by ilene - February 8th, 2016 9:12 pm
Courtesy of Wade of Investing Caffeine
It was another bloody week in the stock market (S&P 500 index dropped -3.1%), and any half-glass full data was interpreted as half-empty. The week was epitomized by a Citigroup report entitled “World Economy Trapped in a Death Spiral.” A sluggish monthly jobs report on Friday, which registered a less than anticipated addition of 151,000 jobs, painted a weakening employment picture. Professional social media site LinkedIn Corp. (LNKD) added fuel to the fire with a soft profit forecast, which resulted in the stock getting almost chopped in half (-44%)…in a single day (ouch). [This analysis does not even include today's sharp selloff.]
It’s funny how quickly the headlines can change – just one week ago, the Dow Jones Industrial index catapulted higher by almost +400 points in a single day and we were reading about soaring stocks.
Coherently digesting the avalanche of diverging and schizophrenic headlines is like attempting to analyze a windstorm through a microscope. A microscope is perfect for looking at a single static item up close, but a telescope is much better suited for analyzing a broader set of data. With a telescope, you are better equipped to look farther out on the horizon, to anticipate what trends are coming next. The same principle applies to investing. Short-term traders and speculators are great at using a short-term microscope to evaluate one shiny, attention-grabbing sample every day. The investment conclusion, however, changes the following day, when a different attention-grabbing headline is analyzed to a different conclusion. As Mark Twain noted, “If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.”
Short-termism is an insidious disease that will slowly erode short-run performance and if not controlled will destroy long-run results as well. This is not a heretic concept. Some very successful investors have preached this idea in many ways. Here are a few of them:
‘‘We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen.” –Warren Buffett (Annual Newsletter 1994)
‘‘If you spend more than 14 minutes a year
by ilene - February 8th, 2016 7:55 pm
The stock market decline doesn't feel like a gift right now but it may turn into one if you have a long-term investment plan. And ironically, the downside risk is less now than it was in May of last year. Which shows how fear and risk are not necessarily coupled in the stock market.
Courtesy of Michael Batnick, The Irrelevant Investor
The S&P 500 closed at a 52-week low on January 20th for the first time since 2011. Last week I took a look at how stocks did in the year they made a 52-week low. Maybe not surprisingly, they performed significantly worse in the years when a 52-week closing low occurred, returning -10% on average, versus 18% for all years that didn’t experience this. Today, I’m going a step further to examine how stocks performed in the one and three years following a 52-week closing low.
When looking out only one year, it’s almost always impossible to say anything conclusive. and this exercise is no exception. With that said, here are a few observations.
- Stocks have historically not been any more likely to be positive one year after they’ve made a 52-week closing low. However, when stocks were positive one year later, the average change was 24%, significantly higher than all periods.
- Following the previous statement, after closing at a 52-week low, stocks were more likely to have an outsized move a year later. For all one-year periods, stocks closed either +/- double-digits 65% of the time. One year after a 52-week closing low, stocks had a double-digit change 75% of the time. Grab your popcorn.
Contrary to what our stomach would have us believe, stocks actually get less risky as they decline. For long-term investors that are working and buying stocks every two weeks, these declines should be thought of as “a gift from god” (H/T Nick Murray).
I usually stay pretty far away from predictions, but here’s something I feel 86% certain about; stocks will be higher three years from now. That’s what has happened historically following a 52-week closing low, so I’m going to go with that. I’m also 74% certain that the S&P 500 won’t be more than 10% lower than the…
by ilene - February 8th, 2016 3:00 pm
Courtesy of Charles Hugh-Smith, Of Two Minds
Many of these apparently high incomes are completely absorbed by high-cost upper middle class expenses.
Since the top 10% takes home 50% of all household income, it follows that this top slice has most of the discretionary cash, i.e. net income left after taxes, servicing debt and paying for essentials such as food, utilities and housing.
