Markets are making 4 and 5 year highs. The noise out of the talking heads has been anything but bearish. Those who listen to all the cheering on the financial channels may be wondering why they are not feeling like their holdings are making new highs. Their statements certainly do not look like the result of a stellar 5 year Bull market run.
Understanding the route we took to get here explains some of it. Over 5 years, this has been a painful round trip, with the market crash continuing to make new lows into October 2002. We nearly revisited those pre-War lows March 2003. Indeed, the bulk of the market gains have come in one year in five: 2003. If you bought equities prior to the war’s start, you were richly rewarded for your risk taking. Meanwhile, longer term “Buy & Hold” investors have suffered lots of agita with very little to show for their troubles.
Looking at the actual numbers reveals why. Going back to the data, we see that the S&P500 was at 1,143 five years ago; It closed at 1,307 Friday. The Nasdaq was at 1,857 five years ago; Yesterday’s close was 2306. The most recent Dow close was 11,280 versus 9,721 five years ago.
Those numbers are annual returns of 2.72% for the SPX, 4.43%, on the Nasdaq, and the Dow generated annual returns of 3.02%. As the nearby chart reveals, this is hardly world beating performance. The exception to this has been the small cap issues; in particular, the strong Russell 2000. After years of under performance, the smaller issues have returned with a vengeance, mean-reverting to annual returns of nearly 11%. That’s about the S&P’s average. One has to wonder, however, when the pendulum will eventually swing back towards the larger cap. (We also note that others have incorrectly predicted this for 5 years running).
Today, Momentum is driving the market, with fundamentals taking a back seat to ever shorter term trading. Long-only managers are starting to get criticized for conservatism, while the shorts have been chased out of town. Liquidity abounds; M&A activity has reached frenzied levels, with plentiful private equity cash driving deals. Today’s WSJ discusses pre-emptive financing – venture capitalists throwing money at risky, untested start-ups. There is hidden leverage behind derivatives and many hedge funds. The Bears have been sent scampering into the woods to lick their wounds and do what it is that bears do in the woods.
Which brings us to this week’s market call: We are hard pressed to find much company as Bears for 2nd half 2006. And we are impressed with how quickly our short term Bullish targets from last week have nearly been achieved: We continue to see those marks – Dow 11,350, SPX, 1,335, and NDX 1,795 – as the upper range of this move, and reiterate our call for cautiousness.
We suspect this market is in the process of topping, as early as this week.
In the past, I have warned against relying on the magazine cover indicator for specific companies. There are some very specific caveats on this here. The reason for this is that, in my experience, the Cover Indicator is useful for determining when large social phenomena are reaching an emotional crescendo. Oftentimes, emotions take over at…Read More
The WSJ streak of taking very interesting columns and hiding them on Saturday continues.
Yesterday, they asked: Are some CEOs reaping millions by landing stock options when they are most valuable amatter of dumb luck — or something else?
"On a summer day in 2002, shares of
Affiliated Computer Services Inc. sank to their lowest level in a year.
Oddly, that was good news for Chief Executive Jeffrey Rich.
annual grant of stock options was dated that day, entitling him to buy
stock at that price for years. Had they been dated a week later, when
the stock was 27% higher, they’d have been far less rewarding. It was
the same through much of Mr. Rich’s tenure: In a striking pattern, all
six of his stock-option grants from 1995 to 2002 were dated just before
a rise in the stock price, often at the bottom of a steep drop.
lucky? A Wall Street Journal analysis suggests the odds of this
happening by chance are extraordinarily remote — around one in 300
billion. The odds of winning the multistate Powerball lottery with a $1
ticket are one in 146 million.
Suspecting such patterns aren’t
due to chance, the Securities and Exchange Commission is examining
whether some option grants carry favorable grant dates for a different
reason: They were backdated. The SEC is understood to be looking at
about a dozen companies’ option grants with this in mind.
Journal’s analysis of grant dates and stock movements suggests the
problem may be broader. It identified several companies with wildly
improbable option-grant patterns. While this doesn’t prove chicanery,
it shows something very odd: Year after year, some companies’ top
executives received options on unusually propitious dates.
analysis bolsters recent academic work suggesting that backdating was
widespread, particularly from the start of the tech-stock boom in the
1990s through the Sarbanes-Oxley corporate reform act of 2002. If so,
it was another way some executives enriched themselves during the boom
at shareholders’ expense. And because options grants are long-lived,
some executives holding backdated grants from the late 1990s could
still profit from them today."
The chart below implies that the odds against these being random are quite high. (I guess Sarbanes Oxley didn’t root out all the corporate corruption after all).
Last week it was the mortgage resets, and this week its CEO Options. Great stories, buried on the front page — of the Saturday edition . . .
The Perfect Payday
CHARLES FORELLE and JAMES BANDLER
WSJ, March 18, 2006; Page A1
How the Journal Analyzed Stock-Option Grants
WSJ, March 18, 2006; Page A5