Daily Gains Letter

institutional investors


U.S. Housing Market About to Be a Big Disappointment?

By for Daily Gains Letter | Apr 25, 2014

Mortgage Lending Plunging Home Prices Driving HigherHome prices are surging in the U.S., which is usually indicative of more investments flowing into the housing market. However, if one looks at the mortgage industry, it points toward the complete opposite.

Mortgage originations have seen a sharp decline in the fourth quarter of 2013 and major banks, including but not limited to Bank of America Corporation, Wells Fargo & Company, and JPMorgan Chase & Co., will be threatened by a further decline in profits if this trend continues into 2014. (Source: Mantell, R. and Rexrode, C., “‘Worst of all worlds’ for mortgage lending in fourth quarter,” MarketWatch, January 15, 2014.)

If mortgage lending is plunging, then what’s driving home prices higher?

In reality, it isn’t the average American Joe buying homes that is driving home prices higher; it’s the institutional investors who are buying homes in bulk—with cash.

Mortgage rates increased around 30% during 2013. With higher rates, fewer people could afford to buy homes, which initially pushed home prices lower, creating a window of opportunity for deep-pocketed institutional investors to lock onto residential properties in cash. This increase in buying took home prices back up to levels out of reach of an average homebuyer, who can seldom buy a home entirely in cash.

About 50% of all home sales in September of 2013 were in hard cash, confirming the growth in buying from institutional investors. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 17, 2014.)

All-cash home sales rose to 35% of total transactions in February of 2014, compared to 32% in February of 2013. However, individual investors only purchased 21% of all … Read More


How to Profit from the Collapse in Emerging Markets

By for Daily Gains Letter | Jan 30, 2014

Emerging MarketsAfter years of easy money and a failure to secure a well-executed exit plan, it looks as though the emerging markets are getting a taste of the Federal Reserve’s economic tapering. Over the last five years, the emerging markets have benefited from low interest rates and listless growth in developed countries.

But, with the U.S., Japan, and Europe—the three biggest economies globally—all expanding for the first time in four years, the tables are turning and the sheen is beginning to wear on the emerging markets.

In an effort to help kick start the U.S. economy after the financial crisis in 2008, the Federal Reserve enacted it’s overly generous bond buying program (quantitative easing). All told, the Federal Reserve dumped more than $3.0 trillion (and counting) into the markets and has kept interest rates artificially low.

The ultra-low interest rates might have been great for home buyers, but income-starved investors had to look elsewhere to pad their retirement portfolio. Many retail and institutional investors went to the emerging markets, where the interest rates were higher and there was a real opportunity for growth.

In December, the Federal Reserve said it was going to begin tapering its $85.0-billion-per-month quantitative easing strategy to $75.0 billion a month in January. Just yesterday, the Fed announced it will be reducing that number to $65.0 billion a month in February. While the amount is negligible, it signals the eventual end of artificially low interest rates. The cheap money that propped up asset prices in emerging markets, like India, China, and Indonesia, is beginning to crumble.

The Argentinean peso, Indian rupee, South African rand, and Turkish lira … Read More


The “Vanishing” First-Time Home Buyer; What It Means for the Housing Market

By for Daily Gains Letter | Jan 29, 2014

Housing MarketAh, the U.S. housing market, the so-called silver lining in the U.S. recovery—but not for long, as it may be rusting. The U.S. housing numbers are in, and they aren’t spectacular.

In the U.S. housing market, December existing-home sales rose one percent month-over-month at an annualized pace of 4.87 million units. Analysts were expecting December existing-home numbers to come in at 4.93 million. The one-percent increase also has to be taken with a grain of salt, as it was helped, in part, by a downward revision in November existing-home U.S. housing market sales to 4.82 million units. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors web site, January 23, 2014.)

The December existing-home U.S. housing market sales of 4.87 million are also 0.6% below the 4.9-million-unit level recorded in December 2012. And sales of existing homes were down 27.9% at an annualized rate for the entire fourth quarter.

First-time home buyers—the fuel of the U.S. housing market—accounted for just 27% of all purchases in December, down from 28% in November and October and 30% in December 2012. That’s a huge drop over the 30-year average of 40% and a number real estate professionals and economists consider ideal. It is also the lowest level since the National Association of Realtors began tracking this metric in 2008.

First-time home buyers, who tend to purchase lower-priced homes, are being pushed out of the U.S. housing market recovery by all-cash sales. All-cash sales accounted for a whopping 42.1% of all U.S. residential sales in December, up from 38.1% in November and 18.0% in December 2012. (Source: “Short Sales … Read More


Is the Housing Market Recovery a Mirage?

By for Daily Gains Letter | Dec 10, 2013

Housing Market RecoveryAs each day passes, more and more evidence builds up against the housing market in the U.S. economy. A significant amount of data is suggesting that the housing sector is cooling and will not continue to increase like it did in 2012, when institutional investors came in and bought homes in bulk, causing prices to skyrocket in some areas.

