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We thought we had it all figured out before this week started. We were wrong.
The top minds in the investment business offered some novel analysis, broke conventional wisdom, and even opened our eyes to some misperceptions.
What follows are excerpts from 11 of our best stories this week. All of the important pieces of research you might have missed this week, right here.
'The call for this week: There have now been 37 trading sessions in 2012 and so far the S&P 500 has yet to experience a 1% Downside Day. This 37-session, or more, skein has occurred 11 other times in the past 84 years and has on every occasion except one seen the equity markets higher by the end of the year. Still, the rise since the 'buying stampede' ended, which stopped on January 26, 2012 at Dow 12841.95, has felt unnatural to me.'
'The idea that consumers might respond to a psychologically important price level seems intuitive enough, but it is difficult to test the importance of the effect of the $4.00/gallon threshold since it has only been crossed once, for six weeks in June and July 2008.'
'The basic idea is that if you imagine that stocks could theoretically pay out 100% of their earnings as dividends, you can easily compare stocks to bonds based on yield. If the S&P had an average PE of 20, then you could say that you're getting a 5% earnings yield. If bonds were only paying 1%, then you're obviously getting way more meat buying equities, with a fat 4% spread between them. Anyway, it turns out that using this method shows that stocks are still incredibly cheap, even after their runup.'
'The volatility is too significant. Almost any asset can suddenly become much more risky. Buying into a mutual fund and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature of financial markets and how complex it's gotten.'
'The percentage of Buy ratings at month end hasn't been this low and the percentage of Hold ratings at month end hasn't been this high since the end of March 2011, which was one month prior to the start of a 17% decline in the price of the S&P 500 from April 30 through September 30.'
'Evidently the relationship between warm weather and growth isn't that obvious, as some forms of economic activity do tail off in warm weather (certain types of retail, home heating purchases, etc.) but that generally the research shows that warm weather is a net plus, especially in areas like construction.'
'Despite the upward revision to Q4 GDP, the report was a small negative for our Q1 expectations. In particular, inventory growth was revised down by a smaller amount than we had anticipated, and stronger inventory growth in a certain quarter means a smaller inventory contribution in the subsequent quarter, all else equal. We therefore revised down our tracking estimate of Q1 GDP growth to 2.3% (annualized) from 2.4% previously.'