Of social media, rocks, and glass houses

Stocks fell on concerns over geopolitical developments ranging from pro-democracy protests in Hong Kong to continued U.S. and coalition airstrikes in Syria. The Dow dropped 41 points, with 20 of its 30 components declining; the S&P 500 Index fell 5 points; and the Nasdaq lost 6. Decliners led advancers by three to two on the NYSE and nine to seven on the Nasdaq. The prices of Treasuries strengthened. Gold futures climbed $3.40 to close at $1,218.80 an ounce. The price of crude oil rose $1.03 to settle at $94.57 a barrel.

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No reason for a repeat of 1984 in the U.S. stock market

Manley on the StreetThe listless behavior of stocks this month has been a bit discouraging when taken in the context of a few other occurrences. September has an unpleasant reputation among investors, and this month was not out of the ordinary. A monthly drop of 1% to 2% in the overall markets is not headline material and certainly was not a persuasive reason to disturb long-held positions.

However, the recent capitulation of a couple of conspicuous bears made me wonder who was left on the other side of the bullish trade. Also, the recent decline in small stocks has left the Russell 2000® Index barely changed for the year. When compared with the healthy gain still in place for the S&P 500 Index, it tells a story of a narrowing market—something that many believe marks the end (or, at least, the beginning of the end) of a major bull market.

As to the first point, I would be much more concerned if the sanguine feelings of us professional prognosticators were matched by that of the investing public. Published reports seem to indicate that the confidence of many investors dipped quickly as the equity market endured a sharp sell-off last week. Skepticism and anxiety rose as well. As I have written many times before, this is usually the psychology of a bull-market correction, not a full 20%–40% decline. I still believe that any enthusiasm in most investors is shallowly rooted.

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Why we think expensive equals better

The markets bounced back from yesterday’s sell-off as investors reacted positively to news that the economy is growing at its fastest pace since 2011.

The Dow gained 167 points, with 26 of its 30 components advancing; the S&P 500 Index was up 16; and the Nasdaq added 45. Advancers led decliners by three to one on the NYSE and by two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures dropped $6.50 to close at $1,215.40 an ounce, and the price of crude oil increased $1.01 to settle at $93.54 a barrel.

After a volatile week that saw daily triple-digit moves for the Dow, the Dow fell nearly 1%, the S&P 500 Index lost 1.3%, and the Nasdaq dropped 1.4%.

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Emerging markets equity investing hits home (excerpt)

Cultural and professional experience gives three emerging markets portfolio managers an edge in this excerpt of On the Trading DeskSM from Tuesday, September 23, 2014. Alison Shimada is Japanese-American, Elaine Tse is Chinese, and Svetlana Silverman was raised in Russia with ties to Ukraine and Kazakhstan.

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Elaine Tse, Alison Shimada, Svetlana Silverman

Elaine Tse, Alison Shimada, Svetlana Silverman (L-R)

Alison, can you tell us about the team?
Alison Shimada:
Certainly. Our team handles a variety of emerging markets products, and we select the analyst by geographical background as well as expertise in that region. It’s very important to us to have that cultural and business understanding of each area.

I’m curious how each of your cultural backgrounds helps inform your investment decisions. Svetlana, do you want to go first?
Svetlana Silverman: I moved to the United States in 1996. Prior to that, I lived with my family in Russia. That’s where I received my first educational degree. I also had lived in Ukraine and Kazakhstan. I believe this experience helps me better understand the region that I cover, which is Eastern Europe, the Middle East, and Africa, and particularly the recent conflict between Russia and Ukraine and the political and economic implications for other countries in the region.

Elaine, how about you?
Elaine Tse: Ethnically, I’m Chinese. I grew up in the relatively more developed Chinese economies of Hong Kong and Taiwan, so I have a very deep understanding of the culture, the lifestyle, and the habits of the Chinese people. And as a result, I have a strong sense of what would appeal to the Chinese consumer and to the Chinese public. We have been investing in the rise of the Chinese consumer, and I believe my cultural understanding and sensitivities to the Chinese culture really help me pick a winner in the market.

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Stocks tank on data, technology, and jitters

A sell-off today led to a search for catalysts, and there were plenty to be found. An unexpectedly large decline in the headline number for durable goods orders in August spooked the markets, although underlying details of the report gave more grounds for optimism. Technology was the weakest sector, while Apple’s shares were pummeled due to product glitches, leading to the Nasdaq dropping the most of the major indexes, nearly 2%.

