Daily Investment Interpretations
Friday, May 17, 2013

2013-5-17 (Friday Night): Dow, S&P end at records, stocks mark fourth week of gains Stocks finish higher for fourth straight week. The NASDAQ Composite rebounded 33.73 points (0.97%) to end at 3,498.97. The Dow popped 121.18 points (0.80%) to end at 15,354.40; the S&P 500 vaulted 17.00 points (1.03%) to 1,667.47. Oil closed at 95.99: Oil futures settle above $96 on strong data. Gold ended at 1,358::..Gold sinks for seventh session in a row The VIX slid 0.62 to 12.45  

    "Stocks continued their climb into uncharted territory on Friday, racking up the fourth week of gains in a row as encouraging economic data prompted investors to pick up shares of growth companies. The ..."
    "The stock market continued its march higher for a fourth week as investors focused on signs of improvement in the U.S. economy. More"

Marketwatch says:     
    S&P at 1,715 at year-end: J.P. Morgan.  "Pull out the cowbells. These analysts join those who say the bull run isn't over."  
    Merrill is no longer a bear -- for this quarter.  
    Defensive stocks are due for a pullback.    
    5 wrong ideas about joblessness.  "These misconceptions distract us from actually fixing the unemployment crisi."  
    Not just stocks but everything is overvalued.   
    Live blog, video on hearing over IRS scandal.    
    European stocks rise to highest level since 2008.    
    Leading economic index up 0.6%     
    Consumer sentiment highest since 2007.    
    Treasurys drop as consumer sentiment rises.    
    Europe stocks on track for weekly gain.    
    Oil futures flirt with $96 after sentiment jump.    
    Google seeks to benefit as Gen Y abandons cash.    
    Bill Gates reclaims 'world's richest' title.    
    Dear Class of ‘13: You’ve been scammed.  "Brett Arends explains how the College-Industrial Complex drove tuition to outrageous highs."  
    Stop 'playing' the stock market.  "Investing isn't child's play no matter how easy it looks these days."  
    .    
    How bond investors can avoid losses.   "Burton Malkiel suggests several alternative strategies using stocks and bonds." 
    Wild chase for yield continues.  "Invetsors look in remote places as yields on even the riskiest debt fall to record lows."  
    How college grads can retire rich (after 60 years).    
    Talk of Fed 'wind down' gets louder.    
    Google is your market tell.  "When markets go awry, key off a widely held stock that exhibits all symptoms of a market gone wild."  
    This market welcomes speculation.   
    When owner sells, do workers lose?.  "Many entrepreneurs approaching retirement choose to sell their companies to their employees. For their workers, are the risks worth the reward?"  
    Reform may not save Bangladesh.  "Andrew O'Day says western companies are shopping for other low-wage countries to replace Bangladesh as clothing suppliers."  
    In charts: Clothing costs dive as deficit shrinks.    
    'Sweet spot' drives stocks higher.    
    Kirk Spano Reality meets Jim Chanos’s China call.    
    Jamie Dimon is counting on the little guy to keep him as chairman    
    Resource plays are a natural bet   "Valuations and sentiment support this contrarian view, writes Neil Gregson."
    2008 crash saved retirement for me.  "Dennis Miller says becoming an active investor gave him more focus and energy."  
    Do-it-yourself investing? Read this first.          
    Who bought Tesla ahead of short squeeze?. 
    Why Fidelity and Vanguard are afraid of politics.  "Mutual funds are caught in the middle of one of the most contentious issues in American politics: Spending by big business to gain influence in Washington."  
    GOP alarmed over political spending plan.    
    Spotlight on economy: More home building in cards.    
    Home-builder confidence rises in May.    
    Das: Less-powerful nations face new order.    
    6% loss in 6 days: Gold spooked by deflation talk.  
    Gold futures 'get crushed,' losing $109 over 7 days
    The most-shorted stocks are now outperforming the S&P 500.    
    Students latest victims of deficit obsession.    
    Top executives' favorite finance apps.  "How financial executives use their smartphones"  
    Scared by stock-market highs.  "with a large sum to invest, should you be worried about stocks setting records right now?"  
    Gold bears going grizzly.  "Brace for another wave of slash-and-burn gold forecasts with Credit Suisse leading the charge."  
    How to invest in oil ‘supply shock’.   "The IEA says a “supply shock” will essentially change the way the oil market works. It also opens up a lot of opportunities for U.S. companies." 
    Saving Social Security by giving it up.  "Wealthier 5% of retirees should sacrifice their benefits to keep the program solvent."  
    Are retirees tapping IRAs too soon?.  "Study suggests that savers in their 60s are making big withdrawals from their nest eggs to pay for basic expenses."  
    
