- July 11, 2011
- Don’t Miss Your Chance to Catch a Bull Market
Many people missed the market’s enormous appreciation during the latest equity bull market because they were late to the game or chose to sit on the sidelines. The sideline is a crowded place these days as investors have been reluctant to fully embrace equities.Household savings for the past 12 months totaled $711 billion, the highest level ever recorded in dollar terms. You can see from the chart that’s roughly double the amount of savings recorded following the Tech Bubble. In fact, household debt-to-savings ratios are currently at levels so low, they’ve not been seen since the mid-1990s.
If you’re one of the people on the sidelines who has been debating whether to get your feet wet in today’s market—now could be your chance.
After peaking in late April, the S&P 500 Index declined for nearly seven-straight weeks before bouncing sharply last week. J.P. Morgan research says a seven-consecutive-week losing streak is an extremely rare occurrence during bull markets, only occurring once before in March 1980. That year, the market rallied 15 percent over the next three months.
Historically, summer’s arrival has been good for the market. J.P. Morgan analysts researched the S&P 500’s performance during the June-August period over the last 111 years. They discovered that markets have risen 3 percent on average during this period, with pretty high frequency of up years (roughly 60 percent). During bull markets, which we believe we’re currently in, the S&P 500 averaged 5 percent with up years 77 percent of the time.
However, recently there have been some notable divergences from historical norms. The S&P 500 rose 11 percent from June through August in 2009, but lost 4 percent in 2010 over the same time period.
One reason we think the market will rise during the second half of 2011 is that sentiment has grown pervasively negative in recent weeks. The American Association of Individual Investors (AAII) survey of investor sentiment, a popular contrarian indicator, showed 77 percent of individuals were bearish in June, one of the lowest readings since the beginning of this bull market in March 2009, according to J.P. Morgan.
Citigroup research also showed the pendulum has swung too far toward negativity. Their Panic/Euphoria Model, a proprietary combination of nine facets of investor beliefs and fund manager actions, gauges the mood toward the market. Overly bullish territory (Euphoria) generally signals a market correction is on its way, while a recovery arrives when sentiment is overly pessimistic (Panic).
Market sentiment fell into a “panic” at the end of June, which is a good sign for investors. Citigroup says there’s roughly a 90 percent chance markets could move higher over the next six months—and a 97 percent chance over the next year—according to historical data. On average, the market bounces 8.9 percent the following six months and 17.3 percent the following year.
It’s likely that ardent followers of Dow Theory can hardly contain their excitement. This technical indicator for the Dow Jones Industrial Average (DJIA) is on the verge of confirming the market’s bull status. Marketwatch’s Mark Hulbert wrote last week that a bull market would be confirmed by Dow Theory if the DJIA closes above its April high of 12,810.54. Friday’s close left the DJIA 153 points (about 1 percent) shy of that mark.
Luckily, in addition to the indicators outlined above, market signs are indicating it soon will. Hulbert says the two S&P sectors to watch are industrials and transportation. The DJ-Transportation Index has already topped previous highs but industrials have “refused to join.” After yesterday’s move higher, industrials were only about 1 percent shy—the same as the DJIA overall—from previous highs.
If this technical data doesn’t convince you, maybe improvement in the global economy will. It’s true Friday’s jobs report was dismal and second-quarter 2011 U.S. GDP growth is expected to come in around 2 percent for the second-straight quarter. However, there were several encouraging developments last week.
We received our first dose of clarity on the Greece sovereign debt issue and it looks like calamity has been averted. The Chinese government, which has been tightening policies to keep the country’s economy from overheating, announced its third interest rate hike this year. This likely is the end of China’s tightening measures and its economy should react positively.There’s also positive momentum building for the U.S. economy. Manufacturing strength is the foundation of a growing economy, and currently both the services and manufacturing Purchasing Managers Index (PMI) remain above the benchmark 50 level, says ISI, indicating expansion. One bright spot is the auto industry, our trusty indicator of the global economy’s fortitude (Read: Booming Global Auto Market Good for Many).
A supply shortage and slowdown in sales as a result of the Japanese earthquake caused many car manufacturers to initiate their annual plant shutdowns early this year. The shutdown time is used to perform maintenance on facilities and restock supply. Automakers such as Ford and General Motors have already completed their shutdowns and are “starting their engines” for a strong second half.
