Saturday, February 25, 2012

Earnings and Consumer Confidence

The end of February is upon us and we still have time to make 2011 contributions to an IRA account and reduce your 2011 taxes. Given the rhetoric about future changes to entitlement programs, aka retirement money, it would be a great idea to contribute to your future nest egg. The headlines for this week included information on corporate earnings and consumer confidence. The biggest risk to our economy is not related to Europe, rather the price of gasoline and oil. It is important to keep a very close watch on consumer confidence. Now is a great time to invest and leave the news media behind you.


Vanguard Weekly Recap

Positive news emerged from two of the global economy's most-troubled precincts: the U.S. housing market and Greek debt negotiations. January results showed that home sales extended their favorable trend in the deeply depressed sector, while European negotiators hammered out an agreement on a second bailout plan for Greece, subject to approvals. For the week ended February 24, the S&P 500 Index rose 0.3% to 1,366 (for a year-to-date total return—including price change plus dividends—of about 8.9%). The yield on the 10-year U.S. Treasury note declined 3 basis points to 1.98% (for a year-to-date increase of 9 basis points).


Corporate Earnings

S&P 500 Gets 9% Cheaper as Record Profit Restores $3.2 Trillion to Stocks

By Inyoung Hwang and Lu Wang | Bloomberg – Thu, Feb 23, 2012 12:01 AM EST

Profits in the Standard & Poor's 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 6 points of last year's peak.

"The world is profoundly underinvested in U.S. equities," Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. "The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen."

Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to $104.27 a share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69 percent increase in earnings since 2009, compared with the 22 percent rally in the index in the past two years. Earnings for S&P 500 companies from Priceline.com Inc. to MasterCard Inc. and Lorillard Inc. are estimated to jump 9.6 percent from last year.


Consumer Confidence

Consumer Comfort Highest in Almost Four Years

By Bob Willis | Bloomberg – Thu, Feb 23, 2012 9:45 AM EST

Consumer confidence in the U.S. increased last week to the highest level since April 2008 as more Americans had a favorable view of their finances.

The Bloomberg Consumer Comfort Index rose to minus 38.4 in the period ended Feb. 19, its fifth consecutive gain, from minus 39.8 the previous week. It marked the second straight week above minus 40, which is the level associated with recessions and their aftermath. Men, homeowners and households with annual incomes of more than $50,000 were the most optimistic in more than a year.

A majority rated their personal finances as positive for the first time since July, indicating a rising stock market and job growth may encourage consumers to keep spending. At the same time, higher gasoline costs threaten to unravel the recent gains in sentiment, as occurred a year ago.

"An improving labor market and rising equity prices have bolstered sentiment of survey participants, especially those in the upper-middle and wealthy classes," said Joe Brusuelas, a senior economist at Bloomberg LP in New York. Still, the "improvement will be put to the test in coming weeks due to the spike in gasoline prices."

The price of a gallon of regular unleaded gasoline climbed to $3.57 as of Feb. 19 from a 10-month low of $3.21 in December, according to AAA, the nation's largest automobile association. A year ago, gasoline costs rose through the middle of May, climbing to $3.99 a gallon, from $3.10 at the end of January. At the same time, confidence waned.


English Language - Somewhat confusing

Let's face it - English is a crazy language. There is no egg in eggplant, nor ham in hamburger; neither apple nor pine in pineapple. English muffins were not invented in England or French fries in France. Sweetmeats are can-dies while sweetbreads, which aren't sweet, are meat. If we explore its paradoxes, we find that quicksand works slowly, boxing rings are square and a guinea pig is nei-ther from Guinea nor is it a pig.

In addition, why is it that writers write but fingers don't fing, grocers don't groce and hammers don't ham? If the plural of tooth is teeth, why isn't the plural of booth, beeth? One goose, 2 geese. So one moose, 2 meese? One index, 2 indices? Doesn't it seem crazy that you can make amends but not one amend? If you have a bunch of odds and ends and get rid of all but one of them, what do you call it?

How can a slim chance and a fat chance be the same, while a wise man and a wise guy are opposites? You have to marvel at the unique lunacy of a language in which your house can burn up as it burns down, in which you fill in a form by filling it out and in which, an alarm goes off by going on.

English was invented by people, not computers, and it reflects the creativity of the human race, which, of course, is not a race at all. That is why, when the stars are out, they are visible, but when the lights are out, they are invisible.

Sunday, February 19, 2012

Importance of Investing Internationally

I hope Valentine's Day went well for you and your family. The topic is the importance of diversification by investing in international stocks. At the end is a paragraph titled Inner Peace. The first section is the weekly recap published by Vanguard.


