Weekly Summary for the Week ending 28 Jan 11

WEEKLY SUMMARY

The market was generally down this past week. All of the major metrics (Dow, S&P 500, NASDAQ, and the Wilshire 5000) were down except the Russell 2000, AMEX and the VIX. The VIX was up 8.5%, which marks two strong up weeks for the VIX. The rising VIX suggests increased volatility in the market in the next month, but increased volatility presents greater opportunity for profitable options activity.

The Dow hovered near the 12,000 level for most of the week. On Friday we experienced a strong down movement starting at 9:50 am and continuing until 12 noon. The Dow closed down 166 points as seen in Figure 1 and Table 2. This negative movement in the DOW was probably due to the political unrest in Egypt, and several less than expected earnings reports, most notably Ford. The situation is of interest to us for several reasons, but especially since we currently hold an ETF (GAF-SPDR S&P Emerging Middle East and Africa), which invests in equities in the middle-east including Egypt.

Figure 1: Dow Jones – 28 Jan 2011

The summary of major market metrics for the past week can be seen in Table 1. I am also including a table showing market behavior on Friday, 28 Jan 11. Table 2 clearly shows Mr. market’s irrational behavior. It would be very difficult to make a case that this market movement is anything other than reaction to uncertainty caused by the unrest in Egypt and the general mood in the Middle East.

Table 1: Summary of Major Market Metrics

	Last	Now		%
Index	21-Jan-11	28-Jan-11	Change	Change
DJIA	11,871.84	11,823.70	-48.14	-0.4055
S&P 500	1,283.35	1,276.34	-7.01	-0.5462
NASDAQ	2,689.54	2,686.89	-2.65	-0.0985
Wilshire 5000	13,499.30	13,450.79	-48.51	-0.3594
Russell 2000	773.18	775.4	2.22	0.2871
AMEX	2,125.88	2,140.29	14.41	0.6778
NYSE	8,105.75	8,062.64	-43.11	-0.5318
Vix	18.47	20.04	1.57	8.5003
Crude Oil	89.10	89.49	0.39	0.4377
US$/Euro	0.7423	0.7305	-0.0118	-1.5897
US$/Yen	83.0293	83.02	-0.0093	-0.0112
Pound/Yen	131.9427	132.0516	0.1089	0.0825
$Index	78.11	78.15	0.0400	0.0512
Gold	1,344.00	1,316.00	-28.0000	-2.0833

Table 2: Market Action on Friday, 28 Jan 2011

	Friday	Friday
Index	Change	% Change
DJIA	-166.13	-1.3856
S&P 500	-23.2	-1.7852
NASDAQ	0	0.0000
Wilshire 5000	-257.14	-1.8758
Russell 2000	-20.03	-2.5181
AMEX	-26.14	-1.2066
NYSE	-144.42	-1.7597
Vix	3.89	24.0867

Notice that the VIX was up 24% on Friday.

Rags to Riches, 23 January 2011

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
23 January 2011

The Market

The market was generally down in the past week. All of the major metrics (S&P 500, NASDAQ, Wilshire 5000 and the Russell 2000) were down except the DOW and the VIX. The DOW was up less than 1%, but the VIX was up 19.5%. The Russell 2000 was down the most at 4.26%. The rising VIX suggests increased volatility in the market in the next month, but increased volatility may present greater opportunity for profitable options activity.

Last week we looked at market trends as expressed by the Dow Jones Index, a collection of 30 blue chip, large-cap stocks. This week we examine the Wilshire 5000, which is the broadest index of the market containing 6700 US companies. Stocks are included in this index if they satisfy the following three rules:

1. The company has its headquarters in the United States.
2. The stock is actively traded on an American stock exchange.
3. The stock has pricing information that is widely available to the public.

The Wilshire 5000 is not only the broadest surrogate of the US market, but some say the best representation of market behavior.

