The Independent Market Observer

3/28/13 – Europe Post-Cyprus

March 28, 2013

With all of the focus on Cyprus over the past couple of days, the refrain has gone something like this: what really matters isn’t Cyprus itself but the bigger picture and what that might mean for Europe. No one has really gotten into what happens and how, so I thought I’d give that a shot.

Cyprus is an even smaller piece of Europe than Greece was. The banking system, which was seven times the size of the economy, is also small in the larger scheme of things. The amount of money required to bail out the system was a rounding error; there was no financial reason not to simply write a check.

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3/27/13 – A Smaller Piece of a Bigger Pie—And Getting Smaller

March 27, 2013

Looking at the effects of Cyprus echoing around the financial markets, one thing that’s become apparent is that it really isn’t all about the U.S. any more. Even as the U.S. economy continues to recover, the international press doesn’t care that much. We are a much smaller piece of a much bigger pie. Still the largest piece, still important, but not what we were.

Some of the perennial questions I get from clients arise from our diminished place in the scheme of things. What happens, for example, if the dollar collapses? Given the central role the U.S. occupies in the world financial system, the standing answer has been that it won’t happen any time soon. World trade is denominated in dollars, the world’s low-risk reserve currency. Under current conditions, there is no alternative.

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3/26/13 – Stocks for Income, Bonds for Capital Appreciation

March 26, 2013

First of all, credit where due: today’s title came from David Rosenberg of Gluskin Sheff, a terrific economist whom I read daily. I laughed the first time I saw it, but per yesterday’s post, I’ve come to believe that it has real applicability to most client portfolios.

The larger point here, though, is that the new new normal we now live in has forced us to reexamine many assumptions. To the extent that portfolios are based on how things were, and not how things are, we may be in the wrong place. The title above is a great way to express that.

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3/25/13 – Supply, Demand, and Interest Rates

March 25, 2013

One of the perennial questions in the investment world over the past couple of years has been “When are interest rates going to take off?” Very soon now has been the consensus—but it hasn’t happened yet. I’ve been as guilty as anyone, although I’ve tended to say something like, “Well, about 12–18 months from now.” I’ve been saying that for the last three or four years.

Mind you, it is likely that at some point everyone will be right, and interest rates will head up. I started calling the real estate market overpriced in 2005, for example, and I was wrong for several years—until I was right. I wasn’t the only one, of course, but you can be wrong for a while before you’re eventually right. Being early, especially too early, is wrong, though.

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3/22/13 − Good News, Bad News

March 22, 2013

In the absence of a single overarching theme today, I thought I’d hit a bunch of smaller points that are important but don’t warrant individual posts.


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3/21/13 - Housing Update: How the Recovery Improves the Economy

March 21, 2013

The housing recovery continues to become more mainstream. As a front-page article in today’s New York Times announces, “Housing Demand on Rise, Builders Race to Catch Up.” Hard to get more mainstream than that.

Now that the recovery seems to be official, it’s time to dig a little deeper into the story. Housing can boost the economy in many ways, not all of which are readily apparent.

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3/20/13 – The Price for Europe Becomes Too High

March 20, 2013

Based on some of the commentary about Cyprus, particularly in the New York Times, it would seem that the country is so small that the crisis there essentially doesn’t matter. I understand what’s behind this view, but I think it misses the point. Let’s take a closer look at why Cyprus does matter and how it could create some very unpleasant consequences in ways that perhaps aren’t immediately obvious.

Here’s the short explanation: Germany and the other major economies have decided they’re done paying any price to keep the eurozone together. A failed Cyprus bailout probably means that the country leaves the eurozone. For Greece, the rest of Europe was willing to pay almost any price to keep that from happening. Now they’re not. This is a big change, and it has implications for every country in Europe.

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3/19/13 – Taxes, as Simple as That

March 19, 2013

I’m still in New Orleans, but I wanted to expand on a response I wrote to a question posed by Faye Casey as a comment on an earlier post. It addresses, directly and indirectly, many of the issues we now face in Washington, D.C. The question was, “If we were to eliminate many of the loopholes in our taxation system, would it not be possible to have lower rates? Seems to me that’s what I’ve been reading lately.”

First of all, thank you, Faye. This is a very good question, and it raises a number of issues that speak not only to the tax problem but to every problem we have in Washington.

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3/18/13 – Is Cyprus the New Greece?

March 18, 2013

This will be a short post because I’m down in New Orleans at the Chairman’s Retreat conference. Commonwealth’s conferences offer absolutely wonderful content—my “Good Habits” post a while ago was based on an earlier one—and are a great deal of fun because of the people who attend.

I can’t focus on this right now, though, because Europe has come back with a vengeance as a risk factor. A bailout for the Cypriot banking system has been proposed, one that would whack individual depositors for the first time ever.

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3/15/13 – What Does the Fed Do Next?

March 15, 2013

The recovery continues. Employment figures keep improving, wages are edging up, and the unemployment rate is dropping. At some point, the Fed will have to make a decision to start pulling back, and that could be a problem.

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3/14/13 – Today Will Not Be a Good Day

March 14, 2013

I’m meeting with my accountant this evening to go over my finances and prepare my tax return. Although I like my accountant and enjoy catching up, I’m not looking forward to it because I always end up owing money. I set aside as little as I can throughout the year, so the question at tax time isn’t whether I owe, but how much. I know I could easily avoid this by having more withheld, but I dislike giving the government an interest-free loan more than I dislike writing the check.

