The Death of Equities Redux

Monday, July 30th, 2012

by Patrick Rudden, AllianceBernstein

A famous Business Week article, “The Death of Equities,” concluded, “Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared.” Sound familiar? The article was published in August 1979.

The Business Week article discusses how, with “stocks averaging a return of less than 3% throughout the decade,” investors were fleeing equities in favor of cash and real assets such as property, gold and silver. “Further,” it states, “this ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries and booms….For better or worse, then, the US economy probably has to regard the death of equities as near-permanent condition.”

The primary economic problem back then was high inflation, which had devastated returns for  stocks and bonds but had greatly buoyed the value of real assets such as gold. Of course, Paul Volcker, then Chairman of the Federal Reserve, was soon to unleash his war on inflation, which set the stage for a prolonged period of strong equity and bond market returns.

But the article says other factors contributed to the death of equities: “The institutionalization of inflation—along with structural changes in communications and psychology—has killed the U.S. equity market for millions of investors. We are all thinking shorter term than our fathers and our grandfathers.”

Inflation (at least of the consumer-price variety) has not been the problem it was in the 1970s, but I would argue that structural changes in communications and psychology have been, if anything, more severe. We are all subject sooner and sooner to more and more information. And, as a consequence, we are thinking shorter term than our fathers and grandfathers and, I should add, mothers and grandmothers.

Equities are no more likely to be dead now than they were in August 1979. Indeed, the expected return advantage of stocks versus government bonds is unusually high at present, in our opinion. However, shorter-time horizons may require us to revisit our investment portfolios. In addition to longer-horizon strategies like value and growth, investors may need to consider shorter-horizon strategies, such as equity income or low-volatility stocks.

Finally, for those investors worried about the return of the inflation bogeyman, holding some exposure to real assets is a good insurance policy.

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.

Patrick Rudden is Head of Blend Strategies at AllianceBernstein.

Copyright © AllianceBernstein

Tags: Bond Market, Booms, Business Cycles, Business Week Article, Chairman Of The Federal Reserve, Economic Problem, Federal Reserve, Gold And Silver, Grandfathers, Grandmothers, inflation, Institutionalization, Market Rally, Paul Volcker, Prolonged Period, Real Assets, Recession, Rudden, Stock Market, Stocks And Bonds
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Earnings Growth—Is It Enough? (Ezrati)

Monday, May 7th, 2012

by Milton Ezrati, Lord Abbett

After two-plus years of exceeding expectations, earnings this year seem poised, at last, to reflect the plodding nature of this economic recovery. In 2010 and 2011, even as the real economy managed only a paltry 2.4% average annual rate of expansion, the earnings of S&P 500^® Index¹companies soared, rising more than 47% in 2010 and almost 20% in 2011. Such a pattern could not persist. And this year, the slow fundamentals will almost surely assert themselves. Even so, it would be a mistake to read matters too pessimistically. There certainly is nothing ominous in the pattern. It is, after all, well-established historically that earnings should come into line with slower-growing revenues in this, the third year of economic recovery. Besides, this year’s probable 10% earnings growth, though only about half 2011’s pace, is sufficient to sustain the stock market rally.

This unfolding pattern of surge and moderation is hardly surprising or new. It has, in fact, become a cyclical commonplace, a reflection of the increasingly huge operating leverage of American business. Every year, business relies more and more on machinery, facilities, systems, and other forms of technology, often in place of labor. Because the trend builds a larger proportion of fixed costs into the production model, even slight variations in revenues have an exaggerated impact on the bottom line. In the more distant past, when variable labor costs were a bigger part of the overall production equation, layoffs could reduce a significant part of overall costs and so relieve some of the strain on the bottom line in recessions, and then, when rehiring raised labor costs in recovery, the profits recovery was more muted. But operating leverage has introduced a more volatile pattern.

