Understanding What Has Happened Recently With US Stocks

Asset Class Moves March 14, 2013

Stocks were 0.56 %, a new high.
Bonds were up 0.04%, still near YTD lows.
US Dollar was down -0.35 % versus a basket of world currencies, and down -0.40% versus the Euro
Asian and European stocks were up
Gold was up 0.20%
Oil was 0.36%

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Commentary:

I have not been writing much here the last several days because when you’re right, it’s annoying to keep saying: “I was right.  Remember what I said.  Yeah, that’s still right.”

And knock on wood, things have gone as anticipated – as prepared for.

However, sometimes, because of the great financial consequences, saying something is still worthwhile.

While stocks reached a new high and bonds are still trading near their YTD lows, looking deeper, beyond the surface of their price movements, to try to understand the magnitude and potential rationales for what has happened to the asset classes’ prices, continues to be of value at this point.

Look at the last 3 months of stock trading:

SP 500 3 month March 13 2013

In the last 3 months, there have only been two very brief times when stocks have temporarily dropped only 2%.  Even if people timed those 2 events perfectly, realizing the full differential (up and down), a nearly statistically impossible task to achieve, after considering the tax consequences and transaction costs, their after-tax gains would be minimal.

The Dow 30 are up 10 days in a row, a consecutive streak that has not been seen since 1996.

We’ve essentially experienced, after a long, 4-year bull market, a 3-month period where ANYONE who sold almost any group of stocks is now experiencing seller’s remorse.

Important to note:  While prices have continued to go up, the average daily trading volume has not gone up (Look at the volume table at the bottom of the image above).  If the number of average daily trades are similar, or lower, and prices are continuing to go up, then it is likely fewer stock owners are wanting to sell what they already own.  Stock owners appear to be holding and not selling in this time period – even though stocks are at all time highs.

To understand why this has happened, and to anticipate when I think it will end, you’ll have to read the other posts on this blog.  I am almost always concise and rarely redundant, so I choose not to repeat those ideas in this post.

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What Happened To Gold Today?

Both gold’s price per ounce and the gold ETF “GLD” were up today.

So, a casual observer may think, “Hmm, people must be buying more gold and hedging in that direction as stocks are achieving higher valuations.”

But that is not what happened today.

While gold was up 0.20% and GLD was up 0.01%, as a world asset, gold actually lost value today on the world stage because gold is denominated in US Dollars and the US Dollar lost -0.35%.  So, gold still lost comparative value to most world stock indices and currencies today – as it appears investors are still more bullish on stocks than gold in this time interval.

This is one reason why it is important to follow the daily valuation of the US Dollar – if you really want to understand (or attempt to correctly interpret and anticipate) how various asset classes are moving in comparative price.

From the perspective of most investors around the world, when denominated in foreign currencies, gold lost value today.

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Bonds also lost net value today with the US Dollar’s -0.35% drop, compared to bonds “increase” of only 0.04%.

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This stock market is a monster.  To give some perspective, here are the beginning-of-the-year major stock trading companies’ predictions for how high stocks would go this year:

SP 500 Predictions For 2013

At 1563, we are within 22 points of the predicted highs for the whole year, for 8 of the 10 predictions.

It took “discipline” (or stupidity) to not sell things at these terrific, high prices today.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Asset Class Moves March 5 2013

Stocks were up to new highs, up strong 0.96%
Bonds were down -0.06%
US Dollar was down -0.16% versus a basket of world currencies, and down similarly versus the Euro.
Asian stocks were up and European stocks were up strong.
Gold was up 0.14%
Oil was up 0.57%

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Commentary:

Below is a 2 year chart for the S&P 500.  As you can see from the price going up, it has been a bullish 2 years:
SP 500 2 year chart 200 and 50 day moving averages March 2013

But notice that the further the green line (the 50 day moving average) moved higher than the red line (the 200 day moving average), and the longer the time period the green line stayed above the red line, the more likely there was a temporary pullback – even in a bull market appreciation cycle.

This pattern will not likely consistently continue, because it is not like an ECG heart monitor.  Patterns change, particularly when there are real world limitations to price increases.  But, considering the pattern, may be worthwhile.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here.  This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions.  Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Could You Invest In Stocks More Profitably Than Warren Buffett This Year?

Question:  How could you manipulate your stock portfolio to outperform Warren Buffett’s stock portfolio?

Answer:  Sell Berkshire Hathaway when its rate of price appreciation is uncharacteristically high, and buy Berkshire Hathaway back after it has declined in price.

Easier said than done.

