Wanna know where the market is headed? This one is too good not to read

Ok, so I hooked you in with that headline. Now I've go to deliver.  Two researches in London and another at Boston University have published a study that followed Internet searches for words such as "portfolio," "inflation" and "economoics" and correlated that individual stock performance and overall market performance.  

We know that many investors use the Internet for market research but can that use be translated into a market indicator.  The formula the researchers came up with was back-tested from January 2004 to February 2011 and found that going long and short the market based on Internet searches for the word "debt" would have generated a 326% cumulative return versus buying and holding the Dow stocks over the same period wihch would have produced a 16% cumulative return.   The program was set up such that it would sell the market short when the number of searches increased over the previous week and go long when the number of searches decreased from the previous week.   

One point we can take away from this study is that according to the study, investors do more research when it comes to selling than they may do when buying.  That's because there is a tendency to buy and hold and usually investors have to have a really compelling reason to sell, especially if the sale generates a loss.  There may some human behavior theories implicit in this and it's also possible there may be some ego involved.

One of the researchers behind this idea has started an asset management firm based on his research. Who knows, he may become the next market sensation.   in the meantime, it's an idea and perhaps one worth watching in concert with a sound and meaningful market strategy. 

Don't keep us in suspense over the weekend: Will it last?

So the question looming on the minds of most who invest in our stock market is "will it last?"  And since we all know that "last" is a relative term, who long is last and, maybe more importantly, how will we know when to get out?

We all know that the stock market goes up mainly for two reasons, expectations of higher corporate
earnings and lower interest rates.  So if corporate earnings continue to improve and interest rates remain in check, the market should prosper.  As I stated the other day, earnings are improving and one need only look at their bank statement, turn on a television or look at mortgage rates to know that interest rates can't get much lower. After all, with the Federal funds rate at zero, rates are
as low as low can be. And we know that rates will not increase until the jobless rate falls below 6.5%.  .

Given the current unemployment rate of 7.8% it would appear we are in a safe haven from rising rates for at least the next 12-18 months.  About a year from now, it will be important to remain vigilant and look for signs of market weakness. 

Interest rates will be one clue for sure.   Right now the stock and bond markets are enjoying very nice returns. Even though unemployment should be below 6.5% for our economy to show it's truly out of the woods, at 6.5% the Federal Reserve might be forced to raise rates as inflationary pressures could reappear.  The Federal Reserve could reverse its stance on interest rates which would deflate the stock rally and send investors heading into money market funds as rate rise as well as into bonds, especially short-term bonds so they can take advantage of rising rates. 

If bond yields start rising measurably, be on the lookout for sliding stock prices.  And once they begin to slide, it's possible a tumble is in the works.  All the reason why even when stocks are on a roll, keeping yourself well diversified always makes sense in the long run.

The good news is that you have the weekend to think all this over.  Even with the market looking good, always guard yourself on the downside. 

Is the market advance for real? And how long will it last?

No two ways about it...the stock market has been on a roll this year.  When the ball dropped in Times Square just four plus months ago, the Dow stood at 13,104.  Since then, it's climbed by a lucky 13 percentage points.  The Standard and Poors 500 has rallied just over by just over 11 percent and the NASDAQ by 9 percent. 

When Bill Clinton was President, the market advanced 79% in his first term.  Our current President has Clinton's first term beat by 6 percentage points.  Indeed, the market is up 85% since Obama took office in 2009.  Now, one could argue that the market had nowhere to go but up after the dismal,
scratch that, worse than abysmal performance. 

Whatever the case, the current occupant of 1600 Pennsylvania Avenue has seen a boom in the market as housing prices have recovered, jobless figures have declined and economic sentiment, both real and perceived, have improved.  Every with all this good news, the question looming as the market climbs is: can it last?

Once upon a time, it appeared that 14,000 on the Dow and 1,500 on the Standard and Poors 500 were the "resistance levels" for the stock market. That means they were considered not just to be milestones; they were considered to be points where selling would come in. That's because these were points where investors had bought back in 2007 at the last market top and anxious to recoup some of their money, investors would sell into a market advance thereby driving prices down once again. 

Well, all that talk is history with the Dow well above 14,000 and the  S&P 500 heading toward 1,600.

