Seguro inicia Presidência aberta em Castelo Branco para acompanhar recuperação

[Keyser Soze]

Dow vs Money Market (Since Peak)
in Finance | Markets | Psychology/Sentiment | Technical Analysis | Trading

On Wednesday, we looked at the breakdown of Dow components, surprised to discover that only 10 of the 30 Dow components were above their 2006 highs. Four stocks -- Boeing, United Tech, Caterpillar and Altria -- were the primary drivers, pulling the Dow higher despite the drag of so many other relatively weak components. 15 of the 20 Dow stocks still below their prior highs are down substantially, with GM and Intel off ~60%, and Microsoft still down by 51%, and Home Depot and Merck off ~ 40%.

But before we get too excited about the new highs on a closing basis -- perhaps even today? -- perhaps we should look at the actual real performance of the Dow.

Consider what happened if you actually held these 30 stocks (individual issues or through the Diamonds) since January 2000: After 6 1/2 years, you are now almost breakeven on a nominal basis. If you reinvested the dividends from the Dow, you would be up 12.7%.

On a real basis, adjusted for inflation, you are actually down 19%; With reinvested dividends, you are down around 9%.

If you were lucky enough to sell back in January 2000, and you instead simply placed the money in a cash fund (money market), you would be up ~20.87% on a nominal basis; On a real basis, you are up just under 2%.

So while everyone on TV is celebrating the new highs, I can't help but think: "Yeah! We only underperformed cash by 818 basis points! Yeah!



That's on a real or a nominal basis.

http://bigpicture.typepad.com/

[Keyser Soze]

As Stocks Near a High, Pressure
Builds for a Professional Investor

By E.S. BROWNING
September 29, 2006; Page A1




As the Dow Jones Industrial Average flirts with a record high, Jon Brorson is sitting at the base of what professional investors call "a wall of worry."

Mr. Brorson, a Chicago money manager with $2.3 billion under his supervision, is one of many doubters who stayed on the sidelines as the market marched ahead this summer. Now the Dow is up 9% in just over two months, within five points of its record closing high of 11722.98 after briefly crossing it yesterday. Investors like Mr. Brorson figure others are driving it too high, setting it up for a fall. They've been expecting a slowing economy to shrink corporate profits and lead to a pullback.
[J B]

Oddly, these doubters are part of the dynamic that has let the market do well.

When the Dow hit its record in January 2000, most pros cheered it on. This time, many have been skeptical. The market's recent gains are based largely on hopes the Federal Reserve's interest-rate management will slow the economy enough to prevent inflation without making companies and consumers suffer. But investors with a different view worry that the Fed rarely has been able to raise interest rates without serious economic consequences.

So far, these skeptics have been outvoted. As stocks have risen, they've seen their holdings suffer -- slowly prompting more and more to throw in the towel and buy the kinds of stocks that benefit from a resilient economy. The gradual conversion of skeptics into stock-buying bulls has provided the fuel for gains. Hence, the cliché: A steadily rising market often "climbs a wall of worry."

Mr. Brorson's worries served him in May. Then, he shifted toward "defensive" companies whose sales tend to hold up in all kinds of economies, such as drug makers, food producers and electric utilities. His May move was gutsy -- and right. The Dow got to within 81 points of its record and then fell 8% into July.

Now, as it rises, he's fighting the trend again. Doing so keeps him up at night and, his wife says, makes him irritable. His travails over the past two months show just how hard it is even for dedicated pros to call the turns. It's especially hard at times like these when investors are debating whether a shifting economy will change stocks' direction.

"I am wiped out when I get home each day," says Mr. Brorson. He's typically in bed by 9 p.m.

Managing money has been his dream since high school, when he first began buying stocks. But at Northern Trust Corp., a big financial group in Chicago that caters to the wealthy, he initially was passed over for an investment job. He was so annoyed he demanded to know why he didn't get it. He got the next one.

After leaving Northern Trust in 1990 to set up his own firm, he was lured back to run most of Northern Trust's mutual funds. His ability to anticipate market shifts helped him weather the post-bubble bear market of 2000-02 better than many. By 2002, headhunters were calling.