The dramatic effect was clear during the last recession and in this recovery so far. In 2008–09, when the real economy dropped 5.1% peak to trough over 18 months, revenues followed, but because businesses had little ability to cut costs, the full brunt of the downturn fell on earnings, which, for the S&P 500, plunged from almost $22 a share in the second quarter of 2007 to a loss of more than $25 at the end of 2008. But however much strain the operating leverage imposed in the recession, it has worked in business’s favor in this recovery. As this huge array of productive capital has come back on line, the fixed costs allowed virtually all the additional revenue to fall to the bottom line. And because profits are a small difference between revenues and costs, the small percentage revenues gain have created huge percentage changes in profits. But now, in this third year of expansion, when most of this productive capital has at last become more fully utilized, the effect of operating leverage should dissipate, forcing earnings to follow slower revenues growth more faithfully.

Still, even as 2012 fails to enjoy the remarkable earnings surges of 2010 and 2011, the outlook for this year is not entirely as depressing as some media reports imply. Earnings can still outpace the 5–6% expected advance in domestic revenues because there is still some operating leverage left in the system and because S&P companies gather more than half their revenues abroad. Europe’s recession, of course, will weigh against foreign revenue growth, but the emerging economies should more than offset Europe’s depressing influence. Though these economies, too, have slowed, and that fact has attracted a lot of attention, they still outpace the United States and other developed economies by far. China, after slowing, still registers real growth of more than 8% and India more than 6%. In nominal terms (which, of course, is the way revenues are measured), those economies should still contribute double-digit growth of their part of the 2012 S&P revenues equation. Adding to likely 7–8% overall revenues gains, the remains of operating leverage should bring S&P earnings up to about 10% in 2012.

That growth, though half last year’s pace, should nonetheless allow equity markets to hold the gains they have already made and likely rise further. Even after market gains of the last six months, valuation measures are far from stretched. Price-to-earnings multiples, after all, depending on which of the seemingly endless calculations one chooses, show a market that at worst is near its historical valuation benchmark, allowing it room to keep up with earnings at least. Since, in most other respects, valuations are still more attractive, equity price advances should exceed the earnings growth. Stocks, relative to Treasury bonds, offer valuations not seen since the early 1950s or even the Great Depression. Next to corporate bond yields, equity valuations look less dramatic, but still suggest considerable upside potential. It is noteworthy that, even today, dividend yields on many stocks atypically exceed the yields on the firm’s own bonds.

Since earnings, though slowing, are still showing substantive growth, the most conservative interpretation of valuations would suggest that equities should hold this year’s gains so far. Anything other than the most conservative interpretation suggests greater gains.

¹The S&P 500^® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.

Tags: American Business, Bottom Line, Commonplace, Dramatic Effect, Earnings Growth, Economic Recovery, Forms Of Technology, Layoffs, Lord Abbett, Market Rally, Milton Ezrati, Moderation, Operating Leverage, Production Model, Proportion, Recession, Recessions, Reflection, Stock Market, Trough
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How Rising Rates Will Affect Stocks (Koesterich)

Wednesday, April 18th, 2012

by Russ Koesterich, iShares

While recent market weakness, and the accompanying bond market rally, has tempered fears of an imminent bond market meltdown, many equity investors are still concerned about the potential impact of rising rates on US and global stocks.

This year, I expect long-term rates to rise modestly as they appear too low. Assuming the US economy continues to stabilize over the course of the year, the yield on the 10-year Treasury will likely rise to around the 3% level, roughly where it was last summer.

However, in my opinion, this probable grind higher is not a major threat to US and global stocks this year for two reasons:

Low Starting Point: It’s important to put the current yield environment in context.  Excluding the period of unusually high nominal yields in the 1970s and 1980s, the long-term average nominal yield for the 10-year note is still 5.25%, more than twice today’s level. As such, any rise in rates will be coming from historically low levels. And a rise in rates from the absurdly low to the merely low has not, at least historically, hurt stocks. Equity valuations do contract when rates are rising, but this relationship typically breaks down when rates are this low.

