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Are We in a Cyclical Bull or Bear Market?
By William Parmenter, editor
Don Richner, CFP,talked on Cyclical Bull? Or Is the Secular Bear Resuming? at the Feb. 18 meeting of the Los Angeles chapter of the AAII at the Skirball Center.
Richner is vice president of Churchill Management Group. He has a bachelor’s degree from the University of Southern California, and is a certified financial planner.
His talk focused on the alternating secular bear and bull markets that have occurred since 1929, which was followed by an extensive and engaging question and answer period.
He started by asking the audience members how many were holding cash. It turned out to be a significant minority. Then, he asked, why? The answer was that people felt an air of uncertainty, fearful that prices could go down.
That transitioned into a presentation of the characteristics of the recurring pattern of alternating secular bear and bull markets. By secular, Richner meant long term.
The roaring ‘20s was a era of dizzying financial and cultural expansion, until the crash of October, 1929 shattered the economy in the Great Depression.
The secular bear of Great Depression from 1929 to 1942 gave a long opportunity to unwind the inflation of the 1920s, and was marked by a down-up-down, stock-market trend.
From 1942 to 1966 occurred a secular bull, marked by growth, inflation and a 955 percent stock market gain.
From 1966 to 1982 came another secular bear market, unwinding all the previous inflation, with only a net 33 percent stock market growth in all those lean years.
From 1982 to 2000 there was another secular bull market, marked toward the end by tremendous growth of technology stocks, with the Nasdaq Composite peaking at 5,000 in March, 2000. The stock market gained 1,089 percent. The period marked a huge expansion of the retail brokerage business via inexpensive internet trading, investment seminars, and client-initiated research on web sites. Prominent were Charles Schwab, Fidelity, and Vanguard’s, John Bogle for pioneering index funds.
Happy days were followed by sad days as the secular bear tore through tech and trashed housing in the rampaging bear market that has been decimating the economy from 2000 to today in 2012. Notwithstanding the best January in the financial markets in 15 years, the cautious money is betting the bear is going to tear up the markets again, and is shoring up its defenses against the next plummet. Not if, but when, is the sell-off coming? There is massive housing indebtedness with a long unwinding path ahead.
Table of ContentsCyclical Bull or Bear?...... Don Richner…………p.1
The Value of Dividends…….John Buckingham………p.3
Education Nuggets………..Don Gimpel………………p.5
Computer Users Group, Part One…………………….p,5
Computer Users Group, Part Two……………………p.8.
Since 2009, the market, according to Richner, has come up 23 percent. Good, but bad, because it is the weakest recovery since World War II.
What is that decisive move we need to make in a serious downturn, when every sector is going down hard and fast? Forget about relative return, and preserve your cash. You do not have to be a FOREX expert to know that cash is an asset class. Invest in cash. Said Richner, “cash is the only capital preservation strategy.”
Right now the fundamentals look terrible and the technicals look good. Since fear and greed power the market, the outlook is problematical. The secular bear will end when the deleveraging is over, perhaps years hence, and the market becomes undervalued. When P/Es are low enough, it will spark a buying surge.
What to look at? Check statistics on new highs and new lows as a percentage of total invested. When it hits .40, expect the market to turn up.
Keep an eye on Bernanke’s pronounce- ments at the Fed. He said interest rates would be kept low until late 2014. Wait and watch.
Monitor advisory service sentiment. The bulls as a percentage of the total of bulls and bears hit an extreme low of 35 percent in March, 2009. Extremes are turning points.
Do not look to short sales as a strategy, due to getting tossed out in choppy down moves.
Look for a divergence in the trend lines of the Dow 30 and the NYSE. Usually the chart lines are parallel, as one is a sample of the larger universe, but in times of stress they diverge.
Look for your calculations, based on trends and probabilities, to be thrown off by events, for example, this year’s presidential election. The $25 billion mortgage servicers settlement will help banks move ahead with foreclosures, which will drive housing prices lower.
