As most active market participants are thin on equity stock holding, investors are reluctant to sell the shares. Any dip in price will attract a lot of buyers waiting for a bargain.
Although the amount of sideline cash is tremendous, many investors are still waiting for market sell-off. Market manipulators intend to use the European creditworthiness downgrade to trigger a market sell-off similar to the event of US downgrade. However, the European stock market does not fall on the news but rises sharply instead. In the US stock market, market participants chase after stocks as the hope of market sell-off vanishes.
Market manipulators begin the year trading unfavorably. The selling strategy may need to be reviewed as market participants have learned not to sell in panic. The previous selling strategy may not work without panic selling from market participants.
Some patient investors have bought shares in recent market bottom when the majority of market participants are in panic. As market have rallied in the last few weeks, there may be some pressure on market due to profit taking. However, the large amount of hot capital can support the market.
Strong earnings and hot money will drive market higher. There may be oscillation due to changing market conditions. Long term market outlook should be optimistic despite current weak investor confidence. Market participants should hold on to the stock portfolio and use the opportunity of pullback to strength the portfolio.
Market Shrinks First Time Since '09
Stocks are getting scarcer in the U.S. for the first time since the bull market began as companies cut share sales to the lowest level since 2006 and buy back equity at the fastest pace in four years.
Amgen Inc. (AMGN), Hewlett-Packard Co. (HPQ) and 1,971 other U.S. companies repurchased $397 billion of stock last year, while they issued $169 billion of new equity, data compiled by Birinyi Associates Inc. and Bloomberg show. The combination reduced the Standard & Poor's 500 Index divisor, a measure of outstanding shares, by 0.6 percent last quarter, the first drop since March 2009.
U.S. share sales fell 8 percent in 2011 as interest rates near record lows spurred companies to issue bonds instead. Corporate debt sales rose 3.2 percent to $800 billion, exceeding stock offerings by the widest margin since 2008, according to data compiled by Bloomberg.
Raising money through the bond market has gotten cheaper compared with selling shares, according to data compiled by Bloomberg. The 3.8 percent interest rate on Bank of America Corp.'s index of U.S. corporate debt compares with the 7.4 percent earnings yield on the S&P 500, the data show. Borrowing costs have been 0.5 percentage point lower than earnings yields on average during the past decade.
The increase in buybacks last year suggests companies have fewer opportunities to invest in projects that will generate profit growth, said Russ Koesterich, the San Francisco-based global chief investment strategist at the iShares unit of BlackRock Inc., which manages about $3.3 trillion.
Buybacks aren't a signal that stocks are undervalued, said Andrew Lapthorne, the global head of quantitative strategy at Societe Generale SA in London. S&P 500 companies spent more than 35 percent of their net cash flow on repurchases at the end of 2007, the highest level since at least 1995, just as the gauge began a 57 percent retreat from its October 2007 peak, according to data compiled by SocGen.
Better-than-forecast U.S. economic data spurred the S&P 500's rally from within 1 percentage point of a bear market on Oct. 3, even as outflows from equity mutual funds tracked by the Investment Company Institute totaled about $63 billion during the final three months of the year.
Government reports showed payroll growth beat forecasts in December and the unemployment rate dropped to the lowest level in almost three years, while the Institute for Supply Management's measure of factory output grew at the fastest pace in six months. The U.S. Citigroup Economic Surprise Index (CESIUSD), a gauge of how much reports are exceeding economists' estimates, rose to a 10-month high on Jan. 6.
"Eventually confidence will return as growth stabilizes," Wasif Latif, vice president of equity investments at USAA Investment Management in San Antonio, which oversees about $50 billion, said in a Jan. 12 phone interview. "All of a sudden you're going to notice that there won't be enough shares around."
The Invisible Hand Behind Bonuses on Wall Street
Mr. Johnson, a consultant who speaks with a light twang from his native Alabama, has never worked for a bank. Nor will his company, Johnson Associates, pay million-dollar bonuses to any of its 12 employees this year. But as one of the nation’s foremost financial compensation specialists, Mr. Johnson is among a small group of behind-the-scenes information brokers who help determine how Wall Street firms distribute billions of dollars to their workers.
This year’s bonus season, which began in late December and will continue until February at some companies, is expected to be the worst for industry employees since 2008, as regulatory measures and economic uncertainty have cut deeply into profits and made pay pools smaller.
In his annual compensation survey, a closely watched report that was sent to roughly 800 of the company’s clients in November, Mr. Johnson estimated that bonuses in the industry would fall 20 to 30 percent from last year’s levels.
“From my personal political standpoint, I wish people got paid less,” Mr. Johnson said of his Wall Street clients. “But my guiding star is not my political belief.”
