Monday, December 23, 2013

Is 2013 a Bubble Like 2008?

Joe Fahmy is a well known blogger, investor and twitter guru.  He recently had a blog post about the internet frenzy in 1999, contrasting it with the stock market in 2013.   Things are not nearly as crazy as then.

I spent a few moments thinking about how different this market is from 2007, the height of the housing bubble. 

I posted on about Beazer Homes.  The stock went from $23 in 2000 to $360 in 2006.  Now, if this was a great company, maybe that kind of increase would be justified.  But Beazer was one of the most poorly regarded of the homebuilders and fairly quickly crashed right back to the $20s.  All split adjusted numbers here.

A lot of the home builders had similar moves, to say nothing of the mortgage companies, banks and reinsurers that imploded over this period. 

Check out a chart for MBIA group ($MBI).  I remember getting an email from a friend saying that if I had bought $MBI on his recommendation, to sell it NOW.  The stock dropped from $64 to $8 in a month.  Countrywide was bought by Bank of America and was a drag on its finances for years. 

The craze had a personal aspect for me.  I had been planning to buy some investment real estate on Hilton Head Island.  Prices tripled in short order during those days, well beyond what could be recouped by renting the unit.  I could have gotten zero down financing from fly-by-night lenders, but decided I couldn’t make any sense out of it, despite what everyone else was doing.   It turned out I was right.  It didn’t make any sense. Lucky. 

I did visit a condo that was an old apartment building that was being refurbished.  The selling price was $200,000.  It was nothing special, and five years later lists for $89,000.  I suspect they are going to have a hard time selling it at any price, despite its relative proximity to the ocean. 

My point is that although prices are fairly high by some historical measures, they are nothing like the bubble that occurred in housing in the mid 2000s. 

This post is informational and should be considered a recommendation to buy or sell securities or rental real estate.  

Sunday, December 22, 2013

The Worst Thing about Shorting Stocks

Selling a stock short is the accomplished by borrowing a stock, selling it, and buying it back (known as “covering”) in hopes that the stock price will decline during that period. 

Most people who trade a lot of stocks will have some short positions.  Since stocks go up and down, it is certainly possible to make money by shorting.  There are also stocks that, at least in appearance, are good short candidates.  A stock like Blackberry $BBRY is often considered a good short candidate, because it is losing market share.  Short sales always take place in margin accounts.

One bad thing that can happen is that a trader can be wrong, and that the price will go up after the short and not come down, at least as long as the trader is willing to hold the short.  There is even the dreaded short squeeze, where the stock will go up suddenly and those holding shorts will be forced to buy the stock to cover, and end up driving the price even higher. The short seller has the potential for infinite losses!

These are very bad things. 

But the worst thing about shorting, in my opinion?  It’s that even if the trader is absolutely, exactly, 100% correct about making the short sale, the most he can do is double his investment.  If he shorts 100 shares of a $50 stock, and puts up $5,000 in margin, the most he can make is $5,000.   

Contrast that with buying a stock, where the investment can double, triple, or technically grow to infinity.  Money can be made both on the long and short side, but it is a lot harder to succeed with shorting.  You have to win a lot more often. 

This post is informational, and not a recommendation to buy (or short) securities.  

Saturday, December 21, 2013

Barry Bonds, Lance Armstrong and the Federal Reserve

I was part of a discussion on the comments on Barry Ritholtz’s blog about QE and why this is the most hated bull market of all time.  There is a lot about QE and its impact on the economy that I don’t understand and don’t really have much interest in.  Some people think it has had a profound impact on the market, that it is been the primary driver of the increase in US equities, and some people (like Barry) not so much. 

I don’t know myself.   I think it is likely, and that QE has worked to keep interest rates low.  I believe the low interest rates are the reason for the stock market surge, because there really isn’t any other good place to invest. 

The point of this discussion relates to why the bull market, which has resulted in a 130 percent increase, is so hated.  Most of the comments feel that the QE is setting up the economy for rampant inflation, which will eventually destroy the economy and cause people to lose huge amounts of money.  And that investors cannot make sound decisions because the economy is being “juiced” by easy money.


The issue is, though, why should people pass on the surging market for something that may happen later.  Or even, as they feel, is guaranteed to happen sometime?  Is how the important question, or is how much?

