Rebound
The “What if” Games Begin
Friday, August 10th, 2012
by Peter Tchir, TF Market Advisors
What if Europe is actually really going to get aggressive?
What if housing has bottomed and is starting to improve?
What if the Q2 jobs data was affected by adjustments as much as Q1 and the economy wasn’t as bad as some feared?
What if Chinese stimulus works?
What if earnings rebound in Q4?
“What if” is a close relative of “Green Shoots”. The market doesn’t need actual data to support it, just needs to think it might be coming. There are a lot of shorts who are nervous about this week’s price action. We didn’t get the typical Monday pullback. Here it is Thursday and we continue to push up against the highs. That is making people question their beliefs, and wonder “what if”. And it isn’t just the bears. Many bulls are underweight and are wondering “what if” this is the real thing.
For myself, I still think 1,425 is a good target, but above 1,410 I start selling again. I think the “what if” analysis is what will push us to those targets.
Copyright © TF Market Advisors
Tags: Bears, Bulls, Earnings, Economy, Europe, Games, Jobs, Nbsp, Price Action, Pullback, Q1, Rebound, Stimulus, Target, Targets, Tf
Posted in Markets | Comments Off
Sector Relative Strength: Defensives Topping
Friday, August 10th, 2012
The charts below show the relative strength of the ten S&P 500 sectors as well as the Dow Jones Transports and the Russell 2000 relative to the S&P 500 over the last year. When the line is rising it indicates that the sector is outperforming the S&P 500, while a falling line indicates underperformance. We have also shaded each sector in red or green to indicate whether the sector has outperformed (green) or underperformed (red) the S&P 500 over the last year.
As was the case the last time we looked at sector relative strength, over the last year six sectors have outperformed the S&P 500 while four have underperformed. One shift that we have seen in the last two weeks, however, is that some of the defensive sectors have started to underperform. Look at the charts below and you will see that Consumer Staples, Health Care, Telecom Services, and Utilities have all started to roll over to varying degrees. For Consumer Staples and Utilities, both sectors are close to dipping into the red in terms of relative performance over the last year. While defensives have seen slowing momentum, sectors picking up the slack include Energy, Industrials, and Technology.
Typically, when the market is in rally mode, you often see outperformance on the part of the Transports and Small Cap Stocks. In the current leg higher, however, both indices have been lagging, and both are underperfoming the S&P 500 by a considerable margin over the last year. In the case of the Russell 2000, the index has made a modest rebound over the last few days (post Knight Trading trade glitch), but it needs to string together another week or two of outperformance before we could confidently say that small caps are participating.
Copyright © Bespoke Investment Group
Tags: Amp, Consumer Staples, Dow Jones, Dow Jones Transports, Glitch, Industrials, Investment Group, Knight Trading, Last Time, Momentum, oil, Rally Mode, Rebound, Relative Performance, Relative Strength, Russell 2000, Sectors, Slack, Small Cap Stocks, Small Caps, Telecom Services
Posted in Markets | Comments Off
Can it Really Be That Easy?
Monday, July 30th, 2012
Throughout the year in reports to our Bespoke Premium clients, we have highlighted the similarities between this year and prior Presidential Election years numerous times. Most recently, in early July we noted the fact that based on the historical pattern the S&P 500 could see a modest pullback in mid-July coinciding with the kick-off of earnings season. Sure enough, the market saw some choppiness about a week and a half ago and subsequently rebounded in the middle of last week. Holding to the historical pattern, that rebound came right at the same time that the market historically sees its summer low.
If the pattern continues, the S&P 500 could be set up for a nice rally to end the Summer. Will it hold? Only time will tell, but if the historical pattern has worked so far, what’s to stop it from continuing?
Tags: Amp, Choppiness, Earnings Season, Investment Group, Nbsp, Presidential Election, Pullback, Rally, Rebound
Posted in Markets | Comments Off
China and EU Concerns Lifts Bonds (May 28, 2012)
Sunday, May 27th, 2012
The Economy and Bond Market Radar (May 28, 2012)
Treasury yields were little changed as mixed economic data here in the U.S. and lots of back and forth speculation in Europe led to an overall muted reaction. New home sales were a bright spot and as can be seen in the chart below, have been steadily trending high since last summer. A similar pattern is taking place in the existing home market and real market recovery appears to be underway.
