End Of The Year.

We're going to be taking some time off between now and the beginning of 2014.  I don't expect much from the world of finance between now and the start of a new year but rest assured we'll cover it if the need arises.  A few quick thoughts before we trot off into the holiday madness.  

*  My S&P 500 estimates are a work in progress for next year but right now I'm thinking of a range between 1,850 and 2,050.  Nothing final yet but let's start with these figures and try to make some sense of them next year.  

*  I continue to think the story next year will be foreign and emerging markets.  I've been saying that for about six months though and so far I've been wrong.  Stay tuned to see what 2014 brings over seas!

* The other story {and on this one I've been a bit more correct} for next year I think will be that the US economy continues to surprise to the upside.  I've said for quite awhile that I think in the aggregate the economy has been getting better.  I think next year will be the year that our improving conditions here at home becomes more apparent to the man on the street.

*   I want to take this moment to thank several groups of folks.  The first is my family without whom my life would have not been as rich in spirit as it is.  The second are my friends.  By-the-way if you're a client you're a friend.  Not just because you pay me {thanks for that by-the-way} but because I'm fortunate to be able to work with people I like.  If a man measures his wealth by his friends then I'm one of the wealthiest people on this world.  Thanks again for your friendship.  It means the world to me.  Thanks as well to my clients, especially those that were with me in the beginning and stuck around for the hard times when it looked like the world was going to end.  Finally, thanks to all of you who read this blog.  I'm amazed how many of you that's morphed into.

*  Thanks to all the folks {military, police fire et al.} who put themselves in harms way each day and man the walls so the rest of us might be safe.  Semper Fi Uncle Mike.

*  God Bless to those in hard or mean places.  May we do more for them in the coming year.

*  God Bless and Godspeed Mrs. T. 

*  In the same vein on things getting better, I urge you to read this uplifting piece that I found on Business Insider.com.  It's titled "The Future is Going to be Awesome, And Here's Why".  It's too lengthy for me to excerpt but I want to leave you with the following:

If we take a further step back, we can see that over the last 100 years economic downturns — be they recessions that occur every few years or bigger crises such as the Great Depression — as painful as they are while we live them, barely register in a background of unabated economic growth. In fact over the last 100 years human lifespans have doubled from 40 to 80, average per capita income has tripled and childhood mortality has divided by 10. The cost of food, electricity, transportation and communications have dropped 10 to a 1,000 fold. Global literacy has gone from 25% to over 80% in the last 130 years.

We have redefined what poverty means. Today 99% of Americans in poverty have electricity, water, toilet and refrigerator. 95% have a television. 88% have a mobile phone. 70% have a car and air conditioning. The richest people 100 years ago could only dream of such luxuries.

We are also living in the most peaceful time in human history; not just of recent history, but in the history of humanity. We are truly living in extraordinary times.

From a financial perspective 2013 was a good year.  Here's to another prosperous year in 2014!  May the new year find you healthy in both body and spirit.  May the road rise to meet you, the wind be always at your back and the sun shine bright across your fields!  Happy holidays to each and every one of you.  Hanukkah has already passed this year, but if you will be celebrating Christmas or Kwanzaa I wish you the merriest one possible.  And finally in the words of Charles Dicken's character, Tiny Tim, God bless us everyone.

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

Things Are Getting Better-GDP

From Bloomberg.com.  US GDP revised higher to 4.1%.  And from Business Insider.com:

"The key takeaway from this report is simply that the underlying momentum in U.S. economic activity has shifted up a gear in Q3," says Millan Mulraine, deputy head of U.S. research and strategy at TD Securities. "While much of the gain in overall activity was due to inventory accumulation (accounting for 1.7 percentage points), the strengthening in domestic consumption and investment activity points to a more constructive narrative on economic activity that previously thought."*

*Business Insider.com:  GDP Growth Surges to 4.1%.

Market Seasonality-A Republish

My post on Wednesday has generated a lot of questions about my views on seasonality.  Since folks seemed interested in this topic, I'm republishing today something I wrote about this back in May, 2012.

Q&A {Part III} Reprint

This is a partial reprint of Part III of our Q and A series.  This was originally posted to our blog on April 6, 2012. {Note:  Highlighted bullet points.}

You place a lot of emphasis on market seasonality. Why is that?

