As of Thursday's close, 89% of the stocks in the S&P 500 were trading at oversold levels (more than one standard deviation below 50-day moving average). As shown in the chart, going back to 2007, the only other period where more stocks were oversold was in October 2008.
Friday, August 5, 2011
Interesting Chart: Gold vs Corporate Earnings
In the midst of all this turmoil, here is a long term chart.
Global equities are the cheapest on record relative to gold, bolstering the case for investors to buy stocks and sell the precious metal even as economic growth slows, according to Citigroup Inc.
US Borrowing Tops 100% of GDP: Treasury
US gross debt shot up $238 billion to reach 100 percent of gross domestic product after the government's debt ceiling was lifted, Treasury figures showed.
On Tuesday, the Treasury had to add more than $200 billion of commitments immediately after President Barack Obama signed into law an increase in the debt ceiling.
The liabilities had been temporarily taken off the federal government's balance sheet since May 16, when the Treasury reached the $14.29 trillion official cap.
It then used extraordinary measures to remain under the legal limit while deeply polarized Republicans and Democrats battled over raising the debt ceiling and reining in the country's massive deficit.
The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, putting the United States in a league with highly indebted countries like Italy and Belgium.
Public debt subject to the official debt limit -- a slightly tighter definition -- was $14.53 trillion as of the end of Tuesday, rising from the previous official cap of $14.29 trillion a day earlier.
The official limit was hiked $400 billion on Tuesday and will be increased in stages over the next 18 months.
With the latest borrowing, the United States joined a small group of countries whose public debt exceeds GDP, including Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent) and Iceland (103 percent), according to figures provided by the International Monetary Fund.
The last time US debt exceeded its annual economy was in 1947 just after World War II. By 1981 it had fallen to 32.5 percent.
Ratings agencies have warned the country to reduce its net debt-to-GDP ratio quickly or facing losing its coveted AAA debt rating.
Moody's said Tuesday that the government needed to stabilize the ratio at 73 percent by 2015 "to ensure that the long-run fiscal trajectory remains compatible with a AAA rating."
5 Signs Of Winning Investments
There has been a lot of discussion about the lost decade for the stock market in America. For the first time in its history, the S&P 500 actually finished an entire decade with a lower valuation than at the start of the decade. While this has caused some investors to abandon ship on long term investing, that is a big mistake. Although the index as a whole has struggled over a 10 year time period, there are some individual companies that have performed quite well. Let's take a look at some of the characteristics that made some investments winners while the market was plunging.
Market Capitalization
It may have been a bad decade for many of the large cap companies but small and mid cap companies did quite well. According to US News, "the Russell 2000 Small Cap Value index was up more than 60 percent for the Lost Decade." The S&P MidCap 400 and the S&P SmallCap 600 were both up over 60% during the same time period. The old saying of no risk and no reward is true. Smaller companies offer a lot more growth potential because of their tiny size and have rewarded investors accordingly. (These three index genres offer different approaches to tracking average market performance. For more, see )
Great Business Model
Investor capital always flows to the next great business model and cutting edge technology has been loved by investors. Netflix is a great example of this. At a time when consumers were used to getting their movies via traditional retail locations, a tiny upstart company called Netflix came along and changed the game. Netflix investors were rewarded with many times the stock's price since its IPO in 2002. Apple has given investors a huge return while changing the face of music distribution and revolutionizing the smartphone market at the same time. (Learning how to assess business models helps investors identify companies that are the best investments. For more, see .)
Produces Items That People Need
One of the common traits of most of the high flying stocks is that they create products that people need. Weight loss products, coffees, juices and other beverages are things that are used on a daily basis. This is why small upstarts have seen their products flying off of the shelves. Medifast has produced a 16,209% return over the last decade with its line of weight loss products. Green Coffee Mountain has carved out a nice niche for itself in the coffee industry generating a 9,211% return over the last 10 years.
Large Amounts of Cash to Deploy
In order for a company to be able to expand its operations, a company has to have significant cash reserves and very little debt. Market winners generate ample amounts of free cash fund so that the companies can fund their operations without relying on a lot of outside debt. Debt is one of the biggest encumbrances to growth and profitability as a company will have to spend a ton of money just servicing its debt loads. (Borrowed funds can mean a leg up for companies, or the boot for investors. For more, see )
No Repeat Performers
It is very rare that a stock that was a market winner in one decade turns out to be a winner in the next decade as well. It can happen where a company that performed poorly in one decade has a greater chance of performing better the next. That is because the market stars of one decade quickly flame out over the next decade. Investors have can have a better chance of finding a future breakout star by searching for a company that was an underperformer in previous years. Alternative beverage maker, Hansen Natural's 129% return in the 1990s was dwarfed by its remarkable 7,022% return over the past decade.
