Friday, May 30, 2008

Quotable Quotes: Drilling for Answers

Have you noticed just how impossible it seems to be to get a straight answer to the simple question – how does one determine the fair value of oil?

A few words on answers.

“When the gods wish to punish us, they answer our prayers.”
Oscar Wilde

“I was gratified to be able to answer promptly. I said, "I don't know."”
Mark Twain

“What if a demon were to creep after you one night, in your loneliest loneliness, and say, 'This life which you live must be lived by you once again and innumerable times more; and every pain and joy and thought and sigh must come again to you, all in the same sequence. The eternal hourglass will again and again be turned and you with it, dust of the dust!' Would you throw yourself down and gnash your teeth and curse that demon? Or would you answer, 'Never have I heard anything more divine'?”
Friedrich Nietzsche

“If you ask me a question I don't know, I'm not going to answer it”
Yogi Berra

Have a good weekend.

Thursday, May 29, 2008

A Troubling Convergence Ahead

commentary from this week's "Sectors and Styles Strategy Report*":

“We are in uncharted waters when the financial system becomes so disrupted.”
Fed Vice Chairman Donald Kohn
May 20, 2008

The Fed vice chairman joined a growing chorus of experts and raised doubts that the worst of the credit crisis is behind us. And, as has been noted on several previous occasions, that difficulty is likely to manifest itself when a new administration occupies the White House and proposes a series of policy changes that will almost certainly exacerbate a difficult situation.

At a minimum, new taxes will be proposed. At a maximum, however, policy decisions may hit the US and world economy precisely at a time when it needs it least. The odds of this occurring increase should the populist-minded Democrats control both the White House and Congress.

Investment Strategy Implications

There is a period of great uncertainty headed the global economy and markets way. That period will likely be led by US policy changes that will be the result of a new administration in the White House which will converge with the second wave of the credit crisis. For when you combine tax increases with credit crisis related losses complements of credit default swaps (and/or other financial Frankensteins) and the potential pressures of global inflation, the world economy will find itself dealing with a toxic mixture that monetary policy may not be capable of alleviating – thereby producing a real world case of pushing on a string.

While this rather gloomy outlook sits in the wings, investors, many still flushed with cash, will likely latch onto the shorter term positives of the global growth story and the effects of the US stimulus package (fiscal and monetary). Moreover, many technical indicators are still in sufficiently positive territory (see Mid Cap comments on page 8 of the report, for example) that day of reckoning may be forestalled.

As last week’s market action showed, a market must be positioned for a major move that requires a catalyst to produce the predicted result - the FOMC minutes and existing home inventories. The technical conditions for a major market decline that matches the economic outlook described above do not exist just yet. However, should they arise, then investors should be on catalyst watch for what will provide the spark for a truly nasty stock market experience.

*To download this month's free sample "Sectors and Styles Strategy Report, click here

Wednesday, May 28, 2008

Beyond the Sound Bite: An Interview with Vitaliy Katsenelson, CFA

My conversation with the Director of Research for Investment Management Associates and author of "Active Value Investing: Making Money in Range-bound Markets" includes the rationale why equities are in a range bound market, the "active value investing" approach to stock selection versus traditional value investing, and the process of identifying attractive stocks in a range-bound market climate.

Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Tuesday, May 27, 2008

Sectors and Styles Strategy Report: May 27, 2008

excerpts from this week’s report:
Model Growth Portfolio (MGP)
"Last week’s results have extended one of the best relative performance weekly winning streaks for the MGP: 8 out of the last 9, 14 out of the last 16, and 16 out of 21 for the year. The MGP’s year to date alpha now sits at 296 basis points..."

Model Growth Portfolio (MGP) Re-balancing
“No portfolio adjustments are being made at this time...”
ETF Market Monitor
Econ. Sectors & Industries: Economically sensitive sectors along with Financials were hit quite hard. Flight to defensive sectors was the standard response.
Size & Styles: Extremely curious to note that Small and Micro Cap had such a strong relative performance week.
Global: Economically sensitive to the US consumer China and India were the big losers.
Other: Exceptional strength across the commodity board.

