As U.S. corporations and the stock markets enter another fiscal quarter for the year of 2013 with promising gains in sales and return – despite the positive movements of the S&P 500 (SPX), Dow Jones (DJIA) and NASDAQ (IXIC) reaching record highs-investors remain leery.
And, with not only stabilization in the markets but, also, the economy improving.
According to the Bureau of Economic Analysis, a division of the , real gross domestic product (GDP) increased at an annual rate of 2.5 percent in the second quarter of 2013 (third quarter report expected to be released September 26th), up 1.1 percent from the first quarter and from last year’s annual rate of 1.2 percent, however, lower than the long term average of 3.29 percent. The report also declares that, “The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending.”
Additionally, real disposable personal income (DPI) increased $140.1 billion or 3.4 percent in the second quarter after decreasing $157.1 billion or 8.2 percent in the first quarter. The upswing in DPI “reflected sharp upturns in personal dividend income and in wages and salaries….”
With this said, if GDP is a reflection of the state of the economy, one could also make the safe assumption that the stock markets’ reflects the state of US businesses. Yet, while this would appear as a simple enough concept, there is contradiction because of the reasons behind how and why investing is done in America.
Don’t panic, I’m not getting ready to paint a picture of everything being splendid, but it’s not all doom and bloom either. Are we ‘better’ off? That depends on which side of the a(isle), balance sheet or whether the size of your billfold or pocketbook has downgraded that you choose to view from. Nevertheless, if recent Gallup polls show that consumers can be reasonably confident in the economy then what’s keeping investors at bay from entering the markets?
For more than 30 years now the popular school of thought, concerning the U.S. economy, has been spotlighted on the principle of the trickle- down theory; that as long as those that have (in abundance) spends the rest of society- by proxy- will benefit, naturally, from the exchanges generated sliding down the economic ladder. This theory carries the notion that as long as ‘the haves’ continue to have, the economy will always sustain itself.
Keeping this logic of abundant disposable income making its way down to the lower-level masses in mind, the present-day behavior from the investment community has been one of actually practicing the opposite of the prosperity-to-all philosophy.
Case in point, in regards to the U.S. stock markets, the majority of traders from high frequency trading institutions to Joe Schmo the daytrader use the investment strategy of speculation. Speculation involves taking on the risks from the short term buying or selling of a security contract. This differs from investing in that knowledge of a company’s fundamentals is not needed.
Attention on the federal monetary and fiscal policies, the unemployment rate, and banking, financial services, housing, auto and consumer retail markets have guided (or misguided, however one chooses to look at it) investment decision-making. In what use to be market analysis by way of investors monitoring the decisions of the Fed in order to forecast which personal investment decisions to make with the forethought of market sensibilities is being replaced by attempts of infusing economic reasoning and behavior with stock market price movements and calling it “emotionally free, technical-assumptions-only” analysis.
So, if we are to go with the notion of economic overflow seeping into the hands of the rest of society then let’s look at some of the performances of companies in the high-end specialty retail industry.
Wearable luxury accessories’ makers Tiffany & Co., Fossil, Coach, and -with the exception of- Tumi Holdings, have outperformed the S&P 500 (NASDAQ for Fossil) and analysts’ estimates.
Shares in Tiffany & Co. (NYSE: TIF) rose a total of 108.56 percent since the 2008 recession, finishing at $79.40, up from $36.73. Currently, the company’s stock is trading above its 50-day and 200-day moving averages of $79.25 and $71.12, respectively. Tiffany & Co. has issued dividends each quarter since 1989 with a current yield of 1.66 percent with a total of 127.94 million shares outstanding. Net income for the second-quarter rose 16 percent to $106.8 million, or 83 cents a share from $91.8 million, or 72 cents, a year ago; analysts projected 74 cents.
Fossil Group’s (NASDAQ: FOSL) stock gained 327.81 percent in five years from $27.72 to $118.59. A total of 56.47 million shares are outstanding and its shares presently are trading above their 50-day $115.23 and 200-day $104.80 moving averages. Second-quarter earnings rose to $67.7 million, or $1.15 per share (a record high), from $57.3 million, or 92 cents per share, a year earlier. Analysts expected a profit of 93 cents per share.
