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
by phil - November 25th, 2015 8:30 am
What do we have to be thankful for?
We should be very thankful that even a horrific terror attack on a major Western city becomes yet another reason to rally the markets. Oil prices shot up 5% yesterday but we rallied just as hard as we do when they fall – one is good for XOM, CVX and others and the other is good for consumers, whose confidence fell 10% between October and November and that was BEFORE the terrorist attacks we are not at all worried about.
Sure, what do consumers know? Their spending barely makes up 70% of our GDP so why pay attention to their mood when there are stocks to buy, right? Economic Confidence is also fading fast and confirms the poor consumer numbers but hey – we're only 50% lower than we were last December – I'm sure we'll be fine if we just ignore it…
Norway's Consumer Confidence is also fun to ignore:
Investors probably don't know anything either so we can also ignore State Street's Investor Confidence Index as it re-tests the year's lows.
See – isn't it fun to ignore things! Even Europe is ignoring things as their markets are fully recovering from yesterday's drop this morning. How silly of us to think that any market sell-off would be allowed to stand!
Clearly our leaders are too TERRIFIED to let the markets even have a normal correction for fear that we all melt-down like China, which has been struggling since October to get it's act together (we're short FXI at $41):
Nobel Prize-Winning Economist, Joe Stiglitz has agreed with my premise (see Friday's post) that Mario Draghi is full of crap and that his is merely "papering over the cracks that are caused by the faulty design of the currency bloc." According to Stiglitz (and myself), Draghi's assurances that he will do "whatever it takes" to boost the Euro-Zone's economy simply distracted…
by ilene - November 24th, 2015 11:05 pm
Courtesy of Joshua Brown, The Reformed Broker
If you’re a millennial, your definition of financial risk should be based entirely on the likelihood of losing your job or heading down the wrong career path. Stock market volatility should literally be the last thing on your mind.
Rob Arnott has made the case that the odds of you losing your job go up substantially when the stock market goes down, but it’s important that you separate the two things in your mind when putting away pre-tax money into a retirement account.
In fact, I would argue that stock market volatility should be embraced for the under 35 set. Ostensibly, you’ve got years (decades) of future accumulation ahead of you – why on earth would you be rooting for higher and higher investment markets when you’re a guaranteed buyer for the foreseeable future? Expected returns for an asset class generally rise when prices stagnate or fall. The big open secret of the investment business is that a know-nothing investor with time on his side is in a better position for gains than a brilliant investor, armed with all the tools under the sun, with near-term liabilities to fund.
In this morning’s incredibly helpful BAML US Equity Year Ahead Strategy report, Savita Subramanian & Co tuck in a pair of important charts for younger investors to wrap their heads around. Below, a contrast between the probability of losing money in stocks over the next decade versus the likelihood of negative returns in the bond market. People in their 20’s should only concern themselves with the fixed income portion of their portfolios in terms of having dry powder for strategic rebalances.
Let’s take a look:
The Millennial: stocks for the long term
While Millennials may be a more risk-averse generation, having witnessed the carnage of the global financial crisis and its impact on their parents, this generation has the benefit of long time horizons. As Chart 28 shows, the probability of losing money in the S&P 500 declines markedly as one’s time horizon increases. By contrast, the probability of losing money in bonds as rates rise has been far higher.
by phil - November 24th, 2015 8:12 am
You can't draw any conclusions from these low-volume trading days but, in general, stocks have been in retreat and this morning the news of Turkey shooting down a Russian jet fighter did not help the mood one bit as European markets dove 1.5% and our Futures followed down half a point (so far).
I already sent out a News Alert to our Members and, if you follow us on Twitter, you already saw it – so I won't go over all the details and possible repercussions again. Needless to say World War III would be kind of a bummer so let's hope things don't escalate. Fortunately, Vladimir Putin is well known for his diplomatic restraint.
The US State Department has already issued a Global Travel Alert that's likely to put a damper on holiday cheer this year. Paris is already seeing a slump as airline bookings into the city are down 13% – enough to put a serious dent in the travel industry's bottom line. I was in NYC this weekend and my children got to see heavily armed police hanging out in Times Square and it was way too easy to get stand-by show tickets on Sunday (but we knew it would be, that's why we decided to go). Buffett's admonition to "be greedy when others are fearful" applies to more than just stocks…
Brussells has become a complete ghost town as the Government there is hunting for terrorists in the capital – not even the subways are running as the ECB must be protected at all costs, of course. It is in this environment, amazingly, that I have gotten tons of messages and comments in the past week telling me I'm too bearish and the markets will fly on the biggest Santa Claus Rally of all time. It really does scare me that so many investors believe in Santa Claus, not to mention the Fed.
I'm tired of explaining why I'm more comfortable being in CASH!!! into the end of 2015 but David Stockman isn't, so you can hear his interview where he makes the case that the Fed is very…
by Sabrient - November 23rd, 2015 4:21 pm
Reminder: Sabrient is available to chat with Members, comments are found below each post.
Courtesy of Sabrient Systems and Gradient Analytics
Some weeks when I write this article there is little new to talk about from the prior week. It’s always the Fed, global QE, China growth, election chatter, oil prices, etc. And then there are times like this in which there is so much happening that I don’t know where to start. Of course, the biggest market-moving news came the weekend before last when Paris was put face-to-face with the depths of human depravity and savagery. And yet the stock market responded with its best week of the year. As a result, the key issues dominating the front page and election chatter have moved from the economy and jobs to national security and a real war (rather than police actions) against a blood-thirsty orthodoxy that, as the world now seems to universally understand, cannot be simply contained. It is suddenly better to risk being wrong but strong than to be right but weak.
In any case, the major market indexes have remained undeterred — by either the Fed’s apparent foregone decision to raise the fed funds rate next month or the sudden wave of violence sweeping the globe — as seasonality and a strong technical picture continue to stoke bullish conviction in U.S. stocks. Moreover, our fundamentals-based sector rankings are mostly unchanged.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
First a planeload of Russian tourists is bombed out of the sky. Then Paris is attacked by suicidal murderers. Then Mali gets the same. Now Brussels is in lockdown. This is not just a containment problem any longer (not that it ever really was). The civilized world seems to be coming together in the conviction that we are at war with a blood-thirsty ideology bent on religious and ethnic cleansing that would sooner see the entire world annihilated…