The Analogy

I compared the idea of juicing the market to sports figures that used performance enhancing drugs, particularly Lance Armstrong and Barry Bonds.  They became winners while they used them and fell from into disgrace when it was found out.

You can see the risk from juicing.  What may be great now will have desperate consequences sometime in the future. 

The Difference

There is a difference between being a fan and wagering on an event.  I may not like Barry Bonds (I never really did) but at his peak, it would have been stupid to bet against him.  If I could have wagered on Armstrong, it would have certainly been a smart bet, without regard to whether I approved of how he cheated. 

In the same way, I may not like how the Fed has driven everyone into equities, but since the goal of investing is to make money, it makes no sense to bet against stocks. 

If every horse in a race but one has two legs tied together, I will rant against animal cruelty as I lay my bets down on the unencumbered steed.   

So, for my money, (and money is what we are talking about here) it doesn’t matter if the market is being pushed forward by QE, buybacks or whatever, it just matters that it is.  When the market corrects, as it is sure to do from some reason anyway, I will deal with it then. 

Just my opinion as an investor, not an economist.   This is not a recommendation to buy or sell securities.   

Thursday, December 19, 2013

Expect a Great Year for the Stock Market in 2014

It seems like everyone is making predictions for 2014 for the stock market, particularly as it pertains to the Standard and Poors 500, or S&P 500.  Not to be left out, and so I can point to this next December when I am perfectly correct, I offer my target.

As of today, December 19, the index stands at 1809.60.  I expect it will move up a bit more to end the year at 1825 as a result of the Santa Claus rally we get most years.  With a little bit of finality from the Fed, this seems reasonable.

For 2014, I expect another excellent year.  I predict the year will end with the S&P 500 at 2360.05, a gain of 22.6%.  A very good year and better than most "experts" are predicting.

Why? The primary reason is because of supply and demand.  There is still a large amount of money on the sidelines (and more being generated each day) and there are very few other places for that money to go.  It's like Joey said in Raging Bull, "They have to give it you, there's no one else."

CASH - Interest rates are still very low, and are expected to remain low for the year.  There is no reason to keep money in cash that can be invested for a real return.

BONDS - If interest rates go anywhere, it will be up slightly, reducing the value of bonds, and their return.

GOLD - Seriously?  Very few people invest anything more than a fraction of their portfolios in gold, and with the metals recent crash, even fewer will.

THE REST OF THE WORLD - I am sure some money will find its way overseas, and to Mexico and South America.  But it's not going to be enough to draw money from the US.  Most of the S&P has overseas exposure too.

There are always headwinds and the market will fluctuate. But until something comes along to offer a better alternative for making money, the S&P is the place to be.

No guarantees here, folks, and nothing here is a recommendation to buy securities. It's just my opinion.  I'll be back to gloat in 2015.  

Sunday, December 8, 2013

What's the Bear Case for a Market Downturn?

Barry Ritholtz, financial advisor and market maven, asked on his blog what's the bear case for stocks right now.

In my blog, I previously wrote why I did not think we were in a bubble, but anything can happen in the market, and only fools are complete sure of the stock market's future direction.

I wrote a response to Barry and I will expand on it here.

One of things that has supercharged the stock market is the lack of alternatives.  Gold has dropped precipitously, oil has done little for the last few years, and the Fed has ensured that interest rates have remained low.  Investors have been pushed into equities, and a lot of money has flowed into "safe" dividend plays like Proctor and Gamble ($PG) and Clorox ($CLX).  They are both at new yearly highs and coincidentally pay a 2.8% dividend, which is also around what the 10 year Treasury Bond is paying.

For conservative investors, the question becomes, why buy a risky asset like a stock (that can go down) when the 10 year pays about the same return?  If the "interest alternative" pays the same rate, why go to the alternative when you can make the safer play?

That's the bear case for me.  Although, I don't think it will cause a major shift back to fixed income at this point for a couple reasons.

1. There are tax advantages for dividends over interest.
2. Yes, stocks can decline, but the price of bonds can also drop if interest rates continue to rise.  Buying bonds now may result in larger capital losses than what investors might see in stocks.

Therefore, although I think this scenario will play out over time, I don't think it will happen at these levels.  I think 10 year yields need to reach 4% before we see a meaningful correction, and I can't see that happening any time soon, because the increase in borrowing cost will have major implications for government.