Expected Return Valuation Model
“Last week’s sharp 3.47% decline in equities moved the ERVM away from fully valued and into a slight undervalued range. Additionally, the credit crisis is over crowd took a hit last week as several commentators noted that worst may not…”

Moving Averages Scorecard
“While no mega trend changes occurred, there was a decidedly broad-based net decline in the near-term direction of many indicators. For example as the following chart shows, Industrials,…”

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.

Friday, May 23, 2008

Quotable Quotes: The Art of Deception

It is fascinating to listen to all the pundits wonder just when Senator Clinton will drop out of the race. What amazes me is how they accept at face value her statement that she will stay in the race “until we have a nominee”. To most, that means whenever either candidate reaches 2026 delegates. However, for those of us schooled in the language of Clinton-speak (the meaning of is is), perhaps it means when the Democrats actually have a nominee – which, by the way, isn’t until the convention in August.

Therefore, to the beer –chugging Senator from Arkansas (via New York) on this Memorial Day weekend in the US let me offer these words from a person who did not dodge a bullet from a sniper:

“You may deceive all the people part of the time, and part of the people all the time, but not all the people all the time.”
Abraham Lincoln

Have a good weekend.

Thursday, May 22, 2008

Big Stocks Do Not Reflect Economic Reality

Recently, economic bulls were cheered by the news that earnings for the S&P 500 ex Financials rose a solid 11.8% in the first quarter of this year. Unfortunately, what the economic bulls seem to have ignored is the fact that once you drill down beneath the stratosphere of large cap issues you find a very different 1Q08 story.

Each week during earnings season, the Wall Street Journal compiles data for nearly 4,000 publicly-traded companies. As the table above shows*, the results paint quite another picture.

What the data reveals is that even when you include the S&P 500 big boys, earnings on a continuing operations basis were up a miniscule 0.33%, and on a net income basis they declined 1.46%. There are two facets of this data investors should consider.

First, were it not for the big boys the results would have been even worse for second and third tiered companies. Since large cap issues populating the 500 group benefit from exports via the global growth story, one can deduce that the more domestically oriented second and third tier companies on the WSJ list reflect a much worse US economic story than the headline numbers would suggest.**

Yet, there is a more ominous dimension to this data. For that I need you to read the following comments in the Tuesday Financial Times’ article titled “Fears of prolonged credit crisis set to hit Wall St”:

“We believe the real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,” Ms (Meredith) Whitney said.

The culprit is less the writedowns themselves than the “shut-down” in the securitization market which at its height provided 66 per cent of household borrowings in the first quarter of 2007.

Without that market, consumer liquidity will come under increasing strain, something that will “push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors.”

Ms Whitney and her colleagues also slashed their 2008 earnings estimates for the large-cap banking sector by an average of 17 per cent and their 2009 estimates by 20 per cent.

Ms. Whitney’s comments stand in direct opposition to certain titans of Wall Street who proclaimed the worst of the credit crisis is over. And what her comments allude to tie directly into my second point (and here’s the onion): the potential for widespread credit defaults in an exceptionally weak US economy will almost certainly produce the Bill Gross (PIMCO) noted fear of $250 billion of writedowns courtesy the $60 trillion credit default swaps market.

Since many recent second and third tier bonds (particularly the high yield variety) were issued with very lenient covenants, default rates have been quite low thus far. However, according to various sources, that story will begin to change in 2009 as those lower quality bond chickens come home to roost resulting in the aforementioned huge writedowns.

Investment Strategy Implications

To paraphrase the old Wall Street technical analysis adage – when the generals move out but the infantry fails to follow, bad things are sure to occur. If investors simply relied on the headline results to reflect the state of US corporate profitability, they would get an overly rosy picture. Moreover, since it is the second and third tier companies (not to mention small businesses) that create jobs in America, one can assume that the economic pressures (should they not alleviate fairly quickly) will result in fewer jobs being created and wages under pressure. This second aspect suggests further difficulties for the already stressed US consumer, which takes you right to Ms. Whitney’s point.