Vanguard

The U.S. economy is showing progress as some risks abate—at least for the moment. A deal in Congress to extend a payroll tax cut and federal unemployment benefits means households won't end up with less cash to spend this year, which some analysts had feared could have caused the recovery to falter. And though the housing market remains deeply troubled, home construction is showing signs of life. For the week ended February 17, the S&P 500 Index rose 1.4% to 1,361 (for a year-to-date total return—including price change plus dividends—of about 8.6%). The yield on the 10-year U.S. Treasury note rose 2 basis points to 2.01% (for a year-to-date increase of 12 basis points).


Importance of Investing Internationally

When building a portfolio that includes mutual funds of stocks it is always a good idea to have a mutual fund that buys stocks in international companies to provide some diversification. During this year, these mutual funds have not done as well as mutual funds that invests in US stocks because of a strong US Dollar. So while a strong US Dollar has been good for the US based stocks it has hurt the return for international based stocks. Given the actions by the federal government and the Federal Reserve this will ultimately change which is the focus of this section.

The primary reason given to purchase this type of mutual fund is that most countries outside of the US and the European Union have a faster growth rate. The primary risk with this type of mutual fund relates to currency fluctuations. An optimum ratio of US stock mutual funds to international stock mutual funds has been studied and a portfolio should have more in US stock mutual funds.

As the value of US Dollar changes relative to other currencies the value of international mutual funds will change while US mutual funds will not be impacted. The relative value of the US Dollar to other currencies is a function of the amount of US Dollars in circulation as well as the perception of the US government as a safe haven.

An example to illustrate the impact of the strength of the US Dollar will be the value of the US Dollar relative to the Canadian Dollar and the change in the Canadian Stock Market. In this example, a Canadian Stock Market Index goes up by 10% during a year. Since we live in the US and our currency is the US Dollar the changes has to be converted.
1) If the value of the US Dollar to the Canadian Dollar does not change during the year then the investment should go up by about 10% in your account.
2) If the US Dollar to the Canadian Dollar gets stronger by about 10% then the investment should not change in your account.
3) If the US Dollar to the Canadian Dollar gets weaker by about 10% then the investment should go up by about 20% in your account.

As our national debt climbs by about $1 Trillion each year this means that we are printing $1 Trillion more US Dollars each year. This trend looks to continue for awhile. The question is do investors want to buy more and more of this additional money each year? If they do then the US Dollar strengthens and if they do not then the US Dollar weakens. So right now, investors view the US as a safe haven and the US Dollar is strengthening.

In the future, when our debt level reaches that of European Union countries the US Dollar will weaken. When this happens owning this type of mutual fund will be very, very important. The question is not if it will happen but when will it happen?


Inner Peace

If you can start the day without caffeine - if you can al-ways be cheerful, ignoring aches and pains - if you can resist complaining and boring people with your troubles - if you can eat the same food every day and be grateful for it - if you can understand when your loved ones are too busy to give you any time - if you can take criticism and blame without resentment - if you can conquer tension without medical help - if you can relax without alcohol - if you can sleep without the aid of drugs - then you are probably -the family dog!

Saturday, February 11, 2012

Watching Money Flow

Next week is Valentine's Day so make sure you take care of your Valentine.

Vanguard Weekly Recap

In a light week for economic news, the U.S. trade deficit increased and U.S. consumer borrowing rose. The trend of fewer people applying for jobless benefits continued, a sign that hiring is picking up. For the week ended February 10, the S&P 500 Index declined 0.2% to 1,343 (for a year-to-date total return—including price change plus dividends—of about +7.0%). The yield on the 10-year U.S. Treasury note fell 1 basis point to 1.96% (for a year-to-date increase of 7 basis points).


Watching Money Flow

Last week I reported on something that I follow called the ARMS index. Another thing that I follow is the money flow in and out of mutual funds. I find this information each week in Barron's.

Equity Funds averaged $5.4 Billion inflow of money over a 4 week period. Money Market Funds averaged $11.5 Billion outflow of money over a 4 week period. Municipal Bond Funds averaged $1.2 Billion inflow of money over a 4 week period. Taxable Bond Funds averaged $7.7 Billion inflow of money over a 4 week period. So for the last month money has been leaving money market funds and ha3 been put to work buying stocks and bonds, driving the stock market indexes higher.

When we look at the change from the previous 4 week average we get a feel for momentum. Last week the Equity Funds had a huge swing from -$1.0 Billion to $5.4 Billion while Taxable Bond Funds had a big swing from $5.0 Billion inflow to $7.7 Billion inflow. Money Market Funds and Municipal Bond Funds were relatively flat.

