Hill's Personal Finance

Capital Adviser's September Outlook 2009

This month our fearless money manager discusses the importance of putting money back for retirement. Download his comments here:

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Capital Investment Council August Outlook

by Hal Eddins, Capital Investment Counsel

 

The Bible advises against building your house on sand.  In general, that's sound advice, but the Bible says nothing about building the economy on sand.  By now, you're wondering what in the world I'm talking about!  I'm talking about technology of course and the sand in question is actually silica: the world's most abundant mineral and the key component in semiconductors.
 
It might surprise you to overlay a 10 year chart of the industrial sector (stocks like Cat and Deere) over the top of a chart of the major tech companies.  Over the years, the correlation between the two groups was uncanny.  In the past, most managers bought the industrial cyclical stocks when the economy looked set to turn up, but 2009 appears different.  The cyclical group ETF (XLI) is basically unchanged on the year so far.  On the other hand, the technology ETF (XLK) is up an impressive 21.7%.  
 
As much as I've enjoyed the outperformance of the tech sector, there is something I enjoy even more-sleeping at night.  Many of the tech leaders have strong balance sheets as well.  I like how Cisco is sitting on a veritable hoard of cash and short term investments in the region of $27 billion.  Microsoft also holds nearly $31 billion in cash and short term investments. It's nice to have peace of mind when investing in the sector; with that type of financial backstop, you can take the longer term view and let John Chambers and Steve Ballmer do what they do best.
 
There is still time for the cyclicals to play catch up with tech, and it's entirely possible that technology stocks may be due for a rest after their big rally.  Either way, there are still quite a few tech leaders that are sporting attractive valuations.  One we bought recently was the global leader in handsets: Nokia (NOK)   NOK is currently trading at $13.42; they sport an 18 PE and a dividend of 3%.  When one considers that the money market is paying essentially nothing, NOK could be an attractive proposition.

 

 

Currently, Apple and Rimm account for only 3% of world-wide sales with their smart phones, but they bring in 38% of the profits!  The smart phone market is ripe for the future and Nokia is rolling out several new smart phones just in time for the Christmas season.

Capital Investment Council July 2009 Outlook

by Hal Eddins, Managing Director  Capital Investment Council

Well, so far so good.  The bottom appears to be in.  The S&P 500's low of 666 (that's a bit ominous) was reached on March 6th and has seemed to be in no danger of being breached since.  With a big second quarter rally in the bag and good news going forward, maybe we can put things on cruise control.  Think again. 
 
        Actually, our current environment is when things get tricky.  Yes, the S&P rallied almost 40% off of the bottom, but what will it do for an encore?  Are the cyclical stocks really cheap at these levels or will they have another leg down?  Is 4% a good yield to lock in on Ten Year U.S. Treasuries?  Will the "terrific three" (RIMM, Google and Apple) continue to rack up the big gains for the NASDAQ?
 
            The answer is that it's too early to tell, and that's where we come in.  Counsel’s experience may come in handy when analyzing the mountains of data that are available today.  When I got into the business 23 years ago, I could not have imagined all the data points I can currently access.  Today’s problem is not a lack of data but rather deciding what's important: finding the proverbial needle in the haystack.  In that vein, we continue to see positive data points.  More importantly, we are seeing positive reactions to the news from stocks.
 
        There are still impressive amounts of cash on the sidelines.  That cash is likely waiting for a pullback to become invested.  What happens if a pullback never comes?  Remember that the strongest markets (like the bulls of 1991 and 2003) sometimes get "overbought" and stay that way.  At times, markets seem to enjoy frustrating the largest number of investors possible.  We think the next important big data points are occurring as we write.  Second quarter earnings are coming thick and fast and the market’s reaction so far has been positive; stocks are at levels not seen since early January.  A breakout above the January highs could possibly lead to higher prices in the fall, but the markets may need to churn sideways for a while longer before moving to higher levels.  
 