Just my take on things.  I'm not an economist, just an upbeat investor.   I don't have a position in the stocks mentioned in this article.

Thursday, November 28, 2013

No, we are not in a Bubble

A lot of talk on Wall Street on whether the stock market is significantly over-valued, that is, are we in a bubble.  Everyone has an opinion.  Including me.

People compare to the bubbles of 2000 and 2007 and see many of the same metrics in our current market.   And it is true that some of the same metrics are in place.  Particularly regarding the S&P 500.  The $SPY is at all time highs, is trading at 16 times earnings and has a historically high CAPE ratio.

The problem with this analysis is that is really wasn't the S&P that was in the bubble in those years.  The bubble was really in other areas and when it popped, spread to the S&P.

In 2000 it was the NASDAQ, particularly the internet tech sector.  The NASDAQ composite skyrocketed to 5,000 (it is still only recovered back to 4,000) and when it crashed, took down everything else, including the staid old companies in the S&P.

In 2007, it was housing that was in a bubble.  House prices escalated to ridiculous heights that couldn't be justified by rents.  Prices still haven't recovered to bubble levels in most areas.  The crash in housing brought down the big banks which were part of the S&P.  

Some bubbles don't have an impact on the overall market.  Gold has crashed (by any measure) from 1900 to 1200 with nary a hint of contagion on the broader market.  Years ago, oil when from $35 a barrel to $150 and back again.  There were some minor disruptions, but certainly not a crash in the general market.

Therefore, in my opinion, there currently isn't a bubble in any sector that will have a damaging effect on the general market.  It may get there, but right now, prices are going up in an orderly fashion.  If you are looking for a crash, find a sector that is way overpriced and see if it can blow up the rest of the market when it falls.

Saturday, November 23, 2013

Should You Invest in a Volatility ETN?

Volatility is one of the most dynamic and misunderstood topics in investing.  There is a lot of interest in the VIX, but most people don’t know how it works.  It is called the best indicator of fear in the market, but that is only because there isn’t a better one.  You can find a good description of how the VIX is calculated, but essentially it is a measure of call and put buying of an instrument, usually the $SPY.   More put buying means a risk of higher volatility, and an increase in the VIX.

Several investment companies, including Proshares and iPath have created volatility ETNs (they operate just like ETFs) and investors can buy and sell them just like stock. 

The problem is that unlike stock, the ETNs lose value over time.  The $VXX, as has been pointed out by Adam Warner (@agwarner on Twitter) has decreased in value from $6,400 to its current price of under $45, a terrible return.  No one should invest in the $VXX for any term longer than a few days.

On the opposite side is an inverse ETN, the $XIV. This product takes advantage of the mechanisms that cause the decay in price of the $VXX.    It has had a 75% return this year on top of similar returns last year.  You will find it hard to get returns like that in any other investment.

Why not just put all your money in the $XIV, or the $SVXY, a similar ETN?

RISK, in all caps.

When volatility does go up, these products get killed.  In 2001, the $XIV was cruising along until the debt ceiling crisis in the summer.  Then it went from $19 on July 1 to a closing low of $4.91 on November 21, a loss of almost 75%. 

Let me repeat that.  A loss of 75% in less than five months. 

Most investors are not going to be able to handle that kind of loss.  Therefore, most investors should stay away from this product, or invest a small amount and watch it carefully for any signs of an increase in market volatility.  It is unlikely you will be able to finance your retirement with this kind of product. 

Professionals love these products because they are useful in hedging positions.  Using them as an investment is asking for trouble.  

Wednesday, November 13, 2013

What are “Mom and Pop” Doing?

One of the main tenets of stock market investing is that the professionals are market leaders, and retail investors are laggards.   The convention wisdom is that when normal people rediscover the market, it’s time to sell. 

Josh Brown, @reformedbroker, is quick to make fun of all sides of the market debate, and he had a tweet, “what are “Mom and Pop” doing today so I can do something different.  He is being funny, of course, playing off the idea that individuals are always late to the party when it comes to the stock market.

My tongue in cheek reply was “laundry.” 

