Archive for August 14th, 2012
Tuesday, August 14th, 2012
Q2 hedge fund reporting season has come and gone. Below is a summary of the key funds, and who held what at the end of June.
Courtesy of Bloomberg:
- Berkshire Hathaway Took Stakes in NOV, PSX
- Exited Stake in INTC
- Cuts Stakes in KFT, GE, V, IR, DG, CVS, JNJ, PG, UPS
- Boosted Stakes in IBM, BK, LMCA, WFC, DVA
- THIRD POINT LLC Took Stakes in UNH, NWSA, COG, PXP, CCE
- Exited Stakes in GOOG, MRVL, FDO, CSCO, ANF
- Boosted Stakes in AAPL, LBTYA, THOR, BIOF
- Cut Stakes in DLPH, HSH, UTX, COF, WFT
- FAIRHOLME CAPITAL MANAGEMENT Exited Stakes in MCY, RF
- Cut Stakes in CIT, BRK/A, BAC, LUK, CIT, JOE
- Boosted Stakes in JEF, SHLD
- APPALOOSA Boosted Stakes in LCC, UAL, DAL, GM, GT
- Cut Stakes in QQQ, AAPL, HIG, BAC, NUAN
- Took Stakes in WHR, MGM, LRCX, CE, JBLU
- Exited Stakes in CVI, XLF, SPY
- PERSHING SQUARE CAPITAL Took Stake in PG
- Exited Stakes in KFT, FBHS, FDO
- Cut Stake in C
- TRIAN FUND MANAGEMENT LP Exited Stakes in DPZ, USO
- Boosted Stakes in IR, FDO
- Cut Stakes in TIF, KFT
- LONE PINE CAPITAL Exited Stakes in LVS, GMCR, FOSL, LMCA, CTRP
- Took Stakes in EBAY, NWSA, LBTYA, DVA, HCA
- Cut Stakes in DG, TDC, V, ST, GRA
- Boosted Stakes in KMI, DIS, GPS, TSCO, ULTA
- BP Capital Management Boosted Stake in VLO
- Cut Stakes in ECA, NOV, SD, WFT, DVN
- Took Stakes in PXD, MMR, SWN, EOG, KWK
- Exited Stakes in BP, CHK, SU, GLNG, EXC
- HIGHFIELDS CAPITAL Boosted Stakes in IRM, CRI, CNQ, APC
- Cut Stakes in TGT, JPM, BLK, TWC
- Took Stakes in IR, STX, GOOG, KFT
- Exited Stakes in CVS, WFC, BEN, MCK
- GREENLIGHT CAPITAL Took Stakes in CI, CVH, UNH, HUM, WLP
- Exited Stakes in DELL, HCA, CA, GDXJ, RIMM
- Boosted Stakes in STX, XRX, S, ABX, CSC
- Cut Stakes in BBY, CFN, GDX, DLPH, CPWR
- RBS Partners Boosted Stakes in SFI, GNW
- Cut Stakes in AZO, OSH, STX, COF, GPS
- Took Stake in AVP
- SOROS FUND MANAGEMENT Took Stakes in WMT, NTAP, EQT, DIS, CLX
- Exited Stakes in CVI, IOC, HSH, CVX, XLP
- Boosted Stakes in GE, GLD, SFLY, CHTR, DISH
- Cut Stakes in M, MSI, STI, CMVT, XYL
- PAULSON & CO Exited Stakes in APC, STI, FDO, URI
- Took Stakes in EQIX, JPM, CBE, CVC, NCQ
- Cut Stakes in DLPH, HIG, COF, BAX, XL
- Boosted Stakes in GLD, HCA, QSFT, HSH, GET
- ICAHN ASSOCIATES Cut Stakes in IEP, CMC
- RELATIONAL INVESTORS LLC Exited CAT, AMAT, BAX, CRI
- Cut OXY, WU, UNM, ZMH, MET
- Boosted ITW, HPQ, FLS, ESL, HAR
- GATES FOUNDATION Boosted Stakes in WMT, CX
- Cut Stake in BRK/B
- Took Stake in TM
Last, and possibly, least:
- JAT CAPITAL Exited Stakes in TPX, BIDU, RL, NFLX, PCLN
- Took Stakes in AAPL, EXPE, AKAM, WYN, CRM
- Cut Stakes in STX, URI, EQIX, FTNT, IPGP
- Boosted Stakes in CBS, EBAY, LNKD, P, GRPN – once a momo…
Tags: Aapl, Bp Capital Management, Chtr, Cmvt, Ebay, Goog, Greenlight Capital, Highfields Capital, Jblu, Lbtya, Lmca, Lone Pine Capital, Lrcx, Mrvl, Ntap, Pershing Square Capital, Soros Fund Management, Trian Fund Management, Trian Fund Management Lp, Xrx
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Tuesday, August 14th, 2012
by William Smead, Smead Capital Management
If you are a long-time follower of our writing at Smead Capital Management (SCM), you are aware of our belief that a titanic shift is in process in the world economy. The fastest growing economy of the last ten years, China, is slowing down very quickly and the US is grudgingly growing during its deleveraging process. Since the US is four years ahead of most of the rest of the world in the cleansing/deleveraging process, we believe the US will ultimately lead the world out of the current growth funk.
