IS NOW THE TIME TO BUY?

IS NOW THE TIME TO BUY?

Some bulls see great opportunities in this correction.

Presented by Kip A. Hoover

“The lower things go, the more I buy.” The legendary Warren Buffett said those words on August 9 in a chat with Fortune. Buffett is a buy-and-hold kind of guy, and even if you don’t buy into his approach, you have to admit stocks are cheap in the wake of the recent correction. For many investors, a downturn like this means picking up quality stocks at markdown prices, including dividend-paying stocks.¹   Note that the general risks inherent to investments in stocks include the fluctuation of market prices and dividend, loss of principal, market price at sell may be more or less than initial cost and potential illiquidity of the investment in a falling market.

Just how cheap are stocks in August? We have some compelling valuations out there. Just to give you some idea of where the broad market is at, the 12-month forward equity earnings yield of the MSCI World Index (according to Reuters) was just above 10% on August 12. This was the highest earnings yield since January 2009 – and more than five times the yield of the 10-year Treasury in mid-August.²

Domestically, Capital IQ data from August 12 shows that stocks in the S&P 500 are trading at a forward price-to-earnings ratio of around 12. Historically, the forward P-E ratio for the S&P 500 has averaged about 16. Judging by that yardstick, we have a buyer’s market right now.³

Returning to Buffett, the “oracle of Omaha” once famously said that you should “only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” The stock market is very much a long-term proposition. The last decade or so aside, taking a long view and sticking it out has had its merits.⁴

When you were in college, where was the Dow trading at? Where is it now? For most people, the answer would be “notably higher”.

Have you noticed how oil prices have fallen? The ripple effect of this development also bodes well for equities. Oil settled at $85.38 a barrel on the NYMEX August 12. Compare that to the $100 oil of February. Oil price cuts imply a stronger U.S. economy – with better corporate profits, lower energy costs, and improved tax receipts.⁵

Could a QE3 come along? The Federal Reserve hasn’t indicated this, but don’t rule it out considering that President Obama’s popularity is scraping new lows and he would like another term in office. Another monetary stimulus from the Fed would mean more cash, which could mean more money directed into gold or equities.

Fed policy could be a big factor in the market’s direction. On August 9, the Fed issued a remarkably definite statement, pledging to keep the federal funds rate at near-zero levels through mid-2013. Wall Street’s volatility might ebb when institutional investors conclude whether or not that tactic will really improve America’s GDP. ⁶

Is the glass half-full or half-empty? Bears are arguing that we don’t have enough job creation in the economy (or buying pressure in the stock market) to drive stocks up. They also point out that the Dow dipped beneath its 50-day moving average and 200-day moving average during the choppy trading week of August 8-12.⁷

Bulls are countering these arguments by pointing to the relative strength index of the DJIA. On August 11, for example, the Dow’s RSI was at 26.6. A reading below 30 is interpreted as a signal that the market is oversold. The S&P 500’s RSI hit 16.5 on August 8, which was a 10-year low. They also think that Ben Bernanke’s approach will succeed – that is, that these sustained low interest rates will encourage businesses to borrow and expand, with gains in consumer income and consumer spending as byproducts. On top of that, many corporations are generating decent or better profits, and carrying much less debt than they did two or three years ago.^7,8

Markets eventually rebound – so these prices won’t last forever. Falling share prices may translate to some outstanding long-term opportunities. Whether you simply practice dollar-cost averaging or something more hands-on, persistence and longevity can be good friends.

Last week, Chicago Tribune columnist Gail MarksJarvis noted how quickly we came back from the 2007-09 bear market. A hypothetical investor with $10,000 in assets divided evenly among long-term Treasuries and an index fund mirroring the S&P 500 would have had but $7,700 by April 2009. By October 2010, the value of that portfolio would have grown 46.8% in 18 months to around $11,300. You don’t want to miss comebacks like that – and Wall Street is certainly capable of making them.⁹

Kip A. Hoover may be reached at «440-729-0036 or kip.hoover@lpl.com.