In the question and answer session, Richner cautioned, not to get too comfortable. The secular bear will be back. When? Possibly after the presidential election.
To control for losses Richner puts in stop losses at 7 percent, 10 percent and 15 percent, depending on the situation.
Citing Investor Business Daily (IBD) several times, Richner said to look for relative strength, which he defined as the investment prospect moving faster than its benchmark. Look for indicators that have predictive value, then look for confirmation. Leadership emerges through relative strength. IBD looks for leadership. Buy stocks on breakouts
Avoid value stocks that are languishing.
Los Angeles County Meeting ScheduleWestside Computer Group – Don Gimpel, (310) 276-9875 . Veterans of Foreign Wars Memorial Bldg. Culver Blvd. and Overland Avenue, Culver City. The group will meet at 10:30 a.m., Saturday, April 7. Topic: TBA. The UltraFS 11 group will meet at 9 a.m. on the same day.
Pasadena Group– Will meet at 7 p.m. March 20, at Pasadena Main Library, in the David Wright Auditorium, at 285 E. Walnut St., Pasadena. (Meets third Tuesday of the month, except for August and December.) Topic TBA. Voluntary contribution of $2. Contact, Ivan Wong at (626) 446-2486, .
Mutual Fund Group – Meeting time and place to be announced.. For more information,contact Gunter Hagen (310) 457-7404; . Meetings are free to the public.
Stock Selection Group—Norm Langhout, (310) 391-6430, . Meeting at 7 p.m. , March 28, using IBD, CANSLIM stock selection method , at Fairview Library, 2101 Ocean Park Blvd., Santa Monica. The group meets the fourth Wednesday of the month.
Los Angeles Chapter, Skirball Center at 9 a.m, Sat. Mar. 17. Seven Books in 49 Minutesby Don Richner, CFP, at Conservative Wealth Management and Is It Worth Trying to Beat the Market? How to Make Sound Choices in Today’s Volatile Marketsby Janet Brown, president, FundX Investment Group and editor of the NoLoad Fund*X
Desert (Palm Springs area) Group Usually meets from 10 a.m. to noon, second Saturday of the month at Sunset View Club House, Sun City, PalmDesert. Currently a meeting on dividend stocks is in the planning.For more information, contact Patricia Gammino, . or at (760) 485-6161.
Option Special Interest Group, meets online on first and third Tuesday of the month at 7:30 p.m. Get instructions on how to participate at ; click on subgroups, and get information from the Options Special Interest Group. Group leader is Robert Morgan at .
Richner is not looking for low P/E stocks. His is not a value stock approach.
Apple is projecting a 47 percent growth for 2012. Keep your eye on it. It could be getting into parabolic growth, signaling a blow-off, followed by steep selling.
Never call the tops or bottoms. Get your fair share and move on. Try to avoid the down drafts.
The Value of Dividends
By William Parmenter, editor
John Buckingham, editor of the Prudent Speculator, spoke on The Value of Dividends: The Prudent Speculator’s Top 2012 Stock Picks for Capital Appreciation and Incomeat the Feb. 18 meeting of the Los Angeles chapter of the AAII at the Skirball Center.
Buckingham is the chief investment officer at Al Frank Asset Management (AFAM).. He has a B.S. magna cum laude in computer science, with a minor in business administration, from the University of California at Southern California
He has had two jobs in his life. One was as a bus boy. The second with AFAM, which he joined right out of college in 1987.
Buckingham has been giving public talks on financial management since the 1990s—and it showed. His talk was well organized, skillfully presented, and his easy-to-read slides were a model of good layout and brief, on-point messages.
The talk was divided into four topics: 1) Fear and Greed, 2) Case for Equities, 3) Value of Dividends and 4) Undervalued Stock Selections.
Regarding fear and greed, the market pendulum swings mightily in both directions. After the stock mother-of-all crashes that bottomed in December, 1974, the market was up 69 percent in two years. Those caught napping were destroyed, and the skillful were richly rewarded.