A Sunday-school teacher for 23 years at his Scandinavian church, Mr. Brorson is a buttoned-down 49-year-old. He is a Midwest conservative down to his black shoes with a banker's cap toe, which he repeatedly ties and reties in the office when he's nervous. His suit is often a navy blue with pinstripes. "Sloppy dress means sloppy work, a sloppy mind," he says. But Mr. Brorson also has a flair for adventure, dog-sledding in Michigan's Upper Peninsula and kayaking in the Baltic Sea with his Swedish cousins.

He attacks the workday, rising at 4:50 a.m. and, after showering and praying, riding a crowded double-decker train. To be one of the first off, he sits on its stairs, his briefcase jammed behind him as he races through two newspapers.

In late 2002, Mr. Brorson and his team quit Northern Trust for money-management firm Neuberger Berman. The switch meant more pay and independence, but big-time pressure. The main goal in his old job had been to protect assets. But Neuberger Berman, now part of Lehman Brothers Holdings Inc., is determined to outdo the competition. It had fired his predecessor just before Christmas that year for being behind the curve. "The mindset is 180 degrees different," he says.

Mr. Brorson sets the direction for a variety of investment accounts including three mutual funds, letting portfolio managers pick most of the individual stocks. For three years, his team rode what proved to be a resurgent market, mostly staying ahead of the pack. But early this year, he got worried. A string of Fed interest-rate boosts was putting a drag on the economy, as were high oil prices. Yields of 10-year Treasury bonds had pushed above 5%, pulling mortgage rates up. Consumers showed signs of restraining their borrowing and spending.

Pulling out of a winning bet is one of the hardest things for investment pros to do. It means selling your strongest positions while others are buying and prices are high. Yet if you wait for stock prices to weaken, it may be too late. Mr. Brorson's stomach churned as he cut back on stocks tied to economic strength, such as copper company Phelps Dodge and aircraft maker Boeing, and shifted into "defensive" ones such as Coca-Cola.

"It is hard to kick out the girl that brought you to the dance and go over to Bertha," Mr. Brorson says.

When the market cracked in mid-May, he was exultant, as his move to caution had put him ahead of the more-bullish competition.

By August, he was newly queasy. The Dow was up 4% since a mid-July low -- and he was still with Bertha. Sitting in his office at 6:50 a.m. one day, he found himself nervously plowing through dozens of emailed analyst reports, scrolling through the headlines on his Bloomberg terminal, preparing to take calls from analysts and casting an eye toward the commentators on CNBC.

To do his job, he immerses himself in the market -- the data, the commentary, the moves of various stocks and indexes. One computer screen is on his desk in front of him, and two others, for email and for charts, on a credenza behind him. Most days he skips breakfast and lunch, munching on nuts, raisins and bananas and drinking coffee and water.

That Monday in the middle of August, the market wasn't going his way. The Dow had been down the Friday before, in line with his expectation, but now it was up 60 points, and his conservative stocks were trailing. With oil prices and mortgage rates by this time retreating, the market was betting on economic growth. More-speculative stocks linked to technology and consumer spending were leading. "We are giving back a lot of what we gained Friday," Mr. Brorson said, looking irritated.

CNBC reported that retailers, a group he had bet against, were rallying. "We knew that. Yup. Retailers are rallying," Mr. Brorson said. To process information, he regularly talks back to the TV screen, to his Bloomberg screen, or while listening to conference calls with his line muted.

Every morning, Mr. Brorson goes to the Web site of Morningstar, a mutual-fund research firm that compares funds to each other and to indexes. Thanks to his May move, in late August most of the funds still were ahead of the competition for the year, but slipping. He wanted to be able to report solid performance when the quarter ends today. "You don't want to bleed to death at the side of the road from getting nicked, but I am not going to change anything," he said. "What I am worried about is a more sustained move that goes up 15%-20% into December. We would have to react to that."