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - finance.fortune.cnn.com/2011/08/11/warren-buffett-buy-stocks/ [8/11/11]       

2 - reuters.com/article/2011/08/12/us-markets-global-weekahead-idUSTRE77B39D20110812 [8/12/09]               

3 - google.com/hostednews/ap/article/ALeqM5jzRK3TF86yN06W1SofDFjPh8eudg?docId=77bfe0d2fbf547498af426d607e98515 [8/12/09]       

4 - billionaires.forbes.com/quote/06lobtIfiO10y?q=Warren+Buffett [8/12/11]             

5 - blogs.wsj.com/marketbeat/2011/08/12/data-points-energy-metals-511/ [8/12/11]

6 - online.wsj.com/article/BT-CO-20110809-716770.html [8/9/11]

7 - ibtimes.com/articles/196193/20110811/dow-jones-industrial-average-dow-djia-stocks-market-banks-financical-crisis.htm [8/11/11]

8 - bloomberg.com/news/2011-08-09/s-p-500-relative-strength-lowest-since-2001-technical-analysis.html [8/9/11]

9 - chicagotribune.com/business/yourmoney/ct-biz-0812-gail-20110812,0,2500613.column [8/12/11]

10 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [8/14/11]

A TIME FOR PATIENCE

A TIME FOR PATIENCE

Coping with the market during a rough week for stocks.

Presented by Kip A. Hoover

As expected, a plunge. World stock markets swooned on August 8 in reaction to Standard & Poor’s downgrade of U.S. long-term debt. On Wall Street, the DJIA fell 634.76, the S&P 500 79.92 and the NASDAQ 174.42. It was the toughest day on Wall Street since December 1, 2008, when the National Bureau of Economic Research announced America had lapsed into a recession.^1,2

Investors endured a shock like this last year. In spring 2010, the S&P 500 pulled back 16% from a peak. At the close on August 8, the index was down 16.8% from its spring 2011 high.³

In 2010, the market healed within a few months. What happened after the 2010 correction? We had a sustained rally from September to New Year’s Eve. The DJIA finished 2010 up 11.0%, the S&P 500 up 12.8% and the NASDAQ up 16.9%.⁴

When will we see capitulation? Yes, when will this mood lift? When will investors see merit in buying? Several factors might encourage a relief rally or something greater.

·         The European Central Bank plans to buy up debt from Italy and Spain.

·         The Federal Reserve could decide to buy up 10-year Treasury bonds and other long-term notes, echoing a move it made during the early 1960s. Economists and bond market analysts are beginning to think we could see this kind of QE3.

·         Amid the heavy volume, bargain hunters will inevitably start shopping. As Suze Orman told CNBC August 8, “This is a gift from the stock-market heavens … in 2008 we had far grander problems than we do today. But by March of 2009, the stock market was rising again. What makes you think that won’t happen again?” In this correction, dollar-cost averaging could potentially snag great values.

·         Some positive signals can be found in the turmoil: falling oil prices imply lower retail gasoline prices for consumers, the manufacturing and service sectors are still growing, interest rates are quite low and corporate profits have nicely improved. As to the chance of a double-dip recession, the U.S. economy is projected to grow 2-3% in 2012, which is about double the growth forecasts for the European Union, Great Britain or Japan.

·         Nobody’s running away from Treasuries. In fact, Treasury yields sank 0.18% August 8, making it cheaper for the U.S. to finance its debt.^5,6,7,8

How might the downgrade of Fannie & Freddie affect the housing market? It might impact consumer confidence more than anything else. S&P’s August 8 downgrade of Fannie Mae and Freddie Mac to AA+ from AAA didn’t immediately shake up the mortgage market, as 10-year Treasury yields were down to 2.40% Monday.^7,8

Moody’s affirms America’s Aaa rating. “Despite the outlook for some further deterioration in the government’s debt metrics over the coming few years, we believe that the U.S. continues to exhibit the characteristics compatible with an Aaa rating,” Moody’s Investors Service senior credit officer Steven Hess wrote in an August 8 note. Moody’s also noted America’s longstanding track record of economic growth as a big reason for confidence. Fitch Ratings also refrained from a U.S. credit downgrade, and both Moody’s and Fitch stated that the possibility of sovereign default was remote.^9,10

Relatively speaking, stocks still look cheap next to bonds & cash. As the dust settles from these big market drops, Wall Street will have to weigh its collective direction. On the one hand, you have rampant anxiety; on the other hand, you have attractive valuations. Patience may prove to be a virtue as the saga plays out and we eventually return to market fundamentals.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - blogs.wsj.com/marketbeat/2011/08/08/data-points-u-s-markets-38/ [8/8/11]   

