As mentioned in earlier post, market has entered inflexion point and it is now obvious that market participants have strong purchasing desire due to mountain of cash on hand but have patience to wait for bargains. It is still maintained an upward market trend with volatility.
Although market is at high level for the last three years, there is no heavy selling due to profit taking as there is a long queue of buyers at various level down to recent bottom in the second half of last year. Market participants are waiting for pullback to replenish the equity starved portfolio. Day traders dominate the trading activities and the limited supply of shares in market buoys the price. A large quantity of equity stocks have changed hands from panic investors to wealthy entities that have holding power and can tolerate market fluctuations. The dividends already provide a decent return on investment for coming years even if the portfolio value remains distressed.
Market movement is the aggregate of activities from market participants. After market crash in March 2009, the majority of individual investors are reluctant to re-enter the market after selling at bottom. After the rally, there is interest in market but prefer to wait on the sideline until another crash to replenish the portfolio. Nevertheless later market bottoms are successively higher and the opportunities are missed.
The May 2010 flash crash provided the first opportunity after the 2008/2009 financial meltdown. It was observed and mentioned in this blog that individual investors though only a limited portion, were returning to equity stock market in October 2010. Market then moved slowly up until May 2011.
As investors were holding large amount of cash and seeking safety, it was perceived that the demand for Treasuries would not drop after the Federal Reserve bond buying program ended in June. Market oscillated in July. And then market manipulators used the US debt rating downgrade news to initiate panic sell-off among market participants. Since the speculative investment portfolio was optimistic on equity stock market, it was heavily loaded with stocks on high leveraging. The crash caused the portfolio to lose two third of value at the maximum point. After the initial crash, there were several smaller scale sell-offs later. But as mentioned in the posts, each sell-off ended with rally on short covering from market manipulators. The speculative trading portfolio recovered some of the previous loss. But the damage due to the initial crash on US rating downgrade was too large due to over-leverage. Market participants were shocked by the crash and failed to take advantage of this opportunity of another market bottom after the flash crash in 2010. The rally from the beginning of 2012 is a surprise to many market participants.
The above two cycles of market up and down appear to be very similar. Market reaches the top and then followed by a crash. Then market struggles at the bottom while market participants are waiting for further decline. Finally market rebounds and climbs on a wall of worry. So far market participants behaved similarly in both cycles before reaching pre-crash top.
In the last cycle, market oscillated when it reached the level before the crash and then moved up further. In this cycle market has now moved back to the level before the US debt rating downgrade when market participants went into panic sell-off. Currently, market have surpassed the pre-crash top. Therefore it may oscillate at this point and after consolidation, advance further. The driving force behind is the mountain of cash in market participants portfolio and the hunger for return on investment.
Since it is difficult to guess market cycle in very short term, the anticipated oscillation at current market top may have pullback anytime soon. In order to take advantage of the potential market ups, market participants should hold current portfolio and strengthen the holding on pullback. Day traders would speculate instantaneous market movement to maximize possible profit.
As learned from the experience in the market crash triggered by US debt rating downgrade, the speculative investment portfolio maintains some hedging against unfavorable market movement. Nevertheless, it is envisaged that market manipulators would not initiate panic sell-off because cash on the sideline are waiting for bargain buy and market participants would not dump the remaining stocks in the portfolio. Therefore, the speculative trading portfolio remains aggressive with high level of leveraging. Nevertheless, it should be able to withstand a 3% market correction without forced liquidation. A crash like the US debt downgrade may be devastating. Market will be closely monitored for symptom of panic selling. After the US debt rating downgrade, market manipulators initiated sell-off among market participants. The speculative trading portfolio overlooked the impact on the herding behaviour of panic investors.
Although it is unlikely that market participants will go into panic selling again, there is still possibility that heavy selling may come from investors taking profit because long term investors are currently loaded with equity stocks. If buying interest from individual investors fades, market may lose momentum.
Are Stocks Reflecting an Economic Recovery Too Soon?
"It gives us a thesis upon which the case for a more domestically exposed portfolio makes a lot of sense," says Mark Luschini in the attached video. The chief investment strategist at Janney Montgomery Scott is betting on a below average economic expansion of 1.5% to 2%, but "one that looks positive nonetheless."
