• Current Conditions

  • Week in Review: 4/11/2014

    Week in Review: 4/11/2014

    Going into this week, equity investor sentiment continued to show little bearishness—not a good sign. My guess is that because the stock market has quickly recovered from so many dips over the past few years, investors are not afraid of volatile or declining stock prices. The S&P 500 is once again challenging its 50-day moving average (MA) price. For quite some time, the 50-day MA has been a firm area of price support. If this support withers and the S&P 500 drops to its 200-day MA, we could be in for a much more dramatic decline.


    This was not a good week for stocks. The S&P 500 fell 2.6% and the NASDAQ Composite dropped 3.1%. Still, the S&P 500 is only 4% below its all-time closing high price from a little over a week ago. It will be interesting to see how this minor correction impacts on investor sentiment.

    Print Friendly
  • More from Current Conditions
  • Recent Articles

  • Week in Review: 4/4/2014

    Week in Review: 4/4/2014

    Wasn’t it just a few years ago that our financial system was threatened and one of the key reasons was sub-prime mortgages and high risk securities? We learned this past week that, according to the Wall Street Journal:

    Risky debt is flying off the shelves. Investors are snapping up low-rated securities backed by companies, home mortgages and car loans at a clip rarely seen since the financial crisis, as fund managers and others tire of paltry yields on safer assets.”

    You would think that such an experience would cure people from not only borrowing when they shouldn’t, but also from buying these risky investments, especially when the yields on them are very low like they are now. This is another example of investors over-reaching for returns and taking on too much risk. My guess is that people are assuming that they can buy these investments because the Federal

    Print Friendly
  • Flash Boys

    I just finished listening to a debate on CNBC about the new book by Michael Lewis, “Flash Boys.” I have an extremely high regard for Michael Lewis, who I consider to be one of the best financial writers around. Although I have not yet read Flash Boys, it is not difficult to summarize what he is telling us about our stock market.

    Let me first remember back to my days as a professional investment manager. Daily, we would buy and sell stocks on behalf of our clients. Over time, and as the sizes of our orders grew (in shares traded), I kept getting the sense that someone was looking over our shoulders, watching us trade, and with that information trading ahead of us.

    Trading on the knowledge of another person’s orders is known as “front running,” and it seemed we could not escape the

    Print Friendly
  • End of Quarter Observations: 3/31/2014

    End of Quarter Observations: 3/31/2014

    With the end of the 2014 first quarter, I thought it would be worthwhile to look at some charts that tell us about the three key factors in the stock market: Valuation, sentiment, and momentum.

    By every valuation measure I respect, stocks ended the quarter significantly overvalued. This does not mean prices cannot rise. Valuation has no sense of time. However, stock prices always swing from overvalued to undervalued and back again. Here are a few of my favorite stock market valuation charts.


    When I ask people about their justification for being aggressively exposed to stocks, the usual answer is, “Where else should I invest? Everything looks overvalued.” Although I agree that most asset classes offer relatively low future returns from current price levels, I think investors have largely misjudged the relative return potential for various investments. For example, the above charts imply a 2.5-3.5% compound annual return for stocks

    Print Friendly
  • Week in Review: 3/28/2014

    Week in Review: 3/28/2014

    Economic news during the past week was a mixture of good and bad. Of course, some of the negative news was probably related to the bad winter weather the nation has experienced through February.

    In the housing area, February new home sales fell, as we should have expected given the snow that blanketed much of the country. According to the Case-Shiller 20-City Index, home prices have declined for three consecutive months. Although home price weakness could also be weather related, this is not consistent  with reports of a housing shortage, which should be working to keep prices moving higher. More likely, housing price increases will be moderating in the future from the big increases we have seen since the Great Recession lows.


    Personal income and spending both rose 0.3% in February. However, there were downward adjustments to prior months’ data, and I expect the same to happen

    Print Friendly
  • Rotation


    In my last post, I mentioned that because we were approaching the end of the calendar quarter, investment managers would be doing some “window dressing” in their portfolios. Window dressing occurs with varying intensity at the end of each quarter because some professional managers want to position their portfolios to “look good” for their clients’ quarterly reports. My thinking was that this would take the form of cash being put to work, thus forcing the stock market higher.

    What seems to be happening instead is that managers are rotating their holdings from extremely overvalued stocks into sectors that they deem to be better values. The following chart shows the relative performance of the banking and biotechnology sectors, along with the S&P 500 Index. You can see the rotation that began in early March and then accelerated in the past week.


    Sector rotation within manager portfolios is not abnormal. And because

    Print Friendly
  • Week in Review: 3/21/2014

    Week in Review: 3/21/2014

    Investor sentiment continues to be very bullish—a negative indicator for future long-term returns. A sign of this high level of bullishness was a blog published this week that outlines three reasons to use own’s home equity to buy stocks. Yes, that makes perfect sense. After five years of rising stock prices, now is the time to take on debt to buy overvalued assets. We can add this crazy thinking to other signposts of increasing stock market risk (a high level of corporate insider stock sales; a booming IPO market; high and rising margin debt; individual investor monies surging into equity mutual funds; a significantly overvalued stock market).

    Mutual fund flows are another indicator of sentiment. The latest data from the Investment Company Institute shows continuing large net inflows to equity funds. Who are these people? Are they the ones who heeded the looney advice to use their home equity

    Print Friendly
  • Week in Review: 3/14/2014

    Week in Review: 3/14/2014

    The stock market had a terrible week, with the S&P 500 Index falling 2.0% and the NASDAQ Composite down 2.1%. Most of the damage was done on Thursday. Equity price weakness has been chalked up to the political problems and social unrest in Ukraine, along with more negative economic news coming from the world’s second largest economy—China. In my opinion, the Ukrainian situation is a short-term problem for stocks. China’s economic slowing is a more lasting issue. China lowered the growth forecast for its economy to 7%. I have little faith in the economic growth numbers reported by the Chinese government. Even if the numbers are accurate, a lot of the growth is coming from construction projects that have little or no use. At some point, the construction Bubble will pop. When is anyone’s guess.

    I think the stock market is beginning to discount the end of rapid economic growth

    Print Friendly
  • Copper Prices

    Copper Prices

    I was going to write this post yesterday, but decided against it. Had I done so, I would have said that if the price of copper falls below $3.00 per pound, it could be a signal that the China construction Bubble was about to pop. Just by pure coincidence, a former colleague emailed me today about the price of copper and the apparent disconnect between its price and that of another key commodities index I watch closely—the CRB Raw Industrials Index (CRBRII). Although somewhat weak, the CRBRII has not been dropping to the same extent as copper prices. Instead of emailing my friend, I decided to call and voiced my concern over a possible drop in copper’s price to below $3.00, not knowing at the time that the drop had already occurred during the day.


    Because China’s construction Bubble is so huge and copper is such a key material in construction,

    Print Friendly
  • Week in Review: 3/7/2014

    Week in Review: 3/7/2014

    For a moment, take yourself back to 2007. Home prices had been strongly rising for years and, in general, were selling significantly above levels justified by the income they could produce if rented. In some areas of the country, home prices rose to absolutely insane prices. Most Americans wanted to own a home, even if it did not make financial sense. It was easy to borrow money to purchase a home. Many people used this environment to “flip” homes (i.e., buying with the sole intention of quickly selling to make a fast buck). Building activity ramped up to a very high level to create the supply to meet the enormous demand. A few economists warned about the dangerous environment building up in the housing market, but few heeded their warnings.

    Knowing what you know now about housing during that period, would you have done anything different? My suspicion is that

    Print Friendly
  • Page 1 of 1912345...10...Last »