By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) — Stock indexes rallying to new highs have put investors on alert for a correction. Now they have something else to worry about: Too many individual stocks touching highs.

The SP 500 Index

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+1.03%


 rose 2.1% last week to close at a record of 1,667.47 Friday, its 16th record close this year. Similarly, the Dow Jones Industrial Average

/quotes/zigman/627449 DJIA
+0.80%


  rose 1.6% on the week to 15,354.40, its 21st record of the year. The major benchmarks, including the Nasdaq Composite

/quotes/zigman/12633936 COMP
+0.97%


, have made a nearly unchecked 16%-17% gain for the year.

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It’s not just the indexes that are stretching for the stratosphere.

Also in the past week, more than half the stocks on the SP 500 touched new 52-week highs, with 141 of those occurring on Friday alone, according to an analysis of FactSet data. Another 128 companies reached new 52-week highs earlier in the week.

“The number of people I’ve heard justifying the valuation has been mind boggling,” said Andrew Wilkinson, chief economic strategist at Miller Tabak Co. “The complacency is now incredible but nobody knows what the catalyst will be for a setback.”

The CBOE Volatility Index

/quotes/zigman/2766221 VIX
-4.74%


, or so-called “fear index” closed down nearly 5% at 12.44 Friday, its lowest close since mid-April. The index has fallen 31% year to date, and current levels seem more at home in 2004 to 2007 than any other time in the last 10 years.

Optimism, whether blind or not, is so rampant, short sellers are particularly miserable. Some of the most-heavily shorted stocks are outperforming the SP 500.

“The bulls don’t have to try too hard because previous bearish forces are adding fuel to the fire, propelling the market higher,” Wilkinson said.

What has been missing from this rally is volume, owing to the slow grind of stocks higher, he said. Volume is about 14% lighter this May from the year ago period, according to Barclays. Similarly, second-quarter volume is nearly 9% off from last year.

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Investment strategists often like to see a rally shared by a wide number of stocks. This breadth should give support to further gains, the thinking goes. But such widespread fortune has also been the precursor to pullbacks.

On Wednesday, 538 stocks on the NYSE reached 52-week highs, the largest number since Nov. 2, 2010, according to Jonathan Krinsky, chief technical market analyst at Miller Tabak,

Krinsky cautions that the last time there were that many 52-week highs on one day, the market experienced a 4.5% correction.

Similarly, surges of 600 or more NYSE-listed companies hitting 52-week highs in April 2010 preceded a 16% correction, which included the “flash crash” of that May, and a day of 600-plus NYSE stocks reaching 52-week highs on Oct. 3, 1997 — when the SP 500 was up 33% for the year — was followed by a 13% decline over the next few weeks.

“While a high reading of new 52-week highs should hardly be considered bearish, we simply want to highlight that a ‘surge’ in the reading is not necessarily the most bullish indicator either, especially following a sustained advance,” Krinsky said in a recent note.

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SAN FRANCISCO –  Stock indexes rallying to new highs have put investors on alert for a correction. Now they have something else to worry about: Too many individual stocks touching highs.

The SP 500 Index (SPX) rose 2.1% last week to close at a record of 1,667.47 Friday, its 16th record close this year. Similarly, the Dow Jones Industrial Average (DJI) rose 1.6% on the week to 15,354.40, its 21st record of the year. The major benchmarks, including the Nasdaq Composite (RIXF), have made a nearly unchecked 16%-17% gain for the year.

It’s not just the indexes that are stretching for the stratosphere.

Also in the past week, more than half the stocks on the SP 500 touched new 52-week highs, with 141 of those occurring on Friday alone, according to an analysis of FactSet data. Another 128 companies reached new 52-week highs earlier in the week.

“The number of people I’ve heard justifying the valuation has been mind boggling,” said Andrew Wilkinson, chief economic strategist at Miller Tabak Co. “The complacency is now incredible but nobody knows what the catalyst will be for a setback.”

The CBOE Volatility Index (VIX), or so-called “fear index” closed down nearly 5% at 12.44 Friday, its lowest close since mid-April. The index has fallen 31% year to date, and current levels seem more at home in 2004 to 2007 than any other time in the last 10 years.

Optimism, whether blind or not, is so rampant, short sellers are particularly miserable. Some of the most-heavily shorted stocks are outperforming the SP 500.

“The bulls don’t have to try too hard because previous bearish forces are adding fuel to the fire, propelling the market higher,” Wilkinson said.

What has been missing from this rally is volume, owing to the slow grind of stocks higher, he said. Volume is about 14% lighter this May from the year ago period, according to Barclays. Similarly, second-quarter volume is nearly 9% off from last year.

Investment strategists often like to see a rally shared by a wide number of stocks. This breadth should give support to further gains, the thinking goes. But such widespread fortune has also been the precursor to pullbacks.

