by ilene - January 30th, 2016 10:55 pm
Courtesy of John Rubino
Well that didn’t take long. Two weeks of falling share prices and the European and Japanese central banks caved. First the ECB promised new stimulus — which the markets liked — and then the BoJ upped the ante with negative interest rates — which the markets loved. Here’s a quick summary from Bloomberg:
In surprising markets by penalizing a portion of banks’ reserves, the Bank of Japan on Friday joined a growing club taking the once-anathema step of pushing some borrowing costs beneath zero.
“Negative rates are now very much the new normal,” said Gabriel Stein, an economist at Oxford Economics Ltd. in London. “We’ve seen they are possible and we’re going to see more.” Negative rates once “sounded illogical,” said Stein. “We now know what we thought was true isn’t.”
This is a resounding admission of failure. Over the past seven years the world’s central banks have cut interest rates to levels not seen since the Great Depression and flooded their banking systems with newly-created currency, while national governments have borrowed unprecedented sums (in the US case doubling the federal debt). Yet here we are in the early stages of a global deflationary collapse. Commodity prices have followed interest rates to historic lows, while growth is anemic and may soon be nonexistent.
The official response: More extreme versions of what has hasn’t worked. Here’s a JP Morgan chart published by Financial Times that shows just how sudden the trend towards negative interest rates has been:
Future historians will have a ball psychoanalyzing the people making these decisions, and their conclusion will almost certainly be some variant of the popular definition of insanity as repeating the same behavior while expecting a different result.
So what does this new stage of the Money Bubble mean? Many, many bad things.
This latest leg down in bond yields presents savers (the forgotten victims of the QE/NIRP experiment) with an even tougher set of choices. Previously they were advised to move out on the risk spectrum by loading up on junk bonds and high-dividend equities. Now, after…
by ilene - January 29th, 2016 9:44 pm
Joshua Brown writes an important "Bear Market Survival Guide" for anyone trying to star in their own portfolio management adventure. (And yes, we're already in a bear market. And yes, if you haven't seen The Revenant, be careful not to read the italics in the Fortune article. )
Courtesy of Joshua Brown
How’s the correction treating you so far? I know it’s not fun. For a lot of areas in the markets, we’ve already gone beyond a correction and into the dreaded “bear market territory.”
But it’s not so bad. We’ll get through it.
In the meantime, I wrote up some rules for surviving the stock market’s version of The Revenant at Fortune Magazine. Hope this is helpful / entertaining. This title wasn’t mine, btw:
If you haven't already read Joshua's "If You’re Reading This It’s Not Too Late," read that too. Long excerpt:
I want to reiterate something I’ve said here many times: a cyclical bear market does not have to end in a crash nor does it have to be accompanied by a recession.
It’s possible, although rare, to have a mid-cycle bear after which the economy and stock market simply pick up the pieces and move forward. In 1984, with many oil companies going bust (sound familiar?), there was a peak-to-trough decline in the S&P 500 of 14.4% from the start of the year through the summer. There was a 19.9% decline in the summer of 1990 as markets were shocked by the Savings & Loan crisis and a 19.3% sell-off during the Asian currency crisis in the summer and fall of 1998.
In other words, cyclical bear markets can happen even during a powerful secularbull market. Not every cyclical bear results in “the next 1929.” Investors in the modern era do not have a lot of experience with these relatively benevolent plunges. The dot com bust of 2000 and the Great Financial Crisis of 2008 – both of which resulted in the
by ilene - January 28th, 2016 8:56 pm
00:02:00 Checking on the stock market, and AAPL, BA, AMZN, YG, SI, NG.
00:07:00 World: A new entire paradigm, because we are not going back.
00:30:09 SPY: Trade idea, puts and calls.
00:38:13 Commodities: Pre-Earning Panic.
00:38:52 Dollar Index: Doesn’t work for Oil, Yen, Euro, Yuan.
00:47:39 QE: the Fed has to redeem its bonds, collect cash and not recycle it beyond this point.
00:50:38 Butterfly Portfolio: trade idea, calls.
00:59:15 FED: No bigger reaction, a bit bullish. It's not going to raise rates.
