The Hardesty Blog has returned with a renewed vigor.
The markets had a good week, bolstered by news from Europe. The Dow was up 1.97%, the S&P 1.71%, and the Nasdaq 1.12%.
European Central Bank head Mario Draghi’s comments were the focus of the week. Draghi said that he is willing to do whatever is necessary to keep the Eurozone intact. There is still plenty of uncertainty in Europe. There is still plenty of it here, too: a fiscal cliff and an election are among the American uncertainties. But we believe that, in the short term, the Eurozone will not break up. This idea has stabilized the markets somewhat.
Next week, earnings season continues. As well as watching our companies, we’ll look at the unemployment figure, as well as initial claims.
This week’s factoid: In ancient Greece, Olympic athletes were expected to be the pinnacles of both mind and body. Poetry and verse were an important part of the games. At Hardesty Capital Management, we believe the Portfolio Management event would be an exciting addition to the 2016 games.
The first quarter of 2012 was a good beginning to the year. We had solid gains in the economy, which were reflected in a strong upward movement in stock prices. In part, these advances were due to good earnings growth during the Christmas season. The market was also strengthened by forecasts for continued earnings gains for the companies in the S&P 500, not only in 2012, but also for 2013. These increases in forecasts helped to paint a brighter picture for the future of our economy. Turning to the fixed income market, interest rates were steady for most of the quarter, but moved higher at the end of March, resulting in a slight negative total return in the 10-Year Treasury (see back page). Bond results were essentially flat, with the Barclay’s Government/Credit Intermediate Bond Index up .61%. Despite (indeed, perhaps because of) the flat returns in the bond market, we are still confident in equities. In this letter, I will show you why we remain optimistic for both the economy and the financial markets.
The expansion of the economy, despite being slow and uneven, has been one of the better-kept secrets in the U.S. over the last six months. This was confirmed by the recent upward revision of the Real Gross Domestic Product for the fourth quarter to an annualized rate of +3%, a level consistent with our country’s longer-term results. The skeptical stock market of last summer and fall responded to the good news, advancing 12.66% in the first quarter as measured by the S&P 500 index, the best first-quarter advance since 1998. The financial sector, one of last year’s worst-performing sectors, reversed roles and was one of the best in the first quarter of 2012. (more…)
When I was a young boy of ten or eleven, the smartest guy in my class enticed me to take a roller coaster ride with him on class day at Baltimore’s old Gwynn Oak park. Mistakenly thinking he was an experienced rider, we jumped into the last car, which my friend assured me was the safest. Only later did I realize he had never ridden a roller coaster and the last car experiences the most violent movements. We both stepped out of the car terrified by the experience. For me, it was to be my first and last ride on a roller coaster. As I look back at 2011, financially, this was much like that roller coaster ride of 50 years ago. The global financial markets rocked and swerved all over the place, only to finish near where they started. The experience was not as frightening as that real ride, but the markets in 2011 were nonetheless unpleasant.
After the very sharp stock market decline in the third quarter, the equity markets gave us a holiday present, advancing 12% in the fourth quarter, bringing the full year total return to the S&P 500 to 2%. However, 2011’s results were punctuated by over 100 trading days where the Dow Jones Industrial Average closed up or down more than 100 points and experienced 16 days where the Dow advanced or declined by over 200 points. This comes in the context of 252 trading days in a year. These levels of volatility are beat out recently only by those seen in the recession years of 2008 and 2002. (more…)
In one episode of the hilariously funny 1990’s sitcom Seinfeld, George Costanza, a slightly overweight, balding, unemployed and self absorbed 30 something, decides to make a change in his life. He concludes that he should try to do the opposite of his every idea and instinct. Immediately, things begin to go his way; a girlfriend, a job with the Yankees and moving out of his parent’s house (a real achievement if you know the character). Although George Costanza hardly represents a beacon of financial acumen, the history of the markets suggests that “doing the opposite”, zigging when others are zagging, can actually work. Conversely, if you are content to take the tried and true paths of others, in your best case scenario you may wind up equal to the pack and have achieved nothing more than the overall market average.