            In another sign that things may be getting back to normal, Goldman Sachs reported a record 2nd quarter and appears to be on track to pay out an average of $770,000 per employee in salary and bonuses.  Correct me if I’m wrong, but didn’t Goldman JUST recently pay back their TARP funds?  The positive side to this is that Goldman and their Wall Street sidekicks, Bank of America and JP Morgan appear to be profitable again.  There is a spring in their step not seen since mid 2007 and that could bode well for the entire economy.  Several of the banks reported that their TARP money has been a key in unlocking the credit markets and things are looking rosier for a change.
 
        In addition to Santa Claus and the Easter Bunny, some fund managers still believe in decoupling.  Decoupling involves the idea that the emerging markets will continue to grow….no matter what happens in developed countries like the United States and Europe.

        China, in particular, is often cited as having moved beyond the influence of the United States.  To put it nicely, that line of thinking may prove to be incorrect.  Currently, China’s exports are 33% of their GDP.  The U.S. is the end consumer for almost 20% of China’s export market.  Suffice it to say; when one customer buys 1/5th of your product, you are still influenced by what that customer does.  Furthermore, going back seven and half years, the Emerging World index has a correlation of 84% compared with the Developed World index, so I think emerging markets have a ways to go before they can truly ignore what goes on in the rest of the world.   

        I’ve written before about the excess of shopping space in the U.S. but this tidbit from “Retrofitting Suburbia” was surprising.  The U.S has 20 square feet of retail space per citizen.  In contrast, Canada was next on the list with only 13 square feet followed by Australia with a measly 6 square feet per person.  This type of figure may help reinforce the theory of how much the U.S. consumer likely matters to Chinese output.

George Soros is one of the few “titans” of finance to make it through the credit crunch with his reputation intact.  One of the many problems that occurred over the last few years was the proliferation in custom derivatives.  Another problem is coming up with a simple and elegant way to explain the negative effect these instruments had on the world economy.  I think I’ve found the answer.  In a recent Financial Times interview, Mr. Soros summed the derivative crisis up in a nutshell: “It is like buying life insurance on someone else’s life and owning a license to kill him. CDS are instruments of destruction that ought to be outlawed.”  There’s not much to add to that, thanks George.

Capital Advisers July 2009 Outlook

This month are tongue in cheek money manager reflects on our tenuous market situation.

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This is used with consent of Capital Advisers. Any other reprint or use is strictly prohibited.

Capital Investment Council June 2009 Outlook

by Hal Eddins, Capital Investment Council

A few months back, a client asked us how we would “know” when the equity markets had gotten “better”. Our reply was that at some point, people would be more afraid to be out of the stock market as opposed to being afraid to be in it.  The public’s outlook on stocks has improved since the market’s rally off of the March 6 lows.  Over that time, volatility and fear levels have dropped from a reading of 55 for the VXO on March 6^th to a recent level of 26.

In early March, the Dow was barely 6500.  Just three months later and we see the Dow at 8800.  It’s ironic that some now feel that the “all clear” has been sounded and it’s time to invest heavily.  I won’t argue that stocks can still be considered inexpensive, especially compared with their 2007 levels.  However, the major averages have still rallied 33% in twelve weeks, and we may be due for a pause.  Note the use of the qualifier “may”.  

             I feel the market could have the potential for a 7% to 9% correction over the next few months, but I also see the potential for the Dow to reach 11,600 in the next few years.  The question is not so much the destination but rather the route we take to get there.  In my opinion, a near term key level for the Dow is 9050.  A close over that level could likely set into motion the beginnings of the longer term rally I spoke of above.  Again, the sticking point may be the timing.   Markets have run into resistance levels at a time when they are also a bit extended and overbought. 

The best markets have a tendency to get overbought and stay overbought.  For an example, think back to the big run off of the bottom in March 2003 as the US invaded Iraq.  By May of that year, the S&P had reached an overbought status; however, the market defied the odds, stayed strong through the remainder of the year, and finished with a 26% gain.

