Wednesday, December 16, 2009

Beyond the Sound Bite: An Interview with Thomas Krasner, CFA

My interview with the Principal and Portfolio Manager at "Concise Capital Management" introduces listeners to a unique fundamental analysis approach to high yield bonds. By focusing on short maturities, Mr. Krasner and his associates minimize the interest rate risk dynamic while capturing high income streams. Tom also provides his perspective on the current default rate cycle in the high yield bond area.

The length of the interview is 16 minutes 15 seconds.

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

Friday, December 11, 2009

Vinny on TV

I had the pleasure of appearing on TV's webcast service. The discussion was a 2010 outline for equities.

The length of the interview is 2 minutes 33 seconds.

To view the interview, click here

Wednesday, December 9, 2009

Beyond the Sound Bite: An Interview with Marc Chandler

In my comprehensive conversation with the Senior Vice President, Global Head of Currency Strategy at Brown Brothers Harriman, and author of "Making Sense of the Dollar", we explored the short (cyclical) and long term (secular) view of the world's most important currency - the US dollar, the risks of a liquidity bubble, the Fed's exit strategy, and the direction of short and long term interest rates.

The length of the interview is 16 minutes 15 seconds.

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

Wednesday, December 2, 2009

Beyond the Sound Bite: An Interview with Richard Kang

My conversation with the Chief Investment Officer & Director of Research for Emerging Global Advisors, an investment advisor to various exchange traded funds, includes a description of the company and its work in creating and managing emerging markets exchange traded funds, the case for emerging markets sector ETFs, and an economic and investment perspective on the emerging markets.

The length of the interview is 14 minutes 31 seconds.

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

Tuesday, December 1, 2009

Appearances Can Be Deceiving

If there is one thing that the New England Patriots have in common with the stock market it’s that neither is quite all that they are cracked up to be.

Like the Patriots, the stock market has a certain amount of star talent supporting its run for success. The Pats have the skills and talent of Belichick and Brady that enable an otherwise mediocre team from drifting into the domain of the pigskin wannabees. In the case of the stock market, it is largely the skills and talent of the stimulus machine (monetary and fiscal) that enabled (emboldened might be a better word) investors to lift prices to above historical average P/E land.

Investment Strategy Implications

Quarterbacks know that handing off the ball to a solid running back makes their life that much easier. The stock market equivalent rests in the economic handoff from stimulus to sustainability. Thus far, that has not quite occurred. Yet, valuation levels strongly suggest that such an occurrence is not only inevitable but will be highly successful (as in earnings growth rates that a V shaped economic recovery makes possible).

Sorry Bill and Tom, this will likely not be your year of glory. Your skills and talent will likely not be enough to mask the weaknesses that underlie your team. As for equity investors, they are accordingly well advised to be sensitive to the economic weaknesses that are masked by huge sums of liquidity. In sport as in the markets and the economy, appearances can be deceiving.

Tuesday, November 24, 2009

We Have Nothing To Fear But Uncle Sam Himself

No, this won’t be a Limbaugh/Beck/Cato Institute inspired rant against the evils of big government. Rather, today’s commentary focuses on the FUD factor - fear, uncertainty, and doubt – that many small businesses harbor toward where the US economy (and the regulatory side of our government) is headed.

Investors know the adage that the markets abhor uncertainty. In the current economic climate, what should be appreciated equally as much is how uncertainty is playing into a diminished US economic recovery: global multinational big earnings notwithstanding.

When I started focusing on the potential of a bifurcated earnings season several months ago, I noted the risks to the US economy and the need for a sustainable, organic economic recovery. As the primary engine of jobs growth, small businesses are key to a sustainable economic recovery – a point highlighted in my September 22nd David Malpass podcast interview and recently emphasized again in a Bloomberg Surveillance radio interview with the National Federation of Independent Businesses (NFIB) chairman, Bill Dunkelberg.

As Mr. Dunkelberg noted in the November 20th Bloomberg radio interview, normally in an economic recovery one of the first groups out of the box to embrace the prospective better times ahead are small, independent businesses. Optimistic by nature, this group wants to find ways to make payroll and grow their businesses. However, as Mr. Dunkelberg also noted, such is not the case in the current recovery as the normal optimism is absent. In its place is a still very high degree of FUD - much of it anchored in concerns over regulatory and legislative change.

There are two implications to this small business tale of woe – one economic, the other market.

As the recent 3Q09 earnings results demonstrate, the global growth story along with the weak US dollar is benefiting the large, multinational while masking what could be the start of a hollowing out of the US economy. The longer term economic implications are obvious – weakened domestic growth impacting the key jobs engine of the economy, small businesses, limits hiring and wage increases, which further inhibits the US consumer’s spending habits and feeds into the new frugality, which then diminishes the US economy’s economic vigor. When you add to this mix the angst over change noted above, the cocktail you end up with is not a very pleasant tasting concoction.