As I thought more about it, it was more insightful than I even planned.  Mom and Pop aren’t thinking much about the market.  They don’t care if it has hit a top.  They likely don’t even know it is at an all time high.  If they look at their investment account statements, they know that they have more money than they did before, but they don’t think much about the why.   People I know are grateful for the bigger balances, but just assume it will go down sometime in the future and they need to keep piling money in so they will someday be able to retire. 

The lesson is, don’t take into consideration what Mom and Pop are doing.  They aren’t thinking about the market anyway. 

Wednesday, October 16, 2013

Don't Lean Out Over the Plate

Stocks look pretty good right now.  For all the reasons listed by Josh Brown here, the market looks like it could take off and do well over the last months of 2013.  Investors do need to careful, because any number of factors might make it less likely that the Dow will hit Jeremy Siegel's target of 17,000 by year end.

If you'll permit, I want to use an analogy from the movie Field of Dreams (warning: moderate spoilers ahead).

Archie Graham has just been knocked down by inside pitches twice, and he calls time to talk to Shoeless Joe Jackson.  Jackson asks him what pitch he thinks the pitcher will throw next.  Graham answers "either low and away, or in my ear."  Joe replies, "he won't want to put a runner on, so look low and away." As Graham walks back to the batter's box, Joe shouts out, "but watch out for in the ear."

Successful investing is a lot like that.  You may think you have a good idea what will happen, based on fundamentals, charting or whatever, but the market can always surprise you.  So don't leave yourself overly vulnerable.  Don't lean too far over the plate.

Archie does get the low and away pitch and hits a key sacrifice fly.  Which is better than being carried off on a stretcher.

It's a great movie.  The quotes are burned into my memory, so forgive me if they are off by a word or two.

Wednesday, August 21, 2013

Staying Upbeat During a Correction

It's not easy to have faith in the positive nature of the stock market when things are crashing all around you.  The market is down around 5% from the high, and the Dow 30 has gone down 6 straight days.

But, take a little long term perspective.  If you had just come back from a two-month cruise and checked your $SPY position, you would find that it was actually UP four points from when you left.  So, as bad as this recent run is, overall the market is up quite a bit over this quarter and for the year.

The market may still drop, there's plenty of economic uncertainty.  But what's not uncertain is that companies continue to generate services and sell products at a profit, and eventually that profit will hit the companies' bottom line, and will eventually be reflected in stock prices.  Maybe not tomorrow, but over time.

So, calmly continue to buy quality companies.  Not with both fists.  Maybe with a finger or two.  Sell the jokers you bought because they were flying high, when they didn't have a good, profitable product.

Stay the course, just trim the speed.

Thursday, August 15, 2013

Too Much Taper Talk

So, I am watching CNBC Fast Money today, and once again, the whole first segment is about the Taper.  Which, if you watch any other program on there or Bloomberg, pick up a newspaper or go to any business website, is all they talk about.

The Taper, but anyone who doesn't know (if that is even possible) is when the Federal Reserve slows (tapers) the amount of bond buying it is doing, that is, buys less than the $85 billion that it has been doing for some months now.

I suppose this is an important piece of economic news.  But, really, is it necessary to discuss all day long on every program, including my fave Fast Money?  Does it dominate all other news, so that stocks only move based on how the market is reading the Fed tea leaves that day? No, it doesn't.

It's boring.  Boring.  Boring.

Just my opinion.

Thursday, August 8, 2013

CASE Shiller and the Bear Case

Stocks have continued their upward momentum, err, OK, they keep going up.  No doubt someday they will get too high and come back down somewhat, but anyone who thinks they can tell you exactly when that day will be is just blowing smoke.

The latest attempt to pinpoint the top is a reference to the CASE Shiller index.  Founded by a professor named Shiller, it looks at the Price Earnings ratio, but not the Earnings for the last year, but the average earnings for the last 10 years.  It compares this to the historical average, and voila, we are now in a situation where the index is too high.  Something like 24 when the historical average is 16 or so, and it was 24 other times when it crashed.

The problem is, stocks don't always crash at 24.  Once they went even higher and crashed at 43.   In your fear of worrying about a top, you would have missed a 70% run.  History is very often a good guide, but situations are never exactly the same.  The best advice?  Be nimble.  Stay invested, but when things look frothy, as they do a bit now, reduce your exposure.  Try being 80% invested.  You'll have some dry powder if stocks fall, and will still participate if they go up.

