The equity markets in 2011 were like reality TV - a lot of drama, but not much substance. There were spirited rallies and frenetic sell offs along the way, but relatively little change in the end. The DOW posted a respectable gain of 8.4% but the much broader S&P 500 was up only 2.1% and the tech heavy NASDAQ down 1.7%. US small and mid size companies were slightly negative for the year and most international markets were down significantly.
Corporate profits, manufacturing, and retail sales, all key economic measures, showed significant improvement during 2011. The anemic housing sector continued to be a drag as did employment, though job reports were improving by year-end. Gridlock in Washington and the sovereign debt problems in Europe fueled much of the volatility investors experienced during the year. Overall, the US economy grew around 2% in 2011 and gained momentum heading into 2012.
Interest rates remained extremely low during 2011 benefiting borrowers and frustrating savers. As the year unfolded, fears of rising rates and inflation subsided as it became more apparent that this period of slow growth and low rates may continue for some time.
The US economy should continue to grow at a modest pace of about 2% in 2012. This is dependent on the European economy experiencing no worse than a mild recession as they continue to make progress with their sovereign debt problems. It also assumes that political divisiveness during this election year in the US does not do too much economic damage. At current levels, equities have a good chance to post solid gains over the next several quarters. But, with the challenges we still face at home and abroad, those gains are certain to be accompanied by continued volatility.
Tuesday, January 17, 2012
Wednesday, September 7, 2011
Jobs? Exporting the Middle Class.
Isn’t it ironic that the jobs report before the Labor Day holiday posted a goose egg? As I told a friend who posted a 0.0 in college during his first semester, “nice work that had to be your goal, because that is awfully hard to do and you accomplished it.” Zero, nothing, nil, naught, zip, zilch (Yes, I hit the synonym button for zero.) Give me a break. According to an MSNBC article, this is the first time the government has reported zero, since 1945. Yes, we had job losses in the past, but for our government to report zero is ridiculous. I am going on record to say when the jobs number is revised we will have negative job growth. Why won’t the government tell you this?
Why is this shocking? We have been laying the framework for decreasing jobs for years. Please understand that as we have imported goods from China and other parts of the world we have exported our middle class. China’s growth right now centers on a boom in the middle class created by goods that we buy.
My Background
One of my paternal grandfather’s goals in life was to make sure that each of his children received an education, so they could have opportunities that he did not have. He was the manager of a tannery. I never met him. He passed away when my father was in college, but from the stories I hear he was a hard worker, instilled discipline, and loved sports.
My maternal grandfather was one of the kindest men I knew. He loved to take pictures and play games. From the time I knew him his health was an issue, but he had a caring for people and family. He also had a very competitive streak, when it came to dominos or monopoly. He caught me keeping my finger on the double five as we mixed them up and told me right then that he had seen me do it twice and not only was I cheating him, but myself as well.
(Not trying to slight them, but both of my grandmothers were caring women who loved to spoil me and could cook anything. One worked in a school kitchen and the other worked in a shoe factory.)
Both my parents graduated from Middle Tennessee State University. My father had plans on going back to work at the tannery, however he was newly married and could not come to an agreement on compensation with the owner. My father took a job with Genesco. In 1973, Genesco transferred my father to their Gamaliel, Kentucky apparel plant to be the assistant plant manager. He told my mother that they would be there two years at max; however he became plant manager and continued well past two years. My mother was a teacher, the most important occupation in our country.
In 1982, my father heard a gentleman in town was going to close his jean factory in Fountain Run, Kentucky. The gentleman had other successful businesses and the plant was losing money. My father convinced him to sell it to him and the gentleman also financed it. In discussing this with my mother, he told her if it did not work, “they could live off her teacher’s salary.” This had to be scary, if you saw how my brother, Brandon, and I ate.