Figure 1: Wilshire 5000 Index – 18 Year History

In the past 18 years the Wilshire 5000 has had three up periods and two down periods. From 1 May 1993 until 1 January 2001 the Wilshire 5000 rose from 4,438.55 to 12,181.33 or 174% in less than 8 years. From 1 February 2003 until 1 October 2007 this index rose from 7,896.94 to 15,673.36 or 98% in less than 5 years. From 1 February 2009 until 1 January 2011 the Wilshire 5000 rose from 7,473.97 to 13,499.30 or 80+% in less than 2 years. The two down trends began on 1 January 2001 and 1 October 2007. From 1 January 2001 until 1 February 2003 the index fell 4284.39 or 35%. From 1 October 2007 until 1 February 2009 the Wilshire 5000 fell 8199.39 or 52%. Two observations seem evident. First, clearly the up trends (bull market) are longer than the down trends (bear market). Second, this index seems to be oscillating about a mean value of approximately 11,000. In statistics this phenomena is called “mean reversion.” I call it “market elasticity”. What goes up must come down and vise versa. The summary of major market metrics for the past week can be seen in Table 1.

Table 1: Summary of Major Market Metrics

	Last	Now		%
Index	14-Jan-11	21-Jan-11	Change	Change
DJIA	11,787.38	11,871.84	84.46	0.7165
S&P 500	1,293.24	1,283.35	-9.89	-0.7647
NASDAQ	2,755.30	2,689.54	-65.76	-2.3867
Wilshire 5000	13,672.74	13,499.30	-173.44	-1.2685
Russell 2000	807.57	773.18	-34.39	-4.2585
AMEX	2,185.52	2,125.88	-59.64	-2.7289
NYSE	8,174.12	8,105.75	-68.37	-0.8364
Vix	15.46	18.47	3.01	19.4696
Crude Oil	91.67	89.10	-2.57	-2.8035
US$/Euro	0.7469	0.7423	-0.0046	-0.6159
US$/Yen	82.8672	83.0293	0.1621	0.1956
Pound/Yen	131.5061	131.9427	0.4366	0.3320
$Index	79.05	78.11	-0.9400	-1.1891

14 January 2011

WEEKLY SUMMARY

The market continues in an uptrend with the DOW up 112 points (.96%) while the S&P 500 rose 1.7% and the NASDAQ (tech stocks) was up nearly 2% this past week. This trend is very similar to the week before. The dollar is down and oil and the market are up. This is the relationship that I have observed to be normal over the past two decades. The Dow closed last Friday at 11,787.38. We haven’t seen this level since 23 June 2008. We should note there has been a relatively steady uptrend (bull market) since 2 March 2009, when the DOW closed at 6,626.94 and almost everyone thought the sky was falling. We have enjoyed a 20-month bull market, with indications that it may continue.

It has been a rough ride since the last market top on 1 October 2007 when the DOW closed at 14,066.01. We see from Figure 1 that the last bull market run was from 1 September 2002 until 1 October 2007 for 5 years and 1 month.

Figure 1: Dow Jones Index – 20 Year History

We also note that the second previous bull market was from January 1995 until December 2000, or approximately 5 years. Do you see a trend developing here? Could we be almost two years into a 5-year bull market? Who knows for sure? Also notice that for the last 20 years the bear markets are shorter in duration than the bull markets. Another way to say the same thing is that market corrections usually are more rapid than up-trends. My forecasts suggest the strong possibility that the bulls will continue to run during 2011 and 2012. That would be nice! The summary of major market metrics can be seen in Table 1.

