That Was The Week That Was-4th Week June

  Mid-year economic forecasting at Barrons.com was reported a few weeks ago. The range of conjecture from the group of experts shouldn’t surprise anyone who has  listened to talk-radio or ask their next door neighbor for financial advice. As one wag said Economic Forecasters give fortune tellers a good name.  For those that missed the article here’s a mini-recap of who said what. Scott Black minced no words when he said the U.S. economy was sputtering, but the markets were historically cheap. Unemployment, he pointed out was at 8.2% but counting those that have stopped looking or marginally employed and the real number is 14.8% (which I suspected but couldn’t prove). The rest of the world is in worse shape. Europe’s recession (our biggest single market) is causing an Asian slowdown for energy and commodities. Bill Gross, PIMCO C.E.O., and bond king extraordinaire, answered it would be another decade before the U.S. economy could stand on its own. He said the U.S. economy can ‘trundle’ along at 1%-2% growth, and hard to envision it growing faster than that. Mario Gabelli,  small-cap wunderking-, said if the president wanted to get elected he should have concentrated on creating jobs and greater clarity on the economy. He also said the markets would be up or down 5%, with lots of volatility. Marc Faber, a cynical bear who may be building his own bomb shelter, said things would be getting worse before they got better. But Faber always says something just as cheery, even during Christmas. It’s not surprising that Faber likes gold and Singapore REITS. Oscar Schafer said the private sector must provide the needed stimulus and politicians need to focus on the deficit. Fred Hickey said the world is worse off now than it was in January. He expects turmoil in the next six months. He said that the U.S. should think of more personal and federal austerity measures going forward. Fred likes gold mining companies and the Canadian dollar (no surprise!). Finally, Abby Joseph Cohen, predicted that we will continue to see economic expansion and that there will be political will to preserve the European Union. But, she cautioned, there will be an extended period of disappointing economic growth.  The bottom line is that things won’t necessarily get worse only may seem like it. Scary news will continue to pour out of doomster’s lips while healing continues. Both politicians and private sector need to get their acts together to make the process as painless to workers and shareholders alike.

Looking Ahead…Opinionated Alan Abelson, in his Up and Down Wall Street, Saturday, Barrons.com., notes and reports more of the same for the coming week and cites: ‘The Philly Fed index plummeted to…a low of 16.6..the lowest in 10 months…it doesn’t speak kindly of what’s happening in manufacturing, …a now-flagging economy….unemployment insurance remains at a six month high. China…disclosed that its manufacturing sector has stalled again….sending the Shanghai composite index ‘hurtling’ lower.’ Finally, Bank Credit Analyst gives credit for early moves by the euro folk but warns that progress is occurring at ‘glacial speed’. It continues that the path of least resistance for risk assets, for the near term, is down.’

Facebook Surges…shares powered ahead the week before by 6%. Chief technology officer Brett Taylor would be leaving the company for his own start up. News didn’t impact share price.

The company has been on a buying spree, recently purchasing Face.com, a facial recognition software company.

Support of Facebook is found  from two iconic companies- Ford and Coca Cola. Both announced last Tuesday that they planned on expanding their advertising on Facebook. Ford will spend, according to sources, about 25% of its total budget on digital advertising, this doesn’t mean it all goes to Facebook. FB closed Friday up at $33.08.

Put on a Happy Face! Each Morning, way before markets are open, and most people are up and about, I review the notes of the day before and jot them down for you to read at the end of the week. This morning Tony Bennett is singing ‘Put on a Happy Face’ on my iPod as I read Irwin Kellner’s opinion on the U.S. economy just a few hours after the Greeks voted to accept austerity, with about the same enthusiasm  as a prisoner choosing his method of execution. Kellner points out that a second recession is already here in the United States. He points to a slowing retail sales number, piles of goods in factories and a struggling housing market as tangible proofs things are ill. Not surprising, he concludes, that business and individuals are hunkering down. This in an election year, I may add, which does not bode well for the President.  Still the markets we’ve gotten to dislike, trade in a narrow range. On Monday the Dow was off a smidge while all other indices were slightly up.

