Clash of the titans
The weakness of the US based car manufacturers was displayed when Toyota overtook GM the world's top car seller earlier this year. GM has not been giving up and noted higher sales attributed to its strong presence in Latin America and Asia. Meanwhile, it seems that customers in North America seem to associate Toyota with high quality and fuel efficiency (and rightly so), making up for the weaker sales on its domestic market. Toyota is expected to beat GM in annual sales for 2007. GM has to either take away Toyota's competitive advantages (superior quality etc.), or refocus their own core competencies (more on this story: http://online.wsj.com/article/SB118491895284472882.html?mod=home_whats_news_us ).
Dow 14000
Yesterday, DJIA broke yet another thousand of points, springing doubts that it is just too high...
The importance of expectations
... and promptly fell 150 points today, as blue chips were releasing disappointing Q2 earnings data. Google's shares went down 5.2% despite quarterly profit grow of 28%, Microsoft also fell despite growing profit... just shows once again, that the markets expectations are the most important (See: http://online.wsj.com/article/SB118493115406772925.html?mod=home_whats_news_us ).
Showing posts with label stock market. Show all posts
Showing posts with label stock market. Show all posts
Friday, July 20, 2007
Bits & Pieces
Monday, March 26, 2007
Do you want to earn big? You have got to think small...
Why is small better?
Small stocks are being viewed as an attractive investment. An article in the Wall Street Journal discussing this trend starts in the following way: "International investors are starting to think smaller. They should have started earlier" (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month).
However there are some major concerns present in the common perception of small stocks. Small capitalization securities tend to be more volatile and hence more risky. Less data is provided for such companies, due both to the fact that smaller companies cannot produce a given level of financial data, as well as, because they seem to be out the focus of most analysts. Do the given above reasons determine that small stocks are not as valuable as an investment option? Not necessarily...
TINSTAAFL... or is there?
The acronym above means, "There is no such thing as a free lunch", and is widely used in economics and finance literature. In finance, this statement applies to the fact that an investor has to bear additional risk in order to achieve a higher return rate.
Surprisingly, small stocks seem to defy this rule and provide "a free lunch" on a regular basis. Historically, small stocks have brought higher returns than big stocks. The Wall Street Journal states: "Small and midsize stocks in Europe, Japan and other corners of the developed world have offered some of the best earnings growth anywhere in recent years. These stocks returned 25% a year, on average, for the five years through December, according to Morgan Stanley Capital International. Like U.S. small-capitalization stocks, small-cap foreign stocks outperformed large-cap foreign stocks for each of the past six years. Up 7% year-to-date, foreign small stocks are ahead again this year." (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month). Analyzing any kind of historical market data should lead to the same conclusion.
This characteristic might be explained by a greater risk present while investing in small caps. However, financial research and empirical evidence seems to prove that, as Robert Strong, CFA puts it, small stocks provide a higher risk adjusted rate of return. Additionally, this outcome seems to be persistent. (See: Strong, R., Portfolio Construction, Management & Protection, 4 edition, Thompson Southwestern, 2006, p.249.). This is commonly known as: "small firm effect - The tendency for firms with low levels of capitalization to perform better than finance theory suggests they should". (From: http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=0324232586&discipline_number=414 ). Known financial researchers, Prof. Eugene Fama and Prof. Kenneth French have researched the topic in detail, one should turn to their work for further information about it.
International diversification allows achieving a level of risk, which is approximately the half of the risk borne in a well-diversified domestic stock portfolio. Well established capital markets in Europe and Japan exhibit a similar form of market efficiency as the US markets, furthermore they do know carry excess volatility of emerging markets. Investing in small caps in developed international markets seems to be a very attractive option, carrying moderate risk and a premium risk adjusted rate of return on average, when compared with the large caps. That just brings an annoying thought that the US investors should have thought about foreign small caps earlier...
Small stocks are being viewed as an attractive investment. An article in the Wall Street Journal discussing this trend starts in the following way: "International investors are starting to think smaller. They should have started earlier" (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month).
However there are some major concerns present in the common perception of small stocks. Small capitalization securities tend to be more volatile and hence more risky. Less data is provided for such companies, due both to the fact that smaller companies cannot produce a given level of financial data, as well as, because they seem to be out the focus of most analysts. Do the given above reasons determine that small stocks are not as valuable as an investment option? Not necessarily...
