2011 Market Thoughts

It seems the stock market has recently gotten everything it wanted in QE2, no expiration of tax cuts, additional stimulus and strong earnings reports.  Still the S&P 500 is about where it was in April and has made no progress in over a month.  Although the market can still break to the upside, the move off the March 2009 bottom has discounted a lot of good news while ignoring all the real pitfalls that may be ahead. 

We here at Brotelli Investments believe a significant market top is ahead and should occur sometime before the end of the 1st quarter of 2011. This should bring a correction which will tell us a lot on what is to come the rest of the new year.

We see the biggest risks to the market as: a U.S. housing douple dip, a slowdown in China, and the spreading of sovereign debt fears to Spain and others in Europe. In addition the market is substantially overvalued at 18 times smoothed trendline S&P 500 earnings.  Overall, at this point we believe the downside risks far outweigh the potential upside rewards.

Finally, we want to wish you a very Happy Holiday season and a wonderful 2011!

White House Proposes Payroll-Tax Holiday

See the link below from the Wall Street Journal:

http://online.wsj.com/article/SB10001424052748704156304576003441518282986.html?mod=WSJ_hp_LEADNewsCollection

“Aides to President Barack Obama are proposing a one-year reduction in the payroll tax as part of negotiations with Congress on a broader package to stave off income-tax increases due to take effect next year.
Under the White House plan, the Social Security tax paid by workers would drop temporarily by 2 percentage points, to 4.2% from 6.2%, a person familiar with the proposal said. For a worker earning $40,000, the tax savings would be $800.
The proposal has not won the approval of congressional Democrats or Republicans. Its emergence in the broader tax negotiations is a sign that the White House is trying to break the logjam on those talks before the end of the year, when tax cuts signed into law by former President George W. Bush are due to expire.
White House officials proposed the cut as a way to stimulate the economy, said the person familiar with the talks. The proposal would take the place of an earlier White House push to extend Mr. Obama’s signature Making Work Pay tax cut, which reduced income taxes for middle-income individuals by $400 a year.”

We at Brotelli Investments see this as a step in the right direction to a sustained economic recovery.  We’ll have to see what the final concessions are and whether this even has a chance of passing, but it has the potential to be a BIG net positive for the economy.  The Republicans would have to essentially concede to what is basically a fresh Obama STIMULUS plan.   How likely is that?   If the economy is strong in 2012 due to the impact of further tax cuts it would be a huge centrist victory for the President and make a Republican run for the White House that much more difficult.  Expect a battle here!

The Holiday Season and the MARKET!

We here at Brotelli Investments always enjoy the Holiday season.  I had the chance to go back to St. Louis last week for Thanksgiving. Spending quality time away from the markets with family and friends is very special and not done enough throughout the year. As for the markets, we sit at a very key level at just under 1188 in the S&P 500 and just over 11,050 in the Dow Industrials. The market will soon be making up its mind on a Christmas rally going into next year. With the dollar overbought and stocks looking strong we may be set to test the highs of the year heading into 2011.
Happy Holidays everyone!

Another LOOK at Housing

 

Demand

Supply

Price

I found the three charts above to be VERY interesting. With supply near its all-time highs and demand near its all-time lows it’s safe to assume that prices have only one direction to move and that’s lower. We will be watching the housing index ($HGX) closely heading into early next year as a dip in the index to new yearly lows would almost surely lead to another recession in the US economy. 2011 here we come...

Thinking of INFLATION...

I found the chart below to be very interesting. If the US follows the path of Japan it looks as if inflation will be very low for a long time. I think it will depend on the housing market and if we double dip next year.

Only time will tell.

Stress Tests: Round 2

See the link below for more information from the Wall Street Journal on the Fed's new round of stress testing for the banks.

http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_hp_LEFTTopStories

The main part of the article I read was:

“The Federal Reserve will require all 19 banks that underwent stress tests during the height of the financial crisis to undergo another review of their capital and their ability to absorb losses under an “adverse” economic scenario.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank.

The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.”

To me, the Fed is clearly seeing something that Wall Street does not.  I think they know the housing market is now rolling over again.  Ben Bernanke has implemented QE2 in case he needs to buy some mortgage backed securties to shore up the credit markets.  He wants to avoid a repeat of Q4 2008. 
That’s a good thing if you ask me.

LOOKING for a TOP!

Here we are in the middle of November and the equity markets are still hanging in overbought territory at just over 1200 on the S&P. We at Brotelli Investments continue to wait for confirmation of a top. We feel a strong break of 1200 will mean a correction has begun. Until then, we are watching the US Dollar index ($usd) to see if a bottom can form along with the commidity index ($crb) to see if a top is complete. Finally, we will be closely watching the housing index after the weak data we posted last week.

Until we see evidence of a top as stated above, the market will continue to rise as the bulls are in control.

Housing

Some bad news out of the housing market yesterday as Zillow, a leading online real estate marketplace, released their third quarter report and it largely echos what was released in Monday's Clear Capital Report, the housing market looks to be double dipping. Home values fell an average -4.3% in the third quarter. Stan Humphries, the Chief Economist at Zillow, says the housing market decline is likely to surpass the Great Depression’s decline and that prices are unlikely to recover before next summer.

