Tag - Consumer Confidence

The stock market failed to build on the rally from Friday. The S&P 500 fell below support at 1,050 yesterday.

Right now, sentiment is just awful across the board. And we're heading into what's traditionally the worst two months of the year for stocks: September and October.

Volume in the stock market has been extremely light. This suggests that individual investors are not buying stocks. And we can see that in mutual fund flows. In July, bond funds attracted $25 billion dollars. And investors pulled $12 billion out of U.S. equity funds.

Individual investors seem to be saying that they don't believe the economic recovery is for real, and they don't want to be blindsided again by a steep drop in the stock market.

It's not just individual investors. Analysts currently rate 54% of stocks as "holds." "Buy" recommendations are at their lowest level since 1997.

Sentiment is as bad as it's been since March 2009, when the stock market bottomed...

"Contrarian investing" is based on the idea that the masses are usually wrong at the extremes. In other words, when investors are overwhelmingly bearish, it's time to buy. And when investors think there's no end to the upside for stock prices, it's time to look for the exits.

Contrarian investing is not a new, or a radical, concept. Warren Buffett expressed the very essence of contrarian investing when he advised investors "... to be fearful when others are greedy and to be greedy only when others are fearful."

During the height of the Internet bubble in 1999 and 2000, investors shoveled $497 billion into stock mutual funds. They were just in time for an historic market crash. In the last two years, investors have poured $480 billion into bond funds. While I'm not forecasting an imminent crash for the bond market, the parallels are intriguing.

Of course, no discussion of contrarian investing is complete without mentioning another stock market saw: financial markets can remain irrational longer than you can remain solvent.

There were plenty of investors who saw the insanity of the Internet bubble and started shorting stocks in 1999. I bet shorting Qualcomm (Nasdaq:QCOM) at $450 a share in early December of 1999 looked like a great idea. And I can only imagine what it felt like when the stock crested $700 a share three weeks later.

Are bonds a bubble right now? I don't know that you can call bonds a bubble. But it's hard to imagine prices going much higher (and yields much lower).

As we know, bond and stock prices tend to move in opposite directions. With seemingly limited upside for bonds, the contrarian investor should be asking if it's time to buy stocks.

My answer for both bonds and stocks is the same: trying to pick a top for bonds or a bottom for stocks is risky venture. And while I fully endorse any investor's desire to be greedy when other are fearful, it's also important to look for signs that stocks will rally.

Right now, we should be watching the banks and oil prices. Oil is a near-perfect gauge of investor sentiment about economic growth expectations. And financials must lead any market advance.

Financial stocks have certainly led the recent decline. The Financial Spider ETF (XLF) peaked on August 2 and has been in a steady downtrend. Bank of America peaked at $14.50 on August 2 and now trades at $12.30 a share. That's a 52-week low.

Bank of America is now trading below tangible book value of $12.40 a share. That means is selling at its "bricks and mortar" price. And the reason is simple: Bank of America is more leveraged to American households than any other bank. So it should be most vulnerable to the weakening economy.

While we haven't seen a clear sign that the stock market is set to rally, it's probably a good time to nibble on stocks with extremely low valuations, like Bank of America.

Economic data released today has been better than expected. The Case-Schiller home price index rose 4.2% when expectations were for a 3.5% gain. Consumer confidence for August jumped to 53.5. That's much better than the 50.5 economists were expecting.

When consumer confidence rises, it's assumed to mean that they (we) may spend more. But consumer confidence is also a very volatile indicator. We'll see if today's positive reading is the catalyst we've been waiting for...

As always, please send me your comments and questions: ianwyatt@wyattresearch.com.

Senate Banking Chairman Christopher Dodd is all set to put his latest banking regulation bill up for a vote. The bill would put an end to proprietary trading, lend transparency to hedge fund trading and derivatives, and give the Federal Reserve the power break up companies if they pose a “grave threat” to the economy.   