This factory had 30-40 people in a facility that had a floor that would sag when people walked across it. The cutting room was in the basement of the grocery store next door. There were nights that my father would come home with a truck full of jeans, eat supper with us or watch our games and then go to Hermitage Springs, Tennessee to wash the jeans at a laundry facility. As production picked up, he bought a cattle truck, cleaned it out, and lined it with plywood. This was not our third vehicle. It was his daily vehicle. Luckily Brandon and I were young and we thought it was cool. Also note, Gamaliel really had no homeowner associations to worry about.
In 1984, dad was joined by a partner and formed Kentucky Apparel. They had worked together at Genesco and they had a great working relationship. The partner knew everything about washing jeans. If there was something to change the look of a jean you can bet he tried it. He also brought some new customers. Between 1984 and 1987, the company grew and they were named Kentucky Small Business Persons of the Year. From 1987 to 1993, they kept growing and actually began buying factories of Genesco and other companies who were getting out of the jean business. In 1993, we had factories in Fountain Run, KY, Gamaliel, KY, Tompkinsville, KY, Summershade, KY, Holland, KY, Burkesville, KY, Bowling Green, KY, Glasgow, KY, Scottsville, KY and Jamestown, TN. Most of these places are very rural. You would not be able to find some of these on a national map 15 years ago, but I suggest you Google them.
What does this have to do with jobs?
Starting in 1993, my father began writing all congressmen and senators in Kentucky and Tennessee about the North American Free Trade Agreement (NAFTA) and the impact that it would have on the apparel industry in the United States. As we know, NAFTA was passed in 1994 and my dad said his only shock was the speed in which the jobs moved. Luckily, having enough foresight, KY Apparel formed a joint venture with a Mexican family as most all our customers began demanding the goods made by the cheaper labor. I think if you asked them the next five years would be described as chaos.
For the company, we had tremendous number of orders as we were taking business from Central and South America; however with the partners in Mexico in charge of the increasing production; quality, on-time deliveries, and organization became big issues. These are things we never experienced in the United States. KY Apparel was known throughout the industry for creating a quality product, having hard workers, and delivering it when they said they would. (This is a trait of most hard working Monroe Countians.) So, how did companies in Mexico make money? The peso devalued. Labor became even cheaper in terms of U.S. dollars.
In 1996, I walked into one of my last public speaking classes for my undergraduate degree and was given 10 minutes notice that I would need to give an impromptu speech. I had just travelled with my father to Mexico that summer and began seeing the difficulties in my home county, Monroe, which has the cities of Fountain Run, Gamaliel, and Tompkinsville. We had shut a few of our other plants that were listed above in other areas however we saw OshKosh, Red Cap and other factories in our area begin to lay-off workers. I titled my speech NAFTA: How it Helped My Family, but Hurt Friendships. I was a 21 year old college kid with 10 minutes. The reasons I gave it helped my family was that the Mexican partners bought into our business and the increase in sales. On the other side, I had friends that worked for KY Apparel and were in danger of losing their jobs.
As I was driving back from a board meeting the other day, I began thinking about the recession, the lack of jobs and the shrinking middle class. I realized my speech was happening on a grander scale not just Monroe County and other rural areas. I would contend Monroe County has been in a recession since the mid-1990s. Look at the last census data, the population has declined as other rural areas. I look around and see doctors, dentists, entrepreneurs, engineers, accountants, lawyers, and teachers that I went to school with that cannot go back to their hometown due to lack of jobs. These jobs were exported out of Monroe County to bigger towns. Now that is happening to America in general.
At this time all of your politicians on both sides of the aisle were talking about NAFTA being a success. Of course, they promised laid-off workers a minimum of 18 months unemployment and re-training. This was great for some, but not all. These jobs were good second income jobs for a lot of families.
Ultimately, in 1999, my father and his business partner had enough. They decided they were going to get full control back of KY Apparel or be purchased out of the business by their partners in Mexico. The Mexican partners bought us out of the business. I can tell you at the time we (I began working in 1997) were announcing to the employees remaining that we were getting out of the business I had seen my father cry very few times. These people were like family and we knew the jobs would not be staying long term.