On Wednesday, 538 stocks on the NYSE reached 52-week highs, the largest number since Nov. 2, 2010, according to Jonathan Krinsky, chief technical market analyst at Miller Tabak,

Krinsky cautions that the last time there were that many 52-week highs on one day, the market experienced a 4.5% correction.

Similarly, surges of 600 or more NYSE-listed companies hitting 52-week highs in April 2010 preceded a 16% correction, which included the “flash crash” of that May, and a day of 600-plus NYSE stocks reaching 52-week highs on Oct. 3, 1997 — when the SP 500 was up 33% for the year — was followed by a 13% decline over the next few weeks.

“While a high reading of new 52-week highs should hardly be considered bearish, we simply want to highlight that a ‘surge’ in the reading is not necessarily the most bullish indicator either, especially following a sustained advance,” Krinsky said in a recent note.

Stock prices near record highs. But are they overpriced?

The real question then becomes whether stocks are overvalued or not. Here, data on one popular measure–price-to-earnings ratios–has something for both the bulls and the bears.

The SP 500′s forward 12-month P/E ratio is 14.4, according to John Butters, senior earnings analyst at FactSet. While that’s higher than the 5-year average of 12.9 and the 10-year average of 14.1, it’s less than the 15-year average of 16.5.

But even that might be misleading. Back on Oct. 9, 2007, when the SP 500 hit a record high before the financial crisis, the forward P/E ratio was 15.2, below the 5- and 10-year averages of 15.7 and 18.6, respectively, Butters said.

Relatively low valuations are mostly the product of high profit margins, cautions Russ Koesterich, global head of investment strategy for iShares at Blackrock. While both forward and trailing price-to-earnings ratios for large-cap stocks are below long-term averages, corporate profits currently make up about 10% of U.S. GDP, compared with a long term average of 8%.

“There’s the implicit assumption that margins will remain elevated, Koesterich said. “If you think margins will revert to normal then some of those earnings are not sustainable.”

FOMC minutes on deck

This week, attention will once again fall on the Federal Reserve as minutes from the central bank’s last Federal Open Market Committee are released. While the Fed has stated it will more or less stay the course with its $85-billion-a-month in asset purchases, stocks are setting new highs even as the call for scaling those purchases back has been gaining momentum.

Miller Tabak’s Wilkinson said the market appears to have a grasp of what the Fed is trying to do with quantitative easing and that gradual improvements in employment and housing are giving the economy enough inertia to more forward on its own soon.

“When you get a child riding a bike with the training wheels on and they don’t need them, it looks a bit silly,” Wilkinson said.

Also, low inflation below the Fed’s 2% target gives the Fed a lot of latitude in which to act, said Blackrock’s Koesterich. The real question, he said, is how investors act when the Fed starts taking it’s foot off the gas.

Earnings season winds to a close

Next week will also see the last of the Dow industrials reporting earnings along with much of the rest of the SP 500.

So far, 463 companies in the SP 500 have reported first quarter earnings. Of those, 70% have topped Wall Street estimates for earnings, while only 43% have surpassed estimates on revenue, according to FactSet’s Butters.

More than 20 SP 500 firms will report this week including Campbell Soup Co.(CPB) , Best Buy Co.(BBY) , Medtronic Inc.(MDT) , TJX Cos.(TJX) , Lowe’s Co.(LOW) , Staples Inc.(SPLS) , Target Corp.(TGT) , Gap Inc.(GPS) , and Sears Holdings Corp. (SHLD).

Home Depot Inc. (HD) and Hewlett-Packard Co. (HPQ) are the final two Dow components that will report for this season.

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Copyright © 2013 Dow Jones Newswires

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By Jesse Barkasy

We have seen a big rally in U.S. stocks and that is what we are seeing still yet! With all the whining and crying and doomsday scenario gurus are selling with their newsletters, the markets have risen to new all-time highs. That is why we are trend followers. We listen to the markets foremost. The market is our boss.

Even though the U.S. stock market is very extended in price since moving up these last few months, the trend seems to be getting stronger in our opinion. Our attempts at testing the short side has yielded feeble results at best.

So in our last report we said we would fade the strong up moves in the markets but also look for stock breakouts to stay with our trend following philosophy. We try to catch the beginning of a trend reversal (which in this case would be a downward move) but we do not consider ourselves ever more right than the markets–and so we cut losses quickly and attempt to ride the current waves.

The markets are in all time high territory and so we expect a big improvement in the economy in order for this bull market to continue. This is what we believe the markets are telling us, not necessarily what the news is telling us though.

A correction is inevitable and so we believe we just have to keep our eyes on stocks that have charts that are not too extended if we are to initiate any large positions.

We also feel that there has to be a gradual comeback at some point for the commodity based stocks like steel, copper and coal for the market to really heat up. If these basic materials stand pat or gently glide down in price we believe we will be in great shape. If they fall hard we would say that the world economy has fallen into a dangerous deflationary spiral. If they rise hard, we believe inflation can take the breath out of the markets.