When I am looking at the housing market, I want to see home buyers. If the number of home buyers in the market increases or there are indicators that suggest it will increase, then I see no problem in thinking the housing market in the U.S. economy is going to see an uptick. But as it stands, this is not the case; home buyers are shying away from the housing market.

The first evidence we’ve seen is through mortgage application activity tracked by the Mortgage Bankers Association. For the week ended November 28, applications for home loans in the U.S. economy declined 12.8% from the previous week. They have been declining for five consecutive weeks and now sit at their lowest level since September. If buyers were rushing into the U.S. housing market, we would see these numbers soar higher, not edge lower. (Source: “U.S. mortgage applications slide for fifth straight week: MBA,” Reuters web site, December 4, 2013.)

Secondly, existing home sales in the U.S. economy are suggesting a very similar phenomenon—buyers are not present. I look at first-time home buyers to see demand and, as I have said before, they are just not excited to buy. (See “More Evidence Housing Market Is Turning Cold.”)

Last but not the least, … Read More


How to Stop Inflation from Burning a Hole in Your Retirement Savings

By for Daily Gains Letter | Aug 12, 2013

Stop Inflation from Burning American investors are sitting on a lot of money. According to the Investment Company Institute, total U.S. money market mutual fund assets for the week ended July 31 came in at $2.612 trillion. Of that total, 65%, or $1.69336 trillion, is attributed to institutional investors, while $918.93 billion belongs to retail investors. (Source: “Money Market Mutual Fund Assets,” ICI.org, August 1, 2013.)

Even though the stock market has been bullish since early 2009, with the S&P 500 advancing around 140%, investors sitting on the sideline remain skeptical. And on one hand, it’s not hard to see why: the financial crisis that led to the Great Recession may have started back in 2007, but the ripple effects are still being felt today.

U.S. unemployment has been above seven percent for over four years, underemployment has been at least 14% since 2009, and the minimum wage hasn’t budged from $7.25 an hour since July 2009. On top of that, personal debt is up, disposable income is a myth, and consumer confidence is down.

Hints that the Federal Reserve could begin tapering its $85.0-billion-per-month bond-buying program have also made global investors jittery, resulting in markets that are increasingly volatile—and for good reason.

On May 22, the Federal Reserve hinted it might scale back its quantitative easing policy. Over the following weeks, the S&P 500 lost 6.5% of its value. After clawing back the losses throughout July, the S&P 500 took another hit in early August after two Federal Reserve Bank presidents said it was possible the bond-buying program could end in September.

For many Americans, risk in the stock and bond markets is … Read More


Why Homebuilders Face a Precarious Future

By for Daily Gains Letter | Jul 16, 2013

 Housing MarketSigns of change in the U.S. housing market are already beginning to show. And homebuilders and development stocks like Brookfield Residential Properties Inc. (NYSE/BRP) and D.R. Horton, Inc. (NYSE/DHI) are becoming vulnerable. They have already shown some signs of weakness since the beginning of May, and more could follow.

There’s no doubt the housing market has seen a significant run. Home prices in the U.S. economy are increasing at a pace not seen since the housing market was booming. It’s hot; some institutional investors are even betting large sums of money on it and appear to think it will continue to grow at this pace.

But looking ahead, I can’t help but point out that there are some issues that can become troublesome for the already damaged housing market. You need to keep in mind that home prices are still down a great amount since their peak in 2006–2007.

Investors need to know about the most troublesome phenomenon occurring in the housing sector: rising mortgage rates.

If you look at Freddie Mac’s monthly average commitment rate on 30-year fixed-rate mortgages, it climbed to 4.07% in June, an almost 10.6% increase from a year earlier. The same mortgage rates in October 2012 stood at 3.35%—their lowest since 1971. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed June 12, 2013.)

As the mortgage rates continue to go higher, many of those who are looking to buy homes now might get discouraged, and a decline in buyers creates a liquidity problem in the housing market. Remember, the housing market isn’t liquid like the stock market or foreign exchange markets, … Read More


Why This Lofty Stock Market Requires an Abundance of Caution

By for Daily Gains Letter | May 7, 2013

Why This Lofty Stock Market Requires an Abundance of CautionEven with some better economic news, it’s very important that investors not lose sight of the fact that the stock market is due for a massive correction.

The run-up since the beginning of the year is pronounced, but the stock market has basically been going up since the March 2009 low.

Corporate earnings are still being reported and, for the most part, the first quarter of 2013 was pretty decent.

It was very evident that revenues were light, but earnings at many companies beat consensus. What the numbers also revealed was a pronounced increase in cash balances at many brand-name companies. The financial health of U.S. corporations is getting better.

But with these fundamentals, the U.S. economy still has a long way to go in its recovery, and it’s important to view the stock market as a leading indicator that represents bets by institutional investors.

Institutional investors are paid to play. When they take in money, it has to go to work, because that’s what customers are paying for.

Corporations are also playing their role in this rising stock market. They’ve been very good at managing their earnings and satisfying what shareholders want—that is, earnings maintenance in a slow-growth environment, increasing share buybacks, and rising dividends.

