Capitalogix

How a Few Poorly-Timed Trades Can Wreck Decades of Healthy Returns

Few investors are good at swing trading — meaning, they're not good at predicting short-term swings in the market.

 

Recently, BusinessInsider observed that more often than not, investors find themselves buying high and selling low. And when the market starts selling off sharply, investors will panic, sell their own shares, and sit on the sidelines.

 

Here is a great way to visualize that.

 

 

via BehaviorGap.

 

Unfortunately, some of the biggest one-day upswings in the market occur during these "tough to trade" volatile periods.

 

In its 2014 Guide to Retirement, JP Morgan Asset Management illustrates what can happen to investor returns when they miss out on these good days.

 

 

 

 

via BusinessInsider.

For instance, if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would've had a 9.2% annualized return.

 

However, if trading resulted in them missing just the ten best days during that same period, then those annualized returns would collapse to 5.4%.

 

In this trading methodology, missing 'big win' days does so much damage because those missed gains aren't able to compound during the rest of the investment holding period.

 

The Big Mac Index - A Feast of Burgernomics

Image by Simon Miller via Flickr

The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say, tongue-in-cheek, that it is arguably the world's most accurate financial indicator to be based on a fast-food item.

The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger ... a McDonald’s Big Mac.

According to this measure, the most undervalued currency is India's Rupee at about 67%  below its PPP rate.  In India, a McDonald’s Big Mac costs just 95 Rupees on average, the equivalent of $1.54 at market exchange rates. In America, the same burger averages $4.62.

The interactive graphic, below, shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

 

 

The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.  The Economist has added an adjustment option to account for this in the interactive version of the data.

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This is What a Bull Market Feels Like

Were you surprised how quickly Markets digested the risk of Russia and the Ukraine?

It's not the news ... it's what markets do after the news hits.  In Bear Markets, markets are looking for excuses to pull-back and take risk off the table.  In Bull Markets, things can advance, even with uncertainty. 

The New York Stock Exchange publishes end-of-month data for margin debt.  Historically, surging peaks of margin debt often happen before big market pull-backs.

The chart, below, shows the relationship between margin debt and the market (using the S&P 500 as the proxy for the market). Even adjusted for inflation, the latest data puts margin debt as at an all-time high.

 

 via Doug Short.

Victor Sperandeo advised speculators to ride the false train of hope as far as possible and jump off just before it falls into the abyss.

Good luck.

 

Who Received the Most U.S. Patents Last Year [List of Top 15]

According to IFI Claims, IBM was assigned a record 6,809 patentsin the United States last year, marking the 21st straight year that IBM has topped the unofficial U.S. patent ranking.

 

via Statista 

 

Google and Apple, often considered the most innovative companies in the world, were ranked 11th and 13th, respectively, both breaking into the Top 20 for the first time.

 

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Here is a Yearly Market Performance Comparison, Back to 2007

The chart shows the top-and-bottom performing markets, ranked by yearly performance.

The data is color coded based on sector. The first column shows 2013 performance, followed by six columns of the most recent yearly market performances.

 

 

Click this link to view weekly, monthly, quarterly, and yearly views of this data.

So, how does that compare to other markets around the world? Here is an interactive chart to answer that question.

A Jobs Chart That Means Something

The unemployment rate dropped to 7.0% (from 7.3%) while the U.S. economy added 203,000 jobs in November.  In addition, the labor force participation rate rose to 63.0% (from 62.8%).  These numbers were stronger than expected.

Nonetheless, the U.S. labor market remains below its pre-recession employment numbers.

Calculated Risk posts a monthly chart that puts the current jobs recovery into perspective. It is often referred to as the "Scariest Chart Ever".  It shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions.

 

  via CalculatedRisk.

This chart shows the depth of the recent employment recession — worse than any other post-war recession — and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

If things continue as they have been, it appears payrolls will exceed the pre-recession peak in mid-2014.

Currently, there are about 1.3 million fewer payroll jobs than before the recession started; and at the recent pace of job growth it will take about 7 months to reach the previous peak.

Given the circumstances, I think the chart shows we've made good progress.  Talk about Qualitative Easing, coordinated actions by global Central Banks ... or a pretty visible 'unseen hand' all you want ... but the Economy and Market seem to have adapted well to change.

 

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This 'Illusion of Choice' Chart Shows Who's Really In Control

What happens doesn't matter nearly as much as what you what make it mean ... and what  you choose to do.

 

Dallas got about an inch of ice and snow towards the end of last week, and we are still at a virtual stand-still five days later.

 

Growing up in New England, this would have been so minor that people wouldn't have called it a 'storm'.  Because ice is so rare here, and we don’t have sanding, salting, or scraping capabilities (or people skilled enough to be comfortable driving in it) this was a Storm.