Finally, to punctuate my big-do-not-reflect-reality point, consider the following excerpt from an article in the Economist magazine re the art market titled, “Stellar art-auction results in New York do not tell the full story”:

ON THE face of it, the art market is still booming—in spite of the credit crunch and fears of a recession.

…about one-third of works that were auctioned on May 6th and 7th were sold at or below the lowest estimated price. Overall takings were below expectations and lower than the total at comparable sales in the past couple of years. And bidding for the second-division artworks flogged during daytime auctions was sluggish at best. “Bids for the superstructure of the art market are still high, but the foundation is weakening,” says Matthew Rutenberg, an art historian in New York.

*click on image to enlarge.
**interestingly, when you exclude Energy from the list results were only marginally worse: -1.69% and -3.39%, continuing operations and net income respectively.

Wednesday, May 21, 2008

Beyond the Sound Bite: An Interview with Art Hogan

In my interview with the Director of Global Equity Products for Jefferies & Co. we explored his shallow recession call, fairly strong operating earnings outlook, sectors (and industries within) that look attractive and ones to avoid, and the influence and importance of hedge funds.

All Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Tuesday, May 20, 2008

W (not the movie)

The economic debate seems to have settled into which letter best fits the future trend of the US economy: V, U, L, or W?

The most bullish group, which includes many in the Goldilocks-redux camp, believe in the down (maybe strong) then up US economic scenario. V for victory, perhaps. Then there is the down then flat group, differing only in whether an upturn occurs sometime in the foreseeable future. U shows eventually, L says “who knows when?”. Some days things look up versus down and dirty for longer than you think.

The last group is the double dip club, my group. The US economy rebounds this year emboldening the Goldilocks dreamers to spout their dreams of an economic “morning in America”. Unfortunately for them, the false dawn will result in a “mourning in America” when 2009 rolls around and the tailwinds of the stimulus package give way to personal economic reality for many US consumers.

Driven by a negative wealth effect, US consumers spend less and save more for that retirement rainy day as concerns over Social Security and a diminished asset base begin to change habits. Such a change will take time, however, as the spending addiction of US consumers still has some strength to it – a strength that will likely exhaust itself thanks to the morphine known as the current stimulus package, fiscal and monetary.

Investment Strategy Implications

Oliver Stone may be working on a movie about George W. Bush titled “W”. But investors will likely spend more time next year focused on another W – the double dip in the US economy.

Short term, equities will likely continue to benefit from the dreams and hopes of the Goldilocks crew. And investors should continue to exploit that fantasy. However, a changed business model for most financial institutions will contribute to a diminished level of credit creation stimulus for the US economy, which when combined with a less profligate, more frugal US consumer will coincide with a new domestic political dynamic leaving only emerging markets to save the global economic day. And that may turn out to be more difficult than it appears.

Monday, May 19, 2008

Sectors and Styles Strategy Report: May 19, 2008

excerpts from this week’s report:

Model Growth Portfolio (MGP)
“What can I say? Yet another strong relative performance week for the MGP (that makes it 7 out of the last 8, 13 out of the last 15, and 15 out of 20 for the year) lifts the year-to-date relative performance results at another yearly high: +2.57%. If maintained for the full year, the MGP would beat the S&P 500 by 6.68%. Doubtful, but you never know.”

Model Growth Portfolio (MGP) Re-balancing
“Both adjustments in the MGP are largely influenced by the US domestic political scene...”

ETF Market Monitor
Econ. Sectors & Industries: Energy may have stolen the weekly performance spotlight but Basic Materials (especially Steel) and Semiconductors were the strongest winners.
Size & Styles: Mid Cap continues its recent outperformance tear. Micro Cap still lags considerably.
Global: One word for Brazil – caliente!
Other: Despite Energy’s continued strong performance, Commodities and Ag were big relative performance losers.

Expected Return Valuation Model
“The US equity market sits right around current fair value (-1.64%), thanks to the recent slight upward adjustment in 2008 expected operating earnings. In that regard, reality has finally sunk in with bottom-up analysts, as the data below shows with a drop below $90 thanks to a downward revisions to 1Q08. It should be noted, however, that bottom-up estimates still have a ways to go as second half earnings expectations are still on the overly optimistic side (see following table)…”

Moving Averages Scorecard
“Global markets led by emerging economies are where the best absolute strength resides (70% positive ratings). Further improvement puts the US economic sectors at the >50% level for the first time in many months. That said, Energy has reached an extreme level as the following chart shows…”

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.