Predictions about this year’s dismal bonuses have no doubt disappointed financiers on Wall Street, who often complain that they are underpaid even when all evidence points to the contrary. But for a compensation consultant, breaking bad news to people unaccustomed to hearing it is often part of the job.
Wall Street Bonus Cuts Prompt Complaints – Aren’t They Thankful They Have Jobs?
Morgan Stanley (MS) broke the bad news to its traders and bankers Tuesday: 2011 cash bonuses will be capped at $125,000 and compensation could be cut by 40 percent.
The good times may be over for Wall Street, says Chris Whalen, a senior managing director at Tangent Capital Partners, but those still showing up at work should "feel fortunate."
Fed's Latest Easing Could Cost $1 Trillion: Economists
The Federal Reserve is likely to step in with $1 trillion worth of easing that could be announced as soon as this month, according to a growing consensus of economists who see the recent uptick in economic growth as unsustainable.
Of course, the announcement also could push stock prices higher, as did the Fed's last balance sheet expansion begun in November 2010.
"We think this deceleration in real GDP will be enough for the FOMC to declare that there are downside risks to both of its objectives by March, the precondition for QE3," he wrote. "The vigor of private demand is being sapped by unfinished business left from the incomplete clean-up of the financial crisis."
About that economic recovery: Economists at the biggest shops also are wagering 2012 GDP down to the 2 percent range - Citigroup's Peter D'Antonia says 1.75 percent - even though the fourth quarter of 2011 could be upwards of 3 percent or better, with Deutsche Bank economist Joe LaVorgna above 4 percent.
Goldman Sachs sees growth at 2 percent in 2012 and not much improvement in 2013, with GDP gaining about 2.25 percent.
The reason for the pessimism is that the improving data masks unsustainable fundamentals - an unusual drop in the savings rate, a jump in auto purchases due mainly to a recovery from Japan's natural disasters last spring, and a surge in inventories.
Where to put your money if the bond bull stumbles
Bond buyers enjoyed another banner year in 2011, with total returns in all classes outperforming the broad U.S. stock market, and investors continuing to pile into bonds and shun stocks.
The celebrity status for bonds troubles some investors and investment strategists. They sense that this great bond bull market will slow in 2012. Not that sticking with bonds at this juncture is a recipe for disaster, but with more of their nest-egg tied to fixed-income securities, investors need to ask some hard questions.
A more realistic possibility is that stronger than expected economic growth spurs U.S. interest rates, raising yields and making existing bonds less attractive.
That said, as the fixed-income analysts at DWS Investments put it in a recent research report: “One could argue that U.S. Treasury yields probably won’t go much lower, if at all, but they can stay surprisingly low for longer than most people predict, especially while the euro overhang persists.”
If you believe world markets will remain chaotic and are concerned about geopolitical unrest, then add Treasurys, Rowen said. But if you think there will be improvement, he suggests lightening up on government bonds in favor of better opportunities in stocks and investment-grade corporate debt.
For those with more of an appetite for risk, corporate bonds fit the bill.
Municipal bonds were one of the best categories in 2011 and analysts expect more of the same this year.
Investors, prepare for tax headache on cost basis
Investors who buy and sell stocks have a new tax form and new reporting rules to contend with this year when they do their tax returns — and some tax pros say the new rules could cause confusion.
The goal of the new rules is to make sure investors don’t pay less than the law requires in capital-gains taxes. The higher the cost basis you report, the lower your gain — and the cheaper your tax bill.
Here’s what’s going to happen: By Feb. 15, brokers must mail to investors — and to the IRS — cost-basis information on the revised Form 1099-B. Investors will use that information to fill out the new Form 8949, which they will then use to complete the revised Schedule D.
Investors always had to report cost-basis, of course. So, eventually, the fact that brokers are providing that information likely will make their tax-filing lives easier. But the first few years of the new rules may create some havoc, given that only certain transactions are “covered” — that is, required to be reported by the broker — while other transactions are not covered but still need to be reported to the IRS by the taxpayer.
Still, given the likelihood that most active investors either hire a tax preparer or use online software, this may not be a big problem. But if you prepare your return with pencil and paper, Hill said, “you’ll probably just say this form doesn’t make sense and just avoid categorizing the transactions.”
Some say taxpayers won’t be that hindered by the new cost-basis reporting rules. “Even before, on Schedule D and the supporting Schedule D-1, you were always supposed to report the basis on it, so in that sense it’s not a huge additional reporting obligation,” said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based tax publisher and unit of Wolters Kluwer.
“It’s pretty much the same information but you have to go to a different form to put it on and then transfer it back,” Luscombe said. “If you’re using software it probably doesn’t matter much. It might be just more complicated for paper filers.”
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