(B)(N) S&P 500 On Life Support

Mark Twain 1897

Drama. We don’t know what it is but something has died in the S&P 500 which is the world’s biggest stock market and worth about $16.8 trillion today and the same three months ago; in contrast, the market value of the companies in the S&P 500 increased by $3.5 trillion or +27% last year at the rate of nearly $1 trillion every three months.

Maybe it’s because the “easy profits” in a pushy market are off the table; or maybe it’s because investors don’t think that the companies can produce the earnings and dividends that they bought forward for cash and on margin.

Or maybe it’s because they can’t say what they want because it sounds silly to say that somebody, somebody, please should buy their stocks from them at even higher prices and sooner rather than later for which reason we don’t know if they don’t want them either. Liquidity?

We’re retired. It’s our money that needs to work harder.

But paradise is not to be found on Wall Street for investors who are uncertain or afraid and who don’t know what to do if the bull is still and the herd is grazing; or don’t know what they want and will take what they get and blame the market if it’s not enough or praise the market if it is.

For example, the struggling $140 billion Ontario Teachers Pension Plan has just reported its first actuarial surplus in a decade but to get there they took increased contributions and reduced the inflation protection and equity portfolio gains of 4% ($2.4 billion) in a 30% market and fixed income losses of $3.1 billion to outperform their expected benchmark losses of $4.2 billion (The Canadian Press, April 4, 2014, Ontario Teachers’ Pension Plan achieves first surplus in a decade – $5.1 billion).

What do we do if the bull is still and the herd is grazing?

But it’s easier for us. We know exactly what we want. We want our money to be safe – 100% capital safety – and we want a hopeful but not necessarily guaranteed return above the rate of inflation. Reasonable, no?

And the market is generous to those who don’t expect too much of it. Just to be clear, these companies don’t need our money; and they don’t owe us anything; and the debt market has gone begging for the last three years; and many of these companies are buying-in their own stock to reduce the float and support the price without giving away their money in dividends.

But if the share price is low enough, the new owners at deep-value discount prices with new money and deep pockets might have some new ideas on how to fix it. How bad is that? And that’s the only issue – the last shareholder at the last shareholder price gets to own the whole thing or possibly just control of it for less if we give them our proxies.

Last year, these companies earned $953 billion in aggregate and returned 37% of it to the shareholders for an aggregate dividend yield of 2.1% and a market price yield of 5.6% ([P/E] 18×). Please see Exhibit 1 for the fundamentals.

Exhibit 1: S&P 500 Companies – Fundamentals – April 2014

S&P 500 Companies – Fundamentals

(B)(N) S&P 500 NYSE On Life Support – Risk Price Chart – April 2014

Although the market is up only +1% so far this year, it’s still “undervalued” and 345 (of 500) of the companies are still trading above the price of risk.

Nevertheless, that’s down from 411 companies in December and over 400 for most of last year and our estimate of the current downside risk in the next three months due to the demonstrated price volatility is minus (7%). Please Click (and again to make it larger) on the link “S&P 500 On Life Support – Prices & Portfolio – April 2014” for more details.

But we’re not worried and “selling” is not our mind. The market will tell us what it wants to pay for the stocks that we own and the Perpetual Bond™ is already up +4.7% (and +38% last year net of the margin account which gave us +56%) and the worse that we can do is to take more profits at the stop/loss.

For more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The Canadian “Hot” Money Stocks or The NASDAQ Expendables or S&P 500 Seven From Heaven or The NASDAQ 100 Trifecta.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100 or La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.