April 2016


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I think I prefer this even to the 998.

Certainly more fun looking at this than the market over the past few days.

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Bought this yesterday at $11.14.

This is going to be a very volatile stock, both to the upside and downside.

*I have just placed an order to sell 100 shares at $14.78

*Just cancelled that order. Rather, I will sell 1 Option contract at $15.oo and 1 contract at $18.oo, expiry May. This better corresponds with a monthly rebalance.

Sold 1 contract at $15.oo for $2.00 and 1 contract at $18.oo for $1.05. This is just a bog standard covered call strategy.

 

 

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I’ll allocate a $10K position to this stock and compare how it fares against the more stable portfolio.

I’m guessing it will either outperform – or go bust.

This is the issue with speculative stocks, they simply are too damn risky. However, the odd one, in an other wise ‘safe’ portfolio, in a small % of the over-all portfolio, can, at times, juice the returns.

If it blows up, then the damage is contained.

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Employment case for constructive dismissal and $200M in damages.

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CHAPEL HILL, N.C. (MarketWatch)—Might a recession be averted after all? The odds that it might got a major boost earlier this week, when the Conference Board reported its index of leading economic indicators rose in March, breaking a three-month downtrend.

The Conference Board concluded the economy for the rest of this year would experience “slow, although not slowing, growth.”

Even so, corporate profits remain in a serious earnings recession that shows no signs of abating. Even if Wall Street analysts’ forecasts are correct (they’re usually too optimistic), earnings per share for the S&P 500 SPX, +0.00% over the four quarters through the end of March will be 16.2% below than where they were in the third quarter of 2014.
Furthermore, those forecasts (if correct) will show that the first three months of 2016 are the fourth consecutive quarter of lower year-over-year earnings for the S&P 500. The last time that happened was in 2008 and 2009, and I need not remind you of the Great Recession that accompanied that earnings downturn.

Why wouldn’t the same thing be happening now?

Realizing that “this time is different” are the four most dangerous words in the investment lexicon, I searched the historical record for any prior instances of an earnings recession that wasn’t accompanied by an economic recession. Surprisingly, I found several.

This time might not be all that different, after all.

Take a look at the chart at the top of this page, which plots corporate profits since 1980; economic recessions are shaded. Notice that while economic recessions are reliably accompanied by earnings recessions, the reverse isn’t always the case.

One stark example occurred between the third quarter of 1985 and the fourth quarter of 1986, during which total corporate profits fell by 26%. Yet, as you can see from the chart, a recession was nowhere in sight.

Perhaps even more surprising is what happened earlier this century: Corporate profits bottomed out in the fourth quarter of 2000 and thereafter began to rise at an impressive pace. Just one quarter later, they were already 5% higher. And, yet, according to the National Bureau of Economic Research, a recession began in March of 2001—after corporate profits had begun growing.

Why might the current earnings recession be one of these occasions in which an economics recession doesn’t occur? One obvious possible explanation is the extent to which recent quarters’ earnings losses have been concentrated in just one sector: energy.

After excluding that sector, Standard & Poor’s data reveal that earnings per share in the first quarter would be at an all-time high. This means the recent earnings recession is far different than those in the past in which earnings declined across all sectors—as they did, for example, in 2008 and 2009.

To be sure, this doesn’t guarantee that a bear market isn’t imminent. As the historical record also shows, many past bear markets have occurred unaccompanied by a broad economic downturn.

But you should think again if you were bearish on stocks because you believed the recent earnings recession would inevitably lead to an economic recession.

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With stock market prices fluctuating wildly during the first quarter, it’s important to consider the longer-term movements of equity prices when trying to decide what to do with your money. As I’ve said many times, making investing decisions based on short-term price movements can be dangerous. Here, I’d like to examine the long term a little bit closer to see if it can tell us anything about the future.

I was born in the middle of 1965. A full 50 years have passed since then. That’s been enough time for me to get married, have three children, and sprout some gray hairs. But it’s also enough time, I think, to consider whether it’s been a decent time to be invested.

If you had invested $1 in the S&P 500 on Jan. 1, 1966, and reinvested all dividends (and somehow endured no costs), then you would have ended up with $102.17 at the end of market trading on Dec. 31, 2015.

That’s 102 times your money. That sounds outrageously good. But was it?

