Not a member?
Register now to start earning Momentum Alert profits right away!
Already a member?
TAG | Dow Jones Industrial Average
21
Is it a Good Time to Invest in Stocks?
0 Comments | Posted by Alexander Green in Alexander Green
Is it a Good Time to Invest in Stocks?
by Alexander Green, Investment U Chief Investment Strategist
Monday, February 20, 2012: Issue #1712
More than two thousand years ago, the Greek sage and philosopher Epictetus counseled, “It is impossible for anyone to begin to learn what he thinks he already knows.”
Nowhere is this truer than in the stock market. You need only ask the many thousands of investors who have sat out an historic rally – the market has doubled from its lows years ago – because they just knew stock prices were only going to go lower.
That mindset has proved to be an expensive one. Yet these individuals now face another test.
If they jump into stocks today, having already missed one enormous move, they risk being in for the next leg down. That would hurt. On the other hand, if they continue to sit on the sidelines – earning next to nothing in bonds or cash – the market may well power higher and leave them with an even more extreme choice in the weeks and months ahead.
What is the prudent investor to do?
They Rise and They Fall
The first is to understand the error of your ways. Every market timer believes that if he sits patiently on the sidelines, he will get a better opportunity to buy stocks at lower prices.
And they often do. Unfortunately, they generally get to feeling so good about missing the downdraft that they convince themselves that the market will keep falling.
And, again, if often does. Until, of course, it doesn’t.
As the market climbs, they begin to rationalize that this is just “a bear market rally” or “a dead-cat bounce.” Until it becomes obvious that the train left the station and they’re still standing on the platform.
Cash is Not King, but Stocks Might Be
Warren Buffett’s mentor Benjamin Graham once said that no investor should have more than 75% of his money in stocks or less than 25%.
That’s a good rule of thumb. Seventy-five percent keeps you from getting overly enthused when times are good. And twenty-five percent keeps you from throwing in the towel when times are bad.
But what do you do now if you’re one of those who has played it too cautious until now and are fed up with your negative real returns in Treasury bonds or cash?
First, stop justifying what you’ve done and get off the dime. Start committing money to high-quality stocks in a gradual way. After all, if you shift a big percentage of your portfolio into stocks right now, you could regret it. And if you remain in cash, you could regret that, too.
So hedge yourself. Start moving money into stocks at regular intervals, being sure to keep buying if the market dips so you get better entry prices.
An Easy Way to Start Investing
A conservative place to start would be the Vanguard High Dividend Yield ETF (NYSE: VYM). True, it currently yields just 2.9%, but that’s still 50% more than 10-year Treasuries are paying and 50 times as much as the average money market fund.
Even if stocks go nowhere over the next 10 years – highly unlikely given the decade we just had – you’d still be better off in this fund than in a bond or money market fund.
There are a ton of reasons to put off making this move from the state of the economy to the size of the deficit. But that’s just the kind of thinking that got you stuck on the sidelines.
Look at the bright side. Inflation and interest rates are low. We’ve had five straight months of declines in the jobless rate. The ECB has extended three-year, low-cost loans to European banks. The Greek parliament has voted to actually cut spending. And we’re in a period of all-time record corporate profits.
So cast off. As the great nineteenth-century theologian William Shedd pointed out, “A ship in harbor is safe, but that is not what ships are built for.”
Good Investing,
Alexander Green
28
Does Low Volatility Put Your Portfolio At Risk?
0 Comments | Posted by Alexander Green in Alexander Green
Does Low Volatility Put Your Portfolio At Risk?
by Alexander Green, Investment U Chief Investment Strategist
Friday, January 27, 2012: Issue #1695
The stock market gyrated so wildly in 2011 that many investors finally threw in the towel.
How else can we read the massive equity fund redemptions that occurred in the second half of last year?
But, apparently, the market has taken its anti-anxiety medication. After last year’s gut-wrenching swings, U.S. stocks have been surprisingly tranquil. For 13 straight days, the Dow has moved up or down less than 100 points.
This is good news for bullish traders and bad news for those who have been making money trading the VIX. Let me explain…
The VIX is the ticker symbol for the CBOE Market Volatility Index, a popular measure of volatility in S&P 500 index options. According to The Wall Street Journal, this so-called “fear gauge” has fallen 20% to levels unseen in six months.
