Blog Posts by Matt Nesto

It's frequently stated in this business that "mom & pop," or small investors, always get it wrong. They buy too late after stocks have risen, and then sell too early after a decline and end up missing the rebound. This trend is so predictably incorrect that some shops simply do the opposite and chalk up their gains to expertise.

With that in mind, it's no surprise that it is increasingly being argued that the record-high stock indexes are doomed simply because investors appear to be belatedly gaining confidence to test the waters, so to speak.

For Don Hays, founder of Hays Advisory Group and a 40-year veteran strategist, nothing could be further from the truth than to suggest that investors have gotten overly bullish.

It's been six months, 300 points and 21% since the S&P 500 (^GSPC) began its ascent into record territory. The astounding, unbending rise has left countless casualties in its wake, especially those who have waited, and waited and waited for the better entry point that never came.

"It's extremely difficult to time this market," says Simon Baker, founder of Baker Ave Asset Management, in the attached video. "This is one of the most unliked rallies ever. The market continues to hit new highs and people are just getting more and more frustrated."

His advice: Stop waiting and get fully invested in stocks.

"Scared money does not make money. You need to be in equities at this stage," he says. "When the Fed, ECB and Japanese are throwing money into the market you need to be long U.S. equities."

A large part of his resolve comes from the fact that too many people are currently waiting for a correction. In fact, Baker says half of the audience at a recent high net worth conference he was speaking at admitted they were waiting for a 5% correction.

Insurance is a wonderful thing — especially when you need it. But it's definitely not free. In fact, the cost of protecting your assets in the stock market has become really expensive, which is why some investment pros are of the mind that the cost of protection just isn't worth it anymore.

Put another way, better deals are currently available on cyclical stocks, rather than defensives.

"Cyclicals are actually cheaper versus the valuation of defensives, or staples, more so than at any time over the last 15 years," says Simon Baker, founder of Baker Ave Asset Management.

While he readily admits that these more conservative equity picks were all the rage in the first quarter, the "chase for yield" by people bailing on bonds has jacked up the price of these lucrative total-return picks. "All of a sudden they're a lot more expensive," Baker says.

For his money, cyclicals are the place to be and now is the time to be in them. That is, "if you do believe like we do: that the economy is turning around and the global recovery is in place."

He is particularly fond of Q1 laggards, such as material (XLB) and tech (XLK) and would advise investors to also "go along with strong themes," such as housing and its expected benefit to the financial sector (XLF).

It almost seems impossible that, at a time when stocks are setting record highs on almost a daily basis, that they could also be considered cheap. And yet, new research by the Federal Reserve Bank of New York entitled Are Stocks Cheap?, is not only arguing that point, but also contends that we'll see "historically high excess returns for the S&P 500 for the next five years."

"I clearly do believe it," says hedge fund manager Simon Baker, founder of Baker Ave Asset Management, in the attached video. "We're hitting new highs but we've basically just recovered where we were over the last 10 years."

Specifically, the analysis shows equity risk premium, or the excess return that investors expect to get from stocks versus a risk-free asset, has never been lower. Of course, part of this calculation is based upon the fact that interest rates are historically low, but Baker says there's more to it than that.

"Clearly the Fed's motive is to put money back into equities. 401(k)s will be higher, people will feel like they've got more assets and will be spending more money," he says. "I think it's interesting that the Fed is coming out and actually using some propaganda to try and get money into stocks."

When shareholders of JP Morgan Chase (JPM) huddle in Florida this weekend for their annual meeting, they'll find themselves about 35% richer than they were in 2012, despite enduring a crisis-filled year of turmoil, regulation and investigation. But instead of celebrating Jamie Dimon's achievement and management dexterity, they'll be voting on whether to demote the bank's hard-charging chairman and CEO.

Predictably, this type of professional affront and disrespect has not sat well with the man who has, by most accounts, capably run the nation's largest lender for nine challenging years. Officially, investors will be given the chance to defy the bank's board of directors and strip Dimon of his chairmanship duties, while installing an unknown entity in his place to oversee him.

While the shareholder vote is expected to be defeated again this year, as it was last, the lead up to the balloting has been anything but salutary. And as my co-host Jeff Macke and I discuss in the attached video, while it is understandable that investors are angry about the $6 billion in so-called "London Whale" losses incurred from a high-risk hedging program being run in the UK, they're taking an even bigger risk if they alienate the 57-year-old leader.

In fact, CLSA banking analyst Mike Mayo has just published a report that says if Dimon is rebuffed or riled enough to walk away from both jobs, shares of JP Morgan would likely drop by 10% or about $20 billion. Not only would it cause a tumultuous transition with no successor in place, but Mayo predicts subsequent executive departures would cause additional hardship.

Seven months from now, when most of the country will be consumed with holiday shopping and seasonal festivities, Ben Bernanke will be focusing on something entirely different. Himself.

That's because, come December 13th, six-weeks before his second term expires, the Federal Reserve chairman will turn 60 and have comparatively little wealth to show for his life's work despite all his success and knowledge and notoriety.

As my co-host Jeff Macke and I debate in the attached video, as much as traders argue over how and when the Fed will extract itself from $4 trillion worth of quantitative easing, recent news reports have stoked speculation about whether or not Bernanke will even stick around to oversee the clean-up of the unprecedented easy money policies he's fostered throughout the financial crisis which began in 2007.

It is at least worth noting that former Fed chief Paul Volcker was also turning 60 when he stepped down from atop the central bank in 1987. His decision also followed several grueling years battling double-digit inflation and unemployment, and was driven in part by a desire to make some private sector money "because he's not getting any younger."

Lately, it's rare that a day goes by, it seems, without the benchmark stock indexes setting fresh all-time highs. And while this lofty perch certainly feels scary to most investors, the earnings multiples that this six-month rally has been built upon remain modest and well below previous peaks.

In fact, despite weak earnings guidance for the second quarter (where 79% of the forecasts given were negative or below expectations), FactSet's senior earnings analyst John Butters says if you use full-year price-to-earnings ratios, equities are still relatively cheap.

"I think you can look at it two ways," Butters says in the attached video. "If you're on the bullish side, PE ratios are nowhere near record levels, but if you're more bearish, you can say we are now above the trailing five- and 10-year averages."

Specifically, he says the PE for the S&P 500 is currently at 14.3 times estimated full-year earnings, compared to its five- and 10-year averages of 12.9 and 14, respectively, and peak PEs of 19 or 20 times earnings at the height of the dot-com bubble in the late 1990s and early 2000s.

With first quarter earnings season now 90% over, and the stock market extending a winning streak that has led to a string of record highs, investors could be forgiven for assuming that all is well inside the halls of corporate America. Unfortunately, it's not. As John Butters, senior earnings analyst at FactSet explains, that's only half the story.

"On the earnings side, we'll give the companies high marks. On the revenue side, the marks aren't as good," Butters says in the attached video of the better than expected 3.2% earnings growth rate for the S&P 500 (^GSPC) versus no sales growth at all.

"However, if you go to the revenue side, it was not a good quarter. We saw less than half (48%) of the companies beat (sales expectation) and it looks like we're going to finish with no growth for the quarter," he says, pointing out that it was even less than the meager 1% sales growth analysts were looking for at the start of earnings season a month ago.

Despite this mixed report card and an overwhelmingly negative guidance ratio (where 79% of companies gave a bleaker outlook than the analysts who cover them), equity markets have largely ignored cautionary indicators and tacked another 3% onto a 6-month, 20% rally that started in mid-November. Over the past five years, Butters says, this negative guidance ratio has averaged only about 61%, which suggests that, for whatever reason(s), companies are even more cautious today than usual.