Table 1: Summary of Major Market Metrics

	Last	Now		%
Index	7-Jan-11	14-Jan-11	Change	Change
DJIA	11,674.76	11,787.38	112.62	0.9646
S&P 500	1,271.50	1,293.24	21.74	1.7098
NASDAQ	2,703.17	2,755.30	52.13	1.9285
Wilshire 5000	13,428.94	13,672.74	243.80	1.8155
Russell 2000	787.83	807.57	19.74	2.5056
AMEX	2,150.58	2,185.52	34.94	1.6247
NYSE	7,980.32	8,174.12	193.80	2.4285
Vix	17.14	15.46	-1.68	-9.8016
Crude Oil	88.03	91.67	3.64	4.1350
US$/Euro	0.7748	0.7469	-0.0279	-3.6009
US$/Yen	83.1488	82.8672	-0.2816	-0.3387
Pound/Yen	129.2789	131.5061	2.2272	1.7228
$Index	81.17	79.05	-2.1200	-2.6118

Rags to Riches, 23 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
23 March 2009

The Market

Every stock market downturn in the past 113 years since the creation of the Dow Jones Industrial Average, WITHOUT EXCEPTION, has been followed by a huge rally. For example:
The February 1906 to November 1907 bear market was followed by a 90% rally in the Dow between November 1907 and November 1909. The infamous September 1929 to July 1932 bear market was followed by a 352% advance in the Dow from July 1932 to March 1937. The January 1973 to December 1974 bear market was followed by a 53% rally in the Dow from December 1974 to July 1975, and, the January 2000 to October 2002 bear market was followed by a 94% rise in the Dow from October 2002 to October 2007.

Consider more carefully the crash of 1929:


Notice the repeated upturns, but an overall downturn from 1929 to 1932.


Advice

What can we learn from this behavior, and is it relevant to the situation today? I think it is relevant. No one can call a bottom, but certain observations seem reliable. Downturns can occur quickly, and bouncing along the bottom is normal. Are we at the bottom? I don’t think so. I expect we will see several bounces before a prolonged upturn (next year?). We need to keep this in mind as we make buy/sell decisions. Keep your portfolio balanced between bull/bear opportunities for now. There will be many opportunities for profit in the days ahead.

Rags to Riches, 16 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
16 March 2009

The Market

Last week was a good week for the market. The DOW rose 570.36 points to 7167.51; the S&P 500 rose 66.80 points to 750.02 and the Nasdaq rose 122.09 points to 1424.97. Volatility (VIX) fell 9.9 points to 41.38. Volatility levels remain relatively high. On the whole it was a solid week for the market.

Zacks Weekend Wisdom

Zacks.com offers a very useful weekend summary of events in the market. Here are some excerpts from the current offering.

“Last week, the mighty Citigroup (C), one of the nation's largest banks and a Dow component, traded briefly below $1 a share before bouncing back to trade at about $1.80. 

Other well-known names like Fifth Third Bank (FITB), Las Vegas Sands (LVS), and Ford (F) are all trading under $5 a share. 

Even blue chipper General Electric (GE), the oldest Dow component, fell below $6 a share last week before it rebounded on news that the cut to its credit rating wasn't as severe as feared. 

Are these "cheap" stocks an opportunity of a lifetime or a fake-out that will lead to disaster for your portfolio? Many investors think a stock trading under, say, $5, is "cheap." Citigroup at $1 seems like it's a no-brainer because it really can't go any lower than $1 - can it? In many investors' minds, a blue chip brand like Citigroup can't simply "go away.” and you can buy a LOT of shares for $1. And if it goes to $2, well, then you've doubled your money. 

It's easy to see how the gambling mentality takes over with low priced stocks. 

As this bear continues to roar don't get sucked into only looking at the price of the stock to determine if it is a bargain. 

The stock price is, really, irrelevant. It's all about the earnings in conjunction with the share price.

For example, fertilizer giant Potash of Saskatchewan (POT) appears "expensive" as the stock trades over $75 a share. But analysts estimate 2009 earnings around $10 per share. That would give the company a forward P/E of about 7.

That's pretty darn cheap for a company with a product that will be in demand for years to come. Potash is a Zacks #3 Rank ("hold") stock.

Or consider Microsoft Corporation (MSFT). Microsoft's stock, trading around $16 a share, is at 1998 levels, split-adjusted.

Is Microsoft "cheap"?

Many investors would answer "no", because the stock's share price isn't at $5 or $10.

