“If you want others to be happy, practice compassion.
If you want to be happy, practice compassion.”- The Dalai Lama
Market Numbers, October 16, 2010
Dow: 11,062.78
Nasdaq: 2,468.77
S&P 500: 1,176.19
10-Yr. Bond: 2.576%
David’ Korn’s Newsletter Equity Investment Portfolio
This portfolio is based on an asset allocation consistently entirely of
equities (when fully invested). It does not include fixed income (i.e.
bonds) which would be more appropriate for some investors — especially
those approaching or in retirement. If you are interested in a retirement
portfolio, consider my other newsletter, The Retirement Advisor at
http://www.theretirementadvisor.net/
25% Vipers (Ticker: VTI) Cost Basis: $54.12 (Current Price: $60.24)
27% S&P 500 Index Depository Receipts (Ticker: SPY) Cost Basis: $103.44
(Current Price: $117.70)
15% Spiders Select Technology (Ticker: XLK) Cost Basis $19.44 (Current
Price: $24.09)
5% iShares MSCI Japan Index Fund (Ticker: EWJ) Cost Basis $9.80 (Current
Price: $10.14)
2% ProFunds Rising Rates Opportunity Inverse Fund (RRPIX) Cost Basis: $18.83
(Current price: $11.82)
2% Vanguard Total World Stock Index Fund (Ticker: VT) Cost Basis: $48.12
(Current price: $46.59)
5% Position in Diamonds (DIA) Cost Basis: $106.31 (Current price: $110.68)
19% SPY (established based on May 26th close using opening price May 27th)
(Ticker: SPY) Cost Basis: $109.19 (Current Price: $117.70)
David Korn’s Weekly Stock Market Commentary:
For the week, the Dow gained 0.5%, the S&P 500 gained 0.9% and the Nasdaq gained 2.8%.
Year-to-date, excluding cash dividends, all of the indices are in good shape. Calendar
year-to-date, the Dow is up 6.1%, the S&P 500 is up 5.5% and the Nasdaq is
up 8.8%.
The benchmark S&P 500 closed Wednesday at 1178.10 ‹ the highest point since
the correction bottom. As of Friday¹s close, the index had given up only
two points and closed the week out at 1,176.19. Let¹s crunch the numbers to
see how far we are from the bull market highs recorded near the end of
April.
Stock Market Decline as Measured From Bull Market Highs
(Based on Friday¹s closing prices)
DOW JONES INDUSTRIAL AVERAGE
Closing High on April 26, 2010: 11,205.03
Close on Friday, Oct. 15, 2010: 11,062.78
Percentage Decrease from Closing High to Present: 1.27%
S&P 500 INDEX
Closing High on April 23, 2010: 1,217.28
Close on Friday, Oct. 15, 2010: 1,176.19
Percentage Decrease from Closing High to Present: 3.38%
NASDAQ COMPOSITE
Closing High on April 23, 2010: 2,530.15
Close on Friday, Oct. 15, 2010: 2,468.77
Percentage Decrease from Closing High to Present: 2.43%
The Dow continues to show relative-strength vis-à-vis the other indices,
only down 1.27% from its peak and for the moment trading above the
psychologically important 11,000 level. The S&P 500 is down 3.38% and the
Nasdaq, which has been showing some strong gains lately, is down just 2.43%.
I am giving some serious thought to making a move with the last position I
added to my newsletter portfolio which was when used 19% of my cash reserves
to purchase S&P 500 Index Depository Receipts (Ticker: SPY) based on the May
26th close. I picked up shares for my newsletter portfolio the following
morning at a cost basis of $109.19. As of Friday, SPY shares closed at
$117.70, marking a gain of close to 8%. I don’t see a compelling reason to
sell just yet, other than the fact that we have had a really nice move since
the correction lows and that we are closing in on the April highs. I am
more inclined to implement a stop loss order and let the position ride a bit
longer. Not going to do anything today, but wanted to give you a heads up
that its on the brain and if I do make a change you will be notified via
Special Alert before I implement anything.
Let’s see how the rise in stock prices is impacting the sentiment outlook.
SENTIMENT
HSNSI: As of Wednesday’s close (which marked the S&P 500′s peak off the
lows), the Hulbert Stock Newsletter Sentiment Index (HSNSI) stood at 25.9%.
