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Opinion (158)

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Wall Streets Top Picks For 2017 With Trump

We are into the homestretch of 2016, and the markets have seen strong upside this year, benefiting from the domestic economy's resilience and the election of Donald Trump.

With just four sessions to go, the Dow Jones Industrial Average has been a up a solid 14.4 percent, the S&P 500 has risen 10.8 percent and the NASDAQ Composite is 9.1 percent higher — with all the three major averages trading off their all-time closing highs.

Among the ten S&P sectors, eight have been in the green. Old economy stocks such as energy, material, industrial, financial, utility and telecom are all up by double-digit percentages. Technology stocks are also up decently. However, the healthcare sector has taken a hit.

Though…

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Admin

Is The Fed About To Experience A Repeat Of 2016?

In the most recent Summary of Economic Projections, Fed officials penciled in three 25bp rate hikes for 2017. The reality, however, could be very different. We all remember how “four” became “one” in 2016. The median dots are neither a promise nor an official forecast. As 2016 progressed, forecasts associated with a lower path of SEP “dots” evolved as the consensus view of policymakers. Will the same happen this year? I don’t think so; it is hard to see the Fed on pause for another twelve months.

As a starting point, I think it best to assume the US economy is near full-employment. But the US economy was near full-employment at this time last year as well. I think the key difference between then and now is that then the after-effect of the oil price slide and dollar surge placed a drag on the US economy sufficient to ease hiring pressure. At the same time, labor force participation perked up, setting the stage for a flat unemployment rate for most of…

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Admin

It's Not What You Think. Market Myths Debunked

"A lie told often enough becomes the truth" - Vladimir Lenin

Imagine for a minute you lived centuries ago when people believed the earth was flat, or the earth revolved around the sun, or that planets were Gods, or that disease was angry spirits or supernatural powers. You'd have an explanation for everything ... only it would be wrong. And that "wrongness" would stand in the way of true understanding and true progress until they were discarded as falsehoods.

And so it is with the Stock Market. Let me explain.

First, let me be perfectly clear. I'm a statistician so I'm not referring to philosophical or political or gut feelings or anything other than Statistical Misrepresentations. Fact, not opinion.

I can hardly go a day without reading…

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Admin

The Run In Small Caps. Will It Continue In 2017

The stock market went on quite a tear in the 3+ weeks immediately following the election, with the month of November especially beneficial for small-cap stocks.

Before delving into what it all might mean for small-cap investors, here's a quick rundown to help contextualize just how dynamic a month it was:

  1. This was the best November in the history of the Russell 2000 Index. featuring its highest monthly return since October 2011 when small-caps were just emerging from a precipitous decline.
  2. The performance spread between…

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Admin

Remembering The Impetus Of Irrational Exuberance

In December of 1996, Greenspan was clearly beginning to worry about the economic fallout of a bursting asset bubble. Back then he had a front row seat and, in fact, a strong hand in creating the dotcom bubble, whether he admits it or not. He was so worried about the consequences of “irrational exuberance” that he declared these concerns “must be an integral part of the development of monetary policy.” And this was before he had even witnessed any of the actual economic consequences we have now lived with for two decades. Clearly, his worries were well founded but he wasn’t quite worried enough.

The financial well-being of entire generations has been permanently damaged. Think of the Baby Boomers whose retirement dreams turned to nightmares through two stock market crashes in less than a decade.…

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Admin

Tactically Cautious On Global Equities

A December Fed rate hike, uncertainty regarding the U.S. presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities.  Comments in italics are mine.

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The summer rally has left equity valuations looking stretched. The median U.S. stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27, but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.

Lackluster earnings growth remains another concern. S&P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major…

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Admin

Credit Spreads And Earnings Estimates. Random Thoughts

This week’s EVA brings the second edition of our new Random Thoughts format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion.

In this issue, we are looking at, once again, the powerful financial force known as credit spreads.   Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint:  both make a dart-board look good!).

As always, your feedback is welcomed and appreciated.

RANDOM THOUGHTS

When the spread isn’t the thing. One of the themes this newsletter has emphasized most heavily this year has been the importance of the spread—or difference—between government and corporate bond yields. As we have repeatedly…

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Admin

Fed Speak Shakes Market

Tranquility that has enveloped global markets for more than two months was upended as central banks start to question the benefits of further monetary easing, sending government debt, stocks and emerging-market assets to the biggest declines since June. The dollar jumped.

The S&P 500 Index, global equities and emerging-market assets tumbled at least 2 percent in the biggest rout since Britain voted to secede from the European Union. The yield on the 10-year Treasury note jumped to the highest since June and the greenback almost erased a weekly slide as a Federal Reserve official warned waiting too long to raise rates threatened to overheat the economy. German 10-year yields rose above zero for the first time since July after the European Central Bank downplayed the need for more stimulus.

Fed Bank of Boston President Eric Rosengren’s…

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Admin

Paper Trading Is Obsolete

I don't actually embrace this headline.  In my experience, yes, emotions exist while paper trading.  It's merely that you can sleep at night knowing your bank account didn't go up in flames but that's just me.  It's also essential in my book that you determine what "type" of trader you want to be.  It's one thing to say you want to invest like Warren Buffett but just what does that entail?  Do you rally know?  It's also super easy to be sucked in by get-rich-quick ads and bloggers who entice you to sign up for their premium edition (none of which I recommend).  Don't underestimate the market.  It's NOT easy, even if you believe you've got a plan and everyone loses.  Everyone.  The trick is not to be fooled.  Ignore the…

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Admin

Bonds Are 'Housing' All Over Again

As German bond yields breach unthinkable levels, BK was struck by a chart from Deutsche Bank – it is a chart of German yields since 1807.