Strengths
- The University of Michigan Confidence Index hit the highest level since October 2007, citing lower gasoline prices.
- April new home sales rose 3.3 percent, beating expectations.
- Existing home sales grew 3.4 percent in April and the median priced jumped 7.6 percent.
Weaknesses
- Durable goods orders in April were weak, with “core” capital goods orders falling 1.9 percent, the third decline in four months.
- HSBC’s flash Purchasing Managers’ Index (PMI) for China fell to 48.7 in May and disappointed hopes for a rebound.
- Markit’s eurozone PMI told a similar story as this indicator fell to the lowest level in nearly three years.
Opportunity
- Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
- The Federal Reserve appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.
Threat
- China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
- Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.
Tags: Austerity Programs, Bond Market, Capital Goods, China Economy, Confidence Index, Core Capital, Durable Goods Orders, Economic Data, Eurozone, Existing Home Sales, Federal Reserve, Four Months, Gasoline Prices, Government Policy Makers, Market Radar, Pmi, Purchasing Managers Index, Rebound, Treasury Yields, University Of Michigan Confidence, Wildcard
Posted in Markets | Comments Off
Oversold Stocks Piling Up (Bespoke)
Thursday, May 10th, 2012
May 9, 2012
Although the S&P 500 is down less than 5% from its bull market highs, the percentage of stocks that are oversold is really starting to pile up. Using a boundary of one standard deviation above or below the 50-day moving average as the threshold for being overbought or oversold, 49.4% of the stocks in the S&P 500 are now considered oversold, while just 19.0% of the stocks in the index are overbought. The chart below shows the daily percentage of S&P 500 stocks that are overbought and oversold. As shown in the chart, the current level of 49.4% is the highest percentage of oversold stocks in the index since 10/3/11.
Tags: Amp, Bollinger Bands, Bounces, Bull Market, Commodity, Dead Cat, Downward Path, ETFs, European Elections, Futures Market, Hallmarks, Intermediate Term, Investment Group, Market Futures, Moving Average, Nbsp, Next Level, Oversold Stocks, Rebound, Relative Strength, Rubber Band, Selloffs, Standard Deviation, Sunday Evening, Swoons, Threshold, Trough
Posted in Markets | Comments Off
Don’t Like the Real Data? Just Pretend!
Thursday, April 26th, 2012
by Jeff Miller, Dash of Insight
If you are reaching an important investment decision, I have a suggestion for you:
Insist on data — accept nothing less!
Investors should monitor diverse sources of investment information to avoid confirmation bias. If you want to succeed, you still need to engage in critical thinking. Some are in complete denial about progress. There is a simple solution if you do not like the reality of strong corporate earnings:
Talk about “normalized earnings.”
This has a wonderful scientific feel to it, lending an air of credibility to those who have not studied the subject. After all, don’t we want our estimates to be “normal?”
If the current strong earnings reports do not fit your forecast, you can just say that you want to “normalize” earnings without offering any clue about your method or how it has worked in the past.
Background
When the recession hit, there were many observers who felt that even the finest companies would be crushed by the economic collapse. They expected that revenues would fall, expenses would increase, and profit margins would collapse.
Some of us thought that the best companies — not all — would learn to get “lean and mean” and would increase earnings rapidly during the rebound. We were right, and we have profited from this investment.
The increased earnings had a downside, since it often came at the expense of workforce reductions, with remaining workers asked to do more.
The Recovery
During the recovery period, the companies with enhanced productivity have blossomed — better earnings and better cash flows. There is a clear lesson:
Profit margins went higher as pricing power and employment went lower.
I disagree with some observers (sometimes accused of being perma-bulls) who think that profit margins have achieved a permanently higher level. My own conclusions are more nuanced. I fully expect profit margins to decline, and I am interested in two questions:
- When?
- How far?
We should all be open-minded about the eventual profit margin level, which is a function of (primarily) new competitive entrants. When it comes to a topic like — for example — unemployment — the bearish pundits are eager to embrace the idea that there have been structural changes. OK — and what about the many companies that are protecting their profit margins?
More importantly, I agree with the general concept that profit margins will decline. At the same time this “mean reversion” occurs I expect all of the things we associate with a strong recovery: Better employment, better pricing power, and more aggressive competition from new companies.
There is nothing surprising about any of this, since it reflects a typical business cycle.
Time to call “FOUL!”
