The Markets
At its most basic level, a trade takes place when a buyer is willing to buy at a certain price and a seller is willing to sell at that price. Both parties could be smart, experienced, and looking at the same data, yet somehow one party thinks it’s a good price to buy and the other thinks it’s a good price to sell.
Last week, several news items represented good examples of how investors could look at the same data and draw different conclusions. Consider these:
1. Gross domestic product rose at a 2.8 percent pace in the October through December period.
Bullish investors say that’s up from 1.8 percent the previous quarter and the fastest pace in a year and a half.
Bearish investors say it’s less than the 3.0 percent growth expected by economists and most of the growth was due to inventory accumulation.
Source: MarketWatch
2. The International Monetary Fund (IMF) cut its forecast for global economic growth in 2012 and 2013.
Bullish investors say fears are overblown as private-sector economic activity in the 17-nation euro zone showed small, but unexpected, growth in January and durable-goods orders were up a strong 3.0 percent in December in the U.S. – the third straight increase.
Bearish investors say just heed the IMF’s warning, “Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro-area crisis entered a perilous new phase.”
Source: MarketWatch
3. Spanish and Italian bond yields dropped dramatically lately.
Bullish investors say the drop in yields and the strong demand in January’s bond auctions suggest the euro zone crisis is easing.
Bearish investors say the Portuguese bond market is now imploding, the Greek restructuring could fall apart, and the European Central Bank's December offer of unlimited three-year loans to banks has simply delayed the inevitable day of reckoning.
Source: The Wall Street Journal
It’s differences of opinion like this that make markets. Thanks to the free market, there always seems to be a buyer for every seller – at a price.
Like Joni Mitchell who sang, “I’ve looked at life from both sides now,” we look at the markets from both the bullish and bearish sides and, ultimately, make decisions which we think will best position you to meet your long-term goals and objectives.
WHAT WORRIES AMERICANS THE MOST about the national economy? Here’s the top 10 answers and the percentage who said it, according to an early January Gallup survey.
1. Jobs/unemployment 26%
2. National debt/Federal budget deficit 16
3. Continuing economic decline/economic instability 10
4. Outsourcing of jobs overseas/creating jobs in U.S. 6
5. Obama not doing a good job/no plan/lack of leadership 5
6. Political bickering/Congress 4
7. Healthcare/Medicaid 3
8. Corporate corruption/corporations run the government 3
9. Housing crisis 3
10. The future of our children 2
11. Eight other responses also checked in at 2 percent
The top two items are not really a surprise, but what’s revealing is how low some “important” issues ranked. Taxes, recession, social security, gas prices, education affordability, and the divide between rich and poor (think Occupy Wall Street) all pulled just 2 percent. The stock market and interest rates barely made the list at 1 percent each and ranking 21st and 25th, respectively, out of 26 on the full list.
Interestingly, if we can resolve the two biggest items on the list – the jobs and debt situations – it would most likely also resolve the third item on the list – continuing economic decline.
Do you think the politicians are listening?
(Note: responses total more than 100 percent due to multiple answers.)
Weekly Focus – Just for fun: How to Turn a Watch into a Compass
Let’s assume that you are lost in the wilderness, but you have a watch that still works. You can easily find the cardinal points by pointing the hour hand at the sun. Then form an imaginary line directly through the center of the “wedge” that is created between the hour hand and 12 o’clock. This is your south–north line. The height of the sun in the sky and the time of day will then show you which end of the line is north and which is south, remembering that the sun sets in the west and rises in the east. Try this at home first!
--Bear Grylls, survivalist, TV host, adapted from his 2008 book, “Man vs. Wild”
Our mission is to be dedicated to enhancing the quality of our clients' lives as we address their wealth to help them achieve their long-term goals and dreams. With our unmatched, quality service and guidance, we build strong relationships as we help simplify our clients' financial affairs, allowing them to focus on those areas that give their life meaning and purpose
Monday, January 30, 2012
Thursday, January 26, 2012
Closing the Book on 2011
Sometimes as one year passes to the next, we reflect fondly on the events of the year before. Unfortunately, for so many of us, 2011 was not that kind of year.
Market-moving events throughout 2011 resulted in extreme volatility. Performance across stocks, bonds, and commodities—and the ups and downs of the headlines—were often concerning.
