GDP {And A Postscript}

GDP grew at a 2.3% rate in the 2nd quarter {although that's less than analysts were expecting it seems}.  1st Quarter was also revised up.

"Gross domestic product rose at a 2.3 percent annualized rate, and a revised 0.6 percent advance in the first quarter wiped out a previously reported contraction, Commerce Department data showed Thursday in Washington. The median forecast of 80 economists surveyed by Bloomberg called for a 2.5 percent gain. Consumer spending grew more than projected, and price increases accelerated.

The economy has moved beyond some of the early 2015 constraints including weather and port delays, while cooling global markets, a strong dollar and insufficient wage gains may continue to limit growth. Fed officials, considering when to begin raising rates this year, concluded on Wednesday that the U.S. is making progress."  {Source Bloomberg.}

We'll chalk this one up in the "Things are Getting Better Department".

Now for the postscript.  I've been going to Rhode Island in the summer now for 32 years, more or less at the same time.  I started going out there with my girlfriend, who became my fiancee back in my college days, who then became my wife when I was in law school and over the course of all those years became the mother of my kids.  Now the kids have flown the coup and we're headed back out there again by ourselves.  One of the things I've noticed over the years is that the market basically does nothing during these summer months or has a negative bias.  I used to express this by saying that I thought stock prices wouldn't be much higher at the beginning of the summer as when I pointed the van west in late August headed home.  That was a reference to the days when the whole family {including the dog} used to drive out and back in our minivan.   It was from noticing this that I did a lot of our original research on market seasonality.  Well I decided to see if my original observation  for the summer months was correct so I ran a scan of the market from 1983 until last year.  I started with the price of the S&P 500 on Memorial Day and used the end of July to reference when we'd usually drive out east.  Finally I   used the end of August for when we returned home as a proxy for our return to the Chicago area.  I ran this from 1983 till last year.  Turns out my original observation was pretty spot on.  From 1983 to last summer the market on average returned -0.72% during the May through August period.  It is up 0.06% in August during those years.  Both numbers are close enough to flat in my book for me to declare victory.  I'll update the results for this year at the end of the summer.  

Speaking of Rhode Island, it's time to recharge the batteries a bit so expect posting to be light the next three weeks.  Next week we'll run our July investment letter to clients in serial form.  

Finally there's this.  Once I had one little boy two little girls .  This is a pic of the one who graduated last spring,  She's  gone from this....

.....to having a classroom of her own and teaching other little girls {and boys}.

She has a couple of proud parents. Good luck Ms. English and God Bless.   Back with some live posts in a few weeks.

*Long ETFs related to the S&P 500 in client and personal accounts, although these positions can change at any time.

In The Things Are Getting Better Department

These two charts show the Civilian Unemployment Rate and the 4-Week Moving Average of Initial Jobless Claims.  As you can see both have plunged precipitously since the end of the last recession and both also continue to decline.  

We think numbers like these are important because they show that:

The economy continues to improve.  That's not only important for economic health but also for the health of the stock market.  

More people working means more people off of the government relief rolls.  That brings down the national debt.  Indeed in the last fiscal year the US had it's smallest national deficit since 2007 or before the last recession.

Working people in general are happier people that spend more money that's why we've seen a rise in consumer sentiment numbers in the past few months.  

Finally in regards to the markets, bull markets typically don't end during positive economic periods.  Stocks may have gone nowhere so far this year , but that may have more to do with other factors {valuation etc.} than an aging economy or consumer sentiment or  health.

Graph Link:  Federal Reserve Bank of St. Louis.

Chartbook {07.27.15}

  
*Long ETFs related to the S&P 500 although positions can change at any time and without notice to our readers.

Investor Mistakes

I was recently asked by a friend to come up with three mistakes that investors make.  These were the three that immediately came to mind:

Like in dieting, investors want to believe there is some magic bullet to investing.  They want to believe there is an easy and painless way to make high returns, yet take little to no risk.  They also equate market volatility, particularly as that volatility relates to market declines with risk of ruin.  That's why you see so many people investing in restaurants, real estate projects they don't understand and the like.  These investments often end poorly but the investors don't find that out till the end.  The reason for this is usually because whatever they've invested in is usually not marked to a realistic market price or any losses are not disclosed until it's too late.   I once had a prospect that brought me her portfolio to review and in it was a promissory note for $10,000 from a local motel that billed itself as a "place for couples to relax"-basically a sex motel.  When I asked her about it, she told me that it was something that her daughter had recommended she invest in.  She was thrilled with the investment she said because she was being paid 13% on it.  I looked into it for her and found out that it was bankrupt and had been for years.  Not only had she lost the $10,000 she didn't even know that she wasn't getting paid.