Between October, 2007 and March, 2009 the market dropped between 50 and 60 percent. Six months later the S&P 500 had shot up 53 percent.
The hot-button issues are out there: Greece, the collapse of the Euro zone, a snail-pace recovery in which full-employment is never attained, millions of pending housing-mortgage foreclosures, and a banking industry riddled with corruption and a reputation in tatters.
What to do?
According to investment legend Peter Lynch, “The key to making money in stocks is not to get scared into getting out of them.”
As for the case for equities, lows in consumer confidence is a buy signal. The AAII bull-bear spread is a good contrarian indicator.
The double-digit unemployment, and a double-dip recession did not materialize. GDP is growing slowly and is way off a recession.
People want to buy stocks when the unemployment rate is high, and starts to decline. As unemployment declines stocks go from cheap to pricey.
Fed policy has been accommodative, planning to keep interest rates at rock bottom until late 2014. The Fed will only raise rates when the economy is showing much more strength.
Corporate profits were never better, at an all time high. The average big corporation has never been better off in terms of profits and its balance sheet. Take Apple, for example, the fourth quarter earnings report was the best ever, and the company is holding $98 billion in cash.
Yet, stocks are getting little love. The Investment Company Institute reported on Feb. 8, 2012 that $7 billion flowed into bonds, while during the same period, just over half of that, $3.6 billion flowed into stocks.
Left to themselves, stocks do better than investors. Over a 20-year period the S&P 500 returned 9.14 percent, while investors gained 3.83 percent. What happened? Investors chased performance. They jumped out too quickly, staying in an average of 3.27 years.
Since October, 2011 stocks are up 25 percent, in the face of bad news and worries.
Look at long time periods. Odds favor the long-term and patient investor, said Buckingham. If the market starts cascading down, protect your capital, perhaps by investing in cash, until the market turns up again.
On the topic of dividends, Buckingham started by comparing returns of growth and value portfolios between 1980 and 2010. Small-value returned, 14.7 percent; large value returned 10.3 percent; large growth returned 9.3 percent; and small growth returned 8.6 percent.
With respect to value versus growth in up versus down market conditions, value underperforms in market declines, and outperforms during market growth. Conversely growth does better during market declines and underperforms during market growth.
When the market is surging higher expect the following rank order of performance with best going to small value, followed by large value, small growth, and last going to large growth.
For top total returns compared to dividends: the top 30 percent of dividend payers returned 11 percent; the middle 40 percent of dividend payers returned 10 percent; the bottom 30 percent of dividend payers returned 8 percent. Non-dividend payers returned 7 percent. Dividends account for 36 percent of total return.
Stock performance follows an annual cycle. November through April returns are historically the best at 7 percent. From May through October returns historically lag way behind, at 3 percent.
What are reasons for buying dividend stocks? Buy dividend stocks for these relative reasons: 1) more income, 2) less volatile, 3) finances are stronger, 4) earning streams are more stable, 5) and capitalization is larger.
Buckingham initiated topic four, undervalued stock selections, with a quote from the quotable Warren Buffett: “If a stock does well, the price eventually follows.”
Comment, the rub is in the word ‘eventually,’ as investors, even Buffett, have reasonable time frames. Buffett stepped away from his mentor Phillip Graham’s unalloyed value approach, commenting that he did not want to hold on to stale, cigar butt companies. For a stock to move, as the IBD group points out, stocks need stimulation, such as a new product, market, manager or institutional sponsorship. Buckingham noted that real money has not come into the market. Pro money is in the market. Private customers are on the sidelines.
Why? Professional managers are keeping their luxurious houses in the Hamptons by taking no risk. They make their money off other people’s money (OPM), by charging fees and fixed or sliding-scale percentages. They get paid salaries and are eligible for bonuses. Professional money managers, being too savvy to take risks, structure deals so that they get a guaranteed return and the investor takes the risk.
Buckingham offered 13 undervalued stocks by way of education and of research prospects for investment. Neither he, nor AAII, is recommending these stocks, so let the reader beware.