What I gathered from first-quarter earnings season is that many corporations expect the bottom half of the year to be stronger.

It’s my view that institutional investors are betting on this expectation, because they have cash inflows that need to be put to work.

I’m actually quite surprised the stock market has not corrected already. Like earnings, the flow of economic news has some … Read More


How Barbecue Charcoal Reveals the Truth About the U.S. Economy

By for Daily Gains Letter | May 6, 2013

Barbecue Charcoal Reveals the TruthIn a rare miss for a consumer products business, The Clorox Company (NYSE/CLX) disappointed the stock market by reporting very flat first-quarter numbers.

It’s more evidence that real economic growth continues to be elusive.

The Clorox Company is a really good business.

It’s way more than “Clorox Bleach:” it’s also “Pine-Sol,” “Liquid-Plumr,” “S.O.S.,” “Glad,” “Burt’s Bees,” “Brita,” and “Kingsford,” to name a few.

According to the company, it could only generate a one-percent gain in sales, to $1.41 billion.

Diluted earnings per share from continuing operations fell two percent from the comparable quarter.

The company’s domestic U.S. business was stronger than international operations. One sore spot for the company was its “Kingsford” charcoal brand, because of the weather; a stronger winter kept charcoal consumers indoors.

There’s also been a strong movement towards more environmentally friendly cleaning products. Plenty of consumer product brands purport to be “green,” and they line the store shelves at many retailers.

Noticeable in the company’s earnings report was a significant increase in cash and equivalents. This is a trend that is prevalent throughout the entire stock market.

Clorox’s 10-year stock chart is below:

clx clorox co nyse

Chart courtesy of www.StockCharts.com

The company’s long-term stock market performance has been excellent.

Clorox announced third-quarter earnings of $134 million, or $1.00 diluted earnings per share. This compares with $134 million, or $1.02 diluted earnings per share, in the same quarter last year.

Like many consumer goods companies, Clorox recently soared on the stock market. While it should be considered fully valued considering its flat earnings, Clorox is still offering a three-percent dividend yield. This is what has kept institutional investors in the … Read More


Three Reasons Why Institutions Are Buying Stocks and Why Investors Need to Be Extremely Cautious

By for Daily Gains Letter | May 1, 2013

Investors Need to Be Extremely CautiousVery soon, the stock market will be overbought. It’s time to be extremely cautious.

Even in the face of mixed earnings and economic news, institutional investors keep buying this market. And while fundamentals don’t particularly support a rising stock market, there are a number of reasons why institutions have to buy. Here are just three of the reasons:

1. They Have the Money

There is a tremendous amount of cash sitting on the sidelines. Both individual and institutional investors have been very frazzled over the last few years, and corporations have, as well.

Earnings results from large mutual funds and investment corporations recently revealed billions of dollars of new cash inflows allocated to equities. That money has to be put to work, because that’s what customers are paying for.

2. There Is Nowhere Else to Go

Because interest rates are so artificially low, there is no other asset class, other than real estate, where investors can allocate their capital and expect to get a return that is greater than the rate of inflation.

Even if the stock market doesn’t do anything and corporations don’t show any growth in earnings, dividend payments and share buybacks are very well assured.

Institutional investors need to invest in this stock market, because bonds, currencies, and commodities no longer offer the right combination of income, safety, and prospective capital gains. This is why so many blue chips have been outperforming—they offer what the rest of the world does not.

3. They Have to Keep Up with the Joneses

Without a doubt, a herd mentality exists on Wall Street. Investment companies have been chasing the safest … Read More


Consumer Staples No Longer a Buy in This Market

By for Daily Gains Letter | Apr 29, 2013

Consumer Staples No Longer a Buy in This MarketThe Procter & Gamble Company (NYSE/PG) is likely a company that a lot of people have in their stock market portfolios, whether they’re saving for retirement or are actually in retirement now. It remains a great business with solid potential going forward.

On the day that Procter & Gamble released its first-quarter earnings results, the stock dropped about $5.00 a share, or six percent. The company revised its 2012 second-quarter earnings lower to below previous Wall Street estimates; top-line growth was anemic.

On the stock market, Procter & Gamble just came off a new all-time record high. The company currently has a price-to-earnings ratio of 17.5 and boasts a dividend yield of three percent.

This blue-chip company has proven to be worth accumulating when it’s down, but the stock is still way up and not quite yet in the buy zone. A full-blown stock market correction should bring this position much lower; then it would be the kind of opportunity to consider with new money.

Another stock that’s likely to be in many retirement portfolios is Colgate-Palmolive Company (NYSE/CL), which has been doing exceedingly well since the beginning of this year. The company reported first-quarter earnings that met Street expectations, and the stock market’s reaction was positive.

Consumer staples stocks are always welcome in a retirement portfolio, or any stock market portfolio with an adherence to risk and capital preservation. It is true, though, that all stocks are risky assets; no matter what, even the most stable companies can experience major downturns, because they are equity securities.

Procter & Gamble had an earnings miss at the height of the stock … Read More


Is It Time to Jump On or Fall Off the Stock Market Bandwagon?