Right now we are looking for the sectors that are causing the markets to rise into all time highs. There are some really well known stocks like United Parcel Service (UPS), Target (TGT), Wal-Mart (WMT), Cree (CREE) and Google (GOOG) lighting up the new highs lists, so we are looking for emerging companies that show the potential to follow in their footsteps.

We have shared enthusiasm for this rally. However, as always we are very careful and ready for the potential corrective move or reversal to come.

The investments discussed are held in client accounts as of April 30 , 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

The post A stock market correction will yield trading opportunities appeared first on Smarter Investing

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Jesse Barkasy

I have traded my own accounts for 24 years and have worked as a professional trader for 13 years.

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“O.K. Mr. Smarty-Pants,” she often asks me, “what stock should I buy now?”

She first asked me this question when I was an undergraduate at Princeton, majoring in economics. She asked again when I was a graduate student at M.I.T., earning a Ph.D. in economics. And she has asked it regularly during the last three decades when I have been an economics professor at Harvard.

Unfortunately, she has never been happy with my answers, which are usually evasive. Nothing in the toolbox of economists makes us good stock pickers.

Yet we economists have written countless studies about the stock market. Here is a summary of what we know:

THE MARKET PROCESSES INFORMATION QUICKLY One prominent theory of the stock market — the efficient markets hypothesis — explains how answering my mother’s question would be a fool’s errand. If I knew anything good about a company, that news would be incorporated into the stock’s price before I had the chance to act on it. Unless you have extraordinary insight or inside information, you should presume that no stock is a better buy than any other.

This theory gained public attention in 1973 with the publication of “A Random Walk Down Wall Street,” by Burton G. Malkiel, the Princeton economist. He suggested that so-called expert money managers weren’t worth their cost and recommended that investors buy low-cost index funds. Most economists I know follow this advice.

PRICE MOVES ARE OFTEN INEXPLICABLE Even if changes in stock prices are unpredictable, as efficient markets theory suggests, we should be able to explain these changes after the fact. That is, we should be able to identify the news that causes stock prices to rise and fall. Sometimes we can, but often we can’t.

In 1981, Robert J. Shiller, a regular contributor to this column and an economics professor at Yale, published a paper in The American Economic Review called, “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” He argued that stock prices were too volatile. In particular, they fluctuated much more than a rational valuation of the underlying fundamentals would.

Mr. Shiller’s paper prompted a storm of controversy. My reading of the subsequent academic literature is that his conclusions, though not all his techniques, have survived the debate. Stock prices seem to have a life of their own.

Advocates of market rationality now say that stock prices move in response to changing risk premiums, though they can’t explain why risk premiums move as they do. Others suggest that the market moves in response to irrational waves of optimism and pessimism, what John Maynard Keynes called the “animal spirits” of investors. Either approach is really just an admission of economists’ ignorance about what moves the market.

HOLDING STOCKS IS A GOOD BET The large, often inexplicable movements in stock prices might deter someone from holding stocks in the first place. Many Americans, even some with significant financial assets, avoid stocks altogether. But doing so is a mistake, because the risk of holding stocks is amply rewarded.

In 1985, Rajnish Mehra and Edward C. Prescott, both now at Arizona State University, published a paper in the Journal of Monetary Economics called “The Equity Premium: A Puzzle.” They pointed out that over a long time span, stocks have earned, on average, about 6 percent more per year than safe assets like Treasury bills. This large premium, they said, is hard to explain with standard economic models. Sure, stocks are risky, so you can never be certain you’ll earn the premium, but they are not risky enough to justify such a large expected return.

Since the paper was published, economists have made some limited progress in explaining the equity premium. In any event, the large premium has convinced most of us that stocks should be part of everyone’s financial plan. I allocate 60 percent of my financial assets to equities.

Stocks may be an especially good deal today. According to a recent study by two economists at the Federal Reserve Bank of New York, given the low level of interest rates, the equity premium now is the highest it has been in 50 years.

DIVERSIFICATION IS ESSENTIAL Every time a company experiences a catastrophic decline — consider Enron or Lehman Brothers — reports emerge about employees who held most of their wealth in company stock. These stories leave economists slapping their heads. If there is one thing we know for sure, it is that sensible financial management requires diversification.

So, if you have more than 5 percent of your assets in any one company, call your broker and sell. Doing otherwise means exposing yourself to extra risk without extra reward.

SMART INVESTORS THINK GLOBALLY One widely documented failure of diversification is what economists call home bias. People tend to invest disproportionately in their home country.

Most economists take a more global perspective. The United States represents a bit under half of the world’s stock portfolio. Because Europe, Japan and the emerging markets don’t move in lock step with the United States, it makes sense to invest abroad as well.

Which brings me back to my mother’s question: If I could pick just one stock for someone to buy, what would it be? I would now suggest something like the Vanguard Total World Stock exchange-traded fund, which started trading in 2008. In one package, you can get low cost and maximal diversification. It may not be as exciting as trying to pick the next Apple or Google, but you’ll sleep better at night.

