The market is trading lower in early trading, after a mixed batch of earnings reports and a weaker than expected housing starts report.
Apple (AAPL) reported blowout earnings last night, and gave very strong guidance relative to its usual conservatism. The stock had already recouped most of its losses from yesterday, after it was reported that CEO Steve Jobs was taking another medical leave. After reporting earnings, the stock gapped higher again, and has traded back as high as Friday's closing price.
IBM also reported strong earnings last night, and the stock has rallied to new all-time highs today. In the financial sector, Goldman Sachs (GS) was a little light on the top line, while Wells Fargo (WFC), US Bancorp (USB) and State Street (STT) reported solid results. Nonetheless, all of the stocks are lower today. The financial sector is down -1.44% so far, more than the -0.67% pullback in the broader market.
Asian markets were higher overnight, while Europe is lower this morning. There are rumors that China's CPI report tonight will be below what has been expected.
The dollar is lower today, helping to boost most commodities. Gold is higher to $1376, while oil prices are down slightly near $91.00.
The 10-year yield is lower to 3.34%; and the volatility index is up +4% to 16.50.
Trading comment: Today looks like it could be the first down day in a while, but we have to see if the mid-day dip buyers come back once again. Regardless of waiting for the overall market to pull back, earnings season will present its own opportunities and volatility. So far, earnings season is off to a good start. The best buying opportunities remain trying to pick up those names that are growing earnings and raising estimates if you can get them on a pullback. Focus on the leaders, not the laggards.
long AAPL, IBM, WFC
19 Ocak 2011 Çarşamba
How to Combat an Arrogant China?
Is there a new Cold War developing between China and the United States? That’s a question hovering over President Hu Jintao and his entourage as they come to Washington to discuss military, trade, and financial flash points with the Obama administration.President Hu told the Wall Street Journal that “we should abandon the zero-sum Cold War mentality.” But is he to be believed?
Everyone agrees that this is a new, muscular, and more aggressive China. The more the Chinese strengthen economically, the more rambunctious they become with their foreign policy. Americans are increasingly irritated by this arrogance.
Just last week — and just as the Pentagon plans to cut back on the modernized F-22 stealth fighter — China insulted Defense Secretary Robert Gates by test-flying its own J-20 stealth bomber during his visit. Admiral Mike Mullen, head of the Joint Chiefs of Staff, wondered out loud why China is boosting its high-tech weaponry. He said, “Many of these capabilities seem to be focused very specifically on the United States.”
Surely the J-20 flight was a snub to Washington. Surely China’s whole military buildup is aimed directly at us. And surely China is of no particular help when it comes to the nuclear operations of North Korea and Iran.
Then, of course, are the numerous trade violations being committed by China. Commerce Secretary Gary Locke wants a level playing field on trade. As a strong free-trader myself, I recognize the many benefits free and open trade offers both China and the United States. But like many others, my free-trade patience with China is wearing thin.
They’re stealing our technology, violating all sorts of patent-protection laws, hacking into Google, and infringing on intellectual-property rights. In fact, 80 percent of Chinese software is reportedly pirated from American companies.
A new Chinese requirement for joint ventures with the U.S. — where China gets 51 percent, and our companies only 49 percent — looks like another attempt to snake our technology. Chinese local-content prescriptions prevent our firms from doing business with China’s state and local governments. The China curb on rare-earth materials, important both for U.S. technology and defense security, is yet another free-trade violation.
Everyone wants cooperation rather than confrontation. Creating trade barriers for Chinese exports would damage American consumers and businesses, each of whom enjoy access to decent quality, low-cost Chinese goods. But if China continues to violate World Trade Organization rules, something has to be done.
On the financial side, the great yuan debate goes on. I have never believed the yuan value should be linked to the U.S.-China trade deficit. Two-way trade is exploding. That’s good for growth. However, Treasury Sectary Tim Geithner’s new angle on the China inflation bubble has merit.
In order to hold down the yuan, China’s foreign-exchange reserves jumped another $200 billion in the fourth quarter of 2010. Those reserves now total $2.85 trillion. With these massive foreign-reserve purchases, China’s money supply is growing by 20 percent. Its inflation rate is rising above 5 percent.
Surely, if the Fed were not printing so many excess dollars — which circulate to China — the Chinese money-supply problem wouldn’t be so great. Nevertheless, holding back the yuan is creating what looks suspiciously like a big asset bubble. When that bubble is finally punctured, it could do great damage to the economies of China, the U.S., and the rest of the world.
Both the Chinese yuan and the U.S. dollar have depreciated substantially relative to gold. That tells me each currency is way undervalued because money is too loose in both countries. As Prof. Robert Mundell has counseled, U.S.-China currency stability is greatly to be desired. However, that desire can only be accommodated with a high degree of currency- and monetary-policy cooperation — of a sort that is nowhere on the radar screen. Why not look to a gold reference point for both currencies?
