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MarketWise newsletter for October 30, 2002 “Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.” ...Thomas A. Edison There are a lot of investors who can identify with Mr. Edison’s comments. Just when it looked like the bottom was going to drop out of the entire US financial market the first week of October, a crazy thing happened: The market kept trying, and a rally unfolded. It is a famous and much-quoted investing skill to buy “when there’s blood in the streets.” Boy, some blood. All of the major US indexes except the S&P 500 had broken their July lows. The charts of the major European market indices had fallen out of bed, and Japan continued the kind of spiral that reminds one of a drain more than a capital-market framework. The bond market and interest rates, to the relentless drumbeat of “deflation, deflation, ” briefly dropped to 50 year lows (making it a great time to refinance, but I bet you’ve already heard that). Improbably, though, amid the relentless gloom and doom, market tone improved. Earnings, dreaded earnings, those much anticipated, perhaps manipulated, and in a couple of notable cases, fabricated, harbingers of corporate economic health—who would have thunk they’d be, gasp, positive? It is, I think, as much a function of two years of lowered analysts’ expectations as a fundamental change in the corporate economic landscape that is responsible for the positive earnings momentum this quarter. That and relentless corporate cost-cutting, because the economy is growing slowly, if at all. Consumer sentiment is trending negative. Unemployment is hovering at levels that are uncomfortable on a national level, if not so badly felt on the as-yet-immune Outer Banks. An economic Petri dish of cause and effect is playing out in the marketplace—war, Japan, terrorism, oil--and it’s just too soon to call THE bottom. If I sound pessimistic, I don’t mean to. Hey, I’m as bullish as the next guy. (Stop it with the “full of bull” jokes, please!) It’s hard to not be bullish on America for the long run, but we’ve still got some work to do in the short-term. There has just been too much damage done in the three-year bear market, and that damage will take some time to heal. Here are a few perspective-enhancers for investors to monitor to help make sense of things: Volume: The number of shares of a stock or an index (like the Dow or the Nasdaq) traded on a given day. Bullish action occurs when volume is higher on up days than down days, bearish action is just the opposite. The Advance – Decline (A/D) line: The number of stocks going up divided by the number of stocks going down on a given day. Tells the depth of the rally in a given market. Market action during rallies: Watch my charts and commentary here, as there are going to be some good tradable rallies—the last few weeks (this is being written on October 25) among them. Much of the market is in rally mode, and some stocks have had significant moves. How much strength these rallies have and how market participants (especially institutional investors) respond will be telling. Model Portfolios: On another note, I have just put the finishing touches on three model portfolios. The portfolios are a way of tracking different investment themes in the marketplace and are not investment securities on their own. The investment goal of these portfolios is to outperform, on paper at least, the S&P 500. For the period of August 28, the inception date for the completed portfolios, through October 24, the S&P 500 had a loss of 2%. Fixed income, a compilation of professionally managed bond funds, had a loss of -0.94%, as investors began favoring stocks to fixed-income investments during the reporting period. 21st Century Growth, a portfolio of 34 stocks, had a total return for the period of 2.06%, beating the S&P 500. Briefly, the investment goal of the portfolio is to identify companies of all sizes that have above-average growth prospects going forward. The portfolio's growth bias allows a somewhat higher price to earnings (PE) ratio than the Dividend Value portfolio. Despite that, the portfolio sports a dividend yield of 1.81%. The five biggest positions are Sysco Foods (SYY), Ameritrade (AMTD), Johnson and Johnson (JNJ), Nokia (NOK), and Southern Company (SO). Dividend growth, a portfolio of 24 stocks with a cumulative PE of 16.9 and a dividend yield of 2.94%, had returned --4.03% including dividends. The portfolio's performance was adversely affected by intense market skepticism towards holdings Tyco Corp. (TYC), Duke Energy (DUK), and Schering-Plough (SGP). The five biggest positions in the portfolio are John Nuveen Co. (JNC), Sysco Foods (SYY), WD-40 Corp. (WDFC), Citigroup (C), and Northwest Natural Gas (NWN). Notable Quotable: “Everyone knows about the “double taxation” of corporate income: first when it’s earned and then when it’s paid out as dividends. But not everyone realizes that that capital gains are always caused by expectations of future income. That means the capital gains tax amounts to a third tax on income that’s already slated to be taxed twice. Taxing both dividends and capital gains is like fining drivers for speeding and then fining them again for having a high speedometer reading.” -Steven E. Landsburg, professor of economics, University of Rochester, as quoted in the Wall Street Charts- This is a chart of the Dow Jones Industrials as of 10/24/02
This is a chart of the S&P 500 as of 10/24/02
This is a chart of The NASDAQ as of 10/24/02
Good investing, Will W. Woodard, III, CFP® Will Woodard is president of Dare Capital Management and Advisory, an independent Registered Investment Advisor and fee-only financial planning firm based in Kill Devil Hills. Will's firm specializes in professional, highly personalized investment management and planning services. Will can be reached at will@darecapital.com or (252)480-9535. "Clients and Friends Newsletter" is published monthly by Dare Capital Management and is free of charge. To subscribe, send your email address to will@darecapital.com and put "subscribe newsletter" in the subject line. All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Dare Capital Management and Advisory is registered in the State of North Carolina as a Registered Investment Advisor Firm. The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Dare Capital Management and Advisory may, in some instances, include securities mentioned herein and/or on the company's web site. Positions in securities mentioned will be disclosed at the time of publication and may be subject to change at any time without further notice. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons. |
