Charles Schwab’s Liz Ann Sonders — whose calls on the start and end of the “Great Recession” proved quite accurate — warns against hyperfocusing on Greece’s debt problems.
“Even the broader European focus has largely seemed to overshadow developments in the United States, which remains the world’s largest economy,” Sonders writes along with Brad Sorensen and Michelle Gibley in commentary on Schwab’s web site. She says that industrial and manufacturing data has been encouraging in the U.S. recently, and that third-quarter earnings reports have overall been solid. “After factoring in the latest results and guidance, valuations are attractive, especially relative to bonds,” she writes.
Sentiment is also giving a bullish sign, she says, noting that pessimism continues to reign, despite the market’s recent surge. And that bodes well for the rally’s sustainability, she says.
Sonders also indicates that economic issues may be making emerging markets a more attractive investment opportunity than Europe. The need to cut back on debt could lead to shorter business cycles and pressure on earnings and economic growth in the coming years in Europe, she says. Emerging markets, meanwhile, “tend to have lower debt levels. Additionally, generally younger demographics create a lighter burden on public finances and potential for more output. Meanwhile, expectations for emerging markets are low, with valuations at the lowest levels since 2009.”
In his latest article for Canada’s Globe and Mail, Validea CEO John Reese says that, while many of history’s greatest investors have been value-focused strategists, momentum can also be a critical part of successful approaches.
“In fact, looking for stocks with good price momentum can be a big boost to returns — particularly during certain market conditions,” Reese writes. “James O’Shaughnessy, one of the gurus upon whose writings I base my Guru Strategies, has researched how the market’s affection for momentum varies over time. … His firm’s research has shown that momentum-type strategies tend to fare well in the second years of bull markets, and that the third year of a bull — which we are now in the middle of — tends to be “much friendlier to trend-following and high-yield strategies than to value.”
Reese says his Validea Canada Guru Strategies — each of which is based on the approach of a different investing great — have borne that out, with the three top-performing guru-based portfolios over the past year or so all including a relative strength criterion.
But Reese also offers a warning: “These and other successful momentum-focused strategies don’t look at relative strength in a vacuum; they use it as part of a broader approach that also examines fundamental and financial criteria. In doing so, they look for stocks that have the wind in their sails for a reason.”
Reese examines three picks with strong momentum that get interest from his guru-based models. Among them: Metro Inc., which gets strong interest from his O’Shaughnessy-inspired approach.
Kenneth Fisher says the fact that GDP growth nearly doubled in the U.S.’s third quarter is far from the only positive economic sign out there — even though the media continues to focus on the negative.
In a post on Forbes.com, Fisher points to a number of economic figures, including improving manufacturing numbers in the U.S.; strong recent retail sales figures; strong manufacturing numbers in Europe; and continued strong growth from China last quarter that indicates the country won’t have the “hard landing” many fear.
Fisher says that there are negatives, too. “But even in periods of the most robust global growth there will be weak spots,” he says. “That so many positive factors exist is bullish. That they are so little talked about is even more bullish. That gap between too-dour sentiment and better-than-realized reality is a powerful positive factor for stocks through yearend and well into 2012.”
Hedge fund guru Barton Biggs, who had been reducing equity exposure late in the summer months, has recently reversed course and has continued to up his exposure since the announcement of the new plan to stem Europe’s debt crisis.
“This morning, all of the wise men of Europe and the economists are very negative about this European deal that was worked out last week,” Biggs tells Bloomberg. “The general feeling is that the right thing to do is to cut back on risk and that it is going to be a flop, and that all they did was kick the can not very far down the road again. I am inclined to feel differently.” He says that there is “a tremendous amount of money that’s trapped out of stocks”, and that the rally is “going to continue for a while.”
Biggs had reduced his net exposure to equities to about 20% in September. But by mid-October, it was up to 65%, and now it is at 80%, Bloomberg reports. He’s particularly high on certain tech sector and industrial sector picks.
In a rare joint interview, PIMCO’s Mohamed El-Erian and Bill Gross say that the US will continue to experience slow growth because of structural problems with the economy, and that the public sector must step in and spend money in areas in which the private sector isn’t willing to do so. Gross tells WealthTrack’s Consuelo Mack that he sees growth of 0% to 1% for the U.S. in the next 6 to 12 months, which means good investment opportunities will be few and far between. El-Erian, meanwhile, offers his take on the European debt crisis, and why Europe must have its “moment of truth” about the nature of its union.