At the end of the day, the best thing the U.S. can do to protect its own interests with respect to China is to adopt Ronald Reagan’s strategy toward the Soviet Union. The Gipper knew that maximum security abroad requires maximum economic growth at home. That’s why the new Republican Congress, hopefully doing business with a more centrist Obama, must follow through on its pledge to reduce spending, lower the corporate tax rate, and roll back unnecessary regulations.
China has gotten cocky because it is growing at 10 percent while our unemployment rate is close to 10 percent. But greater economic strength at home will give the U.S. more leverage to deal with China on all fronts.
This was Reagan’s great lesson.
18 Ocak 2011 Salı
Stocks Say We're Healing; Prices Say Look Out
U.S. economic recovery continues to look better, according to the stock market and a boatload of economic stats last week. Stocks jumped 133 points on the Dow, which hit a 30-month high following its seventh straight weekly rise. Early fourth-quarter profit reports from Alcoa, Intel, and JPMorgan all beat expectations. Share prices are back to June 2008 levels, before the financial meltdown.
Interesting factoid: The mid-cap S&P 400 is now a half percent above the October 9, 2007, all-time stock market peak. Small-cap indexes are about 4 percent below that peak. The NASDAQ is just 2 percent below that peak, while the S&P 500 and the Dow are 17 percent below. I note this because what seemed to be unattainable now looks to be more attainable.
Stocks are a pretty good leading indicator of the economy. A message here is that we are healing.
Last week’s flurry of economic reports send the same message. The index of industrial production continues to rise, and is now 6 percent above year-ago levels. While we’re not getting any help from the housing sector, one positive surprise in this new recovery cycle is that manufacturing is leading the way. That’s good. People are still making things -- including, by the way, business equipment. That sector is up 17 percent from year-ago, showing that profitable businesses are putting money to work in the supply side of the economy.
On the demand side, retail sales continue to rise, and are 8 percent above year-ago. And total sales throughout the economy -- retail and wholesale -- are running 8.5 percent above year-ago. Inventory-to-sales ratios are very low.
The glitches? Early inflation pressures continue. The producer price index jumped over 1 percent in December and is 4 percent above year-ago. Where’s Ben Bernanke’s deflation? Energy and food prices are soaring. The CRB food commodity index is up 35 percent over the past year. Crude oil is drifting toward $100. Raw industrials are up near 20 percent. Energy-price increases are spilling over into the CPI, with gasoline nearly 14 percent above December 2009.
Inflation is a tax on the economy: a tax on business profits and a tax on consumer incomes. This could be the biggest surprise of the new year. Far too much Fed pump priming and a shaky dollar could undermine the recovering economy.
Interesting factoid: The mid-cap S&P 400 is now a half percent above the October 9, 2007, all-time stock market peak. Small-cap indexes are about 4 percent below that peak. The NASDAQ is just 2 percent below that peak, while the S&P 500 and the Dow are 17 percent below. I note this because what seemed to be unattainable now looks to be more attainable.
Stocks are a pretty good leading indicator of the economy. A message here is that we are healing.
Last week’s flurry of economic reports send the same message. The index of industrial production continues to rise, and is now 6 percent above year-ago levels. While we’re not getting any help from the housing sector, one positive surprise in this new recovery cycle is that manufacturing is leading the way. That’s good. People are still making things -- including, by the way, business equipment. That sector is up 17 percent from year-ago, showing that profitable businesses are putting money to work in the supply side of the economy.
On the demand side, retail sales continue to rise, and are 8 percent above year-ago. And total sales throughout the economy -- retail and wholesale -- are running 8.5 percent above year-ago. Inventory-to-sales ratios are very low.
The glitches? Early inflation pressures continue. The producer price index jumped over 1 percent in December and is 4 percent above year-ago. Where’s Ben Bernanke’s deflation? Energy and food prices are soaring. The CRB food commodity index is up 35 percent over the past year. Crude oil is drifting toward $100. Raw industrials are up near 20 percent. Energy-price increases are spilling over into the CPI, with gasoline nearly 14 percent above December 2009.
Inflation is a tax on the economy: a tax on business profits and a tax on consumer incomes. This could be the biggest surprise of the new year. Far too much Fed pump priming and a shaky dollar could undermine the recovering economy.
17 Ocak 2011 Pazartesi
Part 2 from RealMoney.com
Smaller-Cap Stocks on Our Radar1/13/2011 1:48 PM EST
I already wrote a piece on my top picks for 2011, so I won't rehash that. But I want to throw out some other picks that I don't often write about. We normally play in the mid-cap and large-cap space, as these stocks tend to be less volatile (on average). But for our trading accounts, we do play in some of the smaller names, so I do have a few on my radar.