As I have noted many times before, the stock market goes up mainly for two reasons, expectations of higher corporate earnings and lower interest rates. Earnings are improving and one need only look at their bank statement, turn on a television or look at mortgage rates to know that interest rates can't get much lower. After all, with the Federal funds rate at zero, rates are as low as low can be. And we know that rates will not increase until the jobless rate falls below 6.5%.  Given the current rate of 7.8% and the clip that rates have been dropping, the most optimistic of educated predictions would keep the unemployment rate above the Federal Reserve target for at least the next 12-18 months.

We all know the name of the game isn't just to make money; it's to keep what we make. So how can we do that this time around?  How can one figure out when to head for the exit sign before the market heading for another abyss?

There are a few clues.  More on that tomorrow....

Black Friday sales figures, are they a predictor of the holiday season?

I just finished my column that will appear in this Sunday’s paper.

This week, I wrote about Thanksgiving’s aftermath. Not the leftovers. Black Friday. Last year, just two days after Black Friday, the Associated Press reported, “A record 226 million shoppers visited stores and websites during the four-day holiday weekend starting on Thursday, the Thanksgiving Day holiday, up from 212 million last year, according to early estimates by the National Retail Federation released on Sunday. Americans spent more, too: The average holiday shopper spent $398.62 over the weekend, up from $365.34 a year ago.

The National Retail Federation added in a press release issued on the Saturday after Thanksgiving that “total spending over the four-day weekend following Thanksgiving reached a record $52.4 billion, up 16 percent from $45 billion last year." There’s no doubt that the National Retail Federation has a reason/incentive to come out with strong positive figures to open the holiday season. They want holiday cheer, happy faces and open wallets ready to spend. Some critics feel that these associations come out with glowing sales reports that aren’t always, well, totally factual.

In Sunday’s paper, I’ll give you the actual sales figure for the 2011 selling season. One tidbit I did not put in the column: Last year AP reported “a record 226 million shoppers…” This year USA Today reported 166 million shoppers hit the malls, shops and online websites. Can both these numbers be right?

Happy shopping!

Junk bonds and stocks? An interesting pair.

Not sure where the summer is going but here's my latest blog along with my apologies for not being very prolific over the summer.

I was reading in a trade publication about junk bonds and their growing popularity among investors. Investors, mind you, that are not usually inclined to purchase junk bonds but instead flock to stocks.  

The tables can turn quickly on Wall Street and most investors tend to go where the action is or in this case, where the returns are.  Yields on junk bonds (bonds below investment grade ratings; ie those deemed less secure as rated by national ratings agencies) are now 6.5% above Treasury bonds (of the same maturity), it would seem "foolish" in the words of this trade journal to ignore junk bonds.  Right now with the uncertainty in the economy, the yields on junk bonds are much higher than Treasuries. When the economy appears more certain, the difference between in bond yields can be rather slight which means that the risk of buying junk bonds is not outweighed by the return.  

According to this article, what makes junk bonds more attractive other than yield is that many companies have had the opportunity over the past few years to "clean up their balance sheets and get a better handle on their debt."  Credit quality, in other words, is better than it was three or four years ago.  IE the risk is perhaps a bit less than it was.  

Some junk bond funds are up over 7.5% this year which compares with a 7.6% return for the Standard and Poors 500.  Not bad for bonds.  As a rule, please remember stocks are the ones that are suppose to provide capital apprecation.  Bonds are supposed to provide income.  They are worth a second look and could be a good addition to diversifying your portfolio.   

Fixed income Alternatives: What's going to be in this Sunday's paper

When I was thinking about my column for the Times Argus and Rutland Herald this week, I could not help but think back to something that happened to me many years ago.

I was working at a brokerage firm and a woman called. I was still in college and answered the phone because everyone else was on the phone. The woman told me that she had a number of Certificates of Deposit and one was about to mature. The interest rate on her CD was 14%. “I need to renew my CD and want one paying 14%,” she told me. I looked at the rates on what was then a green computer screen and tried to explain to her that CD rates were in the 7% range and we did not have any 14% CDs without paying more than $1,000 (par value) for them. “But I need the 14% return. I depend on that for my living expenses. Please put someone on the phone who can get me some 14% CDs,” she pleaded.