The Driver of Rising Rates: In the past, the reason behind why rates rise has been as important for stocks as how much rates rise. Looking forward, the coming rise in rates will likely be driven by higher real rates, not by higher inflation expectations.

When interest rates are rising due to heightened inflation expectations, stock multiples tend to contract. However, when rising interest rates are due to a rise in real, or after-inflation, rates in the context of a strengthening economy, multiples have not been hurt. In fact, over the long term, there hasn’t been a statistically significant relationship between real yields and multiples. If anything, in recent years — which have generally been characterized by too little growth, rather than too much — stock multiples have risen with real rates.

To be sure, none of above suggests that equities have become impervious to higher rates. While higher real yields probably won’t hurt multiples, a high enough rise could dampen earnings. But in my opinion, any rate rise this year should be modest and likely won’t negatively impact valuations. Looking forward, the real threat to stocks in 2012 is weak economic growth, not higher rates.

Source: Bloomberg

Copyright © BlackRock, Inc. , iShares

Tags: 10 Year Treasury, 1970s, 1980s, Bond Market, Economy, Equity Investors, Fears, Global Stocks, Inflation Expectations, Inflation Rates, Ishares, Market Meltdown, Market Rally, Market Weakness, Nbsp, Nominal Yield, Relationship, Rising Interest Rates, Russ, Valuations
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India Market and Economic Update: “Can India’s Rally Be Sustained?”

Wednesday, February 8th, 2012

Standard Chartered Securities’ Rahul Singh, Nipun Mehta, HDFC’s VK Sharma, and O(x)us Securities Chairman, Surjit Bhalla, weigh in on India’s powerful market rally, and its sustainability, followed up with a discussion on the India GDP growth estimate for 2011-2012 due at the end of the February 7 trading session.

Source Videos:

Rahul Singh, Head of Equity Research, Standard Chartered Securities
http://profit.ndtv.com/video/Experts-on-GDP-growth-estimates-and-stock-market…

Nipun Mehta, Market Expert, and Private Banker
http://www.ndtv.com/video/player/top-tips/market-rally-might-not-sustain-on-p…

VK Sharma, Business Head, HDFC Securities
http://profit.ndtv.com/video/Market-uncertainty-over-buy-power-stocks-on-dips…

Surjit Bhalla
http://profit.ndtv.com/video/Experts-on-GDP-growth-estimates-and-stock-market…

iShares S&P CNX NIFTY INDIA INC (TSX:XID)

MarketClub’s “Trade Triangles” charting shows that its daily buy signal kicked in recently at $16.86 (short term buy signal), its weekly signal kicked in at $16.20 (near-term buy signal), and the monthly signal (a longer term signal) kicked in at $19.27.

Tags: Business Head, Equity Research, GDP Growth, Growth Estimates, Hdfc, India Inc, India Market, Market Expert, Market Rally, Market Uncertainty, Marketclub, Ndtv, Ndtv Com, Nipun Mehta, Power Stocks, Private Banker, Rahul Singh, Trading Session, Video Experts, Video Market, Video Player, Vk
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Global Stock Market Moving Averages: Tide Lifts Some Boats More than Others

Thursday, January 12th, 2012

I often use the 50-day moving average as an indicator of the secondary trend of a stock market, and the 200-day moving average as an indicator of the key primary trend. Specifically, one would like to see a stock market index trading above both these measure, but importantly above the longer-term 200 day line.

I have analyzed the numbers using yesterday’s closing levels, and the following are a few key observations:

• The global stock market rally since the third week of December has pushed most benchmark indices above their 50-day moving averages. Among the bigger markets, Japan and China are notable exceptions.
• Notwithstanding the rally, most markets are still trading below their 200-day averages.
• However, there are a few exceptions. Among mature markets, these include Ireland, U.S., U.K., Switzerland and Denmark.
• As far as emerging markets go, the ones trading above the 200-day averages are: the Philippines (that has just made an all-time high), Venezuela, South Africa, Mexico, Indonesia, Thailand and Brazil.
• Some of the worst performing mature markets, according to the 200-day lines, are debt-ridden countries such as Greece, Portugal and Spain, but Japan, New Zealand and Austria are also lagging.
• The emerging markets lagging the 200-day averages by most include Pakistan, Sri Lanka, Turkey, China, the Czech Republic and India.