What I try to remember is that my life is much, much easier on the tax front than it used to be. Once upon a time, I owned and managed a couple of different companies. Accounting and tax issues took up more of my time than I could initially believe. Now that I’m a W-2 employee, albeit one with various investments that create their own complications, life is easy. Sort of.

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3/13/13 – Where Do Record Stock Prices Come From? Part 2: Earnings Per Share

March 13, 2013

In yesterday’s post about revenue growth and profit margins, we talked about how the significant tailwinds that have benefited the markets over the past couple of years may well be playing out. With that in mind, if company earnings are looking to—at best—grow at significantly slower rates than they have over the past couple of years, does that mean similar results for the stock market?

Not necessarily. Stock prices are based on shares, not companies. The relevant metric, therefore, is earnings per share (EPS), not company earnings. The two are obviously connected; however, while company earnings growth may slow, EPS growth doesn’t have to lag to the same extent.

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3/12/13 – Where Do Record Stock Prices Come From? Part 1: Profit Margins

March 12, 2013

We’ve hit a record with the Dow and are getting very close with the S&P 500. Excitement is building, and the expectation is that stock prices will continue to rise. They may, for a while, based on the psychology alone, but as I discussed in the CFA Institute post last week, the financial fundamentals have to come into play at some point.

Ultimately, for a market rally to be sustainable, earnings per share—the metric that defines the financial benefit to shareholders—has to increase. The question now is whether the current rally is actually based on increases in earnings and, if so, whether that growth can continue.

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3/12/13 – The Current Love Affair with Income and High-Yield

March 12, 2013

Guest post from Peter Essele, CFA®, senior investment research analyst

To assess the riskiness of the highest-yielding area of the bond market relative to that of the equity market, we produced the chart below. The line shows the difference between the average yield for the high-yield market and the average yield for the top 10 percent of securities in the S&P 500. For instance, the current reading of 0.45 is the result of subtracting the average yield of higher-yielding equities (5.33) from the average yield in the high-yield market (5.78).

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3/11/13 – The New New Normal

March 11, 2013

I am rather proud of that title. How often do you get to riff on Bill Gross (“the new normal”) and Michael Lewis (The New New Thing) at the same time? As a bonus, I think it actually reflects what we’re seeing as the economy and markets evolve.

The New New Thing, for those too young to remember, is a book about Jim Clark and his role in the new Internet economy. It’s a great read and recalls a time when everything seemed possible, when we were entering a new economy and it really was different this time. Freed from the constraints of geography (and profitability), Internet companies were going to change the world.

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3/8/13 - The Bull Case for the U.S. Economy

March 8, 2013

I want to do something today that I do not do that often: make a specific case for something. Ordinarily, economics is very much a nuanced “on the one hand/on the other hand” subject—to the extent many wish for a one-armed economist. Today, though, I want to make the case for a strong U.S. recovery.

Let me be clear. I am not pounding the table on this. I still don’t consider it the most probable case, and there are certainly enough factors out there that could derail it. The news keeps surprising to the upside, however, and I think it makes sense to look at how we could continue to be pleasantly surprised as the recovery starts to gear and turn really strong.

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3/7/12 – Rather Pleased with This . . .

March 7, 2013

Recently, I was invited by the CFA Institute to contribute some thoughts to a discussion of investment versus speculation and how you can tell them apart. My commentary was published, and I’ve received some very nice feedback on it. You can read it here.


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3/7/13 – Let’s Talk Spending

March 7, 2013

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3/6/13 – Hooray for a New Record?

March 6, 2013

Yesterday, the Dow Jones Industrial Average hit a new record, up from its previous all-time high in 2007. As I have mentioned before, new records are generally a sign of market strength, at least for a while, and can spur more buying as investors fear missing the boat.

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Market Update for the Month Ending February 28, 2013

March 5, 2013

Markets take a roller-coaster ride

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3/5/13 - March 2013 Market Thoughts Video

March 5, 2013


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3/5/13 – Let’s Talk About Taxes

March 5, 2013

Part of our conversation yesterday revolved around the tax increases we saw early this year and the spending cuts that took effect yesterday. As I mentioned, these are both positive developments, but they’re only the first steps on a long road. What remains to be done is a multiple of what’s been done so far.

Politically, both moves are problematic. But, in my opinion, the tax increases are by far the more difficult. Everyone seems to be in favor of both tax increases and spending cuts—they just can’t agree on whom to tax or what to cut! Taxes, however, are more challenging in that they require taking something away from people that they already have. In many cases, spending is more nebulous, and defense spending cuts won’t mean I have fewer dollars in my paycheck.

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3/4/13 – The First Day of the Sequester

March 4, 2013

Despite the dire warnings, the sun rose today and people went to work. Planning shifted, if it hadn’t already, from avoiding the sequester’s spending cuts to implementing them. Entrepreneurs launched t-shirts and tchotchkes based the sequester and furlough.

Politicians, who had been warning of the disastrous consequences of the spending cuts, haven’t exactly backed off. Instead, they’ve adjusted the time frame—much like the doctor who had given his patient six months to live but then granted him an extension when he couldn’t pay off the bill during that time.

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3/1/13 – A Look at Market Valuations

March 1, 2013

I was thinking about market valuations this morning in light of some of the volatility we saw last month and some discussions we’ve had internally.

For illustrative purposes Apple is a good stock to look at for this kind of discussion. By some metrics Apple could still be considered inexpensive, but it’s uncertain whether it can continue to grow sales as fast as it has. How much of the valuation is based on the assumption of continued sales growth, and how will the stock price be affected if sales growth slows?

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