Bottom Line
As you can clearly see, it is possible for investors to make money in the stock market even when entire sectors are struggling.
And What Will Soon Be The Scariest Chart: Presenting Record Low Mutual Fund Cash Levels
Here is a chart of what could well be the biggest concern for the market, and one we have been highlights for a long time: mutual fund cash levels, which as ICI indicates were 3.4% in June, is the lowest ever. A 4% drop in the absolute value of mutual fund investments, effectively wipes out the capital buffer of most. Enter liquidations.
Stocks Are Still ~30% Overvalued
The DOW dropped 512 points today.
And that's on top of the several hundred points it dropped last week.
The S&P 500, a broader market measure, is now down more than 12% off its recent peak.
So what does that mean?
Is it a "buying opportunity"?
Over the short-term, who knows? If this carnage keeps up, a panicked Ben Bernanke will probably rush to announce some huge new quantitative easing program. Or Congress will quickly rethink its recent commitment to "austerity" and announce trillions of new spending. And those initiatives might boost stocks for a while.
The bigger picture, however, is less encouraging. Even after the recent plunge, stocks are still about 30% overvalued when measured on "normalized" earnings--which is one of the only valuation measures that works.
Specifically, even after the crash, stocks are still trading at 21X cyclically adjusted earnings, as we can see in the following chart from Professor Robert Shiller of Yale. Over the past century, stocks have averaged about 16X those earnings. So we're still about 30% above "normal."
 PE ratio = blue, 10-year interest rate = red Image: Professor Robert Shiller |
In recent months, eager to suggest that stocks are "cheap," most analysts have talked about the market P/E ratio relative to next year's projected earnings. And relative to those earnings, stocks do seem modestly "cheap" (12X, or something).
Unfortunately, measuring stock values against next year's projected earnings has a couple of flaws. First, no one knows whether those projections will materialize. Second, and more important, those projected earnings assume that today's near-record-high profit margins will persist.
Over history, corporate profit margins have been one of the most reliably "mean-reverting" metrics in the economy. When margins get extended to super-high (today) or super low (2009) levels, they generally revert toward the mean. This radically changes the PE ratio.
And measured on average profit margins, not today's super-high margins, the stock market is still expensive. (We discuss this in detail here).
Sadly, this doesn't tell you anything about what the market will do next. As you can see in Professor Shiller's chart, the market has spent decades above and below the average.
What this PE ratio does tell you is that stocks still have lots of room to fall--30%, just to get back to normal, much more than 30% if they "overshoot."
And it also tells you that long-term returns are still likely to be sub-par.
Through history, one of the most reliable predictors of next-10-year returns is the valuation level at the beginning of the period. Today's valuation level is not as high as yesterday's. But it's still higher than average.
Roubini: QE3 Is Coming, But Bernanke Will Be Too Late
Nouriel Roubini, the much heralded NYU economist who has gotten much attention – and the nickname Dr. Doom – for his gloomy predictions in the past few years, isn’t exactly confident in Ben Bernanke or the US economy. Over the past few days he has taken to Twitter to voice his concerns on the recent market free fall, the potential for a double dip and the ongoing crisis in Europe. Today, on the heels of currency market intervention by Japan and Switzerland, Roubini predicted that a third round of quantitative easing here in the United States, tweeting, “QE3 started in Japan & Switzerland via fx action &/or monetary easing. Fed will eventually get to QE3 but it will be too little too late.”
Japan and Switzerland have both gotten involved in currency markets over the past two days, stepping in to prevent outsized appreciation in the yen and the Swiss franc. Switzerland cut interest rates on Wednesday in an attempt to weaken the franc, while the Japanese government and the Bank of Japan collaborated on moves today in an attempt stifle similar appreciation in the yen.
Roubini has previously said that he thinks future rounds of quantitative easing are on the way. As he pointed out in another tweet today, “I argued last year we will get QE3, then QE4 & then QE5 (the Fed, as in the 1950s, targeting the 10yr Treas at 1.5% once all else fails).”
In January, when he sat down with Steve Forbes, Roubini identified states and local municipalities as potential recipients of QE3.
“Until now, we have back-stopped the states through the federal budget – transfer payments of a variety of sorts to make sure that they don’t blow up. At this point, the political willingness to do more of it is limited,” Roubini explained.
“During the crisis, [the Fed] bought even toxic assets of Bear Stearns and of AIG. They could go along the lines – if there are financing pressures like the Europeans – of trying to make stop all the state governments that are in trouble. If Congress doesn’t do it, there’ll be some pressure on the Fed to do that. That might be a version of QE3, after QE2. QE1 was mostly agencies — Fannie and Freddie, QE2 was treasuries mostly. QE3 could be state and local debt.”
