Investing Curiouscatblog

Tag: markets

  • GM and Citigroup Replaced by Cisco and Travelers in the Dow

    Starting next Monday GM and Citigroup will no longer be in the list of 30 companies making up the Dow Jones Industrial Average. I posted in 2005 that GM should be dropped from the DJIA. GE has lasted in the Dow for more than 100 years. 12 of the 30 stocks have been added since 1997. Cisco and Travelers are the companies that are joining the Dow on June 8th.

    The 30 stocks of the Dow Jones Industrial Average, as of June 8th, 2009:

    (more…)

    Stock Market Capitalization Year Added
    Exxon (XOM)             $347 Billion     1928
    Walmart (WMT) 195     1997
    Microsoft 189     1999
    Proctor & Gamble (PG) 155     1932
    Johnson & Johnson (JNJ) 153     1997
    GE 147     1896
    AT&T (T) 145     1999
    IBM 143     1979
    JPMorgan Chase (JPM) 141     1991
    Chevron (CVX) 138     2008
    Coca-Cola (KO) 113     1987
    Cisco (CSCO) 112     2009
    Pfizer (PFE) 100     2004
    Intel (INTC)   91     1999

  • Indian Stock Market up 17% Today

    The Indian stock market surged 17% today on the election results that gave the Congress party an unexpectedly decisive victory. The market was closed early due to the huge spike in prices. The Indian stock market was up 26% this year, before the move today.

    Landslide in India Vote Reshapes Landscape

    Students of Indian politics pointed to several factors. First, under Mrs. Gandhi’s leadership, the Congress-led coalition homed in on the rural poor. During its first term, buoyed by robust economic growth, it used record government revenues to increase social spending, not just raising health and education budgets, but also starting an ambitious public works program in the countryside and a costly loan repayment waiver for farmers.
    …
    Even with a free hand, the Congress-led government will face formidable challenges. India needs to swiftly build roads, highways and power plants; improve public schools and build universities for a swelling young population; and hire nurses and doctors for its feeble public health system. Most of all, it needs to address its abiding poverty. Despite over a decade of high economic growth in India, 300 million people remain below the poverty line.

    Driving India’s Economic Reforms

    The problem is that revenue growth is now collapsing in the wake of the economic slowdown, while well-entrenched government spending is increasing. India’s fiscal deficit has ballooned to more than 10% of GDP this year and the debt-to-GDP ratio is at 80% — the highest for any major developing country.

    India has great potential and great problems. India has poor physical infrastructure and crippling bureaucracy; India ranked the 122nd easiest country for doing business. The election results are giving investors hope the government will be able to make progress to improve the business climate, which will improve economic performance.

    Related: Emerging-market Multinationals – Why Investing is Safer Overseas (Jun 2007) – World’s Wealthiest People – Top 12 Manufacturing Countries in 2007

  • Beware of the Sucker’s Rally

    Beware of the sucker’s rally

    The Bull Market Express may really be pulling out of the station, but Wall Street’s trains have a nasty tendency to derail just as passengers jostle for seats. Most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low. It was a fairly typical sucker’s rally and bear markets often need more than one to create sufficient disillusionment for a definitive bottom.

    The 2000–2002 bear market had three, with average gains of 21 per cent in the Dow Jones Industrials over 45 days.

    The granddaddy of all bear markets, 1929 –1932, had six false alarms with an average gain of 47 per cent. And Japan’s ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.

    Bear markets typically end with a whimper rather than a bang, casting doubt on the latest recovery according to Hussman Econometrics, which analysed numerous US market bottoms and bear market rallies. With the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent.

    I don’t put much money on the line trying to time the stock market. I thought the decline was overdone and I have found some things to buy. I am not convinced the current assent of the USA market especially means the bear market is over. If I had to sell stocks, I would be much happier to do it now than 3 months ago. That said, I am not selling anything or reducing my planned buying (401k buying).

    Related: Financial Markets Continue Panicky Behavior (Oct 2008) – Trying to Beat the Market – Add to Your 401(k) and IRA – see my investing portfolio results

  • First Quarter GDP 2009 down 6.1%

    First Quarter GDP 2009 in the USA was down 6.1%. This is after a revised 6.3% drop in fourth quarter of 2008 (preliminary fourth quarter report showed a 6.2% decline). Real exports of goods and services decreased 30% in the first quarter, compared with a decrease of 23.6% in the fourth. Real imports of goods and services decreased 34.1%, compared with a decrease of 17.5%.

    The personal saving rate — saving as a percentage of disposable personal income — was 4.2% in the first quarter, compared with 3.2% in the fourth quarter of 2008.

    The news certainly is nothing to be happy about. But the stock markets around the world were buoyed by the Federal Reserves positive words:

    Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

    Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

    True, those words hardly sound like great news but the markets were quite happy.

