Most world stock markets rebounded broadly last week with all of the major U.S. indices closing higher. Most of the strongest performing sectors—technology, oil & gas and industrials—were the more economically-sensitive sectors that tend to do well during expansions and poorly during recessions. The exception was the normally-stodgy utilities sector which was up more than 4% on the week. (more…)

Consider two economies. Economy A has just experienced a scientific breakthrough that will probably increase productivity substantially in the years to come. Its public finances are strong, it is generally at peace with the rest of the world and it has been growing strongly. Economy B is just coming out of an economic shock like it hasn’t seen in decades. It has budget deficits as far into the future as the eye can see and unattractive borrowing costs. It is in seemingly-endless conflict with the rest of the world and growth is slow. If you could only invest in one of them today, which one would it be? (more…)

Major stock markets looked as if they would post another weekly gain until we got the unemployment report on Friday. While on the surface a declining unemployment rate and monthly job gains of 431,000 sound good, market participants didn’t see it that way. The problem is that 411,000 of the hires were census workers, and those workers will be let go once the census count is over. The private sector added only about 41,000 jobs, a disappointing number. (more…)

Given the 24-hour news cycle of constant doom-and-gloom, I have a question. If you hadn’t seen the table above and I asked you, “What did the market do last week?” what would you have answered? Up? Down? Booming? Crashing? While the Dow Jones Industrial Average was down slightly last week, the broad market (S&P 500 and DJ U.S. Total Stock Market Index) was actually up. It was a mixed week overall, but with the wide price swings, it didn’t feel that way. I ask the question above in hopes that you, the reader, will consciously think about your own perceptions about investing. Are you affected by the doom-and-gloom news cycle? (more…)

The S&P 500 finally reached official correction territory last week after losing more than 10% since its April 23rd peak. There is plenty of bad news to spook investors (European debt problems, Korean tensions, a bear market in China, the Gulf oil spill, etc.), but little will crush optimism as quickly as remembering the feelings we had during the credit crisis of 2008. That was an emotionally and monetarily painful time for many people, and that pain doesn’t just go away. This, however, isn’t 2008. (more…)

As investors, we are told to diversify our portfolios into assets in which the combined risk/return profile is commensurate with our long-term goals. By doing so, we are told that over time we should be able to achieve adequate returns to compensate us for the amount of risk we take. (more…)

“What we’ve got here is failure to communicate.” — Captain, Cool Hand Luke (1967)

If you weren’t paying attention to the markets on Thursday, that was probably a good thing since the Dow Jones Industrial Average lost over 900 points very rapidly before gaining much of it back by the close. While we don’t have any clear-cut answers as to exactly what happened, we know one thing for sure: the market crashed. Thankfully, it “un-crashed” too.

The current story (which in our opinion is questionable) is that a single trader accidentally put in a sell order ending in “B” for billions instead of “M” for millions of shares of Proctor & Gamble (PG). As the story goes, this one bad trade put computer trading programs into overdrive, and they flooded the market with sell orders. Compounding the problems were questionable quotes for certain securities that had them down 99% in mere minutes. Many of those trades have since been reversed. (more…)

According to Wikipedia, “Game theory [made famous in the movie A Beautiful Mind] attempts to mathematically capture behavior in strategic situations, in which an individual’s success in making choices depends on the choices of others.” But if you want to watch game theory in action, skip the economic text books, ignore the math and simply watch the developments in Europe. Over the weekend, the European Union (EU) approved a €110 billion ($146 billion) bailout for Greece after debt-rating agencies and world markets showed a vote of no confidence with debt downgrades and sell-offs. (more…)

“When the facts change, I change my mind. What do you do, sir?” —John Maynard Keynes

While looking at the earnings reports that have come out recently, I couldn’t help but think of the quote above. Indeed, I have written quite a few times over the last year that I felt the market was becoming fairly valued and that earnings reports would have to impress to make valuations look attractive. Each quarter, earnings have impressed, valuations have come down and the market has again started to look cheap—even after the fabulous advances we’ve seen since March 2009. (more…)

The Securities and Exchange Commission (SEC) fired a shot across Wall Street’s bow on Friday when it filed suit against Goldman Sachs (GS), charging the firm and one of its traders with fraud. While Goldman has had its fair share of bad press since the financial crisis, this is the first real legal action against it. We now wonder, “Will this be the last?” (more…)