So last week, we had a huge increase in money going into Equity Funds while the US Stock Indexes went down slightly, interesting. The drop on Friday was about 0.7%, not much compared to the drops we saw last year. A huge increase in money going into Equity Funds and the US Stock Indexes not going up indicates that the US Stock Indexes have hit a short-term resistance. If the increase in money going into Equity Funds continues this indicates that US Stock Indexes will continue to go up. It should be an interesting year to watch the money flow.


2011 Valentine's Day Spending

According to a National Retail Federation survey of nearly 9,000 consumers, shoppers will spend an average of $116.21 on traditional Valentine’s Day merchandise, such as greeting cards, flowers and candy, this year, up 11% from $103.00 in 2010. 18.1% of consumers say they’ll include online retailers among the venues they’ll shop.

A separate survey of 1,200 online consumers from eBillme, an Internet payment service vendor, and conducted by Javelin Strategy & Research, is more bullish about the web’s role in Valentine’s Day gift-shopping. It says 32% of consumers plan to do their Valentine’s Day shopping online, up from 23% last year.

Jewelry sales are expected to climb, as 17.3% of consumers say they’ll buy jewelry as a Valentine’s Day gift this year, up from 15.5% last year, according to the NRF survey. The NRF says consumer spending on jewelry is expected to reach $3.5 billion, up from $3.0 billion in 2010. Apparel sales also are expected to increase slightly.

Sunday, February 5, 2012

ARMS Index

Last week was very nice to us investors and I hope that many more nice weeks are ahead. I have been having severe back pain for the last few days and am spending a lot of time sitting down with a heating pad. If anyone has a cure for back pain please let me know. The topic this week is the ARMS index and what it means for us. The weekly recap from Vanguard is the first section. The last section is something that I found titled, The English Language.


Vanguard

The first major employment report for the year suggested that businesses may be willing to hire at greater levels than expected. While the unemployment rate remains historically high and risks abound, there are more signs that the economic recovery is strengthening. Manufacturing activity continues to grow, construction spending is improving, and consumers' expectations for the near term are somewhat positive. For the week ended February 3, the S&P 500 Index rose 2.2% to 1,345 (for a year-to-date total return—including price change plus dividend—of about +7.1%). The yield on the 10-year U.S. Treasury note rose 4 basis points to 1.97% (for a year-to-date increase of 8 basis points).


ARMS Index

The Arms Index, also known as TRIN, an acronym for TRading INdex, was developed in 1967 by Richard Arms. It is a volume-based indicator, which determines market strength and breadth by analyzing the relationship between advancing and declining issues and their respective volume; it is used to measure intra-day market supply and demand, and it can be applied over short or longer time periods.

An index value of 1.0 indicates that the ratio of up volume to down volume is equal to the ratio of advancing issues to the declining issues. The market is said to be in a neutral state when the index equals 1.0, since the up volume is evenly distributed over the advancing issues and the down volume is evenly distributed over the declining issues. Many analysts believe the Arms Index provides a bullish signal when it is below 1.0 and a bearish signal when it is above 1.0; however, the index is also said to be useful as an overbought and oversold indicator.

So why is the ARMS index important? When the ARMS index is above 1 it means that value investing will give better performance to growth investing. Conversely when the index is below 1 it means that growth investing will give better performance than value investing. This is a good reason to have a mutual fund that is a value fund and also to have a mutual fund that is a growth fund.

Last year the ARMS index spent most of the time being slightly above 1. This year the index is spending most of the time below 1. This is a very positive indicator for the US stocks for the near term and that growth mutual funds will give the best performance.


The English Language

Let's face it - English is a crazy language. There is no egg in eggplant, nor ham in hamburger; neither apple nor pine in pineapple. English muffins were not invented in England or French fries in France. Sweetmeats are can-dies while sweetbreads, which aren't sweet, are meat. If we explore its paradoxes, we find that quicksand works slowly, boxing rings are square and a guinea pig is nei-ther from Guinea nor is it a pig.

In addition, why is it that writers write but fingers don't fing, grocers don't groce and hammers don't ham? If the plural of tooth is teeth, why isn't the plural of booth, beeth? One goose, 2 geese. So one moose, 2 meese? One index, 2 indices? Doesn't it seem crazy that you can make amends but not one amend? If you have a bunch of odds and ends and get rid of all but one of them, what do you call it?

How can a slim chance and a fat chance be the same, while a wise man and a wise guy are opposites? You have to marvel at the unique lunacy of a language in which your house can burn up as it burns down, in which you fill in a form by filling it out and in which, an alarm goes off by going on.

English was invented by people, not computers, and it reflects the creativity of the human race, which, of course, is not a race at all. That is why, when the stars are out, they are visible, but when the lights are out, they are invisible.