Here is a chart showing the last 7 year performance of Berkshire Hathaway:

Berkshire Hathaway 7 year chart March 2013

The large rectangle shows a five year period, during which there were times when Berkshire Hathaway lost half of its value.  During that 5 year long period, because Berkshire Hathaway does not pay a dividend, an investor would have outperformed Berkshire Hathaway by selling it at a high, not owning it for awhile, then buying it back when its price was lower.

To outperform Warren Buffett, all an investor had to do was sell at one of the highs and buy back the same stock after it had dropped only 5% in value.  Outperformance could have been achieved at an even lower percentage (like 2 or 3%, even after paying trade commissions) if the trading was being done in a tax-deferred account, like an IRA.

The same principles are true for stocks in general.

Why Am I Telling You This?

It is my opinion, and only my opinion, that as stocks (or any other long-term appreciating asset) increase in value at a faster rate AND trade at the high end of their price range, there is an increased likelihood their price will drop 2 to 5%.

To suggest the stock market will pull back in price is not the same thing as being bearish about stocks in the long term.  Rather, it is my estimation that there are certain high rates of appreciation in stocks (or any asset class) that cannot be maintained for a long time.  So, even if stocks appreciate over the long term, historically, there have been regular times when stock prices pulled back, sometimes for days, other times for months or years.

Why Am I Telling You This Now?

It is my opinion, in the next two months, we are in one of those rare time windows, where there are improved odds of accurately anticipating a stock price pull back.

If you agree, then you may be able to figure out how to sell at a relative high, avoid some price drop, and later buy back into the same asset class at a lower price.  If you can successfully do that, you will outperform the stock market.  Or if you prefer, and you own Berkshire Hathaway currently, you might even be able to outperform Warren Buffett this year, while using his Berkshire Hathaway as the tool to do so.

The last 15 years in stock investing reminded stock investors there are risks to just “buying and holding” long.  There are also risks to trying to time the market.  There are risks either way.

It may sound funny for an investor to be talking about the merits of “market timing” in this time window, because the current high price of stocks could be used as a strong argument to support the merits of just “buying and holding.”  Nevertheless, in this time window, I am encouraging investors to consider the merits of infrequent market timing moves, especially when stocks (or any other asset class) have appreciated at a higher-than-normal rate and are trading near long term highs.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here.  This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Five 5-Year Charts

Here are five 5-year charts, showing the price, the 200 day moving average (in red), and the 50 day moving average (in green).

GLD (SPDR Gold Shares):

Gold 5 yr Price Chart March 1 2013

BND:

BND 5 Yr Chart March 1 2013

S&P 500:

S&P 500 5 Yr Chart March 1 2013

Apple:

Apple 5 Yr Chart March 1 2013

Bonds vs. Gold

BND Versus GLD 5 Yr Chart March 1 2013

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Asset Class Moves March 1 2013

Stocks were up 0.23%
Bonds were, to my surprise, also up 0.06%
US Dollar was up strong 0.40% versus a basket of world currencies, and up 0.30% versus the Euro.
Asian and European stocks were mixed
Gold was down -0.15%
Oil was down -1.12%

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Commentary:

You might think this is odd, but I get a little emotional on benign days like today in the asset markets.  While the asset markets did not move much, it appears to me there are certain valuation shifts happening in the background, shifts that metaphorically feel like they should be anticipated and prepared for.

For several days, my brain has been queuing me to write about gold as an asset and the factors that may change gold’s value.  I’ll get back to that.  I’ll begin with . . .

Apple

I don’t take any pleasure in this, because I never like to see any asset lose value.  But for whatever valid or invalid reasons, Apple closed at both a YTD low and a 52-week low, at $430.  I don’t like it when I don’t understand the valuation of an asset.  Because I cannot roughly approximate where Apple’s price will go, I have not owned it individually since January.

When the headlines asked:  Is Apple the new Microsoft?  The question seemed poignant and analogous.  Unfortunately, the stock valuation question was not:  Will Apple be a profitable and large company?  Regardless of the Apple’s size, it appears the more determinative stock valuation question is:  Will Apple’s earnings per share continue to increase?   And with Apple’s earnings per share so high, it was a legitimate question to ask.

Here you can see a technical indicator, called a “death cross,” where Apple’s 50 day moving average stock price (in green) passed below Apple’s 200 day moving average stock price (in red).  Supposedly, for stock technicians, this is a bad sign for a stock’s near term appreciation.  I don’t know how often that proclivity rings true.

Apple 1 yr chart death cross March 1 2013

I don’t know where Apple’s stock price is going to go from here.

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Can you make money from selling into a panic?

Jim Cramer, the CNBC nightly stock commentator, repeated one of his sayings this last week:  “No one ever made money selling into a panic.”

