That Was The Week That Was – 3rd Week May

Fear we may all catch it. The mess in Europe could be contagious and hiding under the blankie won’t make it go away. Fear of Losing Money has kept many sensible investors on the sidelines for most, if not all, the market run since last October. Some planners would say investors are missing the boat. But, there’s enough scary news out there that has legitimate reasons for folks to keep their dough locked in zero earning fixed accounts. Pick up the newspaper, or go on line to read Wall Street appears to run amok with Flash Trades, and the regulators don’t seem to think there is anything wrong with that. Banks, like JP Morgan, fritter away billions in poorly executed investments and thumb their noses at laws and regulators. European leadership seem to sit back and do little except preach cutbacks. Common sense tells you that austerity cannot create wealth anymore than I can pirouette on the head of a pin. Let us not forget in the last four years not a word from our elected leaders about job creation. And, globally, we are the healthy nation!   Domestic corporations have consistently reported better than expected earnings only because of cost cutting and greater employee productivity. GDP is last reported at a smidge over the 10-year bond. A nudge and we’re in the soup. The future promise, if re-elected, from the current administration is for higher taxes to pay off the deficit and little on job creation. On the other side I hear the promise, if elected, that laws reigning in the Mad Men running the nation’s banks will be rescinded and tax cuts, implemented by a previous administration, become permanent.  Given all that it would appear the world and its lack of sensible leadership is conspired against us- but, there is light at the end of the tunnel.

It’s Not Like We Haven’t Been Here Before: In 1998 we had the Russia/Long-Term Capital Management Crisis (That promised to toss the entire global population into poverty!). In 2000 we had the bust of the dot com bubble. In 2001 we had 9/11. In 2002 we had World com and the other com bankruptcies. In 2008 we had a collapse of global markets. In 2011 we had the cuteness of our elected official’s stand-off doing nothing. Yes, we’ve been through worse.

Today We’re Better Off…Really!

• Residential Building Permits are in Recovery
• Home Builder stocks are off their lows
• Stock evaluations are more attractive today. On a forward P/E the S&P 500 should be around 1450
• The 10-year yield last year was 3.3% versus 2012 a sub-par 2%. That makes stocks attractive.
• Corporations are cash rich
• Finally, according to friends at Minyanville, Sell in  May may have come in April (One of the worst months since 2011). 

Inflation or Deflation?

The economy is at that point where it could fall into either camp, with disastrous results. How should an investor position themselves?

• Equities over bonds if inflation.
• Bonds and dividend paying stocks if deflation.

KIDS PLAYING WITH OTHER PEOPLE’S MONEY Henry Blodget said Monday that the JP Morgan $2-3 billion dollar trading fiasco proves that kids working at banks are playing with dynamite. If they win they get bonuses, if they lose they go to work for a hedge fund at twice the pay. Jimmy Cramer said on the Today Show that it’ll be business as usual and don’t expect our legislatures to get tough on banks. They have too strong a lobby. JP Morgan alone spent $21 1/2 million lobbying Congress the last few years. Rana Foroohar, writing in Time’s ‘The Curious Capitalist’, called the JPMorgan goof ‘The $2 Billion Boo-Boo.’ And Morningstar wrote, ‘Where there’s smoke there’s fire.’ Meaning more banks will be uttering mea-culpa’s.

Ouch! Bad Day Monday. Market closed off 125 points. Fear of Greece and JP Morgan blowback was all that the markets needed to continue their run to safety. The dollar was up. Gold off as was oil. Oil finished under $95. Gas prices keep going down. Off 18.7 cents from last year’s peak there doesn’t seem to be a stop on the price of gas. Good news for consumers. Saudi Oil Minister said that Brent crude was over-priced at $111 a barrel and should be selling for no more than $100.Gold also off and finished at $1558. an ounce. Fear is the trade du jour. VIX up. The volatility index may indicate, according to chatter on CNBC, that the S&P dives another 15%-20%.

Bad Tuesday…markets up until the last hour when Greece reared its head- again- and everything fell apart. Gold off another $23 and oil was off a whooping $1.76 to $92.22 a barrel. As of Wednesday morning the whole world was more worried about Greece than Greece is worried about Greece.

Buffett added General Motors to its portfolio last quarter. Berkshire Hathaway took a big bite of the stock- some $10,000,000. General Motors announced it would not be advertising on Facebook as the ads appear not to be effective. And this just a few days before Facebook’s Big Public Debut. With friends like GM…

Worst Week Of The Year! It was ugly and no amount of perfume could mask the stink. Traders acted like they never met a stock they didn’t like.

The Topper Was Friday’s Facebook IPO. Bring in the clowns, dear reader. It was a Hall of Fame jumble of mistakes and errors that was just the perfect topping to a miserable week. First Nasdaq couldn’t handle the trading of Facebook and delayed the issue until around 11 am. There was so much chaos even when they got it started that investors who had orders they thought were filled were not confirmed until late that day after the markets had closed! According to the WSJ some investors sold their positions taking enormous losses. Nasdaq called it a technical glitch. This on the day when Facebook was advertised as the biggest IPO of the year. Others, as reported in the WSJ, tried to confirm or cancel their orders and were prevented from doing so.

Some Investors Stayed On The Sidelines…Not enough information and enough fear from talking heads had investors worried about taking a bite of Facebook on Friday. The gentle folk at GM said they were pulling their ads from Facebook but neglected to add that they were also pulling their ads from the NFL, too. Some stone thrones at Morgan Stanley for being… and having a huge amount of shares offered at the high end of their offering. Still Morningstar came out and liked the company at $32 a share (some talking heads whispered $45). They believe, and call, Facebook a future advertising force! A few words from Morningstar…1) Facebook may not gain ten times more ‘friends’ but they can double their numbers and maybe double again. 2. They have proved they can generate excess returns even in an environment where ad pricing is pretty weak. 3. They, and no one else, has really figured out how to advertise using social networks. 4. Those that criticize and say that Facebook doesn’t know how to use mobile applications don’t realize that no one else does. 5. The company has a 50% level of profitability. There was more, dear reader, but that’s the basics. The disgruntled carried over to Monday where Facebook was beaten up another 11% as investors headed to the exits. And, finally, yes, I did buy and own shares in Facebook.

Questions, call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.