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The Company you Keep!

david —  March 4, 2015

We were pleased to find out that The Buyback Letter has outperformed Berkshire Hathaway over the past 15 years!

Thank you Mak Hulbert of the Hulbert Financial Digest for pointing this out!

Old Gorrila New Gorrila

david —  November 13, 2013

Going 519 days without a big stumble is rare, but not unprecedented, says Bespoke Investment Group. The market trekked 1,153 trading days without a correction from March 2003 to October 2007, and 1,767 sessions from October 1990 to October 1997. We know how those runs ended, but there’s no denying the pull exerted while they lasted. “The current streak would have to extend all the way out to Oct. 1, 2018, to match that record,” notes Bespoke.

-Almanac-Apparently today’s U.S. GDP report, which showed the economy growing at a 2.8% annualized rate, is renewing fears that the Fed will taper bond purchases. Digging into the report, the details don’t seem to support this. It wasn’t consumer spending or business investment that drove growth; it was an increase in inventories. Slowing consumer and business spending does not create more jobs nor does it spark inflation. The Fed has been quite clear that it is not satisfied with the present state of the jobs market and inflation is well below the Fed’s target. Tomorrow, when the job’s report is released, we should have a better idea of whether this 2.8% growth is actually spurring hiring or not.

Sequester cuts, higher payroll taxes, and an improving economy had the U.S. deficit reaching a 5-year low of $680.3 billion in the 12 months ended Sept. 30. For the month, the U.S. posted a $75.1 billion surplus, as advances in employment had revenue climbing 15 percent year-on-year to $301.4 billion – bringing revenue on an annual basis to $2.77 trillion.

The Bureau of Labor Statistics said today that the economy added 204,000 jobs in the month. Economists had expected 120,000, and worried that uncertainty in Washington, D.C., would hold back hiring.

The other event of the day, arguably more significant, was a rate cut by the European Central Bank (ECB). It cut its main rate from 0.5% to 0.25%, a new record low in response to euro zone inflation that fell to an annualized 0.7% last month, well below the 2% target. The cut had an immediate and sizable effect on the Euro and the U.S. dollar. The Euro sank and the dollar surged. Should the U.S. dollar reverse its current trend and head higher, inflation is likely to head even lower. If anything, the details of today’s GDP report and the actions taken by the ECB are more likely to spur the Fed to continue QE3 even longer and possible even expand its monthly purchases.

According to Bloomberg, 244 of the SP500 companies have reported earnings.

  • Investors are “over” earnings at this point – most of the “systemically” important companies/industries have reported by now and the big broad themes and trends from CQ3 have been revealed (although that being said the market’s two biggest companies will be reporting in the coming week – XOM and AAPL).
  • 76% of the 244 have beaten St EPS forecasts by an average of 4.88% (that number has been in the 70%s throughout the entire earnings season).
  • Growth – SPX EPS is tracking up 7% and revs are pacing up 3.5% so far.
  • The largest EPS beats have come in materials – 76% of S5MATR firms have exceeded EPS forecasts by an average of 12%.  Some of the upside highlights include AA, FCX, NUE, IP, and DD.  Financials and consumer discretionary also have been exceeding estimates by a large margin (7% and 6%, respectively).  Utilities are the only sector where EPS in aggregate is tracking below the St.
  • As is usually the case, EPS “beats” don’t always translate into upside stock price action and that is especially the case in banks.  BAC “beat” by 36% but the stock is down small since reporting.  GS also “beat” by 17% but that co’s Q was received very poorly on Wall St (in large part b/c of the soft FICC results).
  • On the sales front trends have been more mixed w/only 53% of companies exceeding expectations.
  • Street EPS estimates haven’t changed over the last few weeks.  “Top down” (average of Wall St strategists) is still calling for $109 in ’13 (JPM’s T Lee is $110) and $115 in ’14 (JPM’s T Lee is $120).  The “bottoms up” (aggregate of all individual SP500 company EPS forecasts) is $110.50 and $122.70.
  • Many people are using ~$120 for ’14 and using a 15x or 16x multiple to justify further SPX upside (15x is $1800 and 16x gets to 1920).