The dictionary defines a contrarian as a person who takes an unpopular position opposite to that of the majority. A contrarian investor believes crowd behavior among investors can lead to exploitable mispricing of securities. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks and understates its positive prospects. Widespread optimism, conversely, can lead to speculative bubbles with unjustifiably high valuations. The Dutch tulip mania is a well known example of wild speculation. Contrarian investing is related to value investing in that overwhelmingly negative sentiment can give rise to what Benjamin Graham famously called a “margin of safety” when purchasing stocks, essentially the ability to purchase earnings and income at a discount to their intrinsic value. Arguably, that “margin of safety” is more likely to exist when a stock has fallen a great deal and is usually accompanied by negative news and general pessimism. (more…)
As Warren Buffet said, “Be fearful when others are greedy and greedy when others are fearful.” Maryland investors do not need a “high-powered” New York investment advisory firm to follow this advice. Our Baltimore-based firm believes so strongly in these words that we’ve placed the quote at the top of the agenda for our weekly investment committee meeting. It’s so easy to get caught up in the emotional side of investing because it is our emotions about money that drive us to invest in the first place. We all love to make money and hate to lose it—greed and fear are the engines of the markets no matter where you live.
There are many reasons why truly successful investors are terrific at what they do. Foremost is their ability to take the emotion out of investing, which allows them to sell closer to peaks and buy nearer the bottom. One doesn’t have to look much further than downtown Baltimore to find famously successful investors—Bill Miller of Legg Mason and Brian Rogers of T. Rowe Price come to mind. (more…)
After a brutal third quarter in which the United States saw an unprecedented downgrade of its credit, many weary investors are staying on the sidelines.
By Hanah Cho, The Baltimore Sun November 20, 2011
Put simply, it was a terrible summer for both the U.S. and European markets. The economic recovery that began in 2009 stalled, and the anticipated improvement in employment failed to materialize. Continued structural weakness in housing further retarded the overall recovery. Many other industries reported mixed results with one strong month followed by weakness in the next, resulting in a trendless quarter. Estimates for gross domestic product growth in the third quarter were halved from 3.6% at the start of the quarter to 1.8% at quarter-end.
In addition, a political fight over extending the debt ceiling frightened American consumers, slowing purchasing and threatening the economy with a double-dip recession. Though the debt extension was resolved at the 11th hour, it was not without cost. Standard and Poor’s, an established independent bond rating agency, downgraded the creditworthiness of the U.S. government debt from AAA to AA+. While not of major financial significance to the U.S., it was embarrassing. However, these events did have broad-based negative effects, not only on the U.S. equity markets, which declined 13.9% in the quarter, but also on foreign bonds and equities. (more…)
Every investor should strive to achieve the largest possible return on investment given a certain tolerance for risk. Although this axiom seems obvious, during periods of economic turbulence it is critical to focus on the risk side of the equation. How safe is the principal value of my account? Am I well positioned to weather a market correction and rebound fully when the investment climate turns favorable? Intellectually, we understand that long term appreciation and income are equally important. But, as markets fluctuate, falling prices can blur the investor’s vision and raise the question: Is my money safe?
Our current economic difficulties stem from the financial crisis that began in 2008, when consumers, financial institutions and businesses recognized the dangers of the explosion of debt that accompanied the “housing bubble.” Not surprisingly, investors raced to the sidelines seeking safety for virtually every financial asset. Today we are replaying a different (more…)
With big-bet strategy, the losses could be equally great
MarketWatch.com Robert Powell’s Your Portfolio Oct. 5, 2011, 12:01 a.m. EDT
Some investors fleeing stocks; companies, executives buying back
By Hanah Cho and Liz F. Kay, The Baltimore Sun 10:21 a.m. EDT, August 22, 2011
The economic recovery that began in Q1 2009 slowed unexpectedly in the first half of 2011. Reported growth of the GDP in Q1 2011 was only at an annualized rate of 1.9%, and a similar modest increase is anticipated for the second quarter. At the beginning of the year, a Bloomberg survey had consensus number for the quarter at 2.5%.
