I’ve had a relatively low position in stocks for clients for quite some time, but I’ve decided to lower it even further. I’m quite concerned about the correlation between Europe and the US, emotion/news driven volatility, and the uncertainty about what the Fed will do.
The risk just doesn’t warrant having as high a percentage as I’ve had.
On the flip side, profitability, efficiency, and cash balances have all been rising in the firms that comprise the S&P 500.
Is the return worth the risk?
Click on video to hear more.
TRANSCRIPT:
Hi there, Mike Brady with Generosity Wealth Management, here in Boulder, Colorado and the question is “where do we go from here?” And we’re getting a lot of conflicting information. In the last month or so we’ve had huge volatility. We’re basically in a trading range, we have been for the last three or four weeks, but it’s been a trading range that’s extremely volatile. And we’re talking a half percent to one percent up over a few days and then “Boom!” a negative two, three, four percent.
We’ve seen the correlations between the European markets and the U.S. and Asia; very high. And as we look back, five, ten, twenty years, the correlations for the international market have become increasingly correlated. We’re a global market now. And so what happens in Europe is, irritatingly, affecting our situation here today.
We’re also seeing a lot of emotions. And we’re seeing a lot of news driven markets- which just absolutely irritate the heck out of me. We as a market, as investors, keep waiting for some bail out, some news from the government: and that just absolutely distorting things.
Philosophically, I’m going to go off on a kind of a slight tangent here. I understand that the government will always be a part of our free market system. It’s never been 100% free. However, the interaction we’re having now, it’s like this 900 pound gorilla in the room; that makes things kind of difficult.
Kind of on the flip side, as we’re looking at some of the positive things. We’ve got almost all of the S&P 500 have done their earnings for their second quarter. And year over year growth is about 12% over the previous year. And if we take out some of the financials, we’re talking almost 20% earnings, net earnings growth.
You’ve got net margins, back in 2008, that’s efficiency of almost 6%. Now we’re going all the way up to 9.27. So when you look at companies, at balance sheets, Apple’s got 76 billion dollars in cash. I mean a lot of these companies have cash on the side-lines, they have been very efficient. Unfortunately, the negative effect of that is they have trimmed their work forces. But as you’re looking at some of the larger companies, the S&P 500, they’ve become very efficient over the last three or four years. They’ve kind of trimmed, as they see it, the fat, and they’re sitting on huge sums of investable assets that they can redeploy at some point. They’re just not redeploying it right now. And so that’s very frustrating.
I am, long term, when I say long term, we’re talking three to five years, bullish on the market. I think that, you know, we’re set up for that. But on the flip side, I mean, I hear all the arguments about how Europe is imploding- which it is. How that’s going to drag our financial system down. What’s going to happen with the EU and the Euro is anybody’s guess. And so, there’s a lot of reasons right now where it could go either way. I mean I just want to sit here and admit that.
What I’m doing, in my portfolio, is I am decreasing some of the equity positions that I have. I’m absolutely going to continue to have some. But from the very conservative to the very aggressive models that I have for clients, I am decreasing the equity positions. Most recently, most likely in the next week or two, we’re going to hear what, if anything Bernanke and the Fed is going to do. We’ve been talking about a little bit about this twist where they buy a bunch of medium to long duration treasuries- to shore up…, well to keep interest rates low.
So, you know, there’s a lot of things in play but I’m just telling you that right now I’m going to decrease my equity position. The market could go up. Once again, I’m going to be happy three to five years from now. But right now, it’s kind of hard to analyze which way it’s going to go. And in that particular case, are you getting the return for the risk that you’re taking and right now I’m questioning that. So I’m going to reduce some of my equity positions and decrease the percentage, of course still stay in the game.
Anyway, Mike Brady, Generosity Wealth Management, here in Boulder, Colorado, my phone number is 303.747.6455.
I have a new blog on my web site, www.generositywealth.com. And I highly encourage you to go there and look at it. I’m going to have archives going back a number of years. And I think it hopefully will be, I think it will be very helpful and very interesting as you go back maybe two years of weekly or every other week, videos like this or other things that I’ve found interesting and (some) analysis. So you can go and get a flavor of what I’ve been talking about for the last couple of years.
I am taking new clients I would love it if you gave me a call or passed this video along to someone who might be interested in a comprehensive wealth management firm, Generosity Wealth Management, that’s me. You have a wonderful week, we’ll talk to you later, bye, bye.
Statistically speaking, when 2 or more things move together (both zig at the same time instead of some of them zagging) it’s called a correlation of 1.0. Over the past 30 years the correlation of the global markets have continued to increase towards 1.
This means that it’s a high probability that as Europe falls, it will impact our US markets. How much is the question, but our fates seem to be intertwined.
Like it or not, globalization is here to stay. Japan, and the impact on supply chains throughout the world, is only going to reinforce the move towards a diverse, diffused world economy.
In the coming years, we’ll see an even greater push toward interrelatedness amongst countries, and each country’s businesses will rely on many countries for their materials. Diversification of supply is key.
Japan is going to recover and recover quickly.
TRANSCRIPT:
Hi Clients and Friends, Mike Brady here.
This week I want to talk about globalization. It’s here to stay and Japan is just an example of why it’s going to stay. Periodically, I talk with people here in Boulder who think globalization is a bad thing. I’m not here to say that it is good or bad. I have my opinions, but now is not the time to get into that political discussion. But what I am here to say is that it is not going anywhere but more globalization.