We believe the long-term demand for oil will be greatly influenced by where the world gets its best future growth. As the chart below shows, the US has cut by 50% the amount of energy which is required to generate each dollar of Real Gross Domestic Product (GDP):
Source: Carpe Diem: 2011: Most Energy-Efficient Economy in History, April 2, 2012
From a personal standpoint, it is easy to see how dramatically US drivers are adapting to the $90 dollar price per barrel of oil and gas prices hovering in the $3.25-4.00 per gallon area. My wife and I bought a mid-sized sedan recently which advertised 23 mpg city and 33 mpg highway. After two months and 4000 miles of driving, I’ve confirmed that the highway mpg is consistently running around 35 mpg. A comfortable, mid-sized car which seats four full-sized adults and blends at 28 mpg means that we are going to use much less gas than we used to.
China, on the other hand, has been using a disproportionate part of the world’s commodities to produce about 10% of the world’s GDP. Professor Michael Pettis, from Peking University, computed that China used 40% of many of the world’s main commodity inputs in the year 2010. China’s use of oil rose 92% from 2000 to 2010 and coincided with a price increase of 242%. These facts are very typical of an emerging market nation whose economy becomes dependent on fixed asset investments for continued growth. If we are right and growth slows more than expected, China will demand significantly less oil than they have in the past five years and certainly their reduced demand is a huge factor at the margin.
If Europe was humming along in a favorable way, Japan was bristling with growth and Latin America didn’t have any problems, you might be able to make up lost US and China oil demand elsewhere. We haven’t even mentioned the damaging effect China’s slowdown will have on oil demand in the countries which have “suckled on China’s bounteous teat” like Australia, Singapore, Canada and Indonesia. Lastly, Brazil and Russia are hugely at the mercy of the price of oil for their prosperity. All in all, demand for oil sits in a very precarious position at best.
On the supply side of the equation, we have rarely seen so many holes poked in the ground and in the ocean looking for oil. From shale in North America to offshore drilling near Brazil, new supplies of oil are coming out of the woodwork. Iran, Syria and Egypt have done their best to keep a supply-fear premium in oil, but so much oil is being produced elsewhere in the world that it is diffusing the supply disruption threat.
Lately, Oil prices seem to trade in high correlation with the US stock market. When US stocks (as represented by the S&P 500 Index) bottomed in late May and early June of this year, oil hit the $77 per barrel mark. Those stock market worries seemed to have been about the possibility of a recession coming soon. To us at SCM, this infers that market participants believe that US economic growth, if it happens, will cause heavy additional use of oil and gasoline. Or it could mean that asset allocators and hedge fund managers are using oil as a trading vehicle to participate in market upswings. These thoughts raise some important questions.
First, where is the economic growth likely to come from in the US? Second, in what industries does the US have big competitive advantages over the rest of the world? At SCM, we believe that the backbone of US economic growth over the next ten years will come from our largest population group, the children of the baby boomers. There are 85 million boomer kids, slightly more than the 83 million baby boomers. They have been a little slower to get married, a little slower to have children and little slower to buy a house than previous generations. They are tech savvy and their attitudes associated with commodity usage have been formed in the last ten years. They are more likely to spend time online, shop online and socialize online. They are less likely to own two cars and less likely to have a landline phone when they do buy a house.
However, with hormones working like they always have and housing affordability the highest in my lifetime, we could see an explosion of household formation in the US over the next five years. Maybe, even “Jeff who lives at home” (recent popular movie) will buy a house. The boomer kids won’t have actors like Seth Rogen and Zach Galifinakis (playing unmarried slobs) as their favorite actors forever. Housing is starting to percolate in the US and you can almost feel the animal spirits start to build. We don’t believe there is any correlation between marriage, babies and buying a home with gasoline usage. Gasoline usage goes up when the kids get their own social life and that is a problem for ten years from now.
The other source of growth in the US is its dominant position in the connection between the virtual/technology world and the real economy. US Companies like Apple (AAPL), eBay (EBAY), Amazon (AMZN), Facebook (FB) and others are dominating the way technology is shaping how we live and spend money. These are US companies leading this phenomena and it is the fastest growing part of the world economy. It is not a sector of the economy which uses much oil and probably causes less oil usage per dollar of GDP produced.
We at SCM believe that supply and demand do matter when it comes to oil prices. We envision reduced demand from China and permanently lower demand in the US. Lower demand combined with spiking supply levels from all the new sources of oil spell lower prices to us. Historically, the US economy and US stock market are inversely correlated with oil prices. We’d like to think that is what comes about over the next three years. It could be the economic stimulus package we’ve been waiting for.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities we recommend will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.
Tags: Asset Investments, Brazil, Capital Management, Dollar Price, Emerging Market, Energy Efficient Economy, Fastest Growing Economy, Gross Domestic Product, Last Ten Years, Michael Pettis, Mpg City, oil, oil and gas prices, Peking University, Personal Standpoint, Price Per Barrel Of Oil, Professor Michael, Russia, Sized Adults, Sized Car, Smead, Time Follower, World Economy
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Tuesday, August 14th, 2012
Below we take a look at analyst ratings for S&P 500 stocks by sector. There are currently 11,220 individual analyst ratings for the 500 stocks in the S&P 500. That means that the average stock has 22.6 analyst ratings. So which sectors are covered the most and the least by analysts? As shown below, the Technology sector is unsurprisingly covered the most, with an average of 28.2 ratings per stock. The Energy sector ranks second with 25.6 ratings per stock, followed by Consumer Discretionary (23.6), Health Care (22.9) and Financials (22.8). While the Financial sector is the second largest by market cap in the S&P 500 (behind Technology), it has the fifth highest analyst coverage.
