November 6, 2015
Where should you look for good information about the stock market? Financial journals, television commentators and even this website will try to shed some light on what's going on with Wall Street. Sometimes though, it is best to go straight to the source: the stock market's recent behavior and current statistics.
Here are five things the stock market seems to be saying:
1. It lacks conviction
What does it mean when the stock market can be down 4 percent one day, then rise by almost as much a few days later? When hundreds of billions of dollars of value can be created or destroyed from week to week?
What it boils down to is uncertainty. People are chasing speculation, and the lack of conviction people have in this speculation is reflected in how frequently the market has been reversing course lately.
This is a good opportunity for investors who have a solid, long-term conviction in an economic outlook or the prospects of a particular company. Market volatility increases opportunities to act on such convictions at favorable prices.
2. Current prices are heavily dependent on interest rates
A good deal of speculation surrounds what the Federal Reserve is going to do about interest rates. The market's nervousness about this topic reveals a sobering reality - market valuations are highly dependent on the current level of interest rates. Super-low rates have made the stock market look like a more attractive option by comparison. Raise the level of interest rates, and the comparison does not favor stocks as much.
This is sobering because short-term rates are already near zero. There is little room for them to fall, and thus little room for stocks to look any better by comparison. There is, however, plenty of room for rates for savings accounts and other deposits to rise, and thus ample room for stocks to look relatively less attractive.
3. It reflects a truly international marketplace
The ability of events beyond America's shores to affect the stock market shows just how global the financial and business arenas have become. For example, U.S. investor concern over China recently has centered on two things: the extent to which its currency devaluation will allow its exporters to undercut U.S. companies, and how much underlying economic weakness will dampen demand for U.S. exports.
This demonstrates that global trading partners are both sources of demand and sources of competition. You should think about both sides when you measure another country's impact on the U.S. economy. As an investor, consider whether each company you own has more to gain or to lose from the opening of foreign markets, and the health of those markets.
4. Earnings estimates should be taken with a grain of salt
Seventy percent of companies in the S&P 500 beat their earnings estimates for the most recent quarter - so why has the market been going down rather than up?
The reality is earnings estimates are somewhat static figures that do not always represent the true expectations of individuals. A lack of reaction to what should be positive earnings surprises can indicate stock prices already reflected an expectation companies would do better than their formal earnings estimates.
5. Fundamental growth has been hard to come by
If you think stock prices have been struggling, the fundamentals that support those prices have been doing even worse.
Over the current stock market cycle, a period going back nearly eight years now, the S&P 500 has climbed just 35.44 percent - a rate of less than 4 percent a year. More troubling, though, is the fact that the fundamentals that drive prices have grown even more slowly. Compared to the 35.44 percent increase in prices over the current market cycle, operating earnings are up by just 23.67 percent, and sales growth rose only 5.56 percent.
Perhaps the most revealing thing about the above clues is what they say about where the market has been. For some time, stock prices ran ahead of operating earnings, and especially ahead of the sales growth required to drive future earnings. Whatever happens going forward with China, interest rates or the U.S. economy, there remains a bill to be paid for prices getting ahead of the fundamentals.
Comment: Which signals are most important to you when investing in stocks?
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October 28, 2015
Did the Fed miss an opportunity at its previous meeting?
It came as no surprise that the Fed announced that its latest meeting ended with a decision to make no change in interest rates, and consequently bank rates. Conditions seem to have deteriorated since the prior meeting, in mid-September. At that time, conditions seemed ripe for the Fed to finally raise short-term rates. It is fair to argue whether not raising rates in mid-September was a missed opportunity, or whether the Fed's caution was confirmed by the slippage in economic conditions since then.
Fed statements consistently focus on two things: inflation and employment. The Fed describes its mandate as striking a balance between fostering price stability and job growth, and the Great Recession left both in shaky condition. Inflation has consistently run below the Fed's target rate of 2 percent and even experienced bouts of deflation, while unemployment peaked at 10 percent back in October of 2009.
Of the two problems, employment improved more quickly than inflation. By August 2015, the unemployment rate dropped by almost half, down to 5.1 percent. Low inflation, however, remained stubborn, most recently because of the sharp slide in oil prices since mid-2014.
It is naturally difficult for consumers to view low price increases as a problem. In particular, when price weakness means cheaper gasoline, it is hard to understand why the Fed found this so concerning. Even from an economic point of view, given that price weakness was largely due to a falling oil price trend that could not continue indefinitely, it can seem overly cautious for the Fed to have held out for inflation hitting its 2 percent target before raising interest rates.
For now though, it may be a moot point because the momentum in job growth appears suddenly to have stalled. Job growth was disappointing in both August and September, so the Fed may be back to having two major problems rather than just one.
Can the Fed say 'I told you so?'
Federal Open Market Committee statements are written in fairly dry economic language, and so it is no surprise that the Fed did not actually come out and say "I told you so" in its most recent statement. Still, the deterioration in employment growth between the last meeting and this one seems to confirm the Fed's cautious handling of the economy.