Meru Networks (MERU) is a provider of virtualized wireless LAN solutions, a space that is heating up and garnering a lot of attention. It has a $300 million market cap and very high growth rates. The stock has been publicly traded for less than a year, so is under most people's radar. It broke out on high volume the other day and is now on my radar.
MIPS Tech is a chip maker for home entertainment, telecom, networking and multimedia. It has a market cap of $800 million and very high earnings growth. This is another stock that has been moving higher on big volume increases, and that could bode well for further gains this year. The stock also ranks well on measures of profitability, relative strength, fund sponsorship, etc.
Radware is a $700 million market cap, Israeli provider of network security solutions. This is another hot space, and there have been many rumors of a suitor looking to buy RDWR. On its own merit, the stock ranks well on all of the measures of growth and profitability that we look for. But the kicker is that I believe that eventually it will get an offer high enough to accept, and that could be the cherry for investors.
IPG Photonics (IPGP) is a manufacturer of fiber-optic lasers, amplifiers, etc. Kind of like a small JDS Uniphase (JDSU). It has a market cap of $1.6 billion, so it's a little larger than the others, but the fiber-optic space is heating up, and IPGP's growth rates are heating up as well. The stock just broke out to new highs this week and could be a good addition on a pullback.
Position: Long IPGP, MIPS, RDWR
Q&A 1/13/2011 3:02 PM EST
Here are some questions I have received today from readers:
Andrew L.:
With the specter of higher yields, what are your ideas for fixed-income portfolios? Andrew, mostly what we are doing for fixed income is keeping maturities short on some corporate bonds when we can find acceptable yields. We have also been adding to our preferred stocks and hedging a portion of the interest rate risk with the ProShares UltraShort 20+ Year Treasury (TBT). On the fund side, we have been allocating to floating-rate funds (which should hold up better as rates rise) and dipping our toe in the water slightly in emerging market bond funds.
John G.:
What is your take on Doug's favorite long, Yahoo! (YHOO)? John, I love Dougie, but I am less enamored of Yahoo!. At the end of the day, I still think Google (GOOG) will outperform Yahoo! this year. Google was totally flat for 2010 (actually down 3%), so I think it will come back this year and provide solid returns. Google continues to take market share from Yahoo! and is doing a better job at diversifying its revenue streams, in my opinion. On a P/E basis, Google is still cheaper, and Yahoo!'s EPS are not even expected to grow in 2011. I prefer to stick with the leaders, and leave the turnaround situations to those with more patience.
Mo.:
What do you think about iShares Russell 2000 Index (IWM) and PowerShares QQQ (QQQQ) as shorts? Mo, I don't think these are good shorts while the market is making new highs and in a confirmed uptrend. When the market is trading below both its 50-day and 200-day moving averages, and those moving averages are no longer upwardly sloping, then I think they might be good hedges on a portfolio. Until then, they are just speculative trades and should carry tight stops with them.
John G.:
Who is the group of managers you polled for your annual forecast? Hedgies? Big firms? John, My group of participants includes many factions. I have a lot of guys that you read here on the pages of RealMoney Silver daily, I also have some institutional traders, as well as a handful of people running their own small investment advisory firms. So while my sample size may not be huge, it is well diversified amongst the various investor types.
Sentiment is on the complacent side of things.
Let's take a look at the sentiment backdrop. Again, here I look at several different types of indicators. I also should point out that while I think sentiment is a bit on the complacent side overall, I have found in my work that following the sentiment indicators works better in helping to time market bottoms than it does trying to time tops. Often that's because market tops are more of a process and take time, while market bottoms are often events (more short term).
Looking at the put/call ratios, the 10-day CBOE put/call is down to 0.77, which is on the low side of the equation. Last year before the flash crash, it got down to 0.75. The 10-day ISEE call/put ratio is more in neutral territory at 131.
The investment adviser surveys show higher levels of bullishness. The spread between the bulls and bears on the Investors Intelligence survey rose to 38% last week. That matches the highest level since October 2007, the height of the last bull market. The spread in the AAII survey eased back this week to 29%, but I should note at the end of December it spiked to 47%, which was the highest reading I could find going all the way back to 2004. Last, the Rydex Nova/Ursa ratio (of mutual fund market timers) also eased back to 0.586 from its recent highs -- it rose to 0.665 last year before the flash crash, for reference.
As such, I think that sentiment is on the complacent side of things. It was even more so at the end of December, and as such, I found myself in the camp calling for a correction. Earlier this week, Bank of America (BAC) put out its hedge fund survey, which showed long/short hedge funds had lowered their net long equity exposure at the end of last year from their normal 30-40% range to just 18%. As such, it looks like the correction camp became a little too crowded, and that may be one of the reasons we have not seen much of a pullback. But January is also a month well known for headfakes, so don't get too lulled into a sense of complacency. Overall, I would have to give sentiment a grade of C+, due to high levels of bullishness (which is bad from a contrarian perspective).