Friday, May 16, 2008

Picture This: Bodacious the Bull

On this day eight years ago, the most feared rodeo bull of all time passed away. So, the next time someone tells you how hard it is to ride a bull market direct them to this video: Bodacious the Bull

Have a good weekend.

Thursday, May 15, 2008

“Inflection Day” Rally: Progress Report and Forecast

Since “inflection day”*, the equity markets have witnessed a modest increase in risk appetite. This is evidenced by several indicators (credit spreads, TAF and TSL auctions, for example) as well as by the trading action between and among various market indices.

To illustrate, the charts to your left show the risk appetite increase but it is not as uniform as one might suspect. And a few surprises are found.

Chart 1** (upper left) shows the performance from a size and style perspective. Note that the top performer is the Mid Cap group (overall - MDY, value - IJJ, growth - IJK). In the number four performance slot is Small Cap Growth (IJT). The rest (Small Cap, Small Cap Value, Large Cap, Large Cap Value, Large Cap Growth, and Micro Cap) are bunched fairly closely together with Micro Cap (IWC) at the bottom of the list.

Chart 2 (upper right) looks at the data from a US economic sector perspective. Here, Energy and Basic Materials assume their global growth story lead position. And “defensive issues” such as Healthcare and Consumer Staples are at the bottom of the list. The remaining sectors are bunched together. However, it is interesting to note who is in the number three performance slot – Consumer Discretionary.

Chart 3 (lower left) takes us to the global markets with the lead country/region held by China (FXI). The second cluster contains Japan (EWJ), Latin America 40 (ILF), and Emerging Markets (EEM). The bottom grouping is anchored at the bottom by the United Kingdom (EWU).

Chart 4 (lower right) provides a look at the BRICs. Once again, China (FXI) heads the group with Brazil (EWZ) in second place. Russia (RSX) is third. And the S&P 500 (SPX) just ahead of highly volatile India (INP)

So, what does this all mean?

Investment Strategy Implications

The above charts provide equity market performance evidence of a return to risk among investors. Higher risk styles, countries, and regions have generally produced the best “inflection day” rally results thus far. There is also performance evidence that US investors believe economically sensitive sectors such as Consumer Discretionary are likely to be near term beneficiaries of the rebate checks in the mail.

From a macro strategy perspective, however, there is much to be concerned about re the sustainability of the “inflection day” rally beyond the end of the summer.

For example, it has been argued on this blog and in my reports that the equity markets are a touch ahead of themselves, that the return of investor risk appetite (including a higher degree of comfort re earnings) is premature at best. The pain to be experienced - economic, financial, and political – going into 2009 may surprise many ready-to-return-to-risk investors. The same goes for those who seem ready to resurrect the Goldilocks scenario (is Kudlow listening?).

That said, it has also been argued here that in the very short term (as in this month), valuation levels and certain technical analysis data suggests the “inflection day” rally may fade a bit before resuming after Memorial Day (US).

Again, so what does this all mean?

I may be wrong but here goes:

Flat to down in the very short term; up through the end of summer; possible mega market top within the next six months; investor hell on earth in 2009.

*So declared by many market mavens as being March 17 – Bear Stearns bailout day.
**click on images to enlarge.
Note: All dates are from March 17 (“inflection day”) through the close yesterday.

Wednesday, May 14, 2008

Beyond the Sound Bite: An Interview with Don Rissmiller

In my comprehensive interview, the Chief Economist with Strategas shares his thoughts and insights on a long and shallow US economic downturn, the US consumer - credit, spending, and savings, and residential and non residential construction and lending.

All Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Tuesday, May 13, 2008

Inflection Day Rally Effects – Rotation Underway

text from yesterday's weekly report:
As the "Inflection Day" rally rolls on, a rotational pattern seems to be emerging. The recent emerging weakness in Consumer Staples combined with strength in areas such as Consumer Discretionary and Mid Cap Growth suggest a sustainable near term rally in the latter groups is highly probable. Furthermore, it can be assumed that other similar riskier groups (Small Cap Growth, for example) are likely to follow as a summer rally emerges after an expected period of weakness this month.

A catalyst for much of this potential strength is the rebate checks in the mail, the majority of which should be received and spent this quarter, 2Q08.

FYI - The economic and valuation effect of the stimulus is noted on page 3 in this week's report.

The US consumer’s desire to spend was evident in last week’s consumer credit report, as the first chart above shows quite clearly.

This appetite to spend, to maintain one’s existing lifestyle, occurs despite the fact that real disposable income is under pressure (see second chart).

Investment Strategy Implications

Consumer sentiment may be at a very low point (next report on this due this Friday) but the need to maintain one’s lifestyle still remains an important factor of American life. This will change, however, as time passes. Savings will rise as the obvious consequences of a negative wealth effect alter consumer behavior, particularly among baby boomers whose retirement timeframes come into sharper (and closer) view with each passing year.

But that is then and this is now. And it is in the now that many investors operate in. Therefore, a counter trend rotational rally will likely unfold this summer with higher risk groups, such as Mid Cap Growth and Consumer Discretionary, outperforming the more defensive areas such as Consumer Staples. After that, a reversion to their secular trends should resume with a very strong downward tilt for the overall market going into the fall of this year and into 2009.

*To learn more about Blue Marble Research's subscription services, click on the newsletter subscription information link to your left.

Monday, May 12, 2008

Sectors and Styles Strategy Report: May 12, 2008

excerpts from this week's report:

Model Growth Portfolio (MGP)

“Yet another strong relative performance week for the MGP (that makes it 6 out of the last 7, 12 out of the last 14, and 14 out of 19 for the year) puts the year-to-date relative performance results at another yearly high: +2.22%...”

ETF Market Monitor

Econ. Sectors & Industries: The base pattern for the current market returned to form with Energy up big and Financials down big. Accompanying Financials to the downside was its performance buddy, Consumer Discretionary.
Size & Styles: What’s up with Mid Cap Growth? Unusually strong weekly performance warrants further monitoring.
Global: As Energy goes, so goes Russia and Canada.
Other: Commodities, Agriculture and Gold recent losers had a very strong up week.

Expected Return Valuation Model

“Based on incoming data, it now appears likely that the tax rebate checks will hit most pronouncedly in 2Q08 thereby producing an economic bounce disproportionately in that quarter. Accordingly, and based on the 1Q08 earnings results (ex Financials), the projected S&P 500 operating earnings for 2008 has been adjusted upward from…”

Moving Averages Scorecard

“Last week’s market pullback produced some weakening in the near term direction for most US economic sectors. There were, however, two interesting developments. Consumer Staples produced an interesting decline in its near term direction (see chart below). Contrarily, Mid Cap has improved sufficiently to warrant closer monitoring as it suggests broader market strength…”

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.

Friday, May 9, 2008

Quotable Quotes: Thank you, Mr. Obama.

Bush, Clinton, Bush, ..oops..

Thanks to Obama (and barring an unforeseen disaster in gun-happy America), the dynasty of dysfunctional political family rule has come to an end.

“It's exciting; I don't know whether I'm going to win or not. I think I am. I do know I'm ready for the job. And, if not, that's just the way it goes.”
George W. Bush

“I'll be glad to reply to or dodge your questions, depending on what I think will help our election most.”
George H. W. Bush

"You know, if I were a single man, I might ask that mummy out. That's a good-looking mummy"
Bill Clinton, looking at "Juanita," a newly discovered Incan mummy

“An election is coming. Universal peace is declared and the foxes have a sincere interest in prolonging the lives of the poultry.”
T.S. Eliot

Have a good weekend.

Thursday, May 8, 2008

The “Inflection Day” Rally

The granddaddy of the market confirmation principle, Dow Theory, states that each index (Industrials and Transports) must confirm the other in order for a move (up or down) to be considered sustainable. If one index makes a new recovery (not all-time, necessarily) high or low, the other must confirm that move with its own recovery high or low for the move to be considered sustainable.