There is a group that I’ll call Pundits in Denial. They engage in static analysis, expecting profit margins to decline while nothing else changes. As a result of this misguided analysis they help to scare the daylights out of the average investor by stating that if earnings were “normalized” —what a wonderful word!! — then the market is massively overvalued.
How to Normalize
When I am analyzing a stock with cyclical properties, I definitely consider the earnings at peaks and troughs of the business cycle. This is one of the key elements of my edge, so most people have no idea about how to do this. If you are at a business cycle trough, you must be willing to buy cyclical stocks at a high P/E multiple — and vice versa.
To do this correctly you need to have a good theory of the business cycle and where we are right now.
You cannot just take a meat cleaver to earnings, saying that you reject the data because of profit margins.
Investment Conclusion
If you want to gain an investment edge you have to find something that most people are doing wrong. Investing in cyclical stocks combines common errors on profit margins, economic strength, and where we are in the business cycle.
I have a current emphasis on this theme, but today presents an outstanding candidate in Caterpillar (CAT). I had several stocks in mind for this article, but CAT is the most timely. I am choosing it as the worst-performing (and therefore the best opportunity) of stock fitting this theme, since the stock sold off today despite a good report. Here is the long-term earnings picture (from the excellent fastgraphs source) before today’s report:
Any investor who looks at this chart for a minute or so will be far ahead of most of the people they see in TV! You can see for yourself the worst case of earnings during recessions, the general growth rate, the ability of the company to deal with recessions, and the current potential.
Nothing in today’s report upset this story, so you get a chance to buy a terrific stock at a discount.
Once again, I abbreviated this story to cite the stock with the best current opportunity. Another candidate to feature in this story was Apple, but that would have been a layup! I hope readers understand that there are many, many stocks like this.
To repeat the main point — “normalizing” profits is not as obvious as it first seems…..
More to come.
Copyright © Dash of Insight
Tags: Bulls, Clue, Conclusions, Confirmation Bias, Corporate Earnings, Credibility, Critical Thinking, Denial, Downside, Earnings Reports, Economic Collapse, Investment Decision, Jeff Miller, Observers, Profit Margins, Rebound, Recession, Recovery Period, Simple Solution, Workforce Reductions
Posted in Markets | Comments Off
Garbage In, Garbage Adjustments, Garbage Out (Tchir)
Friday, April 20th, 2012
by Peter Tchir, TF Market Advisors
It is hard to ignore the fact that this year is shaping up a lot like 2011 and 2010. I’m not a big fan of seasonal patterns, so what else could it be. Could it just be that all of our adjustments are a total mess?
I understand why we attempt to “seasonally” and otherwise adjust numbers. We crave smooth data. It makes charts look better. It puts a number into context, but what if the adjustments are just horribly wrong? The magnitude of the adjustments is large, so even a small mistake could have a huge impact.
Did the plunge in the economy in the months following Lehman cause adjustments that consistently make the Dec-Feb period look better than it should. Did the rebound, which really started in March 2009 affect those adjustments so that they reduce the jobs by too much? We have gone through some violent shifts in the economy since at least 2008. Industries like homebuilding, which had a huge seasonal component, are far less important in today’s economies. So much has gone on, and so much has changed, are the adjustments overwhelming the data and giving us bad reads? I have only picked on payroll, but I am becoming convinced that much of what we see as growth, followed by decline, is just bad data in the first place, further messed up by bad adjustments. We pretend like 50,000 difference in a month is meaningful (when even BLS says that is in their confidence error), when the data shows that probably anything within 250,000 of the real job growth would be a lucky guess.
As you get ready for next week’s deluge of data, it is worth keeping in mind. Expect bad data.
One last rant, I find it interesting that every American has to basically fill in the same forms, in the same way for their taxes, and yet the half a dozen money center banks, thriving on Fed support, each report basically everything in their own way, making it very hard to compare bank to bank or quarter to quarter. Couldn’t the SEC, Fed, OOC, or FDIC insist on a consistent summary format for reporting earnings?
Markets are a little better on the back of German confidence. Those rallies rarely last.
I would be shocked though if we don’t get some commitment to commit out of the G20 and IMF this weekend, so although I think we will fade a little from here, we should see some strength into the European close as everyone gets ready for more “firewall” money. This meeting highlights the ascent of China and the decline of the U.S. as it is Chinese money “coming to the rescue”.
