Thursday, December 29, 2011

2011: The Year of Going Nowhere!

2011 was a very volatile year for the stock markets. The high for the S&P 500 was 1370.58 and the low was 1074.77. That is a difference of more than 25% from high to low. This surely reminds us: buy low and sell high, not buy high and sell low. The year started out with the S&P at 1271.87 and, as I am writing this blog, it stands at about 1260, a slight reduction from the beginning of the year. If you had gone to sleep at the beginning of the year and just woke up, you’d think, “Not much happened in 2011.” For those of us who lived through it, we know this was not the case. With job creation looking better, plus consumer confidence rising, the overall economy of the U.S. looks relatively good going forward. Morningstar Inc. reported in August 2011 that since 12/31/26 thru 12/31/10 the economy had 60 up years, 12 with growth between 0% and 10%, and 48 with growth over 10%. During the same period, 24 were down years, with half of them between 0% and -10%. This appears to be one of those down years. Will 2012 be an up or a down year? I am hoping for an up year, but still am concerned about the situation in Europe. Have a Happy New Year! Ed Mallon

Thursday, December 22, 2011

Santa Claus Rally

Each year we wait to see if we will have a “Santa Claus Rally” in the markets. If we have one, it’s usually an indicator that the coming year will be a good one. If we don’t get the Santa rally, the following year is usually flat or bad. Given the volatility of the current market, it is hard to tell at any one time whether we are having a rally, but let’s say Santa has shown up to lead the way into 2012! At the beginning of 2011, our expectation (as noted in “Outlook for 2011”) indicated a growth rate in GDP of 2.4% for the year and this appears to be the case. The first quarter GDP growth was 0.5%, second quarter 1.5%, third quarter 2.3% and fourth quarter is likely to be in the rage of 3+%. All in all, not too bad. Unemployment, which stood at 10% at the beginning of the year, is now down in the 8% range as we also predicted. Europe did indeed turn out badly¬¬–much worse than predicted. While the U. S. economy has been faring well, we are concerned about our national debt and the sovereign debt of European countries. The new year should be interesting, as I am sure politics will be part of the economic equation. I’d like to remind everyone that, if you are eligible to make a contribution to your IRA for 2011, do so before April 15th. On a final note for the year, I hope each of you has a happy and safe holiday and that the coming year will bring good health and happiness. Ed Mallon

Wednesday, November 23, 2011


For me this time of the year is a time of reflection and thanks. My grandfather came to this country in the 1870’s with nothing but a strong back. I am the recipient of his and my grandmother’s (who came over as an indentured servant) legacy. As I look back, I think of the Berlin Wall going up; the assassination of a President; a financial meltdown; economic recovery; a Vice President resigning; a President resigning; a financial meltdown; economic recovery; the Berlin Wall coming down! The pattern seems clear to me. We seem to have good times and bad times, we keep going on and get through it all without thinking back about how we did it! My forecast for the future is that we will have more economic recoveries and more financial meltdowns and we will survive and do just fine! I hope you all have a safe and thankful Thanksgiving! Ed Mallon

Monday, November 14, 2011

CD's, Bonds and Stocks

Recently, I was speaking with someone at one of the banks where we do business and asked about their CD rates. In general, I find CDs to be somewhat of an indicator of inflation. Rates are currently being held artificially low by the Federal Reserve’s quest to keep short-term interest rates as near zero as possible. According to the bank, the rate for a six-month CD was 0.2% and gradually increased with the length of the CD’s term to two years, which was 0.5%. Treasury debt runs from zero for a 90-day maturity to 3% if you project it over 30 years*. If you decide to raise the risk and invest in investment-grade corporate bonds, you will have an average return of about 4.58%, with a maturity that is now out to 5.1 years* (in the past, maturity been more like 4.5 years). If you decide you want a fixed investment and are willing to take more risk, you can buy High Yield bonds, which currently average about 7.82% with an average maturity of about 3.91 years*. As you can see, to get a decent return these days, you need to take more risk. But what about US stocks? The good news is that stocks are up in the US at this point for the year to date. The bad news, as we all know, is that volatility has been horrendous, with stomach wrenching drops followed by heady moves up! The overall answer appears to be: diversify, diversify, diversify! One of our clients recently asked why I don’t comment on the 200-day moving average of the DJIA. This has not been a pretty picture for a while, with the DJIA falling below the 200-day moving average in late July and just recovering to a position above the 200- day moving average at the beginning of November, where it now remains. This is a good sign, because it generally points to the stock market overall momentum headed in an upward direction. We will see! Ed Mallon *Statistical data provided by Bloomberg LP

Monday, October 31, 2011

Another Blah Month-End Closing!

Yes, once again, today was another month-end downer for the stock markets. But wait, it was an up month! I sometimes wonder why we bother looking at the indexes and the stock market at all. The level of volatility seems extreme and belies the value of the stocks that are being traded. In any event, today the S&P 500 dropped 2.47%, which is hard to take but is likely a reaction to the exuberance on Thursday when the market took off on the “good news” from Europe. I always think, “Do everything in moderation.” On the good side, we saw the S&P 500 rise 10.8% for the month of October. When you get your monthly statements, they should feel warm and fuzzy compared to the end of September, when they just seemed totally fuzzy! Earnings results are coming in better than I expected and the economy is certainly doing better. In the first quarter, GDP was up 0.5%. In the second quarter it increased to 1.3%. With this past August being a total wipeout , I was hoping to see the 1.3% revisited in the third quarter. Instead, GDP was up 2.5%. That is amazing! Manufacturing in September was up a stunning 4% and an economy that was expected to add no new jobs added 103,000. Unless all of this is bogus, the U.S. economy continues to get stronger. Not a bad place to be at this time! Ed Mallon

Tuesday, September 27, 2011

Change in Direction

Early Tuesday morning, September 20th I saw a fundamental change in the stock market. What precipitated my real concern was the combination of changing dynamics coming from Asia, the intransigence of world governments and the inversion of supply and demand indicators. In the case of the change in Asia, it was reported that freight and air shipment capacity was being underutilized. The meaning of this is that fewer goods are being manufactured and shipped. This in turn means that the dynamo, that has been Asia, has scaled down dramatically in a very short period of time. At the same time, world leaders, attempting to deal with the debt crisis in Europe, seem stalled. US lawmakers seem unable or unwilling to compromise in a manner that would relieve the strain on consumer confidence that has been in free-fall since late July. Finally, on the technical side, the graph of supply and demand crossed over with demand for stocks dropping while supply increased considerably. This sent a caution signal that would indicate the need to lighten up on stocks and return the funds to more liquid and stable investments. With manufacturing slowing, consumer confidence reduced, government paralysis and technical factors pointing in the wrong direction it seems action is warranted. Although the markets made a turnaround in the latter part of last week and today, the indications for the balance of the year do not provide much solace. When comparing where we were at the end of May and where we are today the forward-looking perspective is that there is a need to be more conservative with funds. This is not anything like I saw in October of 2007, when we moved decidedly to a defensive position, but rather is an attempt to conserve funds to allay investors’ concerns with the turmoil in their statements that have occurred during the past three months. I still believe better days are coming but for now we are in a down draft. Ed Mallon

Tuesday, September 13, 2011

Stepping up the Market

Since the latter part of July, we have witnessed volatile markets. On many days, the DJIA has changed as much as 300 points. Yesterday (September 12) was not nearly as bad as some days, but as an example, the low point of the DJIA the market was down 167 points from the day before, but closed up 69 points, a change of 236 points. More meaningfully, the market showed a 98% down day at one point yesterday and closed as a 54% up day. If you didn’t tune in until the end of the day, you might have thought “good day in the market.” It is difficult to be a long term investor if you are looking at day to day or even month to month results. If you add to this the media hyping everything that is negative, you can become very depressed. The question that you need to ask is always “is the market getting better or worse?” To answer that question, you need to first look at the ongoing pattern. Many small investors got out of the market on August 8th. Thus far, this has been the bottom point in the current market seesaw. Since then, we have witnessed increasingly higher lows each time the market has dropped. When you see negatives on your account statement for July followed by August, it’s easy to feel bad. If you bailed on August 8th, you should feel sick, because you did exactly the wrong thing at the wrong time. In a Wall Street Journal article on Monday, September 12th, they reported on a study that was done by Prof. Richard Sylla, a financial historian at New York University. Prof. Sylla studied market behavior from 1790 to 2000. “By analyzing patterns detected years ago with two colleagues, he accurately predicted in 2000 the decade of overall declines that haunted investors.” At the request of the Wall Street Journal, Prof. Sylla has made a new forecast. “Better days lie ahead,” he says. If past market patterns hold true, as they did over the last decade, stocks should bottom out during the next few years and begin a recovery. He is not talking about a week, a month or a year, but a decade. Here is the best part. Prof. Sylla says, the DJIA could climb by 84% by the end of 2020 and the S&P could climb by 99% from last Friday’s close. He is expecting a 6.5%, inflation adjusted, real rate of return over the next decade. Is he correct? I don’t know about his numbers, but his attitude of taking the long view is what is so important. Ed Mallon