He believed the upturn wouldn't last. Meanwhile, he had bet that demand would keep energy stocks rising, and had hung onto them. Now, softer oil prices were pulling energy stocks down.

Other pros were selling energy stocks, "taking profits," and putting the money in beaten-down tech and retailing shares. "Very rarely does a sector lead for three consecutive years. I know that. And this would be year three for energy," he said. "But I am maintaining my position."

Although he bases decisions on fundamentals, Mr. Brorson occasionally peeks at another side of the investing world, called technical analysis, which tracks trends in historical and other charts. As he put it: "One of the oldest sayings on Wall Street is, 'I am not a technician, but....' " He pulled out a chart of oil prices, worrying that it seemed to have peaked and started down.

Ken Turek, who oversees the group's biggest fund, and Spiro Voulgaris, who does its data analysis, had been pushing him with increasing urgency to cut back on energy. He was beginning to waver. But suddenly the tension eased. The day's rally faded, and his more-conservative investments recovered. CNBC reported the news. "We knew it would do that. We knew it," he told the TV screen.

Mr. Brorson encourages those around him to think independently. In a staff meeting, Mr. Voulgaris said profit forecasts were rising, suggesting a stronger economy. But Mr. Brorson figured any gains in tech stocks would be a chance to cut holdings in them even more. "I hate these things. If they show any sign of life, shoot 'em between the eyes and throw 'em overboard," he said.

Over the next weeks, the market kept moving against Mr. Brorson. Economic reports reinforced hope the Fed was managing to cool the economy smoothly. The tech-heavy Nasdaq Composite Index was up 10% since mid-July. But rejecting colleagues' entreaties, Mr. Brorson was unwilling to buy more tech or retail stocks.

By mid-September, the stress was intense. Exxon Mobil, a big holding, was off almost 9% from an August high. "We had a lousy August and we are coming up to the end of the quarter," Mr. Brorson said. "I want to see some butt-kicking. Where is the butt-kicking?"

One thing buoying the market, Mr. Voulgaris noted, was that investment pros who were still trailing the indexes they were measured against felt pressure to buy the currently hot stocks before the quarter's end.

Mr. Turek walked in, and said some of his best stocks were the tech and retailing ones Mr. Brorson had asked him to sell, while some of his worst were the energy stocks Mr. Brorson liked. Displaying a downward-sloping chart, Mr. Turek asked, "If that were a stock, what would you do with it?" Then he showed a chart of consumer stocks such as retailers. Its angle was upward.

"Son of a buck," Mr. Brorson said, the closest he comes to swearing. "Dang it."

Mr. Brorson rechecked which sectors were leading -- something he'd been doing almost every hour. Financials and health care, two of his favorites, were OK. Then he saw tech and retailing stocks pulling back a bit. He took a deep breath and relaxed. "You don't have to swing at every pitch," he said. As the market sank to a close, he untied the shoelaces he has been tying and retying all day.

But the day ended with his energy stocks still suffering. "Crap and a half. It was a stinking, frustrating day," he said.

At 2:30 a.m. that night, unable to sleep, he says, he went to the living room and read some of "Uncle Tom's Cabin."

The next day, the stress got worse.

"Today the Dow could be very close to making a new high that could break this wide open," he said. It was at 11580, less than 150 points from a record. He turned up CNBC. "There is a lot of optimism here on the floor," said a commentator.

"They are just a bunch of sheep," Mr. Brorson told the TV. He pulled out a stock chart and began drawing horizontal lines across its peaks and valleys. The work suggested the indexes were pushing back toward old highs. "Jeez," he said.

"We're on a record-high watch for the Dow," said a cheery CNBC announcer.

"Time to sell. Time to sell," muttered Mr. Brorson.

Yet within days, he had shifted his bet. He told associates he had made a classic mistake of staying too long with a winner: energy stocks. "I should have sold out when Ken wanted me to and Spiro wanted me to. So let's close the barn door when there is still a part of the horse left," he said.