The tables below show the detail, with stock markets ranked from those trading the furthest below their moving averages to the ones that are the furthest above the averages.

Developed markets: ranked according to 50-day moving average

Developed markets: ranked according to 200-day moving average

Emerging markets: ranked according to 50-day moving average

Emerging markets: ranked according to 200-day moving average

Tags: Boats, Czech Republic, Denmark, Emerging Markets, Exceptions, Global Stock Market, Greece, Index Trading, Indonesia, Market Rally, Mature Markets, Moving Average, Moving Averages, Pakistan, Philippines, South Africa, Stock Market Index, Stock Markets, Tide, Venezuela
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U.S. Equity Market Radar (December 28, 2011)

Tuesday, December 27th, 2011

U.S. Equity Market Radar (December 28, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 3.74 percent. All ten sectors of the index increased. The best-performing sector for the week was energy, which gained 5.44 percent. Other top-three sectors were financials and industrials. Technology was the worst performer, up 2.01 percent. Other bottom-three performers were consumer staples and consumer discretion.

Within the energy sector the best-performing stock was Nabors Industries, up 8.96 percent. Other top-five performers were Baker Hughes, Murphy Oil, Marathon Oil, and Tesoro.

Strengths

• The healthcare facilities group was the best-performing group for the week, up 13 percent, led by the group’s single member, Tenet Healthcare. This increase may be an example of a low-priced stock with a relatively high beta (1.20) reacting to a stock market rally this week.
• Three groups related to home sales and home construction outperformed this week. The building products group, the household appliances group, and the home furnishings group rose 11 percent, 10 percent, and 9 percent, respectively. Sales of existing homes in the U.S. rose in November to a 10-month high. Housing starts in the U.S. reached a 19-month high in November. Sales of new U.S. homes rose in November to a seven-month high.
• The education services group gained 9 percent. This week the U.S. Department of Education announced the appointment of Georgia Yuan as Deputy Under Secretary, replacing James Kvaal who transitioned to President Obama’s reelection team earlier this year. A major brokerage firm report stated its belief that this appointment will help the Education Department to increasingly shift to an approach that is based on outcome metrics rather than on ideology.

Weaknesses

• The home furnishings retail group was the week’s worst-performer, down 6 percent, led by its single member, Bed Bath & Beyond. The retailer sold off after reporting third-quarter earnings above the consensus and revenue slightly below the consensus. The earnings figure was aided by a lower tax rate. Same-store-sales were below consensus for the quarter, and sales comparisons become more difficult in the current quarter.
• The systems software group underperformed, down 4 percent, led down by Oracle which reported fiscal second quarter earnings and revenue below the consensus estimates.
• The airlines group lost 1 percent, led by its single member, Southwest Airlines. This week, the Federal Aviation Administration (FAA) released new rules on pilot fatigue. The rules, which take effect in two years, reduce the hours that pilots can work and give them longer rest breaks. The new rules will likely result in higher costs for the airline industry.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Baker Hughes, Brokerage Firm, Consumer Staples, Deputy Under Secretary, Domestic Stock Market, Education Services Group, energy sector, Facilities Group, Healthcare Facilities, Household Appliances, marathon oil, Market Radar, Market Rally, Murphy Oil, Nabors Industries, Outcome Metrics, Performing Group, Retail Group, Tenet Healthcare, U S Department Of Education
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Hedge Fund Redemptions Surging?

Wednesday, December 14th, 2011

Hedge Fund Redemptions Surging?

by Leo Kolivakis, Pension Pulse

Here is something that caught my attention. Svea Herbst-Bayliss of Reuters reports, Hedge fund redemptions surge after losses:

Hedge fund investors finally seem fed up.