Friday, August 19, 2011

Is This Time Different?

With the recent volatility in the stock markets, I have had several people ask me if this time is different. The easy answer is yes! The reality of the past 13 trading days is that the markets have had an unusually high level of volatility. For example, during the past 13 trading days, we have had 9 days during which the DJIA has moved up or down 400 or more points. Looking at the NYSE operation companies, we have had 9 days during which the percentage of stocks up or down in a given day is 90% (I don’t believe that has ever happened before). As I look at what is happening, it is clear that there are two groups that account for most of this volatility. Small investors have panicked and programmed trading, where computers make the decision to buy and sell based on algorithms. In the first case, small investors, many of whom were burned during the 2008-2009 meltdown of the markets, panicked. “Once burned, twice shy” my mother used to say. By running for the fire exit, many of these individuals, having left in fear, will certainly maintain whatever losses they incurred up to the point of exit and will have a difficult time deciding when to get back in. It has been interesting to see where they are going with their money. Most have gone to money market funds, which are paying nothing, or to gold, which is at its highest in history. As I see gold moving up, I keep thinking of the housing bubble of 2005 when many people said you can’t lose money on gold--oops, I mean real estate. If this volatility continues, we may decide to take some of our equity funds and reduce positions, but to give this a knee jerk reaction is a mistake. I, along with many of you, lived through the dark times of 1974 when markets plummeted. After President Nixon’s resignation in August and his pardon by President Ford in October, the US appeared to be doomed! All of that was forgotten in December as the markets soared. In 1992, we were in an economic downturn, the Japanese were taking over the world and President Bush was kicked out of office because of a dismal economy. Look at what happened between then and 1995. Often, when things seem to be the most dire, Americans bounce back. I believe such will be the case this time, but it sure tries one’s patience as you live through it! I still believe that next year at this time will be better than this year. At this point, this does not appear to be like 2008-2009 but we are preparing to do what’s necessary if the direction does change. Ed Mallon

Tuesday, August 9, 2011

Panic, Carnage and the Stock Market

Yesterday, the S&P fell by 6.6% and has fallen by 16.77% since July 22nd! Yipes! The overall reason appears to be a lack of leadership in Washington, resulting in fear in this country and around the world, that the United States has run amok. The result is PANIC! Not a great response. As some of my clients gathered, this just might be a great time to buy. But, is that wise? Let’s go back to a famous point in time when panic set in, with the result that the S&P 500 plunged almost 32%. It was the great panic of 1987, and the country was a mess! So what happened? Let me give you two examples using the S&P 500. Your worst-case scenario would have been to invest your money on August 31, 1987. By December 1, 1987 you would have lost 31.97%. If you had hung on until May 31, 1991, however, less than four years later, you would have had a compound rate of return of 7.96%, which is not too shabby. Suppose instead you saw the carnage and invested at the beginning of December 1987 and left your money in until May 31, 1991. You would have done spectacularly well! Your investment would have grown by a compound rate of 19.15%. The real point of this is that you cannot time the stock market. You must make predictions of where things are going in the future, believe in what you are doing and invest accordingly. I believe we are going through a major bump in the road. But in looking at American businesses, I feel they are strong and are undervalued, and that a year from now our investments will be looking good. For now, you need to brace yourself and accept that this too shall pass. Ed Mallon

