Wednesday, September 03, 2014

Few people pay attention to a critical measure of the health of our financial system - the federal funds rate.

This is the rate that banks pay each other to borrow/lend their excess reserves at the Fed and is an early warning sign of trouble. It identified problems in every economic cycle and gave investors time to reduce the risk in their portfolios.

You can see the spike in this rate as banks fought for funds before each crisis: 1980, 1987, 2000 and 2008. This rate was the best indicator of the 1987 stock market crash. There is a chapter in my book Timing the Market (Wiley & Sons) devoted to the fed funds rate because it helped me prepare for Black Monday in 1987.

The good news is that the fed funds rate has stayed low all year and dropped to an extremely low level at the beginning of September. The financial system is liquid and secure.

The stock market can take comfort in that news.

Wednesday, August 20, 2014

The equity market may be worrying about Fed policy.
But the bond market is sanguine.

Credit spreads have been narrowing all month. The high-yield/10-yr. spread has shrunk 50 BP or 1/2% so far this month.

At the moment, the outlook for the stock market is good. That may change along with changes in Fed policy, but now the forecast is for rising equities.

Monday, August 04, 2014

This may be the long-awaited summer correction. As usual, stock market sellers are over-doing their pessimism. You can scoop up some bargains during this "summer swoon."
>After the Dow lost all of its YTD gains, it is finally moving back up.
>All 30 of the Dow fell recently - suggesting panic selling.
>The VIX and the credit spreads are improving inter-day.
>Finally, the put/call ratio is over 100 and signaling "Buy."

Some market analysts are starting to use the phrase, "secular bull market" instead of the usual reference to a three-five year cyclical market. A secular bull market can run seven or eight years. It certainly did in the '90s.

Friday, July 18, 2014

Investors over-reacted to international news yesterday.

Just three of the Dow 30 rose during panic selling. Buyers will come into today's market to scoop up bargains.

Thursday, July 10, 2014

By now you have heard that the Fed will discontinue its quantitative easing in October. Equities cratered on the news and are clawing their way back up to more realistic valuations.

Look for a stronger stock market when investors realize that the Fed has faith in this economy. Quality spreads (the high-yield bond index minus the yield on the ten-year note) will reflect this improved confidence. This spread increases during times of fear; wait for it to become more narrow before investing.

You can follow this data on the St. Louis Federal Reserve's free website.

Tuesday, June 24, 2014

I had the pleasure of teaching Introduction to Wealth Management yesterday to sixteen attractive young people from Mexico. They are clients of the largest bank in Latin America, BBVA Bancomer. We met in the stunning new building of the New York Institute of Finance in trendy SoHo.
Mexico beat Croatia in the World Cup immediately after our class to complete the exciting day!

These students may have the ppt upon request. The general public may have select slides from the presentation.

Friday, June 13, 2014

Last year's strong stock market gains may draw new investors. Double-digit gains often happen two years in a row as the graph shows.
The 20% gains in 1957, '75, '85, '95, '03, and '09 led the way for further large profits in the following year. This year could be another very good year for stock market investors.

Monday, June 02, 2014

Contrary to conventional wisdom, here are five reasons to BUY in May and go away. Returns of 20% or more often lead to further double-digit returns. Last year's 30% profit may presage another year with double-digit growth.

Here is the history of stock markets with 20% returns:

1. The rally in 1975 - 1976 (the 32% return preceded a 19% return)
2. The strong returns in 1985 - 1986 (26% then 15%)
3. The historic rally from 1995 - 1999 (returns of 34%, 20%, 31%, 27% and 20%)
4. The strength from 2003 - 2004 (26% then 10%)
5. The bull market in 2009 - 2010 (23% then 13%)

Once the public realizes that a recession is finally over, it gradually eases back into the stock market. Last year's 30% return does not guarantee that this year will be poor.

In fact, it may be a wake-up call to those who are not yet in the market.

Monday, May 05, 2014

Headlines scream global unrest and hint at war. The stock market is weak and confidence indicators are poor. Don't they know that war, as terrible as it is, stimulates the economy?

Look at the graphs of GDP during wartime from chapter 19 in Timing the Market.
No one wants war; but investors are misinterpreting the economic effects of war.

Wednesday, April 09, 2014

Good news from the banks could boost the equities market.

That foundation of the banking system, commercial and industrial loans, increased at an annualized rate of 26.4% last February according to a Federal Reserve report.

Most of the data has improved - including real estate loans on line 11. Banks seem to be responding to increased business activity.