After months of heavy losses, big and small clients asked funds to return $9 billion in October. That number is three times as large as the $2.6 billion (1.7 billion pounds) they pulled out in September, data from BarclayHedge and TrimTabs Investment Research show.

The dramatic jump in redemption requests shrank the industry to $1.66 trillion, its lowest level in nearly two years and well below its $2 trillion peak, the researchers said in a report released on Monday. The redemptions are the largest since July 2009 when $17.8 billion was removed.

Hundreds of hedge funds had a deadline for clients to pull out money in October and dozens of clients opted to use it after seeing five straight months of losses.

Even some of the industry’s biggest stars like John Paulson, who have hit home runs with bets against the housing market and on gold, have sunk into the red. Paulson’s main Advantage fund was off nearly 50 through the end of September and his investors had until October 31 to say if they wanted to exit.

And while a strong stock market rally helped put most managers into the black at the end of October, the gains did not last long with average losses of nearly 1 percent reported in November, industry data show.

“Investors seem to have lost patience with lackluster hedge fund returns,” said Sol Waksman, founder and President of BarclayHedge.

For years investors gave their managers lots of time to let their strategies work. Now they are becoming less generous, especially as they debate whether lackluster returns can offset hefty fees where managers often take 20 percent of the gains and add on another 2 percent management, investors and managers have said.

Investors pulled $2.6 billion out of so-called long short funds that pick bet on and against stocks, the strategies where most of the industry’s money is invested.

Macro funds which make big bets on currencies, interest rates, and commodities faced redemptions of $1.8 billion and funds specializing in emerging markets strategies saw investors ask for $1.6 billion back. Funds that apply several strategies to the same pool of capital, so-called multi-strategy funds, took in just over $1 billion in new money.

Meanwhile investors also slowly returned to merger arbitrage hedge funds, after pulling money out for months, the researchers said.

“This is the second-straight inflow in this strategy, which had considerable outflows in the previous 10 months, Leon Mirochnik, analyst at TrimTabs said. “These funds posted the heaviest outflow in the past 12 months at over $5 billion (31.8% of assets) while posting the second highest return out of all categories at 2.6%.”

Go back to read my recent comment on hedge funds’ fading star. Could it be that institutional investors are finally waking up to the harsh reality that most hedge funds offer mediocre results and are nothing but large asset gatherers? Is this going to be like December 2008 when hedge funds got clobbered and funds of funds faced extinction?

I doubt it. Most redemptions are already done but now we are realizing why losses in Q3 2011 were so savage and why stock markets remain moribund. Don’t know if we’ll see a Christmas rally after all; this year could be a total writeoff. But don’t be surprised if hedge funds come back with a vengeance, especially if markets pick up in the first quarter of 2012.

One hedge fund that is not facing redemptions is Steve Cohen’s SAC Capital. Surprisingly, Cohen came out to state that insider trading rules are “vague”:

Hedge fund billionaire Steven A. Cohen in sworn testimony earlier this year called the rules on insider trading “very vague” and said sometimes it’s a “judgment call” as to whether a tidbit about a public company is inside information.

The founder of SAC Capital Advisors LLC, one of the hedge fund industry’s best-known firms, offered up his views on insider trading during two days of deposition testimony in February and April this year as part of a long-running civil lawsuit filed by Canadian insurer Fairfax Financial.

It’s rare for Cohen to speak publicly and even rarer for him to share his views on something as controversial as insider trading. Cohen’s insights are revealing not just because of his status as an industry titan, but because his $14 billion firm continues to draw attention in an ongoing investigation by U.S. authorities into insider trading.

In the deposition, an extended excerpt of which was obtained by Reuters, the 55-year-old trader says he often leans on his fund’s lawyer to determine whether something constitutes inside information and admits to being not well-versed in SAC Capital’s own internal compliance manual.