The boring Utilities sector has the lowest amount of analyst coverage, with 16.5 ratings per stock. Materials ranks second lowest at 17.4 ratings per stock, followed by Consumer Staples (19.0) and Industrials (19.1).
Buy ratings continue to outnumber sell ratings by a nearly 10 to 1 margin. That’s just how it is in the analyst community. Of the 11,220 S&P 500 analyst ratings, 5,940 are buy ratings, while just 653 are sell ratings. The rest are “hold” or “neutral” ratings.
Below are charts showing the percentage of buy and sell ratings by sector. As shown, 52.9% of S&P 500 stock ratings are buy ratings. In the Energy sector, however, 66.3% are buy ratings, which is by far the most bullish of any sector. The Utilities sector has the lowest percentage of buy ratings at 31.8%, while Telecom, Consumer Staples and Financials are have readings in the 40s.
Unsurprisingly, the Financial sector has the highest percentage of sell ratings at 8.3%. Analysts have remained sour on financials since the financial crisis.
The Energy sector has the lowest percentage of sell ratings at just 3.5%. With the highest percentage of buy ratings and the lowest percentage of sell ratings, analysts are certainly bullish on Energy stocks.
Interestingly, analysts are much more bearish on Consumer Staples stocks than Consumer Discretionary stocks. The Consumer Staples sector has the second-most sell ratings and the third least buy ratings, while the Consumer Discretionary sector has higher than average buy ratings and lower than average sell ratings.
Copyright © Bespoke Investment Group
Tuesday, August 14th, 2012
In our prior post, we highlighted which sectors the analyst community likes and loathes the most. Below we take a look at the individual stocks in the S&P 500 that have the highest percentage of buy and sell ratings. To make the list, the stock had to have coverage from at least 5 analysts.
As shown, SLM Corp (SLM) has the highest percentage of buy ratings at 100%. Every analyst covering SLM rates it a buy. Seven other stocks in the S&P 500 have at least 90% buy ratings — Agilent (A), Schlumberger (SLB), CVS (CVS), Allegheny Technologies (ATI), Covidien (COV), Fluor (FLR) and EMC (EMC). Apple (AAPL) is another name on the list that’s noteworthy. Of the analysts that cover Apple, 87.7% rate it a buy. The reason this is so impressive is because it has the highest analyst coverage of any stock out there at more than fifty. Qualcomm (QCOM) and Boeing (BA) are two other notables on the list of stocks that are the most loved by analysts.
Most of the stocks that are loved by analysts are up quite a bit in 2012, but there are two — Allegheny (ATI) and Peabody Energy (BTU) — that are down more than 30% year to date. It’s surprising that analysts are sticking with these two stock since they’ve done so poorly over the past seven months.
Receiving a buy rating is no big deal since “buys” make up a majority of analyst calls. Receiving a sell rating, on the other hand, stands out since only 5% or so of all calls are sells. Below are the S&P 500 stocks with the highest percentage of sell ratings. As shown, Sears Holdings (SHLD) owns the title of most hated stock in the S&P 500 with 85.7% sell ratings. Federated Investors (FII) ranks second at 66.7%, followed by Lexmark (LXK) at 58.3%. The rest of the stocks on the list have sell rating percentages below 40.
Interestingly, four of the six most hated stocks in the S&P 500 are having stellar years. The most loathed stock of all — Sears — is up a whopping 70.83% year to date, while FII is up 34.39%, Whirlpool (WHR) is up 50.33%, and Weyerhaeuser (WY) is up 26.41%.
Tags: Aapl, Allegheny Ati, Allegheny Technologies, Analyst Community, Analyst Coverage, Cov, Covidien, CVS, Federated Investors, Flr, Hated Stocks, Investment Group, Lxk, oil, Peabody Energy, QCOM, Schlumberger, Sears Holdings, Shld, Slb, Slm Corp
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Tuesday, August 14th, 2012
by Michael Kahn, Barron’s
Although it has been quiet on the gold front in recent months, gold-mining stocks are finally making some technical noise. They are not yet fully in bullish mode, but several changes on the charts bode well for miners and, by extension, for the metal too.
The first chart of consequence is the performance comparison between gold shares and gold itself. By plotting a ratio of the Market Vectors Gold Miners exchange-traded fund (ticker: GDX) to the SPDR Gold Trust ETF (GLD), we can easily see changes in their relationship (see Chart 1).
The chart headed south for most of this …
Read the complete article below:
Tags: Barron, Bullion, Consequence, ETF, Exchange Traded Fund, Gold Exchange, Gold Front, Gold Fund, Gold Miners, Gold Mining Stocks, Gold Pan, Gold Shares, gold stocks, Market Vectors Gold Miners, Michael Kahn, Performance Comparison, Relationship, Spdr, Technical Noise, Ticker, Vectors Gold Miners
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Tuesday, August 14th, 2012
by Seth Masters, Chief Investment Strategist, AllianceBernstein
While some people deem stocks expensive relative to 10-year trailing earnings, we take a forward-looking approach. It starts with the premise that the stock market is not a casino and stock prices are not pulled out of thin air: they reflect the intrinsic value of companies’ future earnings.
Let’s start with basics. Stocks represent an ownership claim on a share of company earnings. Hence, stock prices reflect (imperfectly, of course) the value of companies’ current earnings and potential earnings growth. In computing the expected returns for stocks, what matters is the starting price, earnings, dividends (the portion of earnings distributed to shareholders), earnings growth and changes in P/E. As you might expect, low starting prices, high earnings and dividends, high growth, and P/E expansion are all good for future stock returns.
The models we use when investing are complex, but a simple argument makes the point. The expected return for a Treasury bond held to maturity is equal to its yield. Similarly, the expected return for a stock equals its earnings per share (EPS) divided by its price—its earnings yield—if the company has no growth prospects and therefore returns all of its earnings to shareholders. If the company does have growth prospects, it would retain some of its earnings to fund growth. In that case, the expected return equals the dividend yield plus dividend growth. If the company pays out a constant share of earnings as dividends, dividend growth equals earnings growth.
Let’s apply this framework to the S&P 500 Index’s price level of about 1,300. Consensus forecasts call for the index to have $104 in earnings per share this year. If the companies in the index didn’t xpect any growth, they would pay out all their earnings as dividends, and earnings and dividends wouldn’t grow. The S&P 500’s dividend yield would be 8%, as the first row of the display below shows.
If the P/E remained unchanged, the total return would also be 8%, but both the S&P 500 and the Dow would stay at their current level. While a flat index price might be disappointing, we think most investors today would probably welcome an 8% return on investment.
Of course, the companies in the S&P 500 do retain a portion of their earnings to finance growth, so the index’s dividend yield is slightly above 2%, rather than 8%, as the second row of the display shows. What kind of earnings growth should we assume?
What About Growth?
Historically, earnings and the stock market have grown with the economy over time, although they can diverge for several years at a stretch, particularly if market euphoria drives stock prices to very high multiples of earnings or if gloom drives stock prices to low multiples. Nominal US GDP, which includes inflation, has grown 7% a year on average since 1947—and so have the S&P 500’s earnings and price. (GDP growth is more commonly quoted in real, or inflation-adjusted, terms. We use nominal growth here to match data for earnings growth and the stock market.)
The three key variables that drive both economic growth and earnings growth over the long term are inflation (which increases the nominal value of economic output), population growth (which boosts the number of people consuming and producing goods) and productivity (which increases the output per person or per unit of capital).
Inflation is widely expected to average about 3% over the long term; population growth, to average about 1%; and productivity, to continue to rise about 2% per year. Since 3% + 1% + 2% = 6%, 6% is a plausible long-term economic growth forecast; it is actually below both the postwar average and the International Monetary Fund’s projections for the next five years.*
So let’s assume 6% economic and earnings growth. With a constant dividend payout ratio, this would lead to 6% dividend growth. Eventually, this growth rate would probably make investors less gloomy, and the market would rise from its current low level of 12.5 times earnings.
If the S&P 500’s P/E rose to 15—halfway back to its average of 17.6 since 1970—the index’s expected return would be 9% per year. At that rate, the S&P 500 would reach 2,000 in five years. The Dow, which typically trades at about 10 times the S&P 500, would reach 20,000 in about five years.
But as discussed above, the market should arguably be trading at an above-average multiple, since bond yields are so low. If the S&P 500’s P/E rises to 20 times earnings as sustained growth in a low-interest-rate environment makes investors more confident, the Dow could reprice to 20,000 immediately, as the third row of the display shows.
Since most investors today would probably welcome an 8% or 9% return for the next five to 10 years (let alone an immediate market revaluation), the current limited appetite for stocks suggests that investors don’t believe in these scenarios. Most likely, they don’t believe in the consensus forecast of $104 in earnings per share this year or 6% economic growth. So let’s examine the implications for stock returns of lower earnings and slower economic growth.
What If Earnings Fall or GDP Growth Slows?
Many people expect earnings to decline because margins are far higher than usual. If corporate spending picks up from the unusually low levels of recent years, margins would fall, and that could drive down earnings.
We think it’s reasonable to expect margins to decline somewhat—although not necessarily to their historical average. But for the sake of argument, let’s look at what would happen if margins declined from 9.5% today to their long-term average of about 6.75%.
Even in this scenario, the S&P 500 would reach 2,000 and the Dow would reach 20,000 in about 10 years. Applied to current revenues, 6.75% margins would reduce S&P 500 earnings by about 30%—to $74, as the fourth row of the display shows.
While there would likely be a severe market pullback initially, if normal economic growth resumed and P/E ratios normalized, the S&P 500 would have a 5% total return and reach 2,000 in 10 years.
But the global economy is now weak, and the European sovereign-debt crisis could end up being a drag on economic growth for years. What if Europe and theUSenter a lengthy period of disinflation? That’s possible, particularly if policymakers are unsuccessful at addressing the world’s serious macroeconomic problems.
So let’s perform a stress test and assume inflation of only 1%, population growth of 1% and no productivity growth at all. That would give us nominal GDP growth of just 2%. A recent survey of professional forecasters said there’s less than a 10% chance that economic growth will be that slow over the next three years.**
What would these dismal economic forecasts imply about future earnings growth and stock returns? If we assume the S&P 500 earns $74 per share this year, 2% growth would still get us to a 4% annualized market return if the market P/E ultimately returns to average, as the fifth row of the display shows. At that rate, it would take 20 years for the S&P 500 to reach 2,000 and the Dow to reach 20,000. Such returns are hardly enticing, but they are still likely to exceed bonds.