Friendly Folks at Janus sent me their Fixed Income Outlook Newsletter. Instead of repeating everything Darrell Watters, Co-Portfolio Manager of Fixed Income, said you should know Watters and Janus like the corporate credit sector as the best risk adjusted return opportunities of all the bond sectors. The reason is that over the past year fundamentals have continued to improve, profit margins have been high and cash has been accumulating on balance sheets. Adding corporate income mutual funds, individual bonds and or ETFs may be a an excellent long-term source of income for investors right about here.

Markets Closed Higher Tuesday. Gold and oil were off. Investors were awaiting word on what the Federal Reserve would be doing to buttress the economy.

Secrets? A lot of people are plain fed up with what’s been going on with stocks, fixed income and the economy. They’re sure that there is some ‘secret’ to managing money with little or no risk. The secret ‘tell’ is in the indices. If a bank pays 1 1/2% on a 1-year CD and the 10-year Treasury yields 1.65% you just got to know that banks are buying business and that’s detracting from their bottom line. And if a bank fails and is taken over by another bank the new bank doesn’t have to honor the ‘promised’ rate of the failed bank. Nor does FDIC, which the higher limit of $250,000 expires in 2013, guarantee anything but principal. Some people make moves because they want to believe in some ‘secret’ that no one else knows. See the following sad story…

 Allen Stanford sentenced to 110 years. Stanford stole over $7 billion from 21,000 people over a 20-year period of time. He did it by recruiting financial planners, brokers, insurance agents and salespeople to sell his ‘better than any other Certificate of Deposit Savings Accounts’. These high paying saving rates were eye popping enough to steal entire family fortunes while Stanford lived the life of a billionaire. It was a Ponzi scheme second largest only to Bernie Madoff’s investment scam. It may take years for ‘clients’ to get a portion of the money Stanford stole. The same old bottom line is  If it sounds too good to be true…

Operation Twist Continues Through 2012.  This was announced Wednesday by The Ben Bernanke who also said the Federal Reserve had ‘other’ tools in case the economy weakened further. He did not give details. The Fed will continue to buy longer-term Treasuries, replacing shorter maturities in order to bring down or keep the rates low on the longer maturity government bonds. The result is that investors are expected to buy corporate stocks, with higher dividends. BCA Research pointed out that the path of least resistance for corporate bond spreads is to tighten in absence of a recession or a sustained and intense ‘flight to quality’.  The following chart from BCA Research illustrates the current cycle versus previous corporate spreads.

The Markets expecting more from the Fed fell slightly.

Big Fan of Energy. Investors are of two minds. One their glad they’re spending less at the pump and Two wondering if they should continue to hold their oil and energy funds. Remember as growth slows less energy is used to deliver goods and services and also keep factories humming. Second, and probably more important, oil is purchased in dollars. As the dollar strengthens oil gets cheap.Given time oil, through no fault of its own, will get dear without much of anything else happening except our dollar will lose its luster from investors looking for a safe haven. Investors who own energy funds should also look at their statement and see dividends being reinvested at lower share prices which will bode well going forward. 

 Time to perhaps put Starbucks on your ‘watch’ list. The company recently bought a ‘French’ bakery and now announced they will open this October their first Tea Only store. Tazo is a $1.4 billion brand. It’ll be their Tea store name. Also, Howard Shultz, recently returned as CEO, wrestled away control of packaged goods distribution from Kraft Foods (they were not doing the job).

Best Plans of Mice and Men… And just as the Fed finished confirming a continuation of their investment  policy Operation Twist markets fell 250 points  Thursday as Goldman Sachs told clients to short the S&P 500 index. Analysts at GS set short positions at 1285, or 4% lower than where the index was at the time. Energy and materials led the markets lower. Previously owned homes also weakened and prices declined    ( OMG- again!) in May. But the biggest monkey wrench into the machine of commerce was Moody’s the ratings firm. Moody’s downgraded the credit ratings of Citi, JP Morgan Chase, Bank of America, Goldman and Morgan Stanley. Crying ‘foul!’, Dick Bove of Rochdale Securities called it the most absurd thing Moody’s has done in the history of the company. (eh, where were you, Dick, when Moody’s  plastered AAA on mortgage bundles back in the day?) Moody’s explained that the banks would be earning less going forward as the economy cools. 