01:06:08 More checking on the stock market.
01:07:28 GDP: 3rd Revision to the GDP
01:08:30 SDS: Trade idea
01:14:49 More markets, S&P.
01:19:20 FED: no wonder we crash!
01:22:46 Everything is bouncing, still good.
by ilene - January 27th, 2016 2:14 pm
Robert Reich discusses the appeal of Bernie Sanders and Donald Trump in the upcoming election. Reich's argument is that people want big money and corruption out of politics. It explains an interesting headline I read earlier, POLL: Without Trump 83% Say They WILL NOT Watch GOP Debate. My first thought was, "Without Trump and his bigoted attacks on just about every group, the debate would be boring. There'd be no show."
But Reich invokes the popular mood to explain Trump's and Sander's popularity. "Either you’re going to be attracted to an authoritarian son-of-a-bitch who promises to make America great again by keeping out people different from you…" [Trump]. Or "you’ll go for a political activist who tells it like it is, who has lived by his convictions for fifty years, who won’t take a dime of money from big corporations or Wall Street or the very rich,.."
Courtesy of Robert Reich
Not a day passes that I don’t get a call from the media asking me to compare Bernie Sanders’s and Hillary Clinton’s tax plans, or bank plans, or health-care plans.
I don’t mind. I’ve been teaching public policy for much of the last thirty-five years. I’m a policy wonk.
But detailed policy proposals are as relevant to the election of 2016 as is that gaseous planet beyond Pluto. They don’t have a chance of making it, as things are now.
The other day Bill Clinton attacked Bernie Sanders’s proposal for a single-payer health plan as unfeasible and a “recipe for gridlock.”
Yet these days, nothing of any significance is feasible and every bold idea is a recipe for gridlock.
This election is about changing the parameters of what’s feasible and ending the choke hold of big money on our political system.
I’ve known Hillary Clinton since she was 19 years old, and have nothing but respect for her. In my view, she’s the most qualified candidate for president of the political system we now have.
by ilene - January 26th, 2016 4:49 pm
The good news is that Apple earned a record $18.4 billion in profit in Q1 2016. Earnings beat estimates, although revenue came short, $75.9 billion vs. the $76.5 billion expected.
Apple® today announced financial results for its fiscal 2016 first quarter ended December 26, 2015. The Company posted record quarterly revenue of $75.9 billion and record quarterly net income of $18.4 billion, or $3.28 per diluted share. These results compare to revenue of $74.6 billion and net income of $18 billion, or $3.06 per diluted share, in the year-ago quarter. Gross margin was 40.1 percent compared to 39.9 percent in the year-ago quarter. International sales accounted for 66 percent of the quarter’s revenue.
“Our team delivered Apple’s biggest quarter ever, thanks to the world’s most innovative products and all-time record sales of iPhone, Apple Watch and Apple TV,” said Tim Cook, Apple’s CEO. “The growth of our Services business accelerated during the quarter to produce record results, and our installed base recently crossed a major milestone of one billion active devices.”
So why is the stock trading down to around $95 today (~ 5% drop)? Although Apple posted its largest quarterly profit ever, it forecast a decline in sales for this quarter. Apple lowered Q2 2016 revenue guidance to $50 – $53 billion (analysts were estimating around $55.5 billion). In Q2, iPhone sales will be lower than in 2015 — marking the company's first year-over-year decrease in iPhone sales. Q2 will also mark AAPL's first sales decline since 2003.
Investors are skeptical about this drop in sales being a temporary glitch in the company's growth.
While analysts and investors fret about market saturation, Apple (AAPL) CEO Tim Cook firmly rejected that view on Tuesday, despite having to concede that iPhone sales at the beginning of this year will be significantly lower than in 2015, the company's first ever year-over-year decrease.
"If we make a great product and have a great experience then we ought to be able to convince enough people to move over," Cook said, when asked about market
by ilene - January 25th, 2016 3:45 pm
Courtesy of Lance Roberts of Real Investment Advice
I recently received an email from an individual that contained the following bit of portfolio advice from a major financial institution:
“Despite the tumble to begin this year, investors should not panic. Over the long-term course of the markets, investors who have remained patient have been rewarded. Since 1900, the average return to investors has been almost 10% annually…our advice is to remain invested, avoid making drastic movements in your portfolio, and ignore the volatility.”