“The answer is when you’re trading securities, it’s a judgment call,” said Cohen, during the deposition that spans more than 600 pages. “Whatever the compliance manual says, it probably doesn’t take into account every – every potential situation.”

(For more from the transcript see: link.reuters.com/vat55s)

The deposition was taken in connection with a lawsuit filed in 2006 by Fairfax, alleging SAC Capital, Kynikos and other traders took part in a so-called short conspiracy.

The lawsuit alleges the hedge funds bet against Fairfax shares and then spread negative stories about the company in hopes of driving down the stock price. Recently, SAC Capital won a motion to be dismissed from the insurer’s lawsuit but Fairfax’s claims of improper trading against other hedge funds and traders continues.

Reuters petitioned the court to obtain the transcript. SAC Capital and its lawyers had sought to keep the excerpts of Cohen’s deposition sealed, arguing that the contents were trade secrets and information that would be useful to competitors.

A Cohen spokesman declined to comment.

In the deposition, Cohen acknowledges that in the aftermath of Galleon Group founder Raj Rajaratnam’s arrest on insider trading charges in October 2009, his public relations firm suggested he begin reaching out to some reporters to burnish his image and “dispel” rumors of improper trading.

In particular, Cohen talked about a December 2009 story in The New York Times on SAC Capital and a subsequent June 2010 profile of Cohen and his wife Alexandra in Vanity Fair.

“There are rumors and what we wanted to do was dispel any notion of that,” he said.

When asked by a Fairfax lawyer what rumors he was referring to, Cohen responded: “The rumors you just stated, that people weren’t sure how we conducted our business.”

In the questioning, Cohen comes off as controlled and well-prepared to engage in a sometimes testy back-and-forth with Fairfax’s lawyer, Michael Bowe, over the dividing line between what constitutes permissible and improper trading.

Cohen says the rules on what constitutes inside information are “very vague” and sometimes it can depend on whether the information will move a stock, hurt another trader or can be obtained through another source.

For instance, Cohen said if he got a tip that an analyst is going to downgrade a stock and his fund opts to buy the stock, that is proper “because I’m on the other side of the trade.”

Cohen said what is “material” in analyzing whether or not it is inside information often depends on the circumstances.

“You know, I mean, I can argue that someone else could think that a – being short in front of a sell recommendation is a non-event because it’s not going to move the stock, and somebody else would think, you know, that’s trading on material nonpublic information regardless if it moves the stock or not,” said Cohen. “These are judgment calls.”

At one point, Cohen shows some of his frustration with all the questions from Fairfax’s lawyers about what constitutes inside information.

“We’re having this conversation for about three hours about what’s material and whatnot,” says Cohen. “It’s pretty clear that you and I have different views on it.”

In the deposition, Cohen also takes issue with the word “edge” to describe SAC Capital’s trading advantage over his rivals. Cohen says he “hates” the word and doesn’t like to use it to describe SAC Capital’s work. Yet he acknowledges the hedge fund talks about having an “edge” in some of its marketing material.

The release of a redacted version of Cohen’s deposition came after Reuters went to court to seek access to it and other documents produced in the lawsuit filed by Fairfax in a New Jersey state court.

The Cohen deposition also was recorded on videotape but the judge’s order only required the parties to make available a transcript.

A copy of Cohen’s full deposition was subpoenaed last year by the Securities and Exchange Commission, which was conducting its own investigation into Fairfax’s allegation.

Last week Reuters reported that the SEC closed its investigation in the Fairfax case with regards to SAC Capital and James Chanos’ Kynikos Associates. (link.reuters.com/xus55s)

Not sure where the SEC is going with this. Looks like they are out to get Steve Cohen but in my mind SAC Capital didn’t do anything different from what other hedge funds routinely do. Were Steve Cohen and his traders always “kosher”? Probably not, but he didn’t become one of a handful of elite hedge fund managers by getting involved in petty insider trading scams. That’s total rubbish.

