Buzz on the Street: What Traders Are Saying About Pension Rebalancing, the S&P 500, and the First-Quarter GDP Revision
A look back at the happenings on Wall Street this week, as seen by Minyanville's contributors.
Here's a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Monday, June 23, 2014
Dividends/Buybacks Hit Record High
FactSet just released its Dividend Quarterly report for the first quarter of 2014, and it makes for a nice companion to the recent data posted on the Buzz & Banter regarding share buybacks [subscription required].
- On a per-share basis, trailing 12-month payouts were up 12.5% year-over-year
- The consumer discretionary sector is expected to grow dividends fastest in 2014 (+21.0%)
- A total 425 S&P 500 (INDEXSP:.INX) companies pay dividends. This is the highest level since 1995
- The S&P 500 payout ratio grew by 30 basis points quarter-over-quarter to 31.9%, which is historically high excluding recession years. (In recession years, earnings go down, pushing up the percentage of earnings that are paid out)
- Total distributions (dividends and share repurchases) hit a record high of $249.1 billion in the first quarter -- surpassing the previous record set in the third quarter of 2007
- Dividend stocks outperformed from November 2009 to 2011, but since 2012, non-payers have outperformed
Below, you'll see a chart from the report showing the total level of shareholder distributions (both buybacks and dividends).
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Keep in mind that companies aggressively buy back stock and raise dividend payouts when they have confidence in future cash flows. And that confidence turns into overconfidence near tops.
That's the normal situation. This time, things feel a bit different because companies aren't just funding through cash flows -- selling bonds to buy back stock has become an increasingly popular financial engineering strategy.
In recent years, companies like Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), and Home Depot (NYSE:HD) have done this, and shareholders have definitely benefited.
But it could result in a big mess if rates ever go up.
It's not a here and now problem, but it's something to remember as the market hovers at all-time highs.
Tuesday, June 24, 2014
Time for a Break in Leadership?
I have been writing a lot about my late-cycle thesis, stating that outperformance should continue for what I deem the late-cycle leaders of consumer staples via Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP); energy via Energy Select Sector SPDR ETF (NYSEARCA:XLE); and industrials via Industrial Select Sector SPDR ETF (NYSEARCA:XLI). There has been a good run in all three, and at this point in the cycle, it is about time for a good shakeout. All three have recently hit overbought. I think the three sectors are due for a good break here, and energy will check back towards its 50-day moving average and possibly see industrials break theirs. Industrials are already failing to make new highs with the markets, so that divergence already seems to be playing out. A July swoon in all three sectors would be just what the bulls need for a second-half run into year end.
Below are charts of XLP, XLE, and XLI, respectively.
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Wednesday, June 25, 2014
The Big Shrug Off?
On April 4, the S&P 500 scored a Key Reversal Day, which perpetuated an 80-point give-back over six to seven sessions. Today, Mr. Market seems to be shrugging both shoulders at Tuesday's S&P Key Reversal Day and at this morning's ugly first-quarter GDP revision. Is today simply a Pause Day prior to lower prices, or are there more bricks in the wall of worry?
Thursday, June 26, 2014
The following information is courtesy of Neil Azous at Rareview Macro.
Quarterly Pension Rebalance Calls: Stocks are for sale, and bonds are being bought. Below is commentary on pension rebalancing from three financial institutions.
1. Goldman Sachs (NYSE:GS): For the second quarter of 2014, equities outperformed fixed-income by +3.74%. As a result, quarterly rebalancing flow estimates are -$7.67 billion in equities for sale. Also, for the month of June, the S&P 500 (INDEXSP:.INX) has outperformed US Treasury notes by +3.00%. The S&P 500 total return has returned +2.16%, and the 10-year total return has been -0.84%. This results in monthly estimated rebalancing flow of -$6.30 billion of equities for sale. Goldman Sachs saw one "trigger" event on June 9, with equities cumulatively outperforming fixed income by a 6% spread up to that date, leading to a net -$10.88 billion of equities for sale. Note that Goldman's assumption is that trigger rebalancing occurs at or around the time of event.
2. UBS AG (NYSE:UBS): As has been the norm in the QE era, UBS expects US pensions to sell stocks and buy bonds during the second quarter quarter-end portfolio rebalancing. UBS's model projects a moderate $19 to $22 billion of equity sales versus just under $10 billion of bond purchases. Furthermore, within equity portfolios, UBS sees the bulk of trimming ($12 to $15 billion) in US large cap stocks. Small cap, developed markets, and emerging market portfolios should see only marginal flows. On the fixed income side, UBS expects rebalancing purchases to affect mostly five to 10-year maturities. The 10-year area should outperform cash while flows are going through.
3. Societe Generale SA (EPA:GLE): The S&P 500 index has outperformed 10-year Treasuries by 3% month to date and 3.7% quarter to date. SocGen's model estimates $20 billion in equity-selling and bond-buying pension rebalancing demand at month end. The model also estimated there was about $17 billion in equity-buying and bond-selling market flow during the equity market rally this month.
I think this will weigh on equities through this coming Monday.
Friday, June 27, 2014
I was on the phone yesterday with Eric Kaufman when he said, "I drew two support trendlines for the S&P 500 a few days ago. One of them came in at Wednesday's intraday low of roughly 1,945. The other is at 1,939. If that area gives way to the downside, you can kiss this rally goodbye."
"Funny," I responded, "For weeks I have suggested the 1940 - 1950 level for the S&P 500 should be the logical support level for any ensuing pullback attempt that should arrive after the S&P stalls in the 1950 - 1975 overhead resistance level so often mentioned in my comments."
Unsurprisingly, the past three sessions' intraday lows have been 1,944.69, 1,947.49, and 1,948.34, and each time that the S&P has dipped into the 1,940s, it has sprung back. Interestingly, in their search for a causa proxima, the media dredged up Iraq for Tuesday's Tumble, the negative 2.9% GDP report for Wednesday's Wilt, and Federal Reserve President James Bullard's comments for yesterday's (June 26) downside attempt. So, where does that leave the market on a trading basis?
Well, as shown in yesterday's Morning Tack [subscription required], most of the S&P macro sectors remain overbought with the majority of stocks above their respective 10-day moving averages (DMAs), above their 50 DMAs, and above their 200 DMAs. On a short-term basis trading, however, the NYSE McClellan Oscillator has corrected its overbought condition of mid-June and could result in another rally attempt.
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Yet, I do not trust any rally from here. My friend Jim Kennedy, of the Atlanta-based Divergence Analysis hedge fund, wrote the following yesterday:
Our momentum screens show momentum tops have been given on every equity index. The daily short-term indicator trend remains down now for 10 days and the weekly short-term trend is now up into next week. If the weekly short-term trend turns down, we will have lower targets. Overall: we remain guarded.
Plainly, I agree!
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