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Guy Conger is licensed as an Investment Advisor Representative (IAR) and is licensed to sell and/or discuss Advisory Services & Products with anyone residing within the United States. IAR registration is in: Texas Guy Conger is licensed to sell and/or discuss insurance products only to... More
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  • Points To Ponder

    Last Week- Following a strong start to the week, the market went up and down for the remainder of the week before selling off on Friday. When the smoke cleared most investors should have seen little change to their portfolios. The aggregate bond index was up by less than 20 basis points while the S&P 500 was down by a fraction. Looking at the individual sectors, utilities continued their outperformance while telecoms were the biggest losers. We are about half way through earnings season with 73% of those reporting beating expectations. However, despite the stronger than expected earnings, of companies that have issued guidance for the second quarter, 70% have guided down, slightly higher than historical trends.

    Potential Bond Bubble - The U.S. bond market totals nearly $40 trillion which is far bigger than the stock market, which stands at about $28 trillion. The bond market is also more tightly linked to monetary policy than the stock market for the simple fact that interest rates affect all types of bonds whereas they don't affect all types of stocks.

    There are three indicators I'm watching that could point to a bubble. First, the rising level of private-sector debt as a percentage of the U.S. economy; Second, narrowing spreads between risk-free Treasuries and corporate bonds; and third, the growing proportion of corporate debt going to riskier companies.

    I feel there is a belief among market participants that the Fed can safely deflate this bubble, but we have to remember what the Fed is currently doing is a grand experiment. Playing around with the economy in an attempt to create growth; While simultaneously keeping an eye on inflation. My fear is that they have overestimated their ability to do either.

    Leaving the Past in the Past- The S&P 500′s current dividend yield is 1.94%, which echoes the interpretation of most other valuation metrics. Stocks are not necessarily expensive relative to their average value over the last 15 years, but are very expensive relative to long term history. In my past remarks about market valuation; I've wondered if this is viable. We might be in a new paradigm for value; but if we are in a new era of structurally higher values, then we have to consider an important result that comes with that.

    If stocks are structurally more expensive than they were in the 20th century, can we expect to receive the same rates of return that we did in that era? If we are leaving the 20th century behind, then maybe we have to leave behind our concept of fair returns on investment. Dividends are one signal telling us to lower our expectations." To get anywhere close to the historical average, stocks would need to fall by half. For argument's sake, we will assume that we are in a new paradigm for stocks where the dividend yield will hover permanently around 2%. What could investors expect in such an environment? It would seem that an investment total return of some 2% or more below the long term average would be in the cards due to the reduced payout percentage

    Bonds don't agree with Stocks -One of the things that I like to look at to get a gauge of the risk appetite out there is the ratio between High-Yield (Junk) Bonds and US Treasury Bonds. If money wants to go to work into risk assets like the US Stock Market, it makes sense that we would see similar action in the bond market. If money is flowing faster into risky Junk rather than the safer Treasuries, then we know that the behavior of the bond market is confirming the new highs in the stock market, Whenever the S&P 500 made new highs last year, the Junk/Treasury spread was also putting in new highs. This inter-market analysis helped confirm what we were seeing in stocks. But so far this year, we're not seeing that confirmation at all. In fact, all we see are lower highs while the S&P hangs out near fresh highs.

    The non-confirmation of junk bonds to the recent rally is a little concerning. Since it reflects the traders belief of economic progress if junk bonds rise versus treasuries the bet is for a better economic performance and vice versa. Of course, the stock market is a forward looking indicator on the health of the economy as well. I have always believed that bond investors are smarter than stock investors, so we will see how this plays out in the coming months.

    Apr 28 1:07 PM | Link | Comment!
  • Volatility- Courtesy Of HFT's And Algorithms

    On Thursday May 6, 2010 the Dow Jones Industrial Average plunged about 1000 points (about 9%) only to recover those losses within minutes. It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history. Traders refer to it as the Flash Crash. The cause of the 'Flash crash' was High Frequency Trading (HFT) a type of algorithmic trading, specifically the use of sophisticated technological tools and computer algorithms to rapidly trade securities. Think of it as number crunching on a grand scale at supersonic speeds. Firms employing this strategy (hedge funds and managed accounts) have racked up great profits over the years and have increased exchange volume 50%. The problem with HFT is it simply creates more and more volatility. HFT programs exploit minute movements in the markets, buying a stock at $1.00 and selling it at $1.0001, for example. Do this 10,000 times a second and the proceeds add up. Constantly moving into and out of securities for those tiny slivers of profit-and ending the day owning nothing. This rapid churning has reduced the average holding period of a stock. 50 years ago it was eight years; today it is around five days.