Credit is very quiet this morning. IG, MAIN, XOVER, and HY are virtually unchanged. High Yield bonds remain well bid, HYG and JNK remain strong, but HY18 continues to struggle. TIPS have continued to do very well in spite of how “transitory” inflation is.
Tags: Confidence, Decline, Deluge, Economy, Garbage, Half A Dozen, Homebuilding, Job, Lehman, Lucky Guess, Magnitude, Mistake, Money Center Banks, Nbsp, Payroll, Plunge, Rant, Rebound, Seasonal Patterns, Tf
Posted in Markets | Comments Off
Buy Commodities, Sell Brands (Smead)
Wednesday, March 28th, 2012
by William Smead, Smead Capital Management
We saw Warren Buffett quoted the other day saying, “We like companies which buy a commodity and sell a brand”. We thought it would be very helpful to unpack his thought and put it into the context of today’s circumstances. We at Smead Capital Management believe these current circumstances are framed by the historical over-pricing of commodities, the coming economic contraction of China, the successful cleansing of the income statements of US households and the inevitable rebound in housing in the US. We will look at the makeup of our portfolio companies which buy a commodity and sell a brand to consider their upside potential in this interesting environment.
When non-economic investors load up on investments in anything which has had a big run up, please circle the wagons. When commodities were at their low point in 1999, it was hard to find any institutional investor or financial advisor recommending exposure in commodities for investors. As of the end of 2010, institutions are dedicating as much as 52% of their portfolio to alternative investments. This includes commodities, gold and energy. These investments are made today for diversification purposes and are simply bets on rising prices. These bets look good in a rearview mirror as we’ve had a once in a generation move into this asset class. We believe that commodities have never been more over-priced in the US and are entering a decade-long bear market.
We believe the reason commodities have been in a bull market for so long is the uninterrupted economic boom in China. When a country with 1.3 billion people grows at over 10% for a number of years without an occasional recession, it ends up relying on fixed asset investments for growth. When fixed asset investments dominate your GDP numbers, borrowed money prepares to turn sour and ultimately lead to a recession/depression. This is something that “getting rid of cable” can’t cure.
The Federal Reserve came out with their household debt service ratio (HDSR) last week. It shows that by the end of 2011, American households had brought the ratio down below 11% to 10.88%. This matches up with the levels seen in the early 1980’s recession and the “anemic” economic recovery of 1990-93. These earlier readings preceded two of the best modern economic growth periods since World War II. While the doomsayers moan about absolute debt levels, we feel they are missing the story on the health of the income statement of the average household. This has boded well for the economy historically. Also, if we continue to be slow to buy houses and cars, this HDSR could put discretionary spending into its most favorable position in decades.
Lastly, this current “anemic” economic recovery has been severely retarded by the boom commodity prices of the last two years, in our opinion. We’ve had to work off a huge number of foreclosed and short-sale housing inventories, while the deep recession temporarily crippled household formation (Jeff, Who lives at Home). It is rebounding as 20-somethings get sick of living with the parents and the parents get sick of living with Jeff. As Mr. Buffett said recently, “eventually hormones take over” and as Brett Arends pointed out in Smart Money,” renting is more expensive than buying in about 75% of American cities.” You add high lumber, copper, iron ore and oil prices to this mix and you get the worst depression in housing and blue-collar employment since the depression. All these headwinds are about to become tailwinds, in our vision, over the next five years.
Therefore, betting on the US economy and the US consumer looks very favorable to us, especially where the rebounds in employment and consumer confidence have an impact. In fairy tales, people are asked to spin straw into gold. We like to own companies which spin milk and coffee (SBUX), cotton (JWN and CAB), internet access (EBAY and ACN), tax returns (HRB) and chemicals (MRK, AMGN, BMY, ABT, PFE and MYL) into gold. Profit margins on commodity-related companies and companies reliant on emerging market growth could plummet in the near future. Just ask the folks at BHP Billiton. They announced March 20th, 2012 that they are seeing in a big drop off in demand from China. In turn, we believe margins could go up for anyone who is positively impacted by lower energy prices and/or commodity prices in general. This is especially true if you “buy commodities and sell brands”.
Best Wishes,
William Smead
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. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.
