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The Simple Accountant
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Harry Fotopoulos, "the Simple Accountant" is a twenty+ year veteran of corporate accounting and finance, much of it in manufacturing, but also including a stint with a tech startup. Harry manages two separate portfolios, one focused on current income, the other on total return. A... More
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  • Looking Back at May and Ahead to June
    On May 1st (Sunday) my weekly outlook article on Seeking Alpha considered whether this would be a good year to follow the old market dictum: sell in May and go away.

    My recommendation then was to sell commodities and hold stocks and bonds. Let’s see how that might actually have worked out using the most widely held ETFs as proxies for these asset classes. June price returns were

    Common Stocks (NYSEARCA:SPY); 1.12% loss
    Multi Sector Bond (NYSEARCA:AGG); 1.24% gain
    Commodities (NYSEARCA:DBC); 5.17% loss

    All in all not a bad call; a balanced portfolio of stocks and bonds broke even on a capital basis and holders collected some dividends for their trouble. My preferred proxy for a drop dead simple portfolio, the Vanguard Balanced Index Fund (VBINX) was minus 0.18% in May.

    As we get into June, poor economic data is beginning to accumulate, and bond yields are continuing to fall in surprising fashion. In my most recent SA article I forecast a 2 handle on 10 year Treasury yields; as of this writing we are already there. The ability of the S&P 500 and the Russell 2000 to remain above support levels, at 1340 and 840 respectively, is something I am watching closely.

    I am not bearish on stocks at this moment. We could be seeing these indexes (and a number of leading stocks) building new bases at current levels…but an inability to break out to new highs, or a break down through 1300 on the SPX and 810 on the RUT – especially with volume – would turn my outlook to negative.

    Commodities still look like a sell to me. For bonds, I expect to see the ten year get to 2.6 – 2.8%.
    Jun 01 10:45 AM | Link | Comment!
  • GDP Growth and Stocks
    This week fellow Seeking Alpha author Jeff Miller of NewArc Investments wrote
    While the market is not a GDP futures contract, it does have a good long-term relationship with economic growth

    This is something I had been thinking about for a long time: the direct relationships between GDP growth, stocks, bond yields and inflation. In order to quantify the specific GDP-stock market correlation, I went through the following exercise.

    Using Federal Reserve data published for a 50 year period from 1960 to 2010, find the Pearson correlation coefficient for two data sets: Year over year change in nominal GDP, and Year over Year change in the average annual price level of the Dow Jones Industrial Average, both contemporaneously and lagged by one year. The reason for lagging is to try to determine whether stock prices lagged or were concurrent with economic growth.

    The results: r value of .48 for concurrent stock data and .57 for lagged data. My interpretation is that there is an economic growth effect on stock performance, but it is weaker than I had suspected, and that there probably is some lag between growth and stock price movements.

    Jeff made the observation that “there is incessant [and presumably unwarranted] skepticism” about stocks presently. Given my finding, I wonder whether this is simply a reflection of some stock investors’ tendency (especially short term and swing traders) to disregard economic data. It could also explain the observation that few economists are superstar stock investors (but they tend to be make pretty good bond managers).

    There is a lot more work to do in this area, though I imagine it’s already been done several times before…but I haven’t been able to find it. Anyhow, I enjoy doing this kind of quantitative analysis myself. It’s good practice to keep your math and inquiry skills up.

    Next project: determine the long term relationship between nominal GDP, inflation and bond yields.
    Tags: DIA
    May 19 8:56 AM | Link | Comment!
  • Mid-week Update
    Reprinted for the benefit of SA readers, my reply to a comment from a reader of my blog:

    The action we are seeing in the markets this week appears to confirm to some degree the outlook expressed in my most recent SA article: commodities are rolling over. In the stock market, we need to drill down to look at what is happening with different sectors, and we can see that the commodity related stocks (energy, mining & materials) are selling off, while other sectors like tech and consumer goods are holding up well. CVX, XOM and CAT alone are responsible for nearly all of the losses in the Dow Industrials.

    Internationally, we see the same theme: weakness in the BRICs, Canada and Australia, relative strength in Japan, Germany, some of the Global Titans.

    What I will be looking for is whether this is a pullback and buying opportunity in the commodity sectors, or a full on commodity rout. Over the weekend I will be trying to identify support points. As usual I will be looking at currency and bond yield data as well. It has been difficult to find time for analysis as I have added a teaching assignment to my regular workload, but I am committed to keeping up the effort.
    Tags: SPY, DIA, DBC, VTI
    May 04 2:26 PM | Link | Comment!
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