The shortfall caught the stock markets by surprise, and after reaching a high of 12,810 on April 29, the Dow Jones Industrial Index fell 3.1% to 12,414 to end the quarter. For the quarter, the Dow was up 1.4%, and up 8.6% for the first half. The S&P 500 was also up a hair, 0.22% for the quarter. Although there was a lot of volatility this quarter, stocks ended up where they started.
On the other hand, interest rates, sensing an economic slowdown, fell to new lows for this cycle. The 10 year U.S. Treasury note closed at a low of 2.86% on June 24th. Returns of short term Treasury notes (U.S. government securities with maturities less than a year) were even more startling. (more…)
It’s difficult to read the financial news these days without noticing some storm clouds on the horizon. European debt woes, budget shortfalls everywhere, a lackluster economic outlook and falling home values represent a few of the problems the world will grapple with for the foreseeable future. Such uncertainty poses risk for all investments and contributes to the volatility in the market value of securities. On occasion, the volatility can feed on itself and lead to outright fear. Time and again, history has proven that at any single point in time markets are often far from rational and subject to the very real human emotions of fear and greed. We’ve seen exuberance and greed abound in market “bubbles” such as the internet and technology craze and numerous housing booms. Such excess has always been followed by “busts,” which is nature’s way of restoring balance. The good news is that eventually markets do find equilibrium and over the long haul sanity prevails. The absolute truth of the matter is that no one (more…)
The first quarter of 2011 was dominated by a series of events that eclipsed the financial markets as front-page news. An unexpected breakdown in the political order in North Africa spread throughout the Mideast, and several governments important to Western economic interests tottered on the brink of collapse by quarter’s end. Governments in Tunisia and Egypt fell and significant unrest spread to Bahrain, a small but important financial center responsible for the coordination of Middle Eastern oil settlements. We were surprised that by quarter’s end a Western coalition had begun offensive air operations against the repressive government of Libya and, under the supervision of NATO, the West was attempting to bring down the government of Muammar Gaddafi, the long-running leader of Libya.
The European banking system came under pressure as banks in Portugal, Greece, Italy, and Spain joined those of Iceland and Ireland in experiencing varying degrees of loss of confidence by depositors and members of the European Union. France and Germany, the wealthy nations in the E.U., although willing to aid the affected nations, offered bailout terms that were quite steep. At quarter’s end, the E.U. banking situation remained unresolved. (more…)
This summer marks my thirtieth anniversary in the financial service industry, beginning at the old Maryland National Bank and ultimately as a senior executive at Ferris, Baker Watts. These two proud institutions, along with countless others, became victims to the ever changing landscape of the industry. Today, “Wall Street” and, in fact, the world’s financial system are dominated by comparatively few investment factories that offer every conceivable alternative investment and access to capital that was unthinkable thirty years ago. Such “progress” has paralleled the dynamic growth of the whole economy and contributed to the advances in our standard of living. Although it would be difficult to argue that we haven’t progressed, does that mean that we have greater clarity about the future? Has innovation and sophistication led to superior investment performance? Are the financial decisions we face any simpler or easier? The answer to these questions is a resounding no.
Placing client interests first is the critical challenge in our industry. (more…)
Hello again everyone. Sorry that this blog has taken an unannounced hiatus. We are back.
The markets had a solid week, with the Dow, S&P and Nasdaq all ending solidly higher: 1.28%, .98% and 1.19% respectively. Capping off the week was the March jobs report. We saw 216,000 jobs created last month, compared to the expected 180,000. The unemployment number came down as well, to 8.8%. That figure has declined a full percent over the last four months. It would seem that employment is gaining some real traction. We expect this trend to continue.
A trend that we are not so cheerful about is inflation. We’ve seen manufacturers across industries saying that they need to increase prices to match rising input costs. The Fed’s infusion of umpteen billions of dollars through their various programs puts more upward pressure on prices. A lot of attention from the media is focused here now, and we think it is something that needs to be watched closely.
Next week, we’ll be looking towards the consumer when consumer confidence numbers are announced Friday. The other, always-important piece of the consumer’s confidence, continuing jobless claim numbers, will bear consideration as well.
This week’s factoid: The radiation exposure associated with living within 50 miles of a nuclear power plant for one year is .09 μSv, which is slightly less than the radiation exposure associated with eating one banana (.1 μSv).