    Related: The Economy is in Serious Trouble (Nov 2008) – Warren Buffett Webcast on the Credit Crisis – Fed Continues Wall Street Welfare (March 2008) – Manufacturing Data – Accuracy Questions

  • Tax Considerations with Mutual Fund Investments

    One problem with investing in mutual funds is potential tax bills. If the fund has invested well and say bought Google at $150 and then Google was at $700 (a few years ago) there is the potential tax liability of the $550 gain per share. So if funds have been successful (which is one reason you may want to invest in them) they often have had a large potential tax liability.

    With an open end mutual fund the price is calculated each day based on the net asset value, which is fair but really the true value if there is a large potential tax liability is less than if there was none. So in reality you had to believe the management would outperform enough to make up for the extra taxes that would be owed.

    Well, the drastic stock market decline over the last few years has turned this upside down and many mutual funds actual have tax losses that they have realized (which can be used to offset future capital gains). Say the fund had realized capital losses of $30,000,000 last year. Then if they have capital gains of $20,000,000 next year they can use the losses from last year and will not report any taxable capital gains. And the next year the first $10,000,000 in capital gains would be not table either. Business Week, had an article on this recently – Big Losers Can Be Big Tax Shelters

    Take Dodge & Cox International. It has a -80% capital-gains exposure, meaning it has a capital loss that covers 80% of assets. So it could have several years of tax-free gains.
    …
    Yet it is Miller’s newer charge, Legg Mason Opportunity, which holds stocks of all sizes and can take short positions, that will prove to be the real tax haven. Morningstar pegs its losses at 285% of its $1.2 billion in assets.
    …
    There are other funds with returns so ugly and losses so large that it may not matter what their trading style is for many years: Fidelity Select Electronics (FSELX), -539%; MFS Core Equity A, -369%; Janus Worldwide (JAWWX), -304%; Vanguard U.S. Growth (VWUSX), -227%.

    How does a fund have over 100% tax losses? The way I can think of is if they have a great deal of redemptions. If the fund shrinks in size from a $3 billion fund to a $300 million fund they could have a 50% realized capital loss (down to $750 million) but then another $450 million in redemptions). Now the $300 million has a $750 million capital loss or 250%.

    Related: Shorting Using Inverse Funds – Lazy Portfolio Results – Does a Declining Stock Market Worry You? – Asset Allocations Make A Big Difference

  • Add to Your 401(k) and IRA

    The recent performance of investments can be discouraging. However, the most damaging reaction to your financial future is to reduce your contributions to retirement savings. IRAs and 401(k)s are great ways to save for retirement. In fact the recent performance has convinced me to increase my contributions. This is for two reasons.

    First, I had been somewhat optimistic in my guesses about investment returns. The current decline means that investments in the S&P 500 have returned about 0% over the last 10 years. That is a horrible performance and it will take many years to even bring that up to a bad performance. So if you reduce your long term investment performance expectations you need to add more while you are working (or reduce your retirement expectations – or work longer).

    Second, I think now is a very good time (long term) to be investing. I think the declines in the markets (both the stock market and real estate market) now provide good investment opportunities. Of course I could be wrong but I am willing to make investments based on this believe. And I believe there are plenty of place real estate prices may still be too high, but I believe there are also good buys.

    A third reason worth considering is the damage done to the economy over the last 10 years and the costs of dealing with that today. Those costs are going to have long term impacts. Likely the economy will be stressed paying for the over-indulgences of the past for quite a long time. That means the risks to those in that economy will increase. And therefore having larger reserves is a wise course of action to survive the rough times ahead. Those rough times include a substantial risk of inflation. Investing to protect against that risk is important.

    I would recommend starting with at least a 200 basis point increase in retirement contributions. For example, if you were saving 10% for retirement, increase that to 12%. If you have not added to your IRA for 2008, do so now (you have until April 15th to do so). In fact, if you haven’t added to your IRA for 2009, do so now.

    Related: How Much Will I Need to Save for Retirement? – Nearly half of all workers have less than $25,000 in retirement savings – Investing – What I am Doing Now

  • There is No Invisible Hand

    There is no invisible hand by Joseph Stiglitz, 2001 Nobel Prize in Economics

    This year’s [2002] Nobel Prize celebrates a critique of simplistic market economics, just as last year’s award (of which I was one of the three winners) did. Last year’s laureates emphasised that different market participants have different (and imperfect) information, and these asymmetries in information have a profound impact on how an economy functions.

    In particular, last year’s laureates implied that markets were not, in general, efficient; that there was an important role for government to play. Adam Smith’s invisible hand – the idea that free markets lead to efficiency as if guided by unseen forces – is invisible, at least in part, because it is not there.
    …
    That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism.

    Let me be clear: the rational expectations models made an important contribution to economics; the rigour which its supporters imposed on economic thinking helped expose the weaknesses underlying many hypotheses. Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty.

