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Happy Anniversary Bull Market

Monday, March 9th, 2015


Today is the 6th anniversary of the post-crash stock market bottom, so just a quick note this morning as I’m at the Retail Banking Conference. I wanted to share a chart that is pretty interesting – it’s Marty Chenard’s graph of the S&P 500 since 2009’s crash bottom showing a well defined rising wedge pattern.

Here is the definition of a rising wedge from Stockcharts: The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the tracding range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

This type of technical analysis is important because it gives you insight into investor psychology more than anything else. It basically tells you that investors get complacent as prices increase and are less inclined to sell on bad news. Generally they take on more risk and possibly utilize margin loans to buy stock that they otherwise can’t afford. Then at some point they see the gains they’ve made and some begin to take profits. Then bad news at some point matters and the selling begins as investors want to preserve as much of their profits as they can. That drives the prices down and the index falls below the bottom line in the rising wedge.

So as with some of the other articles I’ve published recently, this is just a sign that a bit of caution is warranted as this market has risen so much in the past six years.

Our goal is to have some cash in client portfolios to buy companies cheaper when the inevitable pull back happens – not too much because we don’t want to underperform in the short term. We are also de-risking by rebalancing portfolios and taking some money out of big winners to get them back to strategic allocation percentages and adding to under performers also moving them back to strategic levels. Why is this de-risking? The winners have become overvalued and the underperformed shave become undervalued.

Enough for now as our meetings start soon, but I’ll be tuned into the market during the conference and will be taking any needed actions if anything eminent happens in the market.


Columbus Day Thoughts

Monday, October 13th, 2014

It’s Columbus Day and we are closed but I saw the article below in Bloomberg and thought it was a nice supplement to my post last week.

It does a
Nice job showing the extent of the correction and how it’s masked by the capitalization weighted S & P 500 Index:

THE CORRECTION IS ALREADY HERE – Bloomberg: “For most American stocks, the correction has arrived. While gauges such as the Standard & Poor’s 500 Index cling to gains for the year, declines that exceed 10 percent are spreading in the broader market. In the Russell 3000 Index, for example, 79 percent of companies are down that much from their highs … Concern the rate of global growth is slowing and the Federal Reserve is preparing to raise interest rates has pushed the S&P 500 down 5.2 percent from its September record.

“The 1,700-stock Value Line Arithmetic index, which strips out weightings related to market value to show how the average U.S. stock has fared, is down 10 percent since July. Three weeks of declines have broken the almost unprecedented calm that had enveloped markets for most of 2014. Eight trading days into October, the S&P 500 has posted six single-day moves exceeding 1 percent. The market went without any swings of that size for 62 days in May, June and July, the longest stretch since 1995. At the same time, the 5.2 percent decline that started in September is only slightly bigger than the last two retreats that exceeded 3 percent, in April and August. Both gave way to larger advances. At about 15 times forecast earnings, the S&P 500’s valuation has climbed 40 percent from the bottom in 2011, data compiled by Bloomberg show.”

China Ascending

Monday, July 28th, 2014

I’m traveling through China and Tibet right now but the thing that I’ve noticed is the wealth that has been created since I was last here.

Foreign luxury cars are everywhere, including Fords, Chevys, Buicks and Cadillacs. The consumer is alive and well in China and spending furiously.

The stock market here was in the dumps for a few years but it has worked itself into a position where it is now trading At a single digit P/E ratio compared to the US market at nearly double that.

There is definitely value here and momentum seems to be picking up – but many structural issues remain like over building and huge debt levels.

However, it warrants more research when I return home. I am collecting the names of companies that appear to be thriving and we will be analyzing them in due course.

I am posting this with the WordPress app from my iPhone plus China blocks access to YouTube, so no video today.

Until next time,


Equity Volatility for You

Wednesday, September 5th, 2012

Most of you have probably already read Mark’s August 2nd Commentary entitled “Equity Valuations”. If you have not read it, I highly recommend going to Mark’s blog and reading it.  In keeping with that longer-term investing theme, I wanted to build on that particular Commentary. Specifically, I would like to focus on determining what type of equities are right for you.  Whenever the market goes through one of its inevitable rough periods, many investors start to question whether their stocks will ever “come back”.  One of the key points Mark mentioned in his Commentary was if you are someone who wanted to sell (or did sell) after the market was down substantially, then stocks may not be the proper investment vehicle for you.  Each individual needs to perform an honest self-assessment to determine if stocks are the right type of investment for your specific needs and temperment.   Assuming equities are going to be at least a part of your overall portfolio, we need to drill down into just what type of stocks you should own.  For simplification purposes, we will assume there are two basic types of equities, high beta (higher volatility) and low beta (lower volatility). 

In general, you will find that higher beta stocks are found in industries that have above average long-term growth prospects (technology and biotech companies, for example).  The companies that operate in these high growth industries can grow extremely fast (Apple), but they also face the almost constant threat of new companies making their business models obsolete (Palm).  So, the stock prices of these types of businesses tend to fluctuate substantially, both up and down.  These businesses also tend to retain most (or all) of their earnings for future growth opportunities so current dividends tend to be very low.  Most of the stock return in the long-run will come from capital appreciation, not dividends.

At the other end of the spectrum, there are the slower-growing, lower-beta stocks.  Generally known as “Blue Chips”, these are the stocks that most of us have heard of (Pepsi, Johnson & Johnson, Kraft, for example).  These businesses are generally very established in their industry, and their threat of obsolescence is quite low.  Most of these companies have fairly stable, but low, growth rates.  The stocks tend to pay a pretty good dividend since the companies don’t need all of the cash flow to reinvest in their business.  Generally, in the long-run, somewhere around half of an investor’s return will come from dividends, the rest from retained earnings.  The dividend yield generally helps to provide a cushion during market pull-backs.

So the question becomes, are you someone who is comfortable with the substantial ups and downs of higher beta stocks (our Best Ideas portfolio is similar to this) in order to target a higher than average long-term return, or are you more comfortable with the lower volatility of the blue chip equities (our Blue Chip portfolio) with the realization that your long-term returns will likely be lower?  The answer to this question is very important.  Both types of equities will have their day, but they tend to work somewhat inversely of one another. 

It is much better to figure out ahead of time what you are comfortable with, not after a large pull-back in the market.  If you have a long-term investment timeframe (years, not months), and can stick out the inevitable rough periods, then the more aggressive approach will most likely pay off in the end, but you need to stick with it.  If you believe you will feel the need to switch into a more conservative investment, like blue chips, after the aggressive portfolio has underperformed in the short-term, then you will be better off sticking with blue chips from the start.  You may give up some return in the long-run, but you will sleep better at night and stick with it.  Sticking with a long-term investment plan, through good times and bad, is probably the most important part of successful investing, but it is certainly not easy to do.

Golden Equities

Thursday, August 23rd, 2012


As many of you may be aware, Mark is out of the office for a few weeks.  In his absence, he has asked us to keep the blog updated.  I am Charlie Osborne and have worked with Mark for the past three years.  I will be writing this weeks commentary and John will add some thoughts in the next week or two.

One of the questions we have been getting of late is why gold stocks have not been going up given the ongoing problems in Europe.  It seems quite reasonable to think that with the ongoing currency crisis, money would be flooding into gold and the related stocks; however, this has not really been the case (at least so far).  I have attached a chart ( that shows the past 18 or so months of the S&P 500 (orange line), GDX (ETF that represents a composite of large and mid-sized gold mining companies, black line on chart), and GLD (ETF that represents the price of gold itself, blue line on chart).

 18 Month Gold Miners


What you will notice is that the price of gold is up roughly 20% in this time, but the vast majority of that gain came in a couple months.  You will also notice that gold mining stocks (GDX) have greatly underperformed both the overall stock market, as well as the spot gold price over the 18 month time frame.  Intuitively, this does not make a whole lot of sense, since the gold mining companies are making quite a bit of money now (at least the well run ones).  So, there is really two questions here, one being why has gold not gone through the roof (up 20% is still a decent return, but many out there thought it would go up huge); and the second question is why have the gold stocks lagged so much over the past year and a half.

The key argument I hear for why gold should be screaming higher is that it would seem the most logical place for money “leaving” the Euro.  It is true that the Euro has fallen in price in this timeframe; however, it looks like the assets that have seen the majority of the demand increase are US treasury bonds and the highly liquid US blue chip stocks.  The demand for these “safe (or safer) haven” assets has really increased.  I think part of the outperformance of US blue chip stocks over the rest of the stock market in the past 18 months can reasonably be attributed to this “flight to safety” response worldwide.  So, while gold has benefited somewhat, other US assets have also soaked up the demand.

The more puzzling question in my mind is why have gold stocks lagged the spot gold price.  There is no clear cut answer.  Part of it stems from the increasing costs of gold miners, which means that even though their revenues may be increasing, their costs are too, so the net profits don’t go up much.  This is true in some situations, but well run gold miners have actually held their costs down pretty well, and have seen their revenues rise.  So, maybe the answer is that the stocks of these higher quality companies have been irrationally held down, and they may make for good buys around these prices. 

*We are buyers of gold stocks today (through various stocks, ETFs, and funds).  The performance disparity between gold stock prices and the metal itself will not last forever.  Most likely, the performance gap will close quickly when it happens, as has been the case for the past month.  If you look at what happened back in the middle of June, 2011 through September, 2011 (another time when miners were pretty low in relation to the spot gold price), the mining stocks rose almost 30% in three months.  They later gave back those gains, but it does show that the prices can rise very rapidly on undervalued assets when sentiment changes.  These stocks will be volatile, but we think they will do well from these prices.  The final chart shows the past month with the same assets as the first chart.  Prices can change quickly.*

1 month GDX