On the Wall Street Journal’s “Total Return” blog, Jason Zweig highlights research that indicates human beings have an “optimism bias” — that is, we learn more from our successes than we do from our failures. And that, he says, has major implications for investors.
Zweig says a new study, performed by a team of neuroscientists in London and Berlin found that “in short, humans don’t learn equally well from upside and downside mistakes.” Instead, “we pay more attention when the future turns out to be better than we expected.”
“If you bought Apple at $60 a share thinking maybe it would double, you’ve probably spent a fair amount of time wondering why you underestimated its potential and trying to apply those lessons to find other great stocks,” Zweig explains. “On the other hand, if you bought Netflix at $200 a share, never dreaming it would go down by more than half, you’re probably not doing much self-reflection at all; you’re looking for somebody to blame.”
Another example of how this plays out, Zweig says, involves selling decisions. Most investors, he says, stop following a stock after they’ve sold it. But, he says, unless you continue to follow it — and compare the performance to the performance of any stocks you replace it with — you don’t really know whether the sell decision was a good one.
The bottom line, according to Zweig, is that investors have to “force themselves to study their mistakes, or they will never learn from them. Otherwise your automatically optimistic brain will keep you from confronting the truth.”
Top-performing fund manager Steven Romick, who often targets smaller stocks, is finding that the current market environment has larger stocks looking attractive because of their valuations.
“We think owning good, large-cap, global, and growing businesses are a good place to invest today,” Romick tells Morningstar. “Those of which cannot adequately reinvest their capital should pay higher dividends. Wal-Mart (WMT) is an example of that. Its dividend growth far outstrips its earnings growth, and we expect that to continue into the future.”
Bonds, however, are another story. “We refuse to own long-dated bonds of any ilk, particularly U.S. Treasuries,” Romick says. “We cannot understand a world where people are willing to lend to the U.S. for 1.8% for 10 years or 2.8% for 30 years.”
Romick also discusses how to avoid value traps. “When we analyze a company — its business, its industry, their financial statements, and its valuation — we try to make sure that the company has the ability to grow its revenues,” he says. “So-called ‘value traps’ are usually found in those companies that do not have the ability to increase their top line. We believe that this focus will limit (but not eliminate) our mistakes.”
Top value investor Charles de Vaulx is high on Japanese stocks and stocks of European companies with global exposure. De Vaulx tells Bloomberg that there are a lot of strong European firms that are “not that Euro-centric”. He also discusses why he’s putting a lot of his money into France, and why he thinks the European debt crisis is at its core a banking problem rather than a sovereign problem.
In an interview with CNBC, Validea CEO John Reese talks about his Warren Buffett-inspired strategy, and some stocks it’s high on right now. Reese explains how his model uses Buffett-based criteria to pick stocks, including earnings persistence — it looks for firms that have a 10-year history of consistently upping annual earnings. He also talks about some of the other criteria his model uses, and some stocks it’s keen on right now, including Coca-Cola and Stryker Corporation.
Contrary to popular belief, Mark Hulbert says the notion that stock market returns are strong in the years of presidential elections is wrong.
In a recent MarketWatch column, Hulbert comes to that conclusion after examining the Presidential Election Year Cycle. “The implication of this theory is that, immediately after assuming office, presidents swallow whatever economic medicine is necessary, in order to set the stage for the recovery and economic good times that, come the next election, will convince voters with only short-term memories that happy days are here to stay,” he writes. That, he says, would mean that stock returns tend to be better in the second half of a president’s term than the first half. And, he says, that’s true — but “it turns out that second-half strength is almost entirely concentrated in the third years of the cycle.”
In his analysis, Hulbert looked at Dow Jones Industrial Average returns going back to 1932, which, he says, is around the point at which the federal budget became large enough that a president could impact economic cycles. He also used fiscal years (which begin on Oct. 1) rather than calendar years. He found that the fourth-year returns differed insignificantly from the overall returns for the entire period.
The bottom line, according to Hulbert: “The stock market could still produce an impressive return over the next year. The lesson of the data is just that, if the market does do so, it won’t be caused by this coming year being the fourth of President Obama’s term.”