Tags: Alternative Investments, asset class, Asset Investments, Bear Market, Bets, Capital Management, Circle The Wagons, Commodities, Commodity, Diversification, Economic Boom, Economic Contraction, ETF, ETFs, Generation Move, Income Statements, Institutional Investor, Portfolio Companies, Rearview Mirror, Rebound, Recession, Warren Buffett
Posted in Markets | Comments Off
Sector Investing: Not Just for Equities Anymore
Thursday, February 23rd, 2012
Think for a minute, if you will, about your equity portfolio. Do your investments there reflect any sentiment around sectors? For example, you may have shed some of your financial stocks over the past few years. Or you may see opportunity in industrials, so you’ve chosen a mutual fund or ETF that gives you exposure.
No matter which investment vehicle you’re using, chances are that your opinions about sectors are somehow reflected in your equity investments. But often that’s not the case in the fixed income portion of investors’ portfolios. With the investing tools available today – fixed income ETFs being a powerful example – expressing a precise view on bond sectors may be easier than you think.
The US corporate bond market is comprised of 3 sectors: financials (33%), industrials (56%), and utilities (11%). Bonds are classified into one of these sectors based on the issuer’s primary line of business and the revenue streams that are used to repay their debt. As you can see in the periodic table below, the disparity of returns between these three is notable – the average annual return difference between the top and bottom performing sectors has been 4.2% in the past 10 years.
The returns also tell a story about the performance of the US economy over the past decade. From the strong performance in corporate bonds leading up to the financial crisis, to the underperformance of financials in 2008, and then the rebound that all three sectors experienced in 2009 and 2010.
Fixed income ETFs provide a compelling solution for investors wanting to make tactical plays or employ a sector rotation strategy in their bond portfolio. For example, if you have a negative view of financials, you can reduce your overall exposure to the sector by buying a broad corporate bond ETF (such as LQD) and then tactically overweighting an industrials ETF (such as ENGN) and a utilities ETF (such as AMPS). Or, a more hands-on approach might be to buy all three sector funds (ENGN, AMPS, and MONY), and then tactically manage the weights based on current themes and market events. No matter which strategy you choose, there is now a new set of tools to implement your views.
Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Bonds and bond funds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. The Fund is subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.
Tags: Bond Portfolio, Corporate Bond Market, Corporate Bonds, Disparity, Equity Investments, ETF, Financial Crisis, financial stocks, Fixed Income, Industrials, Investing Tools, Investment Vehicle, Line Of Business, Lqd, Mutual Fund, Periodic Table, Precise View, Rebound, Revenue Streams, Sector Rotation
Posted in Markets | Comments Off
What’s Up With the Chinese Economy?
Thursday, January 5th, 2012
The GDP-weighted Composite CFLP PMI that I calculate for China rebounded strongly to 52.6 in December from 49.3 in November. Much of the rebound can be attributed to seasonal factors, though.
While November is normally a weak month from a seasonal point of view the recent extreme weakness is noteworthy and cast serious doubt on the health of the Chinese economy. The strong rebound in December’s seasonally-adjusted Composite PMI (my calculation) to 52.4 from 49.5 in November allayed some of my fears of a possible further deepening of the growth recession in China.
Much of the rebound in the Composite PMI can be attributed to a surge in the CFLP Non-manufacturing PMI to 56.0 from 49.7 in November.
After adjusting for seasonality the CFLP Non-manufacturing PMI jumped to 55.2 from an extremely weak 51.4 in November.
The slump in the seasonally-adjusted non-manufacturing PMI in November was an extension of the weakness that set in since March 2010. The slump in consumer confidence was probably the main driving factor behind the weakness in November.
The strong showing of the non-manufacturing PMI in December may indicate that consumer confidence improved somewhat in December, but with the seasonally-adjusted PMI only at October’s levels consumer confidence is likely to remain at historically low levels. On top of the Eurozone’s malaise, the slump in consumer confidence probably also had an impact on the unseasonal slump in the seasonally-adjusted CFLP Manufacturing PMI in November. That obviously affected Japan’s manufacturing sector too.
Tags: Chinese Economy, Consumer Confidence, Crisis Levels, Eurozone, Extreme Weakness, Fears, Fourth Quarter, GDP, GDP Growth, Inventories, Malaise, Manufacturing Sector, Pmi, Point Of View, Rebound, Recession, Seasonal Factors, Seasonality, Serious Doubt, Slump
Posted in Markets | Comments Off