You can find the details on CASE by earching it.  I love historical perspectives, so I pay attention to this kind of analysis.  But, why is 10 years a magic number?  If it was 5, the great crash of 2008 would be dropping off now and the index would appear very bullish.

Remain upbeat.

Monday, May 27, 2013

Why Harry Dent is Wrong About the Dow Going to 3,300

I just saw an advertisement noting that Harry Dent, who is some sort of stock expert is predicting the Dow 30 will drop to 3,300.  It is important to note the Mr. Dent made that prediction sometime in 2011, when the Dow was some 2000 points lower than the 15,303 it stand at now.  At least if this happens, the drop will be even more dramatic and Mr. Dent may be even more successful at selling whatever it is he trying see on his website.

But, IMO, it's not going to happen, and here is why.  The Dow isn't traded on it's own.  It's made up of 30 stocks that are traded individually.  And if the Dow is to drop by 80%, then those stocks would have to drop an average of 80%.

So, McDonald's would have to drop from 100 to 20, AND Exxon would have to drop from 91 to 18 along with all the other Dow stocks, or some other crazy combination that would drop the Dow an average of 80%. 

Which, BTW, unless those two stocks dropped their dividends, would mean they would have a dividend yield of 15% and 13% respectively.  Nope, not gonna happen.  The great crash of 2008 cut the Dow by only (?) 50%.  This would have to be much worse.  And unless McDonald's is hiding billions of dollars of bad hamburgers off it's balance sheet, there is no reason to even comtemplate a crash of that size. 

Just be upbeat, keep investing in good companies like those mentioned above, and don't worry about a crash.  If prices decline, you will still own companies that make money. 

I don't own any stocks mentioned in this article. 

Monday, May 20, 2013

Buying Facebook for the Long Term

There isn't likely a more controversial stock in the market right now than Facebook (OK, maybe Apple)

Facebook's share price is around $26 now, making the company worth (market capitalization) of $62 billion dollars.  It's down from it's initial offering price of $37 and up from it's 52 week low of $17 and change.

None of that means anything to the upbeat investor.  What's important is what does a share of stock buy you?  Facebook pays no dividends, so the only return you will get is from capital appreciation.  The price/earnings ratio (P/E) is currently 559 according to Yahoo! Finance.  Which means at the current rate of income, you will get your money back in 559 years.  Past the year 2525, if man is still alive.

Clearly, no one would buy a stock on this metric.  The only reason to own Facebook is if you believe those earnings will increase, and in this case, increase substantially.

Now, you may love Facebook, you may use it all time, and think they will be able to make a lot of money through selling ads and other forms of monetization.   But everything will have to go right for them to make enough money to justify that price.  And things rarely do.

Upbeat investor call:  Definitely "don't like"

The author has no current position in any of the stocks mentioned in this article, and no plans to purchase any in the next 48 hours.

Introduction to Upbeat Investing

If you are interested in investing, you can find hundreds of magazines and newspapers, as well as multiple television networks offering advice on what stocks to buy, when to sell and how to market time.  Do you want to invest in options?  There are load of blogs and websites that say they help you select just the right investment or trade.  

There are newsletters that you buy, websites you can subscribe to and lots of other ways to obtain advice from people who tout themselves as experts.  

Maybe they are experts.  It is likely they do know more about the market than you or I do.  But, they don't know what's going to happen tomorrow.  If they did, they wouldn't tell you for just about any amount of money.  

What the Market is Really About

What people seem to forget is what the stock market really is.   It is a place to buy ownership shares in companies.  Companies that make things, or provide services.  These companies, mostly, are able charge enough for their services to make a profit.  That profit is passed along to the owners, in the form or dividends or higher share prices.   

There is a lot more to it of course. The markets are highly liquid.  It is easy to buy and sell, and some people are in business to make money by trading the shares, without any regard to what they own.  Good for them, if it works.  (Although it rarely does, over the long term.)

Upbeat Investing

As long as companies can make a profit, the value of shares over time will increase.  Therefore, the key to profitable investing is to own companies that make money, and not to pay too much for them.  There's a lot more to be said about that.  The goal of upbeat investing to buy great companies and be happy when they generate a profit.  As a owner, some of that profit is yours.  Enjoy it.