On the other hand, you could argue that if the Fed does not raise interest rates when it gets a reasonable chance at doing so, it will be left with fewer policy options when the economy really does start to deteriorate. After all, the U.S. is now more than six years into the current expansion. If that and getting the unemployment rate down to 5.1 percent haven't given this Fed the confidence to return interest rates to more normal levels, one has to wonder whether conditions will ever be strong enough to give them that confidence.
Add your comments: Do you think the Fed made the right decision or missed an opportunity in not raising rates?
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October 21, 2015
Stock analysts may be even more enamored of statistics than fantasy football fans, but the key to using statistics successfully in evaluating stocks is to understand their limitations.
Here are five significant stock statistics to consider:
Price-to-earnings ratio (P/E) - probably the most common valuation statistic for stocks - puts price in the context of how much a company earns. A stock with a low price is not necessarily cheap if it also has very low earnings. There are many variations on P/E, but two important types of variation involve the distinction between reported and operating earnings, and the attempt to smooth out temporary fluctuations in earnings.
Operating earnings are the net profits derived directly from the normal operations of the firm, while reported earnings reflect the adjustment of those earnings for accounting treatments, such as the write-down of depreciated assets or the realization of new liabilities. Operating earnings give a clearer picture of a company's success. But if companies have large and frequent discrepancies between reported and operating earnings, this could be a sign of accounting issues potentially undermining the stock's value.
Fluctuations in earnings can cause major distortions in P/E, especially for cyclical stocks or companies that took a one-time charge against earnings. One way around this is to measure P/E based on a five-year or cyclical average of earnings, rather than on current earnings.
PEG, or price-to-earnings growth, is measured by the P/E ratio divided by the earnings growth rate. The PEG ratio accounts for the fact that faster-growing companies might justify higher P/E ratios than slower growing ones because their faster growth rate will help earnings catch up with the price over time.
Just remember past growth might not continue into the future. In particular, fast-growing companies early in their life cycles will find it difficult to sustain their growth rates as they mature.
Earnings are not always the best measure of a company's success, especially for younger companies. In such cases, it may be necessary to get volume up to a certain critical mass in order to overcome initial investment costs. Even with older companies, new investments or temporary expenses can temporarily depress earnings in a way that does not really reflect the company's success in the marketplace.
In such cases, the price-to-sales (P/S) ratio can be a useful measure. It acknowledges that top-line revenues can be more important for young companies than bottom-line earnings, providing a more stable basis for valuation comparisons than earnings.
Price-to-book ratio (P/B) provides a very stable valuation basis by measuring prices relative to the official value of the company's assets. However, there are some caveats.
First, the book value of a company's assets may be very different from their market value. For example, long-lasting manufacturing equipment may be fully depreciated from an accounting standpoint, but still have great operational value. Conversely, a company with outdated plant and equipment may still carry some book value for assets with little practical use and no resale value.
Second, some industries are more asset-intensive than others, so while P/B comparisons may be useful when evaluating companies within the same industry, they are less meaningful when comparing companies across industries.
It is normal, and often financially advantageous, for companies to carry some debt. However, a fast-rising debt-to-equity ratio can be a red flag that a company's borrowing is getting out of hand.
As with P/B, debt-to-equity is one of those measures that tends to vary greatly depending on the nature of the business, so use a peer group of similar companies to put it in perspective, rather than expecting a universal standard to apply to every situation.
What is important about the above discussion is not just that it covers some of the most prominent valuation metrics, but that in each case, it describes the importance of context in using any of these metrics.
Metrics like the above are a good starting point that can help you identify outliers and start asking questions about whether the conditions that created those anomalies are favorable or unfavorable for the stock in question.
Do you invest in stocks? How do you look at stock stats?
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October 7, 2015
Forget the hot tips and online chatter. Great investments are built on long-term business fundamentals. The more you know about the nature of a company's business position, the better you can assess the odds of that company proving to be a good investment over time. Be advised though, this is not easy work. Fundamental analysis is for people who want to find stocks they can be comfortable holding for the long term, rather than for people looking to make a quick buck.
Here are 10 things you should know about the companies whose stocks you buy:
1. Competitive landscape
Success attracts competition, and so with any successful company, you need to assess which competitors are going to try to take business away from that company. Competitive advantages can come on both the product and cost side of the business. This means products that are prized by customers and not readily matched by competitors, or cost advantages such as economies of scale or more efficient processes that allow a company to maintain a pricing advantage.
2. Supply chain risks
What does a company depend upon to produce its product or deliver its services? There may be raw materials that can become scarce in periods of high demand, or essential components that are only available from one supplier. Potential choke points in the supply chain can create cost pressures that attack profit margins, or limit availability enough to stunt growth. Keep in mind that in labor-intensive businesses, the availability of suitable workers can be a form of supply chain issue.
3. Customer concentration
Diversity in a customer base is good. Businesses that are heavily dependent on one or two major consumer markets for a majority of their sales are at risk to any change in fortunes on the part of those customers. They are also vulnerable to being squeezed on pricing by those major customers.
