Archive for January, 2010

Good Earnings Don’t Help the Market

About of half of S&P 500 companies reported Q4 results, and so far, these results are very similar to those of previous few quarters.  Not only most of the companies are beating estimates, the guidance going forward is also generally exceeding analysts’ expectations.  That had been the case with a number of bellwether companies, such as Intel, Apple, Goldman Sachs, etc.  The economic news have also been fairly positive.  While there were some disappointments in recent employment and housing data, manufacturing and consumer confidence are on the rise.  During the fourth quarter of 2009, U.S. economy grew at 5.7% rate, much higher than expected.

Nevertheless, the markets reacted in decidedly negative fashion to these benign reports and good earnings.  We saw a drop of about 8% from the 15 month market high reached just two weeks ago.  Skeptics are ready to point out that such a negative reaction to positive developments indicates that good news are already reflected in stock prices and that more trouble lies ahead.  Indeed, back in March 2009 the news were overwhelmingly negative, and yet that marked the beginning of the rapid market rise.  On the other hand, a correction such as we are experiencing is normal and is to be expected on a regular basis and especially after a huge rally we had last year.  In fact, since March 2009 there were three corrections already of the similar magnitude and the market kept marching higher after each one.

Who is right this time?  You know that no one can possibly answer this question.  In my view, we have reached a point where easy money has already been made on the way down and on the way up.  Any “dartboard portfolio” lost money in 2008 and made money in 2009.  I think that at present, stocks are reasonably valued and the skill of stock selection will once again become important going forward.

There are some global developments that definitely merit watching.  Financial crisis in Dubai, downgrade of Japanese bonds rating, and high debt obligations of Greece are troubling.  You are probably familiar with the acronym BRIC, which refers to fast-growing developing economies of Brazil, Russia, India and China.  Now we have another acronym: PIIGS.  This one stands for Portugal, Italy, Ireland, Greece, and Spain — countries in European Union that have high debt loads and face a possibility of default that would strain the whole Euro zone.  I even heard views that the euro as a currency may cease to exist within the next five years.  If indeed any of the PIIGS of the world comes even close to a default, you can be quite sure that this will not do wonders for any of the world stock markets.

We do have a lot of uncertainty at this point but this is nothing new.  In my view, a sensible investor must keep a well diversified portfolio of high quality stocks and be always positioned to take advantage of positive market moves.  This has worked extremely well for me last year.  In addition to that, caution and certain downside protection would also be warranted.

January 30, 2010 at 7:30 am Leave a comment

Signs of a Market Top

Here’s a an interesting article that presents a history of major market tops and also discusses clear signs of one.  An excerpt follows:

We’re nowhere near a market top now, but it pays to remember the signs in advance, like: (1) A general market euphoria, with talk of a “new investment era,” in which major corrections are a thing of the past, with the business cycle being softened or repealed. (2) Books like Dow 36,000 will replace the perennial “beware the coming crash” books on best-seller lists; and (3) market gurus will praise the virtues of “buy-and-hold,” while mocking the futility of “market timing.”

Right now, after a major crash, I can’t find anyone who will defend buy-and-hold.  Newsletter rating guru Mark Hulbert made a study of this phenomenon back in 1996 and found that investors disparage buy-and-hold when buy-and-hold would serve them best (as in the 1990s). Then, they become disciples of buy-and-hold at market peaks, when they should unload their big winners.

Ken Fisher echoed those findings in his 2007 book, The Only Three Questions That Count, saying (on page 277) that “at a bull market peak, there is endless advice saying you should never turn bearish and you should never ‘time the market,’ and that people who do are destined to miss the big returns of bull markets.  In 2000, this advice was rampant. The financial services industry marketed heavily that any professional who turned bearish was a quack or a charlatan.”

January 14, 2010 at 5:38 pm Leave a comment

Goodbye to the Naughts!

Year 2009 marks the end of the decade, and I say Good Riddance!  The Naughts, as some people call it, turned out to be the absolutely worst decade in stock market history, with S&P 500 losing 3.3% on average every year.   Compare that to the 30’s: during that decade, the market rose 1.8% annually!  Clearly, as bad as the Great Recession has been, it still can’t even begin to compare in economic terms to the Great Depression.  The main reason for the poor market performance during the last 10 years is that stock prices rose very fast in the 80’s and 90’s.  By the way, those 20 years followed poor 70’s; 30’s were also followed by a decades-long stretch of market gains.  By this historical perspective, next major move should be up (despite that good 2009).

My sentiment about last quarter of 2009 remains very similar to that of a couple previous quarters.  The economy continues to exhibit more and more signs of clear recovery, in GDP growth, improving housing market, stabilizing unemployment, strong corporate earnings, low interest rates, and even consumer sentiment.   The sentiment of market advisors, however, remains decidedly guarded since the gains occurred much quicker than anybody could have anticipated.  Many believe that this is still a bear market rally.  Indeed, can the market really go higher having already risen so much and so fast since March?  The short answer is — yes, it can.  It was unimaginable to think that it could drop even further from the levels of one year ago — and yet it did.

I am sure you realize that I am not actually making a prediction here; I never do.  The future is unknown and my guess is as good as yours.  There is a very good possibility, however, that the market will continue its climb of the wall of worry.

January 5, 2010 at 5:05 am Leave a comment

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Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.


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