U.S. auto production is forecasted to be up 16 percent in July over the previous month and overall production during the third quarter of 2011 is expected to be up 86 percent on a quarter-over-quarter basis. ISI says this would likely raise America’s real GDP by 1 percent.
Who will buy all these cars? Chinese and Americans.
Despite the tightening measures mentioned above, Chinese citizens are expected to purchase 18.5 million vehicles this year, which would be about a 3 percent increase from 2010. ISI says owning a car remains the “#1 most desired consumer durable” in China and estimates the country could reach sales of 30 million per year by 2030.
At home in the U.S., vehicles sales have been on an uptrend since early 2010. The chart shows current levels are still well below the highs of the mid-2000s but are comparable to the early 1990s—just about the time the U.S. economy was beginning to speed up.
The biggest question mark surrounding the direction of the market right now is geopolitical. How the debt ceiling issue is resolved and how companies digest new regulations could decide whether the bull market gets caged. J.P. Morgan-Chase CEO Jamie Dimon passionately told the Federal Reserve last month that some of the floated ideas could spell “suffocation through regulation” for the U.S. economy. Dimon questioned whether anyone had “bothered to study the cumulative effect” of all the new regulations. PIMCO co-CIO Bill Gross has echoed similar statements.
We share many of these concerns but feel the fundamentals of U.S. economic growth can power through these regulatory hurdles. Long-term investors must remember that it’s time in the market, not timing the market. The market may not soar into the stratosphere like Friday’s shuttle launch, but investors who catch the bull and participate could see gains over the next few months.
Portfolio manager and director of research John Derrick contributed to this piece.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Transportation Average (DJTA, also called the "Dow Jones Transports") is a U.S. stock market index of the transportation sector, and is the most widely recognized gauge of the American transportation sector. It is the oldest stock index still in use, even older than its better-known relative, the Dow Jones Industrial Average (DJIA).
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of March 31, 2011: J.P. Morgan-Chase.t
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- March 8, 2012
- Trading Volume’s Disappearing Act
To have a thriving market, you need a healthy number of buyers and sellers. At the local farmer’s market, you need farmers to grow the tomatoes, lettuce and zucchini and shoppers to buy the produce. Likewise, eBay wouldn’t be the world’s leading ecommerce company without the millions of people who buy or sell goods online.
What do investors in the stock market need? Trading volume.
After daily trading volumes in the S&P 500 Index hit a high in July 2002, volume quickly declined before leveling off, bouncing between 20 and 30 billion shares on a daily basis for a few years. Since its January 2009 high, daily shares traded have quickly spiraled downward. Today, volume is at a 15-year low, with only 7 billion shares traded.
Business Insider recently noted how light trading has become, with a “spectacular rally year to date” but “basically no market volume,” suggesting that there might not be any interest in actively trading these days.
Investor interest in U.S. markets seems to have eroded as more than $130 billion was withdrawn from equity mutual funds in 2011. Despite the fact that the S&P 500 experienced the best two-month start in more than 20 years, many have continued to temper their excitement.
In a previous posting, I talked about this feeling of apathy that has stricken investors, which I believe has been driven by a lack of political leadership, excessive regulations and market volatility. When The Economist tackled the issue of U.S. regulations, the magazine pointed out that excessive and badly written rules have negatively affected businesses as they attempt to understand and comply with the rules.
In the chart above, look at the periods that trading volume plummeted. Around the same time in 2002, Sarbanes-Oxley went into effect. In 2010, the Volcker Rule and Dodd-Frank were rolled out. The Economist warns its readers that regulations are suffocating America; they may also be suffocating equity trading.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. None of U.S. Global Investors Funds held any of the securities mentioned in this post as of 12/31/2011.
By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- February 23, 2012
- Is America Over-Regulated?
The cover story of this week’s Economist magazine highlights a theme I’ve been discussing for several years now: From the Patriot Act to Sarbanes-Oxley to Dodd-Frank, we have wrapped a suffocating amount of red tape around American business over the past decade. These onerous regulations have prevented a full-scale rebound for our economy.The poster child for these burdensome regulations has been Dodd-Frank. The Economist says:
“Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end “too big to fail” by authorising regulators to seize any big, tottering financial firm and wind it down. This newspaper supported these goals at the time, and we still do. But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the “Volcker rule”, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.”