Constructive on the Macro Picture1/13/2011 4:01 PM EST
From where I sit, it looks like the economy will continue to gradually improve.
Last, I wanted to briefly touch on the macro picture. This is the fourth leg of the market stool, where we take into account the economy, interest rates, inflation, etc. On this front, I am constructive on the economy as it looks like a continued gradual improvement from where I sit.
Unemployment remains stubbornly high, but this is not a good data point to wait for when investing -- it lags.
The ECRI weekly growth rate continues to improve. Last week, it moved further into positive territory at 3.3% (a 33-week high), and we get another update tomorrow.
Interest rates are poised to move higher, but I don't think they will do so dramatically. Moreover, the reason they are moving higher is as a reflection of an improving economy. Over the summer when the double-dip crowd grew vocal, interest rates fell to levels that appeared unsustainable. So upon an improving economy, one should expect rates to drift higher to a more normalized level. Also, inflation remains low. I know there is some food and energy inflation, but the biggest component of inflation in the economy is labor costs, and those appear well anchored. Additionally, there remains considerable slack in the economy, so inflation is unlikely to be broad-based in the near future.
And with that, I want to again thank everyone for reading and also for the questions. Feel free to continue to email me with any questions or feedback. Tomorrow you will be back in the capable hands of Mr. Kass. Enjoy your evening.
I already wrote a piece on my top picks for 2011, so I won't rehash that. But I want to throw out some other picks that I don't often write about. We normally play in the mid-cap and large-cap space, as these stocks tend to be less volatile (on average). But for our trading accounts, we do play in some of the smaller names, so I do have a few on my radar.
Meru Networks (MERU) is a provider of virtualized wireless LAN solutions, a space that is heating up and garnering a lot of attention. It has a $300 million market cap and very high growth rates. The stock has been publicly traded for less than a year, so is under most people's radar. It broke out on high volume the other day and is now on my radar.
MIPS Tech is a chip maker for home entertainment, telecom, networking and multimedia. It has a market cap of $800 million and very high earnings growth. This is another stock that has been moving higher on big volume increases, and that could bode well for further gains this year. The stock also ranks well on measures of profitability, relative strength, fund sponsorship, etc.
Radware is a $700 million market cap, Israeli provider of network security solutions. This is another hot space, and there have been many rumors of a suitor looking to buy RDWR. On its own merit, the stock ranks well on all of the measures of growth and profitability that we look for. But the kicker is that I believe that eventually it will get an offer high enough to accept, and that could be the cherry for investors.
IPG Photonics (IPGP) is a manufacturer of fiber-optic lasers, amplifiers, etc. Kind of like a small JDS Uniphase (JDSU). It has a market cap of $1.6 billion, so it's a little larger than the others, but the fiber-optic space is heating up, and IPGP's growth rates are heating up as well. The stock just broke out to new highs this week and could be a good addition on a pullback.
Position: Long IPGP, MIPS, RDWR
Q&A 1/13/2011 3:02 PM EST
Here are some questions I have received today from readers:
Andrew L.:
With the specter of higher yields, what are your ideas for fixed-income portfolios? Andrew, mostly what we are doing for fixed income is keeping maturities short on some corporate bonds when we can find acceptable yields. We have also been adding to our preferred stocks and hedging a portion of the interest rate risk with the ProShares UltraShort 20+ Year Treasury (TBT). On the fund side, we have been allocating to floating-rate funds (which should hold up better as rates rise) and dipping our toe in the water slightly in emerging market bond funds.
John G.:
What is your take on Doug's favorite long, Yahoo! (YHOO)? John, I love Dougie, but I am less enamored of Yahoo!. At the end of the day, I still think Google (GOOG) will outperform Yahoo! this year. Google was totally flat for 2010 (actually down 3%), so I think it will come back this year and provide solid returns. Google continues to take market share from Yahoo! and is doing a better job at diversifying its revenue streams, in my opinion. On a P/E basis, Google is still cheaper, and Yahoo!'s EPS are not even expected to grow in 2011. I prefer to stick with the leaders, and leave the turnaround situations to those with more patience.
Mo.:
What do you think about iShares Russell 2000 Index (IWM) and PowerShares QQQ (QQQQ) as shorts? Mo, I don't think these are good shorts while the market is making new highs and in a confirmed uptrend. When the market is trading below both its 50-day and 200-day moving averages, and those moving averages are no longer upwardly sloping, then I think they might be good hedges on a portfolio. Until then, they are just speculative trades and should carry tight stops with them.
John G.:
Who is the group of managers you polled for your annual forecast? Hedgies? Big firms? John, My group of participants includes many factions. I have a lot of guys that you read here on the pages of RealMoney Silver daily, I also have some institutional traders, as well as a handful of people running their own small investment advisory firms. So while my sample size may not be huge, it is well diversified amongst the various investor types.
Sentiment is on the complacent side of things.
