If the last decade has taught investors anything, it is that taking greater risk does not always result in greater return. An investor who put his entire portfolio in a basket of developed-world equity markets at year-end 1999 would have earned all of 2.34% over 10 years. And to earn that 2%, this investor would have endured two of the worst bear markets in history, with peak-to-trough declines of 45% and 53%. What's more, an investment in conservative full-faith-and-credit-pledge short-term U.S. Treasuries was up 55% over the last 10 years. The 2000s were without a doubt a dismal decade … [Read more...]
Is this Round Two?
February 5, 2010 Global equity markets have sold off sharply to start 2010. The risk trade that worked so well last year is getting creamed. A flight to quality is underway. Investors are concerned over the sustainability of mounting debt and deficits of weaker Euro member states. I am talking about Portugal, Ireland, Italy, Greece, and Spain here-better known as the PIIGS. Today, Greece is in the crosshairs of global bond market investors. Greece’s debt and deficits are unsustainable, but there is opposition to a plan to rein in debt. Investors smell blood and have bid up yields on Greek … [Read more...]
A Guide to 2010 Investment Returns
In 2010, the monetary policies of the world's three largest central banks are likely to play a big role in the performance of global equity markets. The vast majority of the world's wealth—close to 80%, by some estimates—is concentrated in the U.S., Japan, and the euro area. My chart shows that the GDP-weighted risk-free rate in these three economies is only 0.14%. A 0.14% T-bill rate would not be a concern if the global economy were still in free fall, but it isn't. The global economy bottomed in the second quarter of 2009. The IMF projects that the global economy will grow by 4% in 2010. … [Read more...]
The World’s Most Profitable Trade
January 15, 2010 In 2009, one investor earned more than the combined profits of Exxon Mobil, Microsoft, and Wal-Mart by employing a common Wall Street trading strategy-the carry trade. The carry trade is a strategy where an investor borrows money at a low rate and invests the proceeds at a higher rate. To make substantial profits from the carry trade, you have to use gobs of leverage. The investor I am talking about used leverage of more than 40 to 1-enough to make even Goldman Sachs blush. What investor in his right mind would use leverage of 40 to 1 so soon after the worst credit crisis in … [Read more...]
Investment Success
November 20, 2009 In 1981, the Dow Jones Industrial Average ended at 875, 10% lower than its year-end value in 1965. During this wretched 16-year period, blue-chip stocks went nowhere. This was the ice age for stock prices. High and rising inflation and interest rates and big government were to blame. This sounds eerily similar to America’s prospects today. Savvy investors have successfully navigated long dry spells in the stock market for decades. What is their secret? Buy the high yielders. My chart compares the hypothetical growth of a $10,000 investment in the Dow Jones Industrial … [Read more...]
A Canary in the Coal Mine?
The Citigroup Economic Surprise Index (CESI) accurately forecasted a 60%-plus rally in the stock market in early 2009. The CESI is an indicator designed to measure whether economic data is coming in better or worse than the average analyst’s expectations. A rising index indicates that economic data is coming in better than expected, whereas a falling index indicates that economic data is coming in worse than expected. The theory is that the consensus expectations for economic data are priced into the market. So then, when new economic data turns out to be better than the market’s expectations, … [Read more...]
Peculiar Divergences
What worries me most about the stock market rally are the peculiar divergences we are seeing. What do I mean? Let's look at some charts. My first chart shows that gold is breaking out to the upside on heavy volume. SPDR Gold Trust Gold is an inflation hedge, a currency hedge, and a safe-haven asset. When gold rises, other financial assets are often falling. But my stock market chart shows that the S&P 500 has rallied virtually uninterrupted since bottoming in March. S&P 500 Oddly, though, volume is falling while prices are rising. A divergence in price and volume … [Read more...]
Top 10 Mistakes #9
August 28, 2009 Most investors fail to make dividends their #1 priority. When it comes to stocks, if you are retired or saving for retirement within the next decade or so, dividends and dividend growth must dominate your thought process. If the results of the last decade have taught conservative investors anything, it is that dividends matter. At Young Research, we do not even consider a stock for our in-house, 32-stock model portfolio unless it pays a dividend. And at our family investment management company, we do not invest for clients in non-dividend-paying stocks. Moreover, we like … [Read more...]
A Strategy for the Current Stock Market Rally
The S&P 500 is up 15% since July 10 and up close to 50% from its March low. What's the catalyst for recent gains? A strong second-quarter earnings season. More than 75% of S&P 500 companies that have reported earnings beat analysts' estimates. Strong second-quarter earnings gave the minutiae-focused quarterly earnings crowd the courage to leap back into stocks. Even after the recent rally, there remains a truckload of cash sitting on the sidelines. But are quarterly earnings a reliable signal of future sustainable stock gains? In this case, I think not. Closer examination of the … [Read more...]
Telling Stories
Last week, I wrote about a possible bubble developing in the Chinese stock market. If you missed it (we experienced some technical difficulties) you can read it here. Every great bubble is accompanied by a great story. In the dot-com stock bubble, investors were mesmerized by the awe-inspiring potential of the Internet. Consumers were expected to do all of their shopping online. Bricks-and-mortar retailers were considered outdated and obsolete. Dot-com start-ups and telecom equipment stocks were what investors bought for growth. And the growth was expected to compound at exceptional rates for … [Read more...]