Why? One reason is that the U.S. economy appears to be getting back on its feet. Despite all the pessimism in the Eurozone, U.S. corporations are busy reporting yet another quarter of all-time record profits. (Just how long will mom-and-pop investors ignore this salient point?)
The Dow is up almost 500 points for the month. Fund companies report that money is flowing back into equities again. Yet the calm makes some investors nervous. I hear many analysts crying out that the market is about to plunge again.
Deluded, Ignorant, or Both
Let’s start with the straightforward declaration that anyone who claims to know “what the market is going to do next” is, by definition, someone who is ignorant, deluded, or both. The market will rise or fall next week or next month based on next week’s or next month’s news. Yesterday’s news has already been discounted. (As Legg Mason’s Bill Miller likes to say, “If it’s in the papers, in the price.)
Moreover, there’s no historical evidence to show that a market pause generally precedes a correction. And the data go back pretty far.
For example, market analyst Mark Hulbert has loaded the Dow’s daily returns – all the way back to its creation in 1896 – into his statistical software. For each trade date since, he calculated the Dow’s trailing volatility and then looked to see if the stock market performed any different following periods of low volatility than it did at all other times.
The short answer? Nope. He came up empty. Perhaps that’s the reason for the old Wall Street saw: “Never sell a dull market short.”
There are two things to conclude here:
- The hair-raising volatility that made trading (going long) the VIX like taking a tootsie roll from a toddler is over, at least for now…
- The other important takeaway is that traders and investors have no historical reason to believe that the recent pause portends a market downturn ahead.
Sure, a spike in oil prices, a hedge fund blow-up or a nasty surprise from across the pond could change that in a nanosecond. But bolts out of the blue are just one of the many short-term hazards of trading and investing.
For now, the market is taking a breather. But that doesn’t mean it isn’t about to get a second wind.
Good Investing,
Alexander Green
24
The Great Minds of the Market: Charles Dow
0 Comments | Posted by Alexander Green in Alexander Green
The Great Minds of the Market: Charles Dow
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 23, 2012: Issue #1692
This week I’m beginning a series about the great men and women – often unknown – who shaped the modern investment landscape.
Why should you care about these individuals, especially since many of them are dead? Because Sir Francis Bacon was right: Knowledge is power. This is especially true in the financial markets. And, as you’re about to learn, the type of knowledge you accumulate is likely to be a primary determinant of your success as an investor.
So let’s kick things off today with a man whose name is legendary on Wall Street:
Charles Dow.
Dow is a significant figure in the annals of financial history for two reasons. He created the first financial bible, The Wall Street Journal, and the first market barometer, the Dow Jones Industrial Average. In doing so, he revolutionized the way we talk about the financial markets.
(By the way, Charles Dow is sometimes credited with creating Dow Theory, too. This is not so. The market-timing strategy was extracted fom his WSJ editorials 20 years after his death by a market technician named William P. Hamilton.)
Charles Dow founded Dow Jones and Company with a partner in New York in 1882. At the time, most financial data was simply outdated news and unreliable gossip. But Dow Jones and Company published daily financial updates in a two-page newspaper called the Customers’ Afternoon Letter – The Wall Street Journal’s predecessor.
It was in the Letter that Dow first published his average, initially comprised of 14 companies – 12 railroads and two industrials.
Today the Dow consists of 30 large companies meant to reflect the U.S. economy. (There are, however, few holdings in heavy industry – and no railroads!) The average, price-weighted to compensate for stock splits and other adjustments, is the most closely watched benchmark for tracking stock market activity.
Yet the Dow is actually a poor representation of the broad market. If you’re looking to capture its performance, you’re much better off owning the better-diversified S&P 500 (NYSE: SPY) or the Wilshire 5000 (NYSE: TMW).
The most important thing we can learn from Charles Dow is the primacy of financial information. More than a hundred years ago, he realized that it was essential for investors to have not just opinions, rumors and forecasts, but verifiable facts. You simply must be well informed and up-to-date beyond this week’s headlines.
I’ve known investors who will buy a stock and not keep abreast of how the company is performing relative to its competitors, the direction of sales, or even the growth in profits. This is an act of faith, not rational investing.