People also don't understand the long term ramifications of high fees.  I'm reviewing a portfolio right now that has a bunch of high cost mutual funds and is carrying a management fee of 2%.  The mutual funds have expenses in the 1-3% range so this person is paying somewhere north of 3% each year in fees alone.  Some of these same mutual funds can be replicated using ETFs, especially since many mutual funds these days are closet index funds.  Most basic ETFs have management fees under 25 basis points and many are much lower than that.  Most folks don't ever seem willing to do this math.

Finally I would say that most investors have no plan for their investments.  That is they have no long-term view of their portfolios and have never properly analyzed their own unique risk/reward characteristics.  Because of that you often see a huge imbalance between how somebody is or wants to be invested and what their risk profile says they should be doing.  I once had a prospect show me a $150,000 portfolio that he wanted to grow to an unrealistic sum over the next 10 years.  He also then listed all of the things he wanted to do when he retired.  All this meant that he was going to need more than two million in 10 years and he wasn't planning on funding his account at a rate to make this doable.  I pointed all of this out to him.  I also told him that he was going to have to save more for retirement then he was currently projecting and then pointed out that if these were in fact his goals then he was going to have to become very aggressively committed to the stock market.  I also told him that even with an aggressive allocation to equities he was unlikely to meet his target and that he would have to be comfortable with a high growth/ highly volatile investment plan.  At that point he looked at me and replied "who said anything about the stock market?  I want all of my money invested in bonds."  This was a an obvious mismatch and we never connected.

Finally I'll give you one more generalization that I've seen with investors and that, especially when they are younger, women tend to be better long-term investors than men.  My opinion as to why this is has to do with an observation that women tend to be in better touch at a younger age with how much risk they are comfortable with than men.  Men seem to become better at this after 40.  

Back early next week.  Enjoy what should be a fine summer weekend folks.  Those of us that live in the north don't often get weather like this and it's been especially lacking in this rain drenched year!

Smidiríní:

Summer Reading Time:

Bloomberg:  It's a Bull Market.  Get Intelligent About Stock Market Investing.  Something to consider:   In the past decade, the DJIA is up 8 percent per year, with dividends reinvested. The 500 of the Standard & Poor's 500 Index are up 7.6 percent per year. The NDX 100 is up 11.9 percent per year. Apple has a lot to do with this. Apple distorts.)

Tribune:  Chicago Public Schools to borrow more than $1.6 billion in long term debt.

The XX Committee:  The Painful Truth About Snowden.

The Reformed Broker:  The Cost of Free.   

*We are long various asset classes depicted above via ETFs or via ETFs related to the S&P 500 in client and or personal accounts.  Positions can vary in accounts depending on account strategy and the unique risk/reward characteristics of our clients.

Performance

Above we show how certain indices have performed this year.  As you can see nothing has really stood out although both the Nasdaq {Dark blue up 4.48%} and Vanguard's Euro-Pacific fund {Pink up 4.31%} are showing decent annualized gains.

From left to right:

S&P 500 ETF-SPY

Fidelity Nasdaq-ONEQ

Vanguard Total Market-VTI

Vanguard Euro-Pacific-VEA

iShares-Global High Yield ex US-HYXU

Vanguard Global Real Estate exUS VNQI

Barclays High Yield Bond-JNK

Vanguard REIT-VNQ

Powershares Int'l Corporate Bond-PICB

Vanguard Emerging Markets-VWO

*We are long various asset classes depicted above via ETFs or via ETFs related to the S&P 500 in client and or personal accounts.  Positions can vary in accounts depending on account strategy and the unique risk/reward characteristics of our clients.

an tSionna {S&P 500}

*Long ETFs related to the S&P 500 although positions can change at any time and without notice to our readers.

Happy Bastille Day

Happy Bastille Day for our compadres in Division 6 at the Hotel California and to Lt. English over in Division 1. 

And here's our annual tribute to France, Le Marseillaise!