Bank of New York Mellon adds fee to deposits
Bank of New York Mellon Corp. said Thursday that it will charge its customers a fee to hold cash deposits over $50 million.
The bank said it has seen such a large increase in deposits over the last month that it will charge a 0.13 percent fee to clients with "extraordinary high deposit levels." Bank of New York Mellon, which has $23.6 trillion in client assets under its custody, said customers have moved money to cash as a safe haven in the past month as investments like stocks and bonds have become increasingly volatile.
The bank's customers are mainly large pension funds and money market funds. The bank collects dividends on stocks and holds cash deposits, among other things, on behalf of such large investment funds.
"This is a historic precedent in the U.S. banking system," said Dan Geller, Executive Vice President at Market Rates Insight, a firm that analyses bank pricing.
Normally, banks pay interest to customers for deposits. But with short-term interest rates near zero, and increased FDIC insurance premiums on deposits, it hurts banks when they hold large amounts of cash on their balance sheets. Deposits are considered a liability because they can be withdrawn at any time. When liabilities go up, banks pay more for FDIC deposit insurance.
Geller believes that the fee on deposits could soon trickle down to consumer deposits too. He said the same economic conditions and nervousness are impacting the American people as managers of pension funds.
"At some point, the safety and security of an insured cash deposit becomes so appealing that people will be willing to pay a small premium for that," said Geller. (more)
Europe on Brink of 'Major Financial Collapse': Guggenheim CIO
Europe is a "train wreck" and on the "brink of a major financial crisis," Scott Minerd, CIO of the fixed-income firm Guggenheim Partners, told CNBC Tuesday.
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Medioimages | Photodisc | Getty Images |
"The way Europe is operating right now, it's what I called recently 'cognitive dissonance,'" Minerd said, or "basically doing the same thing thinking they're going to get a different outcome."
"They keep throwing more and more liquidity at it thinking it's going to get better and it's not," he added. Europe fails to recognize that it has a "structural problem, not a liquidity problem."
People will "flee the euro" unless they find a way to bifurcate the euro in some way where strong countries are in the euro only and the weak countries are out, Minerd explained, adding, "To be honest with you, I don't see the mechanism to do that."
"As the capital is flooding out of Europe, which we're starting to see now, the first place it's going to go is to the safe havens—[U.S.] Treasurys, which [the market] perceives to be safe, and it'll chase gold," he added.
Compared to a 2 percent return on Treasury notes, investors will eventually say that "stocks with price-earnings multiples of 12 or 13 or 14 look relatively cheap, and the growth for corporate earnings in the United States is very good, and this is likely to help us," said Minerd.
The United States is "the least dirty shirt in the bag," Minerd concluded. "We have a very good chance of seeing equities up maybe another 10 percent [over the next six months] from where we are."
Dow falls 512 in steepest decline since '08 crisis
Gripped by fear of a new recession, the stock market suffered its worst day Thursday since the financial crisis in the fall of 2008. The Dow Jones industrial average fell more than 500 points, its ninth-steepest decline.
The sell-off wiped out the Dow's remaining gains for 2011. It put the Dow and broader stock indexes into what investors call a correction -- down 10 percent from their highs in the spring.
"We are continuing to be bombarded by worries about the global economy," said Bill Stone, the chief investment strategist for PNC Financial.
Across the financial markets, the day was reminiscent of the wild swings that defined the financial crisis in September and October three years ago. Gold prices briefly hit a record high. Oil fell even more than stocks -- 6 percent, or $5.30 a barrel. And frightened investors were so desperate to get into some government bonds that they were willing accept almost no return on their money.
It was the most alarming day yet in the almost uninterrupted selling that has swept Wall Street for two weeks. The Dow has lost more than 1,300 points, or 10.5 percent. By one broad measure kept by Dow Jones, almost $1.9 trillion in market value has disappeared.
For the day, the Dow closed down 512.76 points, at 11,383.68. It was the steepest point decline since Dec. 1, 2008.
Thursday's decline was the ninth-worst by points for the Dow. In percentage terms, the decline of 4.3 percent does not rank among the worst. On Black Monday in 1987, for example, the Dow fell 22 percent.
Two weeks ago, investors appeared worried about the deadlocked negotiations in Washington over raising the ceiling on government debt. As soon as the ceiling was raised, investors focused on the economy, and the selling accelerated.
On Thursday, growing fear about the weakening U.S. economy was joined by concern in Europe that the troubled economies of Italy and Spain might need help from the European Union.
The European Union has already given financial assistance to Greece and Ireland, two countries that have struggled to pay their debts. A financial rescue package for Italy or Spain might be more than the group of countries can handle. (more)
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