The HSNSI reflects the average recommended stock market exposure among a
subset of short-term stock market timing newsletters tracked by the Hulbert
Financial Digest. That is significantly lower than where it stood on April
26th (the market’s closing high before the May-June correction) when the
HSNSI was at 65.5%. This means that the typical short-term timer has about
three quarters of his stock portfolio in cash. According to Mark Hulbert,
“Since the usual pattern is for advisors to become more bullish as the
market rises, and more bearish as it declines, the current low level is
quite surprising ‹ and bullish.”
Read the article entitled, “Contrarian analysis is bullish on stocks” at this url:
http://tinyurl.com/2arwrzl
Investors Intelligence: According to the latest data, the number of bullish
advisors as interpreted by Investors Intelligence increased from 45.6% last
week to 47.2% this week. This was the seventh consecutive week that the
percentage of professional advisors increased in bullishness. The
percentage of bears decreased this week from 28.3% to 24.7%. Using the
formula, Bulls/(Bulls + Bears), the sentiment ratio is 65.64%. The
four-week moving average is 61.69%.
AAII: According to the latest poll conducted by the American Association of
Individual Investors, 47.10% are bullish and 26.09% are bearish and 26.81%
are neutral on the market. Using the formula [(bulls)/(bulls + bears)], the
sentiment ratio is 64.43%. The rally has prompted the percentage of bulls
in this survey to be above the historical average of 39% for six consecutive
weeks.
CBOE Put/Call Ratio: The put/call ratio closed Friday at 0.71. The 10-day
moving average is 0.87 and the 21-day moving average is 0.87.
The sentiment data is kind of interesting. The short-term timers are
nowhere near as bullish as you would expect following this pretty powerful
rally. That’s a good sign. The professional newsletter writers have become
more and more bullish in each of the last six weeks. That is very typical
and why the Investors Intelligence survey remains the gold standard overall
I think in terms of providing a contrarian view on stock market sentiment.
With the current Investors Intelligence sentiment ratio at 65%, it is
closing in on the danger zone above 70%. Meanwhile, individual investors
(as reflected in the AAII survey) are pretty much aligned with the pros this
week with the sentiment ratio there at 64%. The put/call ratio is not
horrendously low, but it is at the lower band that we have seen throughout
this bull. Overall, my view is that the sentiment picture warrants caution
at this point, but isn’t totally screaming sell.
EARNINGS/VALUATION
(Based on S&P Close on October 15, 2010 at 1,176.19)
The fundamentals that directly correlate to stock prices are corporate
earnings. And we are the beginning of third quarter earnings season.
This coming week we get a deluge of third quarter earnings. There are 11
Dow components (that’s over a third of the index) and 109 companies in the
S&P 500 on tap to report results. I think overall we are going to see
excellent earnings ‹ especially in the tech sector. We got a preview of
that when Google reported results Friday and rocketed 60 points (11.19%) to
close at $601.45 a share. Amazing. It’s not going to be all that rosy
though. General Electric also reported earnings Friday of 29 cents per
share which beat expectations, but on lower revenue than forecast. GE
shares closed at $16.30, down 5% on the day.
As of Friday, the blended growth rate for the S&P 500 for the third quarter
was 24% according to Thomson Reuters. In a report at the end of this week,
Standard & Poor’s noted that of the companies that have reported earnings,
70% beat operating estimates. Margins are expected to remain high with low
sales growth overall.
Standard & Poor is estimating third quarter earnings to come in at $20.66;
the fourth quarter of 2010, through December 31, 2010, the estimate is for
$21.81; through the first quarter of 2011, the estimate is for $21.84. All
of these estimates have declined slightly since the last time I did this
analysis.
As we try to calculate a forward P/E, let’s break it down step-by-step based
on the S&P 500¹s close this week of 1,176.19. Let’s start with earnings
projections through the end of the fourth quarter 2010, which total $82.75.
That would give us a forward P/E based on fourth quarter 2010 earnings of
14.21. Looking a little further down the road, including the first quarter
of 2011 earnings, the 12-month earnings through the end of March, 2011 would
be $85.21. That translates into a P/E ratio of 13.80. Not too bad,
especially with inflation remaining so low.