N. Gregory Mankiw is a professor of economics at Harvard.

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Given that the Dow Jones Industrial Average (DJINDICES: ^DJI  ) recently crossed the 15,000-point threshold for the first time in history, it should come as no surprise that there’s an ongoing debate about whether stocks are headed for another bubble.

The title of a recent CBS MoneyWatch article sums up the sentiment perfectly: “Stock Market Bubble: Red flag warning.” According to the author, there’s reason to believe that stocks are becoming “frothy” because margin debt — that is, the debt that investors use to purchase stocks in the brokerage accounts — is headed for another peak akin to the dot-com and housing bubbles. Here’s a chart to demonstrate the point:

But there’s another side to this story. Enter Josh Brown, author of The Reformed Broker — a blog I encourage readers to check out. In a post published at the end of last week comparing the stock market in 1999 to today, Josh makes a convincing argument that all of this concern is much ado about nothing.

Here’s a very rudimentary but essential thing to be aware of — in 1999 the SP 500 (SNPINDEX: ^GSPC  ) finished at 1469, earned 53 bucks per share, and paid out $16 in dividends. These are nominal figures, not adjusted for inflation.

The 2013 SP 500 is earning double that amount — over $100 per share. The index will also be paying out double the dividend this year, more than $30 per share, and returning even more cash with record-setting share repurchases.

This sounds pretty good; what’s the catch?

What kind of premium, pray tell, are we paying for double the earnings and twice the dividend yield versus 1999′s market? I’m so glad you asked — turns out we’re not paying any premium at all. We’re paying a discount. 50% off. The current SP 500 trades for a P/E of 14 versus 33 for 1999. So double the fundamentals for half the price.

Sound frothy to you?

Josh then goes on to discuss the Case-Shiller cyclically adjusted P/E ratio, or CAPE. For those of you who aren’t familiar with this metric, it’s a 10-year rolling average of the SP 500′s P/E ratio. Its advantages are twofold. In the first case, it’s the most widely available historical valuation metric you can find for the broader market — do a search for the SP 500′s historical P/E ratio, and it’s basically the only game in town. And in the second case, as its name suggests, by controlling for cyclical variations in valuation multiples, it makes for a nice, smooth line to include in charts.

But, as Josh points out, there’s a problem with relying on this metric to make contemporaneous investment decisions. That is, by including the last 10 years of valuations, the CAPE overstates the SP 500′s current multiple by nearly 38%. You can see this in the following chart, which compares the index’s actual P/E ratio to the CAPE.

SP 500 P/E Ratio data by YCharts

Suffice it to say, the current gap is a function of the financial crisis, shortly after which corporate earnings were eviscerated and thus valuation multiples shot through the roof. This trend was particularly robust in the financial space, where large banks such as Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) were forced to record massive losses because of overexposure to subprime mortgages.

So where does this leave us?

I believe that the truth lies somewhere in the middle. Let’s take a look at one last chart (the explanation follows).

This is an index that compares the gross domestic product to corporate profits to the Dow — all of which are adjusted for inflation. Over the long run, there’s a strong correlation here — if you work backwards from the Dow, this shouldn’t be surprising. The overarching trend and magnitude of increase, in other words, is pretty closely aligned among the three variables.

Yet at any one time in particular, there are discrepancies. The most notable of these were the 1960s — the so-called “Go-Go Years” — and the time period surrounding both the dot-com and housing bubbles. In each case, the performance of stocks outpaced GDP. And in each case, these intervals were concluded in dramatic fashion by stock market crashes.

To get back to the present, if you look to the far right side of the chart you’ll see that the Dow has once again eclipsed the GDP trend line — it should be noted, moreover, that the extent of the eclipse is understated, since the data stops at the end of last year. If history is any guide, in turn, this is indeed indicative of an overheated market.

On the other hand, to Josh’s point, corporate profitability appears to be a primary impetus for the climb — though, as you can see, this was similarly the case in the mid-’60s, late ’90s, and early ’00s. In addition, we obviously have a long way to go before the present resembles anything like those previous bubbles.

My point here is this: Stocks are high. On a comparative basis, are they as high as they were during these earlier periods of excess? No. And could they go higher? Yes. Absolutely. In fact, I’m inclined to think they will in light of the Federal Reserve’s ongoing liquidity measures. But these factors aside, it’s important that investors have a decent idea of where we’re at.

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Facebook CEO Mark Zuckerberg is fond of telling his cohorts that their journey is only one percent finished. Even if you quibble about the exact percentage, he’s right that his company’s vision is boundless and that the service, in its current incarnation, is nowhere near done exploring its potential. The man is nothing if not both ambitious and patient.