Looking back, 2011 was very difficult for investors, and many upsetting events caused intense pessimism that negatively impacted the markets. We had some of the worst weather conditions on record in the U.S.; tornadoes, hurricanes, blizzards, and wildfires all took a toll on the communities, the agriculture industry, and the economy. Japan suffered an insurmountable loss of life, as families and communities were devastated by the earthquake and tsunami. Spreading Arab unrest and the collapse of North African governments caused great concern. Our own policymakers in Congress could not agree on a debt limit deal, and once they did, a major rating agency downgraded its rating on the U.S. Overseas, confidence in European policymakers eroded as Greece appeared to be on the brink of bankruptcy and the eurozone sovereign debt crisis escalated.
Amidst these challenging hurdles, the markets responded positively to many encouraging events. The U.S. saw steady private sector job growth throughout the year, corporations’ earnings reached new highs, and the Fed pledged to keep short-term interest rates on hold until 2013. The European debt crisis began subsiding when European leaders worked together to agree on new bank support and a “Grand Plan” for managing their debt. The eurozone situation will continue to impact the markets in 2012, but we are encouraged by policymakers’ initial steps.
After a year of extremes and volatility, the S&P 500 Index, which is a leading indicator for large cap equity performance, ended the year almost exactly where it began at 1,257.60. However, the S&P’s performance can be seen as a positive. Given everything that happened during the year—the fair amount of good, and the fair amount of bad—the market’s performance demonstrated its resiliency.
Even though 2011 was not necessarily the kind of year we will miss, we should recognize that there are some positive takeaways. We avoided a return to a recession in the U.S., and we did not have the return to the 2008-2009 financial conditions that many were predicting. The U.S. economy continued to grow moderately, demonstrating continued solid fundamentals. We saw some initial stabilizing measures in Europe, and critically, a global financial crisis that so many feared was averted. Despite all the volatility and challenges, the markets proved resilient, and this gives us some optimism for 2012.
Looking ahead, we need to continue to expect elevated volatility but, we think this will subside. We expect the extremes of the past year to migrate to a middle ground in 2012, where we believe investor sentiment, economic activity, and the market’s direction will become more aligned. As you look ahead to meeting in the middle in 2012, please us with any questions.
Triad Financial Strategies
_________________________________________________________________________
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The index of leading economic indicators (LEI) is an economic variable, such as private-sector wages, that tends to show the direction of future economic activity.
Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.
Market-moving events throughout 2011 resulted in extreme volatility. Performance across stocks, bonds, and commodities—and the ups and downs of the headlines—were often concerning.
Looking back, 2011 was very difficult for investors, and many upsetting events caused intense pessimism that negatively impacted the markets. We had some of the worst weather conditions on record in the U.S.; tornadoes, hurricanes, blizzards, and wildfires all took a toll on the communities, the agriculture industry, and the economy. Japan suffered an insurmountable loss of life, as families and communities were devastated by the earthquake and tsunami. Spreading Arab unrest and the collapse of North African governments caused great concern. Our own policymakers in Congress could not agree on a debt limit deal, and once they did, a major rating agency downgraded its rating on the U.S. Overseas, confidence in European policymakers eroded as Greece appeared to be on the brink of bankruptcy and the eurozone sovereign debt crisis escalated.
Amidst these challenging hurdles, the markets responded positively to many encouraging events. The U.S. saw steady private sector job growth throughout the year, corporations’ earnings reached new highs, and the Fed pledged to keep short-term interest rates on hold until 2013. The European debt crisis began subsiding when European leaders worked together to agree on new bank support and a “Grand Plan” for managing their debt. The eurozone situation will continue to impact the markets in 2012, but we are encouraged by policymakers’ initial steps.
After a year of extremes and volatility, the S&P 500 Index, which is a leading indicator for large cap equity performance, ended the year almost exactly where it began at 1,257.60. However, the S&P’s performance can be seen as a positive. Given everything that happened during the year—the fair amount of good, and the fair amount of bad—the market’s performance demonstrated its resiliency.
Even though 2011 was not necessarily the kind of year we will miss, we should recognize that there are some positive takeaways. We avoided a return to a recession in the U.S., and we did not have the return to the 2008-2009 financial conditions that many were predicting. The U.S. economy continued to grow moderately, demonstrating continued solid fundamentals. We saw some initial stabilizing measures in Europe, and critically, a global financial crisis that so many feared was averted. Despite all the volatility and challenges, the markets proved resilient, and this gives us some optimism for 2012.