Yesterday, the Labor Department reported that nonfarm payrolls (jobs) increased by 148,000 in September. Today’s chart provides some perspective in regards to the US job market. Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). More recently, the number of nonfarm payrolls has been working its way higher but at a pace that is not fast enough to close the gap on its 1961 to 2001 trend. It is interesting to note that the current number of US jobs recently surpassed its 2001 peak. However, the job market has yet to reach the peak levels obtained back in early 2008.

Rumble in DC!

david —  October 2, 2013

So the government is shut down (as of this writing) and the market is not tanking.  This may seem confusing confusing however a look at history sheds some light on events.  This is the 12th time that a congressional standoff has shut down the government and the first time in 17 years.  According to Bloomberg: it is a buying opportunity for stock investors, if history is any guide.  The Standard & Poor’s 500 Index has risen 11 percent on average in the 12 months following a government shutdown, according to data compiled by Bloomberg on the 12 instances since 1976. That compares with an average return of 9 percent over 12 months. In all the cases, the U.S. equity benchmark was higher by the end of the next two years.      The last time there was speculation about a U.S. government shutdown was in August 2011, when the S&P 500 fell more than 11 percent in three days. Stocks tumbled during the stalemate between President Barack Obama and Congress over whether to raise the debt ceiling and S&P stripped the U.S. of its AAA credit rating that month.  The losses were later reversed, as the Federal Reserve pledged to hold the benchmark interest rate near zero and maintain bond purchases to support the economy. The S&P 500 gained 25 percent in the 12 months through August 2012.  In the last actual government shutdown that started in December 1995, the S&P 500 rallied 21 percent in the following year, according to data compiled by Bloomberg. The U.S. equity benchmark was up 36 percent in the 12 months after a one-day closure in 1982.

Shorter term the stock market has tended to struggle prior to and during the initial three days following a government shutdown. Following this, the stock market has (on average) trended higher over the ensuing three months. Chart of the Day postulates that…. explanation for this particular average pattern is that the market abhors uncertainty. So as the shutdown approaches, investors fear for the worst. However, after the shutdown begins and investors notice that the economy continues to function coupled with the fact that the shutdown may be short-lived ultimately encourages a stock market rally as investors worst fears are not realized.

In short the government shutdown dance that politicians play bring out classic fear responses in many investors but doesn’t do anything that changes the value of stocks for the mid and long term.  Hopefully this knowledge will help you avoid emotion based decisions at this time.

As always please call me if you have any questions.

Mixed Signals

david —  September 26, 2013

Today John Kosar of Asbury put out the following note indicating a similarity in the market action of today’s market and 1999. John is a very respected market technician worth paying attention to. I will let his piece speak for itself and then present one important factor that is different today and some perspective after that.

By John Kosar, CMT—-Many professional investors use market internals to measure the quality of the trend in a stock market index. One such indicator is the Advance/Decline Line, which is used to confirm both the internal strength of a price trend and its potential vulnerability to a reversal. If the market index is rising while the A/D line is rising, it typically indicates a healthy trend that is likely to continue. Conversely, a rising index amid a declining A/D line indicates a market that is rising on the backs of fewer and fewer stocks, which often results in a market peak and subsequent decline in the index. Another potential indication of an upcoming bearish reversal in a stock market index is when market breadth becomes too bullish or frothy, which can indicate an over-extended condition that often occurs at the end of a price trend.

The chart below plots the NASDAQ 100 (NDX) weekly since 1998 in the upper panel, with the index’s Advance/Decline Line plotted in the lower panel.