Let’s turn it around to get a value for the market by using estimates for
the first quarter. Suppose a multiple of 15. Using 15, multiply that by
the earnings of $85.21, that would bring the S&P 500 to 1278.15. That would
represent a gain of about 8.6% from these levels. I don’t know about you,
but I would sure take that kind of return over the next 6-9 months,
especially when alternative investments such as bonds are paying hardly
anything. (Incidentally, I just checked and the one-year US Treasury, the
safest one-year investment out there, is yielding a paltry 0.22% as of
Friday’s close).
Keep in mind that the S&P 500 has a dividend yield of 1.90% for the
12-months ending September 10, 2010. So figure in almost another 2% annual
return on an investment in the S&P 500 Index even if it goes nowhere.
Here is a link to the earnings calendar for next week:
http://tinyurl.com/2baqlb8
In a couple of weeks, I will update the valuation analysis once the bulk of
this quarter’s earnings are in.
THINKING OUTSIDE THE UNITED STATES
I have been giving a lot of thought as to expanding my investments to
opportunities around the globe other than just the United States. In
reading e-mails from subscribers, it appears I am not alone in that
category.
In recent years, China seems to have dominated the investment news with
India perhaps a close second. But what about Russia? I mean Russia is the
largest country in the world, and the 9th largest in terms of population.
Perhaps more importantly from an investment standpoint, it has the world’s
largest reserves of mineral and energy resources.
Down here in New Orleans there is actually a fairly vibrant population of
Russian immigrants. I am very close to some of them, my wife and I having
studied Piano under Faina Lushtak who is the head of the music department at
Tulane University. (She is a truly amazing pianist by the way, and a gifted
composer). Anyhow, so the idea of investing in Russia has been percolating
in me for sometime and I wanted to have a guest editorialist write about the
country and provide you with some insights as well. If this type of guest
editorial is well-received, I will try and include editorials or more
in-depth commentary on other countries as well.
Guest Editorial Segment
RUSSIAN REALITY
by: Hilary Stockton
If you’re in the U.S. and most of what you know about Russia comes from the
newspapers or other U.S. media, chances are that you have a pretty dim view
of the country. Perhaps the first few words to come to mind are “Putin”,
“KGB”, “mafia”, “corruption,” “oligarchs”, and “wildfire”. It may seem like
a no-brainer to write off the country as a place you¹d ever want to visit,
let alone invest in, even if it is the world’s largest oil producer.
I have a slightly different perspective on the country, having studied it
since my undergraduate days and worked there in 2004-06 as a strategy
consultant at the Moscow office of The Boston Consulting Group.
Let’s examine some of the more commonly propagated myths about Russian, as
well as the realities, and also some of the areas to monitor on a
going-forward basis in weighing a potential investment in Russia.
Myth 1: Oil and gas account for the vast majority of Russia’s GDP.
Reality: In 2010, the oil and gas sectors will comprise about 25% of Gross
Domestic Product; and keep in mind that this is post-recession, while the
Russian economy is still recovering from the crisis. In 2007, pre-crisis,
oil and gas made up only 14% of Russian GDP. What is often conflated is the
share of GDP attributable to oil and gas, vs. the share of Russian federal
tax revenue; they contribute a much larger share to the latter. Oil and gas
are expected to contribute 60% of federal tax revenues in 2010, and in 2007
they comprised 40% of federal taxes.
Myth 2: Russia has a few wealthy oligarch billionaires, but most of the
population lives in poverty.
Reality: A higher percentage of Russians are middle class (as defined as
having >$6000 annual income per capita) than in any other BRIC country (BRIC
countries are R: 68% for Russia vs. 31% for Brazil, 13% for China and 3% for
India. Official income and disposable income figures in any case understate
many Russians’ actual disposable income, given the shadow economy, which is
estimated at anywhere from 20-45% of actual GDP and includes unreported
income streams, such as from renting apartments to small businesses.
EC: The “BRIC countries” is an acronym referring to the countries of
Brazil, Russia, India and China that are deemed to all be at somewhat
similar stages of newly advanced economic development. The acronym was
coined by Jim O’Neill in a 2001 paper entitled, “The World Needs Better
Economic BRICs”
Hilary continued: Russia’s large middle class fueled its rise to Europe’s
second largest car market in 2008 after Germany, with 3 million cars sold,
before collapsing in 2009 amid the crisis. Nevertheless, Russia is expected
to have the BRIC countries’ fastest growing auto market, growing at 15%
annually over the next four years. Car ownership is about 23%, half the
average for Western Europe, yet five times that of China.