Thoughts [07.13.15}

Markets have opened up about 3/4s of a percent in the US on news of a Greek deal in the wee hours of the morning.  Apparently it was a near won thing.  The talks almost collapsed at the last minute with both the Greek and German Prime Ministers prepared to leave the room, ready for a Greek exit from the Euro.  Apparently the European Council President,  Donald Tusk said "Sorry but there is no way you are leaving this room".  That set the stage for a deal.  Apparently the agreement, which sounds worse for the Greeks than the one they could have had a week or so ago, have to get this through their Parlement, so we can't quite put this to bed quite yet. If it passes then we can start to focus on other matters like corporate earnings here at home.

Speaking of those earnings....so far it has been a positive.  Few companies have reported so far. Those that have reported have had nothing to say that makes me think the economic situation has changed for the worse.  We will start to get a better read on this as the week goes on.  Current forward estimates show the S&P 500 trading with a mid-16's PE and an earnings yield over 6%.  

Probability suggests that if we get Greece behind us then we have the potential for a rally going forward.  I suppose you could say we've actually been in that mode since last week, yet by my work we've never really had much of a sell-off.  I know you can argue that we've seen that in the individual stocks and in foreign ETFs, but US indices never really became undone.  Probability suggest we could now see a move back to this year's highs in the US.  From there though the crystal ball becomes a bit more cloudy and the potential for headwinds into early autumn still exists.

Finally changing gears, Dr. Ed. Yardeni thinks we'll see one interest rate rise this year.  I think that's likely baked into markets at this point and investors will be looking to see what the Fed might be up to in 2016.  That is will one increase be enough or are we in for a series of raises at each Federal Reserve meeting in 2016.

Back Wednesday.

Thoughts {07.09.15}

Markets are on track to erase most of yesterday's losses.  We've had a bunch of risk on, risk off days recently which have amounted in our markets to a lot of churning about.  Markets are now over sold enough that probability suggests something of a more sustainable bounce at least in the short term.

Much ink {especially from me} has been spilled regarding Greece and it seems that the markets are just now waking up to the better than 30% decline in China.  First thing we should point out is that China's markets are up over 5% as of this writing.  The 2nd is that most of their decline has to do with Chinese A. shares.  These are shares that mostly trade in China and until recently investors outside of China could not invest in these.  In the context of these A. shares I give you this from Chart of the Day.com {this is their free chart-rest are behind a paywall}.

This chart shows the Shanghai Composite Index.  The first thing you should note is that better than 30% decline in the past month or so.  The 2nd is that this index went up something like 150% in the past year!  Taking a look at this market in this light makes a 30-50% pullback look somewhat understandable.  The issue from my understanding is that there's an awful lot of small investors who've bought near the top and are facing significant losses magnified by margin.  That's a disaster for those people and also for the Chinese government for letting it happen.  The other side of the coin is that the investors who bought earlier this year is still sitting on some handsome profits.  

I mentioned above there's a higher probability that US stocks are oversold in the short term enough so that a bounce of more than a day or so might be forthcoming.  While markets are looking in the green prior to today's opening, probability also suggests that we'll have to get through any Greek or other foreign related headlines over the weekend for a rally to pick up steam.  US stocks have bent in the past few weeks but have never quite broken.  For all the recent negative chatter, the S&P 500 is down less than 2% year-to-date.  That is hardly bear market territory.  It seems that each time that it looks like momentum is gaining on the downside something comes in to save the market.   I've had a shopping list together of ETFs I'd like to put in client accounts and it seems that each time I think these are going to get into a buying range, the market rallies.  It has been frustrating to not be able to execute a strategy but in this kind of volatility it is better to stay disciplined.  We will have to see if we get that kind of opportunity going forward.  This kind of focused approach has not hurt us in a year where markets have basically gone nowhere.   

We should point out that while probability suggests that markets have the potential to rally in the short term, markets have some headwinds to work through in the coming months.  Many of these like Greece and China are foreign related.  However, we still need to see how the US economy fared in the 2nd quarter and what are domestic expectations for the rest of the year.  In particular we will need to see how investors respond to earnings.  Then we will have to again focus on whether the Federal Reserve is going to raise interest rates in September.  Also we can't discount something occurring overseas.  It is amazing how many foreign crises begin in the summer months and come to a head in the autumn.  Finally there are market seasonal factors for us to work through.  Much of Wall Street is going to be at the beach between now and Labor Day and that has the potential to magnify small problems into something larger.  Some of these issues could be mitigated by the fact that the economy is probably doing OK right now.  I am not saying that markets are going to have a correction because I don't know.  I am saying we need to be aware of the possibility of rougher sailing in the next few months.

