Jim Rogers says that European countries are still avoiding their main problems — too much spending and too much debt. He tells Bloomberg that proposed solutions to the Eurozone crisis that don’t address those issues may make markets rally in the short term, but won’t solve the long-term issues. Rogers also questions whether the Euro currency will make it another 10 years. He says he’s shorting European stocks, American tech stocks, and emerging market stocks, and long commodities and certain currencies. Rogers also discusses why he thinks the Federal Reserve is misleading the public.
Monthly Archives: November 2011
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.
Are historically high profit margins for U.S. firms sustainable, or will they come bouncing back to the mean — and throw a wrench into the stock market in the process? Blackrock’s Bob Doll and GMO’s Jeremy Grantham have very different takes, according to Bloomberg.
Doll says a weak job market and labor-saving technologies have helped push margins to their current record high levels. And, he doesn’t see either of those trends abating. Sluggish job growth and low interest rates mean that an increase in costs isn’t a threat right now. “We didn’t need a strong economy to get margins high,” he said. “Why do we need a strong one to keep them high?”
Grantham has a different take. Back in August, he called margins “freakishly high”. He thinks we will see a reversion to the mean in profit margins, which is a danger to stocks. His GMO colleague Ben Inker told Bloomberg that “The implication for the stock market is ugly, because it means earnings are unsustainably high.”
Dennis Bryan, co-portfolio manager of the FPA Capital Fund, which is the top-performing diversified U.S. stock fund over the past 25 years, according to Morningstar, shares Grantham and Inker’s concerns. He told Bloomberg that companies may be reaching their limit in wringing out costs. “Will companies be able to keep tightening their belts by cutting millions more Americans out of the workforce?” said Bryan, who has said that he expects “a lot of profit disappointments coming our way”.
Marc Faber of the Gloom, Boom & Doom Report says equities may rally in the short term, but he doesn’t think it will be a long-lasting bullish move. “The rally came from a very oversold level,” Faber tells FOX Business Network. “We have a very strong support on the S&P between 1100-1150. And usually the December month is a strong month as well as January so we have seasonal strength and oversold conditions and we can rally, but I don’t think you should expect too much. I think we’ll get into overhead resistance when the S&P rallies another 5% or so between 1250-1300.” Faber says he recommends a portfolio that is equally divided among four assets: equities, real estate, gold, and cash. He also discusses why he thinks strong initial holiday spending in the U.S. is unsustainable, and what he thinks the end-game is for Europe.
While the success of retailers on Black Friday can send stocks up or down in the very short term, Mark Hulbert says investors shouldn’t think that such market moves are a harbinger of things to come for the rest of the year.
“The initial reports of how retailers are doing on Black Friday are an unreliable guide to how the stock market performs through the end of the year,” Hulbert writes for MarketWatch. “In fact, more often than not, it’s been a bad omen whenever those initial reports are especially positive and stocks soar.”
Hulbert says that’s the conclusion he reached after studying stock market returns back to 1975, when the term “Black Friday” became popular. He says he looked at the correlation between a) the Dow Jones Industrial Average’s performance on the Friday and Monday following Thanksgiving and b) the Dow’s performance the rest of the year.
“Surprisingly, I found an inverse correlation,” Hulbert writes. “That is, whenever the Dow was strongly up over the two post-Thanksgiving trading sessions, the market tended to fall from then through New Year’s Day. And just the opposite tended to be the case whenever the Dow lost ground over these two post-Turkey sessions.” What’s more, he says the correlation is “significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine.”
History has shown that investors who stick to disciplined, fundamental-focused strategies give themselves a good chance of beating the market over the long haul. And one of the investment gurus who has compiled the most data on that topic is James O’Shaughnessy, whose book What Works on Wall Street became something of a bible for investment strategies when it was released 15 years ago.
Now, O’Shaughnessy has released an updated version of his book, with a plethora of new data on various investment strategies. Using data that stretches back to before the Great Depression in some cases, O’Shaughnessy back-tests numerous strategies, and comes to some very intriguing conclusions.
One of those conclusions is about broader investment approach. For O’Shaughnessy, one of the biggest problems investors face is the tendency to focus on recent events. In the introduction to his book, he discusses how some began calling the “abysmal” returns of the past decade the “new normal”, even though it wasn’t that long ago that commentators were declaring that the Internet had ushered in a “new era” of perpetually rising stock returns — a declaration that proved to be horribly wrong. “It seems that the one thing that doesn’t change is people’s reaction to short-term conditions and their axiomatic ability to perpetuate them far into the future,” O’Shaughnessy writes.
But while many investors are assuming that the poor performance of stocks during the 2000s is the start of a new era of poor returns, O’Shaughnessy says history shows something entirely different. He looks at the worst rolling ten-year returns for equities since 1900; the period ending in February 2009 was the second-worst over that span, with 10 other 10-year spans ending in 2008, 2009, or 2010 cracking the top 50 (his data goes through 2010).
What did he find? Well, he found that equity returns following those awful 10-year periods tended to be outstanding. In the year following the 50 worst 10-year periods, stocks averaged a real return of 20.47%. The average three-year real compound annualized return following the bad decades was 14.53%; the five-year figure was 15.78%, and the ten-year figure was 14.55%.
Since stocks bottomed in early 2009, that pattern has again played out, to an even greater degree. The S&P 500 gained 68.57% in the first year after its March 9, 2009 bottom; it averaged 39.68% gains in the first two years. (These S&P figures are before inflation is factored in, but the main idea — that bad periods are followed by strong rebounds — holds true.)
“Historically, we have always seen reversion to the mean,” O’Shaughnessy explains. “After stocks have had an unusually great 10 or 20 years, they typically turn in subpar results over the next 10 or 20, and after bad 10- to 20-year stretches, the next 10 to 20 tend to be above average.” Why is that? O’Shaughnessy astutely notes that it’s largely about valuation — stocks get overvalued after good decades, and undervalued after bad decades. And disciplined investors who are willing to invest in stocks following bad decades, like the one we’ve recently had, can take advantage of that.
Next week, we’ll take another look at O’Shaughnessy’s updated book, focusing on his latest findings on which valuation metrics have the best track records of success over the long haul, and some of his key tenets for investing success.
In his latest article for Seeking Alpha, Validea CEO John Reese says that Warren Buffett’s recent IBM buy actually isn’t all that out of character for the tech-wary Buffett — and says other “Buffett-esque” tech stocks are out there right now.
“While Buffett’s IBM move was surprising given [his previous tech sector] comments, it wasn’t all that surprising if you look at the fundamentals — which are what my Buffett-inspired Validea.com ‘Guru Strategy’ does,” Reese writes. “My Buffett-based model identifies stocks that have the quantitative characteristics Buffett looked for while building his empire. It doesn’t always jive with Buffett’s real-time moves, since the Oracle of Omaha no doubt takes non-quantitative factors into account when investing. But in the case of IBM, it was on the money. Throughout much of this year, as Buffett has been building Berkshire’s IBM position, my Buffett-based approach has been giving the stock very solid marks.”
The Buffett approach looks for stocks with lengthy histories of increasing annual earnings per share, manageable debt, and high returns on equity, and IBM has all three, Reese says. And, he says IBM isn’t alone; his Buffett-based approach is giving a number of other tech sector stocks high marks. Among them: Oracle Corporation. To read the full article and see all the picks, click here.