Market Drawdown Presents Buying Opportunities

Tuesday, April 17th, 2012

Mar­ket Draw­down Presents Buy­ing Opportunities

by Bob Doll, Chief Equity Strate­gist, Fun­da­men­tal Equi­ties, Black­Rock

April 16, 2012

Another Down­turn for Stocks

Once again, risk assets strug­gled last week with most investors blam­ing the down­turn on re-ignition of con­cerns over the Euro­pean debt cri­sis brought about by a dis­ap­point­ing debt auc­tion in Spain. For the week, the Dow Jones Indus­trial Aver­age fell 1.6% to 12,849, the S&P 500 Index declined 2.0% to 1,370 and the Nas­daq Com­pos­ite dropped 2.3% to 3,011.

Does His­tory Repeat? Or Just Rhyme?

Last year around this time, stocks were com­ing off an impres­sive first quar­ter, but were headed for trou­ble. Higher oil prices, the earth­quake in Japan and the brouhaha over the US debt ceil­ing all con­spired to cause a sharp turn­around in risk assets. So far this year, stocks have been fol­low­ing a some­what sim­i­lar pat­tern as early strength for equi­ties appears to be fad­ing some­what. So, it is worth ask­ing the ques­tion: Will 2012 look like 2011?

There are some aspects of the finan­cial and eco­nomic back­drop that do look sim­i­lar between the two years. In addi­tion to the flare ups in Europe regard­ing debt prob­lems, we are cur­rently in the midst of a period of ris­ing energy prices. Gaso­line prices in par­tic­u­lar are get­ting close to last year's peaks. We are also see­ing some renewed weak­ness in the eco­nomic data—the pace of jobs growth slowed in March and con­sumer con­fi­dence lev­els have been look­ing softer. Should gaso­line prices con­tinue to rise, it would be rea­son­able to fear that the spillover effect onto the rest of the econ­omy would worsen.

We believe it would be a mis­take, how­ever, to look too closely to 2011 as a model for what might hap­pen this year. For starters, cur­rent expec­ta­tions for both the econ­omy and the mar­kets are worse than they were at this point last year. In early 2011, investors were pric­ing in a bet­ter eco­nomic envi­ron­ment than what would ulti­mately come to pass. In con­trast, at this point we believe that mar­kets are already priced for rel­a­tively mod­est lev­els of growth, sug­gest­ing that there is less room for down­side dis­ap­point­ments. Addi­tion­ally, the fun­da­men­tal strength of the econ­omy is bet­ter now than it was one year ago. Notwith­stand­ing last month's data, the labor mar­ket is stronger than it was, hous­ing appears to be bot­tom­ing and US credit con­di­tions have been improv­ing. Finally, it is impor­tant to remem­ber that the recov­ery and mar­ket strength last year were, to some extent, derailed by the nat­ural dis­as­ters in Japan and by S&P's credit down­grade of the United States. While exter­nal shocks are always a risk, we can hope that these sorts of fac­tors will not be repeated.

Rea­sons for Optimism

Given the rel­a­tive dif­fer­ences between the econ­omy in 2011 and what it looks like today, we believe the US econ­omy will be more resilient than it was last year, pro­vid­ing some sup­port for US equities.

In addi­tion to the eco­nomic back­drop, we would also look to cor­po­rate earn­ings as a source of strength. Although we are fore­cast­ing that the pace of earn­ings growth will be slower this year than it has been in the recent past, so far the data has shown that cor­po­rate earn­ings have been doing just fine. Expec­ta­tions for the first quar­ter have been set rel­a­tively low, but so far over 80% of the com­pa­nies that have reported have sur­passed expec­ta­tions, which is a good sign. (In com­par­i­son, in the pre­vi­ous sev­eral quar­ters around 60% to 70% of com­pa­nies beat expectations.)

Putting all of this together, we would argue that we are unlikely to see the sort of sharp and severe pull­back in stock prices that we wit­nessed in 2011. We do, how­ever, expect to see higher lev­els of volatil­ity in the months ahead com­pared to what we expe­ri­enced in the first quar­ter and we would not be sur­prised to see the cur­rent pull­back take the mar­kets down to around the 1,350 or 1,300 level for the S&P 500. Such a pull­back would rep­re­sent a nor­mal cor­rec­tion occur­ring in the midst of a bull mar­ket. Fur­ther­more, we also believe that stocks should see a resump­tion of gains after the cur­rent period of weak­ness, which could cre­ate buy­ing oppor­tu­ni­ties for investors.

Tags: Bob Doll, Brouhaha, Confidence Levels, Consumer Confidence, Debt Ceiling, Debt Crisis, Debt Problems, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Drawdown, Earthquake In Japan, Economic Backdrop, Economic Data, Energy Prices, Flare Ups, Gasoline Prices, Nasdaq Composite, Rising Energy, Spillover Effect
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Does the Rally Still Have Legs? (Lee)

Thursday, April 12th, 2012

Does the Rally Still Have Legs?
And Things to Keep an Eye on in the Sec­ond Quarter

by Alfred Lee, CFA, CMT, DMS
Vice Pres­i­dent & Invest­ment Strate­gist, BMO ETFs & Global Struc­tured Invest­ments
BMO Asset Man­age­ment Inc.
alfred.lee[@]bmo.com
 
April 12, 2012

Recent Devel­op­ments:

• U.S. equi­ties reg­is­tered their best first quar­ter in 14 years. A def­i­nite sur­prise given the macro-economic and geo-political con­cerns com­ing into the new-year. The S&P 500 Com­pos­ite Index had a total return of 12.6% over the quar­ter, while the more blue-chip ori­ented Dow Jones Indus­trial Aver­age returned 8.8% and the more tech-heavy Nasdaq-100 Index returned an impres­sive 21.2% over the same period (all in local cur­rency terms). Over the last 16-months, we have rec­om­mended an over­weight to U.S. equi­ties and con­tinue to do so.
• Much of the rally was attrib­uted to the Euro­pean sov­er­eign debt con­cerns being placed on the back­burner as pol­icy mea­sures put in place by Euro­pean Cen­tral Bank (ECB), were suc­cess­ful in pre­vent­ing a liq­uid­ity cri­sis over the short-term. With decreased con­cerns of an imme­di­ate tail-risk event1, global investors shifted their focus to U.S. eco­nomic data, which con­tin­ued to gather momen­tum, espe­cially on the con­sumer con­fi­dence front. While the first quar­ter rally had sig­nif­i­cant breadth, with only the tele­com sec­tor trad­ing below its 200-day mov­ing aver­age, three sec­tors did much of the heavy lift­ing in dri­ving U.S. equi­ties higher. These sec­tors were finan­cials, tech­nol­ogy and con­sumer discretionary.
• On a fun­da­men­tal level, most global equity mar­kets still look attrac­tive from our point of view, with most major equity indices trad­ing below their 10-year aver­ages in price-to-earnings (P/E) ratios, leav­ing the oppor­tu­nity for fur­ther multiple-expansion if macro-economic risks remain subdued.
• We have been keep­ing a very close eye at the CBOE/S&P Implied Volatil­ity Index (VIX) over the last four months, try­ing to find indi­ca­tions of when and if volatil­ity will return. As men­tioned in one of our prior reports, the VIX had hit an intra­day low of 13.99 sev­eral weeks ago, which is abnor­mally low even in a sec­u­lar bull-market. Last week, the VIX did pop from 15.83 to 16.65 on an intra­day basis on the release of the U.S. Fed­eral Reserve Board min­utes. The VIX also moved even higher on news of a weak Span­ish debt auc­tion late last week and ear­lier this week, when the mar­ket reopened as a result of last Friday's non-farm pay­roll com­ing in well short of expec­ta­tions (Chart A). Though the VIX, which cur­rently sits at 18.51, is still below its long-term aver­age of 20.0, it has recently become more reac­tive to neg­a­tive head­lines, espe­cially com­pared to its behav­iour early in the first quar­ter. (Chart B). While not an imme­di­ate con­cern, whether equity mar­ket volatil­ity can remain com­pressed is some­thing to keep an eye on in the sec­ond quarter.
• Another key indi­ca­tor to watch for is the price of insur­ing against a default of Span­ish sov­er­eign debt, through the price of its credit default swaps (CDS). More specif­i­cally, if the spread between 1-year and 5-year CDS prices on Span­ish sov­er­eign debt begins to con­tract, then the mar­ket will likely shift its focus back to the Euro­pean debt cri­sis. (Chart C).

Invest­ment Idea:

• If we con­tinue to see an absence of macro-economic con­cerns, the upcom­ing U.S. earn­ings sea­son will likely set the tone for the sec­ond quar­ter. Investors should also keep in mind that the ECB's Long-term Refi­nanc­ing Oper­a­tion (LTRO) was designed to pre­vent an imme­di­ate liq­uid­ity cri­sis and not resolve long-term sol­vency issues. Given the strong rally in the first quar­ter, investors may want to con­sider a more defen­sive approach in their equity posi­tion­ing as the tech­ni­cal under­pin­nings of the mar­ket sug­gest a near-term con­sol­i­da­tion. Fur­ther­more, diver­si­fi­ca­tion and tac­ti­cal posi­tion­ing will remain the key to suc­cess in 2012.
• For equity expo­sure, we remain bull­ish on the U.S. and pre­fer non-cyclical areas and/or div­i­dend ori­ented areas in Canada. For fixed income and credit, we con­tinue to rec­om­mend over­weight­ing the short– and mid-part of the yield curve and pre­fer fed­eral and cor­po­rate bond expo­sure. U.S. high yield cor­po­rate bonds and emerg­ing mar­ket debt are also cur­rently offer­ing attrac­tive yield at very rea­son­able volatil­ity lev­els. Please refer to our most recent Monthly Strat­egy Report, "Silent Rivers Run Deep," which can be found on our home­page (www.bmo.com/etfs) for our cur­rent strate­gic and tac­ti­cal port­fo­lio posi­tion­ing using ETFs.

Chart A: Fre­quent Gaps in VIX Indi­cates Increas­ing Investor Nervousness

Source: Bloomberg, BMO Asset Man­age­ment Inc.

Chart B: Volatil­ity Look­ing Bot­tomed Out

Source: Stockcharts.com, BMO Asset Man­age­ment Inc.

Chart C: Could Spain be the Next Prob­lem Child in the Euro­pean Debt Crisis?

Source: BMO Asset Man­age­ment Inc.

*All prices as of mar­ket close April 9, 2012 unless oth­er­wise indicated.

¹ Tail-risk event: The risk of an out­lier or improb­a­ble event occur­ring. Sta­tis­ti­cally, the event is said to be three stan­dard devi­a­tions or more away from the mean, under a nor­mally dis­trib­uted curve.

Dis­claimer:
Infor­ma­tion, opin­ions and sta­tis­ti­cal data con­tained in this report were obtained or derived from sources deemed to be reli­able, but BMO Asset Man­age­ment Inc. does not rep­re­sent that any such infor­ma­tion, opin­ion or sta­tis­ti­cal data is accu­rate or com­plete and they should not be relied upon as such. Par­tic­u­lar invest­ments and/or trad­ing strate­gies should be eval­u­ated rel­a­tive to each individual's cir­cum­stances. Indi­vid­u­als should seek the advice of pro­fes­sion­als, as appro­pri­ate, regard­ing any par­tic­u­lar investment.

BMO ETFs are man­aged and admin­is­tered by BMO Asset Man­age­ment Inc, an invest­ment fund and port­fo­lio man­ager and sep­a­rate legal entity from the Bank of Mon­tréal. Com­mis­sions, man­age­ment fees and expenses all may be asso­ci­ated with invest­ments in exchange-traded funds. Please read the prospec­tus before invest­ing. The indi­cated rates of return are the his­tor­i­cal annual com­pound total returns includ­ing changes in prices and rein­vest­ment of all dis­tri­b­u­tions and do not take into account com­mis­sion charges or income taxes payable by any unit holder that would have reduced returns. The funds are not guar­an­teed, their value changes fre­quently and past per­for­mance may not be repeated.

Tags: Alfred Lee, Asset Management Inc, Cboe, Cmt, Consumer Confidence, Currency Terms, Dow Jones Industrial, Dow Jones Industrial Average, Economic Risks, Global Equity Markets, Global Investors, Indices Trading, Investment Strategist, Liquidity Crisis, Nasdaq 100 Index, Policy Measures, Quarter Rally, Structured Investments, Telecom Sector, Volatility Index Vix
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Presidential Election Year: Good for Stocks?

Wednesday, April 11th, 2012

by Colum­bia Management

With the elec­tion sea­son upon us, have you been won­der­ing what the stock mar­ket will do in a pres­i­den­tial elec­tion year? To be sure, no one has the answer, but look­ing at stock mar­ket per­for­mance dur­ing elec­tion years can pro­vide some help­ful insight.

Elec­tion year mar­ket cycles

His­tor­i­cal data sug­gest that the stock mar­ket and pres­i­den­tial elec­tion years fol­low pre­dictable pat­terns and tra­di­tion­ally result in bet­ter per­for­mance if the incum­bent party wins. A look at the his­tor­i­cal returns of the Dow Jones Indus­trial Aver­age (DJIA), the old­est equity mar­ket index that tracks 30 sig­nif­i­cant stocks, helps illus­trate this point.

Over the past 29 pres­i­den­tial elec­tion years since the Dow was first pub­lished in 1896, the index has deliv­ered an aver­age return of 7.18%, slightly off from the aver­age of 7.35% seen in a non-election year accord­ing to Dow Jones Indexes. Keep in mind that this data rep­re­sents past per­for­mance and there’s no guar­an­tee that pat­terns and results will con­tinue in the future.

The polit­i­cal landscape

Gen­er­ally, investors haven’t suf­fered big losses dur­ing elec­tion years. How­ever, the mar­ket did decline as recently as the last U.S. pres­i­den­tial elec­tion in 2008 dur­ing the finan­cial cri­sis and sub­se­quent bear mar­ket. While his­tor­i­cal analy­sis offers an inter­est­ing snap­shot, it’s impor­tant to remem­ber that each elec­tion year brings its own unique char­ac­ter­is­tics. Cur­rently, the eco­nomic out­look for 2012 holds a tremen­dous amount of uncer­tainty with many fac­tors up in the air rang­ing from cor­po­rate earn­ings to unem­ploy­ment. In addi­tion, the Euro­pean debt cri­sis con­tin­ues to weigh on global mar­kets and the effects will remain unknown while prob­lems go unre­solved. All of these fac­tors can poten­tially have a big­ger impact on the mar­ket and your port­fo­lio than the pres­i­den­tial elec­tion itself.

Pol­i­tics and your portfolio

The polit­i­cal envi­ron­ment and upcom­ing elec­tion can cer­tainly influ­ence the stock mar­ket, as ulti­mately, the pres­i­dent plays a cru­cial role in direct­ing the nation’s eco­nomic pol­icy, tax rates, bud­gets, etc. But mak­ing any finan­cial deci­sions based on elec­tion year mar­ket cycles is not a pru­dent invest­ment strategy.

Stick with your long-term asset allo­ca­tion strat­egy. Don’t let an elec­tion year influ­ence your finan­cial decision-making or your invest­ment goals.

Copy­right © Colum­bia Management

Tags: Bear Market, Columbia Management, Corporate Earnings, Debt Crisis, Dow Jones, Dow Jones Indexes, Dow Jones Industrial, Dow Jones Industrial Average, Economic Outlook, Election Season, Election Year, Historical Returns, Incumbent Party, Market Cycles, Market Index, Political Environment, Political Landscape, Predictable Patterns, Stock Market Performance, Upcoming Election
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Overcoming Objections to Equities (Doll)

Tuesday, March 27th, 2012

March 27, 2012

Ris­ing Bond Yields: A Concern?

Stocks sank last week, but the focus for investors has been on devel­op­ments in the bond mar­ket. Within equi­ties, the Dow Jones Indus­trial Aver­age lost 1.2% to 13,080 and the S&P 500 Index declined 0.5% to 1,397, while the Nas­daq Com­pos­ite man­aged to post a 0.4% gain to 3,067.

The yield on the bench­mark 10-year Trea­sury had been trad­ing at around the 2.0% level for a period of sev­eral months before mov­ing sharply higher in recent weeks. The yield rose to above 2.35% last week before set­tling at around 2.25% by the end of the week (bond prices move inversely to yields). The sell­off in bonds has caused some to won­der whether we are at the fore­front of a bond bear mar­ket. Addi­tion­ally, it raises ques­tions about what yield move­ments mean for the stock market.

