S&P 500 Price Correction Coming?

  S&P 500 Price Correction Coming? Investors have seen a tremendous market increase since the dark lows of 2009. It has been an interesting run since that time – navigating a unique and unprecedented Federal Reserve policy. As another quarter closes and the U.S. markets look relatively flat YTD… It’s a great time for reflection. Price Pays 205% return from the depths of those lows coupled with $4T+ of Federal Reserve balance sheet and zero interest rate policy! This reminds me of the bizzaro world Seinfeld episode. That crazy Gene and Feldman.   I prefer to use the valuation method from Dr. Robert Shiller – Cyclically Adjusted Price to Earnings Ratio (CAPE). The current level is approximately 27.5 with a S&p 500 close of about $2,066. The 5 year average is 22.7. I wondered if we were to revert to the 5 year mean, what type of price correction would the S&P 500 see? It would see approximately a 22.46% correction. I also find it interesting that (per JP Morgan) we are at the 25 year average. Historically speaking we’re at parity for valuations, but in shorter term duration we’re over valued? Ironically the dot-com bubble CAPE was about 44.       Here are the respective S&P 500 sectors; same valuations:         Things seemingly look a little bleak out there. Wage growth is low, unemployment is reasonable (sort of), inflation is low, market valuations are on the high side, Fed holding $4T balance sheet and sitting at ZIRP. Damn Gina! Whatever your investment strategy is… Make sure that you stay diversified based on the risk profile you have...

McDonald’s Brand ReInvention – Ronald’s Trying Hard

You either have it or you don’t… A real life example of brand reinvention is the NBC’s Tonight Show. If you compare the vibe of  Tonight Show with Jay Leno versus Jimmy Fallon you can see an effective reinvention of the Tonight Show brand. As with Fallon/Leno – You either have it or you don’t. Is McDonald’s brand reinvention working? McDonald’s doesn’t have it right now. I find it entertaining watching them find it. Some of the most recent moves to attempt to right the ship. McDonald’s Brand Reinvention McDonalds continued sales decline; New CEO tasked with pulling them out McDonalds going to try all day breakfast McDonalds swag; don’t just eat your burgers – wear ’em Table Service in Germany Burbon Burger These things are all just rolling out recently… With the decline of sales and a continued pressure on the the obesity epidemic – I think they may be hurting. Since we’re among friends here, I’ll let you know that I would not mind owning a burger shirt. I’m not saying I would actually wear it. I’m just saying I’d own it. If you look at their share price, it’s only approximately 3% off it’s 52 week high (as of March 30th closing price). Take a look at their stock chart. The price continues to move upward as their sales decline. So what you do you think? Will these things impact their sales over time? Can they appeal to a younger generation?     Full disclosure: I have no direct position in MCD. Maybe some exposure through mutual funds/ETFs.   Update: McDonald’s now raising pay across the board by 10%....

Fed Rates Impact More Than Bonds

Fed Rates Impact More Than Bonds Federal Reserve rate increases have a large ripple throughout the investment world, however it also has consequences for the U.S. Federal budget and deficit. Fortune Magazine estimates that rate increase will add $1 to $2 trillion dollars to the deficit over the next decade. This could be another reason why the Fed will want to carefully consider rate increases. I don’t believe that the Fed should sit at ZIRP forever… The Fed kept a ZIRP policy longer during this recovery. Check out this chart of the last Fed rate hikes. The Federal Government relays on borrowing to fill the gap of their “lack of income.” Interest on the borrowing is what the Fortune article is referencing. If we take the 2015 Federal Budget you can see it is an estimated $469B.   If the Fed raises interest rates 1% over the current Fed Funds rate that will equate to approximately $4.69B in additional interest rate payments. Let’s assume they raise up to 4% range… it’s $18.76 BILLION!                 The Federal Government has been running a budget deficit for what seems like forever. As I posted, 2018-2019 has a significant amount of treasuries maturing as a result of QE… When we see higher rates when that debt seemingly rolls over, we’ll be paying higher costs for supplementing our nations lack of income. Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions for a full...

Does the Federal Reserve Care about my Fixed Income Portfolio?

Does the Federal Reserve Care about my Fixed Income Portfolio? It’s fairly reasonable to make assumptions, based on Fed language, that the Federal Reserve are looking to raise interest rates… It appears some time this year. Now, Ms. Yellen has been very political-esq in her choices in language. She doesn’t give any more or less than she needs to in order to say something while saying nothing. Wait, what? Yep – that’s’ right. So what happens to my fixed income portfolio if the Federal Reserve raises interest rates 1%. JP Morgan has put together a quick chart on this…  I won’t bore you with the math (until later). The basic sense is 1% price decline per year of duration. So you can do the rough estimation on your fixed income portfolio. However, you need to keep in mind the volatility, credit risk and place in the market. I would suggest reaching out to your financial advisor professional to see if you’re properly allocated based on your risk level. JPM also put together this visual of the yield curve at the end of the year. Keep in mind the 30 year U.S. Treasury had the 4th largest bull market run. Interesting factoid.   I know you’re really excited about the math. Here you go.. directly from JPM: Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2). *Calculation assumes 2-year Treasury interest rate falls 0.67% to 0.00%, as interest rates can only fall to 0.00%....

CNBC: Equity Fund Outflows Pre Crisis Pace, Really CNBC?

CNBC posted an article today that says that investors are fleeing out of equity funds at pre-crisis levels.  They claim this is due to volatility increases. I see it slightly different. Currently the Volatility Index (VIX) displays at approximately 15. Compared to the last market correction, some 40 odd months ago, at 43. Pre-Crisis level (January 2008) the VIX sat at 26. In October of 2008 it sat about 59. So, CNBC – I call bullshit! See some captures of the 5 year and 10 year VIX charts from Yahoo Finance:   Alright, so let’s give CNBC the benefit of the doubt here… Take a look at the flows of funds from investors in the past: I’m not claiming that the U.S. markets are not overdue for a market correction. Typically, investors see that occur approximately every 20 months. The U.S. market has not seen a market correction dating back 40+ months (Summer of 2011). The further we go from the average, the more likely it will happen. However, the market can be irrational longer than you can be solvent. It seems that Janet Yellen has all but said the Fed will raise rates sometime in 2015. This might be the time that the market starts to see some type of correction… Through all of this, make sure that you’re staying diversified to your risk profile.     Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions for a full...
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