TINSTAAFL... or is there?
The acronym above means, "There is no such thing as a free lunch", and is widely used in economics and finance literature. In finance, this statement applies to the fact that an investor has to bear additional risk in order to achieve a higher return rate.
Surprisingly, small stocks seem to defy this rule and provide "a free lunch" on a regular basis. Historically, small stocks have brought higher returns than big stocks. The Wall Street Journal states: "Small and midsize stocks in Europe, Japan and other corners of the developed world have offered some of the best earnings growth anywhere in recent years. These stocks returned 25% a year, on average, for the five years through December, according to Morgan Stanley Capital International. Like U.S. small-capitalization stocks, small-cap foreign stocks outperformed large-cap foreign stocks for each of the past six years. Up 7% year-to-date, foreign small stocks are ahead again this year." (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month). Analyzing any kind of historical market data should lead to the same conclusion.
This characteristic might be explained by a greater risk present while investing in small caps. However, financial research and empirical evidence seems to prove that, as Robert Strong, CFA puts it, small stocks provide a higher risk adjusted rate of return. Additionally, this outcome seems to be persistent. (See: Strong, R., Portfolio Construction, Management & Protection, 4 edition, Thompson Southwestern, 2006, p.249.). This is commonly known as: "small firm effect - The tendency for firms with low levels of capitalization to perform better than finance theory suggests they should". (From: http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=0324232586&discipline_number=414 ). Known financial researchers, Prof. Eugene Fama and Prof. Kenneth French have researched the topic in detail, one should turn to their work for further information about it.
International diversification allows achieving a level of risk, which is approximately the half of the risk borne in a well-diversified domestic stock portfolio. Well established capital markets in Europe and Japan exhibit a similar form of market efficiency as the US markets, furthermore they do know carry excess volatility of emerging markets. Investing in small caps in developed international markets seems to be a very attractive option, carrying moderate risk and a premium risk adjusted rate of return on average, when compared with the large caps. That just brings an annoying thought that the US investors should have thought about foreign small caps earlier...
Thursday, March 1, 2007
Bleak seasons coming, or just a passing shower?
This week we have once again witnessed that the world is one global market place, and stock markets cannot be viewed in isolation. Tuesday's 9% plunge of the Chinese Shanghai index sent stocks in the US and Europe falling. Dow Jones reacted with a 400 points drop, erasing last week's record high, S&P 500 and NASDAQ also noted substantial losses. (More on that: http://online.wsj.com/article/SB117260706682921020.html and: http://blogs.wsj.com/marketbeat/2007/02/27/china-no-its-not-just-china/ ). The situation is even more serious due to the fact that Far Eastern markets, Chinese in particular have been an attractive place for US and European based capital lately. However, many have probably forgotten that this market carries high volatility along with the attractive returns.
Alan Greenspan also contributed to investors insecurity as the word recession was among the ones he used while speaking to investors in Hong Kong (More on the possible effects of this speech: http://www.ft.com/cms/s/2ad62eba-c6d1-11db-8f4f-000b5df10621.html ). Mr. Greenspan's words were interpreted as a prediction of a recession in this year. The former FED's boss's expert status added weight to the claim and certainly did not help the stock markets, which reacted severely to mixed economic data (See: http://online.wsj.com/article/SB117249340786119234.html ).
Another possible reason contributing to the drop is a apparent change in investors attitudes, which seem to change towards putting capital into less risky investments than before. (The Wall Street Journal reports on that: http://online.wsj.com/article/SB117271330926722830.html?mod=home_whats_news_us ).
Just a Shower, or the eye of the Storm?
All in all, the question rises: was this just a single event, or are encountering a bearish period? US Federal Reserve Chairman Mr. Ben Bernake came to the rescue first on Wednesday, when he confirmed his previous US economy outlook for "moderate growth" and referred to the financial markets as being "closely monitored" and "working well" (See: http://online.wsj.com/article/SB117267441551822115.html ). After that, Mr. Greenspan has down-played the tone of his previous utterance (More on that: http://online.wsj.com/article/SB117272314862823068.html ).
