Tom Dorsey and Tammy DeRosier interview DWA Money Manager, John Lewis. Click here.
Podcast: Interview with DWA Money Manager
July 20, 2011
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Posted by: Andy Hyer
The Silence of the Lambs
July 20, 2011Vanguard‘s recent piece discusses the thumping that savers are getting at the hands of the Fed, otherwise known as financial repression:
…today’s near-zero interest rates are no laughing matter for many American savers—not just my kids. They are my parents, my friend saving for a down payment on a home, and my retired neighbors down the street. You may be one of the many Americans trying to live off of your well-earned savings, whether those funds are in money market or checking accounts. In my mind, savers—as opposed to investors—are the proverbial “sacrificial lambs” of monetary policy.
The Federal Reserve has held its interest rate target between 0% and 0.25% since late 2008. Adjusted for inflation, the yield on 3-month Treasury bills is actually negative, as illustrated in the chart below. Quite frankly, yields on such savings vehicles are likely to remain that way for some time, with the Fed expected to keep its target rate near 0% at least for another year—and possibly longer.
Since December 2007, personal interest income has declined by close to $100 billion. The modest economic growth the nation has experienced since 2008 has come, to some extent, at the price of a negative real rate of return for savers.
Vanguard includes a nice chart of real rates as well. You can see that the green line—the real rate of return—is below zero.
(click to enlarge) Source: Vanguard
Most savers probably do not remember volunteering to be the sacrificial lambs of monetary policy, as Vanguard terms it. As an investor, you do not have to allow yourself to be shanghaied into a bad situation. If you want to sit still and be sheared, fine. But you have a choice in the matter, a choice to do something that might better your situation.
If the old axiom “money goes where it is treated best” is at all true, then tactical asset allocation driven by relative strength should be an efficient way to take advantage of that fact. Relative strength does nothing but push the portfolio holdings toward those areas that are rewarding investors with good returns. If the returns start to lag, the position is replaced with something more promising. There’s going to be more volatility involved, but you might have a chance to stay away from the shears.
1 Comment | Investor Behavior, Markets, Retirement/Saving, Thought Process | Permalink
Posted by: Mike Moody
AAPL: Poster Child For The Under-Reaction Effect
July 20, 2011One of the theories for why price momentum works is that there is an under-reaction effect to improving fundamentals. Some investors recognize just how good the fundamentals are, but many drag their feet in accepting the improving fundamentals (and belatedly give in and start buying). This creates a momentum effect that allows trend followers to earn out-sized returns. This was recently explained by Doug Ramsey of The Leuthold Group in a recent interview with Morningstar.
We have found, and I don’t think this is necessarily a shop secret, from a behavioral finance perspective, the reason that intermediate-term momentum works, and when I say intermediate term, it would be about that 12-month length, six to 12 months, is an under-reaction effect. In other words, fundamentals are improving and investors just don’t believe it or they think, hey, we’re too late, we’ve missed it.
I couldn’t help think of this explanation when reading this MarketWatch article about Apple, one of the biggest relative strength winners of the past decade.
But while Apple’s stock has run up significantly over the past month — following a rather flat performance in the first half of the year — Wall Street analysts say the shares are still relatively undervalued, given the potential for the iPhone and iPad products.
The shares were last up about 3.4% to $389.81.
“Despite the law of large numbers, we believe Apple’s impressive growth can continue based on the size of the addressable iPhone and iPad markets,” wrote Gene Munster of Piper Jaffray in a note to clients on Wednesday.
Munster lifted his price target on Apple nearly 10% to $607. Apple shares had briefly topped the $400 mark in after-hours trades on Tuesday following its report.
For the fiscal third quarter, Apple reported that earnings more than doubled from the year-earlier period as sales roared by 82%. The iPhone sold more than 20 million units for the quarter, blowing away projections closer to 17 million…
At $400, Apple shares would be valued at about 13 times estimated earnings for the next four quarters — less than half its 10-year average P/E multiple, according to FactSet Research. (My emphasis added)
(click to enlarge) Source: StockCharts.com
Disclosure: Dorsey Wright currently owns AAPL. A list of all holdings over the past 12 months is available upon request.
Leave a Comment » | Investor Behavior, Markets | Permalink
Posted by: Andy Hyer
Winners Rise To The Top - Int’l Edition
July 20, 2011Apparently, German companies aren’t waiting around for Italy, Portugual, Spain, Greece…to get their acts together. Today’s New York Times article “Europe’s Economic Powerhouse Drifts East” offers an interesting profile of a number of German companies who are proactively finding robust growth in the East, while much of Europe staggers under a debt crisis.
Germany has long sat at the center of the European economy, but Europe is no longer as central to Germany as it used to be.
With large parts of Europe still in an economic rut and struggling to cope with a debt crisis, Germany is increasingly deploying its money and energy outside the euro zone to fuel its robust growth.
The shift in focus, while still in its early stages, could have profound economic and political implications because it comes at a critical time when the rest of Europe is counting on Germany to continue its traditional role as the locomotive of the Continent’s economy.
Profiled in the article, is Fresenius, a German healthcare company in Bad Homburg, near Frankfurt, which also happens to be a holding in our PowerShares DWA Developed Markets Technical Leaders ETF (PIZ).
Last year, Fresenius recorded a sales increase in Asia of 20 percent, to €1.3 billion, or $1.8 billion. That compared with its sales in Europe of €6.5 billion, up 8 percent.
Fresenius’s chief executive, Mark Schneider, said he expected the trend to continue, noting that China was trying to create a universal health care system that would ensure its people access to kidney dialysis and infusion therapies — the sort of products that Fresenius provides.
Fresenius is one of many companies that reflect the trend. Corporate investment in Western Europe is still rising in absolute terms, said Mr. Schneider, but “capital spending and employment is not rising as much as we are seeing in emerging markets.”
The best companies always rise to the top and find a way to thrive, in spite of macroeconomic conditions if necessary. We think relative strength is an ideal method of identifying and capitalizing on those winners.
(click to enlarge) Source: StockCharts.com
See www.powershares.com for more information about PIZ.
4 Comments | Markets, Tactical Asset Alloc | Permalink
Posted by: Andy Hyer
High RS Diffusion Index
July 20, 2011The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.) As of 7/19/11.
The vast majority of high relative strength stocks are now trending higher. The 10-day moving average of this indicator is 81% and the one-day reading is 80%.
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Posted by: Andy Hyer