2 - money.cnn.com/2008/12/01/markets/markets_newyork/index.htm [12/1/08]  

3 - articles.latimes.com/2011/aug/04/business/la-fi-0804-markets-qa-20110804 [8/4/10]       

4 - blogs.wsj.com/marketbeat/2010/12/31/data-points-us-markets-337/ [12/31/10]

5 - cnbc.com/id/44029585 [8/8/11]

6 - cnbc.com/id/44064969 [8/8/11]

7 - foxbusiness.com/markets/2011/08/08/despite-downgrade-us-still-towers-over-peers/#ixzz1UTwUYiFa [8/8/11]

8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield [8/8/11]

9 - blogs.wsj.com/developments/2011/08/08/sp-downgrade-could-feed-home-buyer-anxiety/ [8/8/11]

10 - advisorone.com/2011/08/08/stocks-plummet-on-downgrade-as-obama-defends-aaa-m [8/8/11]

Rounding up the rankings of places to be (and not to be) financially.

THE BEST AND THE WORST

Rounding up the rankings of places to be (and not to be) financially.

Presented by Kip A. Hoover

Do you live in one of the worst tax states for retirees? Are you fortunate enough to live in one of the best states to do business? Here is a roundup of the miscellaneous, fascinating rankings offered by leading magazines and websites.

What are the best (and worst) states for business? Well, CNBC has ranked all 50 states based on 43 criteria including quality of work force, cost of doing business, quality of life, state economies and access to capital. Coming in at #1: Virginia. Number two is Texas, number three is North Carolina. The state with the lowest cost of doing business – Iowa – ranked 9th. The bottom three? Hawaii (48th), Alaska (49th) and … Rhode Island? Yes, it was dead last. CNBC cited its 10.9% jobless rate and a corporate tax rate nearly as high.^1,2

                     

What are the best (and worst) tax states for retirees? Kiplinger sees four “tax hells” in the Northeast. Vermont is ranked #1 (high property taxes along with state levies of up to 8.95%) and Maine, Connecticut and New Jersey also make the bottom ten. Minnesota is #2, Nebraska #3, Oregon #4 and California #5. As to the best, Wyoming ranks #1 among the “tax heavens”, followed by Mississippi, Pennsylvania, Kentucky and Alabama. Wyoming has no estate tax, no state income tax, and only a 4% sales tax; the state collects abundant revenues from oil and mineral firms.^3,4

What cities may be especially attractive for a retiring baby boomer? Fortune offers 4 “great places”, citing ideals among four types of retirement destinations. It ranks Athens, GA as the best college town, Seattle as the best big city, St. George, UT as the best town for outdoors lovers and San Rafael, Argentina as an ideal foreign city for retirement.⁵

Where could I live well and prosper in my career or business? Kiplinger has ranked its Best Value Cities – metro areas featuring “vibrant economies, a low cost of living, and plenty of lifestyle amenities.” The #1 place to be is ... Omaha. Then we have Charlotte at #2, Nashville at #3, and respectively 4th-10th we have Colorado Springs, Knoxville, Lexington, Little Rock, Wichita, Cedar Rapids and Cincinnati. It also identifies the metro areas with the largest household income growth between 2005-09: Midland, TX (+31.3%), Grand Junction, CO (+24.8%) and Jacksonville, NC (+21.8%) came in 1-2-3, while the three biggest household income declines were in St. George, UT (-11.2%), Muskegon-Norton Shores, MI (-11.4%) and Albany, GA (-11.9%).^6,7

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com     

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - cnbc.com/id/41666602 [7/29/11]

2 - advisorone.com/2011/06/29/top-10-best-states-for-business?t=marketing-technology [6/29/11]

3- finance.yahoo.com/focus-retirement/article/112987/tax-unfriendly-states-retirees [6/24/11]

4 - finance.yahoo.com/retirement/article/113021/5-tax-friendly-states-retirees-kiplingers [7/1/11]

5 - advisorone.com/2011/06/03/4-great-places-for-baby-boomers-to-retire?page=2 [6/3/11]

6 - kiplinger.com/guides/best-cities/ [7/31/11]

7 - kiplinger.com/tools/bestcities_sort/index.php?sortby=salary&sortorder=ASC [7/31/11]