World Champions

I will start with the pleasant news.  Since the last blog, the Cleveland Cavaliers brought a championship to Cleveland for the first time in 52 years.  For those of you who do not live in Cleveland, the last game was an epic battle and the sports highlight of almost every Cleveland sports fan’s life.  Following the win was the most incredible victory parade ever.  It is estimated that over 1.3 million people (the most ever in Cleveland at once) attended the celebration.  There were people of all ages and backgrounds all rallying together around the champions.  It was truly one of the best moments in Cleveland ever!  Below are a few photos that capture a bit of the experience and crowd.  WATCH: Parade Highlights and/or  WATCH:  The Best Two Minutes in Cleveland Sports Since 1964

Consumer Debt Defaults

Earlier this week, Synchrony Financial, a private-label credit card issuer, announced that it was increasing its guidance for charge-offs.  While the overall level of charge-offs is relatively low, this is one of the first tangible signs that the consumer might be weakening and that credit may be deteriorating after years of improvement following the 2008-2009 financial crisis.  Synchrony is the largest creditor for retail-store credit, so they are viewed as a bellwether for the industry as a whole.  There have been lots of fears circulating related to auto loans, credit cards and student loan debt, so this is something to pay attention to.  Heretofore, the U.S. consumer has been resilient.  Is this just a minor tick up or the beginning of trend reversal?  MORE:  Cracks Show in Consumer Credit -- WSJ 

Quote of the Week

Bonds Versus Stocks

A widely held belief among investors is that over time, equities will do better than bonds.  While I believed this to be true, I thought it would be interesting to test this.  I was particularly interested in what happened if someone were unlucky enough to have invested all of their money in stocks near the peaks prior to the two major bear markets experienced in the past 30 years.  The chart below shows the current value of $100,000 invested in stocks and bonds on a given date in the past.  To clarify, if one had invested $100,000 in stocks in 1988, he/she would currently have around $1,600,000.  Investing the same amount in bonds would have resulted in a current value of $600,000. 

Looking back over the past thirty years, there is only one short period of time where buying bonds and leaving it there until today would have been better than stocks – the bull market peak before the 2000-2002 bear market.  Even in this case, bond out performance has been marginal.  Interestingly, even if one had invested in stocks at the peak of 2008, right before the biggest bear market since the Great Depression, they would still have been better served being in stocks.  MORE:  Why Stocks Outperform Bonds

Stocks at All-Time High

Including dividends, the stock market as measured by the S&P 500, is at an all-time high as yesterday’s close.  I am guessing that most investors do not feel like this is the case or that their portfolio values are reflecting all-time highs. 

Happy Anniversary!

Today marks a one-year anniversary for the market.  One year ago today, the S&P 500 hit its all-time high.  As I just typed “Happy Anniversary!”, I am reminded that today is my 16^th wedding anniversary too.  What a coincidence!  Anyhow, looking at the table below, you will see that while the S&P 500 is slightly down in the year since its peak, sector performance is quite dispersed, and the Russell 2000 – an index of smaller capitalization stocks – is down considerably.  So, investors’ returns over the past year have been much more about which parts of the market they were invested in rather than just being invested in the market.  MORE: An Unhappy Anniversary for the Market

Perceived Risk and Human Nature

The greatest opportunities in the market, on both sides, occur when there is a large gap between the actual risks to the market and the perception of those risks by market participants.  For example, in 2007, as the sub-prime lending crisis grew, very few people saw those risks and the market dramatically underestimated those risks.  This dichotomy allowed for the greatest shorting opportunity in generations.  As always, the perception of risk moves like a pendulum, so as the actual risks came to fruition and were addressed, the fears and perception of risk moved to an extremely negative stance, thereby creating a great buying opportunity only a year later. 

SpaceX Attempted Landing at Night

A lot of readers were interested in the SpaceX landing I showed last time.   Last night, they tried to land another autonomous rocket on a drone barge in the middle of the Atlantic Ocean – this time at night.  Watch Here to see what happened.  If you are busy, skip to the: 40 second mark, which is where the exciting part begins.  This is revolutionary “stuff” and I would bet that 0.1% of America watched this live.  

Mega-Cap Tech Stocks

In the past week, Microsoft, Apple and Google all had weak earnings reports and were punished accordingly.  Since their recent highs, these stocks have lost roughly $200 billion in market capitalization.  Put another way, that is more than ten times the total value of all residential real estate in Cleveland or, perhaps more interestingly, 50 Freedom Towers in New York could have been built with this money. 

On a positive note, another huge technology stock, Facebook, released earnings today and is moving to new highs.  With today’s move, Facebook has a larger market capitalization than healthcare giant, Johnson & Johnson.   MORE:  Facebook is Everywhere and Planet Facebook 

The Great Debate

There has been much debate on whether rates are going to rise or stay at historical lows and every time the Federal Reserve does something (or nothing), many of those paying attention seem to disagree.  MORE:  Yellen will regret slow pace of rate hikes.  Below is chart of 10-year Treasury rates over the past year. For the most part, rates have been downward trending, culminating (so far) in the synchronized bottom on February 11.  

Elon Musk

In the last blog, I mentioned the incredible launch of the new Tesla Model 3.  Last Friday, while most of America was watching the Kardashians, the Masters or “America’s Got Talent” SpaceX accomplished arguably the most important advancement in space technology since man walked on the moon.  Reusability has been one of the major hurdles in space flight.  Last week, SpaceX was able to launch a spaceship and land its autonomous booster rocket on a drone barge floating in the middle of the Atlantic Ocean.  Click Here to watch video of the landing.  It may be that when we look back, we will point to the Tesla Model 3 launch as the day that electric vehicles went mainstream and that the tipping point for space travel for non-astronauts started the day SpaceX landed a drone rocket on a drone barge in the middle of the ocean.  Of course there is a long way to go on both fronts, but the ball is in motion.   So what do these two historic event have in common?  Elon Musk.  He is the brains behind both SpaceX and Tesla, and oh yeah, he was a founder of Paypal, too!  It was quite a week for Elon Musk, his show is the real “America’s Got Talent”.  More:  Why this is a big deal