The US market reacted well to those news and even though they did not rise, they stopped the rapid losses, as of now all the major US indices have only very marginal losses (See: http://online.wsj.com/article/SB117275252509823347.html?mod=home_whats_news_us ). The fall in the Treasury bills price may indicate that the investors a willing to bear some risk again.
The long term question remains - are the stock market players going to be more risk averse after this weeks events? Regardless of that - if the moderate growth economic outlook holds for now, investors should be able to record gains on their securities in an intermediate time span.
Alan Greenspan also contributed to investors insecurity as the word recession was among the ones he used while speaking to investors in Hong Kong (More on the possible effects of this speech: http://www.ft.com/cms/s/2ad62eba-c6d1-11db-8f4f-000b5df10621.html ). Mr. Greenspan's words were interpreted as a prediction of a recession in this year. The former FED's boss's expert status added weight to the claim and certainly did not help the stock markets, which reacted severely to mixed economic data (See: http://online.wsj.com/article/SB117249340786119234.html ).
Another possible reason contributing to the drop is a apparent change in investors attitudes, which seem to change towards putting capital into less risky investments than before. (The Wall Street Journal reports on that: http://online.wsj.com/article/SB117271330926722830.html?mod=home_whats_news_us ).
Just a Shower, or the eye of the Storm?
All in all, the question rises: was this just a single event, or are encountering a bearish period? US Federal Reserve Chairman Mr. Ben Bernake came to the rescue first on Wednesday, when he confirmed his previous US economy outlook for "moderate growth" and referred to the financial markets as being "closely monitored" and "working well" (See: http://online.wsj.com/article/SB117267441551822115.html ). After that, Mr. Greenspan has down-played the tone of his previous utterance (More on that: http://online.wsj.com/article/SB117272314862823068.html ).
The US market reacted well to those news and even though they did not rise, they stopped the rapid losses, as of now all the major US indices have only very marginal losses (See: http://online.wsj.com/article/SB117275252509823347.html?mod=home_whats_news_us ). The fall in the Treasury bills price may indicate that the investors a willing to bear some risk again.
The long term question remains - are the stock market players going to be more risk averse after this weeks events? Regardless of that - if the moderate growth economic outlook holds for now, investors should be able to record gains on their securities in an intermediate time span.
Monday, February 19, 2007
Follow up
Over a month passed since the time I have created this blog and life has written new lines to some of the stories present in my previous posts.
Business ethics
Last week's Wall Street Journal presented a couple of interesting stories, which add to the post about unethical behavior of business professionals (http://janbartczak.blogspot.com/2007/01/when-will-they-learn.html).
Siemens seems to be in a lot of trouble as bribery allegations might overlap with a German-Russian big-time telecommunications scandal, deepening the company's problems. The case is even more severe, as the issue is clearly not only unethical, but also unlawful behavior.
An example of handling a similar issue completely differently was given with KPMG and its CEO, who decided to admit to the organizations unlawful practices and tried to eliminate such behavior. These actions apparently saved the company, which faced a threat similar to the one that destroyed Arthur Andersen a couple of years ago.
Securities market
In the post “What does the market hold for the future?” (http://janbartczak.blogspot.com/2007/01/what-does-market-hold-for-future.html), I have discussed the possible effect of various factors on the stock market.
Some time followed since then and a couple of things are clearer now. The stock market is obviously affected by the fluctuations of oil prices, and moves in such industries as the Technology Sector (which particularly holds for NASDAQ).
Through this month the Dow Jones Industrial Average showed strength, as it climbed over 12,700 points, and set yet another record in the high 700’s. It is interesting to see now, how the major indices will react to such factors as lower automobile demand, changes in real estate prices and oil price fluctuations.
Business ethics
Last week's Wall Street Journal presented a couple of interesting stories, which add to the post about unethical behavior of business professionals (http://janbartczak.blogspot.com/2007/01/when-will-they-learn.html).
Siemens seems to be in a lot of trouble as bribery allegations might overlap with a German-Russian big-time telecommunications scandal, deepening the company's problems. The case is even more severe, as the issue is clearly not only unethical, but also unlawful behavior.