Let's take a look at the sentiment backdrop. Again, here I look at several different types of indicators. I also should point out that while I think sentiment is a bit on the complacent side overall, I have found in my work that following the sentiment indicators works better in helping to time market bottoms than it does trying to time tops. Often that's because market tops are more of a process and take time, while market bottoms are often events (more short term).
Looking at the put/call ratios, the 10-day CBOE put/call is down to 0.77, which is on the low side of the equation. Last year before the flash crash, it got down to 0.75. The 10-day ISEE call/put ratio is more in neutral territory at 131.
The investment adviser surveys show higher levels of bullishness. The spread between the bulls and bears on the Investors Intelligence survey rose to 38% last week. That matches the highest level since October 2007, the height of the last bull market. The spread in the AAII survey eased back this week to 29%, but I should note at the end of December it spiked to 47%, which was the highest reading I could find going all the way back to 2004. Last, the Rydex Nova/Ursa ratio (of mutual fund market timers) also eased back to 0.586 from its recent highs -- it rose to 0.665 last year before the flash crash, for reference.
As such, I think that sentiment is on the complacent side of things. It was even more so at the end of December, and as such, I found myself in the camp calling for a correction. Earlier this week, Bank of America (BAC) put out its hedge fund survey, which showed long/short hedge funds had lowered their net long equity exposure at the end of last year from their normal 30-40% range to just 18%. As such, it looks like the correction camp became a little too crowded, and that may be one of the reasons we have not seen much of a pullback. But January is also a month well known for headfakes, so don't get too lulled into a sense of complacency. Overall, I would have to give sentiment a grade of C+, due to high levels of bullishness (which is bad from a contrarian perspective).
Constructive on the Macro Picture1/13/2011 4:01 PM EST
From where I sit, it looks like the economy will continue to gradually improve.
Last, I wanted to briefly touch on the macro picture. This is the fourth leg of the market stool, where we take into account the economy, interest rates, inflation, etc. On this front, I am constructive on the economy as it looks like a continued gradual improvement from where I sit.
Unemployment remains stubbornly high, but this is not a good data point to wait for when investing -- it lags.
The ECRI weekly growth rate continues to improve. Last week, it moved further into positive territory at 3.3% (a 33-week high), and we get another update tomorrow.
Interest rates are poised to move higher, but I don't think they will do so dramatically. Moreover, the reason they are moving higher is as a reflection of an improving economy. Over the summer when the double-dip crowd grew vocal, interest rates fell to levels that appeared unsustainable. So upon an improving economy, one should expect rates to drift higher to a more normalized level. Also, inflation remains low. I know there is some food and energy inflation, but the biggest component of inflation in the economy is labor costs, and those appear well anchored. Additionally, there remains considerable slack in the economy, so inflation is unlikely to be broad-based in the near future.
And with that, I want to again thank everyone for reading and also for the questions. Feel free to continue to email me with any questions or feedback. Tomorrow you will be back in the capable hands of Mr. Kass. Enjoy your evening.
16 Ocak 2011 Pazar
Commentary from RealMoney.com
Here is a copy of the posts I made on Thursday while filling in for Doug Kass on RealMoney.com. Below are the first four posts from that day. I will post the second four later--
The Folly of Forecasts1/13/2011 7:30 AM EST
It's always nice to be filling in for Doug in The Edge. I'll try to give readers an update on how the market looks from where I sit and also offer a few ideas. I also want to take some time to answer any questions readers have, so feel free to email me, and I will do my best to answer them all.
It is that time of year when all the market strategists put out their forecasts for 2011. First off, these forecasts should be taken with a grain of salt since all of the strategists are generally bullish and put out positive forecasts. After all, they earn their living in the markets, so it's in their best interest to be upbeat and positive. Second, no one ever goes back and takes them to task if their predictions are way off. To wit, all of the strategists were bullish heading into 2008, but we won't bring that up. Right?
I actually do an annual blog poll of my own. I do this partially for fun but also to see how real life portfolio managers' sentiment compares to the consensus. I recently completed my poll for 2011, and the participants I talked to are bullish, but less so than the consensus.
You might have seen that the average strategist polled by Bloomberg forecast the S&P 500 to close 2011 at 1,379, for a 9.6% gain. Merrill was more bullish with a forecast of 1,400, and Goldman even more so with a forecast of 1,450 (up 15%). The fearless forecast from my group of money managers was for the S&P to rise to 1,332, for a 5.9% gain.
This would be a below-average gain for the stock market, and thus one can conclude that my group is somewhat cautious on the year ahead. Of course, the real reason why we don't place too much emphasis on these forecasts is that no one invests their portfolio based on them and then just sits there until the end of the year to see how they did. The key to solid investment results come from staying on top of your investments and actively managing your risk in your portfolio.
