If you listen to the market commentators on television, you would think we are in a depression. This week, the markets have not helped change that perception. Week to date, June 30th, 2010, the S&P 500 Index is down 4.28% (at close). There are sectors we expect to weather a down turn better than other sectors, but even Consumer Staples was down 1.13% midweek. Financials were taking the brunt of the negativity coming in down 5.78% midweek. It appears that the markets are depressed; however, trading volume is off as we are heading into a long, holiday weekend. We feel this light volume is a point that has been overlooked in many of the negativity-laced news stories.
Pimco’s Bill Gross was on television earlier this week saying that long-term yields on bonds are where he expects them to be at 3%. He calls this climate the “New Normal.” We feel this is a “New Normal” if it is relative to the bubble we just came from. Consider that housing prices have generally followed inflation. During the 10-year span from 1995 to 2005, inflation was 2.5% but housing prices were up around 6.6% annually. That does not sound so bad on an annualized basis, but step back further and realize that housing prices rose nearly 62% more than inflation, which is unsustainable, in our opinion.
Look around now, and you see continuously negative news about municipalities cutting employees, cutting spending and looking to raise fees in order to raise revenues. The reality is that we should have seen this coming because so much of a municipality’s revenue is derived by the value of real estate. Since the top in 2005, housing prices have fallen back down and are now inline with the rate of inflation. So, they are back to normal. Perhaps instead of a “New Normal” it is the “Old Normal”—a pre-bubble normal.
Additionally in a couple of weeks, earnings season will begin. Looking back, at first quarter, 496 companies that are part of the S&P 500 have reported earnings. Earnings were 13.98% better on average than analysts expected. These companies reported 53.5% growth in the quarter relative to the previous quarter, and yet a majority of the time, the market looked the other way, ignoring the fundamentals of earnings growth.
Second quarter numbers are expected to come in around 27.2% growth. If you look back to estimates from April, these numbers have been revised higher by nearly 5%. Also, most companies will choose to underestimate their forecasts because the Sarsbane-Oxley Act requires senior management of companies to certify the accuracy of the reported financial statement. It is not often we see companies missing their forecasts by significant amounts any more.
Yet, it is the negativity of ” Consumer Confidence Falls” or the future of Financial Regulation that is leading the news. The Senate vote is not expected until after a weeklong July Fourth recess because of Senator Robert Byrd’s death on Monday. While the Financial Regulation Bill is being held as a great legislation, we are not in total support of the bill because it does not address one major issue. The proposed legislation does nothing to reign in Fannie Mae or Freddie Mac—two government-sponsored entities that many argue led us into the financial crisis we had by allowing for lower credit mortgages to be packaged and sold to investors. However, the good news about earnings is buried deep within the papers.
If you listen to the old value investors, their credo was, “buy when no one is buying and sell when no one is selling.” Even legendary investor Warren Buffett has said, ” Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”
We say “buy when the stock market is on sale.” It is certainly on sale now.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