In what is becoming known as “inflection day*”, March 17 witnessed the Dow Industrials break to a new low but the Transports failed to confirm that low (see first chart**). Subsequently, stocks marched ahead with each successive new recovery high in each index being matched by the other.

For some less-schooled market technicians, that’s all she wrote. We currently have a non-confirmation that occurred on inflection day and its off to the upside races. For the moment, let’s accept the trend call of the Dow Theory but not stop there. Let’s incorporate a few other indicators (specifically momentum related) and try to patch together a technical analysis forecast for the next several months (something that efficient market types say is impossible).

The second chart** provides several detailed momentum related indicators that I have found to be of considerable short-term value. A close examination of the Momentum, MACD, and Slow Stochastics indicators for the relatively strong Transports all point to one conclusion – the current rally has weak momentum underpinnings. Momentum has failed to produce a higher high, MACD is at a crossover point (to the downside), and the ultra short-term Slow Stochastics has already crossed and is headed south.

None of the above indicators suggest a reversal of the current rally. However, they all point to what is likely to be a very short-term mediocre to down period (probably lasting until Memorial Day, the unofficial start to summer here in the US). After that, a summer rally seems to be in store as the non-confirmation signal on inflection day was followed by a confirmation signal thereafter.

Investment Strategy Implications

Technical analysis (TA) is one tool that can be relied upon for market timing and portfolio strategy purposes. The above signal (one of several in the TA toolkit) suggests a tradable rally into the summer after a brief respite in the very short term***. The other tool, fundamental analysis, tells a decidedly different story – one that will play out into the fall and 2009. I suspect that the technicals of market will begin to signal that ugly period once the current inflection day rally has run its course.

*Bear Stearns deal (steal?) results in a change in the credit crisis.
**click images to enlarge
***expect to hear the tired phrase “sell in May and go away”.

Wednesday, May 7, 2008

Beyond the Sound Bite: An Interview with Maria Fiorini Ramirez

In my interview with the President and CEO of Maria Fiorini-Ramirez, Inc. we discussed her no recession call, impacts of a classic credit crunch and deleveraging, the balance sheet strength of US corporations, and the status of the US consumer.

All Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Tuesday, May 6, 2008

Even Buffett Isn’t Perfect

"The idea of financial panic -- that has been pretty much taken care of,"
Warren Buffett

“Economy May Face Prolonged Pain, History Suggests”
Greg Ip, Wall Street Journal

Mr. Buffett may be technically correct but that won’t help investors who come to the mistaken conclusion that further economic pain has been averted.

The argument being made in my previous reports and on the blog point to a painful adjustment process that the US and world economy will likely undergo as it suffers through the withdrawal pains of deleveraging. Yes, the panic may be over (for now), but the adjustment is not.

A changed credit creation process will impact the real economy overall (through lower credit availability) but will also hit the Financial sector directly through a changed business model. The originate to distribute model is broken and whatever will replace will very likely not be anywhere near as lucrative as was witnessed over the past decade.

Investment Strategy Implications

The recent return to risk (I say complacency) by many market participants ignores the longer term shifts underway in the US economy. Moreover, in the near future there is a rising likelihood that the US consumer, particularly the baby boomers, will come to realization that their dependence on a rising net worth to provide for a retirement lifestyle that equates to something close to their current lifestyle (replete with high degrees of indebtedness) is no longer valid. Accordingly, a shift away from shop ‘til I drop to saving for that inevitable rainy day will contribute to the transformation of the US economy.

Offsetting the downward economic pressure from a higher saving rate by the US consumer will be an expanded US export market. Global growth, if managed properly by emerging economies (not a guarantee by a long shot), can enable the world economy to navigate through the deleveraging process of the financial industry and a shift to savings by the US consumer.

These factors are what await investors. And they should not be underestimated. Whether another credit crisis shoe will drop will only exacerbate the situation.

The situation is highly fluid. Therefore, the assumptions that the markets and economy are out of the woods seems premature, at best.

