Here's a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Monday, April 28, 2014
Q2 Guidance Is Slightly Less Awful
Last Monday (April 21) on the Buzz & Banter, I discussed the possibility [subscription required] of an improvement in the guidance trend.
Now that earnings season is halfway over, the improvement is actually a reality.
According to FactSet, for Q1 for S&P 500 (INDEXSP:.INX) companies, 93 companies issued negative guidance, with just 18 positive -- a ratio of 84% negative.
For Q2, so far this earnings season, 36 companies issued negative guidance, with 15 positive. That's 71% -- not exactly favorable, but it's a step in the right direction in terms of confidence.
In terms of reported earnings, Q1 has been a bit of a mess with the weather, macroeconomic, and foreign exchange concerns, which investors have been OK with, but it would help to see some kind of pickup in earnings momentum for another drive higher.
There's isn't much room left in the multiple expansion game. Time for the "E" in the P/E equation to pick up the slack.
Tuesday, April 29, 2014
I spent the weekend reading Thomas Piketty's Capital and an interesting blog post by Nemo Incognito. The Piketty popularity train is in full gear, and Nemo's discussion of the topic was well worth the read. Economist Paul Krugman is doing all he can to pull the discussion into the smug left-wing black hole that he loves.
For practitioners whose views are often tempered by the realities of markets and margin clerks -- like me -- the topic is still important. I see the Piketty Theory -- that the wealthy (capital holders) will prosper because they can earn a return higher than the economic growth rate that constrains the rest -- in a simpler way: The price level of the stock market tells you little about the economy despite the constant drilling of the connection. In times of quantitative easing central bank policy, the relationship becomes even more elastic (abstract).
What did the level of the Nasdaq (INDEXNASDAQ:.IXIC) say about the state of tech in 1999? What does the recent new high in the S&P say about the soft 2% growth in the economy now? As I and @IvantheK have discussed before, monetary and tax policy is tilted to capital over labor. Abundance economics supports the view that unlike other "products," the price of capital can increase while there's too much of it. The cost of capital is being held down. The monetization of debt has caused equity to take on "cashlike" characteristics. Pundits often say, "Take profits, raise cash, or move to the sidelines" when the market is down. These actions apply to the "owner" of a cash substitute. How exactly does one "move to the sidelines" with an actual megaplex battery factory?
The next 20 years will shift the concept of capital ownership as the baby boomers retire in greater numbers. The massive taking of the profits will have to transfer to someone else. Piketty's solution of taxation underestimates the behavioral shift that would accompany this handoff. I continue to advocate from the other side of the equation. The US economy MUST grow faster at both real and nominal levels. The social upheaval associated with inequality will bubble up in Russia and China long before the US.
Wednesday, April 30, 2014
I seem to be reading a lot of bearish biases in people's writings lately., Sure, there are many reasons to be bearish: divergences, indicators, omens, indigestion, etc., There's always a way to see the bearish side. However, what if the market is setting up for a bullish move? What if the large caps holding higher is the balloon that encourages risk on to happen? What if small caps are already signaling that the market is setting up for a higher move?
Check out this very simple chart of iShares Russell 2000 Index ETF (NYSEARCA:IWM). It broke down, but the downtrend became unsustainable. I wrote a Buzz & Banter post on April 14 [subscription required], saying that the bottom was coming soon, and it bottomed the next day. Then I posted again on April 17 showing that the downtrend was broken. Now, if small caps continued the unsustainable downtrend, IWM tagged that downtrend three days ago in a retest. This type of retest of a broken trend line is typically a sign that a trend will start again in the other direction. This tells me that the risk-to-reward is now tilted toward small caps again, so I'm likely to increase my position size soon.
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Note: I do not use IWM for my position in small caps.
Thursday, May 1, 2014
According to USA Today, ""Everything has been stolen -- including the kitchen sink -- from the kitchen of a model house. Police said thieves stripped the kitchen of the Clayton Homes' unit in south Wichita." Said story stirred memories of the phrase "a kitchen sink quarter." Recall that very often, when a new CEO arrives at a troubled company to turn things around, the CEO will "throw" everything that's financially bad into the next quarter's earnings report to clean the decks for the corporate turnaround. And that, ladies and gents, is what yesterday's advance GDP report felt like to me: a "kitchen sink" report. While the media were shocked by the mere +0.1% GDP growth, it shouldn't have come as a complete surprise given the weather. Remember, however, that this is an advance estimate that's likely going to be revised upward. As Raymond James economist Dr. Scott Brown noted:
Details were a mixed bag. Foreign trade and inventories subtracted, as anticipated. Consumer spending growth was a lot stronger than expected. We did get a partial rebound from October's government shutdown, but defense and state and local government subtracted. Inventory growth slowed but still appears to be too high relative to the pace of final sales. This report should not change the outlook for Fed policy.
This went from Brown's lips to the Federal Reserve's ears, because yesterday afternoon's Fed policy statement didn't surprise. There were some minor differences in the description of the economy, but nothing that implies a sharp change in the Fed's outlook.,
Evidently the markets weren't shocked, and they did seem to look at yesterday's advance GDP report as a "kitchen sink" report, leaving the Dow Jones Industrial Average (INDEXDJX:.DJI) at a new all-time high and thus confirming the Dow Jones Transportation Average's (INDEXDJX:DJT) new all-time high of a week ago. And I don't care if it was the better-than-expected ADP employment and Chicago PMI reports, the fact that crude oil is breaking down, or the Fed's policy statement -- yesterday represented yet another Dow Theory "buy signal." Of interest is that on this current rally, the McClellan Oscillator isn't overbought (see the chart below), and the stock market's internal energy has just about a full charge. In fact, the only thing I found curious about yesterday's action was that the Dow made a new all-time high, but the Russell 2000 (INDEXRUSSELL:RUT) is still 6% away from doing the same. Nevertheless, the upside target price for this move is 1950 on the S&P 500, and investors should act accordingly. This morning, China's manufacturing report met expectations at 50.4, and economic data out of the UK were better than estimates. The question now becomes: Was yesterday a breakout or a fake-out? I think it was a breakout.
Click to enlarge
Friday, May 2, 2014
Not All Confirmation Is Created Equal
The Dow set a new record high on Wednesday, joining the transports and providing further Dow Theory confirmation of an ongoing bullish trend.
But is it an all-clear signal? Arguably, much of the strength in the Industrials has derived from a renewed interest in owning dividend-paying blue-chip stocks as 10-year yields continue to decline and as many former highfliers and small caps face-plant.
It's always a bull market in perception, not facts.
Looking under the surface shows that the price ratio of the discretionary sector (Consumer Discretionary SPDR ETF (NYSEARCA:XLY)) to the consumer staples sector (Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) shows a breakdown, which gives a conspicuously bearish point of view.
Click to enlarge
Confirmation lies in the eye of the beholder.
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