By for Daily Gains Letter | Apr 26, 2013

Is It Time to Jump On or Fall OffIf corporate earnings are coming in as expected and first-quarter revenues are light, the one thing that is very noticeable is the continuing improvement in balance sheets.

Cash and cash equivalents continue to see increases, and shareholders’ equity is going up. The result of all this continues to be corporations becoming highly reticent to invest in new operations.

As is the case every earnings season, new stock market buyback programs are announced, dividends are increased, and corporations give corporate outlooks that are fairly unspecific. Many corporations reported that they expect business conditions to improve in the bottom half of the year, which is a bit of a cop-out.

No company wants to risk a major earnings flop, and the fourth quarter of 2013 is still just too far off.

One thing that surprised me so far this earnings season is that I really would have thought that share prices would’ve sold off more after reporting. The lack of selling off, which is quite typical in an earnings season, is indicative of a stock market that continues to have positive institutional investor interest.

The stock market already went up tremendously before earnings season began. I think this is a real sign that institutional investors think that this market can go quite a bit higher.

But it is important to the trading action that the stock market does take a meaningful break. Valuations aren’t stretched by any means, but the lack of revenue growth is a problem.

Very few of the large brand-name corporations reduced their full-year outlooks so far this earnings season—this is a good sign. But still, growth expectations are … Read More


Why Chipotle Mexican Grill Represents the Economy’s Overall Predicament

By for Daily Gains Letter | Apr 23, 2013

Why Chipotle Mexican Grill Represents the Economy’s Overall Predicament

Restaurants are one stock market sector that’s worth paying attention to.

If people feel more confident and have more disposable cash, they spend money in restaurants.

Earnings in the group have been all over the map, but this is representative not of weakness in terms of consumer spending within the group, but of the success and weakness of individual chains.

Chipotle Mexican Grill, Inc. (NYSE/CMG) surprised Wall Street by reporting excellent first-quarter earnings results. The company jumped 11.5% on the stock market after the news.

The company’s 2013 first-quarter revenues grew 13.4% to $726.8 million on 48 new restaurant openings. Earnings grew a substantial 22% to $76.6 million and earnings per share grew 24% to $2.45. Comparable store sales grew only one percent.

On the stock market, Cracker Barrel Old Country Store, Inc. (NASDAQ/CBRL) has been on a tear.

The company’s revenues for the fiscal second quarter of 2013, ended February 1, grew 4.4% to $702.7 million. Comparable store sales increased 3.3%, while earnings grew an impressive 37% to $35.2 million. Cracker Barrel recently increased its quarterly dividend by 25%.

Darden Restaurants, Inc. (NYSE/DRI), which includes Red Lobster and Olive Garden, has been a laggard within the group.

Red Robin Gourmet Burgers, Inc. (NASDAQ/RRGB) has been doing extremely well on the stock market. The position is not up to its all-time stock market high set in 2005, but it’s working its way back.

And Burger King Worldwide, Inc. (NYSE/BKW), which expects a small decline in its comparable store sales for the first quarter of 2013, recently forecast adjusted earnings growth of about 25%.

On balance, the restaurant group is looking … Read More


Three Reasons Why This Stock Market Can Accelerate on Bad News

By for Daily Gains Letter | Apr 18, 2013

180413_DL_clarkIt’s now the avalanche of corporate earnings season, and so far, it’s not too bad.

There are going to be disappointments. And there will be even more disappointments. But on balance, I don’t care what anybody says; in the U.S. economy and the global economy, any growth is good.

The stock market is going to go where it’s going to go, but the most important factors are the earnings, revenues, balance sheets, and corporate outlooks.

Here’s why the stock market can go higher:

Investor Sentiment

Institutional investors have money that needs to go to work. Money is flowing back into the stock market, and investors don’t pay fund managers to sit on cash. Fund manager BlackRock, Inc. (NYSE/BLK) announced very good first-quarter earnings and net new inflows of funds grew to $39.4 billion, of which $33.7 billion was for the stock market.

Corporate Earnings

It’s early, but earnings last quarter weren’t bad for a lot of companies, and blue chips all around are reporting growth. Certainly, not every company is going to meet or beat earnings expectations, but when you have a mature corporation like Johnson & Johnson (NYSE/JNJ) report first-quarter revenue growth of 8.5% (10% if not for the stronger dollar), that’s impressive in the global economy. Lots of other blue-chip companies are reporting solid numbers—numbers that have beat expectations. The numbers aren’t perfect in large-cap technology, but old economy companies are holding up, as are most banks.

The Fed and Interest Rates

The Federal Reserve is absolutely committed to reinflating assets. It’s been doing this for some time now and, according to the stock market, it’s working. But … Read More


One Simple Strategy for Outperforming Hedge Funds

By for Daily Gains Letter | Apr 18, 2013

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There’s often a debate among Main Street investors that institutional investors—more specifically, hedge funds—can provide better returns compared to managing the money by themselves. The main reason for this is that institutional investors have resources: for example, access to data, the ability to perform in-depth analysis, and so on and so forth.