No matter the outcome, markets have enjoyed a solid three months.  The market could be signaling a recovery in the overall economy over the next 12 months.  At Counsel, we are monitoring our favorite companies.  We are circling potential targets and the prices we would be willing to pay for them.

I try not to delve too deeply into politics, but the large amount of spending of “our” money by the current administration makes me take a second look at the deficit.  To gain some perspective, let’s look back to the end of the Reagan Era.  In 1988, our national debt was 41% of gross domestic product.  Fast forward 20 years to George W. Bush’s last year in office and we see that debt is still 41% of GDP.  So far so good, but the government’s current rate of spending shows the debt to GDP ratio to potentially soar to 80% by the end of President Obama’s time in office.

Some markets are already displaying signs of worry over excessive US government spending.  Perhaps the most visible sign is one that we see and use everyday: the price of a gasoline.  Gas has rallied sharply over the last three months.  While the world economies have seemed to strengthen, I feel it is unlikely that they have strengthened enough to support oil at $70 a barrel.  Supply and demand don’t seem to be doing a good job of forecasting the current action in commodities.  Some market participants appear to be acting in a manner that runs counter to common sense.

  One of those market participants will likely prove to be China.  In addition to their large consumption of oil, China has  developed a taste for gold as well.  In fact, China has doubled their gold holdings over the last six years.  That may well account for the bulk of the gold’s rise from $450 an ounce in 2005 to our current level of $964 China is attempting to hedge their large exposure to the U.S. dollar; as the dollar drops, gold tends to rise.  How does this story end?  I’m asked by many if gold is a good investment.  The answer is not simple.  Gold has doubled in the past four years, and gold tends to shine when other asset classes are floundering.  There are hyper-inflation fears out there.  As the general economy continues to recover, we may actually see gold drop as much of the move has already been discounted. 

             What about that old maxim “sell in May and go away”?  Should we be practicing that this year?  Maybe not.  Historically, the best seasonal periods for stocks tend to be the six months from November to April.  The problem currently is that the “other” six month period (May through October) has proven to come into its own during bear markets.

 Since 1929, there have been 14 bear markets.  In 12 of those 14 markets, the S&P 500 has had an average rally of 12% during the May through October period.  Some fund managers were caught short (literally) by the market’s sharp rise in the last three months.  These managers have cash on hand and are eager to invest it less they miss out again.  That could potentially make our market pullbacks shallow during the summer and early fall.

 

Disclosures:

Past performance is not indicative of future results.  This material is not financial advice or an offer to sell any product.  The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Capital Investment Counsel reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings.  It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. All recommendations within preceding 12 months or applicable period are available upon request.

Capital Investment Counsel is a registered investment advisor. More information about the about the advisor including its investment strategies and objectives can be obtained by visiting www.capital-invest.com.

Capital Adviser's April 2009 Outlook

This month our fearless money manager is tired of this crappy market. Read his thoughts and see if you agree.

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This piece is for personal consumption only. Any redistribution without the expressed written consent of Capital Adviser's is strictly prohibited.

Ned Brines Weekly Outlook for 4/6/09

This week Brines suggests we are in for a test of things to come; its whether we stall at resistance on the S&P 500 index or push through those marks. His cautious optimism sees inflation on the horizon. What sets the stage of his commentary is two quotes 1) "The problem with socialism is that you eventually run out of other peoples money" - Margaret Thatcher and 2) "The market can stay irrational longer than you can stay solvent" -John Maynard Keynes.

