About a month ago, I started a series on the 4 seasons of a business cycle and stated that we were in the spring season. A few events happened that needed to be covered so I put the series on hold and today I am continuing the series and am discussing summer. At the end you will find 2 paragraphs from Warren Buffet's, Berkshire Hathaway, Annual Report, February 2010 that state investing principles concerning understanding valuations and emotion.
The summer season is when the economy is growing in a fairly normal fashion and jobs are being created. Our economy is growing now with little job creation which means that we are currently in spring. The signs of summer can be seen by:
1) The Federal Reserve says the economy is normal or growing at about a 3% sustainable rate.
2) Jobs are being created.
3) CD and Money Market interest rates are rising as the Federal Reserve raises interest rates.
4) The economic mood is very good and people are willing to spend.
5) The Federal Reserve will increase short term interest rates incrementally at each meeting going over 3%.
6) The US Tressury yield curve will flatten out such that the spread between long and short term rates shrink.
7) Business inventories will return to a normal level.
The key shift in investments that needs to occur is money that is viewed as low risk should shift into money market funds. So money that today is invested in mortgage backed securites needs to be moved. The stock market does well as companies are growing normally once again. I am looking forward to it.
Excerpt from Warren Buffet's, Berkshire Hathaway, Annual Report, February 2010
We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.
We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at yearend 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.
Sunday, February 28, 2010
Sunday, February 21, 2010
Fear and Greed
This past week, the mood changed in the stock market and the stock market indexes rose about 3%. For the previous 4 weeks or so the stock market had a downward trend. So what happened to cause this sudden shift in direction? The best way to describe it is a shift in emotion from fear to greed. Certainly, economic data did not shift significantly during the year. At the end of the newsletter are some Winter Olympic facts for your enjoyment.
It seemed that all of a sudden this week anything that looked like bad news was brushed aside while only good news was being considered in an emotion of I must buy to avoid missing out. This is just the opposite of what had been happening where all of the good news seemed to be ignored while bad news was on center stage in an emotion of I must sell to avoid losing money. As emotion shifts, investors with a short term time horizon either buy or sell based upon emotional sentiment. This activity is very important to the brokerage and investment companies that only make money when people buy or sell. The problem for a long term investor is you can not predict when the emotion will change making it virtually impossible to time the market.
In other news, the Fed made a surprising move and raised the discount rate charged to member banks on emergency loans from 0.5% to 0.75%. This is a positive sign for the economy and confirms the position of the economy in the economic business cycle. From an investment viewpoint, it makes investing in bonds more challenging as money market funds still do not yield a suitable return while it makes holding more longer term bonds riskier.
Brokerage and investment companies report money flow in 4 mutual fund categories: money market, stocks, corporate bonds, and government bonds. Money continues to flow from money market funds into all other categories a negative indicator for money market funds. It still seems like it is early in the business cycle to invest in money market funds.
Winter Olympic Facts:
•The first Winter Olympic Games were held in Chamonix, France in 1924.
•Norway has won the most medals (263) at the Winter Games.
•The five Olympic rings represent the five major regions of the world – Africa, the Americas, Asia, Europe and Oceana, and every national flag in the world includes one of the five colors, which are (from left to right) blue, yellow, black, green, and red.
•Up until 1994 the Olympics were held every four years. Since then, the Winter and Summer games have alternated every two years.
•No country in the Southern Hemisphere has ever hosted a Winter Games.
•Only four athletes have ever won medals at both the Winter and Summer Olympic Games: Eddie Eagan (United States), Jacob Tullin Thams (Norway), Christa Luding-Rothenburger (East Germany), and Clara Hughes (Canada).
•Nobody has won more medals at the Winter Games than cross-country skier Bjorn Dählie of Norway, who has 12.