The reality is that hedge fund redemptions might be surging, but true alpha is always in demand. Guys like Steve Cohen, Ken Griffin (Citadel), and Tom Meyer (Farallon Capital) are part of an elite group of hedge fund managers that know how to deliver alpha. They got whacked in 2008, but came back stronger. They will survive the next hedge fund hurricane while most of their competitors will disappear.

But for now, I wouldn’t worry too much, despite underperforming, plenty of dumb money still piling into hedge funds. Barring a European collapse, which I just don’t see happening, there won’t be another massive wave of deleveraging à la 2008 due to surging hedge fund redemptions.

Below, Vanity Fair’s Bryan Burrough, author of “Barbarians at The Gate,” talks with Bloomberg’s Margaret Brennan about Steve Cohen, the billionaire who runs SAC Capital Advisors LP in Stamford, Connecticut. Burrough wrote about Cohen for the July issue of the magazine in what is Cohen’s second-ever published interview.

Tags: Advantage Fund, Bayliss, Dramatic Jump, Fund Investors, Heavy Losses, Hedge Fund Redemptions, Hedge Funds, Hefty Fees, Home Runs, Housing Market, Investment Research, John Paulson, Market Rally, October 31, Redemption Requests, Reuters Reports, Stock Market, Trillion, Trimtabs, Waksman
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Investor Sentiment: Another Case of Selling Low and Buying High?

Wednesday, November 16th, 2011

The article below is a guest contribution by Guy Lerner, writer of the Technical Take blog.

In aggregate, investor sentiment is neutral. The “dumb money” and Rydex market timer continue to get more bullish after missing out on the bulk of the gains in October. Company insiders are not showing any great clarity as well. Nonetheless, investors want in to this market, and this can be seen by the dips being so shallow. But curiously, prices haven’t gone anywhere in two weeks. The time to be in the market and accepting market risk was back in September. At best prices are range bound (as reflected by the neutral investor sentiment) and the market is just digesting the October gains. At worst, this is just another bear market rally. Is this just another case of investors selling low and buying high? That story has yet to be written, but I suspect we will find out over the next month.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows neutral sentiment.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “There were some encouraging and discouraging signals from insiders last week. On the one hand, the number of buyers rose 78% week-over-week and the ratio of sellers to buyers narrowed from nearly 3-to-1 a week earlier to closer to 2-to-1. On the other hand, the number of sellers was the highest since the week ended May 31st. The Technology sector was the main negative driver as sentiment by one measure – our Industry Score – moved to its worst level in a year. No sector displayed bullish sentiment, although the Healthcare sector was showing some positive signs.”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicatoris green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 62.81%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

Let me also remind readers that we are offering a one-month free trial to our Daily Sentiment Report, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets and not opinions.

Source: Guy Lerner, Technical Take, November 13, 2011.

Tags: American Association Of Individual Investors, Bear Market, Bullish Sentiment, Company Insiders, Dips, Dumb Money, Extremes, Figure 1, Guy Lerner, Healthcare Sector, Investor Sentiment, Market 1, Market Rally, Market Risk, Market Timer, Marketvane, Posi, Put Call Ratio, S&P500, Technology Sector
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James Paulsen: Investment Outlook (November 2011)

Friday, November 11th, 2011

The Next Investment Catalyst?
Accelerating Economic Growth??

by James Paulsen, Chief Investment Strategist, Wells Capital Management (Wells Fargo)
November 2011

At least for the time being, the stock market seems to have survived yet another round of “Euro-Crisis Mania.” Recent policy actions announced yesterday by European officials have at least temporarily calmed fears of an imminent calamity. Most believe the rally in the S&P 500 Index to almost 1300 in the last month is due almost entirely to improvements in the European crisis outlook. While recent European developments certainly helped improve the mood of investors, we believe the recent stock market rally mostly reflects a huge reassessment of the potential recession risk in the U.S. economy.

