The Markets
If it feels like the stock market has been volatile this year, you’re right. Here are a few examples:
• Three-month historic volatility for the “fear” gauge known as the VIX hit a record on October 31, surpassing the prior peak from December 2008.
• Intraday swings in the Dow Jones Industrial Average have averaged 261 points since August 1, an exceptionally large number.
• On four consecutive days back in August, the Dow Jones Industrial Average alternated between gains and losses of more than 400 points, the longest streak ever.
Source: Bloomberg
All this volatility and the lack of a clear, sustained direction in the market have frustrated many investors.
The problems in Europe and the budget wrangling in the U.S. have kept investors in a risk-on, risk-off mode throughout much of this year. As a result, many stocks have traded in herd-like fashion without much regard to individual company fundamentals, according to investment manager Duke Buchan, III.
At times like this, it’s important to have patience and as Warren Buffett says, wait for that “fat pitch.”
WHAT IS THE PRICE OF ECONOMIC GROWTH in China and how does it affect us in the U.S.? Ever since 1978 when Chinese leader Deng Xiaoping laid out a vision of economic reform, China has been on a growth spurt of massive proportion. However, that growth comes with a huge price in the form of limited freedom. Last week, Chinese leaders clamped down again on freedom of speech in an effort to control the spread of social unrest.
In China, the government blocks access to the microblog service “Twitter” and, instead, a Chinese version called “Weibo” has become popular. In total, more than 300 million Chinese people use microblogs, with Weibo the most popular, according to Bloomberg.
Regarding last week’s clampdown, Chinese officials announced that users of Weibo in Beijing will have to register their real names and be verified by government authorities before posting on the service. In addition, users are banned from posting anything that could lead to disrupting the social order, according to The Wall Street Journal.
This isn’t the first government crackdown on freedom of speech. Earlier in the year, the government blocked citizens’ access to searches on the “Arab Spring” that was rumbling through the Middle East. Prior to that, the government blocked access to Facebook, YouTube, and Google.
What’s the government’s problem with freedom of speech?
As the “Arab Spring” uprising in the Middle East demonstrated, social media can enable millions of people to communicate and mobilize in short order. China seems to be very afraid of letting its citizens have this capability for fear that a popular uprising could lead to chaos in a sprawling country of 1.3 billion people.
With China still a major growth engine for the world economy, we have to pay close attention to any social trends affecting the country. If the government clamps down too hard and its citizens rise up, it could quickly morph from a social/political movement to one that has major worldwide economic implications. On top of that, China is gearing up for a once in a decade leadership change in 2012 and, given the country’s history, a smooth transition is not guaranteed.
When investing money, you have to consider possible “black swan” events that have a low probability of occurring, but, if they do occur, could wreak havoc. A Chinese uprising could be one of those and we want you to know that it’s on our radar.
Weekly Focus – Think About It
“If the freedom of speech is taken away then dumb and silent we may be led, like sheep to the slaughter.” --George Washington, U.S. President
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Monday, December 19, 2011
Monday, December 12, 2011
Weekly Commentary December 12th, 2011
The Markets
What’s more important to the U.S. stock market, economic growth or the value of the U.S. dollar?
On the surface, economic growth would seem to be the logical answer since as the economy grows, earnings should grow, too. But, digging a little deeper, the answer is not so clear cut.
What muddles the answer is that large U.S. multinational companies generate about 47 percent of their revenue from outside the U.S., according to Standard and Poor’s. When that revenue is translated back into U.S. dollars, the revenue could vary significantly depending on whether the dollar is strong, weak, or neutral.
For example, if the dollar is strong, then foreign revenue translates into fewer dollars which reduces a U.S. company’s reported revenue. Lower revenue could lead to lower profits and possibly lower stock prices. The reverse is also true. If the dollar is weak, then foreign revenue translates into more dollars which increases a U.S. company’s reported revenue and could lead to higher profits.
We’re talking about the value of the dollar today because of the uncertainty surrounding numerous world currencies. The euro, in particular, is on the radar because it might soar or plunge depending on how Europe cleans up its sovereign debt problem. And, with Europe accounting for 22 percent of our total exports so far this year, any major change in the value of the euro could significantly affect U.S. corporate revenue and profits, according to the Commerce Department.
That’s why Christopher Wood, strategist for CLSA Asia-Pacific Markets says, “The key variable for the U.S. stock market is not the U.S. economy, but the U.S. dollar.”
In a globally based economy, the value of the dollar matters. It’s one more variable that could affect stock prices and bears monitoring.
What’s more important to the U.S. stock market, economic growth or the value of the U.S. dollar?
On the surface, economic growth would seem to be the logical answer since as the economy grows, earnings should grow, too. But, digging a little deeper, the answer is not so clear cut.
What muddles the answer is that large U.S. multinational companies generate about 47 percent of their revenue from outside the U.S., according to Standard and Poor’s. When that revenue is translated back into U.S. dollars, the revenue could vary significantly depending on whether the dollar is strong, weak, or neutral.
