The Market Sell-Off–Is it Different This Time?

(Note:  I wrote this for the Arizona Republic Tuesday, June 25th.  Though somewhat time sensitive because the market did indeed move up as I had expected, the principles are firm and sound.)   

Please click here to read the article:  “The Market Sell-Off–Is it Different This Time?”




Keep Calm and Chive On So To Speak

On Wall Street emotions turn on a dime.  Optimism one day.  Despair the next.  In the past two trading sessions the Dow Jones Industrial Average has lost 559.91 points, or 3.66%.  The sell-off was sparked by what Fed Chairman Ben Bernanke said and didn’t say about the Fed’s easing program and the growth of the U.S. economy.  So what exactly did the Fed Chairman say to cause such a violent sell-off?  And was any of it a surprise?

Essentially Bernanke said the Fed does not expect to start raising its key interest rate until probably the first half of 2015 and that the Fed could start to taper the quantitative easing program late this year, ending the purchases entirely in mid-2014. So how does quantitative easing affect the stock market?  You can read my April 5th blog post “Why the Fed and Monetary Policy Matter–Made Easy.” for a full explanation on the Fed and quantitative easing.  But for a specific understanding of how Fed policy affects stock prices below is an excerpt:

“So why do we care about this?  Two reasons.  The first is that while I am a long-term bull on the U.S. equity market, in the short-term, much of the appreciation in stocks which began in 2009  has been fueled by QE. By keeping interest rates so low the Fed is encouraging investors to turn to the stock market for higher returns.   The second reason is that flooding the economy with currency to fund unchecked government spending (recall that the Senate hadn’t passed a budget for the previous four years until a few weeks ago) can lead to inflation and very slow growth in the real economy.

So don’t get caught up in the short-term, day-trading hype propagated by the financial media.  Stay the course.  Buy great companies for the long-term. Over a reasonable period of time the stock market averages approximately 9% per year even when all the bear markets are included.  But, buy quality.”

Mr. Bernanke’s reason for potentially tapering the easing is that the downside risks to the economy have “diminished since the fall” when the latest easing program began.  That should be good news for investors.  And it is.  But for traders, the ones who move the market in the short-term that means the easy money has been made and they must work harder to identify great companies that are trading at a discount; they may also have to extend their time horizon and think more like investors.  Since that is how we select stocks nothing much has changed for us except that we may have the opportunity to buy more of the great companies we already own at cheaper prices.

A few weeks ago I wrote a piece on Cisco (CSCO) that was syndicated by The Motley Fool.  The fundamentals that made CSCO a buy one week ago are still intact and I intend to use any weakness to add to my holdings.

I’ve said it before and I will say it again:  Buy Great Companies for the Long-Term.

The Motley Fool Blog Post

Dear Friends,

I am attaching a link for my blog post recently syndicated by The Motley Fool (TMF) investing education website.  I am pleased to be one of their syndicated bloggers and will be contributing regularly to their site which distributes articles to AOL and Yahoo Finance.  TMF is a well-established site that advances accessible investing information for individuals.

From the TMF website:  Founded in 1993 in Alexandria, Va., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world’s greatest investment community. Reaching millions of people each month through its website, books, newspaper column, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company’s name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king — without getting their heads lopped off.

I will continue to link all of my articles here except when they are repetitive.  (This post is modified and expanded from a previous post on Cisco Systems (CSCO)).

Thanks for reading.



Tune Out the Daily Commentary and Buy Great Stocks for The Long-Term

One of the most difficult things for budding investors to understand is the relationship between the bond market and the stock market.  If you listen carefully through the cacophony of financial pundit prognostications you will discern that the primary reason the stock market is powering up this year is because the Fed continues to buy treasuries and mortgage-backed securities to the tune of $80 billion a month–Quantitative Easing (QE)– keeping liquidity high and bond rates low.  And, that is, for the most part true. (See my previous post:  Why the Fed and Monetary Policy Matter-Made Simple in the Arizona Republic.)

But the punditry volume increases when the discussion turns to how the stock market will perform when the Fed steps back from QE and the inevitable rise in bond rates begins.  That debate ratcheted up in the last week as investors worried that the Fed would begin to “taper” their QE and bond rates would rise.  (It should be noted that treasury bond rates have risen from a recent low of 1.6% for the ten year bond to 2.175% at today’s close.)