Actually, it didn’t match historical averages. The past 50 years’ stock returns, on the whole, haven’t quite been up to snuff compared with either the longer-term historical averages or the 50 years that immediately preceded that half-century. Let’s take a closer look at the returns, keeping in mind the significant impact inflation has on the real returns of the market.

 Period Annualized Return (Nominal) Annualized Real Return (Adjusted for Inflation) $1 Becomes (Nominal) $1 Becomes (Adjusted for Inflation)
1966-2015 9.69% 5.38% $102.17 $13.74
1916-1965 10.36% 7.90% $138.16 $44.75
1871-2015 9.05% 6.86% $285,436 $15,086

When not factoring in inflation, all these time periods look fairly similar, but as you know, inflation matters. Because of the dramatic effects of compounding over long periods of time, the real returns of the market from 1916 to 1965 were more than triple the returns of the past 50 years.

So, though it isn’t covered all that frequently, why have the past 50 years been such a relatively “poor” time to invest? And even if the past 50 years haven’t been outstanding, does that mean you shouldn’t have invested in stocks 50 years ago?

These are important questions, because right now, stocks are just about exactly as expensive as they were at the end of 1965, at least according to one of the more popular valuation metrics available.

The Shiller cyclically adjusted price-to-earnings ratio (the “Shiller CAPE,” or just “CAPE”) takes the price of the stocks in the S&P 500 and divides that figure by the average earnings of the previous 10 years in the market. By dividing by the average of the previous 10 years, rather than only the preceding 12 months as the “normal” P/E ratio does, it adjusts for the typical cycles in earnings. Earnings are highly variable over any 12-month period.

At the end of 1965, the Shiller CAPE stood at 23.6, and today it stands at 24.3. The historical average is 16.7.

So, using just this one measurement, stocks are about as expensive today as they were 50 years ago. If the next 50 years show returns in the same ballpark as the past 50 — and they are working off roughly the same valuation starting point — then investors will do acceptably if they’re expecting returns in the area of 5.5% over that time period. They might do better; they might do worse. But if they do better, it will be because growth in per-share profits is better than that of the past 50 years (possible, though not looking likely in the near term) or multiples go up from here (less likely, especially given the likelihood that interest rates will beeven lower 50 years from now than they are today).

I have as little idea about what the next 50 years will bring as the next guy, but it’s worth remembering that the past 50 years’ decent returns didn’t have the most promising start.

Period Annualized Return (Nominal) Annualized Real Return (Adjusted for Inflation) $1 Becomes (Nominal) $1 Becomes (Adjusted for Inflation)
1966-1969 3.14% (1.15%) $1.13 $0.95
1966-1974 (0.08%) (5.37%) $0.99 $0.61
1966-1981 5.89% (1.04%) $2.50 $0.85
1966-2015 9.69% 5.38% $102.17 $13.74

I’ve selected those periods — the beginning of 1966 through the ends of 1969, 1974, and 1981 — specifically to show what returns would have been after particularly bad years for the market. (Immediately following 1981, 17 of the next 18 years showed positive returns.) You’ll see that there were both short and long periods that didn’t pan out so well for buy-and-hold investors. History tells us that 16-year holding periods generally go pretty well for equity investors, but if you choose your starting and ending dates carefully enough, you’ll find ones that don’t. Of course, that particular time period was in large part defined by the wild rise of interest rates from around 4% to more than 15%, rather than a collapse in company earnings.

I bring these numbers up not as a prediction of what is likely to happen next for investors in today’s domestic market, but as a reminder that the rewards of long-term investing come with occasional declines, and those slumps can last a long time. Attempting to predict when they will next occur is a fairly popular game in the world of financial media, but it’s generally an exercise in futility.

The very long-term returns available for today’s equity investors continue to look promising, but retrospectives like this can help us set expectations for future returns (perhaps in the 5% real-returns category over the long term) and remind us that not only can it take decades to realize those returns, but those higher longer-term returns will inevitably include some shorter periods of low or negative returns.

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The huge double top of the 1970’s market looks familiar to the market 1999 to 2007.

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Then from 2009, we mirrored the market of the 1980’s

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And the eighties morphed into the nineties, which was the most ridiculous bull market ever.

Many things were different in the seventies and early eighties, PE’s were lower, thus returns should have been expected to be higher. The nineties saw some crazy valuations however…on the back of the birth of the internet.

Well currently we have the Internet II, on really, really low interest rates, with no end in sight. Undercover inflation is everywhere. Stocks are one way to hedge inflation.

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