Dodd’s proposal would also create a nine-member “Financial Stability Oversight Council” of regulators, led by the Treasury Secretary. According to Bloomberg, “…the council can make recommendations to the Fed to impose “strict” rules for capital, leverage, liquidity and risk management to make it difficult for firms to grow so big and complex that they endanger the financial system. It could require the Fed to regulate non-bank financial firms that threaten financial stability, ensuring that “the next AIG would be regulated” by the Fed…”   

It’s clear what Dodd is trying to accomplish here. He’s trying to make it so that financial firms can’t engage in trading activities that could ultimately destabilize the entire economy. I’m not sure these proposals, as I understand them, accomplish the objective.   

It seems to me that, once again, it was fraud and outright lying that led to the financial crisis. The ability of investment banks to create mortgage-backed securities that were created using both prime and sub-prime mortgages, and then sold as AAA rated investments was deliberately deceitful.   

It seems to me that the dollar amount of credit default swaps that AIG wrote was deliberately concealed. After all, if you guarantee more than you can possibly pay, there’s something wrong.   

It seems to me that the accounting rules that allowed Lehman Brothers to simply remove $50 billion in impaired assets from its balance sheet encouraged fraud. And statements by former Lehman CEO Richard Fuld that everything was A-OK at the company were lies.   

In civil law, there are laws that try and address ethical behavior, like reckless endangerment, depraved indifference and even manslaughter. It seems to me that we need some ethics rules for Wall Street, too. And this is where all of the financial regulation proposals I’ve seen fall short.   

I know, you’re probably thinking we’ll sooner see pigs fly than ethics rules for Wall Street. But in my opinion, some serious consequences for behavior that’s deemed unethical would help. Or it might help.   

As I told you last week, TradeMaster Daily Stock Alerts’ Jason Cimpl is out in California, attending the Roth Capital Growth Conference. Jason sent me the following this morning:   

The Roth conference is in full swing and thus far I have been impressed with the positive outlook for business spending and the benefits from cost management during the slowdown. Everyone in the media barks about consumer spending trends because that is a large part of GDP. While the consumer is important so are businesses.    

Spending among businesses is a strong sign of economic stability. If business spending is increasing, which is what I am hearing a lot of from CFOs, that means economic growth is more likely to persist.   

Yesterday I focused on business software providers. This group is slaughtered during recessions as businesses protect capital. We know business spending in this industry has picked up, just look at revenue growth, but is it going to remain? All signs point to yes.   

That’s a great insight from Jason. Because it helps explain the seeming disconnect between the stock market and consumer spending/unemployment. Consumer spending is a headline number. But the consumer is also fickle, as we’ve seen in consumer confidence numbers.   

Businesses are far more reliable. And if businesses are spending money, then the economy is on more solid footing than it might appear from consumer numbers.  

Jason also reports that he’s seen at least one company presentation that “made his jaw drop.” That’s Jason-speak for he’s found what should be a big winner for his TradeMaster Daily Stock Alerts readers.

I still think $2.80 looks like a good target for Maguire Properties (NYSE:MPG) before earnings next Tuesday. I will keep you posted in the coming days.  

It’s hard to believe that just a year ago, the Dow Industrials were trading around 6,500. It’s easy to look back and see this as an obvious buying opportunity, but it sure didn’t feel that way at the time.   

Of course, I was recommending stocks in SmallCapInvestor PRO, because valuations were incredibly low. But I was mitigating the risk by taking profits quickly.   

For instance, we took profits on SXC Health Solutions (Nasdaq:SXCI) in April with a 19% gain. That stock has gone on to post some fantastic gains. Conversely, we made a quick 33% on Arena Pharmaceuticals (Nasdaq:ARNA) between March 3 and March 11, 2009. That stock is now much lower than our exit price.   