Looking ahead, we need to continue to expect elevated volatility but, we think this will subside. We expect the extremes of the past year to migrate to a middle ground in 2012, where we believe investor sentiment, economic activity, and the market’s direction will become more aligned. As you look ahead to meeting in the middle in 2012, please us with any questions.
Triad Financial Strategies
_________________________________________________________________________
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The index of leading economic indicators (LEI) is an economic variable, such as private-sector wages, that tends to show the direction of future economic activity.
Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.
Tuesday, January 24, 2012
Weekly Commentary January 23rd, 2012
The Markets
We’re only three weeks into the New Year and already some very interesting trends have developed in the markets. Consider these four:
1. The worst performing stocks in 2011 have been the best performing in 2012. Bespoke Investment Group did an analysis and discovered that the 50 worst performing stocks in the S&P 500 in 2011 were up a whopping 11.2 percent YTD 2012 as of last Wednesday. By contrast, the 50 best performing stocks in 2011 were up only 2.1 percent so far in 2012. What a difference a “turn of the calendar” makes!
2. U.S. Treasury securities are off to their worst start in nine years. With improvements in the employment situation, housing sales hitting an 11-month high and a reprieve in the European debt problem, investors have less need for conservative treasuries and a bigger appetite for riskier stocks, according to Bloomberg and CNBC. At the moment, investors seem to be saying, “risk on.”
3. U.S. stocks rose for the third consecutive week and are near a six-month high. Despite a decidedly mixed start to the 4th quarter earnings season, stocks have roared out of the gate this year and are now up 20 percent from the October 2011 low, according to Reuters. Of course, too much euphoria could lead to disappointment later.
4. The CBOE Volatility Index (VIX) declined nearly 22 percent in the first three weeks of this year. The big decline in the VIX suggests investors are less fearful about near-term market volatility, according to CNBC. In fact, the VIX is down to a seven-month low, according to Reuters. While the markets may be calm now, we’re not complacent.
Trends come and go in the market, but one thing that stays constant is our diligence in helping you reach your goals.
WHY IS IT THAT CONSERVATIVES TEND TO WATCH FOX NEWS and those with more liberal leanings tend to watch MSNBC? Psychologists would tell us it’s because of what they call “confirmation bias.” Confirmation bias is the tendency of humans to seek information that confirms an already held belief or opinion and to avoid or discount information that might contradict an existing belief or opinion.
This concept also applies to investing and it’s very important to avoid it as much as possible.
For example, let’s say we’re really bullish on the U.S. stock market. If we let confirmation bias cloud our judgment, then during our research, we would tend to read the reports that support our bullish view of the market and let that reinforce our decision to be bullish. By contrast, we would tend to avoid reading the reports that are bearish, or, if we do read them, we would come up with reasons why they were wrong.
When we’re under the spell of confirmation bias, it’s easy to miss turning points because we’re stuck on our current belief or opinion and won’t change even when we see contradicting evidence. That, of course, would be bad for your long-term wealth.
How strong is the confirmation bias pull?
A 2009 meta study published by the American Psychological Association reviewed 91 studies in the area of confirmation bias and concluded that people were nearly two times as likely to seek information which supported their existing view than to seek information which contradicted their current view. That’s a strong pull!
How do we overcome this pull?
Here are two keys that could help:
1. Acknowledge that confirmation bias exists. Knowing that it exists helps us try to avoid falling into its trap.
2. Actively seek contradictory opinions. This is another way of asking what could go wrong with an investment and then doing our best to ensure we understand the “other side of the coin.”
So, in addition to making a “rational” case for an investment, we have to make sure we avoid letting psychological biases get in the way.
Weekly Focus – Think About It
“If you take emotion – would be, could be, should be – out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings.”
--John W. Henry, trading advisor, principal owner of Boston Red Sox
We’re only three weeks into the New Year and already some very interesting trends have developed in the markets. Consider these four:
1. The worst performing stocks in 2011 have been the best performing in 2012. Bespoke Investment Group did an analysis and discovered that the 50 worst performing stocks in the S&P 500 in 2011 were up a whopping 11.2 percent YTD 2012 as of last Wednesday. By contrast, the 50 best performing stocks in 2011 were up only 2.1 percent so far in 2012. What a difference a “turn of the calendar” makes!