Fundamentals Get an 'A'1/13/2011 10:01 AM EST
I want to provide an update today on our view of the "">market stool," which we covered the last time we had the helm on The Edge. We tend to look at the four legs of the stool as:
the fundamentals;
the technical picture;
the sentiment backdrop; and
the overall macro picture.
For the fundamental component, I think the market remains on solid footing. We are just entering earnings season, so we will have to watch to see how corporate profit reports come in and how confident managements are in their guidance, but so far the overall level of corporate profits is high and stable. Standard & Poor's has current EPS forecasts for the S&P 500 at roughly $94.79 for 2011, and these estimates have been stable.
That leaves the market at a still very reasonable valuation of 13.5x earnings. This seems to be a low multiple to us relative to past periods in history that demonstrated similar characteristics of low interest rates, low inflation, etc. So we think it is likely that we could see some multiple expansion in the market as the economic recovery continues and the hangover from the Great Recession continues to dissipate.
Corporate balance sheets are also in wonderful shape, with cash balances higher than they have been in decades. Most companies have also refinanced their debt at lower rates, increasing their cash flow and improving the outlook for continued high levels of share buybacks and dividend hikes, as well as continued M&A activity. As such, I would probably have to give the grade of an "A" to the fundamental aspects of the market today.
Technicals Also Get an 'A'1/13/2011 11:06 AM EST
The technical picture for the market looks pretty good as well. We look at a lot of things, but let's start with where the market is trading in relation to its medium- and long-term moving averages -- namely, the key 50-day and 200-day moving averages.
Looking at the S&P 500, the senior index is trading comfortably above both its 50-day and 200-day averages. Moreover, the slope of these key moving averages is important to note as well, and in that light, they are both showing nicely positive upward-sloping shapes.
We also look at the price/volume action in the market, or the accumulation vs. distribution days. On this front, there has been very little high-volume selling of late, and at least a few rallies that have come on higher volume. This is another good sign for the market, and we would expect that before we see any sort of top in the market (even a short-term one), we would see some sort of cluster of distribution days.
Looking at new highs vs. new lows in the market, we see that new highs continue to greatly exceed new lows and that the absolute number of both have been fairly steady of late. Breadth has been positive, and, again, right now we are not seeing any major chinks in the armor. Last, we closely monitor the action of "leading" stocks. Our motto is, as goes the leaders, so goes the market. So the fact that the market leaders have held up well, and continue to break out to new highs is another indicator that falls on the bullish side of the ledger.
I don't want to get off on too-Pollyanna-ish of a note this morning, but I'm afraid that I would probably have to give an A to the technical picture also. It's funny that I phrased my last sentence that way, but these days it's almost as if you feel apologetic for being too bullish. But that is something I'll touch on in a later post when I delve into sentiment.
Positive Signs From the Eurozone1/13/2011 12:11 PM EST
The euro is bouncing for a third day after another bout of solid demand for bond auctions. Earlier this week, it was Portugal, and today Italy's auctions were met with solid demand. More notable is the action in the credit default swaps (CDS) market, where CDS prices for Greece are down 5%, Italy has fallen 8%, and Spain is down 9%. This is a good sign, and hopefully it will continue.
ECB President Trichet has urged eurozone governments to "get ahead of the curve" in dealing with their debt issues. He also wants to improve the "quality and quantity" of the European Stability Fund. So is it possible that the euro crisis won't be the calamitous market event everyone is expecting?
Look, the sovereign debt issues in Western Europe are serious matters, and as such they are not being taken lightly by the markets. But it is possible that they will be dealt with without a huge amount of fallout in the other parts of the global financial markets. Not every crisis leads to a market crash. It might just be that the market will price in these events, yields will move higher for those affected nations, and in the end, we will look back on it as just another stone in the wall of worry that bull markets like to climb.
We are not there yet, so I will continue to monitor the CDS action of the sovereign debt in Europe. But right now, it is not causing us to alter our plans or how we are approaching the market today.
The Folly of Forecasts1/13/2011 7:30 AM EST
It's always nice to be filling in for Doug in The Edge. I'll try to give readers an update on how the market looks from where I sit and also offer a few ideas. I also want to take some time to answer any questions readers have, so feel free to email me, and I will do my best to answer them all.
It is that time of year when all the market strategists put out their forecasts for 2011. First off, these forecasts should be taken with a grain of salt since all of the strategists are generally bullish and put out positive forecasts. After all, they earn their living in the markets, so it's in their best interest to be upbeat and positive. Second, no one ever goes back and takes them to task if their predictions are way off. To wit, all of the strategists were bullish heading into 2008, but we won't bring that up. Right?
I actually do an annual blog poll of my own. I do this partially for fun but also to see how real life portfolio managers' sentiment compares to the consensus. I recently completed my poll for 2011, and the participants I talked to are bullish, but less so than the consensus.