Of course, stock-market returns could be worse than 8% (or 4%), particularly in the short term. S&P 500 earnings could fall below $74, and anxiety could cause market valuations to drop even further below normal; both happened in early 2009. Other market shocks are also possible. For example, very high inflation with slow growth could cause price-to-earnings multiples to contract.
But market returns could also be better. Our stress test incorporated draconian assumptions—a 30% drop in earnings plus no productivity growth at all, a very rare occurrence over a 10-year period. Human ingenuity has led to remarkably persistent and steady productivity growth in the postwar period. In recent years, new technology and globalization have driven productivity growth. In the future, these trends and others not yet imagined are likely to continue to drive it.
Faced with uncertainty and traumatized by losses in recent years, investors who are avoiding stocks appear to be assuming that the worst outcomes are highly likely to occur. Or, perhaps, they’ve just lost their stomach for market volatility and are prizing near-term stability over potential long-term gains.
In my next post, I will compare the likely range of outcomes for stocks and bonds.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer for Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.
*World Economic Outlook: Growth Resuming, Dangers Remain, International Monetary Fund, April 2012
**“Survey of Professional Forecasters,” Federal Reserve Bank of Philadelphia, May 11, 2012
Copyright © AllianceBernstein
Tags: Alliancebernstein, Chief Investment Strategist, Company Earnings, Consensus Forecasts, Dividend Growth, Dividend Yield, Dividends, Earnings Growth, Earnings Per Share, Future Stock, Growth Prospects, Intrinsic Value, Premise, Price Earnings, Shareholders, Stock Market, Stock Prices, Stock Returns, Thin Air, Treasury Bond
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Tuesday, August 14th, 2012
by Don Vialoux, EquityClock.com
Upcoming US Events for Today:
- Retail Sales for July will be released at 8:30am. The market expects an increase of 0.3% versus a decline of 0.5% previous. Excluding Autos, the market expects an increase of 0.4% versus a decline of 0.4% previous.
- Producer Price Index for July will be released at 8:30am. The market expects an increase of 0.2% versus an increase of 0.1% previous. Core PPI is expected to increase by 0.2%, consistent with the previous report.
- Business Inventories for June will be released at 10:00am. The market expects an increase of 0.2% versus an increase of 0.3% previous.
Upcoming International Events for Today:
- French GDP for the Second Quarter will be released at 1:30am EST. The market expects a year-over-year increase of 0.2% versus an increase of 0.3% previous.
- German GDP for the Second Quarter will be released at 2:00am EST. The market expects a year-over-year increase of 1.0% versus an increase of 1.2% previous.
- Great Britain Consumer Price Index for July will be released at 4:30am EST. The market expects a year-over-year increase of 2.3% versus 2.4$ previous.
- Euro-Zone GDP for the Second Quarter will be released at 5:00am EST. The market expect a year-over-year decline of 0.5% versus no change (0.0%) previous.
- German Economic Sentiment Survey for August will be released at 5:00am EST. The market expects –18.5 versus –19.6 previous.
Recap of Yesterday’s Economic Events:
Equity markets traded mixed on Monday during a low volume session that saw the S&P 500 trade on either side of the 1400 mark. Volume has been a significant factor in recent trade, showing some of the lowest levels in years. Monday was no different with the S&P 500 ETF (SPY) showing the lowest volume day since April 25th 2011, approximately the 2011 peak. Volume has clearly been problematic as it provides evidence of a lack of conviction to equities; investors are showing no impetus to buy or sell. Investors are clearly waiting for a catalyst, preferably in the form of central bank easing to give equities a quick boost, despite how bad economic fundamentals get. The sustainability of this is obviously questionable.
Equity markets have had a substantial run since the low set at the beginning of June. The S&P 500 has added over 140 points from the low of 1266 to the recent high of 1407. Resistance is now at hand, as presented by the March and April peaks. Reaction to this peak will be critical in determining the strength behind this market. Rejection from this level could chart a double top, which would likely follow with a significant selloff. A healthy breakout, ideally accompanied by a pickup in volume, could see the continuation of this rally into the fall, a period that is typically negative on a seasonal basis. An increase in the number of stocks breaking out to new 52-week highs is an ideal tell to hint of a breakout to come. Unfortunately, the number of stocks breaking to new 52-week highs has been declining since the start of July, a situation similar to what was realized from February through April of this year in which equity market trends remained positive, but momentum deteriorated prior to a peak. This divergence compared to recent price activity could be warning of a near-term peak in equities.
World equity benchmarks are also approaching a level of resistance presented by a declining long-term trendline. Reaction to this point of resistance is expected, potentially bringing an end to the bullish rally that has remained intact for two and a half months. Descending triangle patterns, potentially a bearish setup, can also be derived from the charts, suggesting negative things ahead for equities. June’s lows will be critical point to watch upon any pullback from the recent intermediate positive trend.
Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.80. The ratio is back within the bounds of the falling wedge pattern.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
- Closing Market Value: $12.36 (down 0.08%)
- Closing NAV/Unit: $12.37 (down 0.15%)
|2012 Year-to-Date||Since Inception (Nov 19, 2009)|
* performance calculated on Closing NAV/Unit as provided by custodian
Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.
