Bad news sells newspapers. That really tells us what is happening today in the financial markets. This is manifesting itself in poor, emotional decisions by investors (selling stocks and buying bonds). In our last market update, we talked about how the stock market is now selling at one of its cheapest levels relative to bonds and cash that we have seen in our lifetime. From a fundamental standpoint, companies are strong financially and have enough cash to weather any storms ahead. Listed below are a few of the most prescient technical indicators that we now see:

– AAII’s (American Association of Individual Investors) survey is now 20% bullish; it was 48% bullish on April 15th – near the peak of the market. Other times that the bullish percentage was lower than today was back in 1988 (right after the ’87 crash), 1990 before the start of the Gulf War and at the most recent stock market bottom on March 5, 2009 (it was at 18.9%). All great times to buy equities.

– The Consumer Conference Board just announced today that consumer confidence was up +2.5% in the month of August. This (along with an increase in consumer spending) shows us that even with all the bad news, consumers are not dead. Consumers have been building their balance sheets over the past 18 months. In fact, credit card debt is back to 2002 levels with an average balance under $5,000.

– For the first time since 2008, insiders (directors and officers) are buying stock in their own companies. Insiders know best what their companies are worth. That is why Hugh Hefner bought back Playboy (at a 40% market premium!!!) and took it private.

We believe the overriding concern of investors is the upcoming election. If the elections were held today, it appears that the Republicans will have more votes in both the House and the Senate. History tells us that a stalemate is not a bad thing from the market’s perspective. Businesses will adjust to new regulations and taxes going forward. What they need is certainty about the future. If the “rules” of the road ahead are uncertain, businesses will hoard cash (the S&P 500 companies currently have $2 trillion in cash). As we have stated many times in the past, the opposite of progress is Congress. Once investors and businesses realize that certainty is coming, the stock market and economy should stabilize and move higher. Whether this occurs before or after the election, we can not predict. However, with the market selling at very attractive valuations, we believe the current downside risk in the market is very limited at this time.

Schwab cost basis information

We wanted to take this opportunity to address an issue relative to your monthly Schwab statements that has generated multiple questions and concerns on the part of our clients. For some time now, Schwab has reported the “cost basis” and the “market value” of each individual position in your account. In many cases, the cost basis is higher than the market value, giving one the perception that the position has lost money. What Schwab fails to report for each position though, is the amount of money used to make the initial purchase. This is important. If there is a difference between the amount of the initial investment and the cost basis, it is likely because dividends have been distributed for the position. As a shareholder, you must report these dividends on your personal income tax return in the year of the distribution. This distribution will increase your cost basis if your dividends are reinvested, but otherwise does not affect the amount of money gained or lost on a particular position. So, subtracting your cost basis from your current market value does not always tell you whether you have made or lost money on that position. We recommend using our quarterly reports to assess the performance of each position as we report all three values – initial investment, cost basis and current value.

New Employee

We would like to welcome our newest employee, Neal Ritondaro, to the THOR team. Neal comes to us as a new graduate of the University of Akron and will be learning all aspects of the THOR process before settling into a formal position at THOR. Please take a minute to welcome Neal to the team. He will be attending the client appreciation dinner so this is another great reason for you to attend the dinner!

Sincerely,

Your THOR Team