But if you look beyond the share price you can find Microsoft's true value. The company isn't taking any money from TARP. There are no fears of bankruptcy as the company has billions in cash. It has avoided the "problems" that many other companies have encountered in the last year or so with credit and debt. While estimates are falling, as they are with just about every company right now, current 2009 estimates call for $1.76 per share. That would mean Microsoft is trading around 9 times forward earnings.

For Microsoft, which has historically traded closer to 25 to 30 times earnings, that's pretty darn "cheap". One caveat to consider when looking for companies that are cheap, or undervalued, is that a lot of companies, and analysts, currently have no idea what earnings are going to look like for the remainder of 2009. Estimates are being cut every day. Some companies have been revising every few weeks.

What looks like a value right now may not be if the company earns less than expected. Investors should look for companies with solid businesses that will continue to generate cash flow even if things get rockier. Microsoft, for instance, continues to generate plenty of cash even as its business has slowed. Same with Google (GOOG), some of the agriculture companies like Monsanto (MON) and cash-rich large energy companies like Chevron (CVX).”

This is good advice. Thanks to Zacks for giving such sound advice. Notice the emphasis on knowing the intrinsic value of a stock. Can we identify stocks that will continue to generate earnings even during the current downturn in the market?

Advice

This seems like a good time to pay close attention to the movement of the market in general, and specific trends exhibited by stocks and ETF’s in our watch list. The billions of dollars being poured into the market by the US government will have an effect. Unfortunately, no one knows the exact effect or the timing. Have we reached a bottom? Will we have a significant and lasting rebound? Pay attention boys and girls; the next two years should be really interesting.

Rags to Riches, 9 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
9 March 2009

The Market

Mr. Market continues to behave badly! The DOW was down 582+ points (8.12%) this past week to a Friday close of 6,597.15. During the week we had three down days and two up days. The VIX (a measure of the fluctuation in the market) was up 14.26% to 51.28.

This past week the Federal Reserve released the latest Beige Book, which gives an indication of current economic conditions. Wikipedia says “The Beige Book, more formally called the Summary of Commentary on Current Economic Conditions, is a report published by the Federal Reserve Board eight times a year. Each is a gathering of anecdotal information on current economic conditions by each Federal Reserve Bank in its district from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other." Most economists and investors see the Beige Book as an important indicator of the health of the economy. The Wall Street Journal made the following summary remarks in their review of the latest Beige Book report:

“The New York Fed reported that a contact monitoring the financial sector maintains that the industry is still far from hitting bottom.” As the failure of Lehman Brothers continues to work its way through the industry, and Citigroup stands on the precipice of being split up, there appears to be more pain to come.

At the larger institutions, a substantial number of job reductions in the pipeline have yet to show up in the payroll statistics, due to ongoing severance payouts, the beige book said. Moreover, year-end bonuses are seen falling 20%-30% from last year at some of the smaller, healthier firms but more substantially at the larger establishments.

The struggles of the labor market aren’t limited to the financial sector, as most Fed districts reported a general weakening of conditions. Job losses in the manufacturing sector were reported by contacts in the Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas districts.

However, there were some growth areas, especially for skilled workers. Richmond noted that demand was strongest for workers providing professional and support services, workers with high-level technical skills, and workers proficient in computer software, the beige book said. Chicago noted employment growth in the education, government, and health-care fields. Cleveland also reported continued hiring in the health-care industries.”

Mr. Market is clearly bipolar, and is currently in a really bad mood!

Mr. Buffett

Warren Buffett appeared this evening on CNBC, and gave a practical and patient analysis of the current state of the economy and the current and future state of the market. Investors are fearful. Fear is very contagious. Investors are also confused. We are in a vicious negative cycle, with 600,000+ new unemployed in the past week. Mr. Buffett made it that he believed that the market will recover, as will the economy. He advised us to not try to time the bottom, but to buy good stocks and time will bring profit. He repeated that America’s best days lie ahead.