Last year was a good year for equities. The key stock indices like the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite index registered gains between seven percent and 13%.

In the same time, according to Hedge Fund Research, Inc., hedge funds posted an average gain of only 6.2% in 2012. (Source: Farrell, M., “Hedge funds say good riddance to 2012,” CNN Money, January 14, 2013.)

Some of the well-known hedge funds underperform the performance of the key stock indices. Consider the Advantage Fund, managed by John Paulson. This fund posted a loss of 14% in 2012, and in 2011, it was down 35%.

Now, the question: are institutional investors right? Is it a good idea to invest with them rather than manage your own money?

Even though the average return from hedge funds was a little more than six percent below the overall market performance, it doesn’t mean the entire fund underperformed. At the end of the day, it’s an average. Certainly, there were funds that did much better than the average. Consider Third Point LLC, managed by Daniel Loeb; this hedge fund provided gains of 21.2% to its investors.

So, saying all institutional investors are right or wrong may not be the best judgment call. What it really boils down to are the … Read More


Mountains of Cash Growing; Will Corporations Stop Hoarding and Pay Out?

By for Daily Gains Letter | Apr 12, 2013

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Corporations, like investors everywhere, are very reticent about current business conditions. They have been this way for years. And they have way too much cash, which is why dividends have been increasing.

The financial crisis really was the catalyst for a huge change in the way corporations allocate their capital. Corporations hunkered down on costs and became extremely tight with their money.

It is highly likely that large corporations will increase their dividends this earnings season. Of course, this will be great news for those investors who seek out dividends from blue chips.

This market is at a high, but it is fairly valued and has a lot of potential to increase further—if corporations can produce growth and there is no major new shock from an event, like a currency default in Europe, for example.

There is still tremendous reticence on the part of corporations to invest in new business operations, new plant and equipment, and new full-time employees. And while this is not a positive for the Main Street economy, it is a positive for shareholders collecting dividends.

Corporations are sitting on a mountain of cash. In many of the earnings results so far, large corporations are reporting too much free cash flow. And they need to do something with all this money, because cash does not earn a rate of return greater than the rate of inflation.

One of the easiest ways to do this is to return the money in the form of dividends to stockholders. I still firmly believe that blue chip investing will do well over the long term.

There may be some spectacular downside … Read More


Stock Market’s Vulnerable, but These Stocks Just Don’t Care

By for Daily Gains Letter | Apr 11, 2013

110413_DL_clark

Right now, there is still some incredibly positive action in this stock market.

Following the major stock market indices is useful, but some of the best stocks out there are significantly outperforming these indices.

Leadership at the speculative end of the stock market is pronounced in biotechnology stocks. These have been some of the best stocks going for the last couple of years, and they are still extremely powerful wealth creators.

One of the best stocks that just broke out of a major stock market consolidation is Celgene Corporation (NASDAQ/CELG). This stock is up almost 50%—since the beginning of the year! Now that’s what I call a powerful breakout. Celgene’s stock chart is featured below:

dl_04112013_graph1
Chart courtesy of www.StockCharts.com

Celgene develops cancer treatments, and the company has been growing at an incredibly fast pace for such a large-cap enterprise. It’s also a stock market favorite among institutional investors, and recent buying in the shares could mean continued momentum.

I have to say, however, that one of the best stocks in the entire biotechnology sector has been Biogen Idec Inc. (NASDAQ/BIIB). Biogen has not only been one of the best stocks in the biotechnology sector, but it has also been one of the best stocks in the entire stock market since 2010.

This company has developed a number of therapies, but it’s been very successful in helping people who suffer from multiple sclerosis (MS). MS is a disease with very few meaningful treatments, so Biogen has an edge. Biogen’s stock chart is below:

dl_04112013_graph2
Chart courtesy of www.StockCharts.com

Some of the best stocks that the market has to offer are companies that … Read More


Why These Stocks Will Continue to Be Number One in 2013

By for Daily Gains Letter | Apr 10, 2013

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Investing isn’t all about managing returns; it’s also about managing risk.

Risk is high right now in all categories: real estate, stocks, bonds, currencies, and even cash. On the cusp of a new earnings season, the stock market is going to be very choppy, but I do think that it will trend higher.

There is no real need to be buying this stock market. With so much uncertainty and so many risks beyond your control, the sidelines are a good place to be.

But the powerful breakout of blue chip and transportation stocks at the beginning of the year is very meaningful.

Of course, many stock market investors have been sitting on the sidelines for a long time. This was the case for institutional investors until the beginning of the year, when sentiment changed. The advertised certainty of continued low interest rates provided the catalyst for new buying.

The last three earnings seasons reflected the choppiness and the uneven performance of many industries in the U.S. economy. But the stock market always wants to be in front of any economic news, and institutional investors have no other place to put their money.

With so much risk in this marketplace, the standout companies have become even more attractive. And this is what institutional investors have done since the beginning of the year—they have gone after the safest names, because they see all the risks, as well.