I got her someone who explained the situation and I could hear the woman’s frustration and the sadness just from listening to the broker’s responses. It’s been years since that conversation took place and yet I still remember it. Her pain of having to face a much lower return on her money resonated with me then and continues to today.

We have the same situation today. Low interest rates are great for first time home buyers but are lousy for someone living off a fixed income who is dependent on their investments for their living expenses. In this week’s Sunday paper, I listed a few investment alternatives that will boost your portfolio’s return without causing your sleepless nights. What follows is a brief synopsis of what will appear in Sunday’s paper. Please read the paper before you run out and make changes and always consult with an investment or financial professional for further and more specific recommendations as they relate to your personal situation.

1. Diversify your fixed income holdings with high-yield bonds, some corporate bonds that are paying a higher return and mortgage-backed bonds which again pay a higher yield.

2. Consider venturing into dividend paying stocks. Please keep in mind that the companies that pay dividends are usually mature companies who have the predictable cash flow to pay regular dividends.

3. Lastly, it may be well worth your time to look into annuities. They pay good rates of return , some allow for growth of your initial investment and they are secure and predictable payment vehicles. Do not attempt to purchase this kind of investment without first finding a insurance or investment professional who really understands the nuances of this kind of investment.

That’s all for now. Please pick up a paper on Sunday for more details.

Market got you down or sideways?

At least for now, the market isn't soaring to higher heights or nosediving into a deep abyss. Not with any purpose that encourages one to think that a solid trend is highly predictable and we can all take the market for granted. In actuality, we should never take the market for granted. 1999 and the years previous were great; along came 2000 and 2001.

While most of us were either not yet born or old enough to remember, in 1966, the Standard and Poors 500 Index hit 100. In 1978, the index was again at 100 with four more years of a secular bear market to go.

In 16 years, the index went through numerous bull and bear markets, but at the end of the period, the index value was almost exactly where it started. That's just in numbers and does not take into account inflation and loss of purchasing power caused by inflation. So does this mean that investors made nothing?

While some investors made nothing, some may have done just fine and earned an acceptable return given the risks they took. It all depends on whether you invested with an investment strategy that took dividends and dividend reinvestment into account.

If you invested at the beginning of the 1966-1978 stagflationary period or during the March 2000 to May 2007 bursting and recovery of the tech bubble and reinvested your dividends, the difference is remarkable. By 1978, your return would have been 60% higher with dividend reinvestment than without. By 2007, your return would have been 18% higher. Despite much lower returns today than in decades past, dividend yields are still attractive when compared with other yielding investments.

Wharton School professor Jeremy Siegel noted in his recent book "The Future for Investors," that "from 1871 to 2003, 97% of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3% comes from capital gains." Bottom line: dividends matter. They may seem small but they add up and can increase your bottom line even when the market seems on a slow road to nowhere.

Capital gains rate may never be better

Even though it’s only March, in just a few months, the sun may set on the almost total “freebie” many taxpayers are getting on long-term capital gains from the sale of securities. While it’s not a total freebie, 15% is a great deal. It’s never going to be any lower than it is today.  And there’s a chance it could go higher when the Bush tax cuts expire in 2013.  

Right now, if nothing changes, the rate on long-term capital gains would increase to 21.2%  and the rate on short-term gains would rise to 40.8% from its current 35% in 2013.  

Also, keep in mind that beginning in 2013, the new federal health-care program imposes a 3.8% tax on the investment income (including capital gains) of high-income taxpayers.

These two changes would result in a combined 66 2/3% increase in the maximum federal income tax in the long-term capital gains rates on the sale of stock in 2013 compared to a sale in 2012.  In other words, the rate will go from its current 15% to 25%.

Additionally, if President Barack Obama’s proposed “Buffett Rule” is enacted, millionaires could face a minimum tax rate of 30% on their long-term capital gains as early as 2013. 

Putting aside the Buffett Rule, for many Americans seeing a long-term capital gains rate increase from 15 to 25% is no small potatoes.  Capital gains are not just a problem for the very wealthy.  The recently retired who are selling their family home; the young couple selling some stock they have accumulated from an employer or on their own who are buying their first home and need a down payment; the parents selling some investments to pay for a child's wedding -- these are people with hard-earned incomes who have saved and no have to pay much more to sell the long-term investments they have made to pay for life goals.  

