My wide ranging interview with the Founder and CEO of Minyanville includes the potential of a retest of the March lows, the importance of the US dollar to asset price changes, the "age of austerity", the value in financial innovation, and the importance of being a contrarian investor.
All Beyond the Sound Bite podcast interviews can be found at beyondthesoundbite.blogspot.com
To listen to this week's interview, click here
…but still too early to ring the bullish bell.
As earnings season begins in earnest and will soon kick into high gear, the fundamental valuation proof for equity prices’ faith (since early March) in an improved corporate profitability environment is the central issue at hand for investors. To justify current prices, second quarter earnings results MUST demonstrate that companies can turn in profits above consensus earnings expectations in an overall weak economic environment.
If 2Q09 results come in above consensus estimates (which are around $14 operating earnings for the S&P 500 - see table to your left), then stocks have a solid leg to stand on from which higher prices can follow as the second half of the year unfolds. Such a performance would signal that companies are able to produce sound earnings growth and profitability from the global economy while developed economies, such as the US, struggle with recessions followed by below potential growth.
Operating efficiencies, enhanced by recessionary-induced cost cutting, coupled with exposure to developing economies (which is where the global growth is and will be for the foreseeable future) are the ingredients for the potential of above consensus earnings results.
Conversely, should the numbers in the quarter just ended come in at or below consensus expectations, then concerns re valuation are justifiable. The valuation math in the near term is therefore not encouraging for the bullish case. To illustrate, take a moment to review the above table from this week’s “Sectors and Styles Strategy Report”.
The operating estimates for the S&P 500 for 2009 are in the mid $50 range. With the index at 900, that produces a 16.4 times P/E. Given the fact that the historical P/E for the S&P 500 in normal times is 15, it is hard to get overly enthusiastic for stocks with an above average P/E in less than normal times - which then brings into play the economic weeds that seem to be flourishing among the so-called green shoots.
Investment Strategy Implications
If companies cannot produce above consensus results (via global growth and operating efficiencies) and given the fragile state of the US economy, the suggestion is that the economic weeds that may strangle the US may also inhibit corporate growth and profitability such that earnings results will not justify even an average P/E.
The earnings results issued from several high profile names is, thus far, encouraging. However, as is the case with the technical analysis of stocks and the incomplete bottoming process, investors are well served to see how this plays out over the coming weeks as the earnings season provides more clarity on corporate profitability and the valuation justification for higher stock prices.
The Chief Investment Strategist at Standard and Poors returns for his third "Beyond the Sound Bite" interview, which includes a prospective correction to the 800 - 825 range for the S&P 500, Info Tech's recent strength and the classic rotation to early cycle sectors, why higher quality sectors have been and remain the investment place to be in the current market climate, and the economic transformation of the US economy.
Beyond the Sound Bite postings can be found at beyondthesoundbite.blogspot.com
To listen to this week's podcast interview, click here
In case you hadn't noticed, there’s a big head and shoulders debate brewing. A bona fide bulls versus bear story.
One side (the bulls) sees the stock market world from a decidedly more optimistic perspective with the potential of an upside breakout and a stock market run to new recovery highs. This view is exemplified by the first chart with the neckline somewhere around the 950 level (S&P 500).
Then there is the more pessimistic crowd who see the glass half empty with the threat of a downside break below the 880 level and the potential retest of the lows of early March (second chart above). The same price data but seen from different time perspectives.
In both cases, old school market technicians will tell you nothing can be concluded UNTIL the pattern is complete, meaning that the neckline has to be broken and the ensuing move underway. It is most interesting that all this is occurring just as the markets enter the all-important earnings season and the fundamental justification for higher (or lower) prices, the answers to which we will receive in the coming weeks.
Investment Strategy Implications
Anyone who has read the technical analysis side of my work these past years knows that I am not a big chart pattern guy. No doubt there are those who have found a way of producing a better than 50/50 chance of predicting future price actions via chart pattern analysis, however, I am not one of them.
In my experience, the vast majority of chart patterns are like a Rorschach test – you see what you want to see. Frankly, the only consistent justification that I have found for paying any attention to chart patterns is the simple fact that many others pay attention to chart patterns, which then moves chart pattern analyses to the behavioral science realm – the study of your fellow investment rats and how they run the maze.
From the more bullish perspective (which is where I sit), the completion of a market bottom would be signaled by an upside break above the neckline. As I have written several times before, that would be the sign for the old school technical analysts to ring the bottom-has-been-seen bell. BUT, as noted above, that cannot/should not be done before the fact.
Or, to quote that investment sage, Yogi Berra, “It ain’t over ‘til it’s over.”
My interview with the Managing Director and Chief Economist with Credit Suisse includes the 2Q09 end to the US recession, expectations of a sub par recovery of 3 1/2%, a sustained level of relatively high unemployment, and a potential compositional shift in the US economy.
Beyond the Sound Bite postings can be found at beyondthesoundbite.blogspot.com
To listen to this week's podcast interview, click here
The Fourth of July is just four days away. So, how about a four step process to investment fireworks for this summer?
The media is attributing today’s stock market swoon as being driven by this morning’s disappointing report on US consumer sentiment. No doubt it is a contributing factor, however, a single data point does make a trend, for when one expands their time horizon beyond the day a decidedly bullish trend has emerged over the past 8 weeks as the above table clearly shows.