Friday Banks Rocked! 

Ignoring the downgrades by Moody’s investors snapped up bank shares as financials lead the market to a sorely needed up day. All the majors were up for the session, JP Morgan was one of the biggest advancers of the day along with Citi, Wells and  Morgan Stanley joining the party. In Europe markets were lower. Next week brings a test of what’s happening overseas and here at home. Watch Spain as banks there agree to convert their preferred stock to common, much as Citi did in 2009. Weekend news is the Spanish banks will ask for money this week and that the markets have been oversold. Lots of news to digest  right here at home this week as much of it involves weakness in the U.S. economy. Monday will see the release of the Chicago Fed activity index for May. Thursday will bring in jobless claims. But all the news could easily be set on its ear with the two day European Council Meeting in Brussels starting Thursday. Markets ended the session on Friday up and the Naz was the big winner ending up for the week. Gold ended at $1573 and oil barely peeked over $80.00 a barrel.

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

That Was The Week That Was-3rd Week June

 Buy What You Like and there is nothing wrong with that. Lots of investors get caught up in studying charts, fundamentals and annual reports (or doing what the herd is doing), and forget the most basic of investment criteria is to buy what you and others really like. Peter Lynch, the fabulous Fidelity manager, who made Magellan a must buy mutual fund back in the day, would say his best stock buys were those he found  when he really liked the service and product of the company. Lynch found The Gap when his daughter came back from a shopping trip gushing about the store. A client of mine discovered Panera Bread  stock because she so loved the cafe that she had to own a few shares. Another client called and said he loved Amazon, and so we bought a few shares and they’ve held up remarkably well through the sell-off and some experts believe there is more room to grow. I bought MasterCard back in the day (and sadly sold it too soon) because I loved the system that had no credit risk. Insurance companies were another sector I liked when interest rates were normal. If you find something you really like and others do too than maybe you should see if you can buy stock in the company.

Asian stocks jumped this Monday on news that the Greek pro-bailout party voted over the weekend to keep the euro zone intact. This confirmed two days last week of gambling by domestic traders that Greece would not leave the union. It was a narrow victory for the EU but it doesn’t mean all is well. Italy could well be next under the microscope and the G-20 meeting gets underway today for a 2 day meeting in Mexico. Europe will be on the agenda. On Wednesday the Federal Reserve meets and economists expect the central bank to explore more domestic easing.

If You Are A Daily Stock Watcher or Just One That Looks At Your Quarterly Statement the news lately hasn’t been pretty or nice. Daily stock watchers are loading up on anti- ulcer pills and quarterly readers wonder what the hell their broker is doing to earn his keep. Surely, they say, there has to be ‘something’ that’s making money. The fact that all equity indices have broken down since May 2012 tells you there isn’t much that hasn’t been touched by fear of European contagion. Even the darling stocks of 2012 have fallen on hard times, and here I’m writing of Apple that has given up 40% from its 2012 high. But, as we learned in 2009 not all bad things last forever. According to Tom Kilgore of Dow Jones, the markets may be ‘carving’ out a bottom much like what happened in 2009. ‘The daily volatility within a narrow range’, he writes June 14th, ‘is one characteristic of a bottoming process.’ Technical Analyst Bob Dickey explains, ‘The longer the bottoming out process the better the uptrend can be once the market breaks out.’ And as we all learned in basic money management – missing only a few days out of the year can make all the difference between huge profitable returns or no return at all.