Wall Street, unlike Zuck, is famously bad at taking the long view of things. When Facebook went public, a year ago today, shares were snapped up by speculators hoping to make an insta-windfall from a pop in its stock price. At the end of the first day of trading — bedeviled by NASDAQ technical gremlins — the stock flatlined rather than popping. In the year since, as my colleague Sam Gustin reports, it’s bumped around without ever returning to the initial offering price of $38. Some people are still brooding about it.

If you’ve lost money on Facebook stock, I feel for ya. Really. But the fact that it didn’t turn out to be a convenient way to turn a quick buck doesn’t have much bearing on the company’s importance to the world. It doesn’t even say much about the its long-term prospects to do well by investors.

Plenty of tech companies have had happier IPOs than Facebook did, but a happy IPO has never been a reliable sign of a bright future. Consider Netscape, the browser pioneer which went public in 1995, in what may remain the most iconic tech-company IPO of them all. In 2003. Jim Cramer, now the host of CNBC’s Mad Money, wrote a wistful remembrance of it for TIME:

We didn’t know what it was. We had never opened a browser. We had never gone on the Net. But we had heard that the deal would be hot, so we at Cramer Co., my $250 million hedge fund, dutifully put in our share of stock in the initial public offering of Netscape. We got several thousand shares. And we, along with most everyone who got some, made an absolute killing. The stock, which we thought was going to be priced at $12 a share, came in at $28 and then opened at $71. (It peaked at $97.62 on March 17, 1999) We were giddy. We had never made money that quickly in our lives. We thought it was going to be a one-time event, never to be repeated.

The Netscape IPO was fabulous if you got in on it, but it was also Netscape’s last great moment of unbridled glory. After doing more than anybody else to popularize the web, the company got distracted by side projects such as business software at the same time that Microsoft began bundling the increasingly formidable Internet Explorer with Windows. In 1998, when AOL agreed to buy Netscape for $4.2 billion, it already felt like it was buying damaged goods. It never did much with its new toy, and killed the browser altogether in 2007.

Facebook is already at least as important to the web as Netscape was in its day, or almost any other company (hello, Google!) has been since. Making that case feels redundant, but let’s recap a few basic numbers anyhow: 1.11 billion monthly active members (751 million of whom use Facebook on mobile devices), 300 million photos uploaded a day, 16 million events created a month. Through features such as Facebook Connect (which lets you use a Facebook account to log into other sites) and those omnipresent Like buttons, the service also provides essential connective tissue to millions of other sites.

If you went through an It’s a Wonderful Life-like exercise of imagining what the web would look like in 2013 if Facebook had never been born, you’d envision a significantly different place. That’s true whether you see it as a positive force or a privacy-invading scourge. And while it’s fashionable to speculate that Facebook’s original audience, young people, no longer think it’s cool, that too is a sign of its dominance of social networking: It’s tough to stay cool when you’re as popular with grandparents, parents, aunts and uncles around the world as you are with teens and tweens.

Facebook’s impact on society makes it fascinating, but it doesn’t, of course, make it a successful business or a sound investment. Not automatically, anyhow. Especially since part of the 99 percent of Facebook’s journey that remains unfinished is finding a business model which is as transformative as the service it provides to consumers.

Most Facebook members have never paid it a nickel directly. The methods it does have to extract cash from them — it keeps suggesting that I give Starbucks gift cards as birthday presents — are unlikely to ever add up to enormous sums. Therefore, it’s marketing messages of one sort or another which will bring in most of the money, and while the company made almost $1.5 billion in revenue last quarter, it has the potential to do far better.

Facebook skeptics may be worried about the amount of information the company has on its users, but anyone who uses Facebook and pays attention to the ads can tell that the company hasn’t yet cracked the code of turning all that information into highly-targeted advertising of the sort that advertisers crave. Earlier this week, for instance, I pulled up my Facebook page and found ads for the Mormon Church’s newsroom, a dating service, a technical-certification school and a contest involving uploading photos of oneself flossing. None of them were a match for my interests, and the dating ad was particularly discordant considering that Facebook knows I’m married. If the service knows too much about me, it’s sure failing to do much with that knowledge.

It’s worth noting that Google established a powerfully effective business model before it went public in 2004: text ads next to search results, auctioned off to the highest bidder. If Facebook ever comes up with anything remotely as potent, people will stop writing articles saying that there’s no way it can turn a meaningful profit.

Over time, Facebook could become a cash cow; it could struggle to satisfy investors; it could grow even more dominant; it could lose ground to some shiny new thing that hasn’t been invented yet. But decades from now, when people look back and argue about Mark Zuckerberg’s legacy — and they will — I’ll be astonished if anyone remembers him principally as that guy whose IPO didn’t live up to expectations. This first anniversary seems as good a time as any to stop obsessing over it.

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By Laurence Fletcher

LONDON |
Fri May 17, 2013 8:41am EDT

LONDON (Reuters) – A booming population, fuelled by immigration, will help Britain’s economy to grow more strongly than Germany’s later this decade and could drive its stock market much higher, according to one of the UK’s biggest equity hedge funds.