Read all at Weekly Market Notes

Ned Brines' Weekly Outlook

From time to time we check in on an old friend mines weekly commentary, because he has very good market insights. This week Mr. Brines still has fear in the market after the strong showing we have had as of late. He still has an open mind to improving economic and market conditions , but still sees danger. Read his comments at Weekly Market Notes

Capital Investment Council March 2009 Outlook

Sometimes to go up, you must first go down.  That statement may sound a bit like Yoda from Star Wars, but that doesn't make it any less true.  Just two weeks ago, the Dow was holding just above 7000.  I wondered if a brief plunge below 7000 would incite the bout of panic needed to put in a short term bottom in stocks.  I use the words short-term as we will not know until months later if the March lows are indeed "the bottom".  While the market has dropped steadily since the Inauguration, it was only in the first two weeks of March that we began to see a climb in fear accompanied by a "waterfall" like decline in the market.  This is the type of behavior that usually leads to a “spring cleaning” of sellers.  Investors who sell now will not be around to sell in a few weeks should the market move higher.  In fact, to participate in any upside, today sellers would have to re-buy.  This could add fuel to any potential rally.

 

         I use the CBOE Options Volatility Index or VXO to indicate levels of fear in the marketplace.  To recap, the VXO is a contrary indicator; a high level of fear may mean that the majority of selling is done and a rally may be at hand.  Since last September, the VXO has traded in a range of 40 to 102.  This is approximately double the VXO’s “usual” range. 

 

Ironically, I have found another data point that shows just how high the market’s angst currently is: handgun sales. For November, 2008, Federal records show a 42% year over year increase in handgun sales.  December sales slowed to only a 24% increase, but the dawning of 2009 showed a bump back to 29%.  Finally, February slowed again to only a 23% sales jump.  The overall trend shows November as the peak and while gun sales continue to grow, they are doing so at a slowing pace.

 

 Those data points mimic much of the action in the VXO and the stock market as a whole.  The VXO peaked at 102 in the early fall, fell off a bit in December and then staged a smaller spike in fear through January and February.  Fear and unrest appear to be universal feelings that are manifested in any number of ways.  At a time when otherwise sane people are forecasting the end of civilization, it may prove to be a buying opportunity.

 

         The decline in the S&P 500 is following a timeline that is similar to the sequence the market undertook from 2000’s peak to the 2003 bottom.  The size of the decline was 49% from the peak in 2000 to the bottom in 2003.  Currently, the swing has seen a drop of 57% from the 2007 high to the March 2009 lows.  So while the drop has been more severe, it is still similar in size and ferocity to what we saw seven years ago. 

 

           I bring this up to give us perspective on today’s events.  Some of us have been in the industry for many years and we have "seen it all".  The media appears to want us to believe that we have not.  When one is confronted with an unfamiliar challenge, one tends to be more nervous than when faced with the same old problem.  My message to you is that this is indeed the same old problem.  We saw it in 1987, 1994, the fall of 1997, the fall of 1998 and of course in March of 2000.  Stick to your “knitting,” rebalance your clients’ asset allocations to reflect today's opportunities and act slowly but decisively to take advantage.  Eventually, we may look back and wonder why we were not more aggressive.

         Why are the retailers having such a hard time in the last eighteen months?  Yes, the credit crunch has something to do with it, but the answer could be much simpler: overbuilding.      Since 1990, domestic spending on clothing grew at an 89% clip.

  89% growth seems impressive until you look at the other side of the equation.  During that same time frame, the number of clothing stores increased by 168%!  Something had to give, and the housing- driven credit crunch provided the catalyst.  However, we are beginning to see opportunities in several of the cash rich, debt free retailers. 

Additionally, the S&P retail index (RLX) made its yearly low of 207 back in November of 2008.  Recently, the Dow plunged to levels not seen since 1996.  On March 6, the RLX put in a “higher” low of 223.  This type of relative strength could portend positive action in the retailers over the next several years. 

The crux of the plan is to own the debt-free retailers.  With financing scarce, the absence of the need to restructure debt levels is critical.  Being cash-rich can buy a company time to make the right decisions for the long term; without that flexibility, a heavily indebted retailer may not even make it to the long term.   I hope many of you will be able to join us on our conference call in early April.

 

 

 

Ned Brines Market Outlook 2/16/2009

I have mentioned Ned before in my blog and that I really respect his opinion insights on the market. His comments for the upcoming week are a very worthwhile read this weeks. He was right about the Santa Claus-Suckers Rally.

Ned Brine's Weekly Market Notes