Is it a melt-up?
You’re familiar
with the word melt. Ice cream melts. Snow melts. You may have seen someone melt
down (or have done it yourself). Right now, markets may be experiencing a
melt-up, according to Barron’s.
Melt-up is a counterintuitive term which describes a sharp, emotion-driven
improvement in market performance. Last June, The Wall Street Journal blog described the melt-up phenomenon like
this:
“Money managers and
analysts are beginning to talk about an idea that dates from the roaring ’90s:
a rapid stock gain known as a melt-up. In the late ’90s, people thought a
melt-up, or a sudden double-digit percentage rise, was a fine thing. Set off by
some exciting event, melt-ups feed on their own gains as people rush to avoid
missing out. In late 1999 and early 2000, the Nasdaq Composite Index surged to
5000 from 3000 amid the Internet frenzy. It then collapsed. Melt-ups, investors
learned, can lead to meltdowns.”
Markets did move
higher last week. In fact, several major U.S. indices finished at record highs
on the same day. That’s a rare occurrence and one that hasn’t happened since
1998. What was behind the move? Barron’s
reported investors were encouraged by mid-term election results, strong third-quarter
earnings, and the European Central Bank’s promise to spend $1.25 trillion on
quantitative easing.
Investor optimism
also gained ground. Last week’s American
Association of Individual Investor’s (AAII’s)
Sentiment Survey found a majority of
investors were feeling bullish. Almost 53 percent believed stock prices would
increase during the next six months. The bears were in retreat with pessimism
about market performance falling to a nine-year low. “At current levels,
optimism is unusually high and pessimism is unusually low. Historically, such
occurrences have been followed by lower-than-average levels of market gains,”
reported the AAII’s blog.
So, is it a melt-up?
It’s difficult to know. What’s really important is this: Melt-ups are buy first,
think later situations which sometimes lead to melt downs, which are sell
first, think later situations. Needless to say, it’s always better to think
first.
Let’s hear it for family businesses! Family-owned and family-controlled
businesses are a pretty important part of the global economy. McKinsey & Company recently noted:
“In many ways, family businesses are
stronger, more vital, and more important than they have ever been. Various
estimates peg their share of global GDP [gross domestic product] at between 70
and 90 percent. While many family businesses are private, about a third of the
Fortune Global 500 companies are founder or family controlled, as are 40
percent of the major listed companies in Europe. Family businesses are
especially important in emerging markets accounting for about 60 percent of
private-sector companies with revenues of $1 billion or more.”
According to The Economist,
the largest family firms in the world span industries ranging from retail to
automobiles to electronics to pharmaceuticals. The top 10 include four
companies in the United States, along with firms based in Switzerland/United
Kingdom, Germany, Italy, Russia, South Korea, and Taiwan.
One of the most important challenges for family firms is
succession. McKinsey & Company
reported many businesses falter as they transition from the founder to the next
generation, and most perish before the third generation can take the reins. Successful
succession requires founders to look ahead, formulate a vision, and plan to
that vision. In general, family-owned businesses have three basic options. The
founder can:
· Give the
business away and start a foundation.
· Sell the
business and invest or divide the proceeds.
· Keep the
business and pass it on to the next generation.
McKinsey &
Company
predicts family companies are likely to become even more influential over time,
especially in emerging markets.
Weekly
Focus – Think About It
“Total
spending by political parties in the British general election was £31.5m
($49.9m). Total spending by outside groups was £2.8m ($4.4m). So all in all:
$54.3m. With 45.6m registered voters in Britain, that comes out at $1.19 per
voter… That is less than the seventh most-costly Senate race (Arkansas),
which cost $56.3m, or $26.47 per Arkansas voter. So the seventh costliest
Senate race cost more than the entire 2010 general election in Britain.”
--The Economist
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