Toscafund, with $1.3 billion of funds open to investment, made its bullish predictions amid signs the UK economy is starting to recover from five years of torpor brought on by the financial crisis, while the euro zone is mired in recession.

“No-one ever gets how good it’s going to be until it (the stock market) moves,” founder Martin Hughes told Reuters.

Hughes, ranked 7th in this year’s Sunday Times Hedge Fund Rich List with a 375-million-pound fortune, cited Britain’s rising population as a driving force for growth.

As a result, he warned the economy could be harmed if Britain voted to leave the European Union and restricted immigration. Prime Minister David Cameron has pledged to hold a referendum on EU membership by 2017, if re-elected.

“If we do leave, the lights will stay on, but we mustn’t use it as an excuse to raise the drawbridge. Inflation and interest rates to a certain extent are low because of immigration,” said Toscafund chief economist Savvas Savouri.

Toscafund’s optimism is also based on Britain’s “strong” labour market, while “property is robust and car manufacturing is healthy”, added Savouri.

“Looking at all three metrics, not many other places in the world have that. Debt servicing is not a concern because most household debt is secured on property whose value is trending higher.”

Savouri, who was correct in his prediction last May that Greece would not exit the euro zone, said Britain’s “dynamic, open” economy would enjoy GDP growth above Germany’s in the coming years, rising close to 4 percent by 2020.

He is working on the basis that Britain’s population will exceed Germany’s within a generation, even though it is currently 20 million lower. Britain’s fertility rate in 2010 was the highest since the early 1970s, according to official data.

“Where there’s population growth, there’s GDP growth,” Hughes said, adding he favoured domestically-focused stocks such as housebuilders, as well as commercial property.

Toscafund owns more than 14 percent of housebuilder Redrow (RDW.L), nearly 27 percent of Daisy Group (DAY.L), a provider of telecoms to small and mid-sized businesses, and 8.5 percent of online dating firm Cupid (CUP.L), according to regulatory data.

STOCK MARKET STRENGTH

With a bullish view on Britain’s economic prospects, Toscafund predicts its stock market, already at around 5-1/2 year highs, could rise much further.

Hughes pointed to the UK equity market’s earnings yield – earnings per share divided by market price – which is above that of many bonds. German 10-year yields are 1.38 percent, for instance.

“The UK stock market’s p/e (price to earnings ratio) of 11 is generally good value. If it’s got a 5 percent earnings yield, why can’t it be a 20 times p/e? The UK offers emerging market growth dynamics at valuations of a declining developed economy.”

The UK FTSE Mid 250 midcap index .FTMC has rallied around 40 percent since June, as central banks have tried to prop up Europe’s stuttering economies. According to Reuters data its p/e ratio is 9.7 times, meaning that a p/e of 20 times would see the index at roughly double current levels.

“Mid-cap UK corporate valuations are exactly the same as for European equities but Europe is shrinking and the UK is growing. The UK stock market is on a 35 percent discount to the U.S.” said Hughes.

He is also taking advantage of an “unbelievable opportunity” to buy UK industrial, mixed use and shopping centre properties particularly outside London, from capital-hungry banks who are selling them off at a discount.

Such sales, driven by banks trying to meet regulatory capital targets, are triggered by a property’s loan-to-value ratio rather than income earned on the property, said Hughes.

“Banks are repossessing it on the basis of loan-to-values, due to capital regulations, so you can pick up an income earning asset in double digits.”

Savouri added that real estate investment trusts (REITs) may be better value than first appears because net asset values may be too low. “With REITs I am convinced surveyed asset values are conservative, and so premiums to NAV over(stated) and discounts understated.”

(Additional reporting by Tommy Wilkes; Editing by Mark Potter)

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DETROIT Shares of General Motors (GM) reached an important milestone on Friday, closing above their initial public offering price of $33 for the first time in more than two years.

GM shares reached $33.77 Friday before slipping back to close at $33.42, up 3.2 percent. The auto giant sold shares to the public for $33 in a November 2010 IPO, but they’ve traded below that price since May 4, 2011.

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GM’s business is getting stronger. Two weeks ago, GM reported solid first-quarter earnings on robust sales in North America. On Friday, there were signs sales declines may have bottomed in Europe, where GM has lost money for more than a dozen years.

Shares of all automakers traded in the U.S. show double-digit gains this year. GM and Ford are benefiting from strong sales in the U.S. as well as China. And investors believe the Japanese government’s economic policies create an advantage for exporters such as Toyota and Honda.

Investors’ overall enthusiasm for stocks has also helped automakers’ shares. And as stock markets set records, investors use some of their gains for a down payment on a car or truck.

But GM’s 14 percent gain this year is also notable because of its top shareholder: the U.S. Treasury.

