Is Cash Signaling an Opportunity?

Posted by Tim Hope on 9/4/08 10:17 am

With the stock market currently struggling through a rough patch, it can be instructive to examine a ratio of cash levels (as measured with money market assets) relative to the market.  The reason is that such a measure can help to identify the degree to which liquidity is available as fuel for market advances.  Currently, cash assets on the sidelines are at a level that has not been seen in over 25 years.  Given that after taxes and inflation money market fund returns are, likely to be negative or close to it, equity investors may find that the opportunity cost of sitting in cash will look less and less attractive.  Of even greater interest for investors is that the last time cash levels were so high, the S&P 500 more than doubled in the following three years.

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The Dow Jones Industrial Average and Record Highs

Posted by Tim Hope on 8/28/08 12:37 pm

Interestingly, since 1904 there have been 61 years in which the Dow Jones Industrial Average did not make a new high.  However, of greater interest for investors is what has occurred in the following year.  Historically, the median return in such a year has been 10.5%.  While anything can happen before the year draws to a close, a least history is on the side of the investor for next year.

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Hurricane Season and the Market

Posted by Tim Hope on 8/25/08 12:13 pm

As the 2008 hurricane season continues to unfold, it is instructive to examine market behavior in the months following major storms that battered the United States (seven category 4 and 5 since 1954).  Interestingly, for the periods examined, mean and median market performance was uniformly positive.

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A tale of two PPI inflation stories.

Posted by Tim Hope on 8/22/08 10:10 am

Each month the U.S. Bureau of Labor Statistics publishes the Producer Price Index (PPI) which is an index measuring changes in wholesale prices.  Despite the fact that food and energy prices have increased significantly over the last few months, they are routinely excluded in official inflation figures so as to arrive at a “core” rate.  While the current “core” rate is a relatively modest 3.5%, it is at a 17 year high.  In addition, it is also 75% higher than the high end of the Fed’s 1-2% target rate.  Looking at the PPI as a whole, the index is at a 27 year high of 9.8%.  Since some use the PPI as a precursor to movements in the Consumer Price Index (CPI), such developments may have a significant impact on the behavior of consumers and wage earners.

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Oversold Energy Stocks Present Opportunity?

Posted by Tim Hope on 8/5/08 11:55 am

Over the past quarter century there have been only three other occasions where the S&P 500 Energy Sector was oversold to the degree that it is today.  In general, after such inflection points, over the subsequent twelve months the performance of the sector has historically been very attractive.  Extreme market conditions often offer investors entry points for profitable investment decisions.

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Housing Mortgage Rate Headwind

Posted by Tim Hope on 8/1/08 10:42 am

While policy makers struggle to bring financial solutions to the problems in the housing market, the cold reality is that home inventories are at multi-decade highs.  In addition, home mortgage rates are presently in an uptrend which may complicate the ability of the marketplace to reduce the surplus of homes.

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Stocks versus Bonds: A Historical Performance Anomaly

Posted by Tim Hope on 7/23/08 10:40 am

Ned Davis Research recently pointed out that over the past ten years stocks have underperformed bonds by the widest margin in nearly seven decades.  Should mean reversion begin and thus reassert the historical performance trends between the two asset classes, investors may wish to consider reducing their fixed income exposure in favor of larger stock allocations.

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The collapse in banking and retailing.

Posted by Tim Hope on 7/16/08 9:50 am

Banking and retailing are critical industries to the health of the U.S. economy.  Both sectors have been hit hard and it could be that additional troubles may lie ahead.  However, with so much damage done, is it now the “darkest before the dawn?”

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How do stocks perform following a bear market?

Posted by Tim Hope on 7/15/08 10:49 am

With stocks recently falling into a bear market range, investors would be well served to consider the performance of stocks following the end of a bear market.  Historically, small cap stocks have enjoyed a performance advantage over large cap stocks in the months following the end of a bear market.

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Adjusting Energy Dependence for Population and GDP

Posted by Tim Hope on 7/11/08 11:28 am

Past dramatic increases in oil prices resulted in significant U.S. economic dislocations as the economy tried to adapt to higher energy inputs and government policy responses.  However, aside from “sticker shock” at the pump, the overall economy currently appears to be coping reasonably well.  Interestingly, adjusting energy use by GDP and per capital measures demonstrate that the economy is now less dependent on energy now than it was in the mid-1970’s and early 1980’s. 

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