Here are Buckingham’s selections: the company name, the ticker symbol, and some incidental notes. Take these prospects and research them for yourself.
Archer Daniels Midlands (ADM), an Illinois-domiciled international grains, food and commodities corporation, with a$21.04 billion market cap, a 17.66 P/E and a2.2 percent dividend yield. Some features: food grains, international expansion, stock buy-backs, a commodities play, and, strong management.
Credit Suisse (CS), Zurich-based financial services company with three segments: private banking, investment banking and asset management, with a $33.16 billion market cap, an EPS of $1.49 with an 11.8 forward P/E, and a dividend yield of 5.4 percent.
Ericsson (ERIC), a Swedish international phone and telecommunications company with a market cap of $32.1 billion, a 17.66 P/E and a dividend yield of 3.8 percent.
Exelon (EXC), largest utility in the U.S.A., with a $26.5 billion market cap, and a 5.3 percent dividend yield. Share price has dipped 11 percent since November. Long term, nuclear power is more viable than coal, which is polluting.
General Dynamics (GD), one of the big four defense contractors still standing, with a dividend yield of 2.6 percent.
Intel (INTC), of Santa Clara, CA, the largest semiconductor manufacturer in the world, with a market cap of $134.9 billion with a dividend yield of 3.2 percent, and a forward P/E of 10.9 percent
Navios Maritime (NM), a seaborne shipping and logistics company, headquartered in Greece, with a $3.8 billion market cap, a 6.4 percent dividend yield, and a forward P/E of 6.4.
Norfolk Southern (NSC), an eastern U.S. railroad with a $9.5 billion market cap, and a 2.6 percent dividend yield.
Portugal Telecom (PT), invested in Africa and Brazil, with a $4.9 billion market cap, and a 15 percent dividend yield.
Staples (SPLS), office furniture, look on it as a play on the recovery of small businesses.
Total S.A. (TOT), a global player in the energy field, whose overall chemical operations are the largest in the world. It has a market cap of $12.8 billion, and a dividend yield of 5.5 percent.
Walgreen (WAG), the best choice among drugstore chains, currently cutting expenses, and in a turn-around mode. It has a $29.2 billion market cap and2.7 percent dividend yield.
Waste Management (WM), often recommended during downturns as a stable performer. It has a market cap of $16.3 billion, and a 4 percent dividend yield.
The stock recommendations concluded Buckingham’s talk, which ran the allotted time, leaving no time for a question and answer session.
Education Nuggets
By William Parmenter, editor
Dr. Don Gimpel talked about where to go to get senior discounts, on the theory that saving money is as significant as earning money,during his five minutes of investor education at theFeb. 18meeting of the Los Angeles Chapter of the AAII at the Skirball Center.
Gimpel pointed out that seniors are sought after by retailers as a desirable demographic.
For most retailers, seniors started at age 60, but there were a few that dropped the age to 50, and a few that raised the bar to 65. Most of the discounts were 10 percent, but one, the Salvation Army, gave discounts up to 50 percent off, starting at age 50. Who knew buying someone’s discards could be such a bargain?
The discounters, with their discount percentage, follow: Arby’s, 10; Burger King, 10; Denny’s, 10; Chili’s, 10; Ben and Jerry’s, 10; IHOP, 10; Jack-in-the-Box, 20 for over 65 years old; KFC, any small drink with a meal; Subway, 10; Wendy’s, 10; Ross, 10 on Tuesday for over 55; Kmart, 20 for over 50; Banana Republic, 10 for over 50; Big Lots, 10; Salvation Army, up to 50 for over 50; Albertson’s, 10 on first Wednesday of the month for over 55; Dollar rental, 10 for over 50; Budget Cars, 10;Holiday Inn, 10 to 30, age 62;Hyatt Hotels, 25 to 50, for over 62; Motel 6, 10 for over 60; Econo Lodge, 20 to 30; Quality Inn, 20 to 30 for 60 years and older.