Tuesday, August 2, 2011

Stumbling and Bumbling

While it will take some time to determine what the fallout will be in total, for now it appears that Washington's decision to kick the can down the road is having a negative impact on the economy. What has become abundantly clear is that we have a lack of leadership in all parts of the government. The S&P 500 had its worst month in over a year in July. As stocks and bonds suffered losses,US and foreign investors lost confidence. One Congressional representative put it very well: "The Greatest Generation passed the ball to us and we dropped it." Looking forward, the reactions of voters in 2012 will be interesting. For now, both small and large businesses have been left in limbo, which usually results in no business expansion. Consumers also hunkered down with a reported drop in consumer spending for June. The GDP report for the second quarter of 2011 came out showing an annualized growth rate of 1.3%, while the anticipated rate was 1.8%. This shortfall, along with lower revised figures for the first quarter from 1.3% down to 0.4%, shows an economy almost at a stall. The bottom line may well be higher unemployment and less job creation. Investors may see a loss of value for the time being. The good news is that most people have short memories and, as the press moves on to other events, we are likely to see a rebound in stocks and bonds, because by most indicators they are underpriced. We will wait and see. Ed Mallon

Tuesday, June 21, 2011

What's your Perspective?

Last night I was in a restaurant in Denver, and the server, whom I've know for years, told me that on the previous night an "Economist" patron had said the economy was "doomed" for at least the next eight years. This had made my server very upset. I asked: "how old was this person and where did they come from?" The first answer was that the person was late thirties, maybe forty. The second answer was that the patron was from Southern Florida. Everyone sees the world though his or her own perspective. For someone aged forty, this latest downturn is likely the first that they have had to deal with personally. They have no real personal comparison for measuring this downturn against some other downturn. The second is that the person came from Southern Florida, where housing prices are still dropping, job recovery is abysmal and no end of bad times seems to be in sight. It's no wonder this patron was seeing the dark side of the economy. I asked my server if things were better now than in November of 2008, and were they better than a year ago? The answer to both questions was that things were in fact better. The next question I asked was "do you think things will be better a year from now or worse?" After some thought, the answer was "things will be better!" Perhaps too often we are brought down by the negative thoughts of others without addressing our own perspective on what is happening. A year ago, there was virtually no job growth. Now we are creating about 200,000 jobs a month. A year ago, home sales were almost nonexistent and housing prices were falling all over the country. Now in many places home sales are happening and prices are stabilizing. A year ago, the consumer was barely spending and now spending has picked up. Much of the cash stimulus that the Federal Reserve has pumped into the economy will likely not have its full impact till the end of the third quarter through fourth quarter of this year. I think we as Americans want instant gratification and would like to see the economy back the way it was in early 2007. We have a way to go to beat down unemployment and to see the housing market back to "normal", but we seem to be moving in the right direction, though slowly. At least that is my perspective. Ed Mallon

Tuesday, June 7, 2011

The Media at Work

I rarely look at TV during the day, but last Friday I walked into a room where a financial news program was the focus of attention. The stock market had been down on the two previous days and it was dropping significantly on Friday. The talking heads called in their various experts, all of whom agreed that the bad news out there meant the market was doomed! One commentator asked: “Is this the start of a big bear market?” to which the “expert” responded, “It sure looks that way!” Sorry, I don’t buy it. On Monday, one of my longstanding clients called in to ask if he should sell his stock positions because the bear market had started. In questioning him, I discovered that he is an avid fan of free financial news programs and owed his depressed state of mind to watching this chatter on television. Because the weather was so fine, I thought he should turn off the TV and go for a nice walk outside. It’s addictive to watch television news programs because, for the sake of ad revenue, they do all they can to keep you watching. Back in March, these same programs were telling us how rosy everything looked. Now we are being told the economy looks awful. I indicated in my April newsletter that I expected a market correction and that this might be the impetus to create more demand and move the market much higher. Well, here we are with a market correction, still in a bull market, and now it’s time for demand to pick up. In the beginning of the year, I indicated that there would be a gradual change in the economy, which is what is taking place. The economy, like the stock market, does not go up in a nice smooth fashion, but rather moves in fits and starts. Being patient pays off in the long run! Ed Mallon