As the 90’s ended, even Alan Greenspan finally got something correct calling it “Irrational Exuberance,” there was no worry about the decreasing manufacturing base. We were making all kinds of paper profits and trading them back and forth. The government had a budget surplus from increase in capital gain tax revenue. There was no reason to worry about Monroe County or other rural areas that were losing jobs.
However, that bubble burst and Mr. Greenspan lowered rates to fuel the great real estate boom/speculation. During this period the loss of manufacturing jobs were covered up by the gains in residential construction, again no reason to worry about Monroe County.
What I contend is that we should have been worrying about Monroe County and other rural areas, because it is happening to all of the United States fifteen years later. These construction jobs will not come back for a long time and we cannot be just a service economy. We must get manufacturing back to the United States. There are a lot of great theories that these free trade agreements work, however I have never been able eat a theory or put a theory over my head at night (some went over my head). I tend to base my observations in the real world. I see another jobs initiative (stimulus) being launched and a quasi QE3 (they won’t call it QE3 for fear of mutiny). Unfortunately, none of this will work.
The importing of goods has been the exporting of the middle class. My grandparents were hardworking middle class that gave my parents the work ethic and belief to strive for the American Dream. If we lose the middle class, we lose the American Dream.
Why is this shocking? We have been laying the framework for decreasing jobs for years. Please understand that as we have imported goods from China and other parts of the world we have exported our middle class. China’s growth right now centers on a boom in the middle class created by goods that we buy.
My Background
One of my paternal grandfather’s goals in life was to make sure that each of his children received an education, so they could have opportunities that he did not have. He was the manager of a tannery. I never met him. He passed away when my father was in college, but from the stories I hear he was a hard worker, instilled discipline, and loved sports.
My maternal grandfather was one of the kindest men I knew. He loved to take pictures and play games. From the time I knew him his health was an issue, but he had a caring for people and family. He also had a very competitive streak, when it came to dominos or monopoly. He caught me keeping my finger on the double five as we mixed them up and told me right then that he had seen me do it twice and not only was I cheating him, but myself as well.
(Not trying to slight them, but both of my grandmothers were caring women who loved to spoil me and could cook anything. One worked in a school kitchen and the other worked in a shoe factory.)
Both my parents graduated from Middle Tennessee State University. My father had plans on going back to work at the tannery, however he was newly married and could not come to an agreement on compensation with the owner. My father took a job with Genesco. In 1973, Genesco transferred my father to their Gamaliel, Kentucky apparel plant to be the assistant plant manager. He told my mother that they would be there two years at max; however he became plant manager and continued well past two years. My mother was a teacher, the most important occupation in our country.
In 1982, my father heard a gentleman in town was going to close his jean factory in Fountain Run, Kentucky. The gentleman had other successful businesses and the plant was losing money. My father convinced him to sell it to him and the gentleman also financed it. In discussing this with my mother, he told her if it did not work, “they could live off her teacher’s salary.” This had to be scary, if you saw how my brother, Brandon, and I ate.
This factory had 30-40 people in a facility that had a floor that would sag when people walked across it. The cutting room was in the basement of the grocery store next door. There were nights that my father would come home with a truck full of jeans, eat supper with us or watch our games and then go to Hermitage Springs, Tennessee to wash the jeans at a laundry facility. As production picked up, he bought a cattle truck, cleaned it out, and lined it with plywood. This was not our third vehicle. It was his daily vehicle. Luckily Brandon and I were young and we thought it was cool. Also note, Gamaliel really had no homeowner associations to worry about.