Copyright © EquityClock.com
Tags: Amp, Business Inventories, Consumer Price Index, Conviction, Core Ppi, Decline, Don Vialoux, Economic Events, Economic Sentiment, ETF, ETFs, Euro Zone, GDP, German Gdp, great Britain, Impetus, Producer Price Index, Report Business, Retail Sales, Second Quarter, Thackray, Trendline, Volume Session
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Tuesday, August 14th, 2012
Conjuring images of Jack Nicholson in ‘A Few Good Men’, Alan Simpson laid out the sad and terrible truth that none of us or our politicians can handle in a very direct and sincere interview with Bloomberg TV’s Deirdre Bolton. “Medicare costs stand to squeeze out the rest of domestic government spending,” Simpson said, “it is on automatic pilot. It will use up every resource in the government.” Simpson also said that the current path of debt, deficit and interest is “totally unsustainable” confirming once again the facade that his 18 years in Washington proved to him that he “never saw any projection of any economist ever come true.” From Paul Ryan’s plan to the ‘simple math’ of CBO budget projections, and whether older Americans should be afraid, Simpson pulls no punches as he sums up American society thus: “we don’t care about our money, all we want is more money for our money.”
Simpson on Paul Ryan and whether older Americans should be worried about his plan to rework Medicare:
“Don’t worry about that generation. Worry about yours. Let’s get serious here. These old cats are taking care of themselves. Nothing that has ever been suggested here, whether it is Simpson-Bowles or the gang of six or the gang of eight has a thing to do with butchering up old people at this time. You either get on a path of solvency. I mean, what is the purpose of this whining and moaning about social security where if you do nothing, you will wobble up to the window to get your check in 2033 and it will be 23% less. Medicare is on automatic pilot. It has no cost containment procedures in it until about 10-years out and then we’ll ignore them. Anybody with a brain has to figure that you have a situation where 1,000, 10,000 people turning 65. You have obesity. You have one person that weighs more than the other two. You have Diabetes A and B. You’ve got to do something with tort reform. You’ve got to do something with doctors and hospitals. Come on. And the guy who can get an operation to buy your building does not even get a bill for $200,000 with a heart operation. Let’s get serious.”
On those who say that Ryan’s plan will trickle down and hurt the people that will need support the most.
“If they read the report that was signed on to by five Democrats, five Republicans, one Independent, 11 of the 18 of us, 60%, which Durbin said, ‘I do not like this at all. I hate it like the devil hates holy water.’ Let me tell you, ladies and gentlemen. Either you start to do something now, or pay me now or pay me later. This country is on a trajectory of debt, deficit and interest that is totally unsustainable, unconscionable and totally predictable. If everybody wants to talk about old people and the kiddies and use the stuff that Dave Axelrod will shower on the American people while Obama’s plan, pretty sweet — have a go at it. It is your country.”
On whether Simpson-Bowles accounted for the slowing economy:
“We put in there that we recognize the nature of a fragile recovery. It’s all in there. I always say to people, when everything else fails, read the damn thing. It’s 67 pages in English. It talks about shared sacrifice and skin in the game and going broke. There is no mystery to what it is. Don’t forget, the president asked for $4 trillion. Are they hammering him? No. He said, I want to take $4 trillion in 12 years. Simpson-Bowles wants to do $4 trillion in 10. So grab hold, no specifics at all. The reason they hammer away is because we were solidly specific. We talked about the tax code, which is $1 trillion which is used by only about 10% of the American people. The little guy has never heard of the stuff in there. It goes to the wealthiest people and the smoothest cats that have the best lobbyists to stick it in there with no oversight ever.”
On Ryan’s plan and its call for huge cuts on almost every piece of domestic spending:
“If you want to go into that stuff, we will never get anywhere. It does not make any difference. Let me tell you. Medicare is on automatic pilot. It will use up every resource of the government and squeeze out all the things you mentioned. They will be completely squeezed out. The discretionary budget will be borrowed. We are borrowing $3.6 billion per day. For every dollar we spend, we are borrowing 41 cents. We owe $16 trillion and no one understands what that is. If you want to get to the old playbook out and use infrastructure, airplanes and all that stuff, that is great. You will not even see it because of what will happen with Medicare. You will not even perceive it. It will not come to pass. All the things you love will not come to pass.”
On the CBO’s budget projections:
“I have always said if you torture statistics long enough they will eventually confess. I was in Washington for 18 years and never saw any projection of any of economist ever come true in 18 years. The next year, greater growth will be this — never happened. This will happen — GDP. All you have to do is use the math. We don’t use Powerpoint. We do not use graphs. All use is your head. If you want to go into all of the horror stories using emotion, fear, guilt, racism, class warfare, you can kiss it off. It is your country.”
On whether it’s possible to reach a compromise that is good for society:
“I hope so. You see, the thing is, the people that will control this debate do not have anything to do with the things to you and I are talking about right now. The people who will control this are ‘the markets.’ And the markets will say, and they have every reason to say it, the chaos between Election Day on November 6 and December 31 where there will be $5 to $7 trillion washing around ready to go somewhere. If you go too far one way, you end up recession. You have to do some balance and all you have to do is a plan. We have it in legislative language. It is circulating among a very good group of Democrats and Republicans. You do a plan and the markets will lay off of you. If you don’t, they will say very simply, ok. We do not care about Republicans. We do not care about Democrats or Obama, or Romney, or Biden, or Ryan. We care about our money and we want more money for our money. And they will ask for more interest. 1% of interest will knock this country on its face. Where is everybody? I mean, it is absolutely nuts. When it happens, interest rates will kick up. The guy who gets hurt the worst — the little guy. The little guy that everybody talks about day and night. What goofy, goofy hypocrisy.”