Thursday, May 5, 2011

Reducing Momentum

It seems to me, that the economy and the stock market are like a giant pendulum swinging back and forth; first too far one way, and then too far in the other, with no real middle ground. Earlier this year, signs pointed to a rising economy that was moving much faster than most economists had predicted. The unemployment rate was sinking, the number of new jobless claims was trending down and new job growth was significant. Corporate earnings for the first three months of the year either met or beat the consensus expectations. On this news, the stock market began taking off in the later part of March and through most of April. As we enter early May, a reevaluation of where the economy is headed is taking place. Where the ideal for new unemployment claims was headed close to the magic 375,000 mark or below, which would indicate job growth, the recent four week average is now at 431,000, a jump of 21% in the past four weeks. The service sector that employs about 90% of the work force slowed for the second straight month. The current expectation for new jobs created has fallen from a week ago. All of this is beginning to drag the stock market down. The question in my mind is: Has the pendulum begun to swing in a negative direction or was the perception of how far it had gone in a positive direction overstated? I believe the case is the latter; that we are still on a positive course but one that corresponds more closely to some of the longer term projections made last year. We were bound to see dips along the way to a better economy. It would be wrong to think everything was suddenly going to be “all better.” The economy is coming out of the worst period since the great depression. Housing prices still do not appear to have bottomed out in many places. Commodity price increases got ahead of themselves. Speculators, who believed the world economy would grow at a fast rate, pushed commodity prices up, and are now seeing them collapse, as the world economy appears to be slowing down. Bear in mind that, at the tail end of last year, predictions were that unemployment would remain over 9% through the end of 2011 and would likely top 10% for a portion of the year. Unemployment is currently at 8.8%; not great but a whole lot better than expected. Perhaps the pendulum is slowing a bit, but it is also likely that stock market investors, commodity speculators and others just jumped the gun on how they interpreted the recent economy. Slow and easy seems to be working very nicely, thank you. The municipal bonds that no one wanted three months ago are desirable again, and inflation fears are subsiding, making corporate bonds and government bonds more stable. Now let’s see what we can do about oil prices! Ed Mallon

Wednesday, April 13, 2011

The Toilet Paper Caper

We don’t like to talk about it, but most of us use toilet paper. It’s one of those things you don’t want running out. We take TP for granted. For years I found the inner cardboard fit nicely on the TP holder. Then I started to notice that the paper seemed to wiggle a bit in the holder. Then it began to seem that the holder had shrunk. I realized that what was happening is that the size of the cardboard holder of the paper was becoming larger. By golly, when I looked, I found the number of sheets of paper on a roll had been reduced. To the eye, the roll seemed unchanged, but it was changed. I noticed this in passing and I also began to notice that the orange juice container was the same size with less product, the coffee bag looked the same but had fewer ounces of coffee, etc. Yesterday, however, the toilet paper caper moved to a new level. While up until now the paper fit exactly into its space, suddenly there was a lot more room around it. Not only was the cardboard roll larger, the width of the roll had shrunk! The next step will be to introduce a new, higher priced, larger roll of toilet paper, that will look like the old roll with a marketing strategy telling me it is Newer, Bigger, Better and overall less expensive! Why is this relevant? As commodity prices have increased, businesses find themselves in a tight spot. They want to keep their profit margins up but they don’t want to raise prices for fear that consumers will not use their products. With the price of oil rising, the cost of gas is increasing, and therefore the cost of transportation is higher, too. We are seeing how insidious inflation can be, even when overall it does not appear to be a problem. Consumer income has not been growing, but consumers are forced to pay more for staples, leaving less discretionary income. If this continues, it could have a negative impact on the growth of the U.S. The key to growth is more money in the hands of consumers for discretionary spending. Ed Mallon

Friday, April 1, 2011

Odd Things - March 31, 2011

Sometimes I see things that strike me as odd. Today is opening day for baseball. Doesn’t seem to make sense, to me, that baseball would begin when the weather, in most of the country, is not warm and sunny. On March 10th, the front page of the Wall Street Journal had two articles next to each other. First was “Discovery’s Last Flight Caps Era in Space Exploration” and next to it “Deficit Proposal Picks Up New Allies.” Seems that only yesterday we were “investing” in space exploration to bring about new innovation here on earth, and oddly, now it’s gone. Recent reaction to continuing drops in job losses and increases in job creation has been mixed. At 10 a.m. this morning, the “Jobs Report” article on MSN Money noted that the DJIA was down because of the report. By the time the “Strong Jobs Report” (same report) was issued by MSN Money at 12:26 p.m., the DJIA was up +87, also noted because of the jobs report. As I was looking at this new posting it was 2:30 p.m. and the DJIA was down again. Seemed odd to me and I wondered if the same report would be renamed again based on how the DJIA finished the day; and it was, to "Lack Luster Jobs Report." So here is the thing: the economy appears to be improving, but what is really happening with the stock market? I like to follow the S&P 500; seems to me that more stocks in the index make it a better gauge of what is happening. On December 31, 2011, the S&P 500 closed at 1257.64. On March 16, 2011, after going up and down for many weeks, it stood at 1256.88 (a slight loss). Now we are at the end of the first quarter of 2011 and the S&P 500 is up about 5.6% since March 16th. It all seems odd to me, but I am happy it is back up. Ed Mallon

Monday, March 14, 2011

Japan 3-11

I couldn’t help thinking, as I watched television this past Friday, that the date was reminiscent of 9-11. The pictures coming from Japan showed devastation and ruin that I knew would result in more than the 40 to 60 deaths that were being discussed at the time. To me, it was in some ways like watching the twin towers coming down all over again. This time, it was Mother Nature reminding us of how precious life is and how delicate the balance under which we all live. We have friends who have loved ones in Japan, we know of military personnel stationed there, and then there are all the people we don’t know who are scared and worried. The emotional impact is chilling! This destruction will have an economic impact for some time to come. Today I noted that the price of oil was receding, stock prices were dropping, and there was a sense that there was not enough information yet to determine what was really happening. This is the point where attitude and fortitude come into play. As bad as it is, we human beings gather ourselves back up, reorganize and move forward. This will happen in Japan. As difficult as it is, they will rebuild. We will help them rebuild. Ed Mallon

Monday, March 7, 2011

A Breath of Fresh Air

For quite some time, we have been waiting for the weekly new unemployment filings to go below 400,000. Even more important is to see the four-week average go below 400,000. For the week ending February 26th, the Labor Department reported the weekly new filings were 368,000 and the four-week average is 388,000. In addition, continuing jobless claims--people who have received benefits for more than a week--fell by 59,000 to 3.77 million. These are all positives on the job front. What we really want to see, however, is new job creation! Well, this too has been a positive. To absorb new workers entering the workforce, the economy needs to create about 100,000 jobs, on average, every month. Since November of 2010, the average is 120,000! The momentum is picking up, with 192,000 jobs added in February. The doom and gloom folks will point out that the number of people employed is still 7.5 million below the end of 2007, but I believe the trend is your friend and in this case the trend is going in the right direction. Hooray! Ed Mallon

Friday, February 18, 2011

Is a Pullback Imminent?

The stock market has been remarkable since the early part of this year. It has risen, with a few pauses, but the direction has certainly been positive. I think we are in a bull market, and still in the first leg of that bull market. The difficulty I am having is that such an uninterrupted expansion with fewer sellers and less demand means that if, for some reason, more sellers begin to show up, demand will likely not support current prices. Since January 29th, when the NYSE 10-Day Moving Average of volume was 4.9 billion, it has dropped about 20% to yesterday, February 17th, when it reached 4.1 billion. Volume should be expanding to support a stock market rally. As I have said previously, I believe we will see a correction with a buying opportunity. Ed Mallon

Monday, January 31, 2011

Market Correction

When I did my “Outlook for 2011” paper, I did so thinking that a stock market correction would occur sometime during January. I therefore did not want to make any equity changes until that happened. As I waited, the technical factors of the stock market appeared to grow weaker, with the number of stocks above their 10-day and 30-day moving averages dropping. Short term demand also seemed to be dropping. Both of these are signs that the market was becoming more selective and was losing momentum. It was clear that a shortfall of earnings or a change in world affairs could have a marked impact on the market. The unrest in the Middle East may be just the thing to instigate the market correction. I believe that the correction could be in the area of 5% to 7% from the S&P 500 current high of 1299. I would not sell equity investments already in place (because I could be wrong) but I have been unwilling to add to equity positions for our clients until this occurs. I still believe that, barring a major incident or a reversal of economic news, we are in a bull market that will progress much farther. Ed Mallon