In 1984, dad was joined by a partner and formed Kentucky Apparel. They had worked together at Genesco and they had a great working relationship. The partner knew everything about washing jeans. If there was something to change the look of a jean you can bet he tried it. He also brought some new customers. Between 1984 and 1987, the company grew and they were named Kentucky Small Business Persons of the Year. From 1987 to 1993, they kept growing and actually began buying factories of Genesco and other companies who were getting out of the jean business. In 1993, we had factories in Fountain Run, KY, Gamaliel, KY, Tompkinsville, KY, Summershade, KY, Holland, KY, Burkesville, KY, Bowling Green, KY, Glasgow, KY, Scottsville, KY and Jamestown, TN. Most of these places are very rural. You would not be able to find some of these on a national map 15 years ago, but I suggest you Google them.
What does this have to do with jobs?
Starting in 1993, my father began writing all congressmen and senators in Kentucky and Tennessee about the North American Free Trade Agreement (NAFTA) and the impact that it would have on the apparel industry in the United States. As we know, NAFTA was passed in 1994 and my dad said his only shock was the speed in which the jobs moved. Luckily, having enough foresight, KY Apparel formed a joint venture with a Mexican family as most all our customers began demanding the goods made by the cheaper labor. I think if you asked them the next five years would be described as chaos.
For the company, we had tremendous number of orders as we were taking business from Central and South America; however with the partners in Mexico in charge of the increasing production; quality, on-time deliveries, and organization became big issues. These are things we never experienced in the United States. KY Apparel was known throughout the industry for creating a quality product, having hard workers, and delivering it when they said they would. (This is a trait of most hard working Monroe Countians.) So, how did companies in Mexico make money? The peso devalued. Labor became even cheaper in terms of U.S. dollars.
In 1996, I walked into one of my last public speaking classes for my undergraduate degree and was given 10 minutes notice that I would need to give an impromptu speech. I had just travelled with my father to Mexico that summer and began seeing the difficulties in my home county, Monroe, which has the cities of Fountain Run, Gamaliel, and Tompkinsville. We had shut a few of our other plants that were listed above in other areas however we saw OshKosh, Red Cap and other factories in our area begin to lay-off workers. I titled my speech NAFTA: How it Helped My Family, but Hurt Friendships. I was a 21 year old college kid with 10 minutes. The reasons I gave it helped my family was that the Mexican partners bought into our business and the increase in sales. On the other side, I had friends that worked for KY Apparel and were in danger of losing their jobs.
As I was driving back from a board meeting the other day, I began thinking about the recession, the lack of jobs and the shrinking middle class. I realized my speech was happening on a grander scale not just Monroe County and other rural areas. I would contend Monroe County has been in a recession since the mid-1990s. Look at the last census data, the population has declined as other rural areas. I look around and see doctors, dentists, entrepreneurs, engineers, accountants, lawyers, and teachers that I went to school with that cannot go back to their hometown due to lack of jobs. These jobs were exported out of Monroe County to bigger towns. Now that is happening to America in general.
At this time all of your politicians on both sides of the aisle were talking about NAFTA being a success. Of course, they promised laid-off workers a minimum of 18 months unemployment and re-training. This was great for some, but not all. These jobs were good second income jobs for a lot of families.
Ultimately, in 1999, my father and his business partner had enough. They decided they were going to get full control back of KY Apparel or be purchased out of the business by their partners in Mexico. The Mexican partners bought us out of the business. I can tell you at the time we (I began working in 1997) were announcing to the employees remaining that we were getting out of the business I had seen my father cry very few times. These people were like family and we knew the jobs would not be staying long term.
As the 90’s ended, even Alan Greenspan finally got something correct calling it “Irrational Exuberance,” there was no worry about the decreasing manufacturing base. We were making all kinds of paper profits and trading them back and forth. The government had a budget surplus from increase in capital gain tax revenue. There was no reason to worry about Monroe County or other rural areas that were losing jobs.
However, that bubble burst and Mr. Greenspan lowered rates to fuel the great real estate boom/speculation. During this period the loss of manufacturing jobs were covered up by the gains in residential construction, again no reason to worry about Monroe County.
