We believe we have identified the reasons why stocks will continue to rise. They make sense and we think you will agree with us. A word of caution: a rise in margin interest could curtail the train, so be mindful.
We also provide 3 traits of successful investors in this week’s issue. Today, we emphasize The 3 P’s.

May 12, 2013
Volume 4, Number 2

The Goldman Guide

Why Stocks Will Continue To Go Up

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Happy Mother’s Day to all of the wonderful mothers out there.

Years ago, more long distance calls were logged on Mother’s Day than any other day in the year. Of course back then the notion of conducting a long-distance call was a big deal.  Today, I doubt many people keep those kinds of statistics anymore. In any event, we are in an environment where the most important       statistics involve the stock market, with perhaps the unemployment rate and the start of the NFL regular season, following behind.  With that in mind, we have watched the rise in the market with glee and trepidation, wondering when it will quit, if it will quit, and why it will cease.

Frankly, at the risk of being a negative barometer (and if that happens we would not be shocked), we do not see an end to the fun. Yet. Why?

For starters, the triggers and catalysts that prompt declines in stocks do not seem to be present. Quarterly earnings season is two-thirds or more complete and the numbers have been pretty good overall, with few companies guiding lower. That is a bullish sign as it keeps the projected earnings for stocks for 2013 relatively unchanged. That is key because what we were afraid of is that financials could be disappointing which would prompt downward revisions. Such moves would mean that the price/earnings ratio on the S&P 500 Index would be above its historical average and during a period when we are not exactly experiencing accelerated growth.

As we have mentioned in recent months, we remain in a low interest environment. Moreover, we have a Fed pumping money out like a marijuana grower.  Plus, now that gold has collapsed along with other hard assets and certain commodities, there are few places to put one’s money aside from equities. 

Real estate is certainly on the rebound but money is not flowing there in great quantities. If interest rates do rise, and that could occur in the coming quarters, bond investors, especially those with longer maturity-based securities will see their value decline. No one appears to wish to be in that position.

Another factor that is a potential proof of a continued and perhaps sustained rise is the fact that the gains upward have not been associated with huge up days. Rather, the increases have been steady, sustained, and somewhat incremental.  For the most part, this has been the case for much of 2013 and it is an unusual thing to behold, given the schizophrenic nature of the stock market over the past 10 years.

Yet another component that is related to this phenomenon is the absence of irrational exuberance.  We do not appear to have major, incredibly vocal bulls, or for that matter, vocal bears, either. Many of the pundits appear to be resolute but even-keeled in their prognostications. It is almost as if the market has lost some of the emotional underpinnings that are part and parcel of trading and investing in stocks. On the one hand, this could be a direct result of enhanced program trading, the migration of more assets to index-correlated funds, and the simplistic nature of the stock trading itself. Chartists are awash with giddiness due to the beautiful patterns of the market’s major indices and many stocks in general. We are also finding that investors and traders alike appear to becoming less and less married to stocks. It is as if they are less interested in detailed company information and more likely to make decisions based upon positioning, sector rotation, technical analysis, advance decline ratios, and themes.

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By the way, this fits in very nicely with our strengths, and or approach. This is why our 30-30 Report and Daily Blogs have had such great performance. 
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All in all, the need for a rest, some poor financial numbers, and the ever-increasing margin interest seem to be the key factor sin halting this rise. Beyond that, however, the future is bright.

Important Note: Alan Abelson, the former long-time editor of the weekly investment bible, Barron’s passed away late last week. I urge you to read some of the comments by his peers, colleagues, etc.  I did not have the pleasure to meet him but was a tremendous fan. He made us all smarter and deep thinkers. He will be missed.

Traits of Today’s Successful Investor

From time to time, we will be exploring the traits of successful investors and traders. Today, we are focused on what we call The 3 P’s. Remember, for the most part, we invest in stocks, not the market. As a result, we have to have a mindset that is associated with such actions. Note: This guidance is geared for investors rather than for traders.

Patience: If you are investing in a stock based upon a theme or industry sector, it is not uncommon that favorable sector rotation or technical may buoy many of the stocks in the space. After all, a rising tide lifts all boats. However, if you are investing in a given stock due to your belief in management, its products, positioning, etc., one must have patience. Too often, investors sell too soon, or sell at the slightest hint of a problem. By having a longer term outlook, and staying on top of news, if your thesis remains the same, you will eventually be rewarded. This is especially the case with stocks such as biotechs or those types of companies whose profits are dependent upon a series of transactions.

Prudence: Do not put all of your eggs in one basket. Make sure there is some semblance of diversity in your entire portfolio. Moreover, don’t go into a stock based in a whim or just because it is trading like gangbusters. That is great if you have a trading posture with that security. However, if you treat each stock this way, it becomes a slippery slope. Above all do your homework, and even go back a few years to see what is different today from 3 years ago. If it appears that management has no clue or can’t buy a vowel, don’t buy the hype.

Productivity:  It is important that as many stocks in your portfolio do well so that you don’t need big hits to make up for losses. Try to find stocks that are less volatile and are routinely demonstrating progress. Take the extra time to seek out information about related stocks, or their customers. Reach out to the IR team. Whatever you do, do not live in a box. Make moves if you are beginning to feel uncomfortable in any sustained or repeated changes in the business model.

Until next week...