Newsletter | June 2013


June 3, 2013 – DJIA = 15,115 – S&P 500 = 1,630 – Nasdaq = 3,455

“I Listened and I Heard Music in a Word”

Recent stock market proclamations have been the siren’s song for the bulls.  Ben Bernanke hints that the Fed could buy more bonds and stocks rally. Hedge fund manager David Tepper informs television viewers that QE is good for stocks.  Stocks rally.  Mr. Tepper then proclaims (on the same show) that less QE is good for equities.  Stocks rally further.  Later on the same appearance, Mr. Tepper states that if the Fed chooses to expand QE that too would be good for the stock market.  Prices go to the moon.

Of course this isn’t the first time the stock market has encountered strong reactions to a speech or interview.  From Alan Greenspan’s “irrational exuberance” or a Jackson Hole speech announcing more QE to a Warren Buffett appearance, large market moves can be caused by a sage’s insight.  We think the importance lies not in that it happened but rather the direction of the causation.  In other words, did these appearances cause the rally or did traders use these events as a reason to extend the rally. 

The challenge isn’t to answer the question accurately but rather identify the less obvious developments behind the buying.  First, the commonly stated reasons include a slowly improving economy, strong corporate balances sheets, central bank stimulus, share buybacks, and asset class rotation.  To be sure, these developments have contributed. 

However, 2013’s rally has been historic so we look beyond the obvious for the cause of this abnormality.  One consideration is that it’s as simple as a function of central banks printing money and using it to buy financial assets. 

A less appreciated role has been the shift in sentiment.  The thick pessimism and gloom that characterized the second half of 2012 has turned into optimism.  The May 21st ratio of bulls vs. bears from Investor Intelligence showed an alarming wide spread.  The survey showed 55.2% of respondents bullish while only 18.85% were bearish.   This 2.93 ratio is very close to the danger zone of 3-to-1 which has signaled market corrections in the past. From a contrarian standpoint, we can find plenty of things to worry about.  The fact that the market seems so complacent is one of them.

Another less talked about development is the lower supply of common stocks.  According to the University of Chicago's Center for Research in Security Prices, the number of publically traded stocks has imploded.  They estimate that in 1997 there were 6,300 companies in their database.  Currently this universe numbers only 3,300.  

There are multiple explanations for this.  The bursting of the technology bubble, mergers and acquisitions, and share repurchases.  Further the hassle and cost of being a public company has encouraged private companies to seek capital from alternative sources such as private equity instead of doing IPO’s.  This is a clear result of cumbersome regulations such as Sarbanes Oxley which was designed to help protect investors. 

Whatever the reason, the fact is that there are more dollars chasing fewer shares.  Econ 101 teaches us that, all things being equal, the result of more demand and less supply is higher prices for the item being bought. 

“The Noise I Was Hearing Was the Noise of a Million People Cheering”1

The bottom line is that the U.S. stock market is at record levels.  May marked the sixth straight monthly gain for the Dow Jones Industrial Average.  It was the 17th positive month in the last 20 which is the best stretch in over 60 years.  Here are the year-to-date returns for the major averages. 

Dow Jones Industrial Average                                            +15.3%
S&P 500                                                                        +14.3%         
Nasdaq Composite                                                           +14.5%
Russell 2000                                                                   +15.9%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends

“Sell in May and go away” is a widely used cliché in the markets.  Clearly it didn’t apply (yet) for stocks but, surprisingly, was accurate for bonds.  The 10-year treasury’s yield steadily climbed from the low 1.60’s% to close May at 2.16%.  This 50 basis point jump may not seem noteworthy, but the 30% move was bloody for a conservative asset class.   More importantly this is not what the Federal Reserve wants to see. 

Looking forward the dominant crosswinds include, on one hand, stocks need a pause.  It is rare to go six months without a meaningful pullback.  That is not to predict one is imminent but to acknowledge that a correction is past due.  On the other hand, stocks have had several good opportunities to correct and haven’t.  Earlier this spring Italy couldn’t form a government and Cyprus couldn’t repay bank depositors.  The Obama administration is beginning to remind people of the Nixon years and Washington remains dysfunctional.  Despite these negatives stocks have steadily climbed throughout 2013.  It is hard to believe that the Dow goes 12 for 12 in monthly gains.  While it can happen, we expect that there is a month or two out there that may disappoint the bulls.  It’s possible that May’s painful fixed income market foreshadows oncoming turbulence for equities. 



“Pure and Easy” by The Who

David Tepper on CNBC’s “Squawk Box” – May 14th, 2013

Past performance does not guarantee future results


Jeffrey J. Kerr is a registered representative of
LaSalle St. Securities, LLC, a registered broker/dealer.
Kerr Financial Group is not affiliated with
LaSalle St. Securities, LLC. Securities are offered
Only through LaSalle St. Securities, LLC
940 N Industrial Drive, Elmhurst, IL   60126-1131


This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Russell 2000 Index is an unmanaged market-capitalization weighted index measuring the performance of the 2,000 smallest U.S. companies, on a market capitalization basis, in the Russell 3000 index. It is not possible to invest directly in an index. Investing involves risks, including the risk of principal loss. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional.