Feb 4, 2014 - Stock & Bond Market Update

Stock Market Analysis

Conclusions: It has been another interesting week on Wall Street. Overall we find large stocks, like those of the S&P 500 fell 0.4%. Meanwhile smaller issues, such as those of the Russell 2000, declined 1.1%. So far the year has seen heavier volume on the market’s down days.

Somewhat disquieting is the old Wall Street saying about “As January goes, so goes the year.” There seems to be some truth to the saying. Since 1940 our research finds that a year’s overall direction follows January’s lead 78% of the time. With the markets under pressure in January it suggests the year, as a whole, will likely benefit from an active approach as opposed to the buy-and-hold mentality that worked in 2013.

The president, in his State of the Union address, discussed income inequality. Through executive order he is pushing federal contractors to adopt a minimum wage of $10.10. Alas, this is unlikely to offer the equality he desires. According to Investors’ Business Daily, in 2007 the minimum wage began its process of rising by over 40%. Further, the president has raised taxes especially on the highest income earners. The net result? According to the Census Bureau, President Obama is presiding over the largest income gap in history.

A better path would be to promote business growth through fewer regulations. Regulations create an incredible burden on businesses. Consider the new health care law, in its final form, is over 11.6 million words long requiring the average reader over 19 weeks to read it from cover-to-cover. That is 19 weeks someone is not focusing on their customers. Obviously we need regulations, but the current burden is simply too much. Is it any wonder that starting in 2007 stocks have advanced over 10% annualized when Congress is OUT of session and lost money when Congress is IN session?

Economically there are some mixed signals for the market to digest. Some data such as shipping prices for dry goods show a major decline of over 20% in the last three months. Likewise Capital Goods (excluding air and defense) orders have plateaued since June. On the other side, manufacturing , according to regional Fed reports from New York, Philadelphia, Dallas, Virginia and Kansas City, remains upbeat. In fact, their data suggests new orders in manufacturing are at their highest levels since early 2011.

Overall, our indicators are in the slightly favorable to neutral camp. It is probably too soon to take action. However, the indicators do remind us that with market declines often comes opportunity.

David W. James, CFA

Bond Market Analysis

Conclusions: A poor week for many stocks, but bonds did well with 10 Year Treasury yield down 8 basis points and a strong 37 basis point decline for the year to date. Commodity prices were very weak. At times throughout the week, Indonesia and Indian currency continued to plunge, but some of the other developing country currencies stabilized a bit.

Sentiment toward bonds, and especially muni bonds, has been extremely negative. They have not only lost ground due to general widespread fears of higher rates, but threats of default in some of the larger issues are rife. Especially I refer to Detroit, Stockton California, Atlanta (Jefferson County) muni bond holders face difficulties. And Puerto Rico. It is no wonder that investors have withdrawn $38 billion from municipal bond funds in 2013. But truth to tell, there are many legal prohibitions against municipal bankruptcy and the long term rate of defaults is less than one half of one percent, according to the NY Times.

And it is not only municipal bonds which are suspect and unpopular. According to Bloomberg, bond funds in general posted a record $80 billion in redemptions in the year just past. That amounted to almost 10% of the total invested.

We think this is overdone, and are optimistic for bond holders. Why? First and more important, our bond risk indicators have abandoned their pessimistic message and are now positive. The economy is stagnant and threatens to decline into a possible recession, when bonds tend to do well. Sentiment among both professionals and brokerage clients is as negative for bonds as I have seen in at least 31 years. In spite of a recent rally, trader sentiment is barely rising. Very rarely do sophisticated investors challenge us to justify holding modest positions in any security, but today they wonder about bonds in portfolios.

Why are we concerned about the economy slowing? Headlines in local papers reflect opinions of the Associated Press, whose recent spin on economic data has been very bullish. But new home sales have been weaker than expectations, only 414,000 sales when 464,000 sales were reported last month and 455,000 were expected. (Our realtor friend thought weather might be a major factor.)

Durable goods order growth has turned negative. Business equipment orders are widely observed because they are said to lead to equipment investment and jobs for operators. Unlike November, where increases of 2.8% were seen, in December such orders declined by 1.3%. December’s Chicago Fed National Activity sum was reported to be barely positive at 0.16, with 48 input indicators positive while 38 were negative. The coincident/lagging index showed a small monthly decline. Our calculation of the Case Shiller home price index gave us a flat reading for the latest quarter, rising less than 0.8%., however home prices over the past year rose a healthy 13.7% positive. The Consumer Confidence Index was reported to have risen a bit, from 78.1 to 80.7.

Long term investors are aware of the level of stock prices relative to the GDP as they proceed, understanding that investing at low relative levels, such as March 2008 is often met with success whereas high relative levels such as 2001 can yield disappointing results. Thus the capitalization of stocks as a percent of GDP is of interest, now reflecting a lofty 147%. Only once before has this ratio been exceeded and that was at the top in March 2000, when the 174% reading yielded negative returns for years into the future (note the 2008, 2009 bear markets.) We are interested in stocks and the general economy because bond prices often move in an opposite direction, advancing when stocks do poorly and the contrary.

Recent news of FED changes in intentions with respect to “Quantitative Easing” which some call printing money and buying bonds is of interest. Such actions have coincided with increases in bond yields, when the intent has been to decrease yields. Thus news the FED is tapering down the program is healthy for bond investors, regardless of media interpretation.

Since November, we have reported better news from our bond indicators: “Our bond indicators are strengthening.” (November 23 2013) We have extended durations for our clients, where it met their objectives. The better news continues. It is not too late to extend maturities where it is appropriate.

F James, Ph.D.

 

Sed id accusamus est nam atque. Voluptas non ipsa dolorem et voluptatem eos reiciendis. Ut facere excepturi libero nostrum nihil.

Quia totam dolorum voluptate molestiae. Autem repudiandae mollitia enim magni impedit modi ducimus. A id neque id. Et iusto beatae dolor eum. Sed adipisci esse veniam eum vel eum.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”