2. U.S. Treasury securities are off to their worst start in nine years. With improvements in the employment situation, housing sales hitting an 11-month high and a reprieve in the European debt problem, investors have less need for conservative treasuries and a bigger appetite for riskier stocks, according to Bloomberg and CNBC. At the moment, investors seem to be saying, “risk on.”
3. U.S. stocks rose for the third consecutive week and are near a six-month high. Despite a decidedly mixed start to the 4th quarter earnings season, stocks have roared out of the gate this year and are now up 20 percent from the October 2011 low, according to Reuters. Of course, too much euphoria could lead to disappointment later.
4. The CBOE Volatility Index (VIX) declined nearly 22 percent in the first three weeks of this year. The big decline in the VIX suggests investors are less fearful about near-term market volatility, according to CNBC. In fact, the VIX is down to a seven-month low, according to Reuters. While the markets may be calm now, we’re not complacent.
Trends come and go in the market, but one thing that stays constant is our diligence in helping you reach your goals.
WHY IS IT THAT CONSERVATIVES TEND TO WATCH FOX NEWS and those with more liberal leanings tend to watch MSNBC? Psychologists would tell us it’s because of what they call “confirmation bias.” Confirmation bias is the tendency of humans to seek information that confirms an already held belief or opinion and to avoid or discount information that might contradict an existing belief or opinion.
This concept also applies to investing and it’s very important to avoid it as much as possible.
For example, let’s say we’re really bullish on the U.S. stock market. If we let confirmation bias cloud our judgment, then during our research, we would tend to read the reports that support our bullish view of the market and let that reinforce our decision to be bullish. By contrast, we would tend to avoid reading the reports that are bearish, or, if we do read them, we would come up with reasons why they were wrong.
When we’re under the spell of confirmation bias, it’s easy to miss turning points because we’re stuck on our current belief or opinion and won’t change even when we see contradicting evidence. That, of course, would be bad for your long-term wealth.
How strong is the confirmation bias pull?
A 2009 meta study published by the American Psychological Association reviewed 91 studies in the area of confirmation bias and concluded that people were nearly two times as likely to seek information which supported their existing view than to seek information which contradicted their current view. That’s a strong pull!
How do we overcome this pull?
Here are two keys that could help:
1. Acknowledge that confirmation bias exists. Knowing that it exists helps us try to avoid falling into its trap.
2. Actively seek contradictory opinions. This is another way of asking what could go wrong with an investment and then doing our best to ensure we understand the “other side of the coin.”
So, in addition to making a “rational” case for an investment, we have to make sure we avoid letting psychological biases get in the way.
Weekly Focus – Think About It
“If you take emotion – would be, could be, should be – out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings.”
--John W. Henry, trading advisor, principal owner of Boston Red Sox
Wednesday, January 18, 2012
Weekly Commentary January 17th, 2012
The Markets
The U.S. became a member last August and, now, so has most of the eurozone. Unfortunately, it’s not a club you want to join.
Late last week, Standard and Poor’s (S&P) announced it was downgrading the credit rating of nine of the eurozone’s 16 members including behemoths France and Spain. In addition, 14 of the 16 members have “negative outlooks” which means S&P believes, “that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013.” The only two countries with stable credit outlooks are Germany (no surprise) and Slovakia, a former Communist country that became an independent state in 1993 after the dissolution of Czechoslovakia.
What does this mean for the future of Europe and the economy?
The New York Times called it, “A move that may have more symbolic than fundamental financial impact, but served as a reminder that Europe’s economic woes were far from over.” Underscoring that, the U.S. downgrade, has – so far – not caused much of a problem. The 10-year U.S. Treasury bond yielded a slim 1.85 percent last Friday, an indication that investors still view the U.S. as a safe haven. The bottom line is everybody knows Europe has problems and the downgrade, while not helpful, simply puts an exclamation point on the obvious.
Back in the U.S., investors seemed more interested last week in tracking our economic momentum which included an eight-month high in consumer sentiment and an improved assessment of the economy from the Fed’s Beige Book. Econoday summed it up nicely when they wrote, “Traders and investors have been moving toward the position that European problems deserve less weight than they have been given in recent months.” That may be true in the short term, but if Europe craters because of their sovereign debt problems, it’s unlikely the U.S. will escape unscathed.
Unlike Las Vegas, what happens in Europe may not stay in Europe.
THE ANNUAL CONSUMER ELECTRONICS SHOW (CES) just wrapped up in Las Vegas and, as usual, it featured a dazzling array of must-have new gizmos and gadgets that will likely show up in your hand or in your family room sometime down the road. With 2,700 exhibitors and 150,000 total attendees, it’s the showcase event for everything electronic.
We thought it’d be fun to take a look at some of today’s commonplace gadgets that were introduced at CES and have you guess the year of their debut. So, here goes…
What year did these devices debut at CES?
• Digital video discs (DVDs)
• Satellite radio
• Videocassette recorder (VCR)
• CD player
• Blu-ray disc
• High-definition television
• Camcorder
It’s not all fun and games at a show like CES. As you can see from the list above, these devices have spawned major industries that generated tremendous economic activity. Innovation is vital for economic growth, and a show like CES helps spotlight the latest electronic advances and, perhaps, the next driver of the economy.
One of the big highlights at the just concluded show was the unveiling of LG's 55-inch OLED TV packed with 3D bells and smart TV whistles. So, what in the world is an OLED TV? It’s a TV that uses a new display technology called OLED (Organic Light Emitting Diodes). OLED televisions are brighter, more efficient, thinner, and feature better refresh rates and contrast than either LCD or Plasma TVs. And boy is it thin. The LG 55-inch OLED TV is only 0.2 inches deep at its thinnest point and weighs a measly 16.5 pounds. If you’re an early adopter, you’ll want one of these beauties in your home theater later this year.
Okay, here are the answers to the “device debut” question, according to CNBC.
Digital video discs (1996), Satellite radio (2000), Videocassette recorder (1970), CD player (1981), Blu-ray disc (2003), High-definition television (1998), and Camcorder (1981).
How many did you correctly answer?
Weekly Focus – Think About It
“It's easy to come up with new ideas; the hard part is letting go of what worked for you two years ago, but will soon be out of date.” --Roger von Oech, author, inventor, consultant
The U.S. became a member last August and, now, so has most of the eurozone. Unfortunately, it’s not a club you want to join.
Late last week, Standard and Poor’s (S&P) announced it was downgrading the credit rating of nine of the eurozone’s 16 members including behemoths France and Spain. In addition, 14 of the 16 members have “negative outlooks” which means S&P believes, “that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013.” The only two countries with stable credit outlooks are Germany (no surprise) and Slovakia, a former Communist country that became an independent state in 1993 after the dissolution of Czechoslovakia.
What does this mean for the future of Europe and the economy?
The New York Times called it, “A move that may have more symbolic than fundamental financial impact, but served as a reminder that Europe’s economic woes were far from over.” Underscoring that, the U.S. downgrade, has – so far – not caused much of a problem. The 10-year U.S. Treasury bond yielded a slim 1.85 percent last Friday, an indication that investors still view the U.S. as a safe haven. The bottom line is everybody knows Europe has problems and the downgrade, while not helpful, simply puts an exclamation point on the obvious.
Back in the U.S., investors seemed more interested last week in tracking our economic momentum which included an eight-month high in consumer sentiment and an improved assessment of the economy from the Fed’s Beige Book. Econoday summed it up nicely when they wrote, “Traders and investors have been moving toward the position that European problems deserve less weight than they have been given in recent months.” That may be true in the short term, but if Europe craters because of their sovereign debt problems, it’s unlikely the U.S. will escape unscathed.
Unlike Las Vegas, what happens in Europe may not stay in Europe.
THE ANNUAL CONSUMER ELECTRONICS SHOW (CES) just wrapped up in Las Vegas and, as usual, it featured a dazzling array of must-have new gizmos and gadgets that will likely show up in your hand or in your family room sometime down the road. With 2,700 exhibitors and 150,000 total attendees, it’s the showcase event for everything electronic.
We thought it’d be fun to take a look at some of today’s commonplace gadgets that were introduced at CES and have you guess the year of their debut. So, here goes…
What year did these devices debut at CES?