The government has been selling off the GM shares it received after providing the company with a $49.5 billion bailout in 2008 and 2009. The government has pledged to sell off taxpayers’ remaining 16 percent stake in GM by early next year. The rising stock price may hasten its exit.

That would be fine with GM, which has long complained that government ownership has discouraged some car buyers from considering GM cars and trucks and steered some investors away from the shares.

In general, consumers have been anything but discouraged about buying cars. An improving job market and the Federal Reserve’s low-interest rate policies are helping. Also, GM and Ford are finally getting credit for improvements they’ve made in their finances and vehicles, said David Whiston, an analyst with Morningstar.

Sales hit 14.5 million last year after bottoming out at 10.4 million in 2009, and they’re expected to rise as high as 15.5 million this year.

Still, analysts are divided on how much further GM shares can climb.

Itay Michaeli of Citi Investment Research gives GM a buy rating with a one-year price target of $38.

But Jamie Albertine, an auto analyst with Stifel Nicolaus, is keeping a hold recommendation on GM, saying the price surge isn’t backed by broader economic indicators in the U.S. “There’s still a very big and profound disconnect between the market and what the average Joe is experiencing,” he said.

GM, he said, has done a lot right since the IPO. The company has bolstered its balance sheet by generating cash and cutting pension liabilities, and buying back shares from the government. There’s a possibility of resuming a dividend.

The company also is replacing its models at a faster rate than in the past, Albertine said. But while the Cadillac brand has seen sales improve, Chevrolet, by far GM’s largest brand, lacks hits. “I don’t think they have many game changers,” he said.

GM hopes it has a hit with the redesigned Silverado and Sierra pickup trucks, due to hit showrooms soon. The Silverado is the second-highest-selling pickup in the U.S. after Ford’s F-series. The company said the new trucks should boost North American profits in the second half of the year.

GM wasn’t the only stock to hit highs on Friday. Ford Motor Co. (F) shares closed at $15.08, the first close above $15 since May 2011. U.S. shares of Toyota Motor Corp. (TM), Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY) all hit 52-week intraday highs.

Despite its growth, GM stock has still lagged the increase in the broader market. The SP 500 index is up more than 16 percent this year.

Still, the share price has grown 78 percent since it bottomed out in July of last year at $18.85 on worries about the European debt crisis.

But even with the increase, taxpayers will lose a lot of money on the bailout. The government is still about $18.8 billion in the hole and would have to sell the remaining 241.7 million shares for about $78 each to break even.

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Editor’s note: Dan Moisand answers reader questions on all things retirement every Friday. If you have a question for Dan, please email him at RetireQA@marketwatch.com.

Whenever markets reach highs or something scary like a fiscal cliff seems to loom, dollar-cost averaging is often brought up as a way around the anxiety that can come from fears of a market drop. Today I discuss why the technique usually isn’t the best course of action. I also tackle Roth IRAs for US citizens working abroad and a Social Security question from a new retiree with a young wife and a preteen son.

Q. I just got a pension buyout and have a significant sum to invest, but with the market at all-time highs, I ‘m worried it is due for a drop. Is dollar-cost averaging a better way to invest than just plunging into the markets in a lump sum?

A. Not exactly. Only with the benefit of hindsight will you know if dollar-cost averaging (DCA) was a better approach. It may reduce the risk of getting into an investment at a relatively high price, but it is a truly a matter of “may”, not “will”. The idea that DCA is a good way to boost returns is not well supported by history, and psychology can greatly undermine the technique’s usefulness. 　　

DCA is　buying into a holding with a fixed dollar amount at fixed time intervals. For example, if you had $60,000 to invest in XYZ mutual fund and wanted to use DCA over the next year, you would buy $5,000 of the fund each month. If XYZ’s price drops, you get more shares with the next purchase. That is indeed better than having bought all your shares at the higher price. However, markets go up more often than they drop, and bull markets tend to rise more than bear markets fall. As a result, the longer the time frame over which you spread out your buys, the greater the odds that the averaging will actually work against you.

For instance, using the SP500 index as a market proxy, pick any month since January 1926 and look at the one-month return. The US stock market rose in 62% of those months. For 12 month periods, the market rose 72% of the time. For DCA to pay off, the market has to decline, and by enough and for long enough, to get a lower average price than a lump sum initial purchase would produce. The longer the time frame, the better the odds the market will not do this and DCA will produce an inferior result. 　

That’s the history. Psychologically, most people use DCA　because they are worried about a market drop. Two points to ponder: First, the record for stocks is crystal clear. Declines are opportunities to buy at lower prices, but in real time, during the decline, it can be hard to see it that way. Recall the panic and fears of a depression during the ’08-’09 market malaise. Many that were using DCA then couldn’t bring themselves to buy, undermining the technique at precisely the time it would be most effective. The drop didn’t trigger the urge to buy, it reinforced the fear.