Japan: Toyota and Honda, 68-72% of the parts for those companies are actually made outside of Japan. So they are going to continue to make automobiles. China and South Korea and other places that are getting their materials from Japan are having a little bit of supply issue, supply problems, for their products that they export to the rest of the world; or export back into Japan once it’s finished goods. And so, Japan and South Korea and frankly, much of the world is going to diversify, in my opinion, going to continue to diversify their supply chain. So that an event from one country does not disrupt it, they’re going to need 2, 3, 4, different supply chains, sources, for their goods as they distribute it into the rest of the world.
I do not believe, that Japan, a year from now a year from now, two years, five years from now, that we’re going to look back and say that this was a huge economic event that had this very negative impact. Japan as a country is the third largest economy. It is a very wealthy country. They’re very resilient people. And while this is very painful, what has happened, I think that Japan is going to pick itself up and pick itself up very quickly. In the meantime, countries that have relied upon Japan, and will continue to rely upon Japan will continue to rely upon Japan but also diversify into other countries.
So from an investor point of view, the question we might ask is how can we benefit from this trend of diffused supply chains, diffused need and globalization? And so that I think that is really the question that we need to ask ourselves.
I continue to believe that 2011, this year, will be a positive year for the stock markets. And frankly, I’m not changing that. Nothing that I’ve seen in the last three months has changed that opinion. In two or three months as the buying of the, from the, QE2 changes or stops, that will be another obstacle that we’ll have to watch very closely to see what happens.
Anyway, that’s what I’m thinking about this week. I hope you’re doing wonderful.
My name is Mike Brady. My company is Generosity Wealth Management. I am a registered rep with Cambridge Investment Research. My phone number is 303.747.6455. Hope you’re doing well. And I’ll talk to you next week, bye bye.
The tsunami that hit Japan last week and has affected their nuclear reactors is causing great concern in the stock markets.
The Nikkei dropped 11% a few nights ago. The US markets have dropped 2% this morning (Tuesday as I write this).
Now is the time to determine if you’re gambling or investing?. Is this an emotional sell off or a harbinger of things to come?
I discuss Emotional Selling in my video this week.
TRANSCRIPT:
Good Morning Clients and Friends, Mike Brady here.
This week I want to talk about emotional selling. The tsunami hit Japan late last week. I’m recording this on a Tuesday morning and overnight the Nikkea went down 11%. It is just absolutely getting killed. Our markets have opened up very sharply down. So the question I’m posing is what do you do in a situation like this? If your first inclination whenever a huge catastrophic event happens, and now we’re trying, and looking and waiting for what’s going to happen with these nuclear reactors, is if your first reaction is to sell, “I’ve got to move right to the cash!” Then you might ask yourself, are you gambling or are you investing?
What I look for, and if you watch some of my videos, particularly my beginning of the year video (hopefully, you’ve watched it time and time again, it’s must watch) that we’re looking at months, weeks, and the year, of what the market is doing; the value of it, the quality of the market. Because there always going to be events like Japan right now, is happening. I don’t want to minimize the impact of what is happening there in Japan. Japan is a huge global economic player and what is happening there is absolutely horrific. So please, don’t take this the wrong way- that I’m trying to minimize it.
But I am looking at historically, there have been huge events- in our most recent times, the last 20 years or so, there’s been Gulf War I, there’s been Gulf War II, there’s been 9/11- where the market really went down. When the markets reopened that, you know, the week after, and the quarter ended up being positive; the next quarter after that.
So, you know, the major impact that this is going to have, I don’t know yet. I absolutely acknowledge that I don’t know and anyone who says they absolutely know is pulling your leg.
What I will do is to continue to watch this very closely. I do not get emotional about it. You know, emotional selling I think, doesn’t serve anyone’s best interest. I might change my mind in days, in a week, and in a month. That is why you can’t be beholden to your theory, you know, so very stringently. But you do have to kind of keep a straight arrow. What are you doing? What are the value of the market? What’s the impact going to be, not just the immediate impact but one month, one quarter and one year from now? And, with all the data that I have right now, as it’s being compiled, etc., I’m not convinced that now is the time to sell out. So I’m not doing anything with my portfolios for clients. But you know, I will continue to keep you abreast that’s why I have weekly newsletters so you can know what I’m thinking.
Anyway, I just wanted to kind of touch base on that. Hopefully, you’re getting this video, I’m doing this on a Tuesday morning, getting it a little late to my compliance department. And hopefully they’re really good about getting it turned around so you are getting this on a Wednesday morning. If not, you’re getting it as soon as possible.
So anyway, have a wonderful week. I’ll keep you informed.
My company is Generosity Wealth Management. I am a registered rep with Cambridge Investment Research. 303.747.6455. I am here in Boulder. If you’re my client, I love you. If you’re not my client, I still like you but I’d love you to be my client. 303.747.6455. Thanks bye bye.
The article I link to below expands on the themes I bring up in my weekly video. You want a double dose of “emotional selling”? You know you do. Click on the link.
Don‘t forget the unexpected happens. The “Peace Dividend” after the Berlin Wall (quite a euphoric event) saw the next 2 years in a stock market recession.
After 9/11? 6 year stock rally ensued.
It is uncertain the long term effect of the Japanese troubles. Let’s not make long term decisions based on short term emotions.
That’s what separates the amateurs from the pros. Be a pro.
