Earnings Continue to Impress
Jul 27th
DuPont, Cummings, and others posted great numbers this morning that easily beat the street and the futures market is pointing to a higher open for all of the major indicies. Stocks are set to continue their run higher as economic and earnings reports worldwide are boosting optimism about the health of the global economy. DuPont also raised its profit outlook for the year. Such outlooks have been a boon to the market because they indicate companies are gaining confidence in a global economic recovery.
The bottom line is that both the market and economy are showing signs of a recovery. Its hard to imagine with unemployment at 10%, but many CEOs are going to begin to spend their cash on expansion and that will have a cross over to higher employment. Additionally, a survey showed last year that even consumers that had jobs were not spending because they felt a low sense of job security. This year, that number is much lower as most consumers with a job have returned to normal spending habits.
Strong fundamentals
Jun 27th
The markets have been fairly flat over the past couple of weeks despite huge day to day swings. The best play at this point is to continue to focus on quality companies as access to credit is only going to get tougher with these new financial rules about to be put in place by Congress. The financial reform bill should be voted on this week so expect financials to take a hit this week.
By quality companies I mean the large caps with plenty of cash. Look at Johnson and Johnson (JNJ), Altria Group (MO), and Pepsi (PEP). They all have great balance sheets, a mountain of cash on hand, and diversified enough to withstand any market downtrends.
Good Numbers
Apr 28th
Elven Dow components reported last week and most of them exceeded expectations. These good numbers helped the market climb higher on limited volatility. One of the upcoming head winds seems to be financial reform being debated in Congress. Its seems two of the key aspects that got us into this crisis, won’t be in this bill. Financial companies leveraged as high as 45 to 1 which meant they had a ton of short term liabilities and no control of risk. Secondly, no bank cash requirements. You can limit some of this risk if banks had to hold a specific percentage of cash with regard to their balance sheet yet neither of these items is addressed in current legislation.
I think this recovery will be limited at best. Consider the facts. Unemployment is still quite high at 9.7% and most would argue the true rate is closer to 20% with many people taking lower paying jobs than their skill set and some giving up altogether. The average time a person spends on unemployment has grown to over 31 weeks. A decade ago this number was just above 10 weeks. Lastly, consider the amount of college grads the past couple of years deciding to go to graduate school because of the difficult job market. That, combined with the increased amount of people graduating from college each year is going to create a large over supply of workers. When large companies begin to hire again (usually after 3-4 consecutive quarters of good GDP growth), they won’t be able to hire at a high enough rate to bring down the unemployment rate in any significant way. In addition, the flow of credit to companies and small business is still very slow. The new financial reforms are going to put increased pressure on this important catalyst to economic growth. The new healthcare legislation is another wild care in that no one really knows the impact it will have on hiring and the health of business.
Expect this recovery to be slow and a “new normal” to be established. For awhile, I believe people should be happy with 5-6% annual growth in the stock market, 3-5% appreciation in their real estate, and a country that is going to grow its GDP at 3-4%.
Trading Tips From Stock Genie
Apr 12th
Day trading became a very hot fad in the 1990s. Its seemed like anyone could do it, but then again you were in a market where everything was going up. Even people with no experience in that market were making money. While those days haven’t returned just yet I wanted to share two quick tips with you that will enable you to maximize your trading returns. If you are new to stock trading, start small. If you invest your entire trading account in one stock and it goes badly, you might lose the passion that got you into trading in the first place. Invest a portion of your trading account into a stock and use those gains to build your nest egg. In terms of each trade, I recommend using a 1/3 strategy. Buy a third of what you want to invest once the recommendation is made. If the stock drops by more than 3%, cut your losses if you’re daytrading. If the stock stays flat or moves up a little, buy your second third and continue the process. If you like the long term prospects of the stock, buy your second third and so on.
Lastly, I can’t being to tell you how critical it is to set goals for each trade. You must know where your exit points in the trade will be. If your trade makes 10% over a short period of time, do not get greedy. Instead, place a stop loss order 2% behind the current stock price. This will lock in a 8% gain on the stock and allows it the opportunity to run higher. For example, imagine you bought shares of Apple (AAPL) on the dip after Steve Jobs took his medical leave. You would have gotten in at the mid $80 range. If your goal was 10%, you might have sold the stock a few weeks later and been very happy with a winning trade. Look at the stock now. $240 plus. You would have missed out on the next 200% of the stocks gain. On the other side, it is important to take losses and move on. By setting a stop loss, you will minimize your risk by setting a predetermined price so if the stock fails you will know what that risk is. Often times investors get too caught up in their belief a company might be great or let ego take over thus not admitting a trading mistake. Not every trade is going to work, so move on.
