I’m a little late posting my Investment Commentary for March. I’ve been waiting for something to write about. I have become used to disaster and excitement. The world has become eerily quiet and uneventful. No dictatorships have been overthrown lately, Syria notwithstanding (they’re working on it). Occupy Wall Street has become “Go Back Home and Occupy Mom and Dad’s House.” Everyone knows Greece is going to default. Everyone is pretty sure Italy is NOT going to default, Spain is tomorrow’s news and no one seems to care much what Portugal is doing. No tsunamis, floods or earthquakes. No disasters of any kind, natural or unnatural. No terrorist attacks. Bin Laden has been captured, tried, convicted and executed (all rather quickly) so no one is worrying about what he is planning next.
Stock markets LOVE periods like this. Stock markets HATE negative surprises, periods of uncertainty and volatility. They don’t like toga parties, they like garden parties. They don’t like Metallica, they like Enya.
One day, not a long time ago, the brain trusts on Wall Street decided they needed an indicator that would let them know whether to be nervous or not… not fully realizing that any such indicator might be “after the fact.” Wall Street created an instrument for measuring volatility. It is called the “VIX,” which stands for the Volatility Index.
Below is a 5-year Bloomberg graph of the VIX. In 2011, the Dow Jones Industrial Average was up or down more than 100 points in a day… sometimes 200 points or more? On the graph, you can see where the VIX spiked close to 50 last year, just as it did in 2010. Looking back to the economic crisis in 2008, you can see where the VIX touched 80 a couple of times.
5-YEAR GRAPH OF THE VIX INDEX
click image for larger view
Interestingly enough, the graph below represents the performance of the Standard & Poors 500 Index during the same 5-year period.
5-YEAR GRAPH OF THE S&P 500 INDEX
click image for larger view
As volatility in the stock market increased in 2008, 2010 and 2011… the prices of stocks declined. And as volatility has disappeared, stock markets all over the world have rallied. U.S. stock markets were up over 4% in February, while the EAFE Index (Europe, Australia and the Far East) increased almost 6%. Year to date they are up 9%, and over 11%, respectively. Since the end of September, they are up over 21% and 15%. It seems that uneventful global optimism is the theme. As long as everyone stays calm, we can just keep making money.
In addition to an absence of volatility, we are quietly seeing slight improvements in the economy… or at least an absence of continued deterioration. We have seen increases in auto sales, industrial production, retail sales, and housing starts, as well as continued decreases in jobless claims. This is not good news for Romney, Santorum, et al.
_____________________
If you are a Republican with aspirations of becoming President of the United States of America someday, you do NOT want to win the GOP nomination this year. Once you run for president and lose, it’s difficult to give it another shot in future elections. I’m not saying it can’t be done. Richard Nixon accomplished that feat. After losing to Kennedy in 1960, he skipped the 1964 election as Lyndon Johnson trounced Barry Goldwater (remember those cheesy AuH2O bumper stickers?) Nixon then went on to become a two-term president, beating Hubert Humphrey and George McGovern in ’68 and ’72.
I think Nixon was more the exception than the rule. It’s not common that either party tries to win the White House with a proven loser. Bob Dole, Al Gore, John Kerry, John McCain… they are all presidential nominees who never ran again. And it appears that whoever runs against Obama this year is going to follow in their footsteps. Romney is the front runner and, barring some embarrassing revelation, (NEVER count that out!) will likely receive the Republican nomination. And, barring some other revelation, he will lose to Obama in November.
President Obama is finally getting the one thing he needs to maintain residence in the White House for four more years… an economy that appears to no longer be on life support. The flat line has begun to “blip,” leading us to believe the patient is alive and may survive. And that’s all Obama needs to not lose… all Obama needs is for things to not turn ugly for 8 more months. The Republicans desperately need a negative economic shock.
________________________________
Trying to establish a value for a stock price is an inexact science. You need to determine three elements, each of which is independently very difficult to determine.
- What is the global economy going to do? You can be right about the company and its products but incorrectly guess the direction of the economy.
- What is the company going to do? Professional analysts all over Wall Street constantly disagree about the earnings prospect of a company.
- What are investors going to do? You can be correct about the future prospects of a company, but be wrong about the stock price for a long time. You may eventually be correct about the stock price, but be frustrated and anxious for months as “those other idiots” keep buying/selling the stock which you KNOW should increase/decline.
That brings us to Apple… the stock which has now achieved legendary status. I am not saying Apple is cheap or expensive. I’m not saying you should own it or not own it. But I stepped back from the forest yesterday and these are the trees I saw.
- At the end of 2011, the price of Apple equaled a total value of $377+ billion. As I am writing this in mid-March the value of Apple has INCREASED $172 billion since the end of 2011, a 45% increase in 2 ½ months. $172 billion in 2 ½ months!!
- Let me put that in perspective. Of the 30 stocks which make up the Dow Jones Industrial Average, 21 of them have TOTAL values less than that. That’s right, the total individual values of Pfizer, Coca-Cola, Intel, McDonalds, Caterpillar, 3M, and DuPont (just to name a few) are all LESS THAN just the INCREASE of Apple since December 31st.
- Apple’s TOTAL value after the increase is now over $550 billion. That is more than the COMBINEDvalues of:
- Alcoa
- Travelers
- Hewlett-Packard
- DuPont Chemical
- Boeing
- 3M Company
- American Express
- Kraft Foods
- Caterpillar Inc
- Home Depot, Inc.
- And the largest valued stock in the Dow Jones Industrial Average is Exxon Mobil with a value of $405 billion.
I’m not telling you the price of Apple won’t go higher. I’m not telling you it isn’t worth $550 billion. However, I AM telling you if our job is to find investments which appear “relatively” cheap and avoid investments which don’t appear “relatively cheap,” this might help you understand why we would be reluctant to purchase Apple at this price.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.