It also follows that the discretionary spending of the top 10% is supporting much of the economy that is dependent on discretionary spending: tourism, eating out, personal trainers, etc.
The top 10% includes the thin slice of Financial Oligarchy (top .01%) and the top 1%. This skews the income and wealth of the top 10%. But if we set aside the top 1%, the next 10% still earns the lion's share of household income.
The top .1% can prop up Maserati sales and buy $5 million vacation homes, but there simply aren't enough super-wealthy to support the U.S. economy. As for the top 1%, they can prop up the local Porsche dealership and pay dock fees at the yacht club, but there aren't enough of them to support the entire economy, either: around 1.5 million qualify as top 1%.
So that leaves the upper-middle class, the roughly 12 million households that earn a disproportionate share of household income, with the task of spending enough discretionary cash to prop up an economy that depends heavily on consumer spending.
Many of these upper-middle class households are far more financially fragile than their substantial incomes suggest. The vast majority of these high-income households depend on two earners, each making substantial salaries, bonuses and benefits such as 401K retirement contributions.
Many of these apparently high incomes are completely absorbed by high-cost upper middle class expenses. $250,000 a year may look like a lot until you throw in a couple of kids attending private prep schools or college, healthcare costs that aren't covered by insurance, an enormous mortgage and sky-high property taxes.
The upper-middle class includes many people with wealth, but it also includes many people who have saved very little, and what they do have is in IRAs and 401Ks trapped in the stock market. Their slide to insolvency can be…
by ilene - February 8th, 2016 12:55 pm
Six trillion dollar question: How much worse is this going to get?
It's ugly in global markets right now. Really ugly.
In the US, stocks had their worst start to a year ever. In Europe things haven't been much better with bad news coming out of Berlin, London, and Athens. And a crash in Chinese stocks to start the year sort of got this all going on the wrong foot….
Source: Deutsche Bank
by ilene - February 8th, 2016 12:38 pm
Courtesy of Howard Kunstler
The remaining Americans sound-of-mind must view the primary election spectacle with mounting sensations of wonder, nausea, and panic. It’s one thing for the financial system to crack up, and another thing for social norms to disintegrate, and still another for the political system to become a locked ward of obvious psychopathology. Even the neurosurgeon on duty went narcoleptic the other night when his name was called to take the stage.
Last week’s candidate “debates” (or boasting contests) only underscored the human frailty on display. Marco Rubio was unmasked as an android with a broken flash drive. For a few moments I thought I was seeing an clip from the old movie Alien. In fact, the Republican melodrama more and more echoes the tone and plot of that story: a hapless, bumbling crew lost in space. One of these nights, something unspeakable is going to shoot out of Donald Trump’s mouth and there will be blood all over the podiums.
The Democratic boasting contest was not more reassuring. Bernie blew his biggest chance yet to harpoon the white whale known as Hillary when he cast some glancing aspersions on Mz It’s-My-Turn’s special side-job as errand girl of the Too-Big-To-Fail banks. Together, Bill and Hillary racked up $7.7 million on 39 speaking gigs to that gang, with Hillary clocking $1.8 million of the total for eight blabs. When Bernie alluded to this raft of grift, MzIMT retorted, “If you’ve got something to say, say it directly.”
There was a lot Bernie could have said, but didn’t. Such as: what did you tell them that was worth over $200,000 a pop? Whatever it was, it must have made them feel all warm and fuzzy inside. Did it occur to you that this might look bad sometime in the near future? Is there any way that this might not be construed as bribery? And how is some formerly middle-class out-of-work average voter supposed to feel about you getting paid more for 45 minutes of flapping your gums than he or she has earned in the past five years?
Bernie could have found a gentlemanly way to say that directly, but perhaps he experienced a sickening precognitive vision of his jibes being used against the party establishment’s candidate in the fall…
by ilene - February 8th, 2016 12:35 pm
Courtesy of Pam Martens.