Right now, with stocks up more than 12% in two months, Luschini's camp is winning the debate. He'd like nothing more than a shallow 3% to 5% pullback to give him another chance to put more money in. In a note clients he writes, "any near-term decline should be used opportunistically to add to positions."
Munson Warns Investors: Be Long or Be Wrong!
Lee Munson, author of the book "Rigged Money" has a stark warning for investors: "You can be long or be wrong this year," says the unabashed former broker.
He believes the second half will be even better than the first and ticks off the following reasons why:
* The horrific global macro news didn't just arrive but is a "spin-off" of a disastrous fourth quarter. The U.S. is much more insulated from Europe's mess than is widely believed.
* Earnings growth doesn't have to be explosive to support higher stocks. Even if 2012 EPS for the S&P500 comes in at $100 --roughly what the stocks in the S&P500 earned in 2011-- stocks wouldn't hit their historical average P/E until S&P 1,500.
* Expectations continue to be downgraded, and too much so in Munson's estimation. By the time the analysts catch up, the best of the rally may be behind us.
* Greece will eventually be out of the headlines. Not fixed, just not a negative national obsession.
The CIO of Portfolio LLC opines that Europe's impact could even be bullish given the enormity of Euro-printing on deck for the next 12 to 24 months. If quantitative easing was bullish in the States (and it was), the impact of QE on a global basis will support stock advances, particularly in the relative safe-haven that is the U.S.
With the rally only starting to pick up steam, Munson says it still makes sense to start ditching what worked last year in favor of taking on more risk. Forget defensive names and avoid dividend plays. Grab beta, he advises, referring to stocks that are more volatile than the overall market. Beta will bury you in a bear market but as we've seen already this year, a bullish tape makes beta an investor's best friend.
Generally speaking Munson thinks too many market participants are thinking and stressing too much; confusing looking "smart" with making money. The trend is on the bulls' side and until that changes shorting stocks is a mug's game.
Dividend Payouts Are Climbing After Plunging to a Record Low
Corporate America may be getting ready to share a bigger chunk of its record profits with investors, who lately have been getting a record-low piece of the pie.
Dividend payouts already are rising and the total dollar amount by S&P 500 companies could reach a record high this year. Standard and Poor's analysts expect the dividend payout for the S&P 500 to surpass the record $247.9 billion paid out in 2008.
"I think there's a change in investor appetite for risk, and that in the last couple of years that has resulted in better performance for dividend paying stocks...to the extent dividends are being paid. There are also plenty of companies choosing to do share buybacks," said Gina Martin Adams, Wells Fargo institutional equities strategist.
Dividends have provided the bulk of return to long-term shareholders for quite a while, and companies are just beginning to catch on to the fact that investors are seeking dividend-paying stocks and will reward them, according to Adams.
Adams said the investor mentality has shifted as sources of yield have dried up in the current record low interest rate environment.
Stocks vs. Earnings: A Surprising Inverse Correlation
Even an uber-bull would have to concede that under normal conditions, those two lines should move together and that 0% earnings growth is hardly the fuel needed to drive stocks higher. Yet Butters points out that this is the 17th time in the past 40 quarters that such an opposite - or inverse - move has occurred.
In the meantime, he like many of us, he won't be surprised to see ''a little pullback" and some increased volatility return after the hottest start to a new year in more than a decade. He's focusing on companies that do business in emerging markets that can deliver profit growth, including industrials and technology, and if they pay a dividend too, all the better.
QE3 or No QE3? The Only “Transparency” the Market Cares About
The minutes of the Fed's January meeting today are likely to shed some insight on just what the heck FOMC members were thinking when the central bank pledged to keep rates at zero through 2014, at least.
In addition to potentially shedding light on that conundrum, the big issue for the market is whether the minutes will reveal any plans for another round of quantitative easing.
"The market cares about one thing: Whether the Fed is going to do QE3," Bianco says. "The Fed's promise to keep rates low for an extra year makes market believe it's more likely. If we get anything that throws cold water on the idea QE3 is coming, the market would react negatively."