Investment Strategy Implications
The investment implications for the above consensus results rests in the likely upward adjustments economists will make to their forecasts, which will in turn produce increased earnings expectations from bottom up analysts. As noted previously, this would occur for the following reason:
Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise is that, in the aggregate, current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, economists change their outlook, which in turn cause individual company analysts to adjust that macro economic component of their industry and company forecasts. However, since this process occurs with a meaningful lag, investors can gain a competitive advantage by anticipating changes to earnings forecasts as the above or below consensus reports are filtered into the forecasts.
In regards to current earnings expectations, consider the following statistic from contrarian value investor and behavioral finance expert, David Dreman (from last week’s NYSSA conference): from 1973 through 2008, the average analyst forecast error is 39%. That means that 2Q09 operating earnings for the S&P 500, currently estimated by bottom up analysts at approximately $14, may actually come in as high as $19.50 or as low as $8.50.
In light of the above consensus data noted above, the lag component of the forecasting process, along with an increasing number of economists estimating that the trough of the recession was reached this quarter, it would not surprise me if the 2Q09 earnings reports tilt more toward the higher number. Should that occur, then all the angst heard over the past few weeks re low volume would dissipate rather quickly as some of the $3.5 trillion still sitting in money market funds moves off the near zero percent interest rate sidelines.
And if that were to occur and stocks made a strong move to the upside, then old school market technicians will ring the bullish bell as completed bottoms and moving average signals will abound.
So, here is how a major bull market begins in earnest:
1 - Above consensus macro economic readings produce
2 - Above consensus earnings reports which
3 - Moves funds moving out of money market funds which produce
4 - Bullish readings by old school market technicians which results in
1050 or higher in the S&P 500.
Let the fireworks begin!
At noon US eastern time today, I have the privilege of conducting a webcast presentation for the Market Technicians Association titled "Market Signals with ETFs". You are invited to join the free 45 minute session as an electronic attendee: listen to the presentation and ask questions.
The topics I will be discussing include:
* Why stocks have an inherently upward bias
* Portfolio strategies such as diversification with a tilt
* Technical analysis tools and ETFs
* The three forces that have empowered all investors
To attend as a guest, click here
"In my blog post yesterday, I referred to valuation points made here and previously and tied them to the earnings reports from second quarter, which will kick in next month. Since we're in the pre-announcement period, investors should be alert for any early warnings signs that earnings will be at or below expectations. Only at-earnings- or above-earnings reports will provide the fundamental juice to power stocks higher from currently fully valued levels...."
To read the complete Minyanville article, click here
To view all Minayanville postings, click here
As dramatic as yesterday’s market decline was, there are several reasons to conclude that a market that was clearly fully valued (see last week’s postings) was one that was susceptible to any signs of economic and/or political areas of concern.
On the economic side of the equation was last week’s negative reading in my Macro Economic Consensus Trend indicator (see accompanying table and description below). After many weeks of net positive readings, last week’s negative -3 net contributed to taking some of the positive froth out of the fully valued market.
As for the political dynamic, more than a few areas of concern – Iranian election results, the loose screw in North Korea, and the US President and media Star in Chief with his major government initiative du jour – was more than the market could bear.
However, as important as all these factors are, it does appear that the more significant event that will determine the sustainability of the cyclical bull market will be the earnings reports, which begin next month. For 2Q09 earnings will provide the most direct sign that the above consensus economic data generated over these past months (noted above) has interpreted into higher corporate profitability. And it is higher profits that will be needed to justify the expected 1050 for the S&P 500 that current market levels imply.
Investment Strategy Implications
Investors can hoop and holler, wish and hope, and stocks can surge and plunge, but the proof will be in the 2Q09 pudding as to whether the anticipation of economic stabilization and higher corporate profits embedded in a fully valued market come to pass in the form of higher stock prices. Until then, marking time is the more likely outcome.
*Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise for the above analysis is that current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, earnings forecasts will adjust accordingly – with a lag. As economists change their outlook, the individual company analysts, taking their economists’ changed outlook, will follow suit and change their forecasts accordingly. By monitoring the data in real time, an investor can gain a competitive advantage by anticipating changes to earnings forecasts as the above or below consensus reports are filtered into the forecasts.
If Ken Lewis is to be believed, then Bernanke and Paulson pulled no punches in muscling BofA into the Merrill deal. Therefore, a few words on muscle.
“What do you think an artist is? An imbecile who has only his eyes if he is a painter, or his ears if he is a musician, or a lyre at every level of his heart if he is a poet, or, if he is merely a boxer, only his muscle? On the contrary, he is at the same time a political being, constantly alert to the heartrending, burning, or happy events in the world, molding himself in their likeness.”
Pablo Picasso
“Action is transitory a step, a blow, The motion of a muscle, this way or that 'Tis done, and in the after-vacancy We wonder at ourselves like men betrayed”
William Wordsworth
“The last three or four reps is what makes the muscle grow. This area of pain divides the champion from someone else who is not a champion. That's what most people lack, having the guts to go on and just say they'll go through the pain no matter what happens.”
Aaaarnold Schwarzenegger
“The function of muscle is to pull and not to push, except in the case of the genitals and the tongue.”
Leonardo Da Vinci
Have a good weekend.