The likelihood for significant increases in the long-term capital gains rates would suggest that taxpayers recognize their long-term gains in 2012 and hold off on selling their losers until 2013. Don’t bother worrying about selling your under water stocks in 2012 to balanc them against your gains.  It looks like you might as well wait until 2013. 

Just a word to the wise well in advance of the end of 2012.  On second thought, maybe I will post this blog entry again around Thanksgiving…just in case we all could use a reminder.

 

All Greek to you? Time for some interpretation

Good news on Wall Street last week. The market, which had been hovering around 13,000, broke through. For a time and then retreated back to just under what for many people is a magic number. The market has not closed above 13,000 since May 19, 2008. Milestones tend to be that way. Round numbers bring out the statistician in people and we all take comfort in the market making record highs.

The market had a good week because of Greece. A last minute round of austerity budget cuts coupled with more funds pouring in from the European Union have averted a debt implosion that would have sucked other countries in Europe into further economic decline. Some feel that this recent reprieve is only that. Just like all band-aid approaches, eventually the world is going to have to come to the realization that Greece will default on its debt and those who hold Greek debt will find themselves with significantly devalued assets. If they are able to recoup any of their investment at all.

For most of us reading this column, Greek debt is pretty much well, Greek to us. We don’t own it, know anyone who owns it and we don’t worry about it. But we should. Greek debt may be a half a world away but the global currency and bond markets are all interconnected and one debacle has
repercussions on all other global economies.

The US stock market began the year on a high note. That song continued into February until the market started getting the shakes about uncertainty in Greece. The EU has more than a vested interest in saving Greece. All their economies depend on one another. The strong are picking up the slack for the weak but that can’t go on forever.

Any uncertainty could send the US financial markets into a tailspin. We are just trying to recover out of a recession ourselves. And this recovery is challenging a best. I read recently that in 2011, corporate profits hit their highest level since 1950 but unfortunately, these record corporate gains have not trickled down into workers’ pockets; workers’ wages and purchasing power has been largely stagnant. Corporate CEOs and others at the top are doing better than they have in 60 years.

We are an interdependent global world and we must acknowledge that when an economy is in crisis. We saw what happened to the financial global world during 2007 and 2007 when our financial giants faltered. The US markets fell as did the European and Asian markets.

Don’t get me wrong. I am happy that the stock market is going up. Sure beats it going down. But, please don’t be sucked in by what may well be an illusionary and temporary jump in stock prices. Hedge your money, have funds in bonds and diversify yourself broadly in the stock market.

Where has all the snow gone?

Actually, the better question is where did winter go? We had the cold weather and we have had some ice but snow? The white stuff that piles up on our sidewalks, roadways and on our roof. The stuff we shovel and plow away. The stuff that creaks when we walk on it and the temperature is hovering around zero or below. You know. That stuff.

More importantly, it's the stuff that people ski on, shoe on, and ride on. And it's one of the mainstays of the Vermont economy. I recently came across a research study that had been done back in 1999 on Vermont's tourism industry and specifically on the ski sector. The paper was co-authored by Kathleen LIang. I recently took a course with her on financial and data management so I can attest to her ability to work with numbers and her straight-forward approach to getting to the bottom of things.

The study states: There are only a few states in the United States in which state income relies heavily on tourism, and Vermont is one of them.

The study continues: "The ski area output multiplier of 1.94 means that for every dollar spent in ski areas, an additional 94 cents of spending is generated. In terms of the employment multiplier, for ski areas, every million dollars of sales generates 45 jobs in total. The personal income multiplier is 0.66 and the indirect business tax multiplier is 0.10, meaning that every dollar sales of ski area will generate 66 cents in personal income and 10 cents in indirect business taxes in Vermont."

In other words, even though the statistics are 12 years old, skiing is big business here.

Back on January 19, 2012, Tom Kavet, an economist hired by the State, said that "Despite ongoing uncertainties -- such as a slow start to the ski season due to poor snow cover, the state of Vermont is doing relatively well compared to most of the rest of the country."

That was a month ago. Since then, we haven't been overrun with snow.

We will know more when the quarterly tax figures come out for the first quarter of 2012. That won't happen until mid or late April. In the meantime, winter isn't over yet!