Time Magazine Explored Global Misery

Writer/reporter Rana Foroohar, in the June 18th issue, concluded that the global economic mess is being served by bad global leadership and tepid tactics they employ. Instead of curing the patient leaders seem to be more worried about symptoms and trying to make them better. Monday last markets tumbled 250 points from top to bottom. They opened on positive news but when the news was examined markets pulled the plug and allowed it to sink. Whomever put together the loan to the Spanish made the contract so one-sided that once everyone understood the conditions they could see it for the joke it was.  The WSJ reported that instead of building confidence the bailout terms reflect repayment terms that fundamentally don’t address the economic environment. Loans would not be made directly to the banks but to Spain, which in turn would be responsible even if the banks fail. In other words lenders want to save the system but be guaranteed to have their loans repaid even if banks should fail.

John Hussman, portfolio manager of the Hussman funds, said the current financial system employed by global leaders is warped and stupid. ‘To restore the economy to growth there is no substitute for ‘allowing bad investments to work out badly.’ ‘The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling back into the private market. Depositors don’t lose a dime.’

Who Loves Us, Baby? Foreigners love buying our homes at a discount is what’s happening…Five states are seeing huge number of foreign buyers. These are Florida, California, Texas, Arizona and New York. Richard Smith of Realogy Corp said foreign buyers are picking up two and three homes at a time and paying cash. Home prices in Miami, after falling by 50% from their 2006 peak, have turned up in recent months and were 2.5% above their year-earlier level in March. Survey shows that 55% of all buyers came from five countries: Canada, Mexico, China, India and the U.K.

 

 Markets zoooomed Tuesday! Investors think that the news is so bad that the Euro Leaders and the Fed have no choice but to up the ante for more of a stimulus, so sayeth Mark Hulbert at MarketWatch.com. The Dow jumped 163 points and the S&P added another 15 points. What leaders are doing may not be what’s in the best interest of anyone investors just don’t care.  The world didn’t end in previous sovereign debt crisis and may not when this one finally comes to a head.

• The Mexican peso devaluation.
• The government debt crisis in Thailand in 1997
• The Russian ruble devaluation in 1998
• Argentine debt/currency crisis in 2001

And more suppositions…Still it could get ugly with Finland saying ‘adios’, and leaving the Eurozone to go it alone, according to European news watchers who think the small country has had enough.

What they don’t teach at those Investment Seminars…Stocks reaching 52 week lows could very well go lower as Shorts pound them while stocks reaching 52 week highs could go higher…’

From one extreme? to another. Rating Firms rubber stamped bundled mortgage products with nary a peek under the hood. Only because they didn’t understand what they were examining. Now, working overtime, Moody’s, the rating agency, is on a path to downgrade banks such as Morgan Stanley, ultimately costing the firm as much as $9 billion. Downgrades cost firms more in borrowing costs. The frustration for the firms/banks is that fighting the raters is a losing battle. 

The chart above was published in Wednesday’s June 13th WSJ from Moody’s Investor Services Information.

 

Don’t Expect Much Going Forward…At Least For The Next Six Weeks. This from Bottarelli Research who completed their analysis of what’s happening with the admonition of ‘Not Buying Stocks Here’. The good folks and analysts concluded that in September the Bulls will attempt to take control. Until then there is little to do unless you want to invest in cash.  Markets fell Wednesday. Treasury Geithner said it would be fruitless for the United States to pressure Europe to solve their banking and sovereign debt crisis. He reasoned that the Europeans had plenty at stake and more would be explored at the G 20 meeting being held later in June at Big Sur.

A New Marketplace for Bonds? The WSJ reported that some institutions are looking at expanding the bond network. Thinking is not to replace the current over-the-counter trading of bonds but add a new electronic network to make bond trading easier for individuals to buy and sell bonds and reduce cost. The problem is that those organizing are the Big Traders and their needs may be in conflict with smaller ‘fund’ managers and the individual investor. The bond market dwarfs the stock market as for its listings but not for its activity as the below charts illustrates. The information came from the Securities Industry & Financial Markets Association and published in the June 14, 2012 WSJ.