We have touched on this in past client letters here  here and here. Basically there are seasonal variations or patterns that come into play in most years. The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows. While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October.

As I've said in the past one of the reasons I think this pattern works is the philosophy behind how most of what we refer to as institutional money is invested. Institutional money is a generic term for large institutions such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark and is also managed so as to not give up the assets. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {i.e. better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out. One of my concerns right now is that the markets have had such a strong move that much of the economic expectations are already priced into stocks. If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter term horizon, may begin to lock in their profits.

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up {unless it’s bad news. It is amazing how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008 banking crisis are examples of this.}

Summer is also when analysts begin to fine tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

Something To Think About.

I am out today so I'm posting a quick muse from both Josh Brown over at the Reformed Broker.com {a blog that in my opinion is an everyday must read} who quoted this from Eric Peters at Wkndnotes {a restricted web address}.

You know next yr will be the 1st since 2003 that Japanese and Chinese stocks both post double-digit gains?” asked the same Asian CIO. Both mkts are cheap, Chinese reform and Abenomic stars are aligning. Plus, the US fiscal drag is lifting, and Europe won’t contract. Then we discussed the deflationary consequences of the technological revolution rippling across the globe. The resulting low interest rates, rising corporate margins. And he asked, “In that world, isn’t the right P/E for the S&P 20?” -Eric Peters.

Josh {Brown} here – If we’re going to muddle through again in 2014, with more slow economic growth and borderline deflationary employment and wage conditions, the S&P 500 is likely fully priced.

But what if we’re not just going to muddle through?

What if something bigger is happening?

Worth considering.

My comment:  Say all of the above takes place {well all of the above with the exception of the US PE expanding to 20-cause in my book probability says that is low percentage likelihood} then I think international markets look increasingly cheap. Global expansion in that scenario could be the tide that lifts all boats.

Link: The Reformed Broker.com" "Re Global Expansion".

Market Seasonality

I've talked a lot in the past about market seasonality.  Bespoke Investment Group was out yesterday looking at markets in December and January.

Here's what they think about this {My highlights in Green}:

"With a weak start to the month{My comment stocks are down in aggregate a bit more than 1% in December.  Foreign markets have faired worse than this}, many investors are wondering where the seasonal strength that we typically see in December is.  Is it time to hit the panic button?  Maybe not yet.  Following up from a Wall Street Journal story that highlighted some of our seasonality analysis, the chart {above} shows a composite graph of the performance of the DJIA from December through January over the last 20, 50, and 100 years.  As shown in the chart, December strength is typically back end loaded.  In fact, over the last 100 years, the DJIA has typically been down for the month as late as December 21st, but it has still managed to finish the month with an average gain of 1.24%.

Over the last 20 and 50 years, December has fared a little better.  Even over these time frames, though, the index has only been marginally higher two weeks into the month, before rallying to finish off the month strong.  Over the last 50 years, the DJIA has averaged a gain of 1.53% by the end of December.  More recently, over the last 20 years, the DJIA's average monthly increase has been 1.44%.  One thing to note in the chart {above} is that the start of the typical 'Santa Claus' rally that comes in December has moved up over time as traders have tried to anticipate it.  Looking at the last 100 years, the Santa Claus rally began around the 21st of the month.  In the last 50 and 20 years, the rally has kicked off a week earlier beginning on the 14th.

Looking ahead to January, over the long-term (50 and 100 years) it has been a positive month for the DJIA.  More recently, though, January has been a tough month for equities as the DJIA has averaged a gain of just 0.03%."

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

Link:  Bespoke Investment Group: December-January Market Seasonality

Foreign ETF Performance-Long Term

Here's a chart from Stockcharts.com of how select foreign ETFs have done over the past three years. {Note that you can double click on the chart to make it larger.} These are mostly regional charts such as VEA {Vanguard Euro Pacific} or concept ETFs such as VWO {Vanguard Emerging Markets}.  The S&P 500 is up nearly 64% in the same time period.  

What strikes me here is that the discrepancy has become too large.  Probability would seem to indicate that either the US market has to revert to where international markets are trading, or these markets have to play catch up with us.  Many foreign markets seem cheaper than the US right now and most pay fairly attractive dividends.  Example is the above mentioned VEA which according to FINVIZ.com pays nearly a 3% dividend.*  These markets are being abandoned as the end of the year performance and tax issues come into play so they are starting to reach oversold status in our indicators.  Not saying they're going to do anything soon or maybe at all but from my perch the longer term risk/reward criteria are looking more favorable.