Tags: Alan Simpson, Automatic Pilot, Bloomberg Tv, Budget Projections, Cost Containment, Deirdre Bolton, Economist, Facade, Few Good Men, government spending, Jack Nicholson, Medicare, Medicare Costs, Obesity, Old Cats, Paul Ryan, Politicians, Punches, Solvency, Tort Reform
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Tuesday, August 14th, 2012
Invest with the Best?!
by Jeffrey Saut, Chief Investment Strategist, Raymond James
August 13, 2012
“Finding the best person or the best organization to invest your money is one of the most important financial decisions you’ll ever make. It’s also one of the toughest. The right manager for someone else may not be the right manager for you, nor can you reasonably expect to find many objective, or even reliable, sources to help you narrow your choices. You will be bombarded with figures, charts, and statistics that seek to sell you on each adviser’s services … the sad fact is that too often you cannot even believe what has been presented to you.”
… Claude N. Rosenberg, Jr.
I have been a “fan” of the astute Mr. Rosenberg ever since hearing him speak back in the 1970s. Many will remember him as the founder of the San Francisco-based money management firm that used to bear his name, Rosenberg Capital Management, before changing its moniker to RCM Capital Management. Others will remember him as the author of numerous books on financial matters, one of which was Investing with the Best, which holds the above quote and deals with the daunting task of selecting an investment manager. Given the plethora of investment managers, each with their own investment philosophy and style, picking a manager is difficult. That’s why many individuals’ selection process consists of nothing more than looking at a portfolio manager’s track record for the past few years. We think such a simplistic approach is a mistake.
Apparently, Jeremy Grantham, eponymous captain of the money management firm Grantham, Mayo, Van Otterloo & Co., agrees. To reprise some of his thoughts: “Ninety percent of what passes for brilliance, or incompetence, in investing is the ebb and flow of investment style (i.e., growth, value, foreign vs. domestic, etc.). Since opportunities by style regress, past performance tends to be negatively correlated with future relative performance. Therefore, managers are often harder to pick than stocks. Clients have to choose between fact (past performance) and the conflicting marketing claims of various managers. As sensible businessmen, clients usually feel they have to go with the past facts. They therefore rotate into previously strong styles, which regress [to the mean], dooming most active clients to failure.”
This is where Raymond James’ Asset Management Services (AMS), as well as our Mutual Fund Research Department, can help. As unbiased intermediaries, these departments are committed to aiding clients in the hiring of an investment manager who most closely aligns the manager/mutual fund with the client’s views on the various markets, as well as their risk tolerance. To this point, I journeyed to the cooler climes of Boston last week to escape the Florida heat, speak at a national conference, and visit with over 20 portfolio managers (PMs). My first visit was with the folks at Pioneer Funds where I met with Marco Pirondini (Head of Equities) and his team, as well as Ken Taubes (Chief Investment Officer). I have spoken with Ken a number of times and find his wisdom both on stocks and bonds to be invaluable. Because of his long tenure as a bond manager, I was surprised when he opined that interest rates should bottom between now and year end. Given that “higher interest rate” view, I was particularly interested in speaking with Jonathan Sharkey who manages the Pioneer Floating Rate Fund (FLARX/$6.88) and the Multi-Asset Ultrashort Income Fund (MAFRX/$10.04). In a rising rate environment these two funds should fair pretty well. I discussed Jon’s investment style/strategy over dinner and found it to be closely aligned with mine. I was also interested in the Pioneer Research Fund (PATMX/$10.64) and will be vetting it, along with other Pioneer funds, over the coming months.
After a few more meetings with hedge funds that afternoon, I spent most of Wednesday with Fidelity. My first meeting was with Jurrien Timmer, co-portfolio manager along with Andrew Dierdorf, of the Fidelity Global Strategies Fund (FDYSX /$9.18). To me, FDYSX is tantamount to a global macro fund because it can “go anywhere” and “do anything.” That means it can invest in just about everything. Moreover, I like the fact that the fund has a technical analysis overlay to it, as well as a tactical leaning, since tactical is what has been working in this manic depressant market. Next was Charles Myers, captain of the Fidelity Small Cap Value fund (FCPVX/$15.27). Chuck told me that while he is really good at picking stocks, he is less confident with his market timing and sector selection abilities. Accordingly, he spends his days looking for good companies and thinking about portfolio construction. Indeed, he adds value to the investment equation through portfolio construction. He does run a concentrated portfolio (~70 names) and does adjust his turnover rate to take advantage of when the markets are more dynamic.
Fidelity Select Health Care Fund (FSPHX/$136.14) is managed by Edward Yoon and has provided very good risk adjusted returns over time. My meeting with him was informative as he thinks insurance companies and PBMs are part of the healthcare solution. Strategically, Eddie thinks the healthcare system has never let customers know what things cost, but that’s changing because employers are moving healthcare risks from their balance sheets to the employee’s balance sheet. This should be a boom for companies that provide consumers with the ability to analyze price competition between vendors. He also suggested there is going to be a shift from public to privatized Medicare. A couple of names he mentioned covered by our fundamental analysts were: Cerner (CERN/$71.12/Outperform) and Nuance (NUAN/$23.53/Strong Buy). My last meeting was with Steve Wymer, who told me the S&P 500 investment style is too conservative for a growth fund and the Nasdaq Composite Index is too aggressive, so he runs The Fidelity Advisor Growth Opportunity Fund (FAGOX/$40.87) somewhere in between. He thinks we are somewhere in the mid-cycle of a recovery provided Euroquake doesn’t derail us. Dinner Wednesday was with the good folks from Fidelity.
