by ilene - November 29th, 2015 8:21 pm
Courtesy of John Rubino
Think of “market internals” as the blood pressure and insulin levels of the financial world. They operate below the surface, frequently unnoticed, but over time they have a big say in the health of the patient.
And right now they’re pointing to a heart attack.
Let’s start with junk bonds. These are loans to financially and/or operationally-weak companies that because of their weakness have to pay up to borrow. Such bonds have a risk/return profile that’s more akin to equities than to, say Treasury bonds, and they trade accordingly, rising and falling on the likelihood of default rather than their relative yield.
Recession means higher default rates for weak borrowers, so when the economy is slowing down or otherwise hitting a rough patch, the junk bond market is often where it registers first. Lately, junk has been tanking relative to stocks
Chart created by Hussman Funds:
Another widely-followed internal is the relationship between large-cap (i.e., relatively safe) stocks and riskier small caps. When large caps outperform small caps, it’s frequently a sign that the broader economy is weakening. Since September, that’s been happening too:
In general, when market leadership gets extremely narrow — that is, when only a few things are going up and everything else is either flat or falling — trouble ensues. During the late 1990s tech stock mania, for instance, the global economy ended up being supported by the US, whose economy was supported mostly by the NASDAQ, which was supported by just a handful of high-flying tech stocks. When those stocks finally cracked, they took the whole world down with them.
Now something similar is happening, thanks in large part to this cycle’s dominant tech firms, especially Apple. From CNBC:
The S&P 500’s profit margin growth over the past five years has been driven largely by tech, and one name in particular: Apple. Unfortunately for the market and for Apple, the days of exceptional expansion may be over.
That’s according to David Kostin of Goldman Sachs, who wrote in a note Monday
by ilene - November 28th, 2015 2:22 pm
Courtesy of Joshua Brown, The Reformed Broker
How do most investors (and many advisors) select funds or strategies to allocate to? They look at what’s been working, learn the story and get long. [For the current example, read Zero Hedge's Diversification Is For Dummies – The Nifty Nine Never Mattered More.]
Sometimes they chase a hot manager who’s just made a great call. Larry Robbins nailed the Obamacare trade! Carl Icahn crushed it with Apple and Netflix!
Other times, they chase a hot theme. Currency-hedged European stocks! Gold outperformed the S&P over the last decade! Biotechs have changed the game!
And then there are the strategy chasers. Tony Robbins has a “permanent portfolio”! Dividend Aristocrats are better than bonds! Everyone’s going into passive indexes! My beta is smarter than your beta!
It may continue to work for a period of time, depending on how early or late one shows up to the hoedown – momentum is a well-documented phenomenon, after all.
And then mean reversion shows up – outperforming managers subsequently underperform, hot themes become over-loved, winning strategies become too crowded to offer excess returns. “No problem,” says the advisor, "I’ve got six new ideas to replace the six ideas that are no longer working!”
It’s sad to say, but this is exactly how it works. I’ve been watching this for almost 20 years. The fastest way to know you’re talking to an amateur investor (or an uninformed pro) is to see how much emphasis or meaning they ascribe to things like trailing 12 months of performance. This obsession with “what’s working?” is extremely widespread.
Research Affiliates has an interesting pair of charts demonstrating this phenomenon in a new note from Rob Arnott, Jason Hsu and Co. They illustrate that increasing fund flows are a decent predictor of subsequent underperformance and that performance-chasing is destructive to returns across all types of investment products:
The procyclical or trend-chasing allocation accentuates the underlying economic shocks to various investment styles as flows push valuations. In the short run, this results in self-fulfilling prophecy and momentum. In the long run, it becomes self-defeating and gives rise to mean reversion. This investor
by ilene - November 27th, 2015 10:05 pm
Now before you shovel all your money into 2015's winners, be sure to read Joshua Brown's, The Trouble With Chasing Hot Strategies.
Courtesy of ZeroHedge
From the 4-horsemen of the dotcom exuberance (and apocalypse), to today's so-called FANG and NOSH stocks, and now 'Nifty Nine', investors could be forgiven for ignoring the benefits of stock market diversification that every commission-taking, fee-gathering asset-collector promotes and going all-in on a few 'easy to select' stocks to make the quick buck that everyone believes is their right as an American taxpayer. While the S&P languishes unchanged in 2015, these small groups of overwhelmingly propagandized stocks are up on average over 60%, but with a collective P/E of 45, they are not cheap (and perhaps should remember that when buying this momo, we are all Thanksgiving turkeys).
The long bull market in US stocks now in its seventh year, has grown much narrower. Previously dominated by smaller companies (which tend also to do better in the longer run), it is now being led by a handful of large stocks that are beginning to earn their own acronyms.