In light of the anniversary of the market lows, the AP ran a great article over the weekend that included a bunch of interesting stock market stats. I’d like to share a few:  

• $5.6 trillion: Total gains in the stock market since March 9, as measured by the Dow Jones U.S. Total Stock Market Index, which tracks nearly all U.S.-based companies.  $
• 5.6 trillion: The amount that stocks are still down from October 2007, when the Dow peaked at 14,164. 83 percent: Amount the technology-dominated Nasdaq composite index is up since March 9. 
• $386 billion: Net cash flow for bond mutual funds $918: The price of an ounce of gold a year ago.
• $1,135.20: The price of an ounce of gold on Friday.
• 726,000: Jobs lost in February last year. 36,000: Jobs lost in February of this year.  
• $202.1 billion: Losses of the companies in the S&P 500 index in the final three months of 2008, a record.
• $132.7 billion: Estimated earnings of the companies in the S&P 500 index in the final three months of 2009.
• 25.3: Consumer confidence a year ago — a record low.
• 46: Consumer confidence today.
• 90: Consumer confidence number that economists believe signifies a healthy economy.

There are a few numbers that really stand out here. First and foremost is the negative $1.5 billion stock mutual fund flow and the positive $386 billion bond fund flow. This is perhaps the most telling stat of them all.   Individual investors have not embraced the stock market rally, despite the $5.6 trillion gain in market capitalization for stocks. And the potential for another $5.6 trillion in market cap gains for stocks is a potential missed opportunity.

Corporate earnings have improved dramatically, and we are nearing the end of another very good earnings season. The current trailing 12-month P/E for the S&P 500 is 21, according to the Wall Street Journal. But the forward number is 14.5, which is reasonable. And if earnings continue to beat expectations, this number is actually low.  

Judging from the consumer confidence number, Americans are not sold on the economic recovery. I don’t think it’s a leap to assume that this is because unemployment remains uncomfortably high.  

I take consumer confidence to be a lagging indicator. I expect the consumer will come around when the economy starts to add jobs, which is imminent.  

The S&P 500 has made a nice move sine the early February lows. And I think we can expect to see more investors embrace stocks as employment numbers improve. As TradeMaster Daily Stock Alerts’ Jason Cimpl has told us, the S&P 500 has already taken out an important resistance level at 1,132, and should be on pace to make new 52-week highs above 1,150. We should be on the lookout for an upside surprise to an employment report soon.  

I received an interesting letter from a reader. Larry S. asked: We have shares of stock in Enviro Energy (China) and Petromin (Canada).  Friends say they will be doing well shortly.  What do you know about these stocks.  Are they worth holding onto?  Thank you for checking these stocks and your newsletters.  We enjoy reading them.  

Petromin (PTR.V) is a Canadian oil driller operating in China. And Enviro Energy appears to be a Chinese stock trading in Hong Kong (I’m not sure I’m looking at the right stock here).  

Because these stocks don’t trade on U.S. exchange, it’s difficult to get reliable financial information on them, and it’s equally difficult to get the latest news.  

I can imagine that drilling for oil in China could be very profitable. And I know that environmental and clean energy stocks are strong performers in China. But again, reliable information on these two companies is difficult to come by. What’s more, the chart for Petromin does not look good.  

For my subscribers’ money, I much prefer to recommend Chinese stocks that are listed on the NASDAQ and the NYSE. That’s because there are rules for these exchanges. Earnings reports have to follow certain guidelines, as does the dissemination of news.       

As you know, I have several Chinese stocks in the SmallCapInvestor PRO portfolio. We’ve got gains of 93% and 52%, and we also have one that’s down 30%. But because I can read the earnings statements and quarterly reports, I have no problem holding for more gains, or waiting for a loss to reverse.  

Chinese stocks have sold off some because the government is managing its economy to keep it from overheating. I’ve carefully selected the Chinese stocks for the SmallCapInvestor PRO portfolio to represent areas that are vital to China’s growth, like environmental protection and energy. I have no doubts that these stocks will continue to grow earnings and revenues. The stock prices will follow. 