    Related: Greenspan Says He Was Wrong On Regulation – Ignorance of How Markets Work – Leverage, Complex Deals and Mania – Estate Tax Repeal – Misuse of Statistics – Mania in Financial Markets

  • Stock Markets Down $30 Trillion for 2008

    $30.1 trillion in stock market valuation was wiped out last year – Journal of a Plague Year: Faith in Markets Cracks Under Losses:

    The price tag has been transcendent, too. Global stock markets lost about half of their value in 2008, or $30.1 trillion dollars. In the U.S., $7.2 trillion of shareholder value was wiped off the books, as the Standard & Poor’s 500 Index fell 39 percent through Dec. 30 and the Nasdaq Composite Index dropped 42 percent.
    …
    Lehman Brothers Holdings Inc., with assets of $639 billion, filed the largest bankruptcy in U.S. history on Sept. 15. Its creditors may have lost as much $75 billion, the firm’s chief restructuring officer said.

    Bear Stearns Cos. was taken over by JPMorgan Chase & Co. in March after a funding crisis triggered by losses from subprime- mortgage investments. Merrill Lynch & Co., facing a crisis of its own, sold itself to Charlotte, North Carolina-based Bank of America Corp. And the last two major investment banks, Goldman Sachs Group Inc. and Morgan Stanley, converted to bank holding companies and got capital injections from the U.S. government.

    2008 was quite a memorable year in the markets. What the markets will do this year is hard to know. But the economy is likely to be very weak. Job losses will increase. If we are lucky the economy will be picking up by the end of the year. A huge problem is we have been living well beyond our means for decades. And now we are selling out even more of our children and grandchildren’s future to pay for the extravagance of those last few decades. How costly our credit-card-like financing of government bailouts is going to be is the most important issue I believe.

    There is nothing wrong with spending money you saved for a raining day when that day comes. There is a big problem (for your future) taking our more credit cards to spend money you didn’t bother to save. You might have to do so, but the costs you are heaping on your future is very high (and for the economy overall many of those costs will be borne by children not yet born).

    Related: The Economy is in Serious Trouble – Crisis May Push USA Federal Deficit to Above $1 Trillion for 2009 – What Should You Do With Your Government “Stimulus” Check? – Over 500,000 Jobs Disappeared in November

  • Investing – What I am Doing Now

    The economy (in the USA and worldwide) continues to struggle and the prospects for 2009 do not look good. My guess is that the economy in 2009 will be poor. If we are lucky, we will be improving in the fall of 2009, but that may not happen. But what does that mean for how to invest now?

    I would guess that the stock market (in the USA) will be lower 12 months from now. But I am far from certain, of that guess. I have been buying some stocks over the last few months. I just increased my contributions to my 401(k) by about 50% (funded by a portion of my raise). I changed the distribution of my future contributions in my 401(k) (I left the existing investments as they were).

    My contributions are now going to 100% stock investments (if I were close to retirement I would not do this). I had been investing 25% in real estate. I also moved into a bit more international stocks from just USA stocks. I would be perfectly fine continuing to the 25% in real estate, my reason for switching was more that I wanted to buy more stocks (not that I want to avoid the real estate). The real estate funds have declined less than 3% this year. I wouldn’t be surprised for it to fall more next year but my real reason for shifting contributions to stocks is I really like the long term prospects at the current level of the stock market (both globally and in the USA). The short term I am much less optimistic about – obviously.

    I will also fully fund my Roth IRA for 2009, in January. I plan to buy a bit more Amazon (AMZN) and Templeton Emerging Market Fund (EMF). And will likely buy a bit of Danaher (DHR) or PetroChina (PTR) with the remaining cash.

    Related: 401(k)s are a Great Way to Save for Retirement – Lazy Portfolio Results – Starting Retirement Account Allocations for Someone Under 40

  • Stocks Still Overpriced?

    I don’t actually agree with the contention in this post, but the post is worth reading. I will admit I am more certain of I like the prospect of investing in certain stocks (Google, Toyota, Danaher, Petro China, Templeton Dragon Fund, Amazon [I don’t think Amazon looks as cheap as the others, so their is a bit more risk I think but I still like it]) for the next 5 years than I am in the overall market. But I am also happy to buy into the S&P 500 now in my 401(k).

    Stocks Still Overpriced even after $6 Trillion in Market Cap gone from the Index

    Looking at data since 1936 the average P/E for the S & P 500 is 15.79. The current P/E for the market looking at second quarter data is 24.92. Since that time, the P/E has started to look more attractive but you have to be cautious as to why this is occurring. First, the current P/E ratios are betting that earnings will not take hits in 2009 which they clearly are.
    …
    Even if we assumed a healthy economy, the price is no bargain. Throw in the fact that we are in recession and you can understand why the S & P 500 is still overvalued. We haven’t even come close to the historical P/E of 15.79 which includes good times as well.

    Just to be clear current PE ratios have nothing to do with next year. It would be accurate to say someone making the argument that the S&P 500 is cheap now because of the current PE ratio, is leaving out an important factor which is what will earning be like next year. It does seem likely earnings will fall. But I also am not very concerned about earning next year, but rather earning over the long term. I see no reason to be fearful the long term earning potential of say Google is harmed today.

    Related: S&P 500 Dividend Yield Tops Bond Yield for the First Time Since 1958 – 10 Stocks for 10 Years – Starting Retirement Account Allocations for Someone Under 40 – Books on Investing