Where's The Risk and Where's The Rewards?
Ten years ago you could have purchased a gorgeous home on the upper east side of Santa Barbara, California for under $600,000. That’s right, back in the fall of 1996, shortly after Bill Clinton was re-elected to his second term, we looked at a 3,000 square foot home with a swimming pool in a very fashionable neighborhood which was offered for $599,000. Today you couldn’t touch it for under $2 million.
Why didn’t we scoop it up and purchase every house and condo for sale back then? Mainly, because the opportunity wasn’t obvious to us. We did buy a couple of condos “just in case” but if we had known what an incredible buying opportunity it was at that point in time we would have mortgaged the farm, borrowed from Uncle Seymour, and purchased dozens of properties. We’d be flying around in our own corporate jet today…if we only knew that the reward far outweighed the risk.
Times of great opportunity with investments are NEVER obvious. In fact the danger signs are a lot more apparent. Some believe that is where we are with the stock market. We’ve seen a huge rally, new highs for the Dow and great recoveries on the other indices. In fact, one mentor told us today, “Since Oct. 4, 2002, stocks have shot up 85%. As I said earlier, if stocks simply stopped trading today and investors walked away with their gains, this would be the third most lucrative stock market rally in the last 60 years. But no rally is without corresponding fallout -- this one included. Unlike all previous rallies, stocks were not cheap at the beginning of the bull cycle. The average stock traded for 15.3 times earnings in late 2002. The last time stocks were this expensive at the beginning of a cycle was in 1987. We all know what happened then…in a single day, the stock market lost 20%. Folks, a fall is coming. I guarantee that. All the signs are there.”
To us that sounds like “famous last words”, although for all we know he could be correct. Another mentor told us that today’s continuing rally had a lot to do with “Fed-heads” talking. Rumor has it that Federal Reserve Bank of St. Louis President William Poole today described the Fed's interest rate policy as "about right." Poole, who is acting as a voting member on the Fed's policy-making Open Market Committee, had reassuring words for a market that has been counting on a steady rate policy for the near future.
Earlier, the Labor Department said inflation at the wholesale level as measured by the Producer Price Index dropped by 1.6 percent last month following a 1.3 percent slide in September. Plunging energy prices were behind the declines, which gave Wall Street some relief from concerns that rising inflation might prompt the Fed to raise rates after three straight meetings where they were left unchanged.
"With the PPI down and with the Fed cautiously optimistic about the economy, not signaling any rate hikes, it confirmed what the market was hoping to hear," said Jay Suskind, head trader at Ryan Beck & Co. November is generally a good month for stocks, and we expect to see sideways action with an upside bias. One reason for a favorable longer term is that a favorable calendar trend is quickly approaching. Historically, stocks have posted their best performances in the third year of a presidential cycle, almost double the average of the cycle's entire four years. The third year is also very consistent; stocks have risen more than 90% of the time in the cycle's third year. Also, the cycle's fourth year historically has provided the second highest gain.
As for the Congressional change, history says that may also work out as a positive. While stocks have posted better returns during periods of political unity, periods of total gridlock such as we have now can also be surprisingly strong. The bottom line is that as long as fundamentals are strong and the Fed stays on the sidelines, the environment for stocks will remain healthy. At least that is what our favorite mentors are telling us.
Our bear mentor mentioned this today: “With stocks still near their recent highs, I think it’s useful to remember the tendency of bull markets to surrender large portions of their gains over the full market cycle. Without that understanding, investors are vulnerable to the temptation to ‘chase’ returns in what is already a richly valued, aged bull market advance, where recession risks continue to gradually increase.”
Now is not the time to be chasing crap stocks. And now is not the time to blindly invest just because stocks are on a roll -- even if you are a “believer”. They don’t always “keep making money.” Just wait, you’ll see." If our brains are still functioning I think he just meant, “it’s a stock-pickers market and don’t buy any junk”. Like the rumor mill, our mentors seem to like under-rated, overlooked companies that are also under-valued in some way.
Rather than worry about the direction of the markets or whether a scary correction is waiting in the wings, we’d rather follow some great investors who know how to find value even in the midst of "crap stocks". That's why we bought Home Depot (NYSE:HD) early this morning and already are glad we did. Our mentors are also singing the praises of energy companies like Occidental Petroleum (NYSE:OXY) and Marathon Oil Corp. (NYSE:MRO). Last week they were encouraging us to buy Wal-mart (NYSE:WMT) on the sell-off and to get ready to pull the trigger on some of the oversold Canadian income trusts like Baytex Energy (NYSE:BTE). Heck, if you want what appears to be the cheapest stock based on its forward P/E ratio, you’d be a buyer of Ampex Corporation (NASDAQ:AMPX). We did our own screening for this on our website at www.CheckTheMarkets.com, There are many ways to determine where the “deals” are.
Where is the risk in the investment world today? Is it in overbought speculative real estate, in stocks trading at high multiples and lofty prices, or a condo in Santa Barbara? If you can figure that out and figure out where the bargains are right now you will become very wealthy. Oh yeah…if you can determine what the most “hated investments” currently are, and if you have the courage and insight to see that the unjust bias against them have caused the price to be ridiculously cheap right now, you will eventually experience rewards that few will ever know. Flee high risk and lock-on to that which is cheap and oversold, and when you figure out what those are please let us know.