It seemed that all of a sudden this week anything that looked like bad news was brushed aside while only good news was being considered in an emotion of I must buy to avoid missing out. This is just the opposite of what had been happening where all of the good news seemed to be ignored while bad news was on center stage in an emotion of I must sell to avoid losing money. As emotion shifts, investors with a short term time horizon either buy or sell based upon emotional sentiment. This activity is very important to the brokerage and investment companies that only make money when people buy or sell. The problem for a long term investor is you can not predict when the emotion will change making it virtually impossible to time the market.
In other news, the Fed made a surprising move and raised the discount rate charged to member banks on emergency loans from 0.5% to 0.75%. This is a positive sign for the economy and confirms the position of the economy in the economic business cycle. From an investment viewpoint, it makes investing in bonds more challenging as money market funds still do not yield a suitable return while it makes holding more longer term bonds riskier.
Brokerage and investment companies report money flow in 4 mutual fund categories: money market, stocks, corporate bonds, and government bonds. Money continues to flow from money market funds into all other categories a negative indicator for money market funds. It still seems like it is early in the business cycle to invest in money market funds.
Winter Olympic Facts:
•The first Winter Olympic Games were held in Chamonix, France in 1924.
•Norway has won the most medals (263) at the Winter Games.
•The five Olympic rings represent the five major regions of the world – Africa, the Americas, Asia, Europe and Oceana, and every national flag in the world includes one of the five colors, which are (from left to right) blue, yellow, black, green, and red.
•Up until 1994 the Olympics were held every four years. Since then, the Winter and Summer games have alternated every two years.
•No country in the Southern Hemisphere has ever hosted a Winter Games.
•Only four athletes have ever won medals at both the Winter and Summer Olympic Games: Eddie Eagan (United States), Jacob Tullin Thams (Norway), Christa Luding-Rothenburger (East Germany), and Clara Hughes (Canada).
•Nobody has won more medals at the Winter Games than cross-country skier Bjorn Dählie of Norway, who has 12.
Monday, February 15, 2010
WWEE Update
This is another update on WWEE. While the previous newsletters on this topic gave qualitative information, now quantitative data is in the public domain. Specifically, it is the amount of data being transfered by people using mobile devices such as a Blackberry, iPhone, computers, etc. It does not pertain to the number of cell phone voice calls. It pertain to people accessing the internet to get data and video information.
The Sunday, February 14, 2010, Charlotte Observer had an article titled “Warning! Data traffic jam ahead”. The subject of the article is the projected volume of data on mobile devices accessing the internet in the US and how infrastructure has to be added now to avoid a future logjam. Keep in mind that this same situation will also occur in other countries around the world, this is not a US only phenomenon.
Quantitative Data for the US Market:
Number of US mobile subscribers accessing the internet: 2008 = 34 million devices, 2014 = 106 million devices. This means that in 4 years, 1 in 3 people will accessing the internet in a mobile manner. My opinion, is that this is conservative and actually more people will have mobile devices.
The projected US Mobile Data Usage in Petabytes per month is shown below. Let me explain a Petabyte. Peta means 1,000 trillion, you know the number that is the size of the US deficit. A byte refers a symbol or character that is comprised of bits of data. A Petabyte is a really, really big deal.
2008 = 6
2009 = 17
2010 = 41
2011 = 91
2012 = 201
2013 = 397
This means that data growth is tripling now and doubling in the future. This means that in 4 years roughly 10 trillion bytes of data traffic will exist per minute. I think this is also conservative given my view of the number of devices that will be in use.
This is a major market move and one to be considered for investing. The constraint for all of this data is not the number of devices connecting to an antenna but rather the back-haul from the antenna to the network. For this data flow to happen, significant money, like Billions of Dollars, has to be invested in infrastructure like antennas, towers, cable, electronics, etc and the investment has to occur now.
The Sunday, February 14, 2010, Charlotte Observer had an article titled “Warning! Data traffic jam ahead”. The subject of the article is the projected volume of data on mobile devices accessing the internet in the US and how infrastructure has to be added now to avoid a future logjam. Keep in mind that this same situation will also occur in other countries around the world, this is not a US only phenomenon.
Quantitative Data for the US Market:
Number of US mobile subscribers accessing the internet: 2008 = 34 million devices, 2014 = 106 million devices. This means that in 4 years, 1 in 3 people will accessing the internet in a mobile manner. My opinion, is that this is conservative and actually more people will have mobile devices.
The projected US Mobile Data Usage in Petabytes per month is shown below. Let me explain a Petabyte. Peta means 1,000 trillion, you know the number that is the size of the US deficit. A byte refers a symbol or character that is comprised of bits of data. A Petabyte is a really, really big deal.
2008 = 6
2009 = 17
2010 = 41
2011 = 91
2012 = 201
2013 = 397
This means that data growth is tripling now and doubling in the future. This means that in 4 years roughly 10 trillion bytes of data traffic will exist per minute. I think this is also conservative given my view of the number of devices that will be in use.
This is a major market move and one to be considered for investing. The constraint for all of this data is not the number of devices connecting to an antenna but rather the back-haul from the antenna to the network. For this data flow to happen, significant money, like Billions of Dollars, has to be invested in infrastructure like antennas, towers, cable, electronics, etc and the investment has to occur now.
Saturday, February 13, 2010
Happy Valentine's Day
Enjoy your Valentine's Day with your family and friends. At the end are some Valentine's Day facts for your enjoyment. Another client joined the Christian Stewardship Retirement family this week, it is always an honor to have another family member.
Recent newsletters have been about having a snowstorm in the stock market even though we are in the spring phase of the business cycle. From a weather perspective, we had a very snowy week with certain cities reaching a record level of snowfall such as Washington D.C. The stock market rose this week, perhaps a partial reason was the shutdown of the Federal Government and the lack of news.
After a month, we finally had a weekly increase in the stock market. It feels like the stock market snowstorm has ended and hopefully sanity will prevail. While most of the corporate earnings have met or exceeded expectations, the stock market has maintained focus on other issues. Sooner or later companies with good earnings performance will be rewarded.
This past week, Ben Bernanke spoke about when the Federal Reserve will change its current economic policy months down the road. From a business cycle perspective, this means that economic policy will change as the business cycle changes from spring, where we are now, to summer. When summer arrives, the economy will be growing at the desired rate, which is 3%, and the Fed has stated that interest rates will be raised to maintain the desired growth rate. Before interest rates rise, long term bonds and mutual funds that invest in long term bonds should be sold.
While it is winter weather outside with lots of cold and snow it is spring time in the economic business cycle. In the future, the winter weather will end and spring will begin. In the future, the economy will continue to improve leading to better corporate earnings and a higher stock market.
Valentine's Day Facts:
Every year around 1 billion Valentine cards are sent across the world. After Christmas it’s a single largest seasonal card-sending occasion. Teachers receive the most Valentine's Day cards, followed by children, mothers, wives, and then, sweethearts. Children between ages 6 to 10 exchange more than 650 million Valentine's cards with teachers, classmates, and family members.
The most beautiful and incredible gift of love is the monument Taj Mahal in India. Built by Mughal Emperor Shahjahan as a memorial to his wife it stands as the emblem of the eternal love story. Work on the Taj Mahal began in 1634 and continued for almost 22 years and required the labor of 20,000 workers from all over India and Central Asia.
In America, the pilgrims used to send confections, such as sugar wafers, marzipan, sweetmeats and sugar plums, to their affianced. Lots of value was placed on these gifts because they included what was then a rare product, sugar. After the late 1800's, beet sugar became widely used and more available, and sweet gifts continued to be cherished and enjoyed.
In the Middle Ages young men and women drew the names from a bowl to see who would be their Valentine. They would wear this name pinned on their sleeves for one week. This was done so that it becomes easy for other people to know your true feelings. This was known as "to wear your heart on your sleeve".