*Dividend information on VEA is from FINVIZ.com.  Its current yield as of today shows at 2.95% on their page.

**Long ETFs representative of the S&P 500 in client and personal accounts.  Long DEM, Dol, VWO,VEA,VGK in both certain client and personal accounts.  Long VT in certain client accounts.

The Millennium Economy: An Introduction.

It's no secret that the world economy has behaved differently in say the last six to ten years.  Here's something then that I've been chewing on for about the last six months.  Economists constantly reference every number and statistic back to every recovery and recession we've seen since the end of World War II.  Everything is always referenced as the "Post War Economy".  Well it strikes me that today's economy bears almost no resemblance to the world of 1945 or 1955 or even 1985.  Politically the world order has been broken and remade several times since then.  Consider that in 1945 the three largest world economies by country were the United States, Great Britain and France.  Today they are The United States, China, Japan then Germany.  

Back in the day, manufacturing was the largest sector of the US economy.  Today it's shrinking.  Computers and modern technology are increasing the rate of learning and economic development while rewriting the rules for how modern systems work.

I'm going to be talking more about this in the months ahead.  This year we introduced an occasional column series entitled "Things are Getting Better."  We're going to do the same thing in the coming months under a new series of columns which we'll tentatively title "The Millennium Economy.  As a start off to what we will be discussing, watch this 60 Minutes clip below from earlier this year on Robots & Jobs.

Stay tuned for more at a later date. 

Dividends In a Rising Rate Environment

BlackRock takes a look at how dividend paying stocks fair in a rising rate environment.  Hint:  They do better than bonds.  You know I'm negative on bonds anyway.  This just adds to my list of reasons to stay clear of this asset class for the immediate future.

"Most investors fear rising interest rates. But perhaps more than the others, bond investors fear the loss of portfolio value that may occur when interest rates rise. Which begs the question – are there alternatives to bonds that might offer income and behave better in a rising rate environment? Indeed, global dividend stocks offer a compelling potential of income and outperformance in rising rate environments."

Link:  BlackRock: Stocks Seek to Offer Protection Amid Rising Rates.

S&P 500

I thought we'd look at the S&P 500 today since markets have seen their worst two day performance in a couple of months.  We're going to look @ its ETF equivalent SPY.  It's trading about 1% higher then when we last looked at it about a month ago.   Here goes.

SPY is trading above its trend line and all of its major moving averages.  It is overbought by our work in all three of the timeframes we follow.  Note however that it has been overbought for a couple of months and markets can stay overbought or oversold for longer periods of time then most investors think.  

S& P 500 four quarter forward earnings-which given the time of year we're in also corresponds to year end 2014 earnings- are now at a record high $120.74.  While I haven't settled in on next year's number, I'm leaning towards something like $117.50.  Those numbers imply earnings potential in 2015 of something north of $125.  Using three different sets of numbers we get these current valuation metrics.

$117.50 is a current PE of 15.16 and an earnings yield of 6.6%.

$120.74 is a current PE of 14.76 and an earnings yield of 6.7%.

$125.00 is a current PE of 14.26 and an earnings yield of 7.0%.

These prices are not cheap the way stocks were priced over the past few years but neither are they historically expensive.  Equities also have to be viewed in the framework of interest rates that are still trading at historically low levels.  Stocks currently trade on a current earnings basis with roughly a 16 PE.  Using that metric for next year on estimated earnings then fair value for the S&P 500 is somewhere between 1,880 and 1,930.  This is just what the math says.  No assumption should be made that these prices will be met.  

The economy may grow faster in 2014 than people currently expect which would be a positive for equities.  The other side of that coin is that the potential for higher interest rates next year could be a significant headwind for the markets at some point.  I would also note that foreign markets look more reasonably priced on a valuation basis than the US.

Charts courtesy of FINVIZ.com.

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

Another View Of Asset Classes

I thought yesterday's asset class illustration was a bit too busy so I tried to clean it up today.  You'll have to pardon my first attempt at doing a screen grab.  {You can double click on the chart to make it bigger.}At any rate the chart above shows the S&P 500's performance via the ETF SPY versus representative ETFs from other asset classes in 2013.  US stocks and certain selected foreign markets have been about the only place to be this year.  The fear of rising interest rates has really put a crimp on almost everything else.