Cramer is a stock cheerleader who I can appreciate, and who appears to be very bright over the long term, because stocks over the long term tend to improve in value, but I have watched him for decades now, and there have literally been decades when he missed the mark – when stocks lost so much value that stock investors lost their shirts either for many years, or as in the case of the Internet/Semiconductor boom, lost their shirts permanently.

The problem with his statement: “No one ever made money selling into a panic” is:  Even if it is true, it misses the more important investment consideration which is:  While no one may have ever made even more money selling into a panic, many investors have preserved capital/principal and preserved gains by selling when stocks were priced high and it appeared a panic was beginning.

So, listening to Cramer, is kind of like listening to Annie telling you every night the sun will come out tomorrow.  While the odds are she is correct, to do well as an investor, it is important to recognize when a season of winter is likely coming.  And historically, winter comes fairly regularly.

Which leads to a discussion of . . .

Why Does Cramer Say “Gold Is A Type Of Currency”?

First, Kramer has not always said, “Gold is a type of currency.”  He only started saying it more frequently after living through the last 12 years, when on many of those days, his beloved stocks got kicked in the teeth as gold appreciated in value faster than stocks.

So, when he regularly discusses diversification these days, he will commonly show a pie chart that suggests an investor’s allocations should include a 20% position in gold.  This is kind of humorous because I’d be very surprised if he personally had 20% of his investments in gold currently.

So, is gold a type of currency?

No, but I understand the concept Cramer is trying to get across.  As with many analogies, they have imperfect comparisons.  To understand gold, it is probably better to consider it an asset rather than a currency.  Like most assets, gold requires an additional trade for it to be used as currency in most transactions.  So, in that sense, it is more like an asset.

In contrast, currencies can be used to purchase anything in their indigenous areas.  Further, currencies need to be more flexible and have the ability to facilitate more economic activity than gold can.

For investors, it is important to understand that under current economic policies, all or almost all world currencies are designed to lose value.

And this is why Cramer wants to emphasize gold in discussions of currencies.  Historically, in periods where world currencies are losing value at a faster than normal rate, gold has understandably maintained or increased its value.

Gold

I can hear you asking:  Why should I care about gold?  I’m never going to buy some gold as an investment.  I couldn’t afford to buy even one ounce of gold, even if it was priced at $1,500/ounce.

Nevertheless, understanding how comparative asset classes compete for investors’ dollars is important for all stock and bond investors.  So, if you want to invest in stocks or bonds, it is probably smart to have a better understanding of what factors effect the price of gold.

As a primer, here are two Wikipedia articles worth scanning:

The Gold Standard on Wikipedia

Gold As An Investment on Wikipedia

The first article will give you some historical reference to how gold was used by governments in the past, as a basis to legitimize the value of their common currency.

The second article gives an overview of gold’s historical price appreciation in adjusted US Dollars, as shown in the chart here.

As you can see, while gold is still trading near all time highs in number of US dollars, it is not currently trading near all time highs in adjusted value of US dollars.

Historical Gold Price Chart 2013 In Adjusted Dollars

Gold vs. the US Dollar

The price of gold, worldwide, is still denominated in US Dollars.

So, on a day when the US Dollar gains value against a majority of the world’s other major currencies, if gold only maintains its value on that day, the actual value of gold increases on that day.

And if the US Dollar loses -0.50% in value on any given day, but gold gains 0.50% value on that same day, gold effectively has only maintained its value, because the underlying currency, upon which it is denominated, lost value.

Why Do No Governments In The World Still Use A Gold Or Silver Standard?

The answers to that question are many and complex.  But as I mentioned above, there is a need for a lot of currency to facilitate the world’s economic activity.  And since the 1960s and before, world governments have come to face the reality that it is simply impractical to generate a sufficient supply of gold to be used as currency.

So, this is one of the major reasons why over the long term an ounce of gold has improved in value much faster than any world currency has improved in value.

Currencies are not designed to be appreciating assets.  Gold is also not “designed” to be an appreciating asset;  rather, gold has appreciated in value as an asset because, even with the latest technological advances in modern mining, gold’s supply is still strongly limited compared to the demand for gold.  The costs related to mining one ounce of gold are still prohibitive.  While the price of gold has boomed in the last 12 years, the value of gold mining companies’ stocks has not.  The best and largest gold mining companies are not dramatically improving their earnings per share because the real costs for mining, storing, insuring, and transporting gold continue to increase.

So, Is Now A Good Time To Buy Gold?

Not yet, in my opinion.  Because gold’s price chart experienced a “death cross” recently:

Gold 5 yr Price Chart Death Cross March 1 2013

For large supply & demand and comparative investment factors that I don’t pretend to fully understand, the chart suggests gold may struggle to gain value in the near term.