First, as we indi­cated last week, we would not be sur­prised to see addi­tional upward moves in yields, at least in the short term. Eco­nomic news has been rel­a­tively good over the past few months and as long as that trend con­tin­ues, yields should retain an upward bias. This is not to say, how­ever, that a bond bear mar­ket is upon us. Typ­i­cally, bond bear mar­kets hap­pen dur­ing peri­ods of inter­est rate pol­icy tight­en­ing. While the Fed­eral Reserve has indi­cated that eco­nomic trends have been improv­ing, there is almost no evi­dence to sug­gest that the United States is enter­ing into an infla­tion­ary envi­ron­ment, and the cen­tral bank has main­tained its for­ward guid­ance that short-term inter­est rates are set to remain low for some time.

Addi­tion­ally, we do not believe that higher bond yields by them­selves will act as an imped­i­ment to the stock mar­ket. While it is true that any sharp and sud­den moves in yields have the poten­tial to unnerve investors, such effects are likely to be tem­po­rary. Over the longer term, we do not believe that mod­estly higher yields should be a source of con­cern for stocks, espe­cially since we believe that the rise in yields is com­ing as a result of improved eco­nomic conditions.

Eco­nomic Trends Remain Mar­ket Friendly

So what are some of the improved eco­nomic con­di­tions that have been push­ing yields higher? We have devoted quite a bit of space in recent weeks to dis­cussing the improve­ments in the labor mar­ket, and while jobs growth is cer­tainly among the most impor­tant eco­nomic indi­ca­tors, there are other fac­tors that have been show­ing signs of improve­ment as well.

Debt delever­ag­ing remains a source of con­cern, but we have been see­ing progress on that front. Indi­vid­u­als have been pay­ing down their debt over the past few years and house­hold debt lev­els have been falling notice­ably. Sim­i­larly, the hous­ing mar­ket has long been a sig­nif­i­cant source of weak­ness, but that sec­tor of the econ­omy does appear to be in the midst of a long-term bot­tom­ing process and may be enter­ing into some sort of recovery.

An addi­tional issue on the minds of many investors is the US fis­cal sit­u­a­tion. The end of this year marks sev­eral impor­tant dead­lines, includ­ing the sched­uled expi­ra­tion of the Bush-era tax cuts and tem­po­rary incen­tive mea­sures as well as the begin­ning of sched­uled spend­ing cuts. Fore­cast­ing exactly what will hap­pen on the fis­cal front is com­pli­cated due to this November's elec­tions, but our guess is that there is prob­a­bly a 50% chance (maybe mar­gin­ally higher) that some sort of tax com­pro­mise is enacted either later this year or early next year. The like­li­hood of a bipar­ti­san com­pro­mise on enti­tle­ment reform would be less likely.

Look­ing Past Down­side Mar­ket Risks

There are a num­ber of angles that could be taken if one wanted to empha­size poten­tial down­side mar­ket risks. In addi­tion to con­cerns over ris­ing yields, we could point to eco­nomic and debt prob­lems in Europe, con­cerns over growth in China, rel­a­tively mod­est lev­els of global eco­nomic growth, weak­en­ing trends in cor­po­rate prof­its and esca­lat­ing geopo­lit­i­cal ten­sion in the Mid­dle East.

While all of these con­cerns are real, we would argue that the cur­rent strong run for equi­ties has mostly been a result of macro risks reced­ing. We argued at the begin­ning of the year that as long as fun­da­men­tals were at least decent, that should be good enough for risk assets. We never believed that solid mar­ket per­for­mance would require a sig­nif­i­cant turn­around in global eco­nomic growth con­di­tions and a con­tin­ued envi­ron­ment of mod­estly pos­i­tive fun­da­men­tals should remain a market-friendly one.

In our view, stocks still remain attrac­tively val­ued and the mar­ket is still dis­count­ing a more neg­a­tive envi­ron­ment than what we expect. Cor­po­ra­tions remain flush with cash and are poised to engage in a num­ber of shareholder-friendly activ­i­ties. From an indi­vid­ual investor per­spec­tive, a large num­ber of peo­ple are still under­weight stocks and we have yet to see sig­nif­i­cant moves into equity mutual funds. As such, we believe we have not yet seen the end of the market's upward moves.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

You should con­sider the invest­ment objec­tives, risks, charges and expenses of any fund care­fully before invest­ing. The funds' prospec­tuses and, if avail­able, the sum­mary prospec­tuses con­tain this and other infor­ma­tion about the funds, and are avail­able, along with infor­ma­tion on other Black­Rock funds by call­ing 800–882-0052. The prospec­tus and, if avail­able, the sum­mary prospec­tuses should be read care­fully before investing.

The infor­ma­tion on this web site is intended for U.S. res­i­dents only. The infor­ma­tion pro­vided does not con­sti­tute a solic­i­ta­tion of an offer to buy, or an offer to sell secu­ri­ties in any juris­dic­tion to any per­son to whom it is not law­ful to make such an offer.

Sources: Black­Rock, Bank Credit Ana­lyst. This mate­r­ial is not intended to be relied upon as a fore­cast, research or invest­ment advice, and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any invest­ment strat­egy. The opin­ions expressed are as of March 26, 2012, and may change as sub­se­quent con­di­tions vary. The infor­ma­tion and opin­ions con­tained in this mate­r­ial are derived from pro­pri­etary and non­pro­pri­etary sources deemed by Black­Rock to be reli­able, are not nec­es­sar­ily all-inclusive and are not guar­an­teed as to accu­racy. Past per­for­mance is no guar­an­tee of future results. There is no guar­an­tee that any fore­casts made will come to pass. Reliance upon infor­ma­tion in this mate­r­ial is at the sole dis­cre­tion of the reader. Invest­ment involves risks. Inter­na­tional invest­ing involves addi­tional risks, includ­ing risks related to for­eign cur­rency, lim­ited liq­uid­ity, less gov­ern­ment reg­u­la­tion and the pos­si­bil­ity of sub­stan­tial volatil­ity due to adverse polit­i­cal, eco­nomic or other devel­op­ments. The two main risks related to fixed income invest­ing are inter­est rate risk and credit risk. Typ­i­cally, when inter­est rates rise, there is a cor­re­spond­ing decline in the mar­ket value of bonds. Credit risk refers to the pos­si­bil­ity that the issuer of the bond will not be able to make prin­ci­pal and inter­est pay­ments. Index per­for­mance is shown for illus­tra­tive pur­poses only. You can­not invest directly in an index.

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Tags: 10 Year Treasury, Bear Market, Bear Markets, Bond Market, Bond Prices, Bond Yields, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic News, Economic Trends, Impediment, Inflationary Environment, Interest Rate Policy, Nasdaq Composite, Overcoming Objections, Selloff, Sudden Moves, Term Interest, Upward Bias
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The Social Media Revolution (Charles Biderman)

Tuesday, March 27th, 2012

Social media I say will cre­ate a rev­o­lu­tion in how we gov­ern our­selves and even­tu­ally will start the next bull mar­ket, but not for at least three to five years. I define social media as the abil­ity for every­body on this planet to be in instant com­mu­ni­ca­tion with every­one else.

Sev­eral of you have com­mented that social media is as big a break­through as was the per­sonal com­puter in 1982. In my opin­ion social media is, but not until the cur­rent rep­re­sen­ta­tive govt for­mat, actu­ally falls apart and unfor­tu­nately that unlikely to hap­pen over the next few years.

Before explain­ing how social media will not only trans­form gov­ern­ment but lay the basis for a long term bull mar­ket, I think a pre amble into the his­tory of tech break­throughs that caused quar­ter cen­tury bull mar­kets in the past would be useful.

On my March 13 Daily Edge I said the Dow was des­tined to drop to around 6000 before bot­tom­ing. To arrive at that con­clu­sion I looked at the three most recent long term bull markets.

The first quar­ter cen­tury bull run that started in 1904, was due to break­throughs uti­liz­ing the abil­ity in mov­ing energy along a wire, called elec­tric­ity; and also cheaply pro­duc­ing gaso­line pow­ered automobiles.

Mar­ket par­tic­i­pants remem­ber 1929 bet­ter than 1904 because 1929 was when the then Dow Jones Indus­trial Aver­age topped out 12 times higher than the 1904 low. What hap­pened, every eco­nomic boom through­out his­tory sooner or later cre­ates the excesses that requires a bear mar­ket to elim­i­nate those excesses.

Some say it took a war to end the 13 year bear mar­ket in 1942. I say it was break­throughs in being being able to trans­mit energy through air­waves, called tele­vi­sion. Sec­ond was the break­through in small motors that cre­ated the mod­ern kitchen and house­hold appliances.

The bull run that started in 1942 was a 12 bag­ger that lasted through 1966 when the Dow first hit 1000. That bull mar­ket cre­ated excesses over a quar­ter cen­tury that it took the next 16 years to work through.

Then in 1982 stor­ing data on a sil­i­con chip at a price afford­able by all became pos­si­ble; and that led to the IBM PC and Apple II com­puter. Then came the inter­net and after that broad­band. 25 years later, by Octo­ber 2007 which was just four and a half years ago, the Dow at 14,000 was 18 times higher than the prior low. The excesses cre­ated dur­ing that 25 year run are still being worked off.

Here is where I pick up the thread from when I said it will take another five to eight years before Social Media starts the next long term bull market.

Rep­re­sen­ta­tive gov­ern­ment is the real head­wind we are fac­ing today. Rep­re­sen­ta­tive gov­ern­ment was cre­ated back in 1790 to solve the prob­lem of how we could gov­ern our­selves even before rail­roads, let alone tele­phones or the inter­net.. The United States was geo­graph­i­cally so large that there was no way every­body could com­mu­ni­cate with every­body else.

But now, social media puts all of us in real time com­mu­ni­ca­tion with every­one else; there­fore why do we need rep­re­sen­ta­tive gov­ern­ment to rep­re­sent us. We will even­tu­ally become in charge of our­selves. To me already exist­ing inside of social media is how we will gov­ern our­selves as a global community.

To sum­ma­rize, in 1904 we mas­tered elec­tric­ity and big engines which allowed for urban liv­ing. The mas­tery of the air­waves and small motors allowed for sub­ur­ban­iza­tion where you could live and work the sub­urbs just as effec­tively as in a city. Microchips and broad­band allows for exur­ban­iza­tion, which means any­one can work from any­where on the planet. And then social media will allow for every­one to become a respon­si­ble mem­ber of the global community.

Unfor­tu­nately, all of that will take sev­eral more years before it hap­pens. It took 13 and 17 years to work of the excesses of the past two 25 year bull mar­kets. That could mean it will be some­time in the next decade before the next bull run starts.

Charles Bider­man
Pres­i­dent & CEO TrimTabs Invest­ment Research
Port­fo­lio Man­ager, TrimTabs Float Shrink ETF (TTFS)

Tags: Automobiles, Bagger, Bear Market, Breakthrough, Bull Markets, Bull Run, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Boom, electricity, Excesses, First Quarter, Gasoline, Household Appliances, Market Participants, Media Revolution, Modern Kitchen, Personal Computer, Quarter Century
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Stocks: More Room to Run

Tuesday, March 20th, 2012

March 19, 2012

Stocks Rise to New Cycli­cal Highs

Equity mar­kets around the world con­tin­ued to advance last week, again thanks to con­tin­ued improve­ments in eco­nomic growth and an over­all sense that macro risks have been reced­ing. In the United States, stocks rose to new post-credit-crisis highs, with the Dow Jones Indus­trial Aver­age advanc­ing 2.4% to 13,232, the S&P 500 Index ris­ing 2.4% to 1,404 and the Nas­daq Com­pos­ite gain­ing 2.2% to end the week at 3,055.

At the same time, bond prices sank as yields moved sharply higher, with the yield on the 10-year Trea­sury jump­ing to close to 2.3% after trad­ing at around 2.0% for sev­eral months. Mean­while, oil and gaso­line prices rose again, gold prices fell and the US dol­lar gained some strength.

Eco­nomic Growth Shouldn't Be Derailed by Higher Oil Prices

As we have been say­ing for the past sev­eral weeks, it appears the US econ­omy is improv­ing to the point that it is enter­ing a self-sustaining cycle, helped in large part by advances in the labor mar­ket. We have recently been see­ing improve­ments in retail sales (with January's fig­ures up by 1.1%) and we are expect­ing that gains in employ­ment will trans­late into faster income appre­ci­a­tion and addi­tional con­sump­tion. One cau­tion­ary note is that job­less claims have stopped falling in recent weeks, which sug­gests that the future pace of jobs growth may be more sub­dued than we have seen in the past few months. It is pos­si­ble that the warm win­ter weather may have skewed jobs growth to the upside.

At the begin­ning of the year, two of the main risks to global eco­nomic growth appeared to be the ongo­ing Euro­pean credit cri­sis and the pos­si­bil­ity of a hard land­ing in China. While those risks seem to have receded since that point, a new one has emerged: ris­ing oil prices. Since Decem­ber, oil prices have advanced by roughly $20 per bar­rel. Our assess­ment is that roughly half of that comes from grow­ing opti­mism about the prospects for global growth as well as some sup­ply short­falls. The other half can be attrib­uted to the risk pre­mium com­ing from noise in the Mid­dle East and con­cerns about Iran. Quan­ti­fy­ing the exact impact of the "Iran pre­mium" is extremely dif­fi­cult since there is a near-limitless range of pos­si­ble devel­op­ments that could impact oil prices. The worst-case sce­nario would be for some sort of mil­i­tary con­flict that could dis­rupt the flow of oil through the Straits of Hor­muz, but at this point that seems unlikely.

In any case, it is impor­tant to remem­ber that the cur­rent run up in oil prices is still only about half of what occurred around this point last year, and at present we do not believe oil prices have risen to the point that they rep­re­sent a sig­nif­i­cant threat to the pace of global growth.

Trea­sury Yields Rise: What Does It Mean for Stocks?

An addi­tional devel­op­ment that drew atten­tion last week was the dra­matic rise in Trea­sury yields. The rise in yields came at the same time that the Fed­eral Reserve held its reg­u­lar inter­est rate pol­icy meet­ing. At that meet­ing, the Fed con­firmed that eco­nomic growth is clearly not weak­en­ing and may be strength­en­ing, and the cen­tral bankers retained their com­mit­ment to keep­ing rates low for the fore­see­able future. At this point, mar­kets appear to be sig­nal­ing that an addi­tional round of quan­ti­ta­tive eas­ing is not in the cards, which (along with improved growth) helps explain the advance in yields.

The sell­off in bonds does raise the ques­tion of how much fur­ther it can go before higher yields rep­re­sent a threat to equity mar­kets. In our view, cur­rent macro con­di­tions war­rant addi­tional increases in yields. We believe a fair value for the 10-year Trea­sury is cur­rently around 2.5% or higher. It is impor­tant to remem­ber that before last week, we saw sev­eral months of improved eco­nomic data with­out a cor­re­spond­ing rise in yields, so in many respects, last week's moves rep­re­sent a sort of "catch-up" effect for the bond mar­ket. We believe the cur­rent trend of ris­ing yields sig­nals an acknowl­edge­ment of grow­ing opti­mism around the econ­omy and, as such, is a pos­i­tive for stocks.

Stocks Likely to Grind Higher From Here

While it is impor­tant to remain cog­nizant of the risks fac­ing the mar­kets, our over­all view toward stocks remains con­struc­tive. Since the cur­rent rally began last autumn, we have seen some mar­ket pull­backs, but they have been brief and shal­low, likely because many investors remain under­weight equi­ties and have been using pull­backs to buy on price dips. Now that bond prices are falling, we believe investors as a whole will finally begin to move out of Trea­suries and into stocks. As such, as long as the macro fun­da­men­tals remain rea­son­ably good, we believe equi­ties should grind higher from here.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

You should con­sider the invest­ment objec­tives, risks, charges and expenses of any fund care­fully before invest­ing. The funds' prospec­tuses and, if avail­able, the sum­mary prospec­tuses con­tain this and other infor­ma­tion about the funds, and are avail­able, along with infor­ma­tion on other Black­Rock funds by call­ing 800–882-0052. The prospec­tus and, if avail­able, the sum­mary prospec­tuses should be read care­fully before investing.

The infor­ma­tion on this web site is intended for U.S. res­i­dents only. The infor­ma­tion pro­vided does not con­sti­tute a solic­i­ta­tion of an offer to buy, or an offer to sell secu­ri­ties in any juris­dic­tion to any per­son to whom it is not law­ful to make such an offer.