Large dividend-paying stocks will continue to be attractive in this stock market for the rest of this year. Many are still not expensively priced, and there should be decent earnings this quarter. Robust earnings are … Read More


Stock Market Flying High, but What About Risk?

By for Daily Gains Letter | Apr 4, 2013

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The performance of many blue chips—consumer staples stocks, in particular—is really stunning. And looking at the shares and how much they’ve moved on the stock market, even since the beginning of the year, you really have to wonder how sustainable this stock market rally is.

I am a big believer in blue chips and investing in stocks that pay growing dividends over time. But right now, we have so many companies trading right at their all-time record highs. I wouldn’t say that the stock market is expensively priced, but realistically, other than momentum players, would individual investors be buying these stocks at their all-time record highs? I find that unlikely.

The stock market breakout really is meaningful and pronounced. Consider The Procter & Gamble Company (NYSE/PG), which has been bid up approximately 16 points since last summer. Procter & Gamble’s stock chart is featured below:

dl_04042013_graph1
Chart courtesy of www.StockCharts.com

The stock market is most definitely due for a break. The leadership from blue chips has been significant, but it also reveals the fragility and uncertainty in the marketplace. Institutional investors want to buy stocks, and they are; but they are buying the safest names.

For the stock market’s current momentum to continue, technology stocks are going to have to show more leadership going forward. Investors are buying in anticipation of a decent first-quarter earnings season.

Among the many blue chips that are soaring in this stock market, consider Johnson & Johnson (NYSE/JNJ). This stock has been rising consistently and strongly since the beginning of the year. Its performance is so unusual. It really is a powerhouse breakout. Johnson & Johnson’s … Read More


Where to Find Certainty in the Stock Market with Cyprus on the Edge

By for Daily Gains Letter | Mar 27, 2013

270313_DL_clarkThere are a lot of great stocks out there with proven track records for making money. These are retirement stocks—brand-name stocks that pay dividends to create wealth. With dividend reinvestment, you can effectively compound this wealth in an easy, costless manner.

One blue chip company that I’d like to highlight is Johnson & Johnson (NYSE/JNJ), which has an outstanding track record of increasing its dividends to shareholders and achieving capital gains on the stock market.

I couldn’t get data for before 1972, but Johnson & Johnson has increased its annual dividends every year since then. Since 1972, the company’s stock has split three-for-one on two occasions, and two-for-one on four occasions. The company’s last share split was on June 12, 2001, and the stock is definitely due for another split.

On the stock market, Johnson & Johnson recently spiked 10 points higher. And that’s just since the beginning of January. The company’s long-term stock chart is featured below:

dl_0327_image001Chart courtesy of www.StockCharts.com

Track record-wise, the stock is up well over 10-fold within the last 20 years, and that’s just capital gains; that doesn’t include dividends paid.

Everyone knows Johnson & Johnson’s consumer products; the company’s baby shampoo is for sale virtually everywhere. But Johnson & Johnson is much more than that. It’s dozens of popular healthcare brands, skin creams, and medicines. The company’s pharmaceutical research in oncology, contraceptives, immunology, and vaccines is extensive. Finally, Johnson & Johnson manufactures implants, diabetes care products, and joint replacement products. It’s a company with hugely favorable exposure to demographic changes and an aging population.

Of course, this is why Johnson & Johnson is rarely … Read More


Stock Market Advance Needs Technology Stocks to Step It up a Notch

By for Daily Gains Letter | Mar 26, 2013

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Most components of the Dow Jones Industrial Average are doing well—some exceptionally well. Alcoa Inc. (NYSE/AA) is one of the laggards, and really, all the position has done on the stock market is return to its historical norm. The company reports in a couple of weeks, and it is currently richly valued on a price-to-earnings (P/E) ratio.

The opposite of Alcoa’s position is 3M Company (NYSE/MMM), which is trading at an all-time record high on the stock market and is not expensively priced. This Dow Jones component has basically been ticking higher since the beginning of 1962. It traded sideways between 2005 and 2012, but it’s a consistent winner for sure.

The Dow Jones Transportation Average and the Dow Jones Industrial Average have been leading the stock market in recent history. The strength in transportation stocks is highly significant in terms of a leading indicator for the rest of the stock market. And the strength in the Dow Jones Industrials isn’t as much an expansion of valuations for these specific old economy stocks; it’s because business conditions for these companies are pretty decent.

Institutional investors have been buying safer names, which is why Dow Jones component companies like The Procter & Gamble Company (NYSE/PG) and Johnson & Johnson (NYSE/JNJ) have traded up so strongly since the beginning of the year. These companies are appreciating like fast-growing technology stocks. It is a bull market signal.

We’re on the cusp of a new earnings season, and the numbers, so far, have been decent, peppered with a few disappointments. In order for the stock market to keep advancing, it needs greater leadership from … Read More


Wal-Mart Stock Breaks 12-Year Consolidation; Why the Retail Sector Is Looking Up

By for Daily Gains Letter | Mar 21, 2013

210313_DL_clarkThere is a resilience to this stock market, and regardless of the reason, it’s a play by institutional investors that first-quarter earnings season will be decent, as well as further earnings growth later this year.

