Bears Make Headlines, Bulls Make Money (NYSE: CBU)
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, May 23, 2012: Issue #1779
My wife and I have very different opinions as to what makes a nice vacation. Her ideal getaway is a hike through the woods, winding up at a nice spot to pitch a tent, cooking dinner over an open fire and hunkering down in our sleeping bags for the night.
I, on the other hand, prefer to sit by the pool (or ocean) sipping a colorful drink that has an umbrella in it, dining at a nice restaurant, catching a show and then going to sleep in our luxury hotel room.
So this year, once again, we had the ongoing debate about what to do this summer. So we reached a compromise…
We’re going camping.
And this year, we’re going to be camping in an area known for bears. Those animals scare the heck out of me. With one kind of bear you’re supposed to play dead, another you’re supposed to scare it away. I have no idea which is which.
I don’t know if it’s the color, the snout, or how you’re supposed to identify them. I know nothing about bears, other than that I don’t want to come across one.
But when it comes to the stock market, I know a lot about bears. And despite this nasty sell-off we’ve had lately, this is no bear.
The market is off 7% since May 1 and has fallen 12 of the past 15 days (as of Tuesday morning). It’s been painful to watch stocks bleed every day like a fighter who’s been cut and keeps getting hit in the same spot over and over.
But that’s not how bear markets usually work. They usually don’t have those drops that feel like a punch to the gut. A bear market typically dribbles lower until one day you wake up and realize you’re down 20%.
Bears usually appear when investors are optimistic. That’s hardly the case right now. According to the American Association of Individual Investors Sentiment Survey, only 23.6% of investors are bullish, while 46% are bearish. The bears are up 3.9% from last week. The long-term average is 39% bullish against just 30% bearish.
A Franklin Templeton Global Investment Survey found that 45% of respondents are more risk averse this year and only 20% would consider becoming more aggressive in their portfolios in 2012.
Combing the financial websites, it’s hard to find someone recommending that investors buy stocks.
In other words, investors are scared, and that’s usually a good time to pick up some cheap stocks. There may not be outright panic quite yet. The bottom may still be a little further down, but it’s probably a good time to start nibbling at some stocks that you’ve had your eye on for a while but wanted to wait until prices went lower.
For example, some of the stocks in my Perpetual Income Portfolio whose yields declined as the stock prices rose, once again have attractive yields.
One I really like, Community Bank Systems (NYSE: CBU), is a great little bank based in upstate New York and Pennsylvania. It’s currently yielding 3.9%, that’s up from 3.5% just over a month ago when the stock was trading several points higher (although Ultimate Income readers are enjoying a yield of 4.7% if they bought it when it was first recommended in September).
Could the market head lower from here? Of course it could. We’re not market timers at Investment U, so I’m not going to make a prediction. However, I will say this certainly doesn’t feel like a bear market.
Instead it feels like an opportunity to leg into some positions, particularly for income seekers who felt shut out over the past few months as income stocks’ prices rose sharply, making obtaining an attractive yield difficult.
Thanks to this sell-off, it just got a little easier.
Now, if anyone has any suggestions on where to find bear repellent (for real bears), I’d appreciate it.
P.S. One of the MLPs in my Perpetual Income Portfolio fell about 17% since hitting a high early this year. But with a yield that’s up and the news that it’s raising its dividend even more, this one looks prime for dividend seekers.
To find out more about Investment U Plus and how you can access this pick and more, click here.
I’m a glass half full kind of person. That’s quite an accomplishment coming from my family, who not only believes the glass is half empty but that it’s teetering on the edge of the counter and is about to get knocked to the floor and shatter into a million pieces. Then we’ll have to wear shoes in the kitchen for a month, otherwise we’ll get shards of glass impaled in our feet.
Over the past year, while talking about the markets and the economy with my father, he’d often skeptically ask the question – “What’s going to make the economy recover?”
My answer was always the same. “I don’t know what’s going to cause it to recover, but the market is telling us it is going to recover.”
The markets are a forward-looking mechanism. They rise and fall a few months ahead of macro-economic trends.
The market topped in October 2007. The Great Recession officially began in December of that year. Similarly, the market hit a bottom in March 2009. The recession formally ended three months later.
There are still plenty of nattering nabobs of negativism out there who refuse to look at the data and admit things are getting better, often because of a political or economic agenda.
They’ll point to unemployment at a still-too-high 8.3% (although it’s down from over 9%) and ignore things like:
Still not convinced the economy is rebounding?
Earnings for S&P 500 companies were not only up 10% last year, they were record profits for the second year in a row.
And although the market is clearly in a bull phase, P/E ratios have actually come down as stock prices have not kept up with earnings growth.
