford, Oklahoma and USC were all supposed to be better than the Irish.  In the cases of the final three opponents, more ink was spilled on how badly Notre Dame would lose than whether they had a shot at winning.  While I don't know how the sports books in Las Vegas figured Notre Dame's odds, my guess is that a ten dollar bet laid down on ND to win the whole thing back in late summer stands the chance of a pretty good payout should they prevail tonight.  

The performance of the Irish this year in many ways mirrors the disdain and low expectations many have had of stocks over the past half decade.  In March 2009 stocks completed a nearly 60% decline in value during the worst economic calamity that has hit the global industrial world since the Great Depression.  Stocks have advanced almost 120% since those bear market lows.  Today markets as measured by the S&P 500 are only 7% off their late 2007 highs.  Market experts have fought this rally all the way up.  We have been told among other things since then that many more banks would fail, a massive round of municipal bankruptcies would occur, Europe was to fracture into itty bitty pieces under the weight of it's debt, the downgrade of the US credit ratings was the beginning of the end of the financial stability of the dollar and President Obama was bent on socializing everything!    Finally we spent almost two months dealing with the nonsense of the "Fiscal Cliff".  Through it all stocks have trudged higher.  It is true that there have been points along the way where the ride has been wild and the volatility sickening.  Stocks suffered a mini-crash back in the spring of 2010 and another big move down in the summer of 2011 during the debt ceiling crisis.  Yet each of those events proved to be pretty good longer term entry points for investors.  Markets each time went on to make another leg higher as the fears that drove investors into cash during those times proved to be unfounded.  These past few years have been a perfect example of stocks climbing that proverbial wall of worry.

Yet investors have been net sellers of stocks and huge purchasers of bonds during much of this period.    Almost every month since March of 2009 has seen individual investors cashing in their chips.  Their expectations of future returns must be so dismal that the prospect of receiving something under 2% in US ten year treasuries, a prospect that is almost guaranteed to lose money in the coming years, is preferable to the uncertainties that comes from investing in equities.

Brian Kelly was hired in December of 2009 to be the 31st head football coach at Notre Dame.  Not only did Kelly take over a program reeling from the final years of Charlie Weis' chaotic administration, he was also ushered in after the University's first choice, George O'Leary, was fired five days after his hiring when it was discovered that he had misrepresented his academic credentials.  Slowly and with several setbacks along the way, Kelly has turned Notre Dame's football program around.  Win or lose tonight the Irish are likely to be a force again in major college football.  The upcoming bowl playoff system and Notre Dame's closer football association with the ACC should help keep the program high in the national system barring an unexpected event.  In short things for Notre Dame football are getting better.  Their star is on the rise.

Similarly we need to ask what if things are getting better in the economy?  In spite of last year's double digit  market returns stocks are still trading around a 14 PE and with an earnings yield in excess of 7%.  This is still lower than their historical trading ranges.  Economic statistics seems to be consistent with growth somewhere between 2-2.5% this year.  Job growth has continued to improve albeit at unacceptably slow rates.  Our economic and national problems are too numerous to mention here and most have not been resolved to anybody's satisfaction, but few can argue that in general as a country we are not better off today than we were a few years ago.  Few also entertain the possibility that things might improve even more in the coming years, that we might be at the beginning of our own Brian Kelly era regarding an economic rebound.  If that should prove to be the case, should we get our act together and should things continue to improve then we must ourselves entertain what that could mean.  One of the things it could lead to is stock prices appreciably higher in the coming years than they are today.  Expect to hear more about this soon as we discuss our economic and market views for 2013.

And now about those Irish......Because I often mention Notre Dame during the football season, readers may think I am a graduate of that institution.  I am not.  I am a proud alumni of DePauw University in Greencastle, Indiana.  At first glance that would make me no different than any of the thousands of "subway alumni " who regularly root for Notre Dame in football.   I though inherited my allegiance to the Irish through family.  My dad's family were some of the first settlers in the South Bend/Mishawaka area, coming there several years before Fr. Sorin founded the University in 1842.  Many still live there.  Before Notre Dame was this large nationally recognized institution it was this little Catholic school in South Bend.  Back then my ancestors worshiped, worked and were buried at the University.  Several including my great-great grandfather are buried in Cedar Grove cemetery on campus.  My father grew  up only a few miles from the campus and worked football games as an usher when he was in high school.  He had some unflattering stories about Frank Leahy from first hand observation during those years.  My Grandmother Marie worked there full time in the old bookstore from the early 1960's until the early 1990's.  After that she worked part time on big event days like football weekends.  I spent much time visiting my grandparents when I was younger and that meant I spent time wandering the campus with them.  It was close to where they lived and they often needed something to do with me so it was logical that we'd go over to  school and let me run around.  I saw my first football game at Notre Dame Stadium with my grandparents in the mid 1960's and have been going strong since.  

My grandmother Marie loved football.  She knew many of the players and coaches from her work on campus.  She was especially fond of Lou Holtz.  Marie never lost faith even in the lean years after the 1988 championship.  She always believed in her heart they would return to the big time.   Marie died in 2004.  In 2005 it looked like she might be right and was perhaps pulling some strings upstairs as the Irish in Charlie Weis' first season as head coach roared out of the gate.  A controversial mid-season loss to USC ended that dream and the years rolled on.  My dad joined her in heaven in 2008.  I'd like to think that come game time tomorrow night the two of them, my grandfather, my uncle Bob and my aunt Georgia will be seated in front of whatever passes for a TV upstairs on a cloud somewhere watching the game.   I'm sure I'll be able to hear the laughter and joy all the way down here if the Irish win.....

....and if they do, I'm going to take a big "Play Like A Champion" poster and glue it to Marie's grave!    She'd love that.  God Bless! 

na heireannaigh a bhantiarna na Notre Dame!

*Long ETFs related to the S&P 500 in client and personal accounts.  I will post again Wednesday.  

PS.  Here's an article from yesterday's Indianapolis Star on how Notre Dame went from being that little Catholic school in South Bend to where it is today.