April 26, 2015 Livin' On A Prayer

Risk/Reward Vol 264

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“Buy it, use it, break it, fix it,

Trash it, change it, mail it,

Charge it, point it, zoom it, press it”---lyrics from “Technological” sung by Daft Punk

“Whoa, we're half way there

Whoa, livin' on a prayer”---lyrics “Livin’ On a Prayer” sung by Bon Jovi

“Is that all there is/Is that all there is

If that's all there is my friends/Then let's keep dancing”---lyrics from “Is That All There Is” sung by Peggy Lee

The NASDAQ Index, comprised of the top 100 “Technological” companies, set a new record on Friday surpassing its previous high set fifteen years ago during the Dotcom days. This rise also caused the S&P 500 Index to flirt with a new high because many NASDAQ companies are also in the S&P. Leading the advance was Amazon which rose 15% on Friday despite reporting another quarter of negative earnings. Investors are willing to forego profits because they love the growth story that is and always has been Amazon---first books, then Kindles and now logistics and web services. As long as consumers “buy it, use it, break it, fix it/Trash it, change it, mail it/Charge it, point it, zoom it, press it”----and it is supplied and/or delivered by Amazon, investors will support the stock. Oh and talk about a good day. On Friday alone, Amazon founder Jeff Bezos’ net worth rose $5billion.

We are midway through the earnings season. How are doing “half way there?” So far, 53% of the companies reporting have missed sales (top line) expectations, but 73% have beaten earnings per share expectations. This dichotomy is not surprising in light of the impact of share buy backs highlighted in last week’s edition. (www.riskrewardblog.blogspot.com ). Overall the performance has been less than stellar, but has been good enough to put both the Dow Jones Industrial Average (+1.44%) and the S&P 500 (+2.86%) back into positive territory for 2015. So are these gains on solid footing, or are we “livin’ on a prayer?”

When tech stocks lead the way and more than half of the companies miss on the top line (despite lowered expectations), one is left to wonder “is that all there is/is that all there is” to support a rally? Should we “keep dancing” or is the music about to end? Having been burned badly by NASDAQ stocks fifteen years ago, I am leery of any market dominated by the tech sector. Moreover, even in the presence of massive stock buy-back programs (which reduce denominators in earnings per share calculations), stocks are at the high end of historic valuations. The S&P 500 stocks are trading at 27 times earnings averaged over the past 10 years---something that they have not done since before the Dotcom collapse. “Is that all there is”---indeed.

But for the NASDAQ 100 (+7.52%), stocks so far in 2015 have been a risky and only marginally rewarding investment. Is the six year bull market about to end? Who knows? I, for one, am holding pat, overweight cash. I remember only too well my Y2K NASDAQ love affair--- and the woe it begot me. Back then, I found myself living these Bon Jovi lyrics:

“Shot through the heart and you're to blame

You (NASDAQ) give love a bad name.”