• Digital video discs (DVDs)
• Satellite radio
• Videocassette recorder (VCR)
• CD player
• Blu-ray disc
• High-definition television
• Camcorder
It’s not all fun and games at a show like CES. As you can see from the list above, these devices have spawned major industries that generated tremendous economic activity. Innovation is vital for economic growth, and a show like CES helps spotlight the latest electronic advances and, perhaps, the next driver of the economy.
One of the big highlights at the just concluded show was the unveiling of LG's 55-inch OLED TV packed with 3D bells and smart TV whistles. So, what in the world is an OLED TV? It’s a TV that uses a new display technology called OLED (Organic Light Emitting Diodes). OLED televisions are brighter, more efficient, thinner, and feature better refresh rates and contrast than either LCD or Plasma TVs. And boy is it thin. The LG 55-inch OLED TV is only 0.2 inches deep at its thinnest point and weighs a measly 16.5 pounds. If you’re an early adopter, you’ll want one of these beauties in your home theater later this year.
Okay, here are the answers to the “device debut” question, according to CNBC.
Digital video discs (1996), Satellite radio (2000), Videocassette recorder (1970), CD player (1981), Blu-ray disc (2003), High-definition television (1998), and Camcorder (1981).
How many did you correctly answer?
Weekly Focus – Think About It
“It's easy to come up with new ideas; the hard part is letting go of what worked for you two years ago, but will soon be out of date.” --Roger von Oech, author, inventor, consultant
Monday, January 9, 2012
Weekly Commentary January 9th, 2012
The Markets
Which stock characteristic most impacted the S&P 500’s performance in 2011?
To answer that question, Bespoke Investment Group performed a decile analysis and concluded that having a high dividend yield was the most important factor affecting stock prices in 2011.
In their analysis, they discovered that the three deciles with the highest dividend yield were the only ones to experience a positive return for the year. In fact, while the S&P 500 index was unchanged for the year, the top three highest-yielding deciles rose 10.4 percent, 6.4 percent, and 8.7 percent, respectively. The remaining seven deciles all experienced a loss for the year.
Now, it won’t always turn out that the highest dividend yielding stocks are the best performers. Some years, investors will be more adventurous and bid up the riskier stocks that tend to pay low or no dividends.
Will the tide turn in 2012 and see the outperformance of the low or no dividend stocks? A lot will depend on how the economy shakes out.
Based on last week’s unemployment report, it looks like we ended 2011 with some economic momentum. The U.S. economy added 200,000 jobs in December and the unemployment rate dropped to 8.5 percent, the lowest in almost three years, according to BusinessWeek.
This week marks the beginning of another quarterly earnings season so the next 30 days or so should give us a good indication of the strength of the underlying economy.
WERE THE “NIFTY-FIFTY” REALLY THAT NIFTY? Back in the early 1970s, pundits fawned over some of the era’s fastest growing, industry-leading companies who seemed to defy the sluggish overall economy. Dubbed the Nifty-Fifty, these glamour stocks were well-known “one-decision” stocks that institutional investors clamored to own. So, how well did these stocks do over the last 40 years? Were they truly “one-decision” stocks?
While there was no official list of the Nifty-Fifty, two competing lists of 50 stocks are commonly cited, according to a research report titled, “The Nifty-Fifty Re-Revisited,” by Jeff Fesenmaier and Gary Smith of Pomona College. For today’s purpose, we’ll look at the 24 stocks that made both lists and were dubbed the “Terrific 24” by Fesenmaier and Smith.
Some of the household names on the Terrific 24 list include: McDonald’s, Walt Disney, Avon, Johnson and Johnson, and Coca-Cola. These companies are still doing well. However, some other household names on the Terrific 24 list performed poorly. Consider the following:
Xerox: It’s still around, but is a shadow of its former self and trades for about $8 per share.
MGIC Investment Corp: It went through various corporate restructurings throughout the years, but is still around as a private mortgage insurer. However, it got battered in the mortgage insurance meltdown of recent years and trades for about $4 per share.
Polaroid: The inventor of instant film couldn’t make the transition to a new world and filed for bankruptcy in 2001.
Eastman Kodak: Perhaps the saddest story of the bunch, Kodak has struggled for years to make the transition to a digital world and is now rumored to file for bankruptcy as early as this month, according to Reuters. Its stock sold for less than 50 cents per share last week. Ironically, Kodak invented the digital camera in 1975, but was never able to capitalize on it.