Sources: Black­Rock, Bank Credit Ana­lyst. This mate­r­ial is not intended to be relied upon as a fore­cast, research or invest­ment advice, and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any invest­ment strat­egy. The opin­ions expressed are as of March 19, 2012, and may change as sub­se­quent con­di­tions vary. The infor­ma­tion and opin­ions con­tained in this mate­r­ial are derived from pro­pri­etary and non­pro­pri­etary sources deemed by Black­Rock to be reli­able, are not nec­es­sar­ily all-inclusive and are not guar­an­teed as to accu­racy. Past per­for­mance is no guar­an­tee of future results. There is no guar­an­tee that any fore­casts made will come to pass. Reliance upon infor­ma­tion in this mate­r­ial is at the sole dis­cre­tion of the reader. Invest­ment involves risks. Inter­na­tional invest­ing involves addi­tional risks, includ­ing risks related to for­eign cur­rency, lim­ited liq­uid­ity, less gov­ern­ment reg­u­la­tion and the pos­si­bil­ity of sub­stan­tial volatil­ity due to adverse polit­i­cal, eco­nomic or other devel­op­ments. The two main risks related to fixed income invest­ing are inter­est rate risk and credit risk. Typ­i­cally, when inter­est rates rise, there is a cor­re­spond­ing decline in the mar­ket value of bonds. Credit risk refers to the pos­si­bil­ity that the issuer of the bond will not be able to make prin­ci­pal and inter­est pay­ments. Index per­for­mance is shown for illus­tra­tive pur­poses only. You can­not invest directly in an index.

Black­Rock is a reg­is­tered trade­mark of Black­Rock, Inc. All other trade­marks are the prop­erty of their respec­tive owners.

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Tags: Bond Prices, Cautionary Note, Credit Crisis, Cyclical Highs, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Gasoline Prices, Global Economic Growth, Global Growth, Gold Prices, Jobless Claims, March 19, Nasdaq Composite, Optimism, Prospects, Retail Sales, Rising Oil Prices, Supply Shortfalls, Warm Winter Weather
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Black: Swans and Crude (Sonders)

Friday, March 2nd, 2012

Black: Swans and Crude

by Liz Ann Son­ders
Seni­or Vice Pres­id­ent, Chief In­vest­ment Strate­gist, Charles Schwab & Co., Inc.

Key Points

• Eco­nom­ic/fin­an­cial "black swans" are gen­er­ally more dire than geo­pol­it­ic­al ones.
• The Mid­dle East is today's hot­bed for po­ten­tial geo­pol­it­ic­al crises.
• Oil is tak­ing the brunt of the pres­sure, but it's not né­ces­sar­ily the death knell for stocks or the eco­nom­ic recovery.

You can glance at any long-term chart of the stock mar­ket and point to spe­cif­ic events that pre­cip­it­ated many of the big ups and downs:

1. Ja­pan bombs Pearl Har­bor, Decem­ber 1941
2. Ja­pan sur­renders in WWII, Au­gust 1945
3. Cuban Mis­sile Cri­sis be­gins, Oc­to­ber 1962
4. Pres­id­ent Kennedy as­sas­sin­ated, Novem­ber 1963
5. Pres­id­ent Re­agan shot, March 1981
6. Cher­nobyl nuc­le­ar melt­down, April 1986
7. Op­er­a­tion Desert Storm be­gins, Janu­ary 1991
8. Septem­ber 11, 2001
9. Leh­man Broth­ers col­lapses, Septem­ber 2008
10. Stand­ard & Poor's down­grades US debt, Au­gust 2011

Stocks and Black Swans

Source: Fact­Set, as of Janu­ary 31, 2012.

These ex­amples rep­res­ent a mix of geo­pol­it­ic­al and eco­nom­ic/fin­an­cial "black swan" events or crises—ones that are both sur­pris­ing and have a ma­jor im­pact. Eco­nom­ic/fin­an­cial crises tend to have more severe and longer-last­ing im­plic­a­tions for both mar­kets and the eco­nomy. Half of the top 10 single-worst days in his­tory for the Dow Jones In­dus­tri­al Av­er­age oc­curred dur­ing the 2008 fin­an­cial crises. On the oth­er hand, geo­pol­it­ic­al crises tend to have a less­er and short­er-dur­a­tion impact.

Geo­pol­it­ic­al crises

Black swans of the geo­pol­it­ic­al vari­ety oc­cur more fre­quently than eco­nom­ic/fin­an­cial crises, with a less-severe im­pact gen­er­ally. On the first trad­ing day after the Cuban Mis­sile Cri­sis, the S&P 500® in­dex sank by nearly 4%, but only six months later the mar­ket was up nearly 25%. Over the one-month peri­od after Ir­aq in­vaded Kuwait (the move that even­tu­ally led to the first Gulf War), the S&P 500 fell nearly 10%, but one year later it was up more than 10%.

At times, the re­bounds have been slower. After the bomb­ing of Pearl Har­bor, the S&P 500 had a quick and severe drop and was still lower six months later. But by the time Ja­pan sur­rendered al­most four years later, the mar­ket had re­boun­ded by nearly 60%. Fast-for­ward to the 9/11 ter­ror­ist at­tacks. In­deed, the stock mar­ket was severely shaken between Septem­ber 10 and Septem­ber 21, 2001, with a drop in the S&P 500 of nearly 15%. But just two months later, the mar­ket had re­gained its pre-9/11 level.

Mid­dle East hotbed

Today we're reg­u­larly faced with height­ened event risk due to polit­ic­al in­stabil­ity, not­ably in the Mid­dle East. Last year, Peter Brookes, a seni­or fel­low for na­tion­al se­cur­ity af­fairs with the Her­it­age Found­a­tion, re­leased an over­view of the glob­al geo­pol­it­ic­al land­scape. He lis­ted the fol­low­ing as po­ten­tial causes of black swan events:

• Ir­an's nuc­le­ar/mis­sile pro­grams, sup­port for ter­ror­ist groups, and in­volve­ment in Le­ban­on, [Syr­ia], Ir­aq, Afgh­anistan and Mid­dle East revolts
• North Korea's nuc­le­ar/mis­sile pro­grams, nuc­le­ar pro­lif­er­a­tion, on­go­ing lead­er­ship trans­ition and acts of provocation
• Over­all ter­ror­ist threats in­clud­ing Al Qaeda core, Al Qaeda in the Ar­a­bi­an Pen­in­sula and home­grown ter­ror and plots
• Venezuela's Bolivari­an Re­volu­tion, nuc­le­ar as­pir­a­tions, ties with Ir­an and ties with FARC
• Pak­istan and Afgh­anistan: Al Qaeda, Tal­iban and Haqqani net­works, se­cur­ity of nuc­le­ar ar­sen­al and Pak­istani ten­sions with India
• Rus­sia's grand am­bi­tions, en­ergy prowess and Arc­tic mil­it­ary modernization
• China's ris­ing power, eco­nom­ic prowess, polit­ic­al clout and mil­it­ary buildup

Oil prices on the rise…

Most of today's great­est geo­pol­it­ic­al risks lie with­in the Mid­dle East and by ex­ten­sion have an out­sized im­pact on oil prices. There's no ques­tion oil prices have a mac­roe­co­nom­ic im­pact, but there's on­go­ing de­bate as to mag­nitude and trans­mis­sion. A 2011 re­port by Ras­mussen and Roit­man showed that the cor­rel­a­tion between oil prices and gross do­mest­ic prod­uct is ac­tu­ally pos­it­ive in more than 80% of coun­tries; only in the United States and Ja­pan is it neg­at­ive. One of the con­trib­ut­ing fac­tors to this pat­tern is that in 90% of coun­tries stud­ied, ex­ports tend to move in the same dir­ec­tion as oil prices.

In fact, much of the in­crease in en­ergy prices since their Oc­to­ber 2011 lows can be ex­plained by the re­sur­gence in the glob­al eco­nomy; to a less­er de­gree the in­crease de­rives from fear about sup­ply dis­rup­tions due to ten­sions in Ir­an and Syr­ia. And since late 2008, when the Fed­er­al Re­serve moved the fed funds rate to 0–0.25%, the stock mar­ket (a lead­ing eco­nom­ic in­dic­at­or) and oil prices have been pos­it­ively cor­rel­ated, as you can see below.

Stocks and Oil Highly Correlated

Source: Fact­Set, as of Feb­ru­ary 24, 2012. Dot­ted line rep­res­ents date when Fed­er­al Re­serve moved tar­get rate to 0–0.25%.

…but not a re­cov­ery deal-breaker

At some point, a con­tin­ued surge would be a risk to the pos­it­ive mar­ket and eco­nom­ic out­look I've had for some time, but at this stage it's not a deal-break­er for the re­cov­ery. For one thing, in the past cen­tury, the real price of gas­ol­ine has spent al­most all its time between $2 and $4 (in cur­rent dol­lars), and we're with­in that range today.

Yes, oil price spikes pre­ceded the 1973, 1980, 1991, 2001 and 2007 re­ces­sions, but the spike in early 2011 did not lead to one, and I be­lieve the cur­rent spike will also be an ex­cep­tion. US con­sumers are now much bet­ter po­si­tioned to weath­er high­er en­ergy prices, with well-im­proved job growth and con­sumer con­fid­ence, cred­it growth pick­ing up, ag­gress­ive Fed stim­u­lus and re­cord-low nat­ur­al gas prices. Most im­port­ant is the fact that en­ergy price in­fla­tion last year was largely spurred by the sec­ond round of quant­it­at­ive eas­ing by the Fed (QE2), where­as today's dri­ver is glob­al growth.

As well, in the United States, spend­ing on en­ergy over­all as a per­cent­age of dis­pos­able per­son­al in­come is less than 6% cur­rently, down from the 8% of the early 1980s.

En­ergy Ex­pendit­ures as Per­cent of Income

Source: Fact­Set, as of Decem­ber 31, 2011.

We've also wit­nessed in the re­cent past how quickly spec­u­lat­ive ex­cess can drain out of the price of oil, es­pe­cially when trades be­come "one-sided." Ac­cord­ing to the lat­est Com­mit­ments of Traders re­port, as of Feb­ru­ary 21, large spec­u­lat­ors held a re­cord net long po­s­i­tion in gas­ol­ine fu­tures con­tracts and the high­est net long po­s­i­tion in light sweet crude oil fu­tures con­tracts since last May.

The best cure for high prices is high prices

High prices make it prof­it­able to bring in­to pro­duc­tion more costly re­sources glob­ally and dis­trib­ute pro­duc­tion more broadly, while also win­now­ing de­mand. Wit­ness the suc­cess of US oil sands, shale hy­dro­car­bons and bio-fuels. The United States and/or the In­ter­na­tion­al En­ergy Agency may also tap the Stra­tegic Pet­ro­leum Re­serve if prices con­tin­ue their as­cent, which will help drive down prices.

Ul­ti­mately we don't know if there's a tip­ping point for oil and what might drive the price to that level. And back to where I star­ted this re­port, shocks of the geo­pol­it­ic­al vari­ety tend not to have long-last­ing im­plic­a­tions for either the mar­ket or the eco­nomy. In­vestors un­doubtedly feel last­ing anxi­ety about the most re­cent ma­jor set of crises, and I'm of­ten asked to opine on the likely next cri­sis. It cer­tainly could be cen­tered in the Mid­dle East and cause an­oth­er spike in oil. But we would cau­tion in­vestors not to get too cute about port­fo­lio po­s­i­tion­ing around such a possibility.

If you're look­ing for a black swan sur­viv­al kit, it could in­clude many of the tried-and-true in­gredi­ents that gen­er­ally serve in­vestors well over time:

• Be di­ver­si­fied, es­pe­cially now that as­set-class cor­rel­a­tions have be­gun to re­cede to­ward nor­mal levels.
• If you like to be op­por­tun­ist­ic, keep some pow­der dry in highly li­quid in­vest­ments for both cash needs and some flex­ib­il­ity to take ad­vant­age of volatility.
• Con­sider more fre­quent re­bal­an­cing if volat­il­ity re­as­serts it­self, al­low­ing you to sell in­to strength and buy in­to weakness.
• Fo­cus on your long-term goals and not short-term mar­ket dips so you're less likely to fall prey to pan­ic sell­ing (or buying).
• Re­view your port­fo­lio and as­set al­loc­a­tion to con­firm your risk tol­er­ance matches your fin­an­cial goals.

Or, you can try to fore­cast the next black swan event and try to po­s­i­tion ac­cord­ingly. We wouldn't ad­vise that.

Im­port­ant Disclosures

Di­ver­si­fic­a­tion strate­gies do not as­sure a profit and do not pro­tect against losses in de­clin­ing markets.

The in­form­a­tion pro­vided here is for gen­er­al in­form­a­tion­al pur­poses only and should not be con­sidered an in­di­vidu­al­ized re­com­mend­a­tion or per­son­al­ized in­vest­ment ad­vice. The in­vest­ment strate­gies men­tioned here may not be suit­able for every­one. Each in­vestor needs to re­view an in­vest­ment strat­egy for his or her own par­tic­u­lar situ­ation be­fore mak­ing any in­vest­ment decision.

All ex­pres­sions of opin­ion are sub­ject to change with­out no­tice in re­ac­tion to shift­ing mar­ket con­di­tions. Data con­tained herein from third party pro­viders is ob­tained from what are con­sidered re­li­able sources. How­ever, its ac­cur­acy, com­plete­ness or re­li­ab­il­ity can­not be guaranteed.

Ex­amples pro­vided are for il­lus­trat­ive pur­poses only and not in­ten­ded to be re­flect­ive of res­ults you can ex­pect to achieve.

Tags: 4 President, Agan, Black Swan, Black Swans, Charles Schwab, Chernobyl Nuclear Meltdown, Chief Investment Strategist, Cial, Cuban Missile Crisis, Curred, Death Knell, Decem Ber, Ders, Desert Storm, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Ery, Financial Crises, First Gulf War, Gins, Har, Hot Bed, Japan Surrenders, Jor, Kets, Lapses, Lehman Brothers, Liz Ann, November 1963, Nuc, Operation Desert Storm, President Reagan, Septem, September 11 2001, Shy Man, Sile, Ups And Downs, Vest Ment, Vice Pres
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Equity Gains Likely to Continue, But at a Slower Pace (Doll)

Wednesday, February 29th, 2012

by Bob Doll, Chief Equity Strate­gist, Black­Rock

Mar­kets Climb to 12-Month Highs

Stock prices rose again last week, although at a more labored pace than has been the case for most of 2012. For the week, the Dow Jones Indus­trial Aver­age rose 0.3% to 12,982 (and did move above the psy­cho­log­i­cally impor­tant 13,000 level a few times), the S&P 500 Index advanced 0.3% to 1,365 and the Nas­daq Com­pos­ite climbed 0.4% to 2,963. With these gains, mar­kets have reached new 12-month highs and have ral­lied close to 25% from their low point of Octo­ber 2011.

A Quiet Week for the Econ­omy, But Good News Nonetheless

It was a rel­a­tively sub­dued week in terms of eco­nomic data, with the high­light per­haps being the weekly ini­tial unem­ploy­ment claims, which were unchanged (a stronger-than-expected result). This data helps con­firm that improve­ments in the labor mar­ket have been gain­ing trac­tion. This Fri­day we will see the Feb­ru­ary employ­ment report and most econ­o­mists are call­ing for a new jobs num­ber of 200,000 or higher with a flat or per­haps slightly lower unem­ploy­ment rate.

One area of the econ­omy that has long been trou­bled is the res­i­den­tial hous­ing sec­tor, but this area of the econ­omy is begin­ning to show some lim­ited signs of improve­ment. New home sales, mort­gage appli­ca­tions and home build­ing lev­els are all show­ing some gains and the large inven­tory of unsold homes is begin­ning to clear. We believe that the hous­ing mar­ket remains in the midst of a multi-year bot­tom­ing process that began in 2009 and we expect that res­i­den­tial con­struc­tion will be a mod­est pos­i­tive con­trib­u­tor to growth in 2012, as it was last year.

From a global per­spec­tive, the world econ­omy has expe­ri­enced a decent start to 2012, but the ongo­ing recov­ery does have some risks and ques­tion marks. Fis­cal pol­icy remains tight in some quar­ters of the globe and there is still room for eas­ing (as we saw with the Bank of Japan's recent deci­sion to enact some new quan­ti­ta­tive eas­ing mea­sures). Addi­tion­ally, ongo­ing debt delever­ag­ing remains a con­cern, as does the recent move higher in oil prices. Of course, we would also add the ongo­ing Euro­pean debt cri­sis to the list of issues that could poten­tially dis­rupt the global economy's pos­i­tive momentum.

Climb­ing Oil Prices Spark Concerns

Sev­eral of the risks that we have been dis­cussing for some time now have ebbed over the last sev­eral months, such as the removal of the uncer­tainty over the US pay­roll tax cut exten­sion, some addi­tional clar­ity over the Greek debt restruc­tur­ing and China's pol­icy eas­ing and likely eco­nomic soft land­ing. An addi­tional risk, how­ever, has sur­faced in the form of higher oil prices. The oil price spike from early 2011 is fresh in investors' minds and the recent advance in oil prices has some won­der­ing whether his­tory will repeat itself. Last year's price spike came as a result of social and polit­i­cal unrest through­out the Mid­dle East and in North Africa and this year esca­lat­ing geopo­lit­i­cal ten­sions with Iran has been the pri­mary culprit.