4. Market penetration
How much market share does a company have? Commanding the majority of a market may seem like a dominant position, but it can also limit growth potential. Perhaps the ideal situation is a relatively small market share that is steadily growing.
5. Market saturation
This is different from market penetration. Penetration is a measure of what share a company has of an existing market. Saturation is how much of the potential audience has been exposed to that market as of yet. A market that has just started to spread has more growth potential than one that is already well established globally.
6. Product life cycle
If a company's big earners are getting somewhat long in the tooth, it is important to ask whether they have competitive replacements on the way, and whether they have a history of successfully reinventing and rejuvenating their product lines.
7. Economic exposure
Economic cycles are inevitable, but some industries are more sensitive to them than others. You should understand how companies you invest in are exposed to an economic downturn and how well-equipped they are financially to survive it. It is also important to consider whether the economy is at a phase of the cycle where this kind of sensitivity would be a positive or a negative in the near future.
8. Legal issues
If there are any serious law suits, patent challenges, or regulatory investigations pending, it is important to assess the impact of a negative outcome. While companies will naturally try to downplay the likelihood of adverse rulings in these cases, judges and regulators can be somewhat unpredictable. You should view these situations as wild cards where you at least consider the "what if" of being on the losing side.
9. Growth model
Based on many of the above factors, you should attempt to create a realistic projection of future earnings growth. Too often investors make the mistake of simply projecting past growth rates into the future, but for fast-growing companies in particular past growth is often unsustainable. Identifying fundamentally where earnings growth will come from can give you a more solid foundation for future expectations.
10. Valuation compared to growth outlook
Successful companies often trade at high valuations, and you should not necessarily let that scare you away. The question is whether or not the earnings growth looks strong enough to grow into current price levels and eventually support even higher prices.
Again, fundamental analysis is hard work, but it can be very rewarding. If your analysis is correct, it can help you identify stocks that you will be happy to own for years to come, and that is better than trying to jump in and out of the story of the week.
Comments: What info is absolutely essential for you before buying stocks?
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October 7, 2015
Over time, even a seemingly harmless trickle of water can wear away a tremendous amount of earth, or even carve deep gashes into solid rock. Bank fees can do the same thing to your account balances if you're not vigilant. Drip, drip, drip - each fee small enough that you decide to let it go, but after a while you find they have eroded away significant amounts of your money.
Here are six fees that could be eating away at your bank accounts without you noticing:
1. Monthly checking account maintenance fees
These are charges just for having a checking account. At an average of $13.09 in the latest MoneyRates Bank Fees Survey, these monthly bank fees add up to just over $157 a year. Three-quarters of all checking accounts now charge these fees, so avoiding them is difficult - but not impossible.
If you are looking for one of the banks with no fees, search for institutions offering online savings or checking accounts. Also, some banks will waive the monthly fee if you have direct deposit or maintain a specified minimum balance.
2. Overdraft fees
Overdraft fees now average $32.44 per occurrence, so if you have a few transactions once you overdraft your account you could pay a multiple of that figure. On top of that, banks often charge an additional fee for each day the account maintains a negative balance. By law, banks now have to assume new customers don't want overdraft protection, but since these fees are a huge profit center for them, they actively encourage people to opt in. Do yourself a favor, and don't agree to accept this very expensive checking account feature.
3. Statement fees
You might have thought that simply having an account entitled you to regular statements. But in an effort to save printing and mailing costs, some banks are now charging for those statements.
These fees are usually just a couple dollars, but you can avoid them if you are willing to view account statements online, or if you find a bank with no fees for monthly statements.
4. Out-of-network ATM fees
If you use your own bank's ATM or one that is part of a network to which your bank belongs, you usually will not be charged a fee. However, if you use an out-of-network ATM, you could pay two types of fees for this convenience. The bank that owns the ATM may charge non-customers a fee, and these average $2.69 per transaction.
In addition to that, your own bank might charge you for using another bank's ATM, and these fees average $1.61 per occurrence. Combined then, using an out of network ATM costs an average of $4.30, so when you choose a bank check to see that they have a network of machines convenient to your regular travels.
5. Currency exchange charges
Banks will often exchange foreign currencies at their branches, but for a fee. With any per-occurrence fee, the key is to consolidate transactions to minimize the number of fees you pay. So, think ahead so you can combine your upcoming needs into a single transaction rather than paying for a series of smaller currency exchanges.
If you are going to be traveling with friends or family members, have everyone pool their money to be exchanged into one transaction rather than each of you paying a separate fee. The galling thing about paying a fee for currency exchange is that banks also make money on these transactions by providing a less-than-favorable exchange rate.
6. Foreign transaction fees
Besides charging you to exchange currency at the branch, banks also often charge an additional fee if you use your credit or debit card in a foreign country. To minimize these fees, try paying for as many small transactions as possible in cash rather than via a credit or debit card.
Don't ignore that dripping sound. While each occurrence may seem harmless, they come in enough forms and happen frequently enough that they can seriously erode your hard-earned savings.
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