Charles Dow created a daily business publication to give investors essential facts. Today, of course, you can get your financial news in real time off the internet. But the important data isn’t today’s government statistics or a new pronouncement by Ben Bernanke, but rather the hard numbers that tell us how individual businesses are performing.
The kind of investment news you accumulate is crucial. Listen to economic analysts, for example, and you’ll hear gloom and doom about high unemployment, the housing slump, consumer confidence, or problems in the Eurozone.
Listen to market analysts and you’ll hear trivia about short-term trends, changes in volume, support and resistance levels, and so on. This is not the type of information that will not make you rich.
But listen to business analysts today and you’ll hear plenty about corporate innovations, new medicines and technologies, and, not incidentally, all-time record corporate profits.
Is it any great surprise that investors who follow business news are making a lot of money in this market and those who listen to economic and market forecasts are sitting on their hands and earning miniscule returns?
Charles Dow knew better. And you should, too.
Good Investing,
Alexander Green
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677
Investors are scared right now and it’s not hard to see why.
Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.
We have all heard these negatives repeated daily and cycled endlessly in the national media.
However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)
Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.
This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.
If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…
Contrarian Investing Works
It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.
A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.
In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)
Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.
I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”
I’m trying to contain my glee. Who says no one rings a bell in the stock market?
The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:
1. Is logic or emotion governing my decision making about my portfolio?
2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?
We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.
Good Investing,
Alexander Green
5
Why You Should Do What Wal-Mart Just Did
0 Comments | Posted by Alexander Green in Alexander Green
Why You Should Do What Wal-Mart Just Did
by Alexander Green, Chief Investment Strategist
Monday, October 4, 2010: Issue #1358
last week, Wal-Mart (NYSE: WMT) made a $4.6 billion offer for Massmart Holdings, a major South African retailer with operations in 12 other African nations, too.
What’s the attraction?
Massmart operates low-cost, high-volume stores in general retailing, making it a good fit. The buyout will serve as an entry point to the entire continent.
Yet there are risks aplenty. South Africa is only beginning to emerge from recession. It’s plagued by high crime and unemployment and has a heavily unionized work force known for long, sometimes violent, strikes.
So why is Wal-Mart doing this? Because it can’t afford not to…
Why Wal-Mart is Heading to South Africa
Over the past decade, Wal-Mart shares have flatlined, just like the broad market. Yet shares of its major rival, Target (NYSE: TGT) have more than doubled.
Wal-Mart has also lost ground to its global archrival Carrefour. The French-based chain got to South America and Asia ahead of Wal-Mart. Carrefour is even the largest international retailer in China, the most coveted retail market in the world.
Wal-Mart must move aggressively to maintain growth in a difficult global marketplace. And so must investors who want to achieve financial independence in the years ahead.
Five Reasons Why You Need to Invest in Emerging Markets
Why should you diversify into emerging markets? The reasons are five-fold…
- Demographics: Emerging markets contain three-quarters of the world’s land mass and roughly the same percentage of its people. China and India alone make up nearly a third of the world’s population.
- Stronger Growth Rates: If you were a businessman, where would you rather operate – in an economy growing at 2% a year or in one growing four times that fast? It’s not a difficult question to answer.
- Better Valuations: In the United States, you might pay 30 times earnings for a company growing at a 20% annual rate. In Brazil or Indonesia, you’re more likely to pay about 15 times earnings. If you believe in buying growth at a reasonable price, you need to own companies in developing markets.
- Currency Diversification: The old greenback isn’t what it used to be. And there’s a risk that it may get weaker in the years ahead. Some emerging markets, on the other hand, hold their currencies artificially low to promote exports. That means investors are likely to see currency appreciation as well as capital appreciation.
- Safety: This is a shocker to many investors: Investing in inherently riskier emerging markets makes your portfolio less volatile. Why? Because emerging markets aren’t perfectly correlated with developed markets. When our markets zig, theirs often zag. The final effect is that your portfolio shows higher returns with less overall risk, the whole point of diversification.
Why U.S. Growth Will Come From Abroad… And Where You Need to Be
A few days ago, a friend with a local business told me he can’t imagine where – with the domestic economy in a funk and the home refinancing game over – future U.S. economic growth is going to come from.