While higher oil prices are unam­bigu­ously a neg­a­tive for global eco­nomic growth and have the poten­tial to act as a drag on equity mar­kets, the scale of the recent increase has still been rel­a­tively mod­est. To put it in con­text, oil prices have advanced by around 20% over the last few months. In con­trast, oil jumped 50% between Sep­tem­ber 2010 and March 2011. While higher oil prices bear watch­ing, we would not con­sider oil a sig­nif­i­cant risk unless the price increase grows more severe.

Fur­ther Gains for Stocks?

The impres­sive advance we have seen in stock prices over the past sev­eral months has largely come about from a string of pos­i­tive eco­nomic news and the absence of the emer­gence of addi­tional down­side risk. In other words, a few months ago, stocks were priced for a weaker macro envi­ron­ment than the one that has come to pass. So what will it take for stocks to con­tinue to move higher? We believe we would need to see some broader improve­ments in eco­nomic data and/or fur­ther polit­i­cal progress in terms of reduc­ing macro uncertainty.

Regard­ing that sec­ond point, last week's announced Greek debt restruc­tur­ing deal should help reduce some uncer­tainty, assum­ing the mea­sures are suc­cess­fully imple­mented. There was lit­tle mar­ket response to the announced deal as it gen­er­ally met investors' expec­ta­tions and there is still more work to be done on this front. We expect the sit­u­a­tion in Greece to worsen from both a fis­cal and social per­spec­tive, but we also believe that the debt restruc­tur­ing will move forward.

Equity risk pre­mi­ums have fallen in recent months as mar­kets have ral­lied and we do believe that there is room for fur­ther advances. At the same time, how­ever, we expect the pace of price appre­ci­a­tion to become slower and more uneven. As we have been say­ing for the last cou­ple of weeks, we would not be sur­prised to see some sort of pull­back or cor­rec­tion in the near term, but we also believe that stock prices will end the year higher than where they are today.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

You should con­sider the invest­ment objec­tives, risks, charges and expenses of any fund care­fully before invest­ing. The funds' prospec­tuses and, if avail­able, the sum­mary prospec­tuses con­tain this and other infor­ma­tion about the funds, and are avail­able, along with infor­ma­tion on other Black­Rock funds by call­ing 800–882-0052. The prospec­tus and, if avail­able, the sum­mary prospec­tuses should be read care­fully before investing.

The infor­ma­tion on this web site is intended for U.S. res­i­dents only. The infor­ma­tion pro­vided does not con­sti­tute a solic­i­ta­tion of an offer to buy, or an offer to sell secu­ri­ties in any juris­dic­tion to any per­son to whom it is not law­ful to make such an offer.

Sources: Black­Rock, Bank Credit Ana­lyst. This mate­r­ial is not intended to be relied upon as a fore­cast, research or invest­ment advice, and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any invest­ment strat­egy. The opin­ions expressed are as of Feb­ru­ary 27, 2012, and may change as sub­se­quent con­di­tions vary. The infor­ma­tion and opin­ions con­tained in this mate­r­ial are derived from pro­pri­etary and non­pro­pri­etary sources deemed by Black­Rock to be reli­able, are not nec­es­sar­ily all-inclusive and are not guar­an­teed as to accu­racy. Past per­for­mance is no guar­an­tee of future results. There is no guar­an­tee that any fore­casts made will come to pass. Reliance upon infor­ma­tion in this mate­r­ial is at the sole dis­cre­tion of the reader. Invest­ment involves risks. Inter­na­tional invest­ing involves addi­tional risks, includ­ing risks related to for­eign cur­rency, lim­ited liq­uid­ity, less gov­ern­ment reg­u­la­tion and the pos­si­bil­ity of sub­stan­tial volatil­ity due to adverse polit­i­cal, eco­nomic or other devel­op­ments. The two main risks related to fixed income invest­ing are inter­est rate risk and credit risk. Typ­i­cally, when inter­est rates rise, there is a cor­re­spond­ing decline in the mar­ket value of bonds. Credit risk refers to the pos­si­bil­ity that the issuer of the bond will not be able to make prin­ci­pal and inter­est pay­ments. Index per­for­mance is shown for illus­tra­tive pur­poses only. You can­not invest directly in an index.

Copy­right © Black­Rock

Tags: Bank Of Japan, Bob Doll, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Employment Report, Fiscal Policy, Global Perspective, Housing Market, Initial Unemployment Claims, Mortgage Applications, Nasdaq Composite, New Jobs, Question Marks, Residential Construction, Stock Prices, Strategist, Unemployment Rate, World Economy
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Dow Jones – Hi or Lo?

Wednesday, February 29th, 2012

This Week: SPDR DJIA TRUST Ticker: DIA / NYSE

The Dow Jones Indus­trial Aver­age just touched the 13,000 level this week after nearly four years. Where to from here? Well, the moun­tain is high. The val­ley is low. We think it will climb, but not with­out woe.

The biggest woe is Greece. The indebted nation agreed a $170 bil­lion res­cue plan, but will only get the money if its gov­ern­ment fires work­ers, slashes pen­sions and wages, and raises taxes, all by month’s end. Greeks are riot­ing and oppo­si­tion lead­ers are threat­en­ing reversal.

Pri­vate hold­ers of Greek bonds are being squeezed too: for every 2 bonds they hold, they’ll be offered a new one that is longer-dated and lower-yielding. If enough hold­ers refuse the offer, Greece could default. There will be more on this by March. Until then, global equity mar­kets will remain nervous.

A Euro­pean reces­sion would be woe #2. For all their sanc­ti­mo­nious lec­tur­ing, France and espe­cially Ger­many prof­ited from exports to their spend­thrift, Euro-neighbors. But two years of fis­cal clam­p­down have hurt eco­nomic growth. Now fur­ther aus­ter­ity threat­ens to push it into recession.

The aus­ter­ity hurt Chi­nese exports. And growth within China was damp­ened by cen­tral bank efforts to tame infla­tion and spec­u­la­tion, espe­cially in hous­ing (noth­ing we’d know about in Toronto). Slower growth in China will have a knock-on effect, espe­cially on us hew­ers and dig­gers, but more broadly too.

Short-term tech­ni­cals are also bear­ish. After climb­ing for five straight months, the Dow is show­ing signs of fatigue. Our pro­pri­etary indi­ca­tor sug­gests a pull-back of about 5% in the next few weeks.  Also, since the start of Feb­ru­ary, the DJ Indus­tri­als has been climb­ing alone. The DJ Trans­porta­tion Index, more closely tied to eco­nomic fun­da­men­tals, has lagged by 5.6%. Not a good sign.

This list of woes sug­gests a short-term cor­rec­tion for mar­kets. Let’s get to the pos­i­tives. What will take us higher on the Dow after the cor­rec­tion? Three things: stocks are cheap, bond yields are thin and the econ­omy is improving.

Qual­ity stocks are cheap by sev­eral mea­sures. The Dow is trad­ing at 13.3 times its earn­ings, near the bot­tom of its long-term range, as prices have lagged earn­ings growth. The Dow’s earnings-per-share is up 134% from the March 2009 lows, while the Dow’s price is up 70%. True, earn­ings growth has plateaued in the last two quar­ters, but that still leaves a large gap.

In the same period, cor­po­ra­tions have dras­ti­cally cut debt lev­els, bring­ing it to par with equity and the low­est level in over a decade. Lit­tle debt, lots of profit…it’s no won­der div­i­dend yields have risen to 2.5% and are expected to rise fur­ther. Com­pare that to a yield of 3.2% on a sim­i­lar qual­ity 10-year bond.

From the tech­ni­cals, look­ing past the next few weeks and out to the next few quar­ters, the view is pos­i­tive too. Though not quite there yet, our pro­pri­etary indi­ca­tor is near a Buy lev­els not seen since March 2009. A cor­rec­tion in the short term would put it firmly in the Buy camp. And while the recent new year rally has been on rel­a­tively light vol­umes, we expect low val­u­a­tions and good div­i­dend yields will lure investors back in.

Finally, the econ­omy: It’s improv­ing. Man­u­fac­tur­ing and ser­vices have con­tin­ued to gain. Unem­ploy­ment is down, with ini­tial job­less claims falling to the low­est level in four years. Con­sump­tion is ris­ing again. Hous­ing prices have bot­tomed.  The yield spread – the dif­fer­ence between long and short term inter­est rates – remains healthy at about +1.9 per­cent­age points. Over many decades, this spread has proved an excel­lent reces­sion fore­caster, best­ing all econ­o­mists. When it turns neg­a­tive – that is, when the rate on a 3 month loan is higher than on a 10 year – watch out.

There are a cou­ple of Exchange-Traded Funds to con­sider for the Dow Jones Indus­trial Aver­age. The first is the SPDR DJIA ETF (DIA/NYSE), traded in U.S. dol­lars in New York. The sec­ond is the BMO DJIA Hedged to C$ ETF (ZDJ/TSX). Both are plain vanilla and hold all the 30 shares of the Index. For Cana­dian investors, with ZDJ you avoid a cur­rency trade and you’re returns will mimic those received by a U.S. investor, regard­less of how the U.S. dol­lar does against the Loonie.

The archerETF Global Tac­ti­cal Portfolio

archerETF offers Global Tac­ti­cal Port­fo­lio Management.

Our out­look is Global: we invest across coun­tries, sec­tors, com­modi­ties and other asset classes to improve returns. Our man­age­ment is Tac­ti­cal: we strive to select the right oppor­tu­ni­ties at the right times in response to chang­ing mar­ket con­di­tions to man­age and min­i­mize port­fo­lio risk.

Please call us at TF 1–866-469‑7990 for more information.

Tags: Austerity, Bond Yields, Canadian, Canadian Market, Chinese Exports, Clampdown, Dj Industrials, DJIA, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Fundamentals, Global Equity Markets, Greek Bonds, Nyse, Opposition Leaders, Private Holders, Signs Of Fatigue, Slashes, Spendthrift, Tame Inflation, Technicals, Transportation Index
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Hedge Fund Managers Thrilled to Death?

Thursday, February 9th, 2012

Mia Lamar of the WSJ reports, Hedge Funds Added Small Gains in Jan­u­ary:

Hedge-fund per­for­mance perked up in Jan­u­ary, although con­tin­ued to lag the major stock indexes, accord­ing to indus­try adviser Hen­nessee Group.

Hennessee's hedge fund index rose 2.5% for the month of Jan­u­ary, less than the Stan­dard & Poor's 500 and Dow Jones Indus­trial Aver­age, which posted gains of 4.4% and 3.4%, respec­tively. The Nas­daq Com­pos­ite Index climbed 8% last month.

Still, the advance­ment in Jan­u­ary comes after a dis­mal 2011 for the hedge indus­try, which has been bat­tered by swiftly chang­ing sen­ti­ment on Europe's sovereign-debt cri­sis and other macro con­cerns around the world. Hennessee's hedge fund Index fell 4.27% in 2011, mark­ing the worst year for hedge funds since 2008.

"It is encour­ag­ing to see a respectable gain even with man­agers con­ser­v­a­tively posi­tioned," said Lee Hen­nessee, man­ag­ing prin­ci­pal of Hen­nessee Group.

Equity long/short strate­gies were among the best-performing strate­gies last month, as the Hen­nessee Long/Short Equity Index advanced 2.47%. Stocks pushed higher in Jan­u­ary, led by tech­nol­ogy and finan­cials, as U.S. eco­nomic data con­tin­ued to show signs of improvement.

It's hardly sur­pris­ing to see Equity long/short funds posted the best returns as stock mar­kets rock­eted up in Jan­u­ary. In other words, once more, it's all about beta stupid!

There is how­ever more good news for hed­gies. Har­riet Agnew of Finan­cial news reports, Long/short hedge funds to gain from cor­re­la­tion decline:

Stock cor­re­la­tion within sec­tors has dropped sig­nif­i­cantly this year as mar­kets have ral­lied, pro­vid­ing a boon for long/short equi­ties man­agers who buy and sell com­pa­nies based on fun­da­men­tal analy­sis of their indi­vid­ual mer­its.

Giles Wor­thing­ton, a port­fo­lio man­ager at River­Crest Cap­i­tal, said: "Cor­re­la­tions are falling with quite a pow­er­ful force and diver­sity in stock returns is ris­ing. This is good news for stock-pickers as once again investors are con­sid­er­ing the dif­fer­ence between a high-quality and a low-quality company.”

The attached chart, pub­lished yes­ter­day on Busi­ness Insider, illus­trates the 21-day stock cor­re­la­tion within the Rus­sell 1000 Index. It shows that cor­re­la­tion has fallen from a peak of about 0.75 in Sep­tem­ber to about 0.2.

Wor­thing­ton said that the key short-term dri­ver of this has been the Euro­pean Bank's three-year pro­vi­sion of liq­uid­ity through its Long Term Refi­nance Oper­a­tion that was announced in December.

He said: "The LTRO has sig­nif­i­cantly reduced the tail risk in the mar­kets. The huge risk of finan­cial implo­sion has gone away for the time being. Last year the mar­kets were dic­tated by macro calls and now they are focus­ing on stocks."

For many man­agers, the drop in cor­re­la­tion is a wel­come respite from the high cor­re­la­tions dri­ven by macro­eco­nomic news­flow that char­ac­terised the mar­kets for much of last year.

Look­ing at val­u­a­tions alone would have cre­ated the wrong idea: defen­sive growth stocks trad­ing at high mul­ti­ples per­formed well, while cheap cycli­cal stocks per­ceived as value invest­ments suf­fered losses.

At times com­pany share prices moved not on indi­vid­ual val­u­a­tions but on the per­ceived coun­try risk or cur­rency risk of the issuer. Late last year, for exam­ple as investors became more con­cerned about France's triple-a rat­ing poten­tially being down­graded, French stocks were sold off indis­crim­i­nately, in line with the market's per­cep­tion of an inher­ent risk of invest­ing in France.

Accord­ing to data provider Hedge Fund Research, the aver­age hedge fund gained 2.63% in Jan­u­ary, with equity strate­gies lead­ing the way, up 3.84%.

Among long/short equity man­agers, many of last year's biggest losers rebounded strongly in Jan­u­ary. Crispin Odey's Odey Euro­pean fund is up dou­ble dig­its this year, while Lans­downe Part­ners' UK fund gained 5.7% in Jan­u­ary, investors said.

Wor­thing­ton said that although stock selec­tion detracted from his fund's per­for­mance in Decem­ber, by Jan­u­ary it accounted for 60% of the returns.

How­ever, he also sounded a note of cau­tion. He said: "The mar­ket always starts the year quite buoy­ant as com­pa­nies invari­ably come out with good expec­ta­tions and they have a full year to disappoint.

"There's been bit of a 'dash for trash' too — in the US, for exam­ple, the top-performing stocks this year under­per­formed by 40% on aver­age in 2011. A lot of the highly-leveraged, high-cyclical com­pa­nies have bounced as port­fo­lio man­agers have rotated out of more defen­sive names."

Accord­ing to Credit Suisse strate­gists, the rota­tion ratio in Jan­u­ary was 76%. This means that around three quar­ters of sec­tors either out­per­formed in Jan­u­ary 2012 after under­per­form­ing in 2011 or vice versa, the high­est level of rota­tion since 2001. Banks are the most strik­ing exam­ple of this, they said.

The chart was first reported by Busi­ness Insider blog.

In other news, Final­ter­na­tives reports that Gold­man Sachs' for­mer spe­cial sit­u­a­tions chief will launch his new firm's maiden hedge fund next quar­ter along with another Gold­man and Tudor vet:

Richard Ruzika, global head of spe­cial sit­u­a­tions at Gold­man between 2007 and last year, founded Dublin Hill Cap­i­tal in Con­necti­cut with Lance Bakrow and Joe How­ley. The Connecticut-based firm will unveil its Global Macro Fund in an effort to take advan­tage of the strategy's cur­rent pop­u­lar­ity, HFMWeek reports.

Ruzika was co-head of global macro trad­ing and global head of com­modi­ties at points dur­ing his 29-year career at Goldman.

Bakrow, another Gold­man Sachs vet­eran, is a founder of Green­wich Energy Part­ners. How­ley, a Tudor Invest­ment Corp. vet­eran, was man­ag­ing direc­tor of nat­ural gas trad­ing at Sem­pra Energy.

When­ever you read vet­er­ans from Gold­man and Tudor are get­ting together to start a global macro fund, it's worth meet­ing them and dis­cussing their new fund. Ask them lots of tough ques­tions but this is the type of new fund I like invest­ing in.