ETFs from left to right with approximate color representation:

SPY        S&P 500 SPDR {+30.97%}*
GLD       SPDR Gold Trust {-24.12%}*  
TLT        iShares 20 Year Treasury {-13.46%}
VWO     Vanguard Emerging Markets {-3.40%}*
JNK        SPDR High Yield Bond Fund {+5.84%}*
BND      Vanguard Total Bond Fund {-1.71%}
VNQ      Vanguard Reit {+4.20%}*
DEM      Emerging Markets High Yield Equity {-5.38%}*

*Indicates ETFs we may hold a position in for both clients and personal accounts.

Asset Classes

Busy chart that shows it's been a great year to be invested in US Stocks.  Everything else, not so much.

Link:  From the Blog "Short side of Long":  Where to Put Money to Work Right Now.

*Not quite sure what to disclose here but I will say that in terms of ETFs long US and foreign equities in client and personal accounts.  Long GLD in certain client accounts.

Gold vs. The Dow.

From Chart of the Day.com:

"For some perspective on the long-term performance of the stock market, today's chart presents the Dow priced in another global currency -- gold. Today's chart illustrates how it currently takes approximately 13 ounces of gold to 'buy the Dow' (i.e. the Dow / gold ratio) -- well off the 44.8 ounces it took back at its peak in 1999. Priced in gold, the Dow had been in a massive 13-year bear market. However, back in the summer of 2011, gold peaked while the Dow continued to rally. While the Dow (priced in gold) is currently well-off its dot-com record highs, it has been surging as of late. The current rally has resulted in a break above resistance of its latest downtrend channel as well as new post-financial crisis highs."

My thoughts:  Gold-once the darling of the investment world during the worst days of the crisis-has really lost it's luster {See here at the Financial Times}.  People forget though that gold is for most people used as a hedge.  When it comes to hedging and diversification the article notes that the difficulty with buying things for diversification purposes is that often when one thing goes up the other goes down.  That's the often times zero nature of diversification.  Hopefully over the long run diversification, when pared with a client's unique risk/reward criteria, gives the client looked for risk adjusted returns. 

Link:  Chart of the Day:  Gold and the Dow.

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

Posting note:  I will not be posting on Monday as I have to be out.  Expect some new and different things coming in the weeks ahead!

Things Are Getting Better {Economic Edition}

A series of data points that illustrate our long held contention that the economy is getting better. Charts come to us from the Federal Reserve Bank of St. Louis.

GDP expands to an all-time high:

Per Bloomberg.com,  US GDP grows at a 3.6% rate.  This is a faster pace than initially reported and  higher than consensus.

Per Business Insider.com:  Initial Unemployment claims unexpectedly decline.  

What Bubble?

A lot of chatter recently about a stock market bubble.  That sort of talk seems to increase every time the market rises.  While stocks can correct at any time, a bubble in the current environment seems like a less probable event.  For one thing investor sentiment as shown in the chart above isn't at levels that usually denote that sort of thing.  There may be bubbles out there {See Bitcoin!} and stocks will fluctuate in value as the normal aspects of volatility continue to rule the roost.  However, I don't see any bubble in stock prices right now and investor sentiment isn't supportive of that sort of thing either.

Note though that in so saying it is very likely that equities will experience some sort of pullback in 2014.  That's just probability given that's the historic norm of stocks.  But such a  pullback would not constitute evidence of a bubble or necessarily show the end of the current bull market.  Bull markets end when investors start to worry about recessions.  The economic data is hardly supportive of that sort of thing right now.

Link:  Source:  Abnormal Returns.com.  Monday Links.

Bond Yields

You are probably aware that I have a long term dim view of what bond returns will be like.  If you are unsure of what I think then go read this.  Now one more argument in favor of stocks longer term over bonds comes to us in the chart above which is courtesy of Blackrock.  This chart shows that throughout most of the world the yield on equities outpaces the yield on bonds.  This just once again tilts the advantage towards stocks in my opinion.  Stocks may not go up all the time but you can still be paid to wait for the next bull run.  

One other thing notice that US stock market yield at 2.1% has more or less held constant even in the face of the market's advance this year due to companies continuing to raise dividends.

Link:  Blackrock:  A Look at Dividend Yields Around the World.