Less bad than expected

This is the time of year when companies report how they did last quarter. It’s referred to as “earnings season.”

There’s nothing magical that happens in a single quarter to business in general, but Wall Street pays a lot of attention to quarterly reports.

Its amusing to watch.

Wall Street analysts try to guess (and I use that term intentionally) what companies will earn in a quarter. There is a lot of focus on these estimates because most people trade securities every 6 months.

If a company beats Wall Street “expectations,” the stock price tends to jump. If a company misses “expectations,” its price usually tanks.

Keep in mind that the fundamental value of a business changes very little over a single quarter. A company is worth it’s earnings into the infinite future. What it does this quarter is, at best, meaningful to less than 5% of a company’s value.

But, if you hold a stock for only 6 months, like most market participants do, then those quarterly estimates and price moves become vitally important. Why play that game?

I don’t. I pay attention to long term business value. I tend to hold companies for 3 to 5 years on average. The reason I buy is because a company seems to be selling far below its mathematically assessed value. I sell because someone is willing to pay much more than think it’s worth.

I don’t guess what will happen in one quarter. I don’t hold for 6 months. I don’t play that game.

This quarter has been particularly amusing to watch because companies are reporting earnings that are less bad than Wall Street expects.

That wording is also intentional. The companies aren’t doing a lot better, they are just doing a lot less bad than Wall Street expects.

These are meaningful moves. When USG (full disclosure: my clients and I own shares of USG) reported earnings on Tuesday, its price jumped 25.4% in one day. When Mohawk (full disclosure: my clients and I own shares of Mohawk) reported earnings today, its price jumped over 33% (as of 1:51 Mountain Standard Time).

Did these companies report record earnings? No, they reported big losses. Did they forecast huge sales and earnings increases in the short term future? No, they both said the economy looks terrible and they don’t know when end demand will pick up.

Did these two companies become 25-30% more valuable simply by reporting losses and dire outlooks? No, of course they didn’t. They just reported less bad earnings and expectations than expected.

If you ever think markets are rational and that most market participants thoughtfully consider the prices they buy and sell securities, just remember these examples of how short term and silly Wall Street and most market participants can be.

I must admit, its amusing to watch….

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Retirement prospects look poor

An article in the Wall Street Journal today highlighted that those in or preparing for retirement are less confident than ever.

Only 13% of workers say they are very confident about having enough money to retire comfortably. That’s a record low.

This is not a surprise considering that 49% of people 55 and older have saved less than $50,000. That’s so far short of what’s needed as to be outrageous. That could pay out around $4,400 a year over 30 years assuming an 8% return. Nowhere near enough money.

Those retired or going to retire over the next decade or two may at least have the benefit of social security and perhaps a pension. Younger folks should know that social security will be so far insolvent as to be unavailable to everyone.

Hope is not a strategy.

Only 25% of workers are highly optimistic about covering food and housing costs in retirement. That means 75% of people know–absolutely KNOW–they can’t take care of themselves in retirement. Stunning!

For those currently retired, only 20% are confident about being able to afford a secure retirement. Only 25% say they have enough for medical expenses. Only 34% are optimistic about covering basic expenses. That means two-thirds of retirees believe they can’t pay for the basics. Unbelievable!

On the bright side, workers are doing something to change their situation. They are cutting spending, working more hours, saving more, and talking to a financial professional. I hope they get good advice.

One major problem is that so many believe they can work longer to postpone retirement. But, 50% of current retirees left the workforce sooner than they expected because of health problems, downsizings or obsolete skills. Counting on working longer is not a solution.

Also, two-thirds of workers planned to work after retiring, but less than 35% actually ended up being able to work. Hoping to work more is not necessarily a viable option.

What do people need to do? They need to save more. They need to invest that money wisely. They need to think hard and independently about the amount of money they will need and why. They need to plan to take care of themselves, not hope that things “work out.” Hope is not a strategy. Hope for the best, plan for the worst.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

New Bull Market, Or False Dawn?

Has the stock market finally turned the corner? Is the economy really recovering? Is it time to throw all your money at the market?

Everyone would love to know the answer to these questions–including me–but no one does. Someone may guess (like I will below) and be right, but that will be luck, not skill (that’s why market strategists are like diapers, they require frequent changing, and for the same reason).

Why can’t anyone know if the market and economy are finally recovering? Because it’s too complex. Why can’t I gather enough data to figure out precisely how many inches of rain will land in a square foot in my back yard this month? Same reason: it’s too complex. Knowing all the inputs doesn’t tell you the outcome. Markets are even more difficult to precisely predict than rain, because the weather doesn’t possess freewill, but investors do!

There are strong psychological reasons for wanting to know what the market and economy will do. No one wants the regret of investing and then watching the market tank by 50%. For that matter, no one wants the regret of NOT investing and then watching the market double, either.

