Wednesday, October 31, 2012

Hurricane Sandy

My condolences to everyone who sustained damage or injury from Hurricane Sandy; and especially to those who lost loved ones. We were relatively lucky. We weren't in the hurricane's direct path, yet we still have no electricity, phone, or internet at home. Our office in Greenwich has the electricity  back, but no phone or internet. 

Despite the hardships, some businesses are benefiting. Home Depot, for example, is expected to do well from all the rebuilding and repairs that have to go on. Restaurants are booming since so many people can't cook at home. 

My neighborhood sustained serious damage from a great number of large trees that toppled over and tore down overhead wires. We are hoping to get back to normal in a few more days. Until then, good luck to everybody. 

Saturday, October 27, 2012

Military Spending Boosts Third Quarter GDP

The advance estimate for third quarter GDP growth came in at a better-than-expected 2.0%. This was up from 1.3% growth in the second quarter and, on the surface, it looks like good news. With the election just days away, the headline number is extremely important to the Obama administration. A 2-handle on GDP growth this far along in an economic recovery is weak, yet it helps make the case that things are getting better.

The market, however, took it as a non-event. Perhaps investors noticed that a good chunk of the increase was due to government spending. Indeed, real (as opposed to nominal) national defense spending surged 13%. Conspiracy theorists might say that the government accelerated military spending in order to boost the GDP report and help make President Obama's case for reelection. I think it is more likely that the accelerated spending was due to the pending sequestration. Unless Congress acts soon, the military budget will be slashed. The increased spending at this time could simply be the Pentagon's way of preparing for the expected cuts.

Whatever the reason, it is extremely disheartening to realize that even with this huge surge in defense spending, third quarter GDP climbed just 2.0%. In fact, growth would have been just 1.4% had defense spending remained flat. No doubt this is information many Obama supporters would prefer the electorate not to know.

Wednesday, October 24, 2012

Investors Get Nervous About Election

Initial jobless claims come out Thursday morning as they do every Thursday morning. Economists are expecting a figure of about 375,000. Any number significantly better helps President Obama make his case that the employment picture is improving. Any number significantly worse bodes well for Mitt Romney.

I delved into this matter in my July 19 posting. In that posting I showed that initial jobless claims have been improving significantly ever since they peaked in early 2009. I also pointed out, however, that the employment participation rate has been deteriorating. In fact, it is at a 30-year low. Some observers have said this is because of the baby boomers retiring. There is some truth to that. Unfortunately, that explains only part of the story. The bulk of the decline in the participation rate is due to large numbers of people simply dropping out of the workforce due to an inability to find jobs.

I have also discussed in the past why the stock market has been rallying even as the economy has been struggling. The bottom line is the Fed. The Federal Reserve has been pushing an easy monetary policy. Each time the Fed announces another round of quantitative easing, stocks rally. In a bit of twisted logic, however, stocks sold off on Tuesday in part because more investors are starting to believe that Mitt Romney may actually win the presidential election. Investors seem to believe that Romney will be better than Obama for the economy in the long run; but in the short run a Romney victory might mean an end to the Fed's easy monetary policy. Romney has already said he would not reappoint Ben Bernanke as Fed Chairman. He will likely replace Bernanke with someone who is more hawkish. That could be bad for stocks as interest rates rise back to what are considered normal levels.

The election is still a toss up. What is clear, however, is that stock market volatility is rising. It still makes sense to invest for the long run. You should, however, be prepared for some severe gyrations.

Thursday, October 11, 2012

Investor's Business Daily on Apple

Back in March, I had a posting asking if Apple was a BUY? My conclusion was that momentum would probably take the stock higher, but Apple wasn't a stock I would buy at the time. Of course, the stock did go higher and eventually topped $700 per share. But Apple has fallen back quite a bit in the last few weeks. Since Apple is the largest stock by market cap in the S&P 500 and NASDAQ, it has a huge influence on those indices. I love Apple's products, but I as I explain in today's Investor's Business Daily, there has simply been too much enthusiasm over the iPhone, the iPad, and Apple TV.

Tuesday, October 09, 2012

Book Interview

Click on to read my interview with Henry Truc about The Forbes/CFA Institute Investment Course.

Friday, October 05, 2012

Low Interest Rates Are Punishing Savers

Stephen Horan of the CFA Institute interviewed me last week about the challenges of trying to generate income in a low-interest rate era. Click here to watch the interview.

Thursday, October 04, 2012

Is the Rally Going Beyond the Fundamentals?

The following commentary was previously sent to subscribers of the Forbes Special Situation Survey investment newsletter. 

We are growing increasingly concerned that the fundamentals do not justify the recent rise in stock prices. The U.S. economy continues to struggle. At the end of September, the Bureau of Economic Analysis revised its estimate for second quarter GDP growth from 1.7% (on an annual basis) to just 1.3%. Because growth is so anemic, the unemployment rate remains stuck at more than 8%. The official figure for August was 8.1%. (The September estimate will be released this Friday.) While it is true that the unemployment rate is down significantly from its peak of 10.0% in October 2009, we find the dismal participation rate more alarming. This little noticed, but extremely important metric has plunged to 63.5%, its lowest level since September 1981! In part, the decline is explained by demographics. After all, baby boomers are retiring in large numbers. Unfortunately, a greater portion of the decline in the participation rate is explained by people dropping out of the workforce simply because they are too discouraged to keep looking for work.

Even the few bits of good economic news have to be taken with a grain of salt. The latest ISM Index came in at 51.5. Any reading above 50 signals expansion in the manufacturing sector. However, this metric is barely above the critical level, meaning that any expansion is weak at best. The ISM Index was signaling contraction during the prior three months and it could easily fall below 50 again. In addition, the Chicago PMI, which came out just a few days earlier, dipped below 50, hitting its lowest level in three years. The housing market is giving some investors comfort with both new and existing home sales and prices picking up; yet the numbers remain at incredibly depressed levels. 

What explains the run up in stocks? We attribute it to a number of factors. First, Federal Reserve Chairman Ben Bernanke keeps delivering more stimuli and promises to keep interest rates low indefinitely. In a few more years, we may be talking about QE 15. The rise in stock prices shows how painful it is for investors to fight the Fed. Second, as bad as things are in Europe, investors go “risk on” every time a European politician or banker indicates that the abyss may be a little further away than they initially thought. Third, investors are hoping that no matter who wins the presidential election in the United States, no politician would be stupid enough to let the country go over the fiscal cliff. Unfortunately, we don’t know many investors who have grown rich by overestimating the intelligence of politicians.

We are about to enter what is known on Wall Street as “earnings season.” While stock prices may rise or fall on any particular day for any number of reasons, over the long run, nothing matters more than sales and earnings. We are concerned with the large number of companies that are issuing warnings. Companies frequently lower expectations in order to beat the reduced estimates; but this time around there appear to be a greater number doing so than usual. Furthermore, sales growth is slowing. The markets have been unusually tranquil in recent months. We suspect things are about to get much more volatile. Cautious investors might want to reduce exposure to equities at this time.