But if you asked me:  If you had to choose between a) having all of your savings and the US dollar for the next 20 years and you could not trade in or out of that asset class, or b) having half of your savings in the US dollar and half in gold, then I would gladly prefer half in gold because the US dollar is designed and intended to lose value slowly (reducing the actual amount of our US government debt) and I perceive, correctly or incorrectly that the demand for gold will continue to exceed its supply as nearly all world government concurrently agree to have policies that intend to devalue their currencies.

Even though gold dropped -0.15% in value today, it’s underlying currency denominator, the US dollar, gained 0.40% versus a basket of other major world currencies.  So, in real value, gold still gained value today.

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Diversification

While I am a strong proponent of diversification, I prefer to only diversify among the asset classes I perceive will appreciate both in the near and long terms.  So, while I don’t own gold now, if stock prices improve, and stocks as an asset class become less attractive to me and other investors, I can see myself being more tempted to create a diversification into gold.

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Why Might This Information Be Important?

It might be important because this is where we’re at now.  And to profit going forward, decisions need to be made in this time window.

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BTW, Warren Buffett’s Annual Berkshire Hathaway Report and Letter to Shareholders came out today and it can be read here:

http://www.berkshirehathaway.com/letters/2012ltr.pdf

A very smart man and always an entertaining read.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Asset Class Moves Feb 26 2013

Stocks were up 0.61%
Bonds were up 0.04%
US Dollar was up slightly versus a basket of world currencies, and down slightly versus the Euro, after making great gains against the Euro yesterday.
Asian and European stocks were down sharply
Gold was up strong 1.7%
Oil was down -0.62%

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Commentary:

Bernanke told the Senators he was staying the QE course.  Had Italy’s elections been decisive yesterday, and had Bernanke said nothing today, the last two day’s of stock price movements are both within anticipated ranges.  I don’t see the “cause and effect” relationship the Finance page headlines imply between those events.

Gold

For gold investors, the last 2 days were probably comforting, reassuring.  Unfortunately, if stocks move higher in the next month, gold and silver may move sideways or down in value in the near term.  Remember, the technical chart “death cross” occurred in gold just this month, suggesting the long term owners of gold are, on the aggregate, not excited about gold in the near term.  Larger forces, and the winds blowing in stocks’ directions, may temper gold’s gains in the near term.  Nevertheless, I remain bullish on gold in the long term, and I may buy some (owning none yet) if stocks continue to go up and gold declines in value the next month.

That seems like a crazy thing for me to say:  buying an ounce of metal for over $1500 – a seemingly dangerous wager for any era or set of economic circumstances.  I cannot recommend for others to follow my lead in possibly buying gold.  I know too little.

Home Depot

Home Depot reported earnings that beat estimates.  The stock was up over 5.5% today.

GM

On Feb 14th, it was reported that Berkshire Hathaway increased their ownership in GM shares during the 4th quarter of 2014, from 15 million to 25 million shares.

I don’t recommend buying GM stock.  Also, it pays no dividend.  Having said that, Warren Buffett knows far more than me, and he thought it was more attractive, somewhere between $23 and $28/share (its price range in the fourth quarter of 2013) than many other investment options.

In the interest of full disclosure, I own some GM, because it was given to me, but I don’t like car company stocks in general.

VXX

If you don’t know what VXX is, you might look it up.  It is an ETF.  It attempts to move in line with investor’s fears.

While I don’t own any of it, it is a contrary play to consider for investors who think stocks are priced too high.  While it lost value today, it is still above its 52 week low, probably because the stock price fluctuations of the last week have understandably increased investors’ fears.

I would not recommend VXX as an investment for anyone, unless they are well informed about stocks and have time to consider stocks’ long-term price trends – on a daily basis.  Nevertheless, in this time window, VXX may be worth more consideration.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here.  This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions.  Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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What Are Home Prices Going To Do In 2013 & 2014?

Edward Jones, the financial company, writes a daily commentary column, updated a couple times each trading day.  It can be found here.

One of the reasons I read it most days is that in a world of CYA writing from corporate institutions, if Edward Jones is reporting it there, the information is probably more objective and of merit than many other sources of information.  It is almost always a concise read, focusing on important figures.

Today they wrote “home prices increased by more than expected in December, and new home sales in January jumped to their highest level since July 2008.  Also fueling the gains were reports that consumer confidence increased by more than anticipated in February.  In corporate news, Home Depot reported third-quarter results ahead of expectations.”

If inflation continues or increases, if home building commodities increase in cost, and if labor costs increase, it will be difficult for home prices to not increase in the next 18 months.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here. This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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