I've been tough on hed­gies lately. Some­one accused me of "wag­ing war against them". Noth­ing can be fur­ther from the truth. While I've seen many "malakies" in the hedge fund indus­try, includ­ing non­sense within pen­sion funds invest­ing in hedge funds, I still believe that excel­lent hedge funds are worth invest­ing with.

Do I believe in pay­ing 2 & 20? A lot less than I used to. Why? Because most hedge funds are mediocre and the large ones are mostly asset gath­er­ers. More­over, insti­tu­tions can repli­cate a lot of hedge funds strate­gies inter­nally and if you're a large pen­sion fund like ATP, you got a large enough bal­ance sheet to beat them at their own game at a frac­tion of the cost. It's stu­pid to get eaten alive by hedge fund fees, mak­ing them rich for gath­er­ing assets.

Tonight I had din­ner with some for­mer col­leagues. We all worked in hedge funds before. We were dis­cussing how stu­pid it is for large pub­lic pen­sion funds to pay mil­lions in fees to hedge funds instead of devel­op­ing alpha inter­nally. These guys are sharp money man­agers and know all about hedge funds. One of the guys can slice and dice any hedge fund strat­egy and reverse engi­neer it. The other is a credit spe­cial­ist who has done his share of due dili­gence on hedge funds and knows all about alpha and man­ag­ing money.

We all feel that too many insti­tu­tions are wast­ing their money on hedge funds. Save your money, develop alpha tal­ent inter­nally and don't waste your time and resources chas­ing hedge funds. And if you are going to ven­ture into hedge funds, seed some alpha man­agers who are per­for­mance dri­ven but don't take an equity stake!!!

All these insti­tu­tions invest­ing in hedge funds, includ­ing the Caisse and Ontario Teach­ers', should pub­licly dis­close how much they've dis­bursed in fees since incep­tion of their hedge fund pro­grams. My guess is hun­dreds of mil­lions. Sure, they've invested in some great funds, made money, but also got clob­bered in oth­ers which you'll never hear about. The point is would they have been bet­ter off tak­ing the ATP approach, invest­ing in inter­nal hedge funds? Results speak for them­selves.

Below, Ann Pet­ti­for, George Kapopou­los and Matina Ste­vis dis­cuss the prospect of a Greek default on Al-Jazeera. Debt dis­cus­sions in Greece have stalled on pen­sion dis­pute. If Greece defaults, you'll see macro news take over again, and cor­re­la­tions rise across all asset classes (except bonds).

If all hell breaks loose, hedge funds will suf­fer. If a deal is struck, watch out, a mas­sive liq­uid­ity rally could mean many hedge funds will under­per­form. Both sce­nar­ios would be bad for hedge funds, espe­cially the for­mer one. At the end of the day, most hedge funds are a lot more like mutual funds and pen­sion funds in that they des­per­ately need the big beta boost to make money.

Tags: Debt Crisis, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Equity Index, Fundamental Analysis, Group Equity, Hedge Fund Index, Hedge Fund Performance, Hedgies, Lee Hennessee, Long Short Equity, Major Stock Indexes, Nasdaq Composite Index, Respectable Gain, Short Hedge, Sovereign Debt, Stock Pickers, Stock Returns, Wsj Reports
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Heart of China Bull Beats Strong

Sunday, January 29th, 2012

Heart of China Bull Beats Strong

By Frank Holmes
CEO and Chief Invest­ment Offi­cer
U.S. Global Investors

My debate this week with Gor­don Chang on China’s future at the Van­cou­ver Resource Invest­ment Con­fer­ence was a stim­u­lat­ing, intel­lec­tual exer­cise. A healthy mar­ket needs a com­pro­mise between the bid and ask, and dis­cus­sions between peo­ple who strongly dis­agree is a great way to pro­mote crit­i­cal thinking.

Crit­i­cal think­ing is vital to our invest­ment process as a means to ensure that we ques­tion assump­tions. One way our port­fo­lio man­age­ment team prac­tices a critical-thinking process is through a weekly S.W.O.T. (Strengths-Weaknesses-Opportunities-Threats) analy­sis of key fac­tors influ­enc­ing global mar­kets. By ham­mer­ing out the pos­i­tives and neg­a­tives, we can paint an accu­rate pic­ture of the real­i­ties we face. The S.W.O.T. model allows us to avoid pit­falls by weigh­ing the evidence.

Lack of crit­i­cal think­ing some­times leads to bub­bles, such as the one tak­ing place in the par­a­bolic rise in the num­ber of arti­cles fore­telling China will expe­ri­ence a “hard land­ing.” Last fall, more than 1,000 arti­cles ques­tioned the pos­si­bil­ity of a “China crash,” accord­ing to data from BCA Research. This is twice as high as the num­ber in 2004, when fear arti­cles reached 500. Gordon’s bear­ish pro­nounce­ments only added to the extreme neg­a­tiv­ity group­think sur­round­ing China’s economy.

Invest­ment strate­gist Keith Fitz-Gerald, a long-time friend of mine, wrote an excel­lent arti­cle com­par­ing today’s dooms­day sen­ti­ment of China to the naysay­ers who fore­casted the demise of the U.S. dur­ing the mar­ket bot­tom of March 2009.

Through­out the past cen­tury, U.S. stocks went through many sec­u­lar bear mar­kets. Keith points to the 1929–1932 period when the Dow Jones Indus­trial Aver­age declined by nearly 90 per­cent, along with point­ing out Dow’s loss of more than 52 per­cent from 1937 to 1942. Also, begin­ning in 1901, 1906, 1916 and 1973, there were four “40+ per­cent declines,” says Keith.

Amer­i­cans have also endured two world wars, the Great Depres­sion, pres­i­den­tial assas­si­na­tions and the dead­liest ter­ror­ist attack ever seen on U.S. soil. What’s impor­tant for investors to remem­ber was that each sig­nif­i­cant mar­ket decline pre­sented a “great buy­ing oppor­tu­nity” with U.S. stocks ris­ing double-, or in some cases, triple-digits, writes Keith.

And, over the past 100 years, the Dow gained an out­stand­ing 24,000 percent.

So despite set­backs includ­ing infla­tion, Tianan­men Square protests, the Asian finan­cial cri­sis of 1997, and the SARS scare, over the last 30 years, China’s aver­age annual real GDP has grown 10 percent.

With ris­ing incomes and increas­ing urban­iza­tion, we believe China is pur­su­ing the Amer­i­can Dream, and the gov­ern­ment has shown great deter­mi­na­tion to build the nec­es­sary infra­struc­ture along with a robust urban labor mar­ket. On a pur­chas­ing power par­ity basis, China’s share of world GDP has risen sig­nif­i­cantly, from around 3 per­cent in 1985 to a cur­rent world share of nearly 16 percent.

Yet, China is only in the mid­dle of its super­cy­cle with sev­eral stages to come. Super­cy­cles, or what we call S-curves, are long, con­tin­u­ous waves of boom and bust inher­ent in human his­tory. While the over­all trend is up, peri­ods of volatil­ity are an inher­ent part of this super­growth. Not every down period is a sign of demise—even a bro­ken clock is right twice a day. It’s the wise active man­ager who learns to man­age expec­ta­tions by under­stand­ing the dif­fer­ence between short-term cor­rec­tions and sec­u­lar long-term bear markets.

While “risks cer­tainly can­not be taken lightly,” BCA Research believes that the risk of a China crash is “exag­ger­ated.” For exam­ple, bears often point to “shadow” bank­ing prac­tices to sup­port their case.

Keith believes Bei­jing was “delib­er­ately tap­ping on the brakes,” in 2009, when the cen­tral bank increased the reserve required ratio for com­mer­cial banks, effec­tively reduc­ing the amount of money banks could loan. This resulted in a sharp decrease in the amount of credit avail­able and sig­nif­i­cantly increased rates from 4.78 per­cent to 8.06 per­cent, accord­ing to BCA.

One neg­a­tive con­se­quence of China’s quan­ti­ta­tive tight­en­ing was that it forced some pri­vate firms unable to gain loans from state-controlled banks to seek credit from “loan sharks at some­times deathly high bor­row­ing costs,” says BCA.

We sent our research ana­lyst to his home coun­try of China to find out how preva­lent this prob­lem was. The Shanghai-native Xian Liang joined an inves­tiga­tive tour led by research firm China Inter­na­tional Cap­i­tal Cor­po­ra­tion (CICC) to the Zhe­jiang Province. His group had access to exec­u­tives from banks, pri­vate lenders and local gov­ern­ment agen­cies, many of which he found knowl­edge­able and shrewd.

Dur­ing his research trip, he learned about an exten­sive sur­vey done by Alibaba of 2,800 smaller and medium enter­prises, which showed that half of the enter­prises needed exter­nal financ­ing, and the com­pa­nies that cur­rently bor­row from banks—only 13 per­cent of Alibaba’s sample—faced pretty strin­gent risk man­age­ment practices.

For exam­ple, one com­mer­cial bank that lends pri­mar­ily to smaller com­pa­nies checks the elec­tric and water meters of the busi­nesses to make sure they are actu­ally using energy. They delve into the per­sonal habits of the pri­vate entre­pre­neurs to gauge if the exec­u­tives are cred­it­wor­thy and finan­cially sound, as it is believed that char­ac­ter has a lot to do with one’s will­ing­ness and abil­ity to repay.

Over­all, Xian under­stood the alleged sys­temic credit risks in the bank­ing sys­tem to be man­age­able at this point. The gov­ern­ment had been pru­dent to not only raise inter­est rates six times, but it also increased the reserve limit banks must set aside against loans.

BCA iden­ti­fied an addi­tional unin­tended con­se­quence of the tight­en­ing. Some banks tried to bypass tight reg­u­la­tory con­trols so they could extend credit, lead­ing to an “increase in off-balance-sheet activ­i­ties,” accord­ing to BCA. This activ­ity was rec­og­nized by the gov­ern­ment, and the cen­tral bank has “increased its over­sight of off-balance-sheet items.”

BCA says that in a way, “‘shadow’ bank­ing activ­ity can be viewed as an attempt by mar­ket par­tic­i­pants to cre­ate more market-driven inter­est rates.”

In a report of Asian banks, CLSA Asia-Pacific Mar­kets found that non-performing loans (NPL)—those assets not yet delin­quent but that have fallen behind schedule—remain near a 12-year low in China, and the NPL-to-loan ratio is under 1 per­cent. This default rate is extremely low com­pared to the 1999–2002 time­frame, and it is believed that no large debt defaults are expected due to China’s abil­ity to cre­ate liquidity.

Keith Fitz-Gerald says the gov­ern­ment has an abun­dance of liq­uid­ity. It has set aside $3.2 tril­lion in reserves, amount­ing to half of the country’s entire GDP. Keith says this could poten­tially be spent on recap­i­tal­iz­ing its bank­ing sec­tor, with “plenty of money to spare.”

Besides the reserves, China has more fis­cal and mon­e­tary fire­power than sev­eral emerg­ing mar­kets. The Econ­o­mist ana­lyzed 27 emerg­ing mar­kets and ranked the country’s abil­ity to ease mon­e­tary pol­icy, tak­ing into con­sid­er­a­tion infla­tion, excess credit, real inter­est rates, cur­rency move­ments and current-account bal­ances. Then it cre­ated a “fiscal-flexibility index” which included gov­ern­ment debt and the bud­get deficit. A score of 100 means a coun­try has no flex­i­bil­ity to ease poli­cies; a score near zero means a greater abil­ity to “let out the throttle.”

This chart “sug­gests that China, Indone­sia and Saudi Ara­bia have the great­est capac­ity to use mon­e­tary and fis­cal poli­cies to sup­port growth,” com­pared to other listed emerg­ing mar­kets, says The Economist.

Many bear­ish arti­cles that appeared last fall relied on gen­er­al­i­ties taken out of con­text. They offer anec­dotes of ghost cities, empty shop­ping malls, rob­ber barons, worker sui­cides and cit­i­zen protests as rea­sons the coun­try as a whole is headed for a crash. These efforts to high­light China’s eco­nomic imper­fec­tions are akin to say­ing the U.S. is a poor nation because impov­er­ished areas still exist. As ana­lysts, it is our job to research and make a ratio­nal deter­mi­na­tion whether the facts are mate­r­ial or superfluous.

“China is merely going through the first uncom­fort­able grow­ing pains of its ado­les­cence,” Keith says, and he does not believe it’s the end of the world if China goes through a mar­ket cor­rec­tion. What he’ll be doing instead is investing.

As our team con­tin­u­ously weighs the evi­dence of China’s econ­omy, I agree with my friend. Moments such as these offer buy­ing oppor­tu­ni­ties for global investors.

We believe China is a buy­ing opportunity.

Tags: Bear Markets, Chief Investment Officer, Critical Thinking, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Fitz Gerald, Frank Holmes, Intellectual Exercise, Investment Conference, Investment Strategist, Long Time Friend, Market Bottom, Naysayers, Portfolio Management Team, Resource Investment, Strengths Weaknesses Opportunities Threats, Strong Heart, Team Practices, U S Global Investors
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U.S. Blue Chips Continue to Lead (Lee)

Friday, January 6th, 2012

U.S. Blue Chips Con­tinue to Lead
Dow Jones Indus­trial Aver­age Hits "Golden-Cross"

Alfred Lee, CFA, DMS
Vice Pres­i­dent & Invest­ment Strate­gist
BMO ETFs & Global Struc­tured Invest­ments
BMO Asset Man­age­ment
alfred.lee@bmo.com

Jan­u­ary 5, 2012

Recent Devel­op­ments:

• Last Tues­day, the Dow Jones Indus­trial Aver­age (Dow), hit a "golden-cross" pat­tern, where its 50-day mov­ing aver­age (MA) crossed above its 200-day MA. This tends to be a bull­ish indi­ca­tor since its short-term aver­age is increas­ing faster than its longer-term aver­age, sug­gest­ing momen­tum is trend­ing higher. As this tends to be a widely fol­lowed tech­ni­cal sig­nal, it does have a ten­dency to cre­ate some tail­winds as it is often met with addi­tional buy­ing (Chart A).
• While the recent golden-cross in the Dow can be seen as bull­ish, there are a num­ber of global macro-economic risk items that remain. As a result, equity mar­ket volatil­ity may again remain ele­vated for much of 2012. Although the CBOE Dow Jones Volatil­ity Implied Index (VXD) which is also known as the "Dow VIX" trended sig­nif­i­cantly lower in the month of Decem­ber, equity volatil­ity tends to exhibit strong sea­son­al­ity pat­terns, with VXD falling 7 of the last 10 Decem­bers and declin­ing 10.6% on aver­age in those 10 Decem­bers (Chart C). Cur­rently, the futures term struc­ture for the implied volatil­ity index on the more broad based CBOE S&P 500 Implied Volatil­ity Index (VIX), is pos­i­tively sloped where its fur­ther dated futures con­tracts are higher than the near dated con­tracts. This indi­cates that the mar­ket is antic­i­pat­ing volatil­ity to rise in the future.
• Sim­i­lar to the begin­ning of 2011, we remain bull­ish on U.S. equi­ties, par­tic­u­larly the Dow since many of the con­stituents are blue-chip com­pa­nies with multi-national reach. Our the­sis from last year remains unchanged. Many of these com­pa­nies have strong cash bal­ances, enabling them to raise div­i­dends and/or buy-back shares while remain­ing well-capitalized should mar­kets decline. From a fun­da­men­tal per­spec­tive, the Dow remains attrac­tive, trad­ing at a cur­rent price-to-earnings (P/E) ratio of 12.9x. Last year, with the major­ity of equity mar­kets fac­ing sig­nif­i­cant head­winds, many of the Dow com­pa­nies such as McDon­alds Corp. and Inter­na­tional Busi­ness Machines Corp. (IBM), made mul­ti­year, if not all-time highs, which should be seen as a pos­i­tive. In addi­tion, from a tech­ni­cal per­spec­tive, the Dow dis­plays excel­lent breadth with 22 of its 30 con­stituent com­pa­nies trad­ing above their 200-day MA. This is con­struc­tive as it sug­gests the major­ity of its con­stituents are dri­ving the index higher, rather than just a few strong per­form­ing companies.

Poten­tial Invest­ment Opportunity:

• Cana­dian investors seek­ing expo­sure to the Dow with­out hav­ing to worry about cur­rency volatil­ity may want to con­sider the BMO Dow Jones Indus­trial Aver­age Hedged to CAD Index ETF (ZDJ). Through ZDJ, investors can access the 30 blue-chip stocks in the Dow on a cost effi­cient basis. Alter­na­tively, investors that are bull­ish on the Dow but believe the index will be slow and steady or range bound, may want to con­sider the BMO Cov­ered Call Dow Jones Indus­trial Aver­age Hedged to CAD ETF (ZWA). A cov­ered call strat­egy allows investors to enhance yield while poten­tially mit­i­gat­ing some volatil­ity but will under­per­form a non-covered strat­egy in a rapidly ascend­ing mar­ket. For fur­ther infor­ma­tion on the mechan­ics behind a cov­ered call strat­egy, please click “Cov­ered call Option Strat­egy” in the “Related Links/Downloads” sec­tion in the fol­low­ing link.

