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.