An example of handling a similar issue completely differently was given with KPMG and its CEO, who decided to admit to the organizations unlawful practices and tried to eliminate such behavior. These actions apparently saved the company, which faced a threat similar to the one that destroyed Arthur Andersen a couple of years ago.
Securities market
In the post “What does the market hold for the future?” (http://janbartczak.blogspot.com/2007/01/what-does-market-hold-for-future.html), I have discussed the possible effect of various factors on the stock market.
Some time followed since then and a couple of things are clearer now. The stock market is obviously affected by the fluctuations of oil prices, and moves in such industries as the Technology Sector (which particularly holds for NASDAQ).
Through this month the Dow Jones Industrial Average showed strength, as it climbed over 12,700 points, and set yet another record in the high 700’s. It is interesting to see now, how the major indices will react to such factors as lower automobile demand, changes in real estate prices and oil price fluctuations.
Wednesday, January 17, 2007
What does the market hold for the future?
The last couple of months have been very good for the stock market, especially the Dow Jones Industrial Average (DJIA), which broke its index record set in the year 2000 and went on over the value of 12,000 points, hitting new record highs on a regular basis.
The DJIA's blue chips are among the stocks pulling the market up, as it has been closing at new all time highs for most of the time in January 2007. Another factor contributing to the rise in stock prices is the very good performance of the financial sector. Examples would be, among other, companies such as JP Morgan, achieving a whooping 68% rise in net income in Q4, comparing with Q4 2005 (More on that: http://online.wsj.com/article/SB116903511859878854.html?mod=home_whats_news_us ), or Merrill Lynch, taking advantage of the strength of the financial marketing in the concluding months of 2006 (More details on this story: http://online.wsj.com/public/resources/documents/info-earn06q4.html ).
The worries about the rising inflation have offset the strong performance of the sector (Details: http://biz.yahoo.com/ap/070117/wall_street.html?.v=33 ). The Tech sector's fall also contributed to what is shaping up to be a pretty weak day on the security markets.
The above concerns do not change the big picture though. Falling oil prices should loosen up the inflation pressure, and the Fed officials feel than can handle inflation and bring it down. Meanwhile, as the MarketBeat blog is stating, the predictions for the global economy are getting more positive (http://blogs.wsj.com/marketbeat/2007/01/17/the-future-looks-bright/ ). The US economy seems to be entering 2007 in good condition, quote: "Most reports ... indicated that economic activity expanded at a moderate pace," the Federal Reserve said (From: http://biz.yahoo.com/ap/070117/fed_economy.html?.v=8 ).
To sum up, it seems that despite some minor problems, the intermediate outlook for the economy looks promising. The question is, how is the market going to incorporate those news.
The DJIA's blue chips are among the stocks pulling the market up, as it has been closing at new all time highs for most of the time in January 2007. Another factor contributing to the rise in stock prices is the very good performance of the financial sector. Examples would be, among other, companies such as JP Morgan, achieving a whooping 68% rise in net income in Q4, comparing with Q4 2005 (More on that: http://online.wsj.com/article/SB116903511859878854.html?mod=home_whats_news_us ), or Merrill Lynch, taking advantage of the strength of the financial marketing in the concluding months of 2006 (More details on this story: http://online.wsj.com/public/resources/documents/info-earn06q4.html ).
The worries about the rising inflation have offset the strong performance of the sector (Details: http://biz.yahoo.com/ap/070117/wall_street.html?.v=33 ). The Tech sector's fall also contributed to what is shaping up to be a pretty weak day on the security markets.
The above concerns do not change the big picture though. Falling oil prices should loosen up the inflation pressure, and the Fed officials feel than can handle inflation and bring it down. Meanwhile, as the MarketBeat blog is stating, the predictions for the global economy are getting more positive (http://blogs.wsj.com/marketbeat/2007/01/17/the-future-looks-bright/ ). The US economy seems to be entering 2007 in good condition, quote: "Most reports ... indicated that economic activity expanded at a moderate pace," the Federal Reserve said (From: http://biz.yahoo.com/ap/070117/fed_economy.html?.v=8 ).
To sum up, it seems that despite some minor problems, the intermediate outlook for the economy looks promising. The question is, how is the market going to incorporate those news.
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