See links:
http://www.zillow.com/blog/research/2010/11/09/it%E2%80%99s-going-to-be-another-long-hard-winter-in-housing/

http://www.clearcapital.com/company/MarketReport.cfm?month=November&year=2010

We here at Brotelli Investments believe housing still remains a simple supply and demand story.  The overhang of inventory is crushing meager demand and the mortgage mess is not helping matters as shadow inventory is pushed further into the future as banks have trouble with foreclosures.  If you thought the housing crisis in the USA was behind us you might want to think again.  We believe housing set the credit crisis in motion in 2007 and it could pose a very serious risk to the economy in 2011. We will be watching the housing index ($hgx) to see how it performs over the next few months to tell us what is going to occur.

Market Thoughts and QEII

Is the market overbought at S&P 1,225? I think so. A correction may be closer than it appears. We just have to wait for the dollar to find a low.

Ben Graham once described the stock market as follows:

“In the short run it’s a voting machine, but in the long run it’s a weighing machine.”

The votes are in and they are unanimous, so far.  Equity investors are voting that QE will do something to improve the economy.  However, that does not mean it actually will do something for the economy.  I believe there is no fundamental reason for equities to sustain gains due to the Fed's second quantitative easing program.  That is not the same as saying that equities can’t move up here even more in the short-term.  Equities move for any number of reasons in the short-term – many of which are entirely irrational. If QE somehow results in economic recovery down the line and we get back to full employment I will have been proven wrong (and I will happily admit as much because after all we will all be in a better place).  At that point, the market will have weighed the facts and concluded Ben Bernanke was in fact correct to push for higher asset prices.

The very idea of this as an economic strategy is frightening to me.  If QE actually works then there is no need for fundamentals.  Why does anyone get up in the morning and go to work?  We can all just go out and open a Scottrade account and let Ben pour money into our accounts.  Unfortunately, that’s not the way economics works.  You would have thought we would have learned this after two bubbles in less than ten years, but no.  Here we go again.  Some of this appears like common sense, but as Mark Twain once said: “Common sense is not so common.”  Personally, I wish it was this easy.  I wish the Fed could just press a button and make economic growth occur, but that would be beyond naive to believe. 

Place your votes in the short-term.  But don’t forget you could get crushed by the weighing machine in the long-term.

MSCPA Awards Conference

This past weekend I received a scholarship from the Missouri Society of CPAs to go towards my degree at Southeast Missouri State University. I want to encourage each of my employees and future employees to work very hard in college and earn your degree. The world of investing will open up your life if you put in the time understanding what it has to offer. One more thing, get out and vote!

Work/Life Balance

Everyone needs a little time away from work and the markets to focus on the things in life which really matter, Friends and Family.

Here at Brotelli Investments, I take a fishing trip every year with my top clients to get away from the markets  for a week and relax.

As the Holiday season comes ever closer, I thought I would share some photos from this years trip from last month.

Election Day!

As voters across the country drive to the polls today, we here at Brotelli Investments wait to see how this election will impact the markets.

Everyone by now is predicting the Republicans will take the House and pick up around 6 seats in the Senate. We shall see.

Right now Republicans are running on promises they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes.

Overall, I believe the election today will change very little in real terms, at least with the things that matter, like whether the US economy can grow. That potential is in our future and it is coming at us faster than you think.

Market Thoughts

The market has soared over the last two months from a level of 1,040 on the S&P 500 to just under 1,190 as of yesterday. It seems deflation fears and double dip recession fears have been erased by better than expected economic and earnings data and an overwhelming confidence in the Federal Reserve's ability to generate inflation and a sustained economic recovery via quantitative easing (QE).

Our view at Brotelli Investments is the equity market will ultimately be disappointed to realize that QE has no inflationary impact on the markets. The dollar is currently pricing in what we believe is an overly optimistic outcome in terms of inflation and the markets currently believe QE will add liquidity and result in more inflation. If investors once again start to seek safety and the dollar readjusts in the coming months, it may serve as a substantial equity market headwind in 2011.

Our Executive Team

On the right is our Chief Investment Officer (CIO), Brian Brophy. In the middle is our Chief Financial Officer(CFO), Brett Castelli and I am on the right, our Chief Executive Officer (CEO).

Dream BIG!!!

Whether one is investing or with life in general, I believe everyone should Dream BIG!

My Investment Philosophy

My 10 Rules for Investing:

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people's heads. It's easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an opposite excess in the other direction

Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras -- excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half and now rebound somewhat. As the fever builds, a chorus of "this time it's different" will be heard, even if those exact words are never used. And of course, it -- Human Nature -- never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don't expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction -- eventually. 

5. The public buys the most at the top and the least at the bottom

That's why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism," says Santa Clara University finance professor  Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend

Even with these sporadic rallies, we have yet to see the  long drawn out fundamental portion of the Bear Market.

9. When all the experts and forecasts agree -- something else is going to happen

If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell? Going against the herd can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.

The Beginning!

I have started my own blog as an employer with Brotelli Investments. I will post on important information in the world of Finance to improve the knowledge of my followers. I will also post information about my company, Brotelli Investments.

I hope each follower has an interest in the world of Finance and a dream of working in or running their own Financial Services firm one day.

Thank you all for your time!