With 40 years of history, here are three key lessons we can learn from the Nifty-Fifty story:
1. Some “glamour” stocks do remain glamorous for many years, e.g, McDonald’s, Walt Disney, and Coca-Cola (although each had its “rough periods” over the past 40 years).
2. Promoting “one-decision” stocks is more of a headline-grabbing marketing strategy than a sound investment strategy.
3. Even the “best” stocks can fall to zero so it’s important to have a sell discipline.
As the British statesman and philosopher Edmund Burke said, “Those who don’t know history are destined to repeat it.”
Weekly Focus – Think About It
“The supreme purpose of history is a better world.” --Herbert Hoover, U.S. President
Which stock characteristic most impacted the S&P 500’s performance in 2011?
To answer that question, Bespoke Investment Group performed a decile analysis and concluded that having a high dividend yield was the most important factor affecting stock prices in 2011.
In their analysis, they discovered that the three deciles with the highest dividend yield were the only ones to experience a positive return for the year. In fact, while the S&P 500 index was unchanged for the year, the top three highest-yielding deciles rose 10.4 percent, 6.4 percent, and 8.7 percent, respectively. The remaining seven deciles all experienced a loss for the year.
Now, it won’t always turn out that the highest dividend yielding stocks are the best performers. Some years, investors will be more adventurous and bid up the riskier stocks that tend to pay low or no dividends.
Will the tide turn in 2012 and see the outperformance of the low or no dividend stocks? A lot will depend on how the economy shakes out.
Based on last week’s unemployment report, it looks like we ended 2011 with some economic momentum. The U.S. economy added 200,000 jobs in December and the unemployment rate dropped to 8.5 percent, the lowest in almost three years, according to BusinessWeek.
This week marks the beginning of another quarterly earnings season so the next 30 days or so should give us a good indication of the strength of the underlying economy.
WERE THE “NIFTY-FIFTY” REALLY THAT NIFTY? Back in the early 1970s, pundits fawned over some of the era’s fastest growing, industry-leading companies who seemed to defy the sluggish overall economy. Dubbed the Nifty-Fifty, these glamour stocks were well-known “one-decision” stocks that institutional investors clamored to own. So, how well did these stocks do over the last 40 years? Were they truly “one-decision” stocks?
While there was no official list of the Nifty-Fifty, two competing lists of 50 stocks are commonly cited, according to a research report titled, “The Nifty-Fifty Re-Revisited,” by Jeff Fesenmaier and Gary Smith of Pomona College. For today’s purpose, we’ll look at the 24 stocks that made both lists and were dubbed the “Terrific 24” by Fesenmaier and Smith.
Some of the household names on the Terrific 24 list include: McDonald’s, Walt Disney, Avon, Johnson and Johnson, and Coca-Cola. These companies are still doing well. However, some other household names on the Terrific 24 list performed poorly. Consider the following:
Xerox: It’s still around, but is a shadow of its former self and trades for about $8 per share.
MGIC Investment Corp: It went through various corporate restructurings throughout the years, but is still around as a private mortgage insurer. However, it got battered in the mortgage insurance meltdown of recent years and trades for about $4 per share.
Polaroid: The inventor of instant film couldn’t make the transition to a new world and filed for bankruptcy in 2001.
Eastman Kodak: Perhaps the saddest story of the bunch, Kodak has struggled for years to make the transition to a digital world and is now rumored to file for bankruptcy as early as this month, according to Reuters. Its stock sold for less than 50 cents per share last week. Ironically, Kodak invented the digital camera in 1975, but was never able to capitalize on it.
With 40 years of history, here are three key lessons we can learn from the Nifty-Fifty story:
1. Some “glamour” stocks do remain glamorous for many years, e.g, McDonald’s, Walt Disney, and Coca-Cola (although each had its “rough periods” over the past 40 years).
2. Promoting “one-decision” stocks is more of a headline-grabbing marketing strategy than a sound investment strategy.
3. Even the “best” stocks can fall to zero so it’s important to have a sell discipline.
As the British statesman and philosopher Edmund Burke said, “Those who don’t know history are destined to repeat it.”
Weekly Focus – Think About It
“The supreme purpose of history is a better world.” --Herbert Hoover, U.S. President
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