    I've moved the Reinhart-Rogoff discussion here. and the Mars articles here.

State of the Markets articles include:    
    Tesla Is Having A Good Month   "To say Tesla Motors Inc (TSLA) has had a good week would be a massive understatement. Before its earnings announcement on May 8, TSLA was already gaining some serious steam throughout April. After closing the month of March at $37.89, the automaker finished April at $53.28, +40.61% higher. Then came the earnings announcement. EPS $0.12 vs. $-0.01. Revenue $562M vs $500.2M. 5,000 new Model S vehicles in Q1, exceeding guidance of 4,500. 5,000 more Model S vehicles expected in Q2. ... Read More »" .    
    LEI Perks Up in April.  "After a slight decline in March, the Conference Board's LEI (Leading Economic Index) perked up in April, with the reading coming in both above the consensus expectations as well as last month's modest ... Read More »"  
    UofM Sentiment Reading Improves in May.   .  
    Early Analysis: Focusing on the Fed.        
 
    For real-time updates throughout the trading day, try State of the Markets Twitterfeed.

    At a P/E ratio of 19.3 on the S&P 500 and 16¾ on the Dow, stocks are near the upper levels of their normal ranges, but are not yet at quite their normal bull market peaks (20-to-22 on the S&P 500). They are not in bubble territory at this time (see Paul Krugman's Too Much Talk About Liquidity). The following chart, taken from Dr. Krugman's referenced article, elegantly illustrates this point.

    This warrants a few further comments. 
    The Shiller Cyclically Adjusted PE (CAPE) ratio is being trotted out to show that the markets are currently overvalued because the ten-year average for the S&P 500 is 23.7, and the Shiller CAPE has had a good track record as a predictor of stock market future performance. But in 1999, the P/E ratio on the S&P 500 reached a level of overvaluation well above its value at any previous time in its history, and has been gradually falling to its present level. (Note, though, that the P/E ratio went to infinity (and beyond (:-)) in March, 2009 when earnings briefly went negative.) So of course it's abnormally high looking backward. If we had picked a decade when it had been abnormally low for a while (like 1977-1987) but were rising again, the Shiller CAPE would have been abnormally low, and would have led to a false sense of complacency just in time for the Crash of '87. Shiller PE Continues To Mislead Investors, S&P 500 Is Fairly Valued 
    This is a little like a situation in which you're in an automobile accident that keeps you from returning to full manual labor for a year. In another year, after you've been  back on the job for a full year, we could say that statistically, you've only been able to work half-time for the past two years, and we could therefore conclude that the probability that you'll be able to work full-time in the third year is only 50%. 
    As Mark Twain said, there are three kinds of prevarications: "lies, damnd lies, and statistics".
    It's tempting, with the market indices approaching their turning points, to scale down our investments, taking part of our profits off the table. That may be sage counsel. The only cautionary note would be that a situation like this arose in early 1996, and especially, later in 1996 when the market indices went way out of bounds, continuing to rise until 1999. This was during the dot.com bubble, and led Alan Greenspan to coin the term "irrational exuberance". It could happen again, although the expected outcome is a limited further rise, followed by a cyclical retrenchment.
    If I weren't following the State-of-the-Markets advisory guidance (and hoping it works), I'd be scaling back my market exposure right now (which the State-of-the-Markets advisory service has already recommended).
    In the meantime, (1) we're overdue for a correction, and (2) the indices are rising parabolically, consistent with a final "blow-off". 
    Are the bears finally capitulating?

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