Bubble wrap: It just might save your life

The major indexes closed the day in mixed territory, following a string of earnings reports and government data that offered a mixed view of economic progress; as jobless claims declined, new-home sales weakened.

The Dow fell 2 points, with 17 of its 30 components advancing; the S&P 500 Index rose less than a point; and the Nasdaq declined 1 point. Decliners narrowly led advancers on the NYSE and the Nasdaq. The prices of Treasuries weakened. Gold futures declined $13.90 to close at $1,290.80 an ounce, a five-week low, following reports of falling Chinese demand. The price of crude oil fell $1.05 to settle at $102.07 a barrel.

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Japan, Abenomics, and the three arrows

Today we have a guest post by Jeffrey Everett, managing director and lead portfolio manager of EverKey Global Equity.

Jeff Everett

Jeff Everett

Recent data from the Japanese economy suggest Japan’s reform policies under Prime Minister Shinzo Abe (“three arrows”) are working. Prime Minister Abe’s three arrows are a series of fiscal, monetary, and structural reforms designed to pull Japan’s economy out of its two-decade-long slump. Why three arrows? Legend has it that the leader of the Mori clan in the 1500s encouraged his three sons to work together for the benefit of the clan. After snapping three single arrows, he asked them to break three arrows banded together. Unable to break the banded arrows, the sons learned the lesson. Abe has similarly tried to convince Japanese politicians and consumers that all three reforms (monetary, fiscal, and structural) are necessary to achieve the goal of reinvigorating the Japanese economy. Recent data suggest Abe’s case is becoming more convincing.

Stimulative monetary policy from a vigilant Bank of Japan and fiscal reforms—the earliest and most easily implemented arrows—are in place as expected. The third arrow—structural reforms—aims primarily at Japanese corporations and prescribes improved profitability, transparency, and governance. Additional measures such as pension reform, tax reform, and broad human resource reform (measures involving women, overseas workers, and flexible work practices) are broader and center on untying the infamous bureaucratic issues that afflict the working environment for Japanese businesses and overseas companies working in Japan. While skeptics may criticize single parts of the reforms, a more important way to assess their efficacy is as a complete package. For instance, why give corporate tax cuts to corporations unless these same corporations are incentivized to not sit idle on the money but invest the money? For shareholders and investors, immediate attention focuses on the establishment of a new index, the JPX-Nikkei Index 400, to highlight the top 400 high-profitability companies in Japan.

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Your car’s miles per gallon might soon live up to its billing

The major indexes diverged today after a string of positive earnings reports from tech companies lifted the Nasdaq but left the Dow and the S&P 500 Index closer to the flatline.

Led downward by Boeing, the Dow fell 26 points, with 20 of its 30 components declining. The S&P 500 Index rose 3 points, and the Nasdaq gained 17. Decliners led advancers by four to three on the NYSE and more narrowly on the Nasdaq. The prices of Treasuries were mixed, with the 30-year weakening and the 10-year strengthening. Gold futures fell $1.60 to close at $1,304.70 an ounce, and the price of crude oil rose 73 cents to settle at $103.12 a barrel.

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There’s one missing ingredient in this economic recovery: Housing

A strong pace of housing activity remains the missing ingredient in this cyclical expansion. Housing activity, as measured by housing starts, has led the economy into recessions and then has rebounded strongly to lead the cyclical recovery. Five years into this cyclical recovery, however, starts are only slightly higher than the lows of those previous cycles. That is an important reason why gross domestic product (GDP) growth in this cycle has been approximately one-half the average pace in prior recoveries.

The current pace of U.S. housing starts lags behind previous recoveries

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Find your inner leader in a game of hide-and-seek

Shares across the major indexes rose today, following another wave of second-quarter earnings and government reports that indicated signs of economic improvement.

The Dow rose 61 points, with 20 of its 30 components advancing; the S&P 500 Index climbed 9; and the Nasdaq gained 31. Advancers led decliners by two to one on both the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures declined $7.60 to close at $1,306.30 an ounce, following a decrease in investor demand for safe haven, and the price of crude oil fell 47 cents to settle at $102.39 a barrel.

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On the road: Putting alternative investments into perspective (podcast)

Alternative investment strategies are gaining traction. What questions should investors ask to determine if this investment vehicle makes sense for them? Amy George chats with Sales Manager Matt Straut, CIMA®; Manager of International Equity and Alternative Strategies Jeff Whitmoyer; and Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, to help put alternative investments into perspective for investors.