According to Bespoke Investment Group, the 14.1 P/E ratio of the S&P 500 is below the prior high (of this bull market) of 15.6, back in April – despite earnings growing at a double-digit clip.
P/E ratios in energy and materials companies have gone down the most, presenting investors with some interesting opportunities.
For example, Williams Partners (NYSE: WPZ), a MLP that’s currently in The Ultimate Income Letter’s Perpetual Income Portfolio, has seen its P/E ratio fall from 17.5 in 2010 to 16.3 at the end of 2011, down to 14.0 today, despite the stock price advancing 31% since the end of 2010.
Also, interesting to note that despite a three-year bull market, investor sentiment is still negative. According to the American Association of Individual Investors, only 44.5% of investors are bullish.
So, what are the markets telling us now?
You know that we don’t try to time the market here at Investment U or The Oxford Club. But the fact that the stock market is still climbing, earnings are growing and sentiment is not yet bullish, makes me think this bull still has some legs. And, just as importantly, that the economy will continue to improve.
When sentiment gets significantly more bullish and the market and earnings turn lower, that’s when I’ll start to grow concerned.
We still have serious problems in the country that need to be addressed. But for now, the market is indicating that the sky isn’t falling. In fact, it’s looking clearer every day.
Market analysts and economic experts love to predict what the market is going to do next. They love being the ones who get quoted in news reports and invited as guest commentators on various business shows to give their lofty-sounding predictions about what stocks are going to do next.
They look professional, sound professional and have professional credentials. And so they’re taken as professionals, with their every word all but good as a gold mine.
Problem is they’re more often wrong than they are right.
Think about it… How many times did you read the words “worse than expected” in a CNBC, CNN Money, Forbes, Wall Street Journal or New York Times report ever since the economy first tanked in 2008?
If you were paying any attention at all, it was a lot. Practically every week – and certainly several times a month – the headlines would be plastered with news of unexpected drops or gains (though mostly drops, it seemed) in one sector or another.
Looking at all of their bad calls – one after another after another – it quickly becomes obvious that the men and women who call themselves “experts” are actually badly out of their league.
Just a few of the many examples of predictions gone wrong last year:
Heck, on Wednesday, June 22, 2011, even Federal Reserve Chairman Ben Bernanke – who is paid the big bucks to know this kind of thing – had to confess: “We don’t have a precise read on why this slower pace of growth is persisting,” adding that problems pertaining to the housing and financial markets were “more persistent than we thought.”
The Market Experts Do Just as Badly as the Economists
So-called experts boasting in their knowledge of the stock market didn’t do much better, as evidenced by a CNN report at the very beginning of last year. On January 4, the first official trading day of 2011, the news site had this to say:
“Stocks have had a great run since bottoming out nearly two years ago, and Wall Street experts anticipate 2011 to be no different. Investment strategists and money managers expect the S&P 500 to rise 11%, on average, according to an exclusive CNNMoney survey. In fact, not one of the 32 experts surveyed by CNNMoney think the S&P 500 will decline this year.
“‘Everything seems to be in place for the stock market to rise,’ said Weeden & Co. market strategist Steven Goldman, whose 12-month target for the S&P 500 fell right in line with consensus estimates of 1,390. ‘We still have decent earnings growth and stimulative policies from the government that will help stocks keep up their performance.’”
And for a while, those 32 “experts,” seemed like they were onto something…
On January 4, 2011, the S&P started out at 1270, already up nicely from its 2010 low of 1,022. And it kept climbing well into February, peaking at 1,343.
After that, it plunged nearly a hundred points down to 1,256, but recovered quite nicely from there, hitting a new yearly high of 1,361 in early May. Then, for the rest of the month, it hit several rough spots, wavering dramatically between price levels but ultimately heading downward very close to its previous low towards the end of June.
Yet the very next month, it seemed to justify all of the experts’ opinions once again, shooting right back up. Many people even thought it was going to hit a new yearly high from there.
Instead, it finished off the rough head-and-shoulders pattern it had begun back in August 11… and fell all the way down to 1,172 before starting a nauseating series of dips and rises over the next few months.
By the end of the year, it had recovered most of what it had lost. But it was still down 13 points when 2011 came to an official end.
Once again, the experts turned out to be wrong. Very, very wrong.
The Truth about the Markets
The truth is that nobody can predict what the market is going to do. And anybody who tells you otherwise is lying or sorely mis-educated. If they were honest or realistic, they’d have to up and admit that the markets can be completely irrational – and therefore unpredictable – at times. They don’t always go up when they’re supposed to head higher and don’t always go down when the economic news looks grim.
There are far too many factors involved in every market move – political, geographical, national, international, sector-related, business-related, investor-related, etc. – to make such large predictions, no matter how confidently they are made.