As the book title of my recent "Beyond the Sound Bite" guest, Vahan Janjigian, puts it – “Even Buffett Isn’t Perfect.”

Monday, May 5, 2008

Sectors and Styles Strategy Report: May 5, 2008

in this week’s report:

Model Growth Portfolio (MGP)

“The combination of the occasional pricing discrepancy between the S&P 500 and the individual economic sectors (1.15% vs. 1.41%) coupled with the strong performance by the Latin America 40 produced an overall excellent week for the MGP.

Year-to-date relative performance now sits at its highest level of the year: +172 basis points.”

Market Monitor

"The Market Monitor has been expanded to include several subsets of key regions of the global market. In developed markets, United Kingdom and Canada. In emerging markets, Malaysia, China, India (deleted “Chindia”), Russia, and Mexico. This is the first step in an overall expansion of the Market Monitor that will occur over the coming weeks.

Econ. Sectors & Industries: Energy dropped significantly, as did Steel. Tech and Telecom were the best performers.
Size & Styles: Once again, little notable performance differences vs. the S&P 500.
Global: Brazil (replacing the Latin America 40) was the big winner.
Other: Commodities joined Agriculture and Gold (second week in a row) as the big losers."

Expected Return Valuation Model

“A continuation of the same set of circumstances exists from a valuation perspective. The crux of the matter is whether lowering the risk adjustment band from the 120 – 140 basis points (which was done to reflect the increased level of risk due to the credit crisis) to the 100 – 120 range is appropriate? Lowering the range will have the effect of raising the fair value target levels….”

Moving Averages Scorecard

“Last week’s continuation of the recent equity market rally moved all segments upward with one positive shift to neutral ((Consumer Discretionary). That said, I believe there is general level of underlying weakness in the recent market rally as noted in a blog entry last Thursday and as can be seen in the following chart (see report)…”

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.

Friday, May 2, 2008

Quotable Quotes: Satanic Statistics

They say the devil is in the details. Well, how about this detail? On Monday the world population will reach 6,666,666.

Perhaps a few words on statistics might alleviate any hellish thoughts.

“There are three kinds of lies: lies, damned lies, and statistics”
Benjamin Disraeli

“Not everything that can be counted counts; and not everything that counts can be counted.”
George Gallup

“One survey found that ten percent of Americans thought Joan of Arc was Noah's wife.”
Rita Mae Brown

“Figures don’t lie, but liars figure.”
Mark Twain

“A recent survey found that 46% of American men are uncomfortable eating a banana in public.”
David Letterman

Have a good weekend.

Thursday, May 1, 2008

Technical Thursdays: May’s Market Flowers Will Wilt Before Blooming This Summer

There’s a certain feebleness to the current US equity rally that the accompanying chart* shows quite clearly and should be a cause for concern to the bulls.

To begin, it is always more encouraging when Momentum (first indicator) is more robust. Failing to reach even the 100 mark is not inspiring. Moving in sync is MACD (second indicator). The slope of the MACD lines has diminished since mid April. And now the prospects of a crossover of the short-term (blue line) down through the longer-term (maroon) is a danger signal. Last, we have the slow stochastics where the short-term (red) has crossed the longer-term (blue) and appears headed toward oversold territory (under 20).

Investment Strategy Implications

From a technical perspective, the above points along with the chart pattern stuff (resistance levels at and above 1400 (S&P 500) as well as the concern that a failure to breech its 200-day moving average) suggest investors will likely be hard pressed to reasons to be overly bullish. Moreover, recent bullish sentiment readings (Barrons cover story, AAII survey) is a serious cause for concern.

From a fundamental perspective, while there has been some improvement equities have reached fair value (see table below)*, 1Q08 earnings and real economy data are being digested, and the Fed is likely on rate cut pause, the catalyst for a higher market does not exist.

Lastly, from a US domestic political perspective, despite the beating Obama (the nominee) and Clinton (the spoiler) have exacted on each other and themselves, McCain has yet to make substantial enough headway to alleviate concerns of his failing to win this fall.

The net result of all of the above appears to be a weak spell for most equity markets (except Brazil – see yesterday’s blog posting).

*click images to enlarge