Vivek Jikar

In his weekly market report, Vivek Jikar reports “the U.S stocks posted the biggest weekly losses in last three months. The retailers continue to face declining sales due to difficult economic situation. The institutional investors have turned to buying more and more gold. The gold and silver futures rose for a second straight week a similar uptrend is seen in some other commodities like copper, wheat, and cotton. The crude oil prices went up due to increased buying by institutional investors and declining inventories. The major reason that motivated trading oil was declining dollar in the forex market last week. I think the big guys are trying to make some money with these fluctuations in the forex market. We will continue to watch if the oil goes up to 2008 levels to affect an individual investor’s portfolio.”

What Kind of Investor Are You?

Personality plays an important role in recognizing the kind of investor you are. You need to be honest about your tendencies. If you don’t know your Myers-Briggs Personality Type Indicator, I recommend that you go to www.humanmetrics.com/cgi-win/jtypes1.htm and take the test and record your personality code. Personality is an indication of how we perform under stress; not who we are! On the other hand it is important for you to understand your tendencies. Learning style is related to personality, but we will discuss this issue at a later time.

So, what kind of investor do you want to be? Be aware that this blog is for investors; not traders. Trading is really a fundamentally different business. Trading is fun and addictive – take it from me! If you are going to be (or are) an investor you need to decide not only your tendency, but more importantly what kind of investor you wish to be. Here are a few of the common types: income, value, growth, and aggressive growth. What do you think? Which of these investment types fits your personality?

Advice

With many stocks at or near all time lows, we need to think carefully about buying stocks with current prices which are well below intrinsic value and provide a reasonable margin of safety. You may wish to visit www.stock2own.com to examine stocks on your wish list. Stocks with good big six numbers offer the opportunity for future profit. Stocks that appear to have the potential to deliver 15% annual return for the next ten years, and are being offered by Mr. Market at less than half their intrinsic value should be seriously considered for addition to your portfolio.

Rags to Riches, 2 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
2 March 2009

The Market

Mr. Market is expressing his opinion of the recent efforts to save the banking system and “stimulate” the economy. AIG is getting another $30 billion from the US government on top of the $150 billion the company received last year. In a joint statement, the Treasury Department and Federal Reserve said the rescue is necessary given the systemic risk AIG continues to pose and the fragility of the market today. The Dow is down 299 points to 6763, a level not seen since April 25, 1997. The S&P 500 decreased today to 700, a drop of 34 points. Volatility (the VIX) is above 50 again at 52.65, an increase of 6.3 points. One day the market is up and the next it is down, but the trend is definitely DOWN! Remember that the DOW was at 14,000 just 18 months ago. Fear and uncertainty are the dominant emotions in the market today. Investors abhor uncertainty, and are extremely fearful. Many investors have simply given up, and withdrawn their money from the market. This irrational selling has forced the market even lower! What is a wise investor to do?

Mr. Buffett

Late last week Warren E. Buffett distributed his annual letter to shareholders. To his credit, he got right to the bad news. Berkshire Hathaway lost 9.6% of its book value in 2008! Berkshire Hathaway has lost money in only one previous year (2001), and has returned 20.3% compounded annual gain over the last 44 years, or an overall gain of 362,319% (S&P 500 – 4,276% during the same period)! Let me quote Mr. Buffett: “Amid this bad news, however, never forget that our country has faced far worse travails in the past… Without fail, however, we’ve overcome them. In face of these obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.” “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.” I cannot say it better!

Vivek Jikar

In his weekly market report, Vivek Jikar reports that the conference board’s consumer confidence index declined to 35 in February. Consumers are NOT confident, and are not spending or investing, but the good news is that more consumers are saving. Jikar observes that the market is stable and is going down, and gives recommendations for buying and selling short based on stock stability.

Advice

Many are saying that the sky is falling, and the world is about to end, but I suggest that Chicken Little (and you and I) will survive, so hang in there. Remember to buy low and sell high. There are many, many buying opportunities so pay attention and prosper! Next week I promise more on investing philosophy with specific advice on when and how to buy and sell.