First of all, as shown in the chart below, the advice given is not entirely wrong – since 1900, the markets have indeed averaged roughly 10% annually (including dividends). However, that figure falls to 8.08% when adjusting for inflation.
It’s pretty obvious, by looking at the chart above, that you should just invest heavily in the market and “fughetta’ bout’ it.”
If it was only that simple.
There are TWO MAJOR problems with the advice given above.
First, while over the long-term the average rate of return may have been 10%, the markets did not deliver 10% every single year. As I discussed just recently, a loss in any given year destroys the “compounding effect:”
“Let’s assume an investor wants to compound their investments by 10% a year over a 5-year period.
The “power of compounding” ONLY WORKS when you do not lose money. As shown, after three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required. In reality, chasing returns is much less important to your long-term investment success than most believe.”
Here is another way to view the difference between what was “promised,” versus what “actually” happened. The chart below takes the average rate of return, and price volatility, of the markets from the 1960’s to present and extrapolates those returns into the future.
When imputing volatility into returns, the differential between what investors were promised (and this is a huge flaw in financial planning) and what actually happened to their money is substantial over…
by ilene - January 24th, 2016 3:06 pm
Courtesy of Wade of Investing Caffeine
Like a full plane hitting a rough patch of turbulence, investors have been shaken by the recent price volatility in the stock market over concerns of a slowing Chinese economy, plummeting oil prices, and a host of other alarming headlines. As a result, investors are left picking up the pieces of the S&P 500 decline, which currently sits off -11% from its 2015 highs (down -15% at the 1/20/16 low). The picture looks even uglier if you consider the Russell 2000 small cap index, which has collapsed -21% from its 2015 highs (-26% at the 1/20/16 low).
What now, and what does this mean? There has been all kinds of crazy technical trading activity occurring around heavy options expirations, stop-loss selling, and short cover buying. With all the frenetic gyrations in the stock market (e.g., 2,000 point swing in the Dow Jones over the last month), there have been no shortage of opinions on TV, on the internet or at the watercooler. However, the best sage advice probably came from 86-year-old investor legend, John “Jack” Bogle (founder of Vanguard Group – $3.4 trillion in assets under management at 12/31/15), who emphatically told investors to “Don’t do something…just stand there!”
The advice to “stay the course” can be very counter-intuitive to human nature. In periods of stress, our brains tend to revert back to our ancestors’ Darwinian survival instincts, which tell us to flee from the ferocious lion (see also Controlling the Investment Lizard Brain). The fact is these periods of turbulence are normal – no different than a bumpy flight into San Francisco. In fact, we’ve hit quite a few choppy air pockets in recent years:
- Debt Downgrade/Debt Ceiling Debate/European PIIGS Crisis (-22% in 2011)
- Arab Spring/Grexit Fears (-11% in 2012)
- Fed Taper Tantrum (-8% in 2013)
- Ebola Outbreak (-10% in 2014)
- China Slowdown Fears (-13% in 2015)
Through all of this mayhem, including the current 2016 dip, the stock market has still managed to rise an impressive +77% since the 2011 pullback, which sure beats the sub-1% yield earned on bank CDs.
by ilene - January 22nd, 2016 4:25 pm
Courtesy of Lance Roberts of Real Investment Advice
Of the last several weeks, I have suggested that markets are oversold and that a bounce was likely. However, such a reflexive bounce should be used to sell into as it is now becoming clearer the markets have changed their trend from positive to negative. As I discussed earlier this week:
“The concept of the full-market cycle is critically important to understand considering the markets have very likely broken the bullish trend that began in 2009. Take a look at the first chart below.”
“This “weekly” chart of the S&P 500 shows the bullish trends which were clearly defined during their advances in the late 1990’s, 2003-2007 and 2009-present. Each of these bullish advances, despite ongoing bullish calls to the contrary, ended rather badly with extremely similar circumstances: technical breakdowns, weakening economics, and deteriorating earnings.