The Dow sank 264 points, the biggest drop since July 31, with all of its 30 components retreating; the S&P 500 Index dropped 32; and the Nasdaq lost 88. Decliners led advancers by nearly five to one on the NYSE and more than four to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures gained $2.40 to close at $1,221.90 an ounce, and the price of crude oil fell 27 cents to settle at $92.53 a barrel.

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Time to invest in high-quality companies

If you had your choice, would you choose high-quality food or junk food? Of course, your choice likely depends on your willpower, what other foods you’ve recently eaten, interest in your long-term health, and other considerations. At times, and in the appropriate amount, arguably, junk food has its place. Many of us have experienced that insatiable desire for the high-fat content of a double scoop of custard instead of the healthier choice of low-fat yogurt. However, over the long haul, we all know a steady diet of high-fat foods, while palate pleasing, leads to unwanted health issues.

This reminded me, as most things do, of choosing which stocks to buy. Which would be a better choice for your long-term investment health, high-fat stocks that have momentarily grabbed investors’ attention or low-fat, high-quality stocks that have demonstrated consistent profitability over time? Like unhealthy but good-tasting food, it’s a willpower-testing decision.

Take, for example, high- and low-quality large-capitalization companies. Several academic studies and influential investors attribute above-average returns to portfolios composed of high-quality companies. A common theme in these studies is that profitability is an important measure of a firm’s quality level. Let’s consider two measures of profitability—return on equity (ROE) and operating margin (OPM)—to determine a firm’s quality level and its stock’s returns. Table 1 below shows the annualized median returns of stocks broken out into deciles by their ROEs and OPMs from 1996 to 2013.

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How a 20-minute coffee nap can protect you from wayward muffin crumbs

Lifted by encouraging housing market data, the indexes rebounded today from two straight days of losses. The Dow climbed 154 points, with 27 of its 30 components advancing; the S&P 500 Index rose 15 points; and the Nasdaq added 46. Advancers led decliners by three to two on the NYSE and two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $2.50 to close at $1,219.50 an ounce. The price of crude oil rose $1.24 to settle at $92.80 a barrel.

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New-home sales: Trimming the tail

August new-home sales increased to a seasonally adjusted and annualized rate of 504,000, up from an upwardly revised rate of 427,000 the previous month. The Federal Reserve (Fed) seems keen on keeping housing activity going strong, so the drop-off in activity from the past year as mortgage rates rose concerned many people and pointed to continued Fed easing. Yesterday’s existing-home sales data disappointed, and today’s new-home sales data was good but not great. Housing activity isn’t giving the Fed much reason to change its policy path.

Part of the recovery in new-home sales over the past few years was driven by bargain hunters, but many of those bargains are now gone. That’s beginning to show in the distribution of sales by selling price. In 2012, 13% of new-home sales were in the “under $150,000” category. In 2013, that dropped to 8%. In August, it was 6%. The parts of the market that are seeing a relative increase in activity are the $400,000–$499,999 and the $500,000–$749,999 categories.

Even with the improvement in new-home sales, activity is only at the level it was in the recession of 1991. There’s a lot of room for improvement. Tighter lending standards and weak income growth will make it a long road to normal. The Fed likely doesn’t want to put many more speed bumps on that road with higher mortgage rates.

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Comic books in the classroom: With great power comes… great grades?

Stocks fell as investors weighed mixed reports on global manufacturing, new rules to stop U.S. firms from moving overseas to avoid taxes, and U.S. and allied airstrikes on Islamic militants in Syria. The Dow dropped 116 points, with 29 of its 30 components declining; the S&P 500 Index fell 11 points; and the Nasdaq lost 19. Decliners led advancers by five to two on the NYSE and nine to four on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $4.10 to close at $1,222.00 an ounce. The price of crude oil increased 69 cents to settle at $91.56 a barrel.

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Emerging markets investing hits home (podcast)

Elaine Tse, Alison Shimada, Svetlana Silverman

Elaine Tse, Alison Shimada, Svetlana Silverman (L-R)

There is an advantage in having a personal, cultural connection when investing in emerging markets. Three portfolio managers join Amy George on the road to lend their perspectives—Alison Shimada is Japanese-American, Elaine Tse is of Chinese descent, and Svetlana Silverman was raised in Russia with ties to Ukraine and Kazakhstan. Alison Shimada is a portfolio manager with Wells Capital Management’s Emerging Markets Equity team. Elaine Tse and Svetlana Silverman are associate portfolio managers for several Wells Capital Management emerging markets products. As senior investment analysts, Ms. Tse is responsible for researching North Asia and Ms. Silverman is responsible for Europe, the Middle East, and Africa.

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