As a result, the best plans gave way to the shut-down. 

 

 

Snow isn't 'good' or 'bad' ... and neither was the change of plans.

Perspective.

 

Fund managers recognize the importance of sensibly diversifying risks and opportunities.

Be that as it may, as MotherJones reported in the wake of the financial crisis, the nation's 10 largest financial institutions held 54% of our total financial assets (compare that to the 20% they held in 1990). Meanwhile, the number of banks has dropped from more than 12,500 to about 8,000.

Here is a map, from the Federal Reserve, that shows the consolidation.  Click to see a bigger version.

 

 

The infographic, above, shows how 37 banks have merged to become just four — JPMorgan Chase, Bank of America, Wells Fargo and CitiGroup (in a period of barely two decades). 

Many people are shocked by a chart like this.  It must be 'bad' to have so much controlled by so few, right? 

But it isn't hard to find a version of this story playing-out in other industries:  Print Media,  Music,  Broadcast Channels,  Consumer Products ... this type of consolidation happens for a reason.

A firm that marshals that more resources gains competitive advantage and has more ways to win.

They benefit from economies of scale, transactional leverage, better distribution and partners, and more ways to diversify risks.  In addition, if they work to communicate, collaborate, and coordinate their actions (and data) they can unlock opportunities that others simply don't have (or can't see).

 

Here is a Chart Showing Some of the 'Winners' at that Game.

 

The following chart highlights our "Illusion of Choice".  A surprisingly big portion of what you buy comes from one of these 10 mega-companies (Kraft, Coca-Cola, PepsiCo, Kellog's, Nestlé, Proctor & Gamble, , Mars, Johnson & Johnson, General Mills, and Unilever).

It's amazing to see what these giants own or influence. Click the picture to see a bigger version.

 

via Reddit.

Here is a more specific example.  You probably think you are familiar with Nestlé.  It is famous for chocolate; but did you realize it was $200 billion-corporation ... and the biggest food company in the world?  Nestlé owns nearly 8,000 different brands worldwide, and takes a stake in (or is partnered with) many others. Included in this network is shampoo company L'Oreal, baby food giant Gerber, clothing brand Diesel, and pet food makers Purina and Friskies.

Kind of cool?

 

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BlackRock Is The Biggest Investor In The World - Is Its Dominance A Problem?

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The Biggest Winners From The Fed's Decision Not To Taper QE

The Federal Open Market Committee's surprise decision to refrain from announcing a tapering down of its quantitative easing program on September 18 has given a lift to a variety of markets around the world.

The chart below highlights returns across asset classes — both in the year to date and since the September 18 decision.

 

via: Business Insider

The orderly returns by asset class surprised me (Equities, Credit, Debt, FX, then Commodities).  It also surprised me that the biggest winners since the Fed decision were Spanish and Italian equities.

What about you?

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Is the Rally in the S&P500 Bigger Than Usual Historically?

The Stock Market tends to be 'mean reverting' ... meaning when the pendulum swings too far in one direction, it makes sense to expect it to swing back in the other direction.

Recently, the equity market rally has surprised people with its size and duration.  Seemingly everywhere I go, there are traders talking about how they expect a 'Top' but "don't want to fight the Fed."

Yes, price is up and so is the trend ...but how unusual is this year's big move up?

The answer is that it's been 'pretty typical'.

 

 

OK, big one-year returns can be 'normal,' but this has gone on for three years ... how unusual was that move? 

The chart below shows that the returns for the past three years were not unusual, and fits nicely in the fat part of a somewhat normal distribution.

 

 

While it's reasonable to argue that stocks are getting expensive, it may be premature to bet that stocks are doomed to crash.

Observation and cautious action often pay better, over the long-term, than fear or greed.

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Jeremy Grantham On Timing Bear Markets: 25% Upside Left And Then The Bust "We All Deserve"

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The normal (or Gaussian) distribution

Stock Prices Keep Going Up, Even Though Growth Expectations Are Down

Stock prices are going up as earnings growth expectations are going down.  That is often an early indicator of an impending correction.

 

via Busines Insider.

This phenomenon of prices rising faster than earnings is referred to as multiples expansion. In other words, valuations are rising as reflected by an increasing price-earnings ratio. However, price-earnings ratios are drifting farther and farther away from their long-term averages, causing some market watchers to warn that we are in a bubble.

According to FactSet, The forward 12-month P/E ratio for the S&P 500 now stands at 15. This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than four years (September 2009).

Given the high values driving the “P” in the P/E ratio, how does this 15.0 P/E ratio compare to historical averages? Is the index now overvalued?

On one hand, the index is now trading above both the 5-year (13) and 10-year (14) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990’s and early 2000’s.

Stock market bears looking for a sell-off are waiting incredulously ; price is the primary indicator (and it is still implying that there are more buyers than sellers).