Today stocks hit new all-time highs on the S&P 500. Happy days, right? Not so fast. Here’s what’s scary about the stock market’s recent climb to new highs and how it could all fall apart. [expand title="Click here to read more."] Take a look at the chart below. On it you’ll see the monthly growth rates for stock prices (the S&P 500 index) and margin debt (on the NYSE). Normally the two track one another pretty closely. But look what happened just before the last two recessions. Margin debt growth spiked, while price growth for stocks decelerated. Today we’re seeing a … [Read more...]
Stocks you can Trust Today
With the Dow soaring to record highs you have to wonder what you can trust in the stock market. Are gains in the market just an expression of Fed easy money policies, or should you jump in for a quick buck? … [Read more...]
A Winning Stock Policy for You
Thinking about all the cash Apple is holding on to makes me wonder about its dividend policy. Some of that cash would probably be better off in the hands of stockholders. I’ve been spending some time reviewing my copy of Security Analysis by Benjamin Graham and David Dodd. I’ve had the book since the early ’90s, when I was at Babson College. What Graham and Dodd wrote in the early ’30s on dividends applies just the same today. Here’s what they had to say: Dividend Policies Arbitrary and Sometimes Selfishly Determined. –One of the obstacles in the way of an intelligent understanding by … [Read more...]
This Stock Rally Is a Dud
Investors are not paying attention to the real returns of this stock market. Rich Karlgaard, publisher of Forbes, wrote a spot-on piece recently in The Wall Street Journal. He pointed out that the S&P 500 is up 124% over the past four years, but gold is up 88%, oil 106%, and silver 167%. The broad correlation between stocks and commodities implies that dollar weakness is driving prices higher, not the fundamentals of supply and demand. In light of that, the stocks’ returns aren’t that great in real-dollar terms. Karlgaard also compares this rally to that of the 1974–80 market when the … [Read more...]
America’s Businesses Not Feeling the Love
With the stock market soaring one would expect businesses to be exploding with optimism. Since the beginning of 2013 the S&P 500 is up 6.4%, that’s explosive growth for such a short period. But rather than confirming the optimism being implied by investors, business owners and management are sounding the alarms. Today’s NFIB Small Business Economic Trends report barely increased, coming in at 88.9, up only slightly from 88 in December. The headline was not a resounding sign of strength, but once you drill into the data, small business optimism looks even worse. Only 6% of … [Read more...]
S&P Ripe for a Correction
After rocketing upward by 4.8% already in the new year, the S&P 500 is entering extreme overbought territory. On the chart below you can see the ratio of the S&P 500 price index to its 50 day moving average. The ratio is nearing 1.05, traditionally a turning point. What’s driving equity prices higher? It’s not earnings. Trailing P/E ratios of the S&P are increasing quickly. Is the market expecting faster growth in the future? Forward P/E ratios are increasing too, so that’s not the root cause. More likely, the cause is that the massive amounts of high powered money … [Read more...]
Stocks Soar: Don’t Miss the Boat
It seems Mr. Bernanke’s bludgeoning of individual investors is finally starting to pay dividends. Four years of pinning short-term interest rates at zero with a promise to hold them at zero for another two years and a commitment to buy massive quantities of long-term Treasuries and mortgage backed securities ad infinitum has put stocks back in favor with individual investors, for all of the wrong reasons of course. Nonetheless individuals are buying stocks at the fastest pace in years. The Investment Company Institute reported net equity mutual fund inflows of almost $15 billion for the … [Read more...]
Fairy Tales in the Fantasyland of Washington D.C.
Chuck Schumer, the liberal democratic senator from New York is out with some post-election blather on the fiscal cliff. Schumer and his liberal allies have yet to figure out that higher tax rates don’t generate more revenue. Here is what he said during an address at the Christian Science Monitor Breakfast yesterday. From the Daily Caller: “It’s a lovely thing but it’s a fairy tale…it is the Rumpelstiltskin tax fairy tale that if you cut taxes you increase revenues.” Mr. Schumer’s beliefs are grounded in a fantasy land where higher rates don’t encourage tax avoidance. But the truth is, … [Read more...]
Earnings Catch Wall Street by Surprise
Last week the market was surprised by an unintentionally early release from Google, which reported earnings much lower than analysts had expected. But Google wasn’t alone in missing earnings estimates. Chipotle Mexican Grill, General Electric, Ingersoll-Rand, Baker Hughes, Honeywell and others also came in below estimates, disappointing shareholders. But should analysts and investors be surprised? As you can see in the chart below, margins (estimated using corporate profits as a percent of GDP) maxed out in the fourth quarter of last year. Companies did all they could to boost margins … [Read more...]
Survival Stock
In seventh grade, my school had a program called “Survival” up in the woods of Western Massachusetts. It was for the whole grade. Not just for those who enjoyed the outdoors. It was a big deal—a rite of passage for all of us before moving on to the next grade. Each of us was allowed to fill a milk crate with food. But you had to carry it up to base camp three miles up a hill, so packing only what you could carry took on new meaning. Once base camp was set up, we were split into two teams. One team would go out for three days on the survival part, and the others would stay at base … [Read more...]
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