Watch Economist editor Matthew Bishop discuss regulations on CNBC
In addition to the paralyzing effect these regulations have on investment, they come with a sizable price tag. According to a study completed by the Small Business Administration, the average cost of compliance with all these regulatory rules is over $10,000 per employee.
The article offers a solution: The Economist says “rules need to be much simpler” because “all-purpose instruction manuals” get lost in an “ocean of verbiage.” I agree. What makes the U.S. special is our entrepreneurial spirit, and we must adopt policies that promote prosperity and efficiency in order to empower the world’s best businesses.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
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- February 9, 2012
- The Quiet After the Storm
It’s all quiet on the equity front. For the past month, the S&P 500 Index has experienced an unusually calm period of lower volatility.
Bespoke Investment Group says the timeframe between December 28 and January 26 has been remarkably lacking in “1 percenters.” The firm found that it’s been more than a year since the S&P 500 has gone 26 trading days without declining one percent.
While 26 days is a lot in today’s volatile world, the consecutive lack of down days doesn’t even come close to a record streak for the S&P 500, says Bespoke. Over the past three decades, there were numerous streaks that lasted longer than 26 days, “with a few surpassing the 100-trading day mark,” according to Bespoke. The record number of days without a 1 percent drop appears to be 112 days during the mid-80s. The S&P 500 “quiet streak” these days hardly registers as out of the norm.
The market was particularly volatile last year, but we also noticed a distinct trend between the first half of the year and the latter half. Most of the daily movement in both directions was concentrated in the last six months of 2011. There were many more days that stocks increased or decreased at least 1 or 2 percent during the last half of the year compared to the daily movement during the first six months of the year.
During our January webcast with Jeffrey Hirsch of Stock Trader’s Almanac, Jeffrey noted an increase in severe moves since the 1999 repeal of the Glass-Steagall Act that removed the separation between investment banking and commercial banking. Jeffrey referred to an interesting blog post at the Stock Trader’s Almanac website that looked at the number of daily moves over the last century. Moves of 3 percent or more on a daily basis in either direction used to be rare, but since 2000, there were 125 in nearly 3,000 trading days. “Perhaps regulation (or the lack of) does contribute greatly to overall market volatility,” says the blog post.
We believe government policies are precursors to change, which is why our investment team continually monitors and tracks the fiscal, monetary and regulatory policies of countries. As active managers, in quiet or stormy markets, tracking this information helps us anticipate how markets might react so we may adjust our investment strategy accordingly.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
By clicking the links above, you will be directed to a third-party websites. U.S. Global Investors does not endorse all information supplied by this/these websites and is not responsible for its/their content.
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- February 7, 2012
- A Spark That Lit the Economy
Friday’s employment data was the latest of a series of data showing marked improvement in the U.S. economy. ISI counted 18 straight weeks of stronger U.S. data including better vehicle sales, same store sales, homebuilding and manufacturing.
Also, U.S. money supply is growing at a robust 10 percent year-over-year, greasing the wheels for America’s economic engine, which showed 3.7 percent growth in nominal GDP in the fourth quarter.
What was the spark that lit the bottle rocket and sent the fireball into the sky for the economy?
The Wall Street Journal recently reported U.S. corporate tax receipts as a share of profits were at the lowest level in 40 years. Corporations paid a tax rate of 12 percent on profits during the fiscal year that ended September 30, 2011, less than half the average rate companies paid from 1987 to 2008. They employed a tax incentive known as “bonus depreciation” allowing businesses to deduct the capital that they invest back into their businesses.
At the same time, capital expenditures for American companies reached $1.5 trillion in 2011, up 10 percent from 2010. This is the third year in a row of increased capex spending.
There appears to be a multiplier effect here: As corporations pay fewer taxes, they can deploy additional capital by expanding their businesses and purchasing new fleet vehicles, machinery and data systems, which then creates and maintains thousands of jobs for American citizens.
It is unlikely the U.S. government would have achieved the same return on investment and multiplier effect on the economy.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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