The next morning I arrived at MFS, which is an active global asset manager that employs a uniquely collaborative approach to build better insights for our clients. Their investment approach has three core elements: integrated research, global collaboration, and active risk management. Of course, “risk management” is a big thing with me for the essence of portfolio management is the management of risk, not the management of returns. My meeting was with Jim Swanson (Chief Investment Strategist) and eight PMs/analysts. Jim began by stating that people he meets in everyday life talk about how bad the stock market is. He then “closed” that comment by noting the S&P 500 is up nearly 12% YTD, while the NASDAQ Composite is better by ~16%. Moreover, when you impact those returns for the almost non-existent inflation, the “real” returns are awesome. The rest of the conversation was about the topics du jour (government, Euroquake, the fiscal cliff, etc.). Regrettably, I did not have the time to meet with my friend Thomas Melendez, who manages my favorite international fund, MFS International Diversified Fund (MDIDX/$13.27), or the PM of the MFS New Discovery Fund (MNDAX/$20.15), but that will happen next trip.
My final meeting was with Putnam to reconnect with Bill Kohli, portfolio manager of the Putnam Diversified Income Trust (PDINX/$7.65) that has so often been featured in these comments. It is one of only two bond funds I have featured over the years because I think PDINX is positioned for a higher interest rate environment. The fund has a 5.8% yield with zero duration. The fund employs 70 – 80 different strategies to pursue a diverse range of opportunities. For example, the fund is “long” non-agency RBMS (Residential Mortgage Backed Securities), but hedges that position with agency IOs (Interest Only). Hence, to lose money on those positions would require home prices to collapse over 50% from their already depressed prices. And then there was David Glancy and his Putnam Equity Spectrum Fund (PYSAX/$28.04). Hereto David thinks a lot about portfolio construction and combines stocks, bonds, bank loans, convertibles, opportunistic short-selling, and cash to produce returns. To this cash point, I was taught early in this business that cash is indeed an asset class for to assume the investment “opportunity sets” that are available today are as good as those presented next week, next month or next quarter is naive; and, you need to have some cash to take advantage of those opportunities. Evidently David thinks that as well because his cash position has varied from 44.4% in 2Q09, to 14.8% in 3Q10. David loves stocks and I could talk individual companies with him for hours. As always, all of these mutual funds should be vetted before purchase.
As for the stock market, not much really happened in my absence as the D-J Industrials (INDU/13207.95) experienced their tightest weekly trading range since January 2007. Of course, that was not the case a year ago when our sovereign debt was downgraded and equities collapsed 6.66% (the mark of the devil as well as the intraday low of March 6, 2009 where the new bull market began). Indeed, what a difference a year makes. Nevertheless, the rotation away from the defensive sectors and into Materials (+2.83%), Energy (+2.34%), and Technology (+2.10%) is an interesting observation because when the defensive sectors lead it is not indicative of a healthy and sustainable rally. Said rotation reinforces my belief that the upside breakout above the 1360 – 1366 level is for real and suggests we are finally setting up for another push to the upside. The real battle should be waged at the April highs of 1422. That said, the rally that began on June 4th has left ALL of the macro sectors overbought in the short term. It has also left the SPX at the top of the parallel chart channel (read: resistance) referenced in last Monday’s letter. Consequently, a pause or pullback attempt is not out of the question. Support remains in that 1360 – 1366 zone for the SPX.
The call for this week: The good: stocks are hanging in pretty well after an 11% rally from the June 4th low, earnings are still beating estimates by ~60%, earnings revisions are rising again, economic reports are strengthening, European equities have rallied while their sovereign yields have declined, the SPX continues to track the typical election pattern (see chart from the sagacious Bespoke organization), and there was a rare “buy signal” from the Bob Farrell sentiment indicator. The bad: all sectors are overbought, companies are beating revenues estimates by only 48.3%, the number of new highs is shrinking, upside momentum has waned, we are at the top of a parallel channel in the SPX chart. The ugly: forward earnings guidance is negative by 5.5%, the presidential election rhetoric is getting nastier, commercial hedgers have moved close to their most extreme short position in years, the Volatility index (VIX/14.74) is below 15 (read: no fear), gasoline had its largest two-week rise this year (+$0.18), and the list extends. Nevertheless, I think this is the pause that refreshes and not the start of a big decline.
Copyright © Raymond James
Tags: Capital Management, Chief Investment Strategist, Claude N Rosenberg, Daunting Task, David Rosenberg, Ebb And Flow, Financial Decisions, Gluskin Sheff, Grantham Mayo Van Otterloo, Investment Manager, Investment Managers, Investment Philosophy, Investment Style, jeffrey saut, Money Management Firm, Moniker, oil, Portfolio Manager, Raymond James, Relative Performance, Reliable Sources, Rosenberg, Rosie, Sad Fact, Saut, Simplistic Approach
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