Chart A: The Dow Hits a "Golden-Cross"

Source: BMO Asset Man­age­ment Inc., Bloomberg

Chart B: Implied Volatil­ity on the Dow (VXD) Fell Sig­nif­i­cantly in December

Source: BMO Asset Man­age­ment Inc., Bloomberg,

Chart C: Implied Volatil­ity Tends to Fall in Decem­ber Exhibit­ing Strong Seasonality

Source: BMO Asset Man­age­ment Inc., Bloomberg

*All prices as of mar­ket close Jan­u­ary 3, 2011 unless oth­er­wise indicated.

Dis­claimer:
Infor­ma­tion, opin­ions and sta­tis­ti­cal data con­tained in this report were obtained or derived from sources deemed to be reli­able, but BMO Asset Man­age­ment Inc. does not rep­re­sent that any such infor­ma­tion, opin­ion or sta­tis­ti­cal data is accu­rate or com­plete and they should not be relied upon as such. Par­tic­u­lar invest­ments and/or trad­ing strate­gies should be eval­u­ated rel­a­tive to each individual’s cir­cum­stances. Indi­vid­u­als should seek the advice of pro­fes­sion­als, as appro­pri­ate, regard­ing any par­tic­u­lar investment.

BMO ETFs are man­aged and admin­is­tered by BMO Asset Man­age­ment Inc, an invest­ment fund man­ager and port­fo­lio man­ager and sep­a­rate legal entity from the Bank of Mon­tréal. Com­mis­sions, man­age­ment fees and expenses all may be asso­ci­ated with invest­ments in exchange-traded funds. Please read the prospec­tus before invest­ing. The funds are not guar­an­teed, their value changes fre­quently and past per­for­mance may not be repeated.

The Dow Jones Indus­trial Aver­age^SM is a prod­uct of Dow Jones Indexes, a licensed trade-mark of CME Group Index Ser­vices LLC (“CME”), and has been licensed for use. “Dow Jones®”, “Dow Jones Indus­trial Aver­age^SM”, “Dow Jones Canada Titan 60” “Dia­mond” and “Titans” are ser­vice marks of Dow Jones Trade­mark Hold­ings, LLC (“Dow Jones”)and have been licensed for use for cer­tain pur­poses. BMO ETFs based on Dow Jones indexes are not spon­sored, endorsed, sold or pro­moted by Dow Jones, CME or their respec­tive affil­i­ates and none of them makes any rep­re­sen­ta­tion regard­ing the advis­abil­ity of invest­ing in such product(s).

Tags: Alfred Lee, Blue Chip Companies, Blue Chips, Cboe, Chart C, Decembers, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Risk, Futures Contracts, Global Macro, Golden Cross, Implied Volatility, Investment Strategist, Market Volatility, Structured Investments, Tailwinds, Volatility Index Vix, Vxd
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True Reflections … on 2011 and 2012 (Sonders)

Friday, January 6th, 2012

by Liz Ann Son­ders, Senior Vice Pres­i­dent, Chief Invest­ment Strate­gist, Charles Schwab & Co., Inc.

Key Points

• The Dow Jones Indus­trial Aver­age (DJIA) man­aged a gain for the year in 2011, but very few investors were cheering.
• With infla­tion set­tling down, the upward boost to real gross domes­tic prod­uct (GDP) is likely being underestimated.
• Although the euro­zone cri­sis may keep volatil­ity ele­vated short-term, 2012 is look­ing like a bet­ter year.

"I always avoid proph­esy­ing before­hand because it is much bet­ter to proph­esy after the event has already taken place."
—Win­ston Churchill

It's that time of year again, when we review the year that was and look ahead to the year that is. It's a time rife with fore­casts, out­looks and pre­dic­tions. At Schwab we do our part, but not quite like the oth­ers. At our company's core is the belief that dis­ci­plined invest­ing is the key to long-term suc­cess, and that invest­ing based on forecasts—yours, mine or any­one else's—is gam­bling in dis­guise. That is why we don't pub­lish year-end price fore­casts … I haven't a clue where the mar­ket will close the day I'm writ­ing this and that's only a few hours away, let alone where it will close on Decem­ber 31, 2012.

Expect the unexpected

What we do try to do is review trends, sce­nar­ios, pos­si­bil­i­ties and prob­a­bil­i­ties, while always keep­ing a close eye on the con­trar­ian view. As Oscar Wilde said, "To expect the unex­pected shows a thor­oughly mod­ern intellect."

Last year was a doozy. From the start of 2011 to the end of April, the S&P 500 Index ral­lied nearly 10%, only to plunge nearly into bear-market ter­ri­tory (-20%) by early Octo­ber. It ral­lied back nearly that much by the end of Octo­ber, giv­ing back another 10% by Thanks­giv­ing, but fin­ish­ing with a nearly full recov­ery of that 10% over the hol­i­day season.

The real trou­ble erupted in August thanks to a dys­func­tional Con­gres­sional debate about the debt ceil­ing, a sub­se­quent US credit-rating down­grade and the re-eruption of the euro­zone debt cri­sis. The DJIA aver­aged a daily intra­day swing of 270 points between August and Novem­ber, more than dou­ble the spread over the same period in 2010.

A mar­ket full of "sound and fury, sig­ni­fy­ing nothing"

When all was said and done, the S&P 500 and the Dow did eke out gains for the year (though only thanks to div­i­dends for the S&P). But that per­for­mance belied the tur­moil of the year and few investors have been cel­e­brat­ing save for maybe those who stuck with US Trea­sury bonds over the year. Even the so-called smart-money hedge funds had a tough year: the aver­age return was –5% accord­ing to Hedge Fund Research. There's lit­tle worse for a hedge fund than post­ing a neg­a­tive sign before returns with the major indices in pos­i­tive territory.

You can see the array of returns across many of the key global indices below:

2011 Asset Class Performance

Source: Bloomberg, Thom­son Reuters, as of Decem­ber 30, 2011.

Key to the year's ini­tial surge into late April was the expec­ta­tion that the eco­nomic recov­ery was pick­ing up momen­tum. Those hopes, along with the market's rally, were dashed with a very weak second-quarter GDP report that was not only weaker than expected, but brought sig­nif­i­cant down­ward revi­sions to prior quar­ters' growth rates (includ­ing a whop­ping revi­sion to 2011's first quar­ter from 1.9% to 0.4%). What we ulti­mately learned about the year's first sev­eral months was that a sharp increase in infla­tion took a big bite out of "real" (inflation-adjusted) GDP.

The $30 surge in oil prices in the five months through April 2011 likely carved about 1.5% out of GDP growth. There were also major weather dis­rup­tions to crop pro­duc­tion that caused a spike in food infla­tion, and ush­ered in the Arab Spring. Add to that the March earth­quake and tsunami in Japan, which wreaked havoc with the global sup­ply chain, and we had the recipe for a bru­tal first half of 2011. The mis­take some made was extrap­o­lat­ing this weak­ness into the future and assum­ing the weak­ness was sec­u­lar, not cycli­cal and reversible.

Infla­tion takes over from Fed­eral Reserve policy

Infla­tion has been, and will remain, a big dri­ver on the mar­gin of growth. In cycles past, Fed pol­icy and its influ­ence on short-term rates would move the nee­dle on growth with nearly every tick. But with short rates pegged at zero since the end of 2008, this is no longer the case. What appears to now move the nee­dle, given other growth con­straints, is con­sumer infla­tion, which can make a big dif­fer­ence given lim­ited income gains. Here's where there's some good news recently, and as we look ahead to 2012.

Tags: Bear Market, Charles Schwab, Chief Investment Strategist, Congressional Debate, Contrarian View, Debt Ceiling, DJIA, Doozy, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Gross Domestic Product, Liz Ann, Oscar Wilde, Outlooks, Price Forecasts, Senior Vice President, Term Success, True Reflections, Winston Churchill
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Dow Rings in 2012 With a "Golden Cross"

Thursday, January 5th, 2012

I often refer to the 50– and 200-day mov­ing aver­ages in my com­men­tary as indi­ca­tors of the inter­me­di­ate and pri­mary trends respec­tively. In a per­fectly bull­ish sce­nario the price series should trade above both the 50– and 200-day lines, with both these lines ris­ing, and also with the 50 DMA trad­ing above the 200 DMA.

In the case of the Dow Jones Indus­trial Index, the 50 DMA has just breached its 200 DMA, thereby form­ing a so-called golden cross. This is the first time the 50-day line trades above the 200-day line since August 2011. How­ever, as always with chart­ing sig­nals, it is wise to wait a few days in order to guard against a false break.

The Dow has expe­ri­enced 20 golden crosses over the last 50 years. Although his­tor­i­cally the Dow traded in pos­i­tive ter­ri­tory after six months in 65% of the instances fol­low­ing a golden cross, the aver­age return of 2.9% is not all that excit­ing as it lags the 3.5% aver­age of all six-month peri­ods (research via Bespoke Invest­ment Group).

As far as the S&P 500 Index, the Nas­daq Com­pos­ite Index and the Rus­sell 2000 Index is con­cerned, the 50 DMAs were still trad­ing below the 200DMAs by 1.56%, 1.69% and 4.34% respec­tively as of yesterday’s close.

Source: Arthur Hill, StockCharts, Jan­u­ary 4, 2012.

Tags: Amp, Arthur Hill, Crosses, Dma, Dmas, Dow Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Few Days, Golden Cross, Instances, Investment Group, January 4, Moving Averages, Nasdaq Composite Index, Russell 2000 Index, Signals, Six Months, Stockcharts, Stocks
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Progress in Europe Lifts Sentiment (Doll)

Tuesday, December 13th, 2011

by Bob Doll, Chief Equity Strate­gist, Black­Rock, Inc.

A Volatile, but Pos­i­tive, Week for the Markets

Mar­kets traded in a volatile fash­ion last week, with investors quickly react­ing to news and rumors sur­round­ing responses to the ongo­ing Euro­pean debt cri­sis. Thanks to a rally on Fri­day, mar­kets ended the week in pos­i­tive ter­ri­tory, with the Dow Jones Indus­trial Aver­age climb­ing 1.4% to 12,184, the S&P 500 Index climb­ing 0.9% to 1,255 and the Nas­daq Com­pos­ite advanc­ing 0.8% to 2,646.

Euro Sum­mit Deal Rep­re­sents Tan­gi­ble Progress

Mar­ket action last week cen­tered on the Euro­pean sum­mit that took place on Thurs­day and Fri­day. While no one is sug­gest­ing that the debt cri­sis will go away any time soon, the frame­work agree­ment that was reached has at least reduced some of the anx­i­ety and appears to have eased the grid­lock in Euro­pean finan­cial markets.

Although there are many details that still need to be worked out, it does appear that most par­ties in Europe are in agree­ment about the need to estab­lish a more sta­ble fis­cal union that has tighter con­trols over the region's debts and deficits. While these moves will do lit­tle to ease the near-term debt issues affect­ing many Euro­pean coun­tries, they are impor­tant in that they rep­re­sent the start of the process of assur­ing investors and cen­tral bankers (par­tic­u­larly the Euro­pean Cen­tral Bank) that politi­cians are seri­ous about fis­cal dis­ci­pline and that they can no longer delay action. In our view, last week's sum­mit may well rep­re­sent the first tan­gi­ble pos­i­tive devel­op­ments since the cri­sis began.

For its part, the ECB did cut inter­est rates by another 25 basis points last week. This is an impor­tant step and mir­rors the broader global trend of cen­tral banks mov­ing from a tight­en­ing to an eas­ing bias that has occurred over the course of 2011. The Euro­pean Cen­tral Bank, how­ever, stopped short of indi­cat­ing that it would be will­ing to pro­vide fur­ther sup­port for the Euro­pean bank­ing sys­tem. The ECB has clearly been unwill­ing to take up the charge of being a lender of last resort for the region, but it does seem likely that the cen­tral bank will become more proac­tive if it sees real progress being made in terms of greater fis­cal stabilization.

Eco­nomic and Invest­ing Envi­ron­ment Con­tin­ues to Show Signs of Improvement

We have been sug­gest­ing over the past sev­eral weeks that eco­nomic growth in the United States appears to be accel­er­at­ing, and last week's eco­nomic data helped con­firm this view. Specif­i­cally, US job­less claims fell sharply and we are opti­mistic that pay­roll growth should sur­prise to the upside over the com­ing months. Addi­tion­ally, con­sumer spend­ing remains solid and the cor­po­rate sec­tor has been see­ing strong profit growth, a trend we expect will continue.

While we are not call­ing for par­tic­u­larly strong lev­els of eco­nomic growth in the year ahead, we do believe that pos­i­tive sur­prises may out­weigh neg­a­tive ones. We are expect­ing to see income lev­els rise in 2012 and are also call­ing for con­tin­ued improve­ments in pri­vate pay­rolls cre­ation. A key risk to this out­look remains the uncer­tainty over the exten­sion of the pay­roll tax cut into 2012. At present, we believe it is more likely than not that a deal will be put together to extend the cuts, but absent such a deal eco­nomic and fis­cal head­winds would grow.

For stocks, it is hardly likely to be smooth sail­ing from here, but con­di­tions have cer­tainly improved since the wild mar­ket swings that we saw over the sum­mer. Look­ing ahead, we can iden­tify some rea­sons for fur­ther opti­mism, par­tic­u­larly in terms of how resilient the US econ­omy has been. As has been the case for many months now, the Euro­zone cri­sis remains the key wild­card, but we may be begin­ning to see a clearer endgame.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

Copy­right © Black­Rock, Inc.

Tags: Basis Points, Blackrock Inc, Bob Doll, Central Banks, Debt Crisis, Debt Issues, Debts And Deficits, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, ECB, European Banking System, European Financial Markets, European Summit, Fiscal Discipline, Framework Agreement, Global Trend, Gridlock, Nasdaq Composite, Tangible Progress
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Markets Cheer Economic and Policy Progress — A Sharp Rally for Stocks (Doll)

Tuesday, December 6th, 2011

Decem­ber 5, 2011

A Sharp Rally for Stocks

After two weeks of dis­ap­point­ing eco­nomic and pol­icy news that drove stock prices sharply lower, stocks wit­nessed a strong rever­sal last week. The main cat­a­lyst for the rally was a global coör­di­nated cen­tral bank pol­icy action designed to help bank­ing liq­uid­ity, but mar­kets also ben­e­fited from some improved eco­nomic data. For the week, the Dow Jones Indus­trial Aver­age jumped 7.0% to 12,019, the S&P 500 Index rose 7.4% to 1,244 and the Nas­daq Com­pos­ite advanced 7.6% to 2,626.

Cen­tral Bank Action a Pos­i­tive, but More Is Still Needed

Last week's mar­ket action cen­tered on the US Fed­eral Reserve's and other cen­tral banks' announce­ment that they would pro­vide coör­di­nated action to boost the liq­uid­ity of the finan­cial sys­tem by reduc­ing dol­lar bor­row­ing costs from for­eign cen­tral banks by between 50 and 100 basis points. The cen­tral bank actions are clearly a pos­i­tive in terms of investor sen­ti­ment and will be help­ful from a prac­ti­cal basis regard­ing expand­ing liq­uid­ity. Impor­tantly, the move does under­score the will­ing­ness of the Fed and other cen­tral banks to sup­port the global bank­ing system.

The moves by the cen­tral banks, how­ever, do not address the root causes of the Euro­pean debt cri­sis. On that point, Germany's chan­cel­lor Angela Merkel and French pres­i­dent Nico­las Sarkozy have been push­ing hard for increased Euro­pean inte­gra­tion and more effec­tive fis­cal dis­ci­pline. Should these efforts suc­ceed, they would pro­vide some reas­sur­ance to the pol­i­cy­mak­ers at the Euro­pean Cen­tral Bank (ECB) that the politi­cians are seri­ous about estab­lish­ing the fis­cal mea­sures the ECB believes are nec­es­sary, which could pave the way for addi­tional ECB inter­ven­tion in the mar­ket. Whether any of this comes about is, of course, still an open ques­tion since any pro­posed plan would need the back­ing of coun­tries other than Ger­many and France, but it does appear that the par­ties are mov­ing in the right direction.