EC: Ford Motor Company announced this month it was planning on raising
production levels in Russia. More on this story here:
http://tinyurl.com/2cppo6r
Many of Russia’s other markets share a similar story:
already a significant market, and fast growing because current ownership or
usage is low. For example, although online retailing is a small fraction of
Russia’s overall retail market, it is growing rapidly on the back of a
market of 45 million Internet users (Russia has the second largest Internet
population in Europe and the eighth largest in the world, yet this is only
32% of the population, providing plenty of room for growth), local players
such as Ozon (Russia’s version of Amazon), and new entrants in the market,
including eBay.
EC: Ozon’s site looks pretty similar to Amazon’s US site in many regards,
except the language of course:
http://www.ozon.ru/
Myth 3: Every industry in Russia is controlled by the government.
Reality: There is no question that the government has controlling stakes
(and plans to keep them) in companies in the oil, gas and natural resource
sectors which it regards as “strategic.” In many other industries, however,
there are no government-controlled companies and Russian and international
competitors compete vigorously. Take the food retail sector‹there are
Russian competitors such as X5 and Magnit, international competitors such as
France’s Auchan, Germany’s METRO Cash & Carry, and many small independent
convenience stores and outdoor markets, all competing for the Russian food
shopper.
EC: I read just a week ago that O’Key, Russia’s third-largest food retailer
is going to do an IPO in London and plans to list shares in the form of
global depository receipts. Goldman Sachs and VTB Capital are joint global
coordinators. As Hilary noted, Magnit is a big player in this field and
their shares doubled on the London exchange since listing in April of 2008.
More on O’Key’s proposed IPO at this url:
http://tinyurl.com/2ejv3d7
Myth 4: Russian labor productivity is much lower than that of other BRIC
countries.
Reality: Labor productivity, using GDP per employed person as a proxy, is
highest in Russia ($33.5K), followed by Brazil ($20.5K), China ($10.2K) and
India ($7.5K). Naturally, one could argue that high value oil/gas exports
and lower population help Russia in this comparison. But even looking at
some specific sectors, such as steel, Russian workers are on average more
productive. Russian workers average ~200 MT crude steel per worker, while
Chinese workers average 60-120MT and U.S. workers exceed 600 MT per worker
per year.
Russia is helped by a highly literate and educated workforce. There
remains, however, a significant productivity gap between Russia and the
U.S./Western Europe that poses both a challenge, since it requires some
significant structural and business process changes, but also an
opportunity, since this kind of increase in productivity is low-cost and
doesn’t require new investment capital.
EC: If you are wondering what some of the employment/labor law issues are
facing Russia, I found this web site:
http://sras.org/russian_labor_law_1
Myth 5: Russian corruption and mafia violence are pervasive.
Reality: I worked in Russia for 2 years, 2004-2006, and was never
personally affected by corruption or mafia violence; neither were any of my
Russian colleagues or friends. That’s not to say it doesn’t occur; clearly
there is significant corruption associated with major enterprises,
particularly in obtaining permits and clearing other regulatory hurdles
(witness IKEA’s corruption scandal earlier this year, when it came to light
that its Swedish managers had approved a general contractor’s use of bribes
to facilitate connection to the electrical grid). There also continue to be
horrific contract killings of political enemies and journalists
investigating controversial matters. The average citizen, expat or visitor,
however, remains unaffected by these high-profile tragedies.
Although I’ve sought to refute some of the more common myths about Russia,
there are still major challenges and issues to monitor when weighing whether
Russia is a good investment:
* Oil prices: Given the large contribution of oil revenues to government
taxes and the federal budget, in the short to medium term, oil prices will
need to be high in order to minimize the budget deficits that the government
began running in 2009, following several years of surpluses.