What I contend is that we should have been worrying about Monroe County and other rural areas, because it is happening to all of the United States fifteen years later. These construction jobs will not come back for a long time and we cannot be just a service economy. We must get manufacturing back to the United States. There are a lot of great theories that these free trade agreements work, however I have never been able eat a theory or put a theory over my head at night (some went over my head). I tend to base my observations in the real world. I see another jobs initiative (stimulus) being launched and a quasi QE3 (they won’t call it QE3 for fear of mutiny). Unfortunately, none of this will work.
The importing of goods has been the exporting of the middle class. My grandparents were hardworking middle class that gave my parents the work ethic and belief to strive for the American Dream. If we lose the middle class, we lose the American Dream.
Tuesday, August 9, 2011
Reaction to U.S. Down Grade and Lack of Economic Growth
Reading the news over the weekend, I have been shocked at the reaction to the S&P downgrade. Did we think the meaningless theatrics in Washington over the debt ceiling would truly change the course that we have been sailing for the last 30 years? Did we think adding to our debt problem in the short term while promising future reductions would allow us to keep our AAA rating? I hate to be the bearer of bad news, but the U.S. should not have a rating of AAA. If there is even more than a slight chance, you are going to default; you don’t deserve an AAA rating. (Side note: I think all of the rating agencies have major deficiencies, but we have great issues as a country that must be addressed to truly be AAA.)
I am concerned, because the reactions from our politicians are to blame someone else instead of getting to work on placing our fiscal house in order. Unfortunately our political system has created the following goal for our politicians: (yes, I kept goal singular)
1.) Get Elected next time.
For the last 30 years, we have simply ignored and provided stimulus to any potential economic hiccup. I call some of these hiccups, because they were minor to what we faced decades before and what we are facing going into the future. What we fail to realize is that we have been on economic stimulus for the last 30 years. The following have been stimulants to our economy:
1.) Decrease in Interest Rates. We have seen our rates go from the near 20% range to almost 0%. Less you pay in interest the more you can pay on other items.
2.) Decrease in Tax Rates. Same as above lower taxes allow you to spend on other items.
3.) Deficit Spending. Each dollar spend above collections is being taken from someone saving the money and given to someone spending it.
4.) Increased Consumer Debt/Reduction in savings. Lowering our savings rate place more dollars in the economy. At some point (last 3 years), this gets to a point that diminishing returns on economic growth are pushing to zero, because of interest payments. (Imagine if we had high rates.)
5.) Stimulus plans. I really think these have added very little to the economy, but may have just prolonged the inevitable. This could also fall above in the deficit spending as it increases the deficit. However I wanted to note it, because even without stimulus plans we still have deficit spending.
Now that you have reviewed the five of these, tell me which ones are going to give a positive boost for our economy going forward. None of these will and that is what the politicians will not tell you, because they do not get elected by telling you that you might need to expect slow growth and high unemployment. They hope to blame the other guy. Changes of any of these will have a negative drag on the economy, but we must address the overall debt situation because it will only continue to compound if we procrastinate.
1.) Decrease in Interest Rates. We saw what kind of mess higher interest rates started a few years ago. As for being a stimulant, they cannot go much lower, so this will not assist the economy.
2.) Lowering of Tax Rates. We all know this is not going to happen with the deficit as it is and there is a good chance they increase.
3.) Deficit Spending. We cannot keep going forward with this, so this will be dollars taken out of the economy.
4.) Consumers are tapped out and will continue to reduce their debt.
5.) Stimulus plans. We have already fired most of the bullets we have and I do not see any stimulus plans being passed by the government in the foreseeable future. The Fed may try QE3, 4, 5. Etc., but this will only slow the inevitable and could lead to more pain.
We have heard the analogy many times over of “driving the economy off the cliff.” If we do nothing this is what will happen, however the actions that must be taken are not great for the economy either. Instead of driving off the cliff, it is like driving into those yellow containers full of water. It gives us some cushion, but it does a lot of damage.