Back Wednesday next week unless something comes up where I feel the need to break in.

*Long ETFs related to the S&P 500 in client and personal accounts.  Long ETFs related to China in certain client strategies and in personal accounts.  Positions can change at any time without notice.

an tSionna {Asset Class Returns}

Averaging all nine asset classes by this definition shows a rate of return of 1.47% for the first six months of the year.  Returns would have likely been 2-3 percentage points higher if the quarter had ended a week earlier.  Thank the Greeks {and also the Chinese} for that difference!

Link:  Asset Class Returns. {Via Novel Investor & the Big Picture.com} 

*We are long various asset classes depicted above via ETFs or via ETFs related to the S&P 500 in client and or personal accounts.  Positions can vary in accounts depending on account strategy and the unique risk/reward characteristics of our clients.

an tSionna {07.07.15}

*Long ETFs related to the S&P 500 although positions can change at any time and without notice to our readers.

Thoughts: {The Day After}

Greece votes no on accepting the European Union's bailout proposals.  Here's Mohamed A. El-Erian's "10 Consequences".   Everybody "across the pond" now shifts into "Plan B." mode.  Problem is that right now nobody knows exactly what that is.  Markets in Europe are down 1-2% and US futures looking to be down somewhere in between that.  We noted last week that our economy has no real exposure to Greece.  "Business Insider.com" measures that a bit more precisely at exports to Greece at 0.006% of the US Economy.   Probability suggests that the recent choppiness in the market should continue for the next few days and then likely settle down.

The playbook right now says to wait and look for bargains in our different strategies and portfolios. You can read about those portfolios here.  I thought we would get this opportunity last week but that opportunity never occurred as markets seemed poised to continue their decline but then stabilized prior to the Greek vote over the weekend.  We'll see if we get that opportunity over the next few days. Given where we are right now and our current cash levels we prefer to let prices come to us.

Probability right now suggests we see some of stabilization and perhaps a rally in the next few weeks. However, there are enough headwinds building that stocks have the potential to see some rough going as we proceed into the "dog days" of summer.  Stay tuned.....!

The Next Few Days.

I will be out tomorrow and the markets are closed on Friday. I don't make trading calls in the short term but 30 years in this business does give me some idea of how short-term traders think. In that vein, probability suggests stocks could get choppy between now and tomorrow's close.  It is likely that traders will not want to be long short-term trades going into a weekend where uncertainty may be higher than normal.  The situation in Greece remains fluid and there are a few more negatives out there what with Puerto Rico and the like.  The other side of that coin is that the US economy is percolating along right now with decent job growth creation and other economic statistics showing gains.  That could provide a floor to market uncertainty at some point.

Not saying that any of this will happen and I definitely think you should do your own research, consult your own investment advisor or better yet hire us before making any short-term assumptions. This is nothing more on my part than observation and you run the risk that I may be wrong in my probabilistic assessment of a short-term observation.  To sum it up,  you are on your own if you act on this or anything else you read on this blog!

Back Monday or Tuesday.  Will break in over the weekend if the need arises.

Market Price to Earnings Ratio

From Chart of the Day.com:

And here's their comments:

"Today's chart illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis. More recently, due to rising stock prices and declining corporate earnings, the PE ratio has trended higher and has just made a new post-financial crisis high and is now at a level that prior to the 1990s would have been considered very high."

I have one comment.  Based on what seems to be a PE above 20 in the chart above, it looks to me like the author is using trailing earnings versus forward estimates.  The advocates for looking at  historical earnings  is that you are dealing with a known certainty in that these earnings have already been posted.  On the other hand most market observers, including me, prefer forward estimates because markets are constantly looking towards the future.  Markets discount forward events.  In that sense it is a daily voting machine regarding what might occur at some future date.  The current forward PE for the S&P 500 is between 16.50 and 17.50 times earnings out to June of next year depending on who's estimates you use.  That is still high by historical standards but not as bad as the piece above would suggest.  

Link:  Chart of the Day.com: Historical PEs.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at anytime without notice.

Back later in the week.