* Government spending, especially pension indexing/social expenditures: due
to the campaign promises and the government’s focus on maintaining social
stability within its most politically active constituency (pensioners),
pension fund payouts increased 33% annually 2007-09. Since each $1/barrel
(bbl) increase in oil price generates about $2 Billion in additional
revenues for the Russian federal government, the growing pension
expenditures have effectively raised the break-even oil price for the federal
budget from ~$40/bbl in 2004-06 to $62/bbl in 2008, $99/bbl in 2009 and $105
in 2010. Clearly this is a dangerous trend, as such entitlements, once
granted, are politically virtually impossible to take away. Raising Russia’s
low pension age (60 for men and 55 for women) would help, but is highly
unlikely leading up to the 2012 elections, at which Putin is expected to run
again for the Presidency.
* Level of competition and private investment in non-strategic sectors:
Russian companies’ demand for new foreign capital, whether from equity
offerings or loans, are likely provide pressure to increase productivity.
Given the steep fall in foreign direct investment in 2009, it will be
important to see the extent to which investment returns and existing
international companies expand their Russian operations and/or acquisition
activity.
* Population: much has been made of Russia’s declining population, although
in 2009 the population actually grew slightly by about 20,000 to 141.9 M.
The main drivers were lower mortality rates and increasing migration
(primarily from the Central Asian republics), although birth rates also rose
compared to 2008. If the population remains stable or grows, this would
significantly change long-term growth projections for Russia, which
economists continue to view as the least predictable of the BRICs.
EC: Investing in a foreign country isn’t something you do. It needs
serious consideration. Most of you know my preference to invest in
something would be to try and adopt a diversified low cost approach. A
couple of investments for Russia along these lines comes to mind. State
Street offers the SPDR S&P Russia Exchange Traded Fund (RBL) which has an
expense ratio of 0.59%. Another is Van Eck’s Market Vectors Russia ETF
(RSX) which has an expense ratio of 0.62%.
If you are inclined for something with a little more exposure than just
Russia, consider the iShares Emerging Markets Eastern Europe Index Fund
(ESR) where Russia accounts for about 60% of that fund’s investments.
Russia also figures prominently in other ETFs such as the SPDR S&P Emerging
Europe (GUR) and Dow Jones Emerging Markets Energy Titans Index Fund (EEO).
EC#2: I want to thank Hilary for giving us her insights into Russia. I
particularly liked them because she lived there for a couple of years and
isn¹t just speaking theory as an academic. Let me give Hilary a plug as
well. She is the CEO and Founder of a new company called TravelSort which
uses a proprietary recommendation engine to help members find exclusive
travel deals and new destinations and hotels.
Here is the url:
http://travelsort.com/blog
If you want to become a member of their official launch and be entered into
a contest to win a cool trip to NY, go this url:
http://travelsort.com/contest.
BOB BRINKER FIX
Bob took the weekend off Moneytalk with Lynn Jimenez sitting in. I’ll
return to Moneytalk interpreting next weekend.
THIS WEEK
On tap next week in terms of big economic data is Industrial Production,
Housing Starts, the Beige Book, Leading Indicators and the Philadelphia Fed
Survey.
This link brings you to the full economic calendar:
http://tinyurl.com/29s7fft
FINAL THOUGHTS FROM DAVID KORN: Have a great week! – David
GLOBEX FUTURES PRICES: Check out this link to try and gauge how the United
States’ stock market will open tomorrow morning. Remember though, the
market sometimes opens very differently than the futures indicate:
http://www.bloomberg.com/markets/stocks/futures.html
DISCLAIMER: This e-mail is neither sanctioned by, nor written under the
auspices of ABC Radio Networks, Moneytalk or Bob Brinker. This e-mail is
not a substitute for listening to Moneytalk, it is only my interpretation
and commentary of some of what is discussed on Moneytalk, along with
additional educational information that I include, editorial comments about
the market and helpful financial links. I also provide my own stock market
commentary to subscribers as part of my service and give them access to my
web site, http://www.BeginInvesting.com. If you want to know what was said
verbatim on Moneytalk, listen to the show live or subscribe to “Moneytalk on
Demand” which allows you to listen to the show in case you missed it live.
The web site, bobbrinker.com has all the links to the ABC Radio Network
stations that broadcast the show live. The information contained in this
newsletter is not intended to constitute financial advice and is not a
recommendation or solicitation to buy, sell or hold any security. This
newsletter is strictly informational and educational and is not to be
construed as any kind of financial advice, investment advice or legal
advice. Copyright David Korn, L.L.C. 2010.