After looking at many troubling signs of our economy, I will state several of our companies have tremendous amounts of cash. This should be a positive for growth once we work out our fiscal crisis, but I tend to believe several of these companies will hold on to the cash until more is known. They want to have liquid assets should we have a slow down or should we have a freeze up in the capital markets again.
Although I do feel U.S. debt is not AAA, I do not think the U.S. will default. We as nation will work through the hardships and come out better and more careful. The unfortunate part is it will create some pain for everyone and we will repeat the cycle again. Prosperity brings comfort and comfort allows us to be undisciplined, then crisis brings discipline which brings prosperity, then repeat.
I am concerned, because the reactions from our politicians are to blame someone else instead of getting to work on placing our fiscal house in order. Unfortunately our political system has created the following goal for our politicians: (yes, I kept goal singular)
1.) Get Elected next time.
For the last 30 years, we have simply ignored and provided stimulus to any potential economic hiccup. I call some of these hiccups, because they were minor to what we faced decades before and what we are facing going into the future. What we fail to realize is that we have been on economic stimulus for the last 30 years. The following have been stimulants to our economy:
1.) Decrease in Interest Rates. We have seen our rates go from the near 20% range to almost 0%. Less you pay in interest the more you can pay on other items.
2.) Decrease in Tax Rates. Same as above lower taxes allow you to spend on other items.
3.) Deficit Spending. Each dollar spend above collections is being taken from someone saving the money and given to someone spending it.
4.) Increased Consumer Debt/Reduction in savings. Lowering our savings rate place more dollars in the economy. At some point (last 3 years), this gets to a point that diminishing returns on economic growth are pushing to zero, because of interest payments. (Imagine if we had high rates.)
5.) Stimulus plans. I really think these have added very little to the economy, but may have just prolonged the inevitable. This could also fall above in the deficit spending as it increases the deficit. However I wanted to note it, because even without stimulus plans we still have deficit spending.
Now that you have reviewed the five of these, tell me which ones are going to give a positive boost for our economy going forward. None of these will and that is what the politicians will not tell you, because they do not get elected by telling you that you might need to expect slow growth and high unemployment. They hope to blame the other guy. Changes of any of these will have a negative drag on the economy, but we must address the overall debt situation because it will only continue to compound if we procrastinate.
1.) Decrease in Interest Rates. We saw what kind of mess higher interest rates started a few years ago. As for being a stimulant, they cannot go much lower, so this will not assist the economy.
2.) Lowering of Tax Rates. We all know this is not going to happen with the deficit as it is and there is a good chance they increase.
3.) Deficit Spending. We cannot keep going forward with this, so this will be dollars taken out of the economy.
4.) Consumers are tapped out and will continue to reduce their debt.
5.) Stimulus plans. We have already fired most of the bullets we have and I do not see any stimulus plans being passed by the government in the foreseeable future. The Fed may try QE3, 4, 5. Etc., but this will only slow the inevitable and could lead to more pain.
We have heard the analogy many times over of “driving the economy off the cliff.” If we do nothing this is what will happen, however the actions that must be taken are not great for the economy either. Instead of driving off the cliff, it is like driving into those yellow containers full of water. It gives us some cushion, but it does a lot of damage.
After looking at many troubling signs of our economy, I will state several of our companies have tremendous amounts of cash. This should be a positive for growth once we work out our fiscal crisis, but I tend to believe several of these companies will hold on to the cash until more is known. They want to have liquid assets should we have a slow down or should we have a freeze up in the capital markets again.
Although I do feel U.S. debt is not AAA, I do not think the U.S. will default. We as nation will work through the hardships and come out better and more careful. The unfortunate part is it will create some pain for everyone and we will repeat the cycle again. Prosperity brings comfort and comfort allows us to be undisciplined, then crisis brings discipline which brings prosperity, then repeat.