The red highlights in the lower panel point out that, as of the close on Friday, the NASDAQ 100’s A/D Line is testing its March and August 2000 all-time high. The chart shows that this historic frothy extreme preceded a major peak in NDX 13 years ago, and warns that this over-extended condition could help to trigger a corrective decline in the index now. The red vertical highlights between both panels point out that previous, lesser peaks in the A/D Line, in January 2004, November 2007, and April 2012, all preceded significant declines in the NASDAQ 100, which tends to lead the US broad market both higher and lower.

So, while the bellwether S&P 500 is making new all-time highs and the financial media is clinking champagne glasses to celebrate it, keep a close eye on the NASDAQ 100’s A/D Line for a potential indication of an overdue corrective decline.

John Kosar, CMT, has 30 years of experience and insight in covering the global financial markets. John spent the first half of his career on the trading floor of the Chicago futures exchanges, where he had the opportunity to learn how the US financial markets work from the inside out. This experience, early in his career, became the foundation for the unique analysis, insight and perspective that defines Asbury Research. John is frequently quoted in the financial press both in the US and abroad, and can be seen regularly on U.S. financial television. Follow him on Twitter at:@asburyresearch.

Now the counter piece from Chart of the Day with my comment below:  PEs are nowhere near where they were in 1999

A recent Chart of the Day illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis. More recently, the PE ratio has trended higher (to around the 19 level). However, over the past five months, corporate earnings have increased enough to maintain a relatively flat PE ratio — an overall positive for the stock market.


Chart of the Day

So whats an investor to do? Is either position correct?  Can they both be correct?  What should we do since prediction is difficult, especially about the future?  I think the answer is to be mindful that over the long term market prices are driven by value but over the short and medium term prices can be driven by emotion.  The chart from Asbury is charting behavior which leads to emotion while the chart from COTD is keyed from statistics.  We all know that eventually the market will correct but we don’t know when.   Therefore we are using stops (on individual stocks) and hanging in there with one eye on the emotional button as emotions can change quickly!

Call us at 310-459-9196 if you have any questions!

End of Summers

david —  September 19, 2013

A few weeks ago we opined about the various reasons the market was declining at the time.  One of the reasons we discussed was potential concern about tho possible appointment of Larry “smartest guy in the room” Summers to succeed Ben Bernanke.  Bingo, Summers realizes he has no chance of being confirmed so he withdraws his name from consideration.  Did someone say he was a smart guy?  I wonder, if he bought calls before he resigned would it be considered trading on inside information?  Then again he never would have thought that news of his official demise would rally the markets so chances are he did not buy market calls.  If it turns out that he did bet the market would go up on news of his withdrawal than I would have to reconsider my opinion of him.  Somehow I doubt it.

In any event the news that he would not be the next Fed chairman rallied the market about 1.5%.  This news was followed in a few days with a September surprise from the current Fed Chairmen that the easing of QE would have to wait a bit.  This rallied the markets anther percent or so.  This really did surprise most everyone, including me.  I had thought the the Fed would at least announce a token slowing of asset purchases.  That they did not due so and the markets rallied says that they are still very concerned about employment growth which continues to be anemic. It also reinforces the impact that the Fed is having on the stock market.  As a result, as our chart shows, the market has reentered the uptrend that it had been in for most of the year.  The big question is will it stick. Sooner or later the Fed has to change course and reason would suggest (not that the markets are always reasonable) that the markets wont like it.  In any event move up your stops and enjoy the party as long as it goes on.  Just keep an eye of the beer keg.  Eventually the last one will run out and there wont be a replacement!  As always, feel free to contact me if you have questions or want to chat about the markets!

Peace for Our Time

david —  September 12, 2013

In our last post we discussed the relationship between crises in the Middle East and recessions in America.  Over the past 50 years Middle East problems have often created spikes in oil prices which have coincided or preceded recessions.  The reason is that spikes in oil lead to higher gas prices which takes away purchasing power for other items for the average consumer.  I stated then that I was not yet thinking that will be the case presently.  However, Continue Reading…