As I have shown in the chart above, when the markets broke the bullish trends (blue dashed lines), the subsequent bear market occurred rather rapidly. The conversion from the bull market to the bear market was marked by a breakdown in prices and the issuance of a very long-term “sell signal” as noted in the bottom of the chart.
We can look at this same analysis a little differently and see much of the same evidence.”
“The chart above shows something I discussed last week: ‘Markets crash when they’re oversold.’”
The inability for the markets to muster a rally from currently extremely oversold short-term conditions suggests market dynamics have indeed changed from a “buy the dip” to “sell the rally” mentality.
This weekend’s reading list is a collection of articles on the current state of the market. Is this just a correction within a bullish tend? Or, is this the beginning of the long awaited bear?
1) 7 Reasons Not To Be A Bear by Jeff Reeves via MarketWatch
- Insulation From China
- US Dollar
- The Long Term
But Also Read: Growth Fears Grip The Market by Robert Johnson via Morningstar
by ilene - January 22nd, 2016 1:17 am
Courtesy of Joshua Brown, The Reformed Broker
What’s taking people’s breath away about this year’s stock market sell-off is probably some combination of three things: A) we’re unaccustomed to it, we’ve been spoiled for years, and B) it’s global in nature (and some would say global in origin), and C) the speed of the selling is incredible, by any historical standard – it feels like a whoosh straight down.
But as disorienting as this all feels, the truth is that double-digit drawdowns from prior highs in the S&P 500 are not an anomaly – they are the norm, statistically speaking. In fact, this happens during 2 out of every 3 years.
My colleague Michael Batnick has run the numbers…
- The average intra-year decline is 16.4%. This current decline might feels worse due to the speed at which it’s happening, and because it’s occurring right out of the gate.
- Double digit declines are to be expected, 64% of all years experienced them.
- It’s not unusual for those double digit declines to be of little importance. 57% of the years with 10% drawdowns finished positive.
- Stated differently, 36% of all years saw a double digit decline and still finished positive.
- Drawdowns of 20% or more have happened 23 times, or 26% of all years. On five of those 23 occasions, stocks still ended up positive on the year.
He’s also got a great pair of charts showing the decline in each year along with that year’s closing gain or loss. This is a very powerful thing to be aware of given the cacophony of fear-mongering you’re coming into contact with right now.
Head over and check it out:
by ilene - January 21st, 2016 6:05 pm
In our weekly market review and instructional trading video (below), we discuss current market conditions, stocks, options, trade ideas, and more. Major topics are listed below the video.
- 00:01:46 Checking on the markets: It’s horrible! This is good market sell-off. NASDAQ, S&P, NIKKEI, DJIA — all have been selling off.
- 00:05:51 Short-term portfolio: bearish. Offset to the long-term portfolio.
- 00:12:46 Europe finished 3 1/2% lower.
- 00:13:30 Butterfly portfolio: bullish
- 00:14:50 Value of DOW
- 00:17:35 FED announcement
- 00:19:48 Energy sector is down 6% today, but not everything is falling.
- 00:21:34 Sector Performance Charts
- 00:24:51 Short-term portfolio: bull calls spread, puts, trade idea.
- 00:32:00 HAL: Trade idea
- 00:33:16 Trade idea
- 00:37:00 SPX
- 00:42:00 DOW, AAPL, AXP, CVX, XOM
- 00:46:00 FUTURES: CL, RB, WYNN, VIX, AAPL, TSLA, NFLX, NIKKEI, NG, TLT
- 00:48:15 UCO: Trade idea
- 00:53:43 Oil continues to go down.
- 00:55:17 IRBT: 5% Portfolio, call spread, trade idea
- 01:04:40 TWTR
- 01:07:00 UCO Trade
- 01:09:28 OIL is at $28.50
- 01:10:15 RUSSEL
- 01:14:00 ARR, NLY, CIM, AGNC, STWD, trade idea
- 01:17:49 VNQ: Construct the hedge, trade idea
- 01:20:55 NLY: Puts, dividend, trade idea
- 01:25:20 ARR: Calls, dividend, trade idea
- 01:27:22 IBM: Trade idea, puts and calls