You might have seen that the average strategist polled by Bloomberg forecast the S&P 500 to close 2011 at 1,379, for a 9.6% gain. Merrill was more bullish with a forecast of 1,400, and Goldman even more so with a forecast of 1,450 (up 15%). The fearless forecast from my group of money managers was for the S&P to rise to 1,332, for a 5.9% gain.
This would be a below-average gain for the stock market, and thus one can conclude that my group is somewhat cautious on the year ahead. Of course, the real reason why we don't place too much emphasis on these forecasts is that no one invests their portfolio based on them and then just sits there until the end of the year to see how they did. The key to solid investment results come from staying on top of your investments and actively managing your risk in your portfolio.
Fundamentals Get an 'A'1/13/2011 10:01 AM EST
I want to provide an update today on our view of the "">market stool," which we covered the last time we had the helm on The Edge. We tend to look at the four legs of the stool as:
the fundamentals;
the technical picture;
the sentiment backdrop; and
the overall macro picture.
For the fundamental component, I think the market remains on solid footing. We are just entering earnings season, so we will have to watch to see how corporate profit reports come in and how confident managements are in their guidance, but so far the overall level of corporate profits is high and stable. Standard & Poor's has current EPS forecasts for the S&P 500 at roughly $94.79 for 2011, and these estimates have been stable.
That leaves the market at a still very reasonable valuation of 13.5x earnings. This seems to be a low multiple to us relative to past periods in history that demonstrated similar characteristics of low interest rates, low inflation, etc. So we think it is likely that we could see some multiple expansion in the market as the economic recovery continues and the hangover from the Great Recession continues to dissipate.
Corporate balance sheets are also in wonderful shape, with cash balances higher than they have been in decades. Most companies have also refinanced their debt at lower rates, increasing their cash flow and improving the outlook for continued high levels of share buybacks and dividend hikes, as well as continued M&A activity. As such, I would probably have to give the grade of an "A" to the fundamental aspects of the market today.
Technicals Also Get an 'A'1/13/2011 11:06 AM EST
The technical picture for the market looks pretty good as well. We look at a lot of things, but let's start with where the market is trading in relation to its medium- and long-term moving averages -- namely, the key 50-day and 200-day moving averages.
Looking at the S&P 500, the senior index is trading comfortably above both its 50-day and 200-day averages. Moreover, the slope of these key moving averages is important to note as well, and in that light, they are both showing nicely positive upward-sloping shapes.
We also look at the price/volume action in the market, or the accumulation vs. distribution days. On this front, there has been very little high-volume selling of late, and at least a few rallies that have come on higher volume. This is another good sign for the market, and we would expect that before we see any sort of top in the market (even a short-term one), we would see some sort of cluster of distribution days.
Looking at new highs vs. new lows in the market, we see that new highs continue to greatly exceed new lows and that the absolute number of both have been fairly steady of late. Breadth has been positive, and, again, right now we are not seeing any major chinks in the armor. Last, we closely monitor the action of "leading" stocks. Our motto is, as goes the leaders, so goes the market. So the fact that the market leaders have held up well, and continue to break out to new highs is another indicator that falls on the bullish side of the ledger.
I don't want to get off on too-Pollyanna-ish of a note this morning, but I'm afraid that I would probably have to give an A to the technical picture also. It's funny that I phrased my last sentence that way, but these days it's almost as if you feel apologetic for being too bullish. But that is something I'll touch on in a later post when I delve into sentiment.
Positive Signs From the Eurozone1/13/2011 12:11 PM EST
The euro is bouncing for a third day after another bout of solid demand for bond auctions. Earlier this week, it was Portugal, and today Italy's auctions were met with solid demand. More notable is the action in the credit default swaps (CDS) market, where CDS prices for Greece are down 5%, Italy has fallen 8%, and Spain is down 9%. This is a good sign, and hopefully it will continue.
ECB President Trichet has urged eurozone governments to "get ahead of the curve" in dealing with their debt issues. He also wants to improve the "quality and quantity" of the European Stability Fund. So is it possible that the euro crisis won't be the calamitous market event everyone is expecting?
Look, the sovereign debt issues in Western Europe are serious matters, and as such they are not being taken lightly by the markets. But it is possible that they will be dealt with without a huge amount of fallout in the other parts of the global financial markets. Not every crisis leads to a market crash. It might just be that the market will price in these events, yields will move higher for those affected nations, and in the end, we will look back on it as just another stone in the wall of worry that bull markets like to climb.
We are not there yet, so I will continue to monitor the CDS action of the sovereign debt in Europe. But right now, it is not causing us to alter our plans or how we are approaching the market today.
15 Ocak 2011 Cumartesi
HERE WE GO AGAIN
Humans, for whatever reason, tend to project the past into the future. It is an emotional flaw in our genetic makeup. It is also the reason why so many otherwise intelligent people miss the big turning points in the economy and stock market.