So, to answer the question, I have no way to form an opinion of the stocks in question. I would recommend investing in Chinese stocks that are listed on a U.S. exchange.  

I understand a few Daily Profit readers were unable to take advantage of the 50% OFF sale for SmallCapInvestor PRO before we hit our sales goal and closed the sale.  

So in the interest of fair play, I’ve re-opened the sale until midnight tonight. Respond today and you can get a year of SmallCapInvestor PRO for just $99. It’s going to be a while before I offer such a discount again, so I encourage you to take advantage of this offer. Click HERE to get the details.  

And if you hurry, you’ll get my latest investment report during market hours. SmallCapInvestor PRO are buying a leading Smart Card company that’s got a forward P/E of 9, a PEG ratio of 0.4. The company does $59 million in annual revenue and has $3.45 per share in cash.  

With those shares trading for just $6.50, it’s extremely undervalued. But that’s not going to last. With over 900% earnings growth coming this year as the U.S. market opens up, this stock has tremendous upside potential.   

Here’s that link for SmallCapInvestor PRO again.  

There is an article at Slate.com making the rounds in the financial press. Warren Buffett's partner at Berkshire Hathaway, Charlie Munger, penned a parable about America's rise and fall, called "Basically, It's Over."

The article details how a young, fiscally responsible country called Basicland got caught up in the "casino" of speculation, ignored its export economy, and essentially went bankrupt.

While perhaps a bit simplistic, Munger's piece is intended as a warning about rising government debt and an over-reliance on risky financial speculation. This speculation is intended to make up for the lack of manufacturing as a major component of GDP.

Some of the statistics he throws out are a bit scary. He says "The winnings of the casinos (investment banks) eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos."

I haven't verified those numbers, but they certainly suggest an economy that's out of balance.

As I read Munger's article, I thought immediately of yesterday's story about how Goldman Sachs and other investment banks may knowingly used mortgage-backed securities and CDOs to set-up AIG.

I'm sure we all believe it is any company's right to take advantage of another company's weakness. At the same time, however, it seems to me that at some point, a company must ask itself "at what cost?"

In the case of the housing bubble, investment banks knew the mortgage-backed securities they were selling were junk. Not only did they set AIG up for a fall, these casinos, as Munger calls them, essentially cannibalized America to make a buck.

Munger's answer? Listen to Paul Volcker. Keep banking separate from investing. And "…produce and sell items that foreigner's [are] willing to buy."

Let's hope that our elected officials are not so ensnared in the casinos' tentacles that they can make the changes that America needs.

Consumer Confidence

Stocks sold off yesterday as the Consumer Confidence survey showed a surprise drop from 56 to 46. For a little color on what this means, I asked TradeMaster Daily Stock Alerts' Jason Cimpl for his take...

"Consumers dominate the U.S. economy, so when confidence data falls from 56 to 46 in one month, investors panic. But while the reading from yesterday was less than expected it is nothing to get too excited over - or too bearish for that matter.

The move lower yesterday could have been a lot worse. Last week the market successfully absorbed a Fed rate hike and lousy economic data. It seems yesterday's news of a drop in consumer confidence was the final straw and the market pulled back...

For the rest of the week, it's all about 1085 on the SPX. The SPX lost 1097 support yesterday afternoon, but as long as 1085 is not taken out the bulls are in control of trading direction."

90% Potential

Google China is hiring. And apparently customers are returning, too. After Google threatened to leave China altogether, this is the first indication I've seen that behind-the-scenes negotiations with Chinese official may be going Google's way.

I continue to believe that China could create a lot of goodwill and encourage investing in the country if it's able to work out a solution where Google could continue to operate in China. Because let's face it – foreign investment is very important for China.

Several of the recent Chinese stock recommendations at SmallCapInvestor PRO have sold off and look very attractive at current levels. One of my favorite Chinese energy stocks has the potential to rise 90% as it increases capacity by 200% to meet the exploding demand for its products. You can read more about this stock HERE.