Some talk about the Fang stocks — Facebook, Amazon, Netflix and Google — while Ned Davis Research refers to the Nifty Nine, which adds Priceline, Ebay, Starbucks, Microsoft and Salesforce. (Note that Apple appears on neither list.) If made into indices, research by the FT statistics group shows that either of these groupings would have gained about 60 per cent for this year, while the S&P 500 is up about 1 per cent.
What are the implications? The success of the Fangs is a symptom of the rise of a new model for the economy that revolves around services rather than manufacturing.
But it is best not to get carried away. All these companies are richly valued (Ned Davis puts the Nifty Nine’s collective price/earnings ratio at 45, double that of the S&P 500). They also look expensive when compared with their sales.
Hype and excitement around a few big companies, and eclipse for riskier small companies, are classic symptoms of the top of a bull market.
by phil - November 27th, 2015 8:34 am
What an interesting year it has been.
On the whole, the markets have gone nowhere and it's up to December to either make or break a positive close for 2015. As you can see from Dave Fry's S&P 500 Chart, we had a big "W" pattern that seems to be leading into an "M" pattern that, on the whole will drag us back down to about 2,000 at some point.
That point, however, plus or minus 2 weeks, will make or break the markets in 2016. Brokers need to have a good finish to 2015 or their brochures for 2016 investing won't look attractive enough to get customers to pull their cash off the sidelines – especially in a rising rate environment. At the moment it's "sure bonds were only good for 3% last year but stocks were down" – that's NOT a good way to get baby boomers to cash in their bonds and open a new trading account, is it?
And Americans are saving. After all – it's a Recession. Just because the Government doesn't want to call it a recession and the Corporate Media isn't even allowed to say the word – it doesn't mean it isn't happening and the consumer spending data clearly indicates recessionary behavior has certainly taken hold.
Very sadly, looking at this BLS chart of Consumer Spending, the average family spends more after-tax money than they earn and that really doesn't leave a lot of growth for economic expansion in a country where nearly 70% of our GDP is consumer spending. Savings is not even a category on this chart – for goodness sakes!
As we know, less money has gone to gasoline this year and it was hoped that the savings would flow to other spending but that has not been the case as the average 48 year-old consumer is, of course, a little concerned with all this campaign talk about cutting the Social Security checks they expect to begin collecting in 17 years.
by ilene - November 26th, 2015 1:30 pm
As you’re probably aware, the Fed has a hard time spotting asset bubbles. Just as there was no housing bubble in 2006 according to the honorable and exceptionally “courageous” Ben Bernanke, there’s no bubble in equities today and certainly no ZIRP-induced fixed income bubble either.
The other thing the Eccles cabal has trouble spotting – and this is of course inextricably linked to an inability to spot speculative excess – is inflation.
Nevermind the fact that housing costs have gone parabolic in places like California and New York and pay no attention to corporate “slack fill” and “weight out” tactics that mask 72% inflation on everything from deodorant, to ground pepper, to Soda Stream refill units, and certainly do not read too much into hyperinflation in the high end art world where $170 million Picassos and Modiglianis clearly indicate that QE-driven rallies in capital markets are driving bored billionaires to push the price of trophy assets into the stratosphere, just stay calm and take solace in the fact that according to the headline numbers, inflation is non-existent.
Of course you may have a hard time swallowing that (no pun intended) today as you sit down for a hearty holiday feast because your turkey cost nearly 7% more than it did last year. In fact, the whole meal crossed $50 for the first time in history in 2015 and as you can see from the following chart, the total cost is up triple digits since the late eighties.
So give thanks to the Fed for your meal and remember, it's misleading, negligible core CPI prints that allow the Fed to persist in ZIRP on the way to restoring your 401k which they helped destroy in 2008.
Oh, and while dinner may be $50 today, it's worth noting that in 1909 – so, before the Fed – it was 50 cents:
by ilene - November 25th, 2015 2:28 pm
The PSW weekly webinar is ready to watch if you missed the live version. Enjoy!
[Subscribe to our YouTube Channel here.]
00:01:53 Quick look at the stock market.
00:02:47 Markets Overview: Germany, DAX, Nikkei, Euro Stoxx, S&P, $SPX, AMZN, WMT, VMW, EMC, GOOG
00:25:56 XLY INDEX: AMZN, DIS, HD, NKE
00:32:00 IBM: It does a lot of buybacks!
00:50:40 IBM: Review Positions
01:04:41 IBM: puts and bull calls spread
01:26:20 IBM puts, trade idea
01:29:24 DOLLAR Stronger, GLD, SLV, TLT
01:34:00 CIM puts