Coach’s (NYSE: COH) stock increased $55.04 or 86.64 percent from the start of the recession of $25.99. A total of 281.93 million shares are outstanding. At this time, the company’s stock is trading below its 50-day and 200-day moving averages of $55.28 and $54.73. The company has issued dividends each quarter since 2009 with a current yield of 2.45 percent. Coach ended their fourth-quarter with net income totaling $254 million or $0.89 earnings per share, which came in-line with Zacks’ estimate. This compared to net income of $251 million and earnings per share of $0.86, in the prior year’s fourth quarter. Reported net income for the year totaled $1.034 billion with $3.66 earnings per share.
Tumi Holdings (NYSE: TUMI)-designer of high-end business-oriented products such as briefcases and luggage – has trading down at -16.55 percent since its April 20, 2012 initial trading day. The stock has a 50-day moving average of $22.50 and a 200-day moving average of $23.33 with a 52-week low of $19.44 and high of 26.24. 63 million shares of the company’s stock are currently outstanding. Second-quarter net income was $11.19 million or $0.16 per share; up from $6.49 million or $0.10 per share in the same period last year. Current analysts’ recommendations are buy or hold.
After reporting net sales of $108.19 million or 12.9 percent up from $95.82 million the previous year and a gross profit increase of $120.3 million or 57.0 percent of net sales, from $100.1 million or 56.9 percent of last year’s net sales, shares plummeted more than 13 percent due to the second-quarter results missing analyst estimates of $114.03 million.
The company now forecasts net sales for the year- fiscal year ending December 31, 2013- to increase 16 percent to 18 percent, down from the prior range of 18 percent to 20 percent. Although, it should be noted that this is a projected forecast-a forecast that is still within a 2 percent range of growth.
This is an example of when reading the numbers is necessary.
By taking the equitable validity of these companies mentioned just at “face value,” for example, and as an illustration of trickle-nomics, market participants continue to dismiss market valuation for speculative scrutiny.
Fleeting are the days of only rational speculators trading under the practice of adopting public expectations for general market prognostication, now leading the charge seems to be the “trickling down” of the U.S. stock market at-large with a ‘speculation is king’ sentiment. This top-down approach to investing is being nestled as the new normal strategy in financial investing.
There has been an overwhelming selling-off of the US stock markets which thereby negates the original principle of buying being the solution to our economic woes. With trading volume at a five-year low (although this is a typical sell-off season of the equity market), one can’t argue for economic prosperity while practicing market destabilization.
If the stock market is a reflection (or true indicator) of the economy, then the market cannot predict or predetermine an economic outcome and come after the fact, or react, at the same time and vice versa. The two forces cannot co-mingle, rather respond to one another.
Furthermore, if we believe in market efficiency, that current stock prices are true estimations of company asset value, then stop looking at the prolonged uptrend of speculation as the only means to partaking in the market and start applying more than one method as part of the overall investment plan.
There are many factors affecting our economy. High corporate sales with low profits make for less of an ability to reinvest. Low interest rates and a strong U.S. currency have not motivated expansion. However innovation and the need for more progression are even more prevalent for businesses to loosen the stunt in growth. While another possibility to consider in the stagnation is the rate of working-age citizens from 2006-2011 grew at less than 1 percent a year.
Unfortunately, the only real stimulus being generated is the perpetual cycle of consumers holding onto their savings, or lack thereof, and watching if their jobs will remain intact because businesses are waiting to decide on whether to create more jobs or not because they’re watching those in Washington bicker back and forth, all the while speculators are waiting for the whole thing to crash with bated breath just for the chance to say, “I told you so.”
With many commentaries and intro/retrospection on the five-year anniversary of the financial crisis and what lies ahead for the investment community, one idea that is needed to invoke discussion is financial economics versus the asset allocation ideologies and what is needed to understand what matters falls beneath which issue and attempt to resolve accordingly. Sounds easy right? Well, maybe not so but it’s a start.
- Wall Street Facing Drop in Trading Look to Fed for Relief (bloomberg.com)
- Stocks edge higher after mixed economic reports (news.yahoo.com)