The fear of regret drives people to look for all kinds of clues, but such searching and wishing won’t bring the answers. You can’t reap the benefit of market returns if you sit on the sidelines. You have to put your money at risk and then either win soon, or win later. Not a bad bargain, when you think about it.

Okay, enough rambling, what do I think about the market and economy? I believe there are faint glimmers that the economy may be starting to turn. Those signs come in lower claims for unemployment, a slight rebound in factory activity, a pickup in activity in China, better than expected retail sales, and stronger than expected exports.

Do those glimmers mean the economy definitely will recover? No (please reread above if you expected the answer to be yes). There is still plenty of bad news out there, like higher credit defaults, higher foreclosures, more bankruptcies, higher unemployment, weak car sales, etc.

What about markets? Does a market recovery require an economic recovery, first? Probably not. Markets anticipate improving fundamentals and tend to turn up first, usually 3 – 9 months before the economy does. The stock market’s rebound is one of the main reasons many believe the economy may be starting to recover.

I tend to think that the market and economy have yet to turn up, but that’s just a guess. The problems that got us into this situation–housing and credit markets–are still in serious pain. Just because housing starts and prices are declining at slower rates doesn’t mean happy days are here again. The economy and markets will probably recover before housing and credit do, but I think there is still a lot of downside there before things turn up.

Also, the stock market has only been going down for 1 1/2 years. This is the worst economic downturn since the Great Depression, so markets will probably be down longer than usual. The 2001 recession was one of the mildest on record, yet the stock market took 3 years to hit bottom. Granted, valuations were higher in 2000 than in 2007, but that doesn’t account for everything.

Also, the consensus of leading economists think the economy will recover late this year or early next. Those folks are almost always wrong! Guess how many of them predicted this severe recession even with over-extended credit markets and declining housing prices staring them in the face? Zero, zilch, nada, not a one. If those folks didn’t see this coming, then why should I believe they correctly see the recovery? I don’t.

It’s possible the economy could start to recover toward the end of this year or early next year, and that would indicate an increasing stock market now, this summer or this fall. But, the stock market could also go down much further into this fall (2009), spring of 2010 or fall of 2010. Who knows? I don’t, and I don’t know anyone else who does or can, either.

It’s also possible the economy starts to recover only to enter another recession in 2011 or 2012. That’s referred to as a double dip recession, and it happened in the late 1970’s and early 1980’s. That was the worst recession we had had since the Great Depression, until this one of course. A Double dip recession could easily be caused by the Federal Reserve raising interest rates too soon, or by raising them too slowly and causing enough inflation to send us back into a scenario like the stagflationary 1970’s. Let’s hope not (but, hope is NOT a strategy).

The best thing to do is invest wisely in sound, low valuation companies and prepare for the market to be bumpy. No predictions will prevent the market from going up and down. Sitting on the sidelines through it all is a sure-fire way to miss the upswing when it does come–whenever that will be. . .

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Don’t listen to a word I have to say

When you listen to a financial expert’s advice, your brain turns off.

This revelation came through Jason Zweig, who writes for the Wall Street Journal. In Zweig’s blog, he highlighted a recent study by Dr. Gregory Berns of Emory University.

In Dr. Berns study, he watched how people’s brain responded to inputs using a functional magnetic resonance imaging (fMRI) scanner. Specifically, he monitored blood flow to different parts of the brain of test subjects.

When subjects thought for themselves, two parts of their brain activated: one for determining the payoff of a sure win in the scenario presented, and one for calculating the possible gain from such a gamble.

Then, they did the same experiment, but with an “expert” with impressive sounding credentials. When that happened, the subject’s brain activity faded. In other words, once the expert started suggesting, the subject’s brain when into resting mode, “off-loading” the task of making the decision to the supposed “expert.”

It seems obvious to me that not everyone falls for this gag, but, it’s good to be aware of it.

I know I’ve paid for car maintenance I didn’t need because I tried to make a decision too quickly in the presence of an “expert,” so I feel keenly how easy it is to fall for such a trap.

How do you avoid “off-loading?”

Zweig suggests speaking to “experts” with a list of your concerns or the direction you’d like to go thought out and written down ahead of time. This will give you something to refer to when you’re talking to an “expert.”

Another thing he suggests is to make the decision later, after you’ve had a chance to think about it on your own. This lets you regain independence and get that blood flowing to the payout and gain portions of your brain.

There’s nothing wrong with listening to investing advice, but doing so without the right approach may lead you to do something you’ll regret.

So, listen to my advice, but turn it over in your mind on your own, think about what you thought beforehand, and give yourself some time before acting or deciding.

I always recommend this to my clients, too, because I’ve found I’d rather have happy clients for the long run than tricked clients that soon figure they aren’t happy with my approach. In the long run, the truth will out.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.