Second, once the DCA period is over, all the money is subject to market risks. DCA just delays full exposure. Investing, as opposed to speculating, is supposed to be a long-term activity. Most would be better-off learning to be resilient rather than fretting about how to be nimble.

Be honest with yourself about your temperament. DCA may reduce the regret you would feel if the market took a tumble immediately after investing, but it does nothing to prepare you for the long term. If you employ DCA, keep the time frame short for the buys and be committed to follow through and buy if there is a drop.

If the stock market scares you on a regular basis, there are several things you can do that could have a more profound impact on your success than DCA. Educate yourself about market history and the investor behavior that went along with its gyrations. Consider working with an adviser who can teach you these things and coach you through bad markets. Most important, make sure you understand why you own stocks and that the balance between volatile assets like stocks and more stable choices in your portfolio is appropriate for your tolerance for risk and your goals.

Q.
Hi Dan. My wife is a U.S. citizen but moved to Hong Kong seven years ago. She has an investment account in the States and wants to keep the account mainly for retirement purposes, so she won’t withdraw any money in the near future. Is it a good idea to set up a Roth IRA account for this purpose? Currently, she doesn’t have to pay any US tax as she can enjoy [an] overseas income tax bracket.—IY

A. It would be a good idea to set up and contribute to a Rot, h but she can’t contribute to any type of IRA unless she has taxable wage earnings. US citizens working abroad can exclude up to $97,600 from federal income tax under the Foreign Earned Income Exclusion (FEIE). Until she makes more than that, or has other taxable earnings not offset by the FEIE, such as earnings on business trips to the US, she is out of luck.

Even if she has taxable income, she may still not be able to contribute if you earn a good salary. Whether a household can contribute to a Roth IRA is dependent on their Modified Adjusted Gross Income (MAGI). Full contributions start to phase out at $178,000 of MAGI for joint filers and no contribution is allowed if MAGI exceeds $188,000. Any income excluded through the FEIE (as well as foreign housing exclusions and deductions) is added back to calculate MAGI.

So to make the standard maximum Roth contribution of $5,500 she would need $103,100 of earnings ($103,100-$97,600=$5,500), or $104,100 if she was over age 50 and wanted to make the maximum additional $1,000 catch-up contribution. She would have $5,500 in taxable income, but all $103,100 would be added to your earnings to determine eligibility.

Accounting for foreign earnings can get complex and I’ve only scratched the surface. You may be well-served by working with a tax preparer who is familiar with these matters.

Q. I am 61 and I was forced into retirement last year. My funds are my traditional IRA. My home is paid in full. My wife is much younger. Our son will be 12 when I turn 62. I have read many different articles with different results. The question is, will we get an SSA payment for raising a child under 18 (or is it under 16)? – TS

A. Once you start your retirement benefits, your wife can get a benefit until your son reaches age 16. In addition, your son can get payments until he is 18 (19 if still a full-time elementary or secondary student). All of these benefits will be reduced if you start receiving the funds at age 62.

If you were forced to retire due to disability, different benefits apply. The Social Security Administration’s (SSA) definition of disability is strict. The SSA considers you disabled only if “You cannot do work that you did before; We decide that you cannot adjust to other work because of your medical condition(s); and
Your disability has lasted or is expected to last for at least one year or to result in death”.

If you think you could meet that definition and the other requirements, you should pursue disability benefits. The disability payments will convert automatically to full retirement benefits at your Full Retirement Age. By qualifying for disability, your payments and your spouse’s benefits on your record will be higher than if you start retirement payments early. If you go on disability, additional payments to family is also possible. For more detail see the SSA’s guide for disability benefits.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you

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DETROIT –  General Motors Co shares on Friday topped their 2010 initial public offering price, which will help the automaker’s largest shareholder, the U.S. Treasury, pare its losses.

GM shares broke above $33.00, the price in the November 2010 IPO, rising as high as $33.21 in morning trading. It is the first time the stock has surpassed $33 since May 2011. So far this year GM’s stock is up 14.5 percent.

The run-up in the stock price could help Treasury, which provided GM with a $49.5 billion bailout, trim losses that will likely still total billions of dollars. Treasury said earlier this month that it would begin another round of sales of its 241.7 million GM shares.

In December, Treasury said it would fully exit its GM investments by April 2014. By the end of March, the government had recovered $30.4 billion of the bailout funds GM received under the Troubled Asset Relief Program.

For Treasury to break even on the bailout, it would need to average about $79 a share on its remaining stake. Treasury officials have said the goal was not to turn a profit on the GM shares but to save U.S. jobs.

Executives at GM have said that putting this issue behind them will improve the company’s image and boost sales, as they believe some consumers have held the bailout against the company.

GM executives have chafed under the tag of “Government Motors” since the bailout and bankruptcy that left the U.S. Treasury with 60.8 percent ownership of the Detroit automaker. After the IPO, Treasury’s stake fell to 32 percent.

(Reporting by Ben Klayman; editing by John Wallace)

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