What, no more bubble wrap?!?

I’ve been a bit troubled lately as I toil away researching and contemplating the state of and future prospects for the markets. For example, I recently learned that Charlotte-based manufacturer, Sealed Air Corporation, had developed a lighter, more economical packaging material to replace bubble wrap. While I applaud the technological advancement, I am saddened by the demise of such a fun product to handle. There are few things more enjoyable than popping that ubiquitous packing material, as I’m sure everyone knows so well. It’s like eating popcorn at the movies… Once you start it’s hard to stop. But as we all learn to cope with this culture-shattering development, we can all take great comfort in knowing that there is a Facebook group called “Popping Bubble Wrap,” with over half a million members.

I think what has been troubling me is that we are becoming continually less serious in a world that is becoming continually more serious. Yes, that is exactly what is troubling me. In my view the world is becoming less safe, governments are too involved in too many areas of society and the economy, and our national debt continues to grow unabated. To me these are serious issues, yet our focus is elsewhere. The dialogue and debate of these critically important issues needs to be deep and thorough, yet it is all too often shallow and partisan. This misguided approach is not good for our economy or our country. So, currently we are approaching our research and portfolio management with a degree of caution.

Meanwhile on the corporate earnings front…

Second quarter earnings have been challenging. Not in all cases, but in general, corporations are struggling to grow revenues, while earnings gains are being driven by cost-cutting and share buy-backs. In many instances, even for companies that hit expectations in the most recent quarter, forecasts for the remainder of the year have been tempered. This really isn’t new news, but the market has largely ignored the lackluster fundamentals, primarily because the FED has kept interest rates near zero. What other option are there for investors, when the yield on a 5-year US Treasury bond is 1.6%? This means, after inflation, the real return is negative. So, in that context, despite the weak economy, the overall stock market indices are hovering close to all-time highs. What’s wrong with this picture??

Narrower and narrower…

The market averages are increasingly being driven by fewer and fewer stocks. So far this year, six stocks – Amazon, Google, Apple, Facebook, and Netflix have accounted for over half of the gain in the NASDAQ composite. Similarly, the first four, along with Gilead and Disney, have accounted for all of the gain in the S&P 500 year to date.

A market that is rising on fewer and fewer names is not a healthy one. It is however, a typical pattern toward the end of a multi-year bull market. Interestingly, Amazon surpassed Wal-Mart in terms of market capitalization, despite having 1/10 the earnings and revenue of the latter. Amazon has a price/earnings ratio of 386. Wal-Mart’s PE is 15. Caveat emptor….

Some of the trading action in the market is also unsettling. Over the past few weeks there have been huge moves in individual stocks, both up and down, in response to positive or negative earnings. While the direction of these gyrations seems appropriate, the magnitude is often puzzling. Most likely this is a result of an absence of liquidity in the markets and heightened investor anxiety driven by a struggling global economy and continued government overreach. In a nutshell, a cautious stance seems prudent in the near term.

The global scene is no less troublesome… China’s economy has slowed and their fledgling stock market has jumped all over the place. Government attempts to control, or perhaps manipulate the markets, has only added to the uncertainty. At the same time, Europe continues to suffer from low growth, bloated governmental bureaucracies, and entitlement spending.

While we seem to be on a questionable and perhaps unsustainable path at the present time, things are bound to change. I remain hopeful that our economic and political situation will eventually improve. In the meantime, proper diversification and an unwavering commitment to high quality securities, purchased at reasonable prices, is a prudent approach. Pursuit of such is a typical day for our team, a serious day for all of us. Just one without bubble wrap.