Recent newsletters have been about having a snowstorm in the stock market even though we are in the spring phase of the business cycle. From a weather perspective, we had a very snowy week with certain cities reaching a record level of snowfall such as Washington D.C. The stock market rose this week, perhaps a partial reason was the shutdown of the Federal Government and the lack of news.
After a month, we finally had a weekly increase in the stock market. It feels like the stock market snowstorm has ended and hopefully sanity will prevail. While most of the corporate earnings have met or exceeded expectations, the stock market has maintained focus on other issues. Sooner or later companies with good earnings performance will be rewarded.
This past week, Ben Bernanke spoke about when the Federal Reserve will change its current economic policy months down the road. From a business cycle perspective, this means that economic policy will change as the business cycle changes from spring, where we are now, to summer. When summer arrives, the economy will be growing at the desired rate, which is 3%, and the Fed has stated that interest rates will be raised to maintain the desired growth rate. Before interest rates rise, long term bonds and mutual funds that invest in long term bonds should be sold.
While it is winter weather outside with lots of cold and snow it is spring time in the economic business cycle. In the future, the winter weather will end and spring will begin. In the future, the economy will continue to improve leading to better corporate earnings and a higher stock market.
Valentine's Day Facts:
Every year around 1 billion Valentine cards are sent across the world. After Christmas it’s a single largest seasonal card-sending occasion. Teachers receive the most Valentine's Day cards, followed by children, mothers, wives, and then, sweethearts. Children between ages 6 to 10 exchange more than 650 million Valentine's cards with teachers, classmates, and family members.
The most beautiful and incredible gift of love is the monument Taj Mahal in India. Built by Mughal Emperor Shahjahan as a memorial to his wife it stands as the emblem of the eternal love story. Work on the Taj Mahal began in 1634 and continued for almost 22 years and required the labor of 20,000 workers from all over India and Central Asia.
In America, the pilgrims used to send confections, such as sugar wafers, marzipan, sweetmeats and sugar plums, to their affianced. Lots of value was placed on these gifts because they included what was then a rare product, sugar. After the late 1800's, beet sugar became widely used and more available, and sweet gifts continued to be cherished and enjoyed.
In the Middle Ages young men and women drew the names from a bowl to see who would be their Valentine. They would wear this name pinned on their sleeves for one week. This was done so that it becomes easy for other people to know your true feelings. This was known as "to wear your heart on your sleeve".
Saturday, February 6, 2010
All About Jobs
The news this past week was all about the debt level in 4 European Countries and Jobs. Remember about 2 years ago when Vice Presidential candidate Joe Biden said the 2008 election was about 3 letters, JOBS. Well, this past week was also about JOBS.
This morning's Charlotte Observer had the top story on jobs with several employment statistics on the front page. The cartoon in the paper had a saddled horse titled Economy with a person running on the ground after it titled Jobs. This week, we had at least 10 job related statistics published with a variety of meanings. Instead of going through each statistic let's stay with the big picture, the bottom line is employment is stable.
Last quarter we had a 5.7% increase in the economy as measured by the Gross Domestic Product, GDP. We also had reports on the manufacturing and service sectors that also showed growth during January. So how can the economy grow without an increase in jobs? The answer is that during last quarter we had a 6.2% increase in productivity as defined by the output per employee. So employers are in aggregate working people longer hours, paying overtime in required, instead of hiring people.
Employers work people more hours than hiring more people because it is more cost effective and prefer to hire when economic recovery is more certain. An overtime rate of about 10% is typically viewed as being a reasonable level before hiring more people. So this means that the job situation is fairly normal for this stage of an economic recovery, people need to chill out!!!
This week we had companies reporting earnings and for the most part they were better than anticipated. In fact, Cisco reported that from their perspective the economy has hit a new higher level in the economic recovery. With all this good news, the stock market went kind of psycho and ended the week down slightly.