It will come from companies who are moving aggressively overseas – like Wal-Mart, which has boosted its international sales to nearly one-quarter of the company’s total, compared with just 4% in 1995. It will also come from American companies that are able to service these firms.
Consumers in emerging markets need everything we take for granted in the West: better quality food, clothing, shelter, health care, credit cards, computers, cell phones, insurance and so on.
But make no mistake: Countries like Brazil and India and China are not going to let Western firms come in and just pick all the low-hanging fruit. If you want to reap the maximum benefit from the world’s biggest economic development story, you need to move a percentage of your portfolio into these markets themselves.
That’s the real lesson behind the Bentonville Behemoth’s aggressive South African new acquisition.
Good investing,
Alexander Green
7
Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
0 Comments | Posted by Alexander Green in Alexander Green
Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, September 7, 2010: Issue #1338
When the Dow bottomed near 6,500 in the thick of last year’s financial crisis, few investors thought it was a good time to buy stocks. Sentiment was overwhelmingly bearish.
So when the market bounced higher, the consensus was that it was a “dead-cat bounce,” a bear-market trap. But it wasn’t.
As the rally gained speed, investors began to think that perhaps the worst of the financial crisis was indeed over and they would buy some stocks on a retracement or when the market tested its lows.
But that didn’t happen either. In fact, the Dow didn’t tire until it crossed 11,000 in May. By then, the market was up over 70% in just 14 months.
That was pretty depressing to investors sitting on the sidelines, earning microscopic yields on their cash. Many were so busy licking their wounds from the sell-off that they made little or no new investments during the rebound.
So what should you do now?
Investing in Stocks: Follow the Earnings
Since the market high four months ago, the Dow has lurched back and forth. But the primary direction has been down. No surprise here. After a rally of this magnitude, a correction is not unusual.
But don’t be like last year’s investors and miss the next rally. Now is a good time to put money to work in high-quality stocks.
In fact, the market is almost as cheap today as it was during the depths of despair in March 2009.
How is that possible when the Dow is more than 3,500 points higher?
Because a stock or index price doesn’t tell you anything about valuation. What matters are earnings and the multiple that the market puts on them.
Three Reasons Why You Should Buy Stocks Today
When measured by profits, the market is almost as cheap today – at 14.9 times trailing earnings and 12.2 times prospective earnings – as it was in March last year.
That’s because earnings are up. Way up. Second quarter profits at U.S. companies hit an all-time record.
A year and a half ago – when investors should have been buying stocks – the media was busy telling them about The Great Recession and how the world was coming apart at the seams.
Today, it provides saturation coverage of home foreclosures, personal bankruptcies and endless political carping. And because we’re blanketed with bad news, few investors see the positives. Consider, for example:
- The Fed has taken interest rates to near zero. That makes it cheaper for consumers and businesses to borrow. It also makes ultra-low-yielding cash a horrible investment.
- Inflation – the great bane of both stock and bond investors – is M.I.A. With the consumer price index showing virtually no increase, businesses don’t have to battle rising costs.
- Around the globe, most stocks are unloved and undervalued. Historically, when the P/E of the S&P 500 has dropped dramatically – as it has since the highs of May – it isn’t long before the market puts on a significant rally.
A Leaner Corporate America Could Drive the Next Rally
I know analysts are saying that earnings won’t be anything great. But they could be wrong – yet again – for two key reasons.
- Businesses have tightened up their cost structure, laid off unnecessary personnel and refinanced debt at lower levels. Even a modest uptick in sales could deliver surprisingly good bottom-line growth.
- It’s so cheap for businesses to borrow right now that I expect we’ll see many of them issuing debt to buy back their own shares. This could lead to robust growth in earnings per share, even if growth in gross earnings is less dramatic.
The bottom line?
Investing in Stocks: The Ultimate Contrarian Indicator Right Now
Stocks today are almost as cheap as they were when the Dow hit 6,500 18 months ago. And the macro-economic picture – while always cloudy – is a heck of a lot better now than it was then.
As an investor, look at your options. Cash pays next to nothing. Treasuries yield little more and could easily drop precipitously. Real estate is a non-starter, due to illiquidity, a flood of foreclosures and tough new lending rules.
But stocks offer excellent potential. And if you know anything about contrarian indicators, the fact that so few believe it only confirms it.
Good investing,
Alexander Green