Don’t Bet on Apple! Writes Hilary Kramer of Kramer Research. The stock is off 40% and she doesn’t think it’ll hit $1,000 a share. Kramer gives a laundry list of potential stumbling blocks and I’ll share a few here:

• Competition is everywhere
• Cannibalization of the Mac by the iPhone
• Apple TV =unprofitable
• Overzealous expectations on China market
• Unsustainable margins

She doesn’t see where the value is even though she  calls it a terrific company! There was no mention of price target just that there were serious reasons why Apple wouldn’t reach the $1,000 a share price. eventually, as long as they keep on-trucking…they very well may see that target price. Morningstar likes it to $740 and sez sell at $940.00.

Drama

It was that and more on Thursday as rumors hit the markets and shares soared on news that Central Banks were prepared with a ‘plan’ if the Greek vote goes against the wishes of the Eurozone. This is not how markets usually function (only in the oddest of occasions), but it’s becoming a permanent form of investment management. Stocks cheered the supposedly ‘intervention’ news. In the meanwhile stocks were up significantly on news that the economic picture was so bad that someone, somewhere in high places, had to do something. Plus the WSJ reported Foreign Investment in U.S. markets surged $28.7billion in the first quarter of this years, marking the 12th consecutive quarter of positive in-flow. The chart was published in the WSJ from info from the Commerce Department.  

Interesting… Louis Navellier wrote that investors should pay more attention to the CPI numbers that were released last week. The drop in Consumer Price Index was primarily due to the price of gasoline. The more money folks have the more they’ll spend. Lou writes that time after time consumers have proven that when they have a little cash they’ll spend it. And, since American consumers are the engine of growth, their spending is the V-8 engine of the U.S. economy (and probably the world).

Year-to-Date Sector Performance:

Markets staged a remarkable rally Friday. It seemed traders were laughing at a possible Greek default. Almost like river boat gamblers the market ignored the unknown and placed chips on the table that common sense would raise its head, and even if it didn’t the Central Banks would come running to the rescue. For the week markets were up and for the year the S&P was positive over 6%. Some would prefer the collapse of the euro and get rid of the nonsense of range bound markets and get on with the business of real healing and growth. Charles Gave of GavKal Research is one. He said money would flow to companies that didn’t depend on government spending. Those he liked would be J&J, IBM, Texas Instruments and SAP.

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

That Was The Week That Was-2nd Week June

Risk. Investors understand that return in the equity and bond markets means accepting some risk. This may seem almost comical in explaining but some investors are still in a time-warp from the ‘70s’ where they would like twenty-percent return on their money with zero risk. A few folks out there think that there’s some investment secret. They’ll scour the earth, bend an ear to talking heads and believe anything anyone will say to them that is close to what they want to hear. People who first started investing around the 1970s were soon surprised to find that what went up also comes down. There is, however, a secret to controlling volatility and that’s Measuring Risk, using something called Beta. Beta compares risk in an investment portfolio against a definable index. In most cases an equity investment portfolio is measured against the S&P 500 index. If the portfolio has a historical performance of volatility less than the S&P 5oo it will be given a number less than One. If more it will be a Plus One. If it matches the index it is given a 1. An investment plan with less risk could have a number such as point seven-five or .75, or anything less than one. At point seven five (0.75)this is telling the owner of the investments that his or her investments have 25% less volatility than the S&P 500. Investments that are more volatile can be explained with numbers higher such as a 1.25 or twenty-five percent greater risk than the S&P 500. Every investment has its own Beta.

Risk Decreases As Time Goes By. Historical projections illustrate that the longer one holds the identical investment allocated portfolio the less risk one assumes. This measurement is based on the original contribution and Not on gains earned.

Investors Get Proprietary About Gains. It isn’t your gain until you cash out and put it in your pocket. Investors buy $1000 of stock and it may, over time, grow to $2,000. Mr. Market may take away the growth on the investment in one fell swoop and investors assume that it was their money they lost when in fact it was the gains on their money they lost. They may very well have their original investment intact but it is the gain on the investment that they lose.  It isn’t any less painful to lose gains but measurement of risk on gains plus principal can be illustrated using the same criteria illustrated over time.

Understanding Risk & Investment Efficiency are important components of managing an investment portfolio. Once an investor measures a portfolio against a known index then they can fully appreciate how well or poorly they are performing against the market as a whole.

Sell-Offs…The week before last markets on Friday tanked miserably. There were few ‘sweet’ spots and almost every index was down for the day. Only the pure Treasury and long-term corporate bond was able to gain a little or hold its own. Income associated investments that were allocated with stocks, bonds and cash were also hit but not as hard as pure equity investments. Utilities also saw some softness but not for the reasons that most would think. In a sell-off there is nothing sacred and positions are unwound with little thought as to losses, gains or safety of specific sectors. Leverage plays a huge part of professional managers positions. This along with options just aggravates the volatility of the market. Sell-offs, such as what we’ve experienced, have nothing to do with quality of holdings but fear.

 Secret to investing? If there was some hidden investment secret folks wouldn’t have to cheat and steal. Lately some of the biggest names in the business headed for the hoosegow as they were involved and caught in insider trading. There is always the goof that thinks there is some hidden trick to managing investments. There isn’t! Buying and holding quality at reasonable prices always wins in the end. Dividends reinvested during good times and bad usually account for, historically, 30% or more of the total return on investment.

If a stockbroker brags that they clear trades through a discount broker it ‘doesn’t’ mean that his customer’s trading costs are cheaper. It simply means the broker’s cost is less than going through a full-service or traditional brokerage firm. ITS NOT WHAT SOME SALESPEOPLE SAY- IT’S WHAT THEY DON’T SAY THAT HURTS… And a full service or traditional brokerage firm can and almost always discounts some trades to their bestest customers.

Monday Laura Metaj at Franklin Templeton called and asked if I needed some printed info on what was happening overseas to distribute to my clients. I said no, thanks, and that my clients were already over-loaded with information. Then I asked what Franklin Templeton’s thoughts were on the EU situation. In a five minute conversation we both agreed that the information from Europe was sketchy, the major players (France and Germany) cannot afford to see the euro fail and the smaller debt ridden countries cannot find themselves out of the Union. The loss would be catastrophic to all involved. In the meantime fear rules and the smart players are slowly buying quality to add to their portfolios.

 

Subtle was Monday last as Markets ended up mixed. Dow was off slightly as was oil. Everything else was up- slightly. To be honest it felt like it was the eye of the tornado. There has been too much fear too fast that has ripped a swath through portfolios that may take the rest of the summer to repair. Negative connotation is such that Mark Hulbert at MarketWatch writes that the correction phase is close to being over. He calls this the Hulbert Sentiment Index and it measures investor grief.

Our Friends at JP Morgan (the investment side not the banking side) sent us a news report illustrating a chart that shows even though, since 2009, markets fell and rose, the rose was always higher after every fall.  

Barrons and Others Report Starbucks is Buying a Bakery Chain with a ‘secret’ French recipe. The company is also hiring French baker Pascal Pigo to revamp  and refine the menu. Shares of Panera Bread may soon be feeling the heat. 

Zacks came out with the above allocation suggestions. Note no bonds, cash, high yield, emerging markets, mid-caps, real estate, commodities (gold, oil, etc). Nor is there a place in the allocation for option protection.

and, yes, Professor, they even spelled aggressive wrong!  

Facebook = $20.00 Yes, friends, that’s where whispers say the markets will knock it down to before starting to scoop shares up. Still folks at Allianz RDM Tech Fund offers up other Tech bargains to buy: Microsoft, Apple they like to $750-$800 a share, Google could see $650-$700 in the next 12 months. Finally they suggest Intel. 

The best kept secret in the Eurozone is Estonia. The country has worked out its debt, has a surplus and the economy is booming at 7.6% growth. When questioned they answered how they did it was through austerity and cutting everything. In three years they worked their way out of debt and into success.

Finally! Best week markets enjoyed in 2012 was last week. This was in anticipation of Spain asking for help and both sides of the Atlantic pitched in for a $125 billion bailout. This would not reduce Spain’s awful unemployment numbers of 25% or create anything other than quelling unrest among world stock markets.

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