Also on the global pol­icy front, China announced last week that it would lower its bank reserve require­ments. This likely rep­re­sents the first in a round of reduc­tions and should be stim­u­la­tive for Chi­nese growth, help­ing reduce the prob­a­bil­ity of a hard landing.

US Eco­nomic Improve­ments Continue

In the United States, eco­nomic data con­tin­ues to point to an accel­er­a­tion in growth. November's labor mar­ket report was a solid one, show­ing that jobs growth came in at 120,000 (with pri­vate pay­rolls increas­ing by 140,000). The data also showed some solid upward revi­sions to Octo­ber and Sep­tem­ber jobs growth. At the same time, unem­ploy­ment fell notice­ably in Novem­ber, although it remains uncom­fort­ably high at 8.6%. In addi­tion to the labor mar­ket data, con­sumer con­fi­dence mea­sures moved higher for Novem­ber, which is a reflec­tion of improved eco­nomic activ­ity on a num­ber of fronts.

In addi­tion to the solid eco­nomic data, there have also been some signs of progress on the polit­i­cal front. It is still much too early to say for sure, but signs are emerg­ing that politi­cians may be able to come together to enact an exten­sion of the pay­roll tax cut (and pos­si­bly unem­ploy­ment ben­e­fits) that are set to expire on Decem­ber 31. Should these exten­sions not occur, they would cause a fis­cal head­wind in the first part of 2012.

Out­look Still Mixed, but Slowly Improving

Although last week's news was pos­i­tive (and investors were cer­tainly cheered by recent events) it is too early to declare any sort of vic­tory and it is impor­tant to remem­ber that the mar­ket gains that occurred last week did not match the losses of the pre­vi­ous two weeks. In any case, how­ever, it does appear that con­di­tions are con­tin­u­ing to improve. The coör­di­nated rate action and con­tin­ued easy avail­abil­ity of money should ease some of the world's debt bur­dens. On the eco­nomic front, we are expect­ing gross domes­tic prod­uct growth in the United States to increase to at least 3% in the fourth quar­ter, which should pro­vide fur­ther evi­dence that the macro back­drop is get­ting bet­ter. The main risk remains a poten­tial Euro­zone fail­ure or breakup, but the odds of that occur­ring have been at least slightly reduced.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

Dis­claimer:

The infor­ma­tion on this web site is intended for U.S. res­i­dents only. The infor­ma­tion pro­vided does not con­sti­tute a solic­i­ta­tion of an offer to buy, or an offer to sell secu­ri­ties in any juris­dic­tion to any per­son to whom it is not law­ful to make such an offer.

Sources: Black­Rock, Bank Credit Ana­lyst. This mate­r­ial is not intended to be relied upon as a fore­cast, research or invest­ment advice, and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any invest­ment strat­egy. The opin­ions expressed are as of Decem­ber 5, 2011, and may change as sub­se­quent con­di­tions vary. The infor­ma­tion and opin­ions con­tained in this mate­r­ial are derived from pro­pri­etary and non­pro­pri­etary sources deemed by Black­Rock to be reli­able, are not nec­es­sar­ily all-inclusive and are not guar­an­teed as to accu­racy. Past per­for­mance is no guar­an­tee of future results. There is no guar­an­tee that any fore­casts made will come to pass. Reliance upon infor­ma­tion in this mate­r­ial is at the sole dis­cre­tion of the reader. Invest­ment involves risks. Inter­na­tional invest­ing involves addi­tional risks, includ­ing risks related to for­eign cur­rency, lim­ited liq­uid­ity, less gov­ern­ment reg­u­la­tion and the pos­si­bil­ity of sub­stan­tial volatil­ity due to adverse polit­i­cal, eco­nomic or other devel­op­ments. The two main risks related to fixed income invest­ing are inter­est rate risk and credit risk. Typ­i­cally, when inter­est rates rise, there is a cor­re­spond­ing decline in the mar­ket value of bonds. Credit risk refers to the pos­si­bil­ity that the issuer of the bond will not be able to make prin­ci­pal and inter­est pay­ments. Index per­for­mance is shown for illus­tra­tive pur­poses only. You can­not invest directly in an index.

Black­Rock is a reg­is­tered trade­mark of Black­Rock, Inc. All other trade­marks are the prop­erty of their respec­tive owners.

Tags: 100 Basis Points, Angela Merkel, Central Banks, Chancellor Angela Merkel, Debt Crisis, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, European Integration, Fiscal Discipline, Fiscal Measures, French President Nicolas, French President Nicolas Sarkozy, Global Banking, Investor Sentiment, Nasdaq Composite, Nicolas Sarkozy, Open Question, President Nicolas Sarkozy, S Market
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Stocks Buffeted by Euro Fears and Super Committee Failure (Doll)

Tuesday, November 29th, 2011

by Bob Doll, Chief Equity Strate­gist, Black­rock, Inc.

Novem­ber 28, 2011

A Sharp Drop for Stocks

Equity mar­kets sank sharply last week as the Euro­pean debt cri­sis wors­ened and the US super com­mit­tee failed to come to an agree­ment. For the week, the Dow Jones Indus­trial Aver­age fell 4.8% to 11,231, the S&P 500 Index dropped 4.7% to 1,158 and the Nas­daq Com­pos­ite sank 5.1% to 2,441. Because the polit­i­cal prob­lems in the United States and the cri­sis in Europe could result in a nearly end­less array of out­comes, investors are faced with a high degree of uncer­tainty. As a result, unless and until more clar­ity emerges, mar­kets are likely to remain some­what trend­less in the near term.

Out­look Uncer­tain for the Euro­pean Debt Crisis

While much of the focus on the euro cri­sis has been on Greece and its risk of default­ing, in recent weeks, that focus has shifted to a gen­eral lack of liq­uid­ity within the Euro­pean debt mar­kets as banks strug­gle to main­tain credit rat­ings. Many large global banks are attempt­ing to sell or reduce their expo­sures to trou­bled Euro­pean sov­er­eign debt, and the sell­ing pres­sures are trig­ger­ing a new surge in gov­ern­ment bond inter­est rates. This, in turn, has been forc­ing more coun­tries into higher debt bur­dens and big­ger deficits.

At this point, it has become clear that the mea­sures taken so far to stem the cri­sis have not been suf­fi­cient. In our view, it will prob­a­bly require the cre­ation of some­thing like a com­monly issued euro bond to con­tain the debt cri­sis. Although Ger­many has so far resisted that pos­si­bil­ity, there are grow­ing indi­ca­tions that such a solu­tion may well be forthcoming.

Regard­less of what hap­pens in the debt cri­sis itself, a reces­sion in Europe now seems a fore­gone con­clu­sion. Should pol­i­cy­mak­ers be able to come to an effec­tive res­o­lu­tion soon, the reces­sion is likely to be shal­low, but risks are grow­ing that the reces­sion could be deeper. It is an open ques­tion as to how much a Euro­pean reces­sion would impact the United States and other global mar­kets. The main risk comes in the form of the inter­twined nature of the global credit mar­kets since severe Euro­pean bank delever­ag­ing could neg­a­tively impact US credit avail­abil­ity as well.

Super Com­mit­tee Fail­ure Cre­ates a Murky Debt Future

The fail­ure of the super com­mit­tee to pro­vide a plan to reduce the deficit was cer­tainly dis­ap­point­ing, but it would be a mis­take to put too much stock in that spe­cific inci­dent. The dead­line imposed by Con­gress was an arbi­trary one and the auto­matic cuts set to take place as a result of the non-decision will not occur until Jan­u­ary 2013. As a result, Con­gress still has an oppor­tu­nity to address deficit reduc­tion, but of course the fact that all of this is occur­ring with the back­drop of the 2012 elec­tions means that uncer­tainty lev­els are elevated.

In our view, the more impor­tant ques­tion is whether or not Con­gress will be able to extend the pay­roll tax cuts and unem­ploy­ment ben­e­fits set to expire at the end of this year. Should they be unsuc­cess­ful in doing so, it would likely cre­ate a sig­nif­i­cant fis­cal head­wind in 2012.

Stocks Likely to Remain Range-Bound

Some­what lost amid all of the euro debt and US polit­i­cal head­lines has been the fact that US eco­nomic data has con­tin­ued a grad­ual improve­ment. The Novem­ber pay­rolls report is set to be released this Fri­day and indi­ca­tions are that it will be decent. True, last week it was reported that third-quarter gross domes­tic prod­uct (GDP) growth was revised lower, but the inven­tory reduc­tion that occurred may help set the stage for a stronger fourth quar­ter. At this point, fourth-quarter GDP looks to come in at 3% or pos­si­bly higher based on improved prof­its, a bet­ter labor mar­ket, increased cap­i­tal expen­di­tures and a low cycli­cal start­ing point for inventories.

Eco­nomic accel­er­a­tion should cre­ate firmer foot­ing for stocks, but for the time being, we believe mar­kets will remain focused on the short-term head­lines. Of all of the fac­tors affect­ing the mar­kets (US pol­i­tics, the eco­nomic slow­down in China, etc.) the most crit­i­cal remains the Euro­pean debt cri­sis. Stocks are likely to remain range bound (trad­ing between the 1,100 and 1,250 level for the S&P 500) for now, but should pol­i­cy­mak­ers be suc­cess­ful in gain­ing some trac­tion, mar­kets could see some bet­ter results.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

Sources: Black­Rock, Bank Credit Ana­lyst. This mate­r­ial is not intended to be relied upon as a fore­cast, research or invest­ment advice, and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any invest­ment strat­egy. The opin­ions expressed are as of Novem­ber 28, 2011, and may change as sub­se­quent con­di­tions vary. The infor­ma­tion and opin­ions con­tained in this mate­r­ial are derived from pro­pri­etary and non­pro­pri­etary sources deemed by Black­Rock to be reli­able, are not nec­es­sar­ily all-inclusive and are not guar­an­teed as to accu­racy. Past per­for­mance is no guar­an­tee of future results. There is no guar­an­tee that any fore­casts made will come to pass. Reliance upon infor­ma­tion in this mate­r­ial is at the sole dis­cre­tion of the reader. Invest­ment involves risks. Inter­na­tional invest­ing involves addi­tional risks, includ­ing risks related to for­eign cur­rency, lim­ited liq­uid­ity, less gov­ern­ment reg­u­la­tion and the pos­si­bil­ity of sub­stan­tial volatil­ity due to adverse polit­i­cal, eco­nomic or other devel­op­ments. The two main risks related to fixed income invest­ing are inter­est rate risk and credit risk. Typ­i­cally, when inter­est rates rise, there is a cor­re­spond­ing decline in the mar­ket value of bonds. Credit risk refers to the pos­si­bil­ity that the issuer of the bond will not be able to make prin­ci­pal and inter­est pay­ments. Index per­for­mance is shown for illus­tra­tive pur­poses only. You can­not invest directly in an index.

Black­Rock is a reg­is­tered trade­mark of Black­Rock, Inc. All other trade­marks are the prop­erty of their respec­tive owners.

Pre­pared by Black­Rock Invest­ments, LLC, mem­ber FINRA.

Copy­right © Black­rock, Inc.

Tags: Blackrock Inc, Bob Doll, Bond Interest, Debt Burdens, Debt Crisis, Debt Markets, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Endless Array, Foregone Conclusion, Global Banks, Government Bond, liquidity, Nasdaq Composite, Open Question, Recession, Sovereign Debt, Strategist, Term Outlook
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U.S. Bluechips to Outperform on Strong Profits, Low Valuations

Sunday, November 27th, 2011

This Week: ISHARES S&P 500 INDEX FUND C$ Hedged Ticker: XSP / TSX

Early this year, we defied the doom-and-gloomers and declared our­selves bulls on large-cap U.S. blue-chips. We said they would out­per­form smaller U.S. com­pa­nies and their global peers, includ­ing Cana­dian stocks. We also said the U.S. dol­lar would strengthen. Right on all counts, we remain bull­ish on the United States as we head into 2012.

Given the may­hem in Europe and the roller-coaster mar­kets, you could be for­given for think­ing that all stocks have per­formed ter­ri­bly this year. In most cases you would be cor­rect. U.S. mid-caps are down 1.0% and small-caps are down 4.3%. Europe, Japan, and Emerg­ing Mar­ket indices are all down about 14% year-to-date. Our own S&P TSX 60 is down 7.6%.

The one excep­tion though has been the bluest of the U.S. large-cap firms. The Dow Jones Indus­trial Aver­age exchange-traded fund, the SPDR DJIA Trust (DIA/NYSE), is up a respectable 6.6% in the year-to-date. The Pow­er­shares Nas­daq 100 ETF (QQQ/NYSE) is up even more at 7.3%. A stronger U.S. dol­lar adds another 2% to those returns for Cana­dian investors.

Not bad for a coun­try where GDP is grow­ing at less than 2%, unem­ploy­ment is riot­ing at over 9% and gov­ern­ment debt is pil­ing up faster than the heap of failed Repub­li­can pres­i­den­tial candidates.

Which brings us to pol­i­tics. In the face of an obstruc­tion­ist oppo­si­tion, the Obama admin­is­tra­tion is prac­ti­cally emas­cu­lated until at least the elec­tion next Novem­ber. The Fed­eral Reserve has lim­ited options, other than to keep inter­est rates low and money sup­ply plentiful.

But the view is much brighter on Wall Street. Chevron, Du Pont, Cater­pil­lar, Kraft and Boe­ing are just some of the mega-cap names report­ing double-digit growth in profits.

The one thing these firms all have in com­mon is their global reach. Though apple-pie-American, each of these firms earns most of its rev­enue and nearly all its growth from over­seas mar­kets, espe­cially in Asia. Their suc­cess is a tes­ta­ment to the strength, inge­nu­ity and resilience of Amer­i­can enter­prise and one good rea­son not to under­es­ti­mate the United States.

Cor­po­rate prof­its are higher now than they were before the 2008 cri­sis. Earn­ings per share on the S&P 500 Index are at 95.16, 5.7% higher than their 2007 high and 57% higher than 2008.

The strong earn­ings are not reflected in the price. The main S&P 500 ETF, SPY/NYSE, trades at a price-to-trailing-earnings ratio of 14 times. The DIA/NYSE trades at 13 times. Those lev­els are on par with the lows of March 2009, just when the post-2008 rally began. The lev­els are also well below the aver­age P/E of about 17 times.

Earn­ings across the Dow Jones com­pa­nies are expected to grow about 10% next year. Even if the price-to-earnings ratio doesn’t shift, the Index should still see a healthy return for 2012 on earn­ings growth alone. There will likely be some big bumps on the road, given the Euro­pean debt  prob­lem is far from over. But for U.S. equi­ties, the out­look is positive.

The case for the U.S. dol­lar is not as clear. On the one hand, the Fed­eral Reserve’s easy money pol­icy will cap U.S. dol­lar gains through this year. Even­tu­ally though, as U.S. exporters con­tinue to ben­e­fit from the weak dol­lar, the trend should reverse and the dol­lar will strengthen.

Cana­dian investors can avoid the cur­rency uncer­tainty by opt­ing for a hedged invest­ment. That way, they will get approx­i­mately the same return as a U.S. investor would get.

There are sev­eral good currency-hedged ETFs avail­able to invest in U.S. equi­ties. The old­est and biggest by assets is iShares S&P 500 Index C$ Hedged ETF (XSP/TSX).

Another is Hori­zons’ HXS/TSX, also on the S&P 500. It has two ben­e­fits. First, its fee, 0.15%, is half of XSP/TSX. Sec­ond, it is more tax-efficient since it con­verts div­i­dends into cap­i­tal gains. It does this by using a deriv­a­tive called a “swap” to earn the return of the index rather than buy­ing the stocks directly. (For the com­plete list of the oth­ers, includ­ing one on the Dow, sub­scribe to archerETF’s free newsletter.)

As for the doom-and-gloomers, we will let them hide in their caves for another year.

The archerETF Global Tac­ti­cal Portfolio

archerETF offers Global Tac­ti­cal Port­fo­lio Management.

Our out­look is Global: we invest across coun­tries, sec­tors, com­modi­ties and other asset classes to improve returns. Our man­age­ment is Tac­ti­cal: we strive to select the right oppor­tu­ni­ties at the right times in response to chang­ing mar­ket con­di­tions to man­age and min­i­mize port­fo­lio risk.

Please call us at TF 1–866-469‑7990 for more information.