Conversely, "stock and risk markets will respond positively" to any further indication on the timing or likelihood of more Fed asset purchases, he notes.
Stocks Can Rally Another 10% and Still Be Cheap: Fund Manager
"Anything to keep the consumer spending right now," says Ted Parrish, fund manager, Henssler Financial in the attached video. "I think it will keep the growth going. We don't need to detract from that."
"We've had 19 weeks of positive economic data and we need to keep that going," he says.
Parrish believes earnings and an improving political environment should allow the S&P 500 to continue its rebound toward all-time highs, and is targeting a move to 1495 by year-end.
Parrish believes earnings and an improving political environment should allow the S&P 500 to continue its rebound toward all-time highs, and is targeting a move to 1495 by year-end.
"Overall, the market's just cheap," Parrish says, and argues that earnings have grown by more than double the rate of stock prices since 2008, which means there's still lots of catching-up to do.
Home buying: Most affordable in decades
Buying a home is now more affordable than it has been in the last twenty years.
Thanks to continued declines in home prices and rock-bottom mortgage rates, the National Association of Home Builders/Wells Fargo Housing Opportunity Index hit a record level of affordability.
Unfortunately, being able to afford a home and actually being able to buy one are two different matters entirely. According to Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla., potential home buyers are still finding it difficult to land mortgages.
US Housing Among Most Attractive Assets: Marc Faber
The housing market in the south of the United States is among the most attractive asset classes in the world, Marc Faber, the editor of the Gloom Boom & Doom Report, told CNBC on Friday, because while homebuilder stocks had rallied, property prices hadn't moved much.
Faber said he went to see homes in Phoenix and Atlanta, and in some cases, U.S. homes were cheaper than those in Thailand, where he lives.
At the same time, the fact that people couldn't get credit to buy homes in the U.S. was helping to boost the rental market, he added.
Faber said plenty of investors were already making money by buying distressed homes, but he said the fragmented nature of the market didn't benefit large investors with billions of dollars of capital. Rather, he said it was more nimble investors who were doing well.
Dear Walmart, McDonald’s, Starbucks: How Do You Feel About Paying Your Employees So Little That Most Of Them Are Poor?
The rich keep getting richer and the poor stay poor, and many folks who used to have decent jobs and lives in the middle are now joining the ranks of the poor or near-poor.
The disappearance of America's middle-class is generally attributed to the "loss of manufacturing jobs," as technology replaces people and companies move jobs overseas.
But the real problem is the loss of good-paying jobs, not the loss of manufacturing jobs.
Many Americans who used to have middle-class manufacturing jobs--or who would have had them had they not disappeared--now work in low-wage service jobs at companies like Walmart, McDonald's, and Starbucks.
The consensus about these low-wage service jobs is that they're low-wage because they're low-skilled.
A century or two ago, many of the manufacturing jobs in the economy paid extremely low wages, and the work was done in dangerous, unhealthy environments. Then workers began negotiating collectively, and wages and working conditions improved.
Corporate profit margins, in fact, are close to an all-time high, while wages as a percent of the economy are at an all-time low.
Obama wants cheaper pennies and nickels
The U.S. Mint is facing a problem -- especially during these penny-pinching times. It turns out it costs more to make pennies and nickels than the coins are worth.
To be precise, it cost 2.4 cents to make one penny in 2011 and about 11.2 cents for each nickel.
Given the number of coins that the mint produces -- 4.3 billion pennies and 914 million nickels last year alone, those costs add up pretty quickly: a little more than $100 million for each coin.
Despite popular belief, since 1982 pennies have only been copper plated, not copper through and through. Much less expensive zinc makes up 97.5% of the mass of a penny, the rest is a copper coating.
Nickels actually have much more copper in them -- 75% copper and 25% nickel, the same mix it has always had.
Treasury had already made a cost-saving move in December when it stopped making dollar coins.
With 1.4 billion surplus presidential dollar coins sitting in bank vaults waiting to be circulated, and American consumers showing little appetite to start using the coins, Treasury estimates the halt in production of the coins will save about $50 million a year.
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