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Real and imaginary inflation

The Consumer Price Index (CPI) for June increased 0.3% from May, mainly driven higher by rising gasoline prices. Over the past 12 months, the CPI has increased 2.1%. Don’t worry; the Federal Reserve (Fed) isn’t going to imminently increase rates. The Fed looks at the price index for personal consumption expenditures (PCE), not the CPI, for measuring inflation. Plus, as Charles Evans of the Chicago Fed made clear, inflation running a bit over the Fed’s 2% target isn’t a reason for concern. That is especially true when higher inflation is driven by increases in food or energy prices, which tend to reverse themselves over longer periods of time.

Some people—a minority of investors and people who claim to be economists—think that the official statistics on inflation are hiding real inflation. You see gasoline prices higher, food prices higher, companies putting less product in packages, and government statisticians resorting to voodoo techniques like imputations and hedonic adjustments to conceal the truth that inflation is rampant. To put it politely, that’s a bunch of baloney. While food and energy prices are higher, they are off their 2011 highs. Plus, for your average urban resident, food and energy make up around 20% of monthly spending. What’s going on with that other 80% also matters.

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Need cash? This town pays for new residents.

Continued geopolitical risk—particularly in Ukraine and Gaza—helped push stocks lower early in the session, but losses moderated in the afternoon. Russia’s MICEX Index fell 2.7% in today’s trading, pressured by the prospect of further sanctions against the country as the investigation continued into the downing of Malaysia Airlines flight MH17.

The Dow fell 48 points, with 22 of its 30 components retreating; the S&P 500 Index dropped 4; and the Nasdaq lost 7. Decliners led advancers by five to three on the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures gained $4.50 to close at $1,313.90 an ounce, and the price of crude oil rose 91 cents to settle at $102.86 a barrel.

In Earnings News:

  • Shares of Hasbro Inc. (HAS) dropped 2.69% after the toymaker reported falling sales of games and preschool toys. Net income for the quarter was $33.5 million, down from $36.5 million a year ago due to a tax adjustment. Revenue rose 8.2% to $829.3 million. Sales of Transformers and My Little Pony toys were strong, with strong international sales growth of 17% overall, but U.S. and Canadian sales fell 1.6%.

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Are market targets useful?

Today’s Manley on the Street post is a joint collaboration between John Manley and Dr. Brian Jacobsen.

Summary

  • Targets shouldn’t dictate your investments, but they should provide a reality check for your expectations.
  • The best use of a target is to peel it back and look at the underlying environment.
  • We see two risks in the near term—an overly aggressive Federal Reserve (Fed) and corporate profits rolling over. We feel both are unlikely.

Manley on the Street: Are market targets useful?“Life is a journey, not a destination.” Ralph Waldo Emerson

In September 2012, we published a piece targeting 2,000 for the S&P 500 Index by the end of 2014. Now that the S&P 500 is flirting with 2,000, what should we make of our target?

At the time we published our target, the S&P 500 traded at 1,465. Earnings per share (EPS) for S&P 500 companies were $90. Now, the S&P 500 is flirting with 2,000 and EPS for the year could be $120.

How did we get here? Earnings have marched higher, and investors are willing to pay more for those earnings. It’s pretty simple, really—and that was the point of the target we published in 2012. It wasn’t a ridiculous, pie-in-the-sky call on the market. We were just noticing that if analysts’ expectations for earnings grew at a 5% to 6% annual rate—while the average over the past 20 years was 6% to 7%—then the consensus expectation for 2015 EPS would reach $125. The average price/earnings ratio applied to forward earnings over the past 20 years has been 15.0 to 16.5. So we applied a 16.0 multiple to the $125 EPS number to get 2,000.
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Prepping for the big kindergarten entrance exam

U.S. markets were higher today, as investors focused on encouraging earnings results instead of growing turmoil overseas. The same couldn’t be said for global markets, where most of the major indexes posted losses.

The Dow gained 123 points, with 28 of its 30 components advancing; the S&P 500 Index rose 20; and the Nasdaq climbed 68. Advancers led decliners by 9 to 2 on the NYSE and 11 to 3 on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $7.50 to close at $1,309.40 an ounce, and the price of crude oil slid $0.25 to settle at $101.95 a barrel.

For the week, the Dow was up 0.9%, the S&P 500 Index added 0.5%, and the Nasdaq increased by 0.3%.

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