Archive for January, 2011
“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.” – Benjamin Graham
Chances are good that you have heard or used the phrase, “No good deed goes unpunished.” Our government has taken this “truism” and turned it on its head. Now, the way to get good things is to make really bad decisions, knowing that there is a good likelihood that the Fairy Godfather, Uncle Sam, will transform your rotting pumpkin into a brilliant gem-studded carriage. Such was the case for BankUnited FSB in Miami Lakes, Florida. According to a report in the Wall Street Journal (WSJ), facing failure, the FDIC sold the bank to some lucky (or should we say, “well-connected”) financial people in New York. The
To get our country back on sound financial footing, our federal government must attack two important issues over the next few years: The annual fiscal deficit and the coming financial nuclear blast of the Baby Boom generation entering the age of Social Security and Medicare benefits. In a recently released study from the Urban Institute, “Social Security and Medicare Taxes and Benefits Over a Lifetime,” authors C. Eugene Steuerle and Stephanie Rennane attempt to quantify the amount of money a “typical” American individual or married couple will pay into and, ultimately, receive in benefits from Social Security and Medicare.
Below are charts showing, for the “average” wage earner and based upon the year a person or couple reaches the age of 65, the amount of estimated Social Security and Medicare benefits received during the years in retirement, total taxes paid into these programs while working, and
The world continues to be bullish on the price of gold, although Friday’s Wall Street Journal had an article showing the first sign of a bit of caution. The uptrend in gold is still intact, as the chart below displays. I have drawn in two trend lines to keep an eye on. A breach of the orange line would be a minor concern. If gold moves through the red line, then the bull market is done.
I have written in a recent post about the close relationship between the prices of gold and oil. For those of you who want to gauge the valuation level of gold, the chart below is an easy way to keep track. The chart plots the prices of the GLD exchange traded fund versus oil.
What this chart implies is that either gold is overpriced or oil is underpriced. The conclusion is that either gold should
I mentioned in a recent post that the precious metals sector of the stock market has been the star 5-year performer. Below is a chart showing the 10-year compound annual returns for various stock categories. The huge outperformance of the precious metals sector is stunning.
The contrarian in me is screaming, “Beware!” Such a dramatic performance difference is highly unlikely to continue over the next 5-10 years. In fact, I think it is more likely that precious metals stocks are likely to be a poor relative investment from here. There is more to worry investors about precious metals, especially gold, than historical performance. The level of exposure a product or service is getting in media advertising has been a good indication of how ingrained the idea is in the minds of consumers and investors. The media is full of ads encouraging consumers to sell their personal gold and silver or
“If I had a formula for bypassing trouble, I would not pass it around. Trouble creates a capacity to handle it. I don’t embrace trouble; that’s as bad as treating it as an enemy. But I do say: meet it as a friend, for you’ll see a lot of it, and had better be on speaking terms with it.” – Oliver Wendell Holmes
Oliver Wendell Holmes was an associate justice of the U.S. Supreme Court from 1902-1932. Known as “one of the most influential American common law judges” (Wikipedia), Justice Holmes learned about trouble and facing it head on during his service (including being wounded) in the Civil War.
Our country is facing troubled times that require the courage to take things away from people you believe they need or deserve these things. Sure, the worst of the Great Recession may be behind us, assuming the housing market stabilizes, the
A friend and investment professional sent in a comment in response to my 2011 Outlook report that discussed the huge amount of cash on corporate balance sheets. Here is a chart showing that non-financial corporations currently hold about $2 trillion in liquid assets. That’s a lot of money.
As my friend pointed out, this cash could find its way into making acquisitions, which would help stock prices, or capital expenditures, which would help the economy. In addition, companies could decide to increase dividends or buy back their outstanding stock, both of which would have a favorable impact on stock prices.
One of the interesting things about this cash, however, is how it came to be. As the above chart clearly shows, there has been (and always will be) an upward bias to corporate liquid assets. As the economy grows over time, so will total cash on companies’ books. That does
The stock market had a decent 2010, finishing near its highs for the year. the 2010 price changes for the major indexes are:
Dow Jones Inds Avg: +12.8%
S&P 500 Index: +11.0%
NASDAQ Composite: +16.9%
Markets usually continue in the same general direction until extremes are reached. At the moment, there are no significant extremes that appear to put this cyclical bull market in jeopardy. Certainly, we are due for a correction, but that does not mean conditions are ripe for a full-fledged bear market.
The most important favorable factor for the markets in 2011 will be Federal Reserve Board (FRB) policy. Chairman Bernanke has basically promised to keep interest rates low until the economy shows signs of sustained recovery. In spite of the possibility that such a policy will bear rotten fruit in the distant future, low interest rates will likely continue throughout 2011.