So can the stock market continue to perform in the face of rising interest rates?  Generally the conventional wisdom would say “no”–as bond rates rise, the stock market declines and vice versa. But, during the 1950’s and 1990’s the stock market continued to perform well in the face of rising interest rates.  According to the Leuthold Group as reported in Barron’s this last week, in the 1990’s the Dow Jones Industrial Average (DJIA) generated an average annual return of “15.7% when corporate bond prices fell” and rates rose (emphasis mine).   During the 1950’s the returns were not as impressive but still robust.  The DJIA rose 10.8% per year on average when bond rates increased.

Continue to build holdings in high-quality, industry leaders with steady growth.  Most stocks are not expensive by any historical measure.  Buy quality for the long-term.  That is investing.  The rest is just noise.


Rather than viewing the dividend as a surrender to growth, a growing dividend often indicates what management thinks about future earnings growth.


Cisco Systems (NASDAQ: CSCO) was one of the tech darlings of the 1990’s.  The stock rose 69,230% from its public offering in February of 1990 through 12/31/1999. That equates to a 94% annual return compared to 25.6% for the NASDAQ over the same period.  Then, as though on cue, at the dawn of the 21st century, the stock stalled out, tail-spun into a rapid descent and finally, flat-lined with little hope (or expectation) of robust future earnings growth or stock price outperformance.  From 12/31/1999 through 12/31/ 2011 CSCO generated a total return (which includes price movement and dividend income) of -61.9% or a loss of just over 7% per year.  Compare this to the return of NASDAQ for the same period–a decline of 16.9% or -1.4% per year (again including price and dividends).  When it comes to CSCO and all fallen-angel growth stocks for that matter, investor emotions have run the gamut from love to disappointment to hate and finally, neglect.   So why buy CSCO now?


The company surprised investors in May of this year when management reported better than expected FY Q3 earnings.  The stock rallied dramatically on the news and is up approximately 24% year-to-date through May 31–the bulk of that return coming after the earnings report.  Cisco CEO, John Chambers, normally strikes a conservative tone.  On the May 15th earnings conference call he was surprisingly upbeat about the company’s prospects, “Cisco is executing at a very high level in a slow, but steady economic environment…We are starting to see some good signs in the US and other parts of the world which are encouraging.”   In subsequent interviews Chambers stated that although the pace of technological change is increasing, CSCO has historically taken advantage of change to transform the business and trounce the competition.  “Usually, when things are toughest for us is when we work harder and surprise people.  That’s when they should be betting on us.” That kind of optimism bodes well for future growth.


CSCO management and the board of directors initiated a dividend in 2011 and the quarterly dividend has gone up three-fold since then resulting in an expected yield of 2.8%. (The S&P 500 currently yields 1.3%.)  When rocket-propelled growth stocks mature, the declaration of a dividend is often perceived by investors as a declaration of surrender to future growth opportunities for the company.  But, in fact, often at this point in the company’s growth, the dividend  signals what management and the board think about future earnings growth.  In other words, he dividend is frequently established as a portion of  what management and the board believe is sustainable, long-term earnings power.  John Chambers joined a dignified group of corporate managers when he said as much about a dividend increase in August of 2012:  “We wanted to send a message to shareholders.”


Slowing growth does not have to be a death knell for future stock price performance.  Nor does the initiation of a dividend. The market is full of many companies who have successfully made the transition from growth to value stock and have gone on to generate solid performance.  Coca Cola (NYSE: KO) is one such company.  But let’s consider International Business Machines (NYSE: IBM) another company like CSCO which managed the maturation process but also dealt with the additional burden of shifting technological trends.  After maturing from Nifty-Fifty growth stock darling to mature, old-fashioned computer company, IBM spent a decade in exile just as CSCO did.  But the company transformed its underlying business and eventually earnings growth as well as the stock price accelerated once again.  Another consolidation in the early 2000’s and yet another surge (see the 10 year performance chart for IBM).  Buying great companies for the long-term may not result in year-to-year outperformance but over the long-term, it frequently pays off.


With a price/earnings ratio of 11.5x next year’s earnings which is a discount to competitors’ Qualcomm (NASDAQ: QCOM) and Juniper Networks (NASDAQ: JNPR), a dividend yield double that of the S&P 500 and a company executing extremely well in a difficult global economic environment, CSCO is the kind of long-term investment idea investors should consider owning for the long-term.