While it’s tough to think about with the stock market at its highs, this market could go a lot higher yet, based on continuing stimulus from the Federal Reserve and a slight improvement in business conditions.

One of the best things available from the massive cash balances that large corporations have accumulated is increasing dividends. The stock market saw a lot of new dividend announcements last year, partially because of tax changes but also because companies can afford it.

This is a trend that is going to continue this year, and it’s good news for blue chip investors who are saving for retirement.

There are a lot of attractive blue chips that are growing their earnings and are not expensively priced in this stock market. Wal-Mart Stores, Inc. (NYSE/WMT) is five points below its recent high; it has a current dividend yield of 2.6% and a price-to-earnings (P/E) ratio of about 14.5. Wal-Mart’s longer-term stock chart is featured below:

dl_0321_image001Chart courtesy of www.StockCharts.com

Wal-Mart has been trading sideways for years, and its recent stock market breakout is meaningful. Again, Wal-Mart is not expensively priced, and Wall Street continues to nudge the company’s 2013 earnings estimates higher.

This upcoming earnings season is make or break for the stock market. Most corporations were coy with their forecasts last quarter, but they do this on purpose so as to show outperformance. But even with these conservative forecasts, most … Read More


No Place Left to Go, Institutions Buying

By for Daily Gains Letter | Mar 19, 2013

190313_DL_clarkWhat goes up will come down. But the action is the action, and if you own the stock market, you should be making good money these days.

The price action in the stock market and most blue chips has been very strong, obviously. But trading volume hasn’t spiked with prices; it’s been consistently flat during the recent run-up. There is tremendous pressure now on first-quarter earnings season to deliver the goods. If it doesn’t, this will be the catalyst for a stock market correction.

The recent breakout in the stock market is reminiscent of the action at the beginning of 2012 when stocks crossed their 200-day moving average on the upside. The market advanced strongly for the first three months of 2012, then retreated on first-quarter earnings news. This year, a similar scenario seems likely, as the stock market is absolutely due for a break. The stock chart for the Wilshire 5000 total market index is featured below:

dl_0319_chart1Chart courtesy of www.StockCharts.com

While a great number of companies are expected to report flat comparable earnings in the first quarter, many of the current stock market leaders have seen strong increases in estimates over the last 30 days. Countless Dow stocks are seeing a significant increase from Wall Street in their earnings estimates, for this year and next. Some include United Technologies Corporation (NYSE/UTX), The Home Depot, Inc. (NYSE/HD), The Walt Disney Company (NYSE/DIS), Pfizer Inc. (NYSE/PFE), General Electric Company (NYSE/GE), and Wal-Mart Stores, Inc. (NYSE/WMT).

Increased earnings estimates are a bullish indicator, but it is just one of many. The stock market is really charged up on slightly better economic … Read More


Dow Jones Industrials Still Hot; How to Play the Correction

By for Daily Gains Letter | Mar 18, 2013

180313_DL_clarkAction in the stock market is robust. Some economic news has shown improvement, but really, investors are just betting on first-quarter earnings.

The Dow Jones Industrials have been strong, outperforming the other indices and revealing how skittish investors are about the stock market’s advance. Investors are buying Johnson & Johnson (NYSE/JNJ) because it’s safe. When the party ends, Johnson & Johnson is less risky.

Institutional investors are betting on stocks because there really isn’t anywhere else to go. The bond play is over, currencies are too risky, and the commodity price cycle is taking a break. While it does seem unbelievable, the Dow Jones Industrials will likely keep ticking higher before the month is out.

While the action is hard to believe, considering the Main Street economy, the Dow Jones Transportation Average is still plowing ahead, leading the rest of the stock market. Regardless, this is the classic sign of further strength in share prices.

The stock market is not expensively priced, and it’s up to corporate earnings to tick higher, so they we don’t create a bubble. Practically, as a stock market investor, it doesn’t pay to fight the Federal Reserve or the tape. The action is the action; if you want to play the market, “why” doesn’t matter too much.

But if you’re an investor and you own, or would like to own, shares in blue chips like the Dow Jones Industrials, it’s tough to be a buyer when the stock market is at all-time highs.

I wouldn’t buy this market, but when there is a major correction, it will be an interesting opportunity to consider. Of course, … Read More


Breakout in Transportation Stocks Gains Strength—How to Play the Disconnect

By for Daily Gains Letter | Mar 13, 2013

130313_DL_clarkThe Dow Jones Transportation Average experienced a powerful breakout this past December. And it’s been a stealth rally ever since, with an expansion in valuations, not earnings.

The stock market’s strongest sector over the past few months has been transportation stocks, which have been much stronger than technology stocks or the S&P 500 companies. Even though it doesn’t seem real, leadership in the Dow Jones Transportation Average is a classic stock market sign.

Helping the cause are lower oil prices. Countless names among large-cap transportation stocks are soaring. And at new 52-week highs, they still aren’t expensively priced on the stock market, which means they can go higher.