Tags: Apple Pie, Blue Chips, Canadian Investors, Canadian Stocks, Double Digit Growth, Dow Jones Industrial, Dow Jones Industrial Average, Emerging Market Indices, Exchange Traded Fund, Fund C, Mega Cap, Mid Caps, Nasdaq 100, Obstructionist, Powershares, Republican Presidential Candidates, Roller Coaster, Small Caps, Spdr, TSX 60
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Conditions Continue to Improve, but Risks Remain (Doll)

Monday, November 21st, 2011

Con­di­tions Con­tinue to Improve, but Risks Remain

Novem­ber 21, 2011

Mar­kets Weaken on Uncertainty

Last week was a tough one for equity mar­kets. Investors grew uneasy in the face of renewed uncer­tainty about the state of the Euro­pean debt cri­sis as well as grow­ing indi­ca­tions that the US Con­gres­sional "super com­mit­tee" charged with a mas­sive deficit reduc­tion task gave indi­ca­tions that they would be unsuc­cess­ful. For the week, the Dow Jones Indus­trial Aver­age lost 2.9% to close at 11,796, the S&P 500 Index was down 3.8% to 1,215 and the Nas­daq Com­pos­ite fell 4.0% to 2,572.

Con­cerns Over Europe Remain Key

In our view, the Euro­pean debt sit­u­a­tion remains the most impor­tant vari­able affect­ing the global finan­cial mar­kets. Con­cerns over Europe's debt sit­u­a­tion have been out­weigh­ing the pos­i­tives com­ing from robust earn­ings reports and better-than-expected eco­nomic data as investors remain con­cerned over the pos­si­bil­ity of a finan­cial melt­down that could trig­ger a sig­nif­i­cant global eco­nomic slow­down or reces­sion. Despite the ongo­ing fears, we do believe that some progress is being made.

The changes in gov­ern­ment that have occurred in both Greece and Italy seem to be pos­i­tive signs as new Prime Min­is­ters Lucas Papademos and Mario Monti are well respected and are widely regarded as tech­nocrats who appear com­mit­ted to solv­ing their nations' debt prob­lems. The ques­tion, of course, is whether or not any solu­tions imple­mented through­out Europe will take place fast enough to pre­vent wide­spread contagion.

US Super Com­mit­tee Poised for Failure?

The Con­gres­sional super com­mit­tee has been dom­i­nat­ing head­lines of late and cur­rent indi­ca­tions are that the com­mit­tee may soon announce that it has failed to pro­duce a frame­work for iden­ti­fy­ing the needed $1.2 tril­lion in deficit reduc­tion that it was charged with. We had long sus­pected that the com­mit­tee would pass on the tough­est issues, but we had thought it was pos­si­ble that the group would be able to iden­tify cuts and sav­ings of around $400 to $600 bil­lion, com­ing up with a sort of half-victory. At present, the odds of the com­mit­tee announc­ing that they have reached absolutely no deal are ris­ing, which would set the stage for an across-the-board auto­matic set of cuts that would com­mence in Jan­u­ary 2013.

Although the uncer­tainty sur­round­ing the super com­mit­tee is a con­cern for investors, it is impor­tant to remem­ber that, unlike the debt ceil­ing debate that occurred over the sum­mer, there is no loom­ing threat of a gov­ern­ment shut­down or any sort of debt default asso­ci­ated with the committee's plans. As a result, the mar­ket impact of the committee's plan (or lack thereof) should remain rel­a­tively con­tained. To us, the more impor­tant issue is whether or not Con­gress will be able or will­ing to extend unem­ploy­ment ben­e­fits and pay­roll tax reduc­tions. If these exten­sions do not occur, it would act as an eco­nomic drag into 2012.

Eco­nomic Accel­er­a­tion Con­tin­ues (For Now)

Although the news has been over­shad­owed by events in Europe and the antic­i­pa­tion of the super committee's announce­ments, eco­nomic data has con­tin­ued to be broadly encour­ag­ing. Retail sales for Octo­ber were stronger than expected and ini­tial unem­ploy­ment claims recently fell to their low­est level since early 2011. A broader look back over the course of this year shows that eco­nomic growth has been accel­er­at­ing. First-quarter gross domes­tic prod­uct ??grew by 0.4%, sec­ond quar­ter growth was 1.3%, third quar­ter growth was 2.5% and ana­lysts are cur­rently fore­cast­ing fourth-quarter growth of around 3.0%. While we do not expect this pace of eco­nomic accel­er­a­tion to con­tinue into 2012, we do think the data shows that the fears of a double-dip reces­sion have largely passed.

Out­look Con­tin­ues to Hinge on Europe

Notwith­stand­ing last week's mar­ket set­back, con­di­tions have improved notice­ably over the last cou­ple of months. In late sum­mer, many were pre­dict­ing that there was a greater-than-50% chance that the United States would sink back into reces­sion, Europe was on the verge of falling apart and there were wide­spread fears of a hard eco­nomic land­ing in China. Today, it is grow­ing more clear that not only has the United States avoided a reces­sion, but it is actu­ally show­ing signs of growth accel­er­a­tion, Europe is show­ing signs of progress (although much more needs to be done) and China appears poised for a soft land­ing. As a result, equity mar­kets in most parts of the world have appre­ci­ated by double-digit per­cent­ages since the height of these problems.

The ques­tion for investors, of course, is whether these sorts of gains will con­tinue. We lean toward the opti­mistic side of this ques­tion, but rec­og­nize that it takes no small amount of faith to do so. We are hope­ful that the eco­nomic momen­tum from the United States and else­where will remain a tail­wind, but, as has been the case for months now, much hinges on the out­come of Europe's debt problems.

About Bob Doll

Bob Doll is Chief Equity Strate­gist for Fun­da­men­tal Equi­ties at Black­Rock^® a pre­mier provider of global invest­ment man­age­ment, risk man­age­ment and advi­sory ser­vices. Mr. Doll is also Lead Port­fo­lio Man­ager of BlackRock's Large Cap Series Funds. Prior to join­ing the firm, Mr. Doll was Pres­i­dent and Chief Invest­ment Offi­cer at Mer­rill Lynch Invest­ment Managers.

Sources: Black­Rock, Bank Credit Ana­lyst. This mate­r­ial is not intended to be relied upon as a fore­cast, research or invest­ment advice, and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any invest­ment strat­egy. The opin­ions expressed are as of Novem­ber 21, 2011, and may change as sub­se­quent con­di­tions vary. The infor­ma­tion and opin­ions con­tained in this mate­r­ial are derived from pro­pri­etary and non­pro­pri­etary sources deemed by Black­Rock to be reli­able, are not nec­es­sar­ily all-inclusive and are not guar­an­teed as to accu­racy. Past per­for­mance is no guar­an­tee of future results. There is no guar­an­tee that any fore­casts made will come to pass. Reliance upon infor­ma­tion in this mate­r­ial is at the sole dis­cre­tion of the reader. Invest­ment involves risks. Inter­na­tional invest­ing involves addi­tional risks, includ­ing risks related to for­eign cur­rency, lim­ited liq­uid­ity, less gov­ern­ment reg­u­la­tion and the pos­si­bil­ity of sub­stan­tial volatil­ity due to adverse polit­i­cal, eco­nomic or other devel­op­ments. The two main risks related to fixed income invest­ing are inter­est rate risk and credit risk. Typ­i­cally, when inter­est rates rise, there is a cor­re­spond­ing decline in the mar­ket value of bonds. Credit risk refers to the pos­si­bil­ity that the issuer of the bond will not be able to make prin­ci­pal and inter­est pay­ments. Index per­for­mance is shown for illus­tra­tive pur­poses only. You can­not invest directly in an index.

Black­Rock is a reg­is­tered trade­mark of Black­Rock, Inc. All other trade­marks are the prop­erty of their respec­tive owners.

Pre­pared by Black­Rock Invest­ments, LLC, mem­ber FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: Contagion, Debt Crisis, Debt Problems, Debt Situation, Deficit Reduction, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Earnings Reports, Economic Data, Financial Meltdown, Global Economic Slowdown, Global Financial Markets, Mario Monti, Nasdaq Composite, Positive Signs, Prime Ministers, Recession, Technocrats, Trillion
Posted in Markets | Comments Off

Every Picture Tells a Story: Market Charts Looking Good (Sonders)

Friday, November 18th, 2011

Novem­ber 14, 2011

by Liz Ann Son­ders, Senior Vice Pres­i­dent, Chief Invest­ment Strate­gist, Charles Schwab & Co., Inc.

Key points

• With so much focus on the macro, I thought an update on the micro would be welcome.
• Sev­eral mea­sures of sen­ti­ment, val­u­a­tion and tech­ni­cal con­di­tions show the mar­ket to be in pretty good shape.
• Macro head­winds per­sist, but the expec­ta­tions bar has arguably been set low enough to be eas­ily hurdled.

My and my research col­leagues' reports this year have been heav­ily macro-oriented, for obvi­ous rea­sons, given mas­sive macro head­winds with which the mar­kets and econ­omy have been con­tend­ing. How­ever, in my report of two weeks ago, I veered into the future, with a more opti­mistic assess­ment of what could go right with the US economy.

Today, I want to look short-term again, but go back to basics with an update on some of the clas­sic fun­da­men­tals that typ­i­cally drive mar­kets. It's been a while since I wrote about sen­ti­ment, val­u­a­tion, earn­ings and the market's tech­ni­cal con­di­tion. Since charts often tell the most accu­rate story, this report is filled with them. I'll start with sentiment.

But before I get to that …

… we all know it's been a wild ride so far this year. As I write this, the S&P 500 Index® is flat on the year, hav­ing suf­fered a near-bear mar­ket drop of more than 19% from the April 29 high to the Octo­ber 3 low, and since ral­ly­ing 15%. It's no won­der investors are frustrated—last week alone saw a remark­able swing, with the Dow Jones Indus­trial Aver­age los­ing nearly 400 points Wednes­day but then recov­er­ing nearly all of that in the sub­se­quent two trad­ing days.

Sen­ti­ment charts

The first sen­ti­ment chart below is the well-watched Crowd Sen­ti­ment Poll put out by Ned Davis Research. Although opti­mism did rise along with the recent rally, it remains in the "extreme pes­simism" zone—a zone in which the mar­ket has his­tor­i­cally had nearly 10% annu­al­ized returns since 1995.

Sentiment's Improved But Still Pessimistic

Source: Fact­Set, Ned Davis Research (NDR), Inc., as of Novem­ber 8, 2011. Fur­ther dis­tri­b­u­tion pro­hib­ited with­out prior per­mis­sion. Copy­right 2011 © Ned Davis Research, Inc. All rights reserved.

The next chart is a more direct way to mea­sure investor sen­ti­ment and shows the dra­matic out­flows from stock mutual funds this year ver­sus the inflows into fixed income funds. Over the past five years, indi­vid­ual investors have redeemed more than $400 bil­lion of domes­tic equity funds while con­tribut­ing more than $800 bil­lion to (low– or no-yielding) fixed income funds. That swing, of more than $1.2 tril­lion since early 2007 is, by far, an all-time record change in pref­er­ence of bonds over stocks, accord­ing to Doug Kass, writ­ing for RealMoney.com.

Investor Have Greatly Favored Bonds Over Stocks

Source: Fact­Set, Invest­ment Com­pany Insti­tute, as of Sep­tem­ber 30, 2011.

Finally, we can look at hedge-fund sen­ti­ment via their net equity expo­sure, which, as you can see below, is near the low last seen at the market's March 2009 bot­tom. Add to that the fact that pen­sion funds' expo­sure has been fixed income-skewed and you get a recipe for some rever­sion to the mean toward stocks.

Hedge Funds Have Not Chased Rally

Source: ISI Group, as of Novem­ber 9, 2011.

Val­u­a­tion charts

Most clas­sic val­u­a­tion mea­sures include earn­ings in the denom­i­na­tor (the "E" in P/E, or price/earnings, ratio). So let's start with earn­ings since we're well into third-quarter report­ing season.

Source: Thom­son Reuters, as of Novem­ber 14, 2011.

With more than 90% of com­pa­nies hav­ing reported, S&P 500 earn­ings are up nearly 18% year-over-year—well bet­ter than what was expected a cou­ple of months ago when reces­sion fears were rampant.

As for val­u­a­tion on those earn­ings, to some degree it's a func­tion of the period one is mea­sur­ing. One of my pre­ferred longer-term val­u­a­tion met­rics incor­po­rates five-year nor­mal­ized earn­ings (four-and-a-half years of his­toric earn­ings and two quar­ters of fore­casted earn­ings). On that basis, the mar­ket is trad­ing at 18.2 times earn­ings ver­sus a median of 17.1 since the late 1940s (the period through which we have data).

Five-Year Nor­mal­ized P/E a Lit­tle Rich

Source: Fact­Set, The Leuthold Group, as of Novem­ber 4, 2011.

But let's look at arguably the most pop­u­lar val­u­a­tion met­ric, which incor­po­rates prospec­tive 12-month earn­ings. On this basis, the mar­ket is dirt cheap at a mul­ti­ple of 12.4 ver­sus a median of 16.8 since 1990 (the period through which we have data).

For­ward P/E Dirt Cheap

Source: Fact­Set, Stan­dard & Poor's, as of Novem­ber 11, 2011. P/Es based on for­ward 12-month oper­at­ing earnings.

One final val­u­a­tion tool I find inter­est­ing is to com­pare the broad envi­ron­ment of today ver­sus the first time the S&P 500 crossed the price at which it's presently trading.

Source: Fact­Set, Fed­eral Reserve, Stan­dard & Poor's, The Leuthold Group. Jan. 6, 1999, rep­re­sents the first time the S&P 500 hit 1,264 (actual clos­ing price was 1272). Bond yield rep­re­sented by 10-year US Trea­sury bond.

Indeed, the S&P 500 has made no head­way in nearly 13 years, but the same can't be said for the econ­omy, val­u­a­tion (using five-year nor­mal­ized earn­ings) or inter­est rates. The mar­ket was over­val­ued back in 1999, but based on this analy­sis, it's quite under­val­ued today.

Tech­ni­cal charts

Lastly I want to high­light two inter­est­ing tech­ni­cal sit­u­a­tions I noticed last week thanks to sentimenTrader.com. The first sur­rounds the Arms Index, also known as the TRIN. It mea­sures the amount of vol­ume in declin­ing stocks ver­sus vol­ume in advanc­ing stocks. A very high num­ber means sell­ing vol­ume is excep­tion­ally lopsided.

Huge Surge in TRIN Shows Lop­sided Sell­ing Pressure

Source: Fact­Set, as of Novem­ber 11, 2011.

Dur­ing last Wednesday's big decline, the TRIN closed above 6. That's only hap­pened eight times in the past 60 years, and one month later, the S&P 500 was up every time, by an aver­age of 6.0%. Three months later it was up every time except one, by an aver­age of 10.3%, with the one loss a mea­ger –0.1%. What it shows is that we expe­ri­enced some cli­mac­tic sell­ing pres­sure last week, a good sign.

The final tech­ni­cal chart brings in volatil­ity. On Fri­day, the mar­ket expe­ri­enced the 17th time in the past three months that the S&P 500 SPY (exchange-traded fund trad­ing the S&P 500) gapped by more than +/- 1% at the open and then didn't close that gap dur­ing the day. This means that the S&P didn't reverse enough to "kiss" the pre­vi­ous day's close. As you can see in the chart below, this level of "unclosed gap" behav­ior has been seen only four other times since the early-1990s. All occurred while the mar­ket was form­ing a major bottom.

Source: www.sentimentrader.com, as of Novem­ber 11, 2011.

In sum …

… this is but a smat­ter­ing of charts high­light­ing the present sentiment/valuation/technical con­di­tion of the mar­ket. Frankly, depend­ing on your bias (bull­ish or bear­ish) you could prob­a­bly find charts to sup­port your case. Even my val­u­a­tion exam­ples tell mul­ti­ple sto­ries (no pun intended).

The net for me is I con­tinue to think the expec­ta­tions bar is set pretty low and that hur­dling it won't be hard. There's a lot of money on the side­lines as we head into year-end and some of that is under increas­ing per­for­mance pres­sure. The mar­ket isn't out of the woods, espe­cially as it relates to the euro­zone debt cri­sis, but we think ral­lies may be more likely than cor­rec­tions in the near term.

Impor­tant Disclosures

The infor­ma­tion pro­vided here is for gen­eral infor­ma­tional pur­poses only and should not be con­sid­ered an indi­vid­u­al­ized rec­om­men­da­tion or per­son­al­ized invest­ment advice. The invest­ment strate­gies men­tioned here may not be suit­able for every­one. Each investor needs to review an invest­ment strat­egy for his or her own par­tic­u­lar sit­u­a­tion before mak­ing any invest­ment decision.All expres­sions of opin­ion are sub­ject to change with­out notice in reac­tion to shift­ing mar­ket con­di­tions. Data con­tained herein from third party providers is obtained from what are con­sid­ered reli­able sources. How­ever, its accu­racy, com­plete­ness or reli­a­bil­ity can­not be guaranteed.Examples pro­vided are for illus­tra­tive (or "infor­ma­tional") pur­poses only and not intended to be reflec­tive of results you can expect to achieve.

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