Why didn’t we scoop it up and purchase every house and condo for sale back then? Mainly, because the opportunity wasn’t obvious to us. We did buy a couple of condos “just in case” but if we had known what an incredible buying opportunity it was at that point in time we would have mortgaged the farm, borrowed from Uncle Seymour, and purchased dozens of properties. We’d be flying around in our own corporate jet today…if we only knew that the reward far outweighed the risk.
Times of great opportunity with investments are NEVER obvious. In fact the danger signs are a lot more apparent. Some believe that is where we are with the stock market. We’ve seen a huge rally, new highs for the Dow and great recoveries on the other indices. In fact, one mentor told us today, “Since Oct. 4, 2002, stocks have shot up 85%. As I said earlier, if stocks simply stopped trading today and investors walked away with their gains, this would be the third most lucrative stock market rally in the last 60 years. But no rally is without corresponding fallout -- this one included. Unlike all previous rallies, stocks were not cheap at the beginning of the bull cycle. The average stock traded for 15.3 times earnings in late 2002. The last time stocks were this expensive at the beginning of a cycle was in 1987. We all know what happened then…in a single day, the stock market lost 20%. Folks, a fall is coming. I guarantee that. All the signs are there.”
To us that sounds like “famous last words”, although for all we know he could be correct. Another mentor told us that today’s continuing rally had a lot to do with “Fed-heads” talking. Rumor has it that Federal Reserve Bank of St. Louis President William Poole today described the Fed's interest rate policy as "about right." Poole, who is acting as a voting member on the Fed's policy-making Open Market Committee, had reassuring words for a market that has been counting on a steady rate policy for the near future.
Earlier, the Labor Department said inflation at the wholesale level as measured by the Producer Price Index dropped by 1.6 percent last month following a 1.3 percent slide in September. Plunging energy prices were behind the declines, which gave Wall Street some relief from concerns that rising inflation might prompt the Fed to raise rates after three straight meetings where they were left unchanged.
"With the PPI down and with the Fed cautiously optimistic about the economy, not signaling any rate hikes, it confirmed what the market was hoping to hear," said Jay Suskind, head trader at Ryan Beck & Co. November is generally a good month for stocks, and we expect to see sideways action with an upside bias. One reason for a favorable longer term is that a favorable calendar trend is quickly approaching. Historically, stocks have posted their best performances in the third year of a presidential cycle, almost double the average of the cycle's entire four years. The third year is also very consistent; stocks have risen more than 90% of the time in the cycle's third year. Also, the cycle's fourth year historically has provided the second highest gain.
As for the Congressional change, history says that may also work out as a positive. While stocks have posted better returns during periods of political unity, periods of total gridlock such as we have now can also be surprisingly strong. The bottom line is that as long as fundamentals are strong and the Fed stays on the sidelines, the environment for stocks will remain healthy. At least that is what our favorite mentors are telling us.
Our bear mentor mentioned this today: “With stocks still near their recent highs, I think it’s useful to remember the tendency of bull markets to surrender large portions of their gains over the full market cycle. Without that understanding, investors are vulnerable to the temptation to ‘chase’ returns in what is already a richly valued, aged bull market advance, where recession risks continue to gradually increase.”
Now is not the time to be chasing crap stocks. And now is not the time to blindly invest just because stocks are on a roll -- even if you are a “believer”. They don’t always “keep making money.” Just wait, you’ll see." If our brains are still functioning I think he just meant, “it’s a stock-pickers market and don’t buy any junk”. Like the rumor mill, our mentors seem to like under-rated, overlooked companies that are also under-valued in some way.
Rather than worry about the direction of the markets or whether a scary correction is waiting in the wings, we’d rather follow some great investors who know how to find value even in the midst of "crap stocks". That's why we bought Home Depot (NYSE:HD) early this morning and already are glad we did. Our mentors are also singing the praises of energy companies like Occidental Petroleum (NYSE:OXY) and Marathon Oil Corp. (NYSE:MRO). Last week they were encouraging us to buy Wal-mart (NYSE:WMT) on the sell-off and to get ready to pull the trigger on some of the oversold Canadian income trusts like Baytex Energy (NYSE:BTE). Heck, if you want what appears to be the cheapest stock based on its forward P/E ratio, you’d be a buyer of Ampex Corporation (NASDAQ:AMPX). We did our own screening for this on our website at www.CheckTheMarkets.com, There are many ways to determine where the “deals” are.
Where is the risk in the investment world today? Is it in overbought speculative real estate, in stocks trading at high multiples and lofty prices, or a condo in Santa Barbara? If you can figure that out and figure out where the bargains are right now you will become very wealthy. Oh yeah…if you can determine what the most “hated investments” currently are, and if you have the courage and insight to see that the unjust bias against them have caused the price to be ridiculously cheap right now, you will eventually experience rewards that few will ever know. Flee high risk and lock-on to that which is cheap and oversold, and when you figure out what those are please let us know.
posted by Marc Mentor at 7:24 PM
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