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Take a moment to reflect on this chart – in over 200 years, German bond yields have never been lower. This period of time includes such notable and notorious events as:

  • US Civil War
  • The British Railway Mania Bubble
  • The Panic of 1873 and The Long Global Depression
  • Industrial Revolution
  • Thomas Edison’s Invention of Electric Light
  • Invention of the Automobile
  • Stock Market Panic of 1907
  • World War I
  • 1929 Stock Market Crash
  • The Depression of the 1930’s
  • World War II
  • Japan’s Real Estate Bubble and Crash
  • The Dot-Com Bubble
  • 1987 US Stock Market Crash
  • 1997 Asian Currency Crisis
  • 1998 Russian Default and Long…

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Admin

Business Loan Delinquencies At 2008 Levels

Energy defaults have been heavy on my mind as their Bankruptcies are expected to increase greatly in the second half of 2016.  I didn't even touch on farms and other exploding debt. Clearly I'm not alone in this concern.  It's not housing this time; it's much worse.  If rates rise, what will happen? Emphasis in bold mine.  Read on.

This could not have come at a more perfect time, with the Fed once again flip-flopping about raising rates. After appearing to wipe rate hikes off the table earlier this year, the Fed put them back on the table, perhaps as soon as June, according to the Fed minutes. A coterie of Fed heads was paraded in front of the…

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Admin

Buyers Stay Home; See You Next Fall

(Click image to enlarge)

There's nothing here that even remotely makes me want to make a purchase. These are weekly shots of the main indexes so what do you see?

We rallied up over weeks like crazy madmen, squeezing out weak shorts and even had the heaviest shorted sectors help out with a short covering rally; getting the weekly into 'overbought' levels. We came up right against the long term column trend line resistance, hit overbought levels...........the weekly is rolling over. Another failure. Sorry boys. So much for that.

Certainly day traders and short-term swing traders will make their long plays but who has time for that............and why go against the trend of 'this' market......which is down. That's rhetorical.

  • We know the market is stretched on a valuation…

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Admin

The computers have won.

Institutional Investor just released its annual list of the top-earning hedge fund managers, and six of the top eight are quants, or managers who rely on computer programs to guide their investing.

The list includes Ken Griffin of Citadel, Jim Simons of Renaissance Technology, and John Overdeck and David Siegel of Two Sigma.

In 2002, by contrast, just two computer-driven investors were included in the ranking, according to Institutional Investor.

The list highlights just how hedge fund investing has changed over the past 15 years.

It is not that…

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Admin

Why "Tobins Q" Ratio Should Have You Concerned

After writing “Here’s The Perfect Metaphor For Recent Fed Policy,” I had to pick up a copy of The Dao of Capital. Mark Spitznagel just has a unique way of looking at the markets that really resonates with me.

One thing that really jumped out at me while reading it was Spitznagel’s research regarding Tobin’s Q, (though he calls it, “The Misesian Stationarity Index”). It struck me for two reasons. First, I haven’t seen much research like this elsewhere and second, the opinions I have seen regarding it are all of a dismissive nature.

Just Google “Tobin’s Q” and you’ll find all sorts of pieces proclaiming, ‘Don’t worry about Tobin’s Q,’ and,…

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Admin

Investors, advertisers, and business leaders around the world are still trying to understand millennials, the generational group that will shape commerce for the foreseeable future. In the past, that’s why we’ve looked at millennial investing and banking preferences, their favorite brands, and even what real estate professionals need to understand about the generation.

Today’s infographic from Adweek is of particular interest, because it focuses on a very particular subset of millennials. The data in the graphic is from a survey of nearly 500 nominees for the…

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Admin

The Global Economy: April 2016

The global economy has regained some composure, according to asset management firm Schroders. In their view, markets have regained a risk appetite following action by central banks, the normalization of commodity prices, and a lack of materialization for tail risks such as a U.S. recession or a Chinese hard-landing:

While volatility is indeed near its YTD low with the benchmark VIX down 32% since the start of the year, we would point out that this is potentially some calm before the storm.

Here are some upcoming waves, and we’ll see how they break:

Earnings and Buybacks: The blended earnings decline for the S&P 500 so far in 2016 Q1 is -8.9%, according to Factset.…

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Admin

The Bloomberg US Financial Conditions Index and the S&P 500 tend to move in pretty close unison. In March, however, they started to move apart in a manner similar to late last year, before the market took a nosedive. Once again, either financial conditions improve or the stock market corrects.

bloomberg financial conditions spx
Source: Bloomberg

Shown below we see a similar wide divergence when looking at credit spreads (inverted in red) compared to the S&P 500 (in black). When financial conditions are healthy, credit spreads narrow since investors require less compensation for the risk of holding non-government securities. As financial conditions deteriorate and default risks increase, credit spreads widen. The credit markets were confirming the message of the stock market up…

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