They debated where to put the cash. Still expecting a weaker economy, Mr. Brorson wanted defensive stocks such as makers of food and household products. Mr. Voulgaris disagreed. "History suggests that headwinds haven't slowed the consumer in the past," he said, adding that auto-industry cutbacks, paradoxically, would put more money in people's pockets as they took buyouts. The staff compromised and spread the cash around, to stocks they already owned.

Mr. Brorson knows that if the market keeps defying his expectations, he will at some point be forced to start buying the winners, or risk falling behind. "I do believe we are at the midpoint in a much more elongated cycle, where China will be spending money to support the 2008 Olympics," he said. But he didn't want to position himself for that yet.

In a belief that quarterly profits, due out in October, could disappoint, he and his colleagues agreed late this month they won't chase the tech and consumer stocks. But they reminded themselves that, in the fourth quarter, technology often is a leading group. Their expectation: Techs will pull back after earnings reports; then they'll be prepared to buy.

The goal, Mr. Brorson repeatedly reminds himself, isn't to be right, it's to own winning stocks. "It is not a moral thing, about who is right and who is wrong," he said. "It is just money and we are paid to make it grow."

[Keyser Soze]

America’s main stockmarket index is nearing a record high. Are investors overly optimistic?



WALL STREET has had the breathless anticipation of a man waiting for a sneeze that won’t quite come. The Dow Jones Industrial Average has been floating tantalisingly close to its record closing high of 11,722.98, reached on January 14th 2000. The index came within a hundred points of its high point in May, before concerns about inflation and rising oil prices drove it back down again. Since then, the Dow has slowly clawed its way back, and for several days it has been flirting with the old record. During the day on Thursday September 28th it briefly rose to 11,724.86.

Some will carp that a nominal record means little. Worse, say some, because of the way it is constituted, the Dow fails to give a true reflection of investors’ sentiments. The S&P 500, which arguably provides a better measure, is only at a five-and-a-half year high. And though the Dow undoubtedly indicates that markets are buoyant, one might reasonably ask what traders are so happy about.

The Dow is a powerful symbol in a country that seems increasingly worried about the possibility of a recession. GDP growth was just 2.6% in the second quarter, a healthy rate by European standards, but lacklustre compared with America’s recent record. Consumer confidence peaked in April and has since fallen back. Orders for durable goods, which give an idea of buyers’ confidence in the economy’s future, unexpectedly fell for the second month on the trot in August.

More worrying still is the unsettled state of the housing market. A long boom seems finally to be coming to an end. This is troubling because the increasing values of homes have been helping to persuade consumers to open their wallets. Now home-owners may lose their love of shopping. And foreigners may already be losing their zeal for America. Previously a torrent of borrowed capital flowed into the country. Americans now appear to be paying out significantly more to foreign creditors than they are getting from foreign investments, something that has not happened for some 90 years.

Given the gathering gloom investors might, at first glance, seem to be somewhat over-optimistic. According to the Bureau of Economic Analysis, overall corporate profits are still rising, but they went up by rather less in the second quarter of the year (a rise of $23 billion) than they did in the first (up by $176 billion).

However, not all the news is bad. Oil prices have fallen dramatically since July. Lower energy prices should ease consumer finances and benefit America’s soaring current-account deficit. Fears of inflation are also abating, partly thanks to a steady increase in interest rates by the Federal Reserve. Economic news from abroad is also increasingly rosy: Japan is getting up some speed after more than a decade in the doldrums, and Europe’s big economies are also looking brighter. Even if America’s economy falters, recovering demand in those markets should help mitigate the damage for companies that export their wares.

The stockmarket is also a happier place now that the pace of interest rate increases is slackening—at its last meeting the Fed kept rates steady at 5.25% for the second month running, after 17 straight months of increases. On Wednesday Randall Kroszner, a governor of the Federal Reserve, also gave Fed watchers a reason to smile. He told the Forecasters Club of New York that productivity growth is likely to stay strong for quite some time, which will increase the pace at which the economy can grow without triggering inflation. Optimists, at least, can believe that markets will ride high for some time yet.