Thursday, April 14, 2011
1st Quarter Review of 2011
The bulls remained in charge during the first quarter of 2011. The S&P 500 returned 5.92% during the quarter, the DOW Industrial 7.07%, and the NASDAQ 4.83%. Smaller US companies advanced even more and international stocks were also positive, though they lagged the US markets. The story during the 1st quarter was that signs of a strengthening economy trumped all kinds of bad news from around the globe. Turmoil in the Middle East, debt issues in Portugal and other European nations, the high cost of recovery in Japan, and the ongoing struggles of the US housing market are all issues of serious concern. However, the markets have continued to climb based on strengthening consumer demand, increasing industrial activity, growth in corporate profits, and a stabilizing employment picture. The low interest rate environment continues to provide fuel for economic growth as well as an incentive for risk taking. However, inflation concerns are growing as consumers are seeing higher energy and food costs and investors worry about what the Federal Reserve will do in the second half of the year. Fixed investments struggled during the first quarter as the interest rate picture became more unclear. Though the market trend continued to be up, volatility increased over the last quarter. This is a clear sign that the major challenges facing the world economies can not be ignored and that future gains may be more difficult to achieve. Significant improvement in employment and keeping inflation under control are needed to allow the economy and markets to continue to move forward. If the economic recovery slows, chances increase that we will see a market pull back at some point later this year.
Tuesday, April 12, 2011
The Best Retirement Plans for the Self-Employed
Good article on Yahoo Finance today.
If you would like to discuss this in more detail, please contact us at either 859-239-9000 or 270-846-0405.
Link
If you would like to discuss this in more detail, please contact us at either 859-239-9000 or 270-846-0405.
Link
Tuesday, January 4, 2011
2011: Move Forward with Caution
I love this time of year. You cannot pick up a financial publication without reading someone’s forecast or their top ten can’t miss investments. The great thing for these prognosticators is that no one really tracks them and they always give you that small disclaimer to consult your financial advisor and this should not be taken as a solicitation and blah, blah, blah. You know the one I am talking about. With that being said, I thought I would put out a vague piece with very little guidance on what I think, so I can match everyone else out there in the investment world. However, I will provide you with quality data to consider.
As many of you know, I live off the theory that the investment world revolves around the basic emotions of fear and greed. As Warren Buffett has summarized, he is greedy when people are fearful and fearful when people are greedy. In addition to following investor sentiment, over the past year I have read everything I could possibly get my hands on about the Dow Theory. Dow Theory was never meant to be a theory, but was based on the writings and comments of Charles Dow in regards to his Industrial and Rail Indexes from the late 1890s to early 1900s. The rail index is now known as the Transportation average.
Investor sentiment extremely bullish
In a recent poll conducted by Bloomberg, the chief strategists from Bank of America, Bank of Montreal, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Oppenheimer, RBC and UBS expect the S&P to be higher for 2011. Individual investors are currently bullish as well. From a recent USA today poll, 88% expect the market to be up in 2011, while only 1% expects the market will be down more than 10%. Daily Sentiment Index by trade-futures.com reached a 94% bullish reading in November, the highest total it has seen since January 2007. This numbers low was 7% bulls in March 2009, when we reached the market lows.
Does this guarantee the markets are heading down?
No, however it does state that sentiment is extremely bullish and market turns tend to occur after reaching extreme bullish readings. Noting the numbers for January 2007, it took until October for the market to make its peak. The lessons we want to take from these numbers are investors should be cautious and focus on quality names.
Another reason for focusing on quality names are the New Highs of the NYSE has not topped its April 26th number of 674, however each of the indexes have passed their April highs. We can interpret from these numbers that fewer stocks in the index are pushing the indexes higher. If we can get more New Highs than the April high, this is bullish, while if we continue to lag behind with New Highs the more cautious we need to become. In the recent bear market, New Lows reached its greatest number in late October, while the market finally bottomed in March of 2009. Today, we closed at a 2 year high, however new highs were 373.