Numbers Often Lie
Apr 5th
The market continues to crawl higher as a majority of the data coming out is negative. The jobs report that came out when the market was closed on Friday did meet expectations. However, keep in mind two things. First, it did not change the overall unemployment rate (still 9.7%). Secondly, about 40k of those jobs were from the government hire of census workers (roughly 45,000). The census is going to add over 500,000 jobs to the data over the next six months so be sure to factor that into each overall number.
Mortgage rates are trending higher as the 30 year fixed has moved from 5% to 5.23% in a matter of weeks. With the home buyers tax credit about to expire, this is going to put a new strain on an already tough real estate market. If people don’t have jobs and those that have them are concerned about keeping them, then no one is going to make a huge investment on a new home. Small banks continue to fail at a faster pace than previous years and this is continuing to put pressure on the commercial real estate market.
Having said all of that, I don’t know how much longer I would stay fully invested. It may be a good time to begin to take some off the table, add stop losses on your winning trades to control your risk exposure, and if the market does drop look for opportunities for great entry points in long term winning stocks.
The Feds next move
Mar 17th
The Federal Reserve decision on interest rates comes out later today and I am expecting no movement in the fed funds rate. Earlier this month they raised the discount window rate (rate charged to banks from their regional federal reserve) and while this has a slight trickle down effect on consumers, the main rate to worry about is Federal Funds rate. News should report no change in this meeting with one vote cast to raise rates. This, among other factors, signals the Fed is going to raise the Federal Funds rate soon. This increase will effect adjusted mortgage rates and the overall money supply. It does indicate a growing economy and should give the markets a signal that the economy is out of the woods. After a few rate increases and consistent positive GDP growth, companies begin to hire again and the unemployment rate drops.
The minutes of the FOMC meeting should be read over carefully for more clues on when the Fed might begin to raise rates.
What’s Next?
Feb 19th
As I mentioned last week, the Federal Reserve is taking action. They raised the discount rate by 0.25% to 0.75%. This exit strategy will have the effect of strengthening the US dollar. While this move by the Fed indicates our domestic economy is improving, it signals negative short term returns for the markets. The Asian stock market seems to agree with the average decline being just over 2%. I don’t see this trend slowing down when Europe opens and I think our markets open lower and finish that way.
Based on that, I would recommend shorting financials. It sounds simplest but sometimes the best trades are.
Gloomy forecast
Feb 15th
We have fallen 7% off the January highs. Market could easily fall 10% in the near term. Not back to the March 2009 lows as that crisis is behind us, but look at what is going on. GDP is trending lower to 2% versus projected 3% which means the unemployment rate will remain high. It looks like 50% of commercial real estate loans will be underwater by the end of this year and thats going to have a huge impact on local community banks. The Fed is looking at an exit strategy that will tighten liquidity by raising the discount rate, increase rates on excess reserves which gives banks more incentive to keep money with the Fed, which gives them less incentive to lend thus pushing up rates to consumers.
Often investors ask “What do I do? Put all my money in cash?” Reframe the question for your own portfolio and ask the question “What mistake can I afford to make?” If you pushed into all cash as the market dropped, you most likely missed a lot of the 70% rally from the bottom. Therefore its important to make your current investment more conservative, but continue to dollar cost average each month into equities. This will have the lasting effect of a lower cost average and allow you to enjoy any upcoming market rally while making more of your investments conservative.
PIIGS get slaughtered
Feb 11th
Our domestic credit crisis spread pretty quickly throughout the world, but it is still having lasting effects across the pond. The PIGS (Portugal, Ireland, Italy, Greece, and Spain) continue to struggle and are showing no signs of a quick turnaround.
You have to pick your spots carefully in this market in which I see our Dow getting to 9000 before it touches 11,000 again. What does this mean for your investments if you think the Dow is going to drop further and investing in a diversified international fund won’t work either? I like Morgan Stanley’s Double Short Euro (DRR) exchange traded fund.
At these levels the Euro is still overvalued by 5-10% and many of their economies continue to tumble meaning the European Central Bank may have to cut interest rates. This is another force that will cause the Euro to drop.
Sticker Shock
Feb 11th
Things are not always as they seem. Words to live by. Many investors see these massive snow storms and think “Well no one is going out to shop, I’m going to short the retailers.” Logical at first glance, but dive a little deeper. Two major issues make this a bad trade.
First, one of the top holdings in a lot of retail etfs is Amazon. They will do quite well if everyone stays home and does their shopping online. Secondly, Valentines Day is this weekend and most retails do quite well with this holiday. Add to that its a long weekend with President’s Day and this trade is dead in the water in the short term.