From an investing perspective, it means that even with this volatility the longer term economic trend remains intact. For investors with a longer term perspective, the current investing strategy should be maintained.
Snow Shoveling Info:
The good news is that 15 minutes of snow shoveling counts as moderate physical activity according to the 1996 Surgeon General's Report on Physical Activity and Health. We all should aim for at least 30 minutes of moderate physical activity of some kind on most days of the week. Brisk walking or social dancing are other ways to fit in moderate physical activity during cold winter months.
The bad news is that researchers have reported an increase in the number of fatal heart attacks among snow shovelers after heavy snowfalls. This rise may be due to the sudden demand that shoveling places on an individual's heart. Snow shoveling may cause a quick increase in heart rate and blood pressure. One study determined that after only two minutes of shoveling, sedentary mens' heart rates rose to levels higher than those normally recommended during aerobic exercise.
Shoveling may be vigorous activity even for healthy college-aged students. A study performed by researchers at North Dakota State University determined that, based on heart rate, shoveling was a moderately intense activity for college-aged subjects most of the time but was vigorous activity during about one-third of their shoveling time of 14 minutes.
Shoveling can be made more difficult by the weather. Cold air makes it harder to work and breathe, which adds some extra strain on the body. There also is the risk for hypothermia, a decrease in body temperature, if one is not dressed correctly for the weather conditions.
This morning's Charlotte Observer had the top story on jobs with several employment statistics on the front page. The cartoon in the paper had a saddled horse titled Economy with a person running on the ground after it titled Jobs. This week, we had at least 10 job related statistics published with a variety of meanings. Instead of going through each statistic let's stay with the big picture, the bottom line is employment is stable.
Last quarter we had a 5.7% increase in the economy as measured by the Gross Domestic Product, GDP. We also had reports on the manufacturing and service sectors that also showed growth during January. So how can the economy grow without an increase in jobs? The answer is that during last quarter we had a 6.2% increase in productivity as defined by the output per employee. So employers are in aggregate working people longer hours, paying overtime in required, instead of hiring people.
Employers work people more hours than hiring more people because it is more cost effective and prefer to hire when economic recovery is more certain. An overtime rate of about 10% is typically viewed as being a reasonable level before hiring more people. So this means that the job situation is fairly normal for this stage of an economic recovery, people need to chill out!!!
This week we had companies reporting earnings and for the most part they were better than anticipated. In fact, Cisco reported that from their perspective the economy has hit a new higher level in the economic recovery. With all this good news, the stock market went kind of psycho and ended the week down slightly.
From an investing perspective, it means that even with this volatility the longer term economic trend remains intact. For investors with a longer term perspective, the current investing strategy should be maintained.
Snow Shoveling Info:
The good news is that 15 minutes of snow shoveling counts as moderate physical activity according to the 1996 Surgeon General's Report on Physical Activity and Health. We all should aim for at least 30 minutes of moderate physical activity of some kind on most days of the week. Brisk walking or social dancing are other ways to fit in moderate physical activity during cold winter months.
The bad news is that researchers have reported an increase in the number of fatal heart attacks among snow shovelers after heavy snowfalls. This rise may be due to the sudden demand that shoveling places on an individual's heart. Snow shoveling may cause a quick increase in heart rate and blood pressure. One study determined that after only two minutes of shoveling, sedentary mens' heart rates rose to levels higher than those normally recommended during aerobic exercise.
Shoveling may be vigorous activity even for healthy college-aged students. A study performed by researchers at North Dakota State University determined that, based on heart rate, shoveling was a moderately intense activity for college-aged subjects most of the time but was vigorous activity during about one-third of their shoveling time of 14 minutes.
Shoveling can be made more difficult by the weather. Cold air makes it harder to work and breathe, which adds some extra strain on the body. There also is the risk for hypothermia, a decrease in body temperature, if one is not dressed correctly for the weather conditions.
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