Monday, May 14, 2012

Stat of the day!!

I can remember having a conversation with a co-worker back in 2000 asking the question, "what if the US stock market enters a lost decade like Japan?".  At the time, as stocks were soaring and brilliant business models like pets.com and webvan were being funded every day, so it seemed like such a silly question to even ponder but after looking up a number today it may not have been quite so silly.

On May 17th 1999 the S&P 500 (the best and broadest measure of stock prices) closed the day at 1,339.  Today, May 14th 2012, thirteen years later, the S&P 500 closed at 1,338.  So not only have we had a lost decade, but we're 1/3rd of the way through a second lost decade.

Now if you've been a nimble trader these have truly been the best of times.  Rapid, breathtaking advances followed by equally heart stopping collapses.  This is why adept traders and hedge funds are making huge money because the traditional methods of buy and hold are performing so poorly. 

However to get a sense of why this matters to you, consider one small segment of the market - pension funds.  The typical pension fund has an assumed annual return on their investments that varies from 7% to 8.5% with the average somewhere around 8%.  The ability of these pension funds to meet their obligations to retirees is contingent upon them meeting these investment returns.  Historically, they have some up years and some down years, but over the long haul the hope is that they achieve a return that is close to their expectations.

Let's take a simple set of assumptions to demonstrate what happens if a pension doesn't meet expectations.  Assume a pension has $100 on year 1 and assumes an 8% annual return. 

By the end of year 1 the pension fund assumes a balance of $108 (assuming no new contributions, etc).  By the end of year 2 that number jumps to $117 because you start earning returns on your returns.  By the end of year 13 your $100 pension fund has grown to an impressive $272.  Now, leave the world of financial textbooks and look at the US stock market for the past 13 years.  If you operated like the traditional pension fund (buy and hold forever), you are likely flat from 1999 to today based on your investment returns.  So how do you make up the difference?  Well, you require the pension plan sponsors (state and local governments for example) to contribute more to the pension to make up the difference.  This means less money for day-to-day operations for the plan sponsors.  So, now you'll watch the market with a little more interest.

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On May 8th I threw out a tweet from @grindstone_fin that while I'm not chart reader, the charts are getting spooky.  Well, the charts fulfilled that premonition today with their closing prices.  I won't bore you with all of the crazy lines, weird names and goofy concepts, but suffice to say that the people that think past performance DOES indicate future performance will be very nervous at this point.  The word buzzing around the web tonight is that today marked a MAJOR reversal of the uptrend.

Having said this, the Facebook IPO later this week is going to be the financial story of the year to date and you can see the impact that the Facebook buzz is having on the market already (other web 2.0 consumer plays were up sharply today).  I still don't get Facebook but maybe that's the old timer in me.  It seems to be a fine consumer tool for a certain segment of the population (I question their usage rates among valuable 18-40 yr olds) but when I hear major advertisers questioning the return on their facebook ad spend I think it creates enough concerns that people should be cautious with the company valued at $70-$100 billion.

Cheers!

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