Senator Richard Shelby (R-Alabama), the Chair of the U.S. Senate Banking Committee, has announced a hearing on March 3 at 10:00 a.m. to examine “Regulatory Reforms to Improve Equity Market Structure.” To appropriately conduct that hearing, all the lights should be turned out in the hearing room and the senators and witnesses should have to fumble and stumble their way to their seats in the dark, since that’s what American investors have been forced to do since the 2008 crash – a tortuously long seven years of make-believe financial reform.
Following the 1929 crash, whose economic impact was also swift and devastating, the Senate Banking Committee spent the years of 1932 through 1934 holding comprehensive hearings and investigations on the structure of the stock market. The hearings unraveled, day by day, the frauds that the Wall Street titans of that era were inflicting on a gullible public. The initiating Senate resolution to undertake the hearings was worded thusly:
“A resolution to thoroughly investigate practices of stock exchanges with respect to the buying and selling and the borrowing and lending of listed securities, the value of such securities and the effects of such practices.”
As each devious fraud was revealed, the details landed on the front pages of newspapers in bold headlines. That provided the strong public momentum for the Banking Act of 1933, known as the Glass-Steagall Act, to separate the fraud-prone Wall Street bankers from the banks taking deposits from savers.
No such scenario played out after the 2008 crash.
by ilene - February 8th, 2016 12:33 pm
Courtesy of John Rubino
So far, each financial crisis in the series that began with the junk bond bubble of 1989 has been noticeably different from its predecessors. New instruments, new malefactors, new monetary policy experiments in response.
But the one that’s now emerging feels strikingly similar to what just happened a few years ago: Banks overexposed to assets they thought were safe but turn out to be highly risky see their balance sheets deteriorate, their liquidity dry up and their stocks plunge.
This time it’s starting in Europe, where bank stocks are down by over 20% year-to-date and credit spreads are exploding. For a general look at this process see Is Another European Bank Crisis Starting?
Not surprisingly, the scariest stories are emanating from Italy which, despite inventing the mega-bank concept during the reign of the Medici, seems unable to grasp how money actually works. Check out the following Wall Street Journal chart of non-performing loans. When 16% of an entire country’s borrowers have stopped making their payments, that country is pretty much over.
All eyes are therefore on Italy’s Banca Monte dei Paschi, which has a non-performing loan ratio of 33% and, as a result, a plunging share price. When the Italian economy finally blows up, this will probably be where it starts.
But here the story takes an even more disturbing turn. It seems that the other lender now spooking the markets is none other than Deutsche Bank, pillar of the world’s best-performing economy. Shockingly-bad recent numbers have combined with questions about its mountain of derivatives and exotic debt to put DB in a very uncomfortable spotlight. Excerpts from analysis of the aforementioned debt:
(Wolf Street) – Shares of scandal-plagued, litigation-hammered, loss-ridden Deutsche Bank, one of the largest and least capitalized megabanks in the world, closed at €16.32 today in Frankfurt, down 50% from April last year. Investors are fidgeting in their seats, cursor on the sell-button.
In October, it had announced that it would shed divisions, clients, and employees, and hopefully some risks, and that it would scrap its dividends.
January 20, the bank reported “earnings” – in
by ilene - February 8th, 2016 12:05 pm
Courtesy of Joshua M. Brown, The Reformed Broker
Today’s MLP of the Day – Energy Transfer Partners LP, ticker symbol ETE. In a tersely-worded 8K, the company announced the replacement of their CFO. I don’t know anything about the company, but the investors in the name are clearly shooting first here and getting the hell out of dodge. Shareholders in this and many other MLPS are now learning an abject lesson in portfolio construction and the true nature of risk-reward tradeoffs in fixed income.
For a 4.5% income stream in ETE during the salad days of MLPs, investors endured almost complete wipeout of their principal.
We’re seeing portfolios come in to us lately loaded with securities that carried high yields at the time of purchase, but that also carried extreme risk – a foreign concept during the QE years when anything could be financed and refinanced at will.
The pros knew not to construct income portfolios laden with “bond alternatives” or, at a minimum, to keep these holdings small and compartmentalized. The pretenders replaced the Treasury slots of their fixed income holdings with garbage so they could promise clients (and prospective clients) a current income higher than what the guy down the street was offering.
And now we separate the pros from the pretenders, as the potential risks become actual risks, and, in many cases, permanent losses.
If you’re an advisor who won business over the last few years by out-delivering on current yield in your proposals, your time of reckoning has come. Because all fixed income must be looked at from a total return perspective, not merely quoted in terms of the trailing 12-month’s dividend yield.
Read this if you haven’t yet:
by ilene - February 8th, 2016 11:59 am
Courtesy of Dana Lyons
While the broad stock market has been getting hammered, the utility sector hit a 52-week high this week – and achieved a significant relative breakout.
Our firm’s philosophy when it comes to investment selection, i.e., where to invest, is to concentrate in the strongest performing areas of the market. We refer to this as relative strength. Typically, this means the sectors that are rising more than the rest, especially on a risk-adjusted basis. Occasionally, though – in a market correction or bear market – it can mean the sectors that just aren’t losing ground, or are losing the least.
This is the case currently with the utility sector. For, while most areas of the market are off to a historically weak start, utilities are up 8% for 2016, as measured by the Dow Jones Utility Average (DJU). Furthermore, while the DJU is up a mere 1.7% over the past 52 weeks, it is nevertheless at a 52-week high.
Additionally, as the chart indicates, the utility sector has broken out of a well defined downtrend on a relative basis versus the S&P 500. While there is no guarantee, this does suggest that, over the longer-term, the utility sector could be in the early staged of out-performance versus the market. And based on past occurrences when we have witnessed relative breakouts of some variation (e.g., 2000, 2007), this is not necessarily a positive development for stocks overall.
It remains to be seen whether similarly challenging times will materialize for the broader market versus utilities over the longer-term, but that trend certainly is in effect at the moment.
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More from Dana Lyons, JLFMI and My401kPro.
by ilene - February 8th, 2016 10:33 am
Ever since early 2015, we have repeated that with the world caught in a negative rate "race to the bottom", which even S&P now admits, it is inevitable that the US will join the rest of the DM central banks, especially after the flawed and much delayed attempt to hike rates into what is at least a quasi recession.
Now, with sellside chatter that it is only a matter of time before the Fed will likewise join the fray despite stern warnings by the likes of Deutsche Bank that more easing will only exacerbate conditions for global financial firms, JPM's Michael Feroli has set the "bogey" or the catalyst for what will be needed for the Fed to finally admit defeat and go not only back to zero but below it:
While we earlier mentioned that negative nominal rates should affect the economy no differently than ordinary policy easing, there is some evidence that the exchange rate channel is particularly pronounced in the case of NIRP. The leadership role of the Federal Reserve in the global monetary system may lead to some hesitancy to engage in what may be uncomfortably close to a skirmish in the currency wars. Lastly, there is the political issue. To be sure, political concerns about NIRP are not unique to the Fed; presumably one reason central bankers abroad sought to limit the pass-through to retail depositors was to avoid pushback from the political establishment. Even so, it seems reasonable to judge that the Fed’s current political situation is more parlous than is the case among its overseas counterparts. For all of the above reasons, we believe the hurdle for NIRP in the US is quite high, and we would need to see recession-like conditions before the Fed seriously considered this option.
So the "hurdle is quite high", but all that will be needed for Yellen and co. to surpass this hurdle is for "recession-like" conditions to emerge.
Which means be on the lookout for "recession-like" conditions because a few more days of stocks crashing and wiping out years of the Fed's carefully planned out "wealth effect" and the Fed wil have no choice but to beg the Department of Commerce to come up with quadruple seasonal adjustments that make every data…