The stock market collapsed in early August after a significant downward revision to real GDP growth in late July suggesting the pace of economic growth nearly flat lined in the first half of this year. Thereafter, the probabilities economists placed on an imminent U.S. recession rose significantly, and many prominent forecasters suggested a recession was indeed forthcoming. In recent weeks, however, a steady stream of “better-than-feared” timely economic reports from Main Street USA has calmed fears of an imminent recession. In combination with another robust corporate earnings season (which looks anything but recessionary) and capped by yesterday’s report that U.S. third quarter real GDP growth was a much stronger-than-anticipated 2.5 percent (with a robust and totally surprising real final demand growth of 3.6 percent!) has ultimately elevated investor greed beyond diminishing recession fears.

So now what? Investors have backed away from the recession cliff and the S&P 500 has returned to its approximate 1250 to 1350 trading range evident prior to the recession scare between February and July. Does the stock market remain trendless next year? Will it again come under intense selling pressure? Or is there a catalyst (beyond the notable currently attractive stock market valuation—that is, the stock market has trended sideways this year while earnings have continued to rise and competitive bond yields have declined) which would allow the stock market break out to new recovery highs?

Is Economic Growth Accelerating?

Although most have backed away from an imminent recession expectation, the consensus forecast still calls for only “muddling along” economic growth during the coming year. According to Bloomberg, the consensus economic forecast for real GDP growth is an anemic 2 percent for both the fourth quarter of this year and for all of 2012. Most believe the U.S. economy is destined for “sluggishness” since policy officials can no longer assist. Monetary officials are widely perceived as out of bullets and fiscal authorities seem helplessly gridlocked. Without another dose of stimulus, why should the economy improve?

Although policy official assistance for the economy may be limited, the private sector has adopted a policy of “self-medication” which could produce a surprising acceleration in real GDP growth next year. Exhibit 1 illustrates six sources of “stimulus” implemented in recent months which should improve economic prospects in the coming year.

Exhibit 1: Economic Self-Medication

First, the national average mortgage interest rate has declined by more than 1 percent since early this year. Long-term interest rates have declined by similar amounts on Treasury securities and on corporate and municipal bond yields. Although no policy official is responsible, long-term credit costs for many economic sectors have been significantly reduced in the last several months.

Tags: Chief Investment Strategist, Corporate Earnings, Downward Revision, Early August, Earnings Season, Economic Reports, European Developments, European Officials, Forecasters, GDP Growth, Investment Outlook, Market Rally, Outlook, Policy Actions, Real Gdp, Reassessment, Recession Fears, Steady Stream, Street Usa, Wells Capital Management, Wells Fargo
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Does the Stock Market Rally Have Legs?

Monday, November 7th, 2011

The past five weeks have witnessed stock market rallies of breathtaking proportions. At this juncture, the pressing question is whether the recovery would be sustainable, i.e. are we back in a cyclical bull market.  Let’s turn to Arthur Hill of StockCharts.com to cast light on this issue.

Hill said: “It is of our opinion, that it [the stock market rally] does have ‘legs’, and it does so given the Financials (XLF) are rallying … but more importantly – the Homebuilders (XHB) are leading the rally. And, we think the XHB shall continue leading and actually do better than anyone anticipates at this juncture.

“The ‘head & shoulders’ bottom on the weekly chart is very clear; although it is not yet confirmed. However, the 30-week moving average is on the verge of being given, with the 20-week stochastic turning higher through it’s trigger point. Again, in the past, this has resulted in a sustained rally – and if neckline resistance is violated as we believe it shall be – then targets in the range of $27.50 to $37.50 come into view. This is certainly not the consensus view, but as they say – ‘every dog has its day’.

“Therefore, any weakness broader market in the days ahead can be used to consider long positions.”

Source: Arthur Hill, Stockcharts.com, November 5, 2011.

Tags: Amp, Arthur Hill, Consensus View, Head Shoulders, Homebuilders, Juncture, Legs, Market Rallies, Market Rally, Moving Average, Neckline, Proportions, Resistance, Stock Market, Stockcharts, Stocks, Targets, Trigger Point, Verge, Xhb, Xlf
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