Alexander Green, Investment Director for The Oxford Club and Editor of The Momentum Alert, The Insider Alert and The New Frontier Trader, wrote an article for Investment U in January, describing a conversation he had with a friend of his.
Basically, the friend was having a difficult time with his investments, which were going nowhere in both the short-term and over a longer period of time. Several years back, his broker had him heavily invested in stocks, which – as everyone knows now – was not a good place to be. And after the market crash in 2008, his broker switched tactics completely and put most of Alex’s friend’s money into safer investment plays that promised not to lose a lot… but also wouldn’t make much.
Of course, that was when the market soared.
“I just can’t seem to win for losing,” the friend complained. So Alex clued him in that he had a bad broker giving bad advice, “not because his broker failed to outguess the market… but because he’s guessing at all.”
He went on to write how “It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.
“Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?”
The same goes for market timing, he also shares, pointing out how much easier it is to look backwards and analyze rather than forwards and predict.
That’s a large part of the reason why Marc Lichtenfeld, Editor of The Oxford Systems Trader tends to do so well in the markets. He doesn’t let the prevailing opinion get in his way when looking at an investment.
Instead, he carefully analyzes each one that crosses his radar, taking his cues by looking at fundamentals and the bigger picture over the single or less important factors that tend to catch the “experts’” eyes more often than not.
As his Investment U bio says, “Marc also looked at the market with a journalist’s skeptical eye as a columnist for The Street, where he broke several stories on companies in the biotech sector. His contrarian recommendations (including shorts) gained 12.6% annualized versus the S&P 500’s gain of 0.5%.
How to “Predict” the Markets
There is no way to predict what the market is going to do next. But that doesn’t mean there isn’t a way to make money off of it.
People who buy up individual stocks or markets have a tendency to do better than those who try to predict what the entire economy is going to do. Admittedly, looking at fundamentals instead of listening to a bunch of know-nothing (or, at best, know little) talking heads does require a bit more work.
It requires spending time looking at an investment candidate’s fundamentals. What is its price-to-earnings ratio? This number can be easily figured out by dividing a business’ going share price by its earnings per share (usually determined by the last four quarters’ average).
If the resulting amount is high, that’s oftentimes a good sign, as it indicates that current investors expect better results going forward. Though, a word of caution on that subject: Just because the number seems high doesn’t automatically mean that it is. Different industries have different averages, which should be considered as well.
And that’s only one of the many areas of interest a diligent investor could and/or should look into. A few other relevant questions include:
How has it performed in the past? Are insiders excited about it? Does it offer goods or services that consumers actually want? How does it do at putting its name out there to the public? Does it offer any additional incentives like dividends? If so, what kind of track record does it have concerning investor payouts? What news has come out concerning the company in the last year or so?
There are easier ways to do all of that and there are more difficult ways. The aforementioned Marc Lichtenfeld, for example, uses what he calls S.T.A.R.S. (Stock Trading Analytical Research System), a computer-based program that sorts through “the billions and billions of variables involved in stock market prices each day,” alerting him and his subscribers “to stocks that we would have never expected to rise.”
But individual investors can make healthy returns on their investments by sitting down and crunching the numbers themselves. It takes time and dedication – and, as with S.T.A.R.S. or any other method of crunching the numbers, it isn’t completely foolproof either – but most investments will indicate whether they’re worthwhile or not if a person is just willing to dig into it a bit.
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, September 7, 2011: Issue #1595
Computers conducting high frequency trades make roughly 70 percent of stock trades on all U.S. equity markets.
Every day, supercomputers – owned by hedge funds – buy and sell millions of shares of stock, and sometimes the holding periods are as short as milliseconds. The goal of this sort of trading is to take advantage of market inefficiencies and scalp profits all day, every day.
High-frequency traders generate approximately $21 billion in profits annually for the funds and investors that own the computers.
And high frequency trading is only going to increase. While regulators pay lip service to leveling the playing field for the little guy, in reality, the supercomputers are going to have even more of an impact going forward.
The New Center of the Stock Market Universe
In the future, the center of the universe when it comes to the markets will no longer be on the corner of Wall and Broad Streets in lower Manhattan. Instead, it’ll be a red brick building in Jersey City. That’s where a new facility is being built for the New York Stock Exchange. It will house several football fields worth of computer servers.
Funds will be able to lease space from the Exchange in order to place their supercomputers in the same building as the Exchange’s computers, taking precious milliseconds off of the speed of their high-frequency trades.
The average investor would be a fool to try to compete against the institutions in this style of trading.
But there is good news. Super-computing technology is becoming more readily available to the everyday investor.