The stock market likes betting on the future. Institutional investors are not fighting the Federal Reserve; they are buying in anticipation of first-quarter earnings season. Fourth-quarter earnings season wasn’t that bad for corporations, but for individuals, it’s another story. This is why the stock market and the Dow Jones Transportation Average can still tick higher—valuations and oil prices. The stock chart for the index is featured below:

dl_031313-image001Chart courtesy of www.StockCharts.com

The stock market will use first-quarter earnings season as its new catalyst for action. My expectation is that we’re in for a meaningful correction, even if first-quarter numbers are decent.

There is a real disconnect in the U.S. economy between the stock market and the Main Street economy. Corporations have all the money, and any modest uptick in economic activity will amplify the bottom line. Corporations, being lean and mean with dividends and share buybacks, are way better than individual incomes.

This is a very difficult market to play. Risk for … Read More


Protect Yourself—Dow Jones Industrials Very Vulnerable

By for Daily Gains Letter | Mar 12, 2013

120313_DL_clarkA lot of good news is priced into the stock market right now. Fourth-quarter earnings season is on the horizon, and it will have to be a good one for stocks to keep appreciating.

There still aren’t a lot of reasons to be a buyer in this stock market. Even just looking at a five-year chart of the S&P 500, the market seems pretty stretched and is due for a correction.

Ben Bernanke and Alan Greenspan have been so accommodative to Wall Street and the stock market. But it’s true that it does not pay to fight the Federal Reserve, even if you don’t agree with the central bank’s policy actions. I just don’t see an end to the cycle of money supply growth.

Price inflation already exists in this economy, though I’d say it’s really more like four percent compared to what is reported. Everything is going up in price, so it is absolutely critical that after-tax incomes go up as well—and that’s going to be a continuing problem going forward.

I think we have the makings of a substantial stock market correction that could happen very soon, even if we don’t get any particularly negative data. The market has been ticking higher fairly consistently for four years now, and we’re due for some downside.

First-quarter earnings expectations have flattened right out, and that makes sense; but large corporations are still being highly cautious with their outlooks, and they’ve been very good at beating consensus, typically on either revenues or earnings—though not both in most cases. Some consensus data collectors are now reporting increased earnings expectations for the bottom … Read More


The Only Thing You Can Bank on Near-Term

By for Daily Gains Letter | Mar 11, 2013

110313_DL_clarkThe stock market is absolutely where it should be, given current earnings—and it’s across the board; from large-cap to small-cap, valuations are fair. But the real telltale sign will be first-quarter earnings season. The stock market wants to see growth, and it actually doesn’t need much of it in terms of the bottom line. This market wants to see revenue growth or stocks will go into correction.

Corporations, especially large ones, have done an exceedingly good job of maintaining their earnings through the last recession and the modest economic recovery. They’ve done this through diligently controlling costs, doing little in the way of new hiring, ensuring productivity gains per existing worker, and using technology. The health of U.S. corporations is very good; for individuals, it’s a whole other story.

Corporations have also been very conservative with their earnings outlooks, making it easier to outperform or beat the Street. With the large cash hoards that corporations have been built up by not investing in this economy, companies are keeping investors happy with increased dividends, even with the prospect of no earnings growth.

This stock market is due for a correction; but it’s still unclear whether there will be decent buying opportunities when this correction occurs. If this upcoming earnings season disappoints, then new buyers will be better off holding out for future weakness.

The S&P 500 has to show more breakout strength in order for the rest of the stock market to follow. We need technology stocks to further accelerate, along with the industrials. But in reality, what the stock market is doing now is really more of an expansion in … Read More


The Final Countdown: The Stock Market’s on Its Final Leg to Recovery

By for Daily Gains Letter | Mar 7, 2013

070313_DL_clarkSkepticism is very high among individual investors. Institutional investors who run buy-and-hold mutual funds don’t need to be as worried; they get paid to buy stocks. The stock market’s run makes total sense in that the Federal Reserve continues to promise low interest rates and continues to increase the money supply, while revenues and earnings from corporations are growing modestly.

Other than real estate, there is no other place for an investor to put his or her money to generate income above the inflation rate. So the stock market is likely to keep ticking higher over the near-term. Now, all the power is with corporations.

I believe we’re on the final leg of the bull market recovery from the March 2009 low. All investors want to see is revenue growth and they will keep buying stocks. Growth is the name of the game as corporations have actually done a great job keeping a lid on costs. I expect more new announcements regarding share buybacks and rising dividends this upcoming earnings season.

The toughest problem facing the Main Street economy is employment conditions. But even though the Federal Reserve has catered an extravagant menu of stimulus to Wall Street and corporations, large companies just don’t want to invest in new plant, equipment, or employees. The cash hoarding will continue; the beneficiaries are stock market investors, not workers.

In the final leg of this stock market recovery, there are some attractive buys out there. One particular investment theme that I believe in is that corporations will begin to open their wallets, but the cash won’t be spent on new employees; it will … Read More