    The 'Flash Crash' was a canary in the coal mine, unfortunately the market watchdogs will never be able to catch up and rein in the funds and small firms employing this tactic. Even worse the strategy has started to trickle down to mom and pop investors. Firms like Interactive Brokers will be more than happy to get you into the game for just $10,000.

    With the rise of high-frequency trading and it's volume-multiplier effect a whole new industry in chart and trend analysis has popped up and in some areas, supplanted fundamental stock analysis.

    Companies like Sterling Global are using ETF's and algorithmic programs to enable their investors to ride the wave the big boys and their HFT programs are creating. You don't have to be on a surfboard waiting for it to come and you don't have to ride it to a crest or crash. Sterling Global is simply following the flow of money from one basic ETF category to another and using algorithmic number crunching to pick the proper entry and exit points.

    As a long time fundamental analysis investor I cringe at this brave new world created by the "Quants" (people who specialize in the application of mathematical and statistical methods - such as numerical or quantitative techniques - to financial problems). To me it is just day trading on Steroids. The problem is day trading only hurt the fool trying to get rich by jumping in and out of stocks within a trading day. The

    Firms using algorithmic and HFT programs have the ability to take all of us along for the ride.

    Apr 21 12:10 PM | Link | Comment!
  • Pensions, An Endangered Species

    Politicians lie. A statement we all learn to be true before we reach voting age. Yet most Americans still believe politicians when they promise us our Pension Plans are safe. I don't believe them and neither does Warren Buffet. Here is an extract from a recent shareholders letter he sent out.

    "Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford.

    "Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them.

    "Unfortunately, pension mathematics today remain a mystery to most Americans.

    "During the next decade, you will read a lot of news - bad news - about public pension plans."

    In case you are still skeptical of what Mr. Buffet has said let me give my own example.

    I have worked with educators for many years helping them plan for retirement. Many of them are part of the Teacher's Retirement System of Texas (NASDAQ:TRS). It is a basic pension plan administered by the State of Texas which of course means politicians are involved.

    Texas is in better condition economically than almost any other state yet TRS currently only has 80% of the money it needs to cover current and future public school retirees. How is this possible? '

    Simple, when governments set up pension plans many years ago the mortality rate was much lower.

    Today as we all know the mortality rate is very high and getting higher (80 for men 87 for women).

    Since pensioners are living longer governments like the State of Texas are running out of money.

    They are being forced to either change the rules of when a government employee can receive their pension or like Uncle Sam has done with Social Security they are raising taxes.

    Not only will government pension blow ups effect state employees they will also effect private sector citizens since the Federal Government will have to step in to help keep state pension plans solvent .

    We all know taxes will have to rise to support political promises.

    Here are three steps you can take to protect your retirement from pension plan melt downs and the taxes our politicians will need to raise support them.

    #1. You should continue building your own private nest egg aggressively so that your family receives enough income to support the retirement lifestyle you deserve.

    For the bulk of your money, I continue to recommend a good mix of dividend-paying stocks and select bonds. It's simply a matter of deciding what particular percentages make the most sense given your age and tolerance for risk and then sticking to your plan.

    #2. You should continue reducing your current and future tax liability through every legal means available.

    I've said it plenty of times before, but there is perhaps no better way to build your wealth than limiting the massive drag created by taxation.

    And with the wide availability of 401(k) plans, IRAs, and other common shelters, you do not have to resort to exotic strategies to limit the amount of money you fork over to governmental agencies.

    You just need to learn which types of shelters make the most sense for your retirement, and then using them religiously.

    #3. Always view promises or financial forecasts made by politicians extremely skeptically.

    There's nothing more frustrating than seeing lawmakers continue writing checks their butts can't cash. But unfortunately, that's simply the game being played in Washington and our country's state capitols.

    Whether you're talking about unrealistic pension promises or the continued cover-up of our worsening Social Security system, most elected officials will continue doing and saying whatever is best for their careers regardless of the longer-term consequences.

    Mar 31 10:56 AM | Link | Comment!
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