Last week, I wrote a column about inventory turnover and how using one piece of data could help you beat the market by more than 21 percent. It literally took me longer to type in my instructions than it did for the computer program I was using to crunch the data and arrive at a conclusion.
And that was analyzing every publicly traded company in the United States.
Successful Stock Analysis
To be a successful stock analyst today requires more and more computing power.
On my laptop, aside from a lightning-fast internet connection, is a trading platform that gives me real-time order flows, charting, news and every other type of information that I could possibly need about the market or a particular stock.
I also have a program, linked to a supercomputer, which can crunch millions of pieces of data on thousands of companies in just seconds.
As a 15-year stock market veteran and a former NASD licensed analyst, I have a pretty strong idea about what makes a stock a winner. For example, I’m much more partial to cash flow than I am to earnings. Net income can be manipulated much more easily than cash flow.
I look at balance sheet items like inventory and accounts receivables to search for signs that fundamentals may be deteriorating or improving, before they show up in the revenue or profits figures.
But through a super-computing program that I call S.T.A.R.S., I was able to test my theories. The computer could tell me, in just seconds, which variables were positively impacting performance and which were not.
As I mentioned last week, inventory turnover was an important component for success. Surprisingly, certain technical indicators that I had relied on in the past were not.
Through the process of adding and subtracting a very wide range of fundamental and technical variables, I was able to create a reliable system that, in a 10-year backtest, outperformed the S&P 500 by 1,568 percent.
It also beat the market nine out of 10 years. What I liked most about the system was that during markets that were bottoming, it suggested lots of stocks, ensuring plenty of exposure to the market. However, when markets were topping or about to sink, like in early 2008, the system only recommended a handful of stocks, limiting exposure to the market. Even then it was able to pick winning stocks like Alaska Air (NYSE: ALK).
If you’re interested, you can learn more about S.T.A.R.S. and my new service, the Oxford Systems Trader.
But the purpose of this column isn’t to be a commercial for the Oxford Systems Trader. It’s to emphasize that if you’re going to do your own research, you need powerful tools…
Three Ways to Speed Up Your Trading in the Digital Age
Here are three ways you can ensure you’re up to speed in this digital age.
Whatever your style of investing, if you’re not harnessing the power of technology, you’re being left way behind. And chances are your investing returns confirm that statement.
The high frequency trading that’s conducted by hedge funds and their supercomputers are out of reach for most investors.
But thanks to improving technology, average investors can generate large profits that widely beat the market.
by Marc Lichtenfeld, Investment U’s Senior Analyst
Wednesday, July 20, 2011: Issue #1560
Last November, I wrote about how to protect yourself from an impending crash that would take place this year – if the threat of failure to raise the debt ceiling seemed real.
As of right now, most people expect some resolution to be reached in the next few weeks before the August 2 debt-hike deadline.
And while our politicians act like stubborn, self-centered toddlers, only concerned with getting what they want rather than solving America’s problems – they’re not stupid (well, most of them aren’t). They know that not raising the debt ceiling will have catastrophic consequences on our financial system and millions of Americans.
However, we can’t have blinders on assuming everything is going to be just fine. We need to be prepared for a black swan event (a major event that’s unexpected)…
The Political Game of Chicken Endures
Should the Republicans decide that bringing down President Obama is more important than ensuring the safety of our financial system, or should the Democrats refuse to cut spending or give on taxes in order to pin the failure on the Republicans, the political game of chicken could cause severe pain in the financial markets.
So far, the markets don’t seem overly concerned. If they were, they wouldn’t be near their highs.
I’m keeping a close eye on the financial sector. Big investment banks have been weak and have all dropped recently, in particular:
If people become seriously worried about default, it wouldn’t shock me to see a run on the banks, 1930s style. Hopefully, that’s not what the weakness in the banks and other financials are telling us…
With Washington’s Continued Ineptitude… Add These Investments To Your Radar
You’ll never see me acting like one of those pundits who constantly tell you the world is coming to an end and that you should load up on gold, ammo and canned goods and move to the mountains.
But, it’s worth your time to at least consider the possibility of a financial calamity being brought on by ineptitude in Washington.
I don’t recommend selling your entire portfolio in order to put it into “safe” assets. However, the following types of investments should be on your radar, just in case.
I also still like the recommendations from the article in November, which included two ways to short treasuries:
It’s Time to Identify Quality Stocks Now…
As you can see, I’m not a nervous Nelly. Nor am I a nattering nabob of negativity. In fact, I’m using this time to identify stocks that I’ll be interested in if they come down in a Washington-induced crash.
If such a slide occurs, it could be short lived, after a solution is agreed upon. I want to be buying into a panic. So start looking for quality companies that can continue to do well in any environment.
*Note: Investment U has a commercial relationship with EverBank.