For example, if the dollar is strong, then foreign revenue translates into fewer dollars which reduces a U.S. company’s reported revenue. Lower revenue could lead to lower profits and possibly lower stock prices. The reverse is also true. If the dollar is weak, then foreign revenue translates into more dollars which increases a U.S. company’s reported revenue and could lead to higher profits.
We’re talking about the value of the dollar today because of the uncertainty surrounding numerous world currencies. The euro, in particular, is on the radar because it might soar or plunge depending on how Europe cleans up its sovereign debt problem. And, with Europe accounting for 22 percent of our total exports so far this year, any major change in the value of the euro could significantly affect U.S. corporate revenue and profits, according to the Commerce Department.
That’s why Christopher Wood, strategist for CLSA Asia-Pacific Markets says, “The key variable for the U.S. stock market is not the U.S. economy, but the U.S. dollar.”
In a globally based economy, the value of the dollar matters. It’s one more variable that could affect stock prices and bears monitoring.
IT’S NOT JUST HOW MUCH A COMPANY EARNS, but how much of an earnings multiple investors put on those earnings that helps determine stock prices. To illustrate this, let’s assume it’s your lucky day and you have the ability to inherit one of the following five companies. Based on the data given in the following chart, which of the five companies would you choose to inherit?
| Company | 2010 Annual Revenue | 2010 Operating Profit |
| Ford (car company) | $128,954,000,000 | 6,658,000,000 |
| DuPont (chemicals) | 32,733,000,000 | 3,711,000,000 |
| Honeywell (manufacturer) | 33,370,000,000 | 3,134,000,000 |
| eBay (e-commerce) | 9,156,000,000 | 2,054,000,000 |
| VMware (software) | 2,857,000,000 | 428,000,000 |
Source: Morningstar
Just looking at the numbers, you might think Ford would be the obvious choice. Its revenue was nearly four times the next closest company and its operating profit last year was nearly 80 percent higher than the next closest company.
Interestingly, the stock market can tell us how it thinks these five companies stack up against one another. It turns out that as of last week, the market value of these five companies (stock price times shares outstanding) was between $40.5 billion and $41.9 billion. In other words, the stock market valued these companies at basically the same price.
That may seem strange since the financial metrics of these five companies differs significantly. How can Ford, with $129 billion in annual revenue and $6.7 billion in operating profit be worth about the same as VMware, a company with just $2.9 billion in annual revenue and an operating profit of only $0.4 billion?
This highlights the point that in the long run, earnings do drive stock prices; however, the value that investors place on those earnings can vary significantly from one company to the next at any point in time. So, what causes investors to value a small company like VMware at about the same market value as the much larger Ford? Ah, that’s the million-dollar question which keeps investment analysts gainfully employed!
We mention these five stocks not as a buy or sell recommendation, but simply to point out that numerous factors affect the valuation of stock prices. It’s not as simple as saying those with the most profits win.
Weekly Focus – Shuffling Cards
Playing cards is about as American as baseball, hot dogs, and apple pie. So here’s a trivia question for you. How many times must you shuffle a deck of 52 playing cards in order to ensure it is truly scrambled?
Mathematicians have studied this problem and determined that even after six shuffles you can still find patches of non-random sequences. It’s the seventh shuffle that does the trick. At seven shuffles you reach a tipping point and the deck turns into chaos, according to the book Magical Mathematics by Persi Diaconis and Ron Graham as reported in The Wall Street Journal. So, if you are concerned that one of your table mates is a skilled cheat, make sure you shuffle at least seven times!
Monday, December 5, 2011
Weekly Commentary December 5th, 2011
The Markets
Politicians may struggle to work together, but at least the world’s central bankers can.
At 8:00 a.m. EST on November 30, the Federal Reserve released a statement that sent worldwide financial markets skyrocketing. Here’s the first paragraph of the statement:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
The U.S. Federal Reserve went on to say that should liquidity conditions continue to deteriorate, it has “a range of tools available” and “is prepared to use these tools as needed.” For many investors, this move meant world central banks “get it” and are ready to pull out “the big guns” to keep the worldwide economy from grinding to a halt.
Investors rejoiced and, by the end of the day, stocks had soared as the Dow Jones Industrial Average rose 4.2 percent, according to The Wall Street Journal.
While the central banks’ moves were welcome, they don’t solve the economy’s underlying problem. Certain European countries (and the U.S., too) suffer from too much debt and too little growth. The banks’ moves were akin to taking ibuprofen -- they mask the pain, but don’t provide a cure.
The cure likely won’t happen until European politicians agree on a credible and enforceable, “long-term regime of fiscal discipline,” according to The Wall Street Journal. While European leaders meet frequently to discuss policy solutions, they unfortunately suffer from the old truism, “When it’s all said and done, a lot more gets said than gets done.”
WHO WANTS TO BE A BILLIONAIRE? Ever wonder how billionaires got to that level? Here are 10 success tips shared by four billionaires on a recent episode of the news show “20/20:”
1. Figure out what you're so passionate about that you'd be happy doing it for 10 years, even if you never made any money from it. That's what you should be doing.
2. Always be true to yourself.
3. Figure out what your values are and live by them, in business and in life.
4. Rather than focus on work-life separation, focus on work-life integration.
5. Don't network. Focus on building real relationships and friendships where the relationship itself is its own reward, instead of trying to get something out of the relationship to benefit your business or yourself.
6. Remember to maximize for happiness, not money or status.
7. Get ready for rejection.
8. Success unshared is failure. Give back -- share your wealth.
9. The truth is cold and hard, but it's the first point on the path to hope and salvation.
10. Successful people do all the things unsuccessful people don't want to do.
Even if you’re not focused on becoming a billionaire, these are some pretty good tips to live by. Which ones resonate with you?
Weekly Focus – Fun With Math
It’s been said that compound interest is the eighth wonder of the world. Compound interest simply means that you get “interest on your interest” instead of just interest on your original principal. Here are a couple math questions that display the power of compounding.
A typical piece of copy paper is 0.004 inches thick. If you were able to fold this piece of paper in half everyday for 10 days (i.e., double the thickness each day), how thick would your paper be after 10 days?
Taking this a step further, how many times would you have to fold your paper in half in order for your piece of paper to be as thick as the average distance between the earth and the moon? Here’s a hint: the average distance between the earth and moon is 238,857 miles.
Are you ready for the answers? After 10 days, your paper would be 4.1 inches thick. And, to reach the moon, you’d have to fold your paper in half each day for just 42 days. Surprised?
The power of compounding also makes a good case for reinvesting your dividends so you can get a “return on your return.”
Politicians may struggle to work together, but at least the world’s central bankers can.
At 8:00 a.m. EST on November 30, the Federal Reserve released a statement that sent worldwide financial markets skyrocketing. Here’s the first paragraph of the statement:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
The U.S. Federal Reserve went on to say that should liquidity conditions continue to deteriorate, it has “a range of tools available” and “is prepared to use these tools as needed.” For many investors, this move meant world central banks “get it” and are ready to pull out “the big guns” to keep the worldwide economy from grinding to a halt.
Investors rejoiced and, by the end of the day, stocks had soared as the Dow Jones Industrial Average rose 4.2 percent, according to The Wall Street Journal.
While the central banks’ moves were welcome, they don’t solve the economy’s underlying problem. Certain European countries (and the U.S., too) suffer from too much debt and too little growth. The banks’ moves were akin to taking ibuprofen -- they mask the pain, but don’t provide a cure.
The cure likely won’t happen until European politicians agree on a credible and enforceable, “long-term regime of fiscal discipline,” according to The Wall Street Journal. While European leaders meet frequently to discuss policy solutions, they unfortunately suffer from the old truism, “When it’s all said and done, a lot more gets said than gets done.”
WHO WANTS TO BE A BILLIONAIRE? Ever wonder how billionaires got to that level? Here are 10 success tips shared by four billionaires on a recent episode of the news show “20/20:”
1. Figure out what you're so passionate about that you'd be happy doing it for 10 years, even if you never made any money from it. That's what you should be doing.
2. Always be true to yourself.
3. Figure out what your values are and live by them, in business and in life.
4. Rather than focus on work-life separation, focus on work-life integration.
5. Don't network. Focus on building real relationships and friendships where the relationship itself is its own reward, instead of trying to get something out of the relationship to benefit your business or yourself.
6. Remember to maximize for happiness, not money or status.
7. Get ready for rejection.
8. Success unshared is failure. Give back -- share your wealth.
9. The truth is cold and hard, but it's the first point on the path to hope and salvation.
10. Successful people do all the things unsuccessful people don't want to do.
Even if you’re not focused on becoming a billionaire, these are some pretty good tips to live by. Which ones resonate with you?
Weekly Focus – Fun With Math
It’s been said that compound interest is the eighth wonder of the world. Compound interest simply means that you get “interest on your interest” instead of just interest on your original principal. Here are a couple math questions that display the power of compounding.
A typical piece of copy paper is 0.004 inches thick. If you were able to fold this piece of paper in half everyday for 10 days (i.e., double the thickness each day), how thick would your paper be after 10 days?
Taking this a step further, how many times would you have to fold your paper in half in order for your piece of paper to be as thick as the average distance between the earth and the moon? Here’s a hint: the average distance between the earth and moon is 238,857 miles.
Are you ready for the answers? After 10 days, your paper would be 4.1 inches thick. And, to reach the moon, you’d have to fold your paper in half each day for just 42 days. Surprised?
The power of compounding also makes a good case for reinvesting your dividends so you can get a “return on your return.”
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