Dow Theory on a Buy signal
In future writings, I will get in more detailed discussions about Dow Theory, however currently it is on a buy signal. The one thing to remember in following the Dow Theory is that at some point after many correct buy or sell signals, there will become a buy or sell signal that is incorrect. Dow Theory will never call the top or bottom of the markets, but it should be able to see the markets breaking down or a market that is beginning to recover.
In this theory, both the Industrials and Transports must confirm each other. This means they need to pass earlier highs together for a buy signal or pass lows together for a sell signal. One average breaking their recent high or low without the other is a non-confirmation and you could see the market move in the opposite direction.
Move forward with caution
In trying to reach my early goal for this piece, I leave you with “move forward with caution.” As of this moment, the Dow Theory is on a buy signal, however investor sentiment is at levels that sometime signal a pause and other times signal a reversal depending on the reactions and how the markets move in the following months. If I have one conclusion, the markets contain more capital risk for reduced upside potential. With this conclusion, focus should be on quality names that have better than average yields. In a few days, I will discuss the recent projections of Jeremy Grantham that better explains the risk/return of the markets.
As many of you know, I live off the theory that the investment world revolves around the basic emotions of fear and greed. As Warren Buffett has summarized, he is greedy when people are fearful and fearful when people are greedy. In addition to following investor sentiment, over the past year I have read everything I could possibly get my hands on about the Dow Theory. Dow Theory was never meant to be a theory, but was based on the writings and comments of Charles Dow in regards to his Industrial and Rail Indexes from the late 1890s to early 1900s. The rail index is now known as the Transportation average.
Investor sentiment extremely bullish
In a recent poll conducted by Bloomberg, the chief strategists from Bank of America, Bank of Montreal, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Oppenheimer, RBC and UBS expect the S&P to be higher for 2011. Individual investors are currently bullish as well. From a recent USA today poll, 88% expect the market to be up in 2011, while only 1% expects the market will be down more than 10%. Daily Sentiment Index by trade-futures.com reached a 94% bullish reading in November, the highest total it has seen since January 2007. This numbers low was 7% bulls in March 2009, when we reached the market lows.
Does this guarantee the markets are heading down?
No, however it does state that sentiment is extremely bullish and market turns tend to occur after reaching extreme bullish readings. Noting the numbers for January 2007, it took until October for the market to make its peak. The lessons we want to take from these numbers are investors should be cautious and focus on quality names.
Another reason for focusing on quality names are the New Highs of the NYSE has not topped its April 26th number of 674, however each of the indexes have passed their April highs. We can interpret from these numbers that fewer stocks in the index are pushing the indexes higher. If we can get more New Highs than the April high, this is bullish, while if we continue to lag behind with New Highs the more cautious we need to become. In the recent bear market, New Lows reached its greatest number in late October, while the market finally bottomed in March of 2009. Today, we closed at a 2 year high, however new highs were 373.
Dow Theory on a Buy signal
In future writings, I will get in more detailed discussions about Dow Theory, however currently it is on a buy signal. The one thing to remember in following the Dow Theory is that at some point after many correct buy or sell signals, there will become a buy or sell signal that is incorrect. Dow Theory will never call the top or bottom of the markets, but it should be able to see the markets breaking down or a market that is beginning to recover.
In this theory, both the Industrials and Transports must confirm each other. This means they need to pass earlier highs together for a buy signal or pass lows together for a sell signal. One average breaking their recent high or low without the other is a non-confirmation and you could see the market move in the opposite direction.
Move forward with caution
In trying to reach my early goal for this piece, I leave you with “move forward with caution.” As of this moment, the Dow Theory is on a buy signal, however investor sentiment is at levels that sometime signal a pause and other times signal a reversal depending on the reactions and how the markets move in the following months. If I have one conclusion, the markets contain more capital risk for reduced upside potential. With this conclusion, focus should be on quality names that have better than average yields. In a few days, I will discuss the recent projections of Jeremy Grantham that better explains the risk/return of the markets.
Wednesday, September 15, 2010
Subscribe to:
Posts (Atom)
Posts
