Are Stocks Cheap?

This morning the Wall Street Journal has a nice piece that discusses the hotly debated topic- are stocks currently cheap?  Both sides of this debate tend to point to overly optimistic or overly pessimistic forecasts to help make their argument.  Our perspective, which is in line with this article, is that stocks are certainly not cheap but they are not significantly overvalued either. For the stock market to continue to power ahead with a sustainable advance we need to see much stronger earnings growth than what we currently see.  If you strip out bank earnings the S&P 500 companies that have reported so far actually have seen earnings drop .6% year over year.  After five years of corporate cost-cutting, profit margins are stretched and appear poised to contract from record levels.  This puts the onus on revenue growth to drive future earnings.  With a sluggish global economy, double-digit revenue growth seems like wishful thinking in the near-term.

With a fully-valued market, stock and sector selection are critical to managing risk and achieving strong returns going forward.

For the Wall Street Journal’s excellent analysis click here:
http://blogs.wsj.com/moneybeat/2013/07/30/morning-moneybeat-stocks-arent-as-cheap-as-you-think-they-are/

What Lies Ahead for the Fed

Fed Chairman Ben Bernanke sparked a bond market sell-off in late-May when he announced the Fed’s plan to begin to taper their $85 billion/month bond-buying program.  The past two weeks bonds have stabilized but what lies ahead for the bond market and what indicators will the Fed be watching closely this summer?  We address these questions and more in our latest video update.

Italian Lending Increases

The European debt crisis reached a boiling point last summer until European Central Bank President Mario Draghi announced that the ECB would do “whatever it takes” to save the Euro. Since then bond yields have dropped significantly in financially troubled countries like Spain and Italy. Pro-growth reform is still badly needed and while the financial crisis is not over and the majority of the Eurozone is still in a recession, it is encouraging to see lending to small and mid-sized businesses picking up in Italy. We will continue to watch carefully for more positive developments.

For more click here:  http://on.wsj.com/12mNWrC

Rain and a Market Meltdown

I hope your July 4th weekend was enjoyable.  With it raining most days here in Seattle, I mean Atlanta, my wife and I had to get creative over the holiday weekend to keep our boys (and us as well) sane.  Twice we ended up putting on old clothes/rain gear and went on hikes as well as blackberry picking.  It was something different and we had a great time.

Ever since Fed Chairman Ben Bernanke began warning in mid-May that the Fed was working on a plan to taper their bond-buying program volatility has ramped up in the market and significant losses have occurred in a majority of asset classes.

If you look at the graphic below it is clear that recently there have not been many places to hide.  In fact, it is hard to remember a time when US Treasuries, Gold, US Stocks and Commodities have all sold off at the same time.The good news is that the sell off provided opportunities is several asset classes as the baby was once again thrown out with the bathwater. Higher volatility in the summertime  is nothing new and using that volatility to identify attractive investments is always the objective.

Description Symbol 1 Week 4 Weeks 13 Weeks 26 Weeks
US Stocks VTI -4.45% -4.9% 1.12% 11.08%
International Developed Stks EFA -5.98% 7.19% -2.71% 1.19%
Treasury Bills SHV -0.01% 0.0% 0.01% 0.01%
US High Yield Bonds JNK -4.02% -5.71% -4.19% -1.91%
Mortgage Back Bonds MBB -2.17% -2.72% -3.28% -3.16%
International REITs RWX -7.01% 11.25% -9.97% -6.55%
US Equity REITs VNQ -6.68% -11.99% -5.58% 0.88%
Total US Bonds BND -2.45% -3.36% -3.32% -3.55%
Commodities DBC -3.95% -2.99% -6.84% -7.69%
US Credit Bonds CFT -3.42% -5.21% -4.69% -5.01%
Intermediate Treasuries IEF -3.15% -4.23% -4.48% -4.59%
International Treasury Bonds BWX -4.98% -2.49% -3.72% -7.54%
Municipal Bonds MUB -5.29% -8.23% -7.16% -7.38%
Emerging Market Stks VWO -8.91% -14.79% -13.59% -15.65%
Emerging Mkt Bonds PCY -9.1% -12.91% -12.06% -15.7%
Gold GLD -7.36% -7.35% -20.17% -22.84%
Frontier Market Stks FRN -7.15% -12.86% -19.47% -22.7%

Source: Myplaniq.com     As of 6-24-2013

U.S. stocks have been the standout this year as Gold, Silver, Commodities, China, Brazil, Emerging Market Stocks & Bonds, Treasury Inflation-Protected Bonds, Long-Term Treasuries and Investment Grade Corporate Bonds have all suffered losses ranging from 2% – 37%.

Throughout this year we have continued to closely monitor the outlook for U.S. stocks. One of the indicators that we pay close attention to is the Cumulative Advance/Decline Line for the S&P 500.  When this line is trending higher it tells us that the stock market is being driven higher by a larger number of stocks, and thus is more sustainable. Typically as a longer-term rally nears its end the Advance/Decline line begins to break down as fewer and fewer stocks have the strength to move higher.

In the chart below the S&P 500 is rebounding from the recent 6.5% pullback while the Advance/Decline Line is hitting a new high.  This is a positive sign for stocks and is one of the important indicators we will keep an eye on.

breadth

On a personal note, I hope your July 4th weekend was enjoyable.  With it raining most days here in Seattle, I mean Atlanta, my wife and I had to get creative over the holiday weekend to keep our boys (and us as well) sane.  Twice we ended up putting on old clothes/rain gear and went on hikes as well as blackberry picking.  It was something different and we had a great time.

2nd Quarter down…

The 2nd quarter is now in the books and businessinsider.com has a nice chart summarizing the 2nd quarter returns for key asset classes.  After a first quarter with little volatility the 2nd quarter saw a significant increase due primarily to concerns over the Federal Reserve tapering it $85 billion/month stimulus plan.  Of note, 10-Year US Treasurys  were down 8% and Gold was down a monster 23%.

For more click here:
http://read.bi/19POWNq