Every once in a while, an initial public offering of stock (IPO) comes around – this time its Facebook (FB) that the financial media proclaims as the most exciting thing investors have seen and ever will see… at least since the last one a few years ago (Google GOOG).
Facebook is a phenomenon for sure, with an estimated 12% to13% of the world’s population currently using the social networking site in some capacity (over 900 million users out of a world population of just over 7 billion).
What does all this mean for the FB IPO and should you buy the stock?
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Portfolio management is all about balancing the risk of loss with the opportunity for return. Traditionally, lowering risk was as simple as blending some bonds into a portfolio; then Modern Portfolio Theory (MPT) demonstrated that by adding in some other “alternative asset class” categories such as international stocks, REITs, and even commodities it could potentially lower the portfolio’s overall risk and increase its return because the alternatives might have a low “correlation” with US stocks and bonds. That is until the correlation among most assets went to 100%, like they did in markets such as 2008. During markets like that, adding riskier alternative assets to the mix may only increase already catastrophic losses. Is there a way to get the benefits of diversifying into alternative assets without the catastrophic losses they’re capable of generating? Yes there is! “Alternative strategies” have emerged as the new “alternative asset class”. In other words, the benefits of diversification can potentially be derived not only by “what” you invest in but also by “how” you invest. If you’re not familiar with the benefits of incorporating alternative investing strategies into your portfolios or how to do it give us a call.
Art Nunes, CMT-The Dynamic Investing Group.
Over the last few weeks there have been some significant positives coming out of Europe to deal with their “debt crisis” that are largely being ignored by the main stream media:
- The “dollar swap lines” program announced by the world’s major central banks two weeks ago has temporarily relieved liquidity issues at European banks. It has basically taken eminent Euro bank failures off the table for now.
- The “unlimited” availability” of three year loans at 1% announced by the ECB has created a lucrative carried trade for the banks (i.e. borrow at 1% and invest at 3% – 6% or more).
- The relaxation of loan collateral rules takes even more pressure off the Euro banks (and it increases the risk of the lenders!).
- All of the above reduces the pressure on Eurozone leaders until they can put together a credible plan to solve their long-term problems. Basically these actions put a “back stop” in place until the Eurozone nations can come together. So far these actions have been well received by the bond markets as we’ve seen lower sovereign yields in last few weeks, and they may be starting to be noticed by stock investors.
In summary, the ECB’s willingness to loan their banks an unlimited amount of money and allowing them to use sovereign debt as collateral is a major change in sentiment. Suddenly there is a market for that high yielding sovereign debt, with a backstop. This is effectively a new version of quantitative easing by the ECB and there is no limit on the loans…this could be a major game changer for the markets at least in the short-term.
Headlines out of Europe today continue to push stocks higher as the new week gets under way but so far nothing is finalized. For the last four months, investors have been trying to figure out what the outcome of the European Debt Crisis will be and its impact on the worldwide economy. This “evaluation” period has created a very volatile trading range for the broad market putting it on the verge of collapsing several times and also to the point of breaking out to the upside several times. An example of this can be seen on the S&P500 price chart below. Just a few weeks ago we were celebrating Thanksgiving and the broad market was testing the level it was at during the August – September period at 1,150. This past week the rally has taken the S&P500 back to just below its 200 day moving average (DMA) again at about 1,263. You can see in the chart below that this is the fourth try at crossing up and over the 200 DMA. Once again, we will quickly see whether the S&P500 can make it and stay there. That would validate that this trend is “rising” again and give the “all clear” for a longer-term move up. The good news is that the decline two weeks ago reversed back up at about 1,150 which is a higher low off the summer bottom indicating buyers are starting to take more control of things. The red trend lines on the chart show that the market is converging to a point where it will either begin a longer-term move up or resume its longer-term decline.
In a recent Investment Alert Mark Kramer compared the similarities of the initial phase of the 2007/2009 bear market with the current one. In both cases there was a central problem that posed widespread “systemic risk” to the investment markets. Back in 2008 it was the “sub-prime mortgage” crisis and now it’s the “European debt” crisis. In both cases the S&P500 initially declined about 20% from its high, traded in a volatile sideways trading range for several months and then underwent a strong rally that carried it up about 13% to its 200 day moving average (DMA) trend line. Back in May of 2008 the market spent several weeks at its 200 DMA then it began its most damaging leg down (+ 50%) over the next ten months (see October 12, 2011 Alert). Continue reading →