A classic example occurred in the summer of `07. The sub-prime market was just starting to implode. With the benefit of hindsight we now know that was the beginning of the end for not only the stock market but the global economy.
Unfortunately because we couldn't read the writing on the wall we trusted that the Fed would "fix" this minor blip but cutting rates aggressively and spewing out an avalanche of freshly counterfeited dollar bills. It did not fix the credit markets and instead spiked the price of oil to $147 a barrel. That turned out to be the final straw that broke the camels back and sent the global economy spiraling down into the worst recession since the Great Depression. The stock market rolled over into the second worst bear market in history.
Amazingly enough we are ready to repeat this process all over again. The writing is on the wall and virtually no one can see it.
I'm now going to lay out the the series of events that will ultimately lead to the next leg down in the secular bear market and the reaction by the Federal reserve that will end up pushing the economy over the edge into the next depression.
It is going to start in the municipal and state bond markets. I should say it's already started.
So far the stock market is ignoring the cancer growing in the city and state bond markets... just like it ignored the initial stages of the sub-prime implosion in the autumn of `07.
At some point it is going to dawn on the market that there may be a serious problem developing. I expect that recognition to come as the market starts to drop down into the next intermediate cycle correction (which I expect to begin next week). If so, then what should start out as just a profit taking correction will turn into a much more serious decline, possibly even erasing all of the fall rally.
We've already seen big warning signs that smart money has been exiting this market for a couple of months now, basically since the first signs of stress in the muni markets appeared in November. Big money has used the QE driven rally to unload stock on the clueless public over the last several months.
It will begin as the first cities and states start to default. That will correspond with massive layoffs as cities and states will no longer be able to borrow to meet payrolls. Their only option will be to make drastic cuts any and everywhere they can.
The Fed will panic and start running the printing presses in overdrive just like they did in `08 and just like in `08 that will spike the price of energy and food (it's already starting. Gasoline is back above $3.00 a gallon and a loaf of bread is pushing $4.50-$5.00).
Spiking inflation in a very high unemployment environment will understandably destroy the fragile economy just like it did in `08. (I have no idea why Bernanke thinks rising prices along with 20% unemployment is a good thing.)
This will be the period when gold will enter the final leg up in its ongoing C-wave advance and the dollar will collapse down into the 3 year cycle low unleashing the currency crisis we've been expecting.
I fully expect by fall the economy will be heading back into recession/depression and the global stock markets will have rolled over into the next leg down in the secular bear market that began in 2000 with the bursting of the tech bubble.
A classic example occurred in the summer of `07. The sub-prime market was just starting to implode. With the benefit of hindsight we now know that was the beginning of the end for not only the stock market but the global economy.
Unfortunately because we couldn't read the writing on the wall we trusted that the Fed would "fix" this minor blip but cutting rates aggressively and spewing out an avalanche of freshly counterfeited dollar bills. It did not fix the credit markets and instead spiked the price of oil to $147 a barrel. That turned out to be the final straw that broke the camels back and sent the global economy spiraling down into the worst recession since the Great Depression. The stock market rolled over into the second worst bear market in history.
Amazingly enough we are ready to repeat this process all over again. The writing is on the wall and virtually no one can see it.
I'm now going to lay out the the series of events that will ultimately lead to the next leg down in the secular bear market and the reaction by the Federal reserve that will end up pushing the economy over the edge into the next depression.
It is going to start in the municipal and state bond markets. I should say it's already started.
At some point it is going to dawn on the market that there may be a serious problem developing. I expect that recognition to come as the market starts to drop down into the next intermediate cycle correction (which I expect to begin next week). If so, then what should start out as just a profit taking correction will turn into a much more serious decline, possibly even erasing all of the fall rally.
We've already seen big warning signs that smart money has been exiting this market for a couple of months now, basically since the first signs of stress in the muni markets appeared in November. Big money has used the QE driven rally to unload stock on the clueless public over the last several months.
It will begin as the first cities and states start to default. That will correspond with massive layoffs as cities and states will no longer be able to borrow to meet payrolls. Their only option will be to make drastic cuts any and everywhere they can.
The Fed will panic and start running the printing presses in overdrive just like they did in `08 and just like in `08 that will spike the price of energy and food (it's already starting. Gasoline is back above $3.00 a gallon and a loaf of bread is pushing $4.50-$5.00).
Spiking inflation in a very high unemployment environment will understandably destroy the fragile economy just like it did in `08. (I have no idea why Bernanke thinks rising prices along with 20% unemployment is a good thing.)
This will be the period when gold will enter the final leg up in its ongoing C-wave advance and the dollar will collapse down into the 3 year cycle low unleashing the currency crisis we've been expecting.
I fully expect by fall the economy will be heading back into recession/depression and the global stock markets will have rolled over into the next leg down in the secular bear market that began in 2000 with the bursting of the tech bubble.
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