Things That Make You Go Hmmmmmm

The stock market has reacted well to the following:

Federal Reserve is planning to keep interest rates low for a "considerable time."

Energy costs are on the decline, which puts more money in consumers' pockets.

American consumers are feeling financially more comfortable as their financial net worth hit an all-time high last quarter. As a result, they are taking out more debt, which fuels spending and corporate profits.

Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown.

The record setting gains of the S&P 500 masks that 47% of NASDAQ stocks are in a bear market.

Bottom line: The stock market continues to make gains and defy reason with minimal corrections over the last several years. There does not seem to be any individual or combination of economic or geopolitical issues to derail it in the near term. That being said, as the old saying goes, be careful what you wish for.

For more information relating to my comments, continue reading.

The Federal Reserve

After the housing market collapsed in 2008, the Federal Reserve lowered interest rates to rock bottom levels in hopes of boosting borrowing and spending. In addition, it bought trillions of dollars in Treasury bonds and mortgage-backed securities with the hope of boosting the housing market and therefore the economy.

In a piece just published in Foreign Affairs, Brown University political economist Mark Blyth and London-based hedge fund manager Eric Lonergan argue the Fed could have done better by pursuing a far different type of grand policy experiment. For the trillions already doled out to the financial sector via those “quantitative easing” asset purchases, every family in America could have been on the receiving end of $56,000. The result, the authors contend, would be an economic boost fueled not by re-inflating the housing market but by consumer spending, which accounts for nearly 70 percent of America's GDP.

American Consumers' Feeling Better Financially

Put It on My Tab

The Wall Street Journal reported this week, that Americans' combined wealth posted a new record high in the second quarter, allowing consumers to ramp up borrowing—a development that could put the economy into a higher gear.

Overall household borrowing rose at the fastest rate since the first quarter of 2008. Economists hope rising asset values, falling unemployment and stronger household finances lead to more consumer spending, which accounts for roughly two-thirds of economic output. Recent reports on the nation's economic health have been mixed: Unemployment is falling faster than many expected, yet growth remains erratic thanks in part to weak income gains for most Americans.

This week the Federal Reserve detailed a new technical plan for how it will raise short-term interest rates, something most officials currently don't intend to do until next year. The central bank has kept the federal-funds rate near zero since December 2008 and offered assurances along the way about rates remaining low for a "considerable time," another part of its varied efforts to boost the post-financial-crisis economy.

How Some Oil Companies Are Addressing Low Energy Prices

Big oil companies and traders are stashing millions of barrels of crude on massive tankers bobbing in the ocean, in a bid to profit from a quirk in oil markets.

Fuel Flotilla

The amount of oil tied up in the strategy has risen to between 25 million and 50 million barrels of crude from almost zero as of April, oil-market traders and analysts estimate, based on trading and ship-chartering data.

 

The spike in oil being stored on the high seas has caught the attention of many investors, who say it is the hallmark of a global supply glut and signals that oil prices—already at two-year lows—are likely to keep falling.

"It shows that there's oversupply in the market due to weak demand," said Amrita Sen, an analyst with Energy Aspects.

 

Stock Buy Backs

 

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008. According to Barclays, companies in the second quarter spent 31% of their cash flow on buybacks, the most since 2008 and up from 14% at the end of 2009.

The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of non-electronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

Gary Black, co-chief investment officer at Calamos Asset Management Inc., which manages $25.8 billion, had the following to say about stock buy backs. "It does act as a floor....Is it driving the market? No, but it's an accelerant. It's giving juice to this market."

What's Up With The NASDAQ And Small Company Stocks

Beneath the U.S. stock market's record-setting gains, there is a different story that is not hitting the headlines. About 47% of stocks in the Nasdaq Composite Index are down at least 20% from their peak in the last 12 months, while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor's 500 Index (SPX), which has closed at new highs 34 times in 2014 and where less than 6 percent of companies are in bear markets, data compiled by Bloomberg show.

The divergence shows the appetite for risk is narrowing as the Federal Reserve reins in economic stimulus after a five-year rally that added almost $16 trillion to equity values. It's been three years since investors saw a 10% decline in the S&P 500 and they're starting to avoid companies that will suffer the most when the market stumbles, said Skip Aylesworth, a portfolio manager for Hennessy Funds in Boston.

College: Is It Worth The Price Of Admission?

Attending college is expensive and, as a result, choosing what field of study and where to attend are crucial decisions. Especially if you are going to be taking on debt. Thus, you may find the following video helpful.

 

 

 

 Quotes

 

“Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes."

                   Howard Marks, Baron's, April 9, 2014

 

On the lighter side

"Always borrow money from a pessimist, he doesn’t expect to be paid back."           

 

                  Author Unknown

 

“A bank is a place that will lend you money if you can prove that you don’t need it.”

                   Bob Hope

 

Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

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