As for the market dynamic to all this, it is a fruitful exercise to compare the price action of the large and mega cap sector of the market to the mid, small, and micro groups for signs of price performance divergences. If a divergence begins to develop (a point I first noted on September 29th), then a market recognition of the real economy risks noted above will very likely set the stage for a more meaningful market pullback, most likely in the first quarter of next year.

As the above chart* shows, such divergences have begun to occur - the recent highs by the large and mega cap sectors (SPX and OEF) are thus far not being confirmed by the Smids and micro cap groups (MDY, IJR, and IWC). Moreover, the late October/early November pullback made lower lows in the Smids and micro caps but not in the large and mega cap areas. Both market developments are facts that have not occurred since the bull rally got started in early March.

Crying Uncle

Maybe all will be well as the rising tide of big business eventually lifts the smaller boats. Then again, a scenario similar to Japan in the 1990s make occur in which big business exploits their competitive advantage at the expense of their smaller, more domestic brethren via pricing pressures to gain market share. And we all know how that story turned out.

*click image to enlarge

Friday, November 20, 2009

Vinny on

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Wednesday, November 18, 2009

We (Still) Don't Know What We Don't Know

So, here we are. More than two years into what started out as a credit crisis, one plus year after the Lehman collapse and a question that pertains to the one of the central workings of the equities market cannot be answered.

At last evening's Market Technicians Association Educational Foundation seminar, the question your trusty moderator (that's me) posed to the esteemed panel with its decades of experience was in regards to volume. Specifically, the equity markets' volume as recorded each day for every stock traded. That is, the volume that accompanies the price action that results in the market capitalization of the stock market that results in the market value of every investor's portfolio.

Many market analysts have noted the low volume that has accompanied this bull rally. Some have used this fact as a reason to be more cautious, even bearish. Others have cited that low volume bull rallies have occurred in the past and this one is no different. However, in the past, the volume recorded for equity trades completed were quite accurate and reliable, being recorded on exchanges and reported accordingly. Today, the picture is not quite so clear.

With so much trading occurring in the off the exchanges hidden recesses of dark pools and structured products, I asked my very knowledgeable panel, can any investor rely on the volume figures being generated in this current market to measure the strength of the price action of a stock? The answer received was, "We don't know". Well, if this well connected, highly informed group of individuals doesn't know, you can easily assume that just about no one knows. Do you?

The importance of understanding this issue goes beyond its impact on basic market analysis tools (such as technical analysis) and cuts to the heart of a financial system that is still shrouded in opaqueness.

Transparency remains elusive. Yet, transparency (knowing what investors need to know) is vital to the restoration of a sustained confidence in a system that can be measured. When trades occur in the dark corners of dark pools and other off-exchange structured products, clarity as to what exactly is transpiring becomes the victim and investors seeking to measure the market become the equivalent of a bystander to a drive-by financial shooting.

Investment Strategy Implications

Nothing increases the risk factor of any investment more than the dangers posed by ignorance. Yet, here we are. More than two years into what started out as a credit crisis, one plus year after the Lehman collapse and we still don't have a clear idea of what exactly is transpiring in a central part of the capital markets - equities.

For those who might be tempted to dismiss such concerns I simply point to the two key impacts of changing equity prices: the wealth effect and the cost of capital. Both directly impact the real economy, in the current case in a positive way. Were it not for rising market values, the current government policies designed to rescue the US (and global) economy would be brought into doubt. And doubt, a close cousin of uncertainty, is a bad thing for a fragile economic environment.

Price without volume is an incomplete measure of the strength (or weakness) of a market move. Yet, in the current environment, price is the only metric that can be tracked with clarity. Volume, its indicator of power, cannot.

Two years and running and we still don't know what we don't know.

To further the exploration of what we don't know tomorrow I will describe how hedge fund replication products pose a potential threat to the equity markets.

Tuesday, November 17, 2009

At the Intersection of Fundamental and Technical Analysis

This evening I have the privilege of moderating a panel discussion for the Market Technicians Association Educational Foundation. My goal is to gain insight into the economy and markets at the intersection of fundamental and technical analysis with my esteemed panel: Robert Barbera, John Mendelson, Jason DeSena Trennert, Louise Yamada, CMT, and Edward Yardeni. Some of the likely questions that I will pose in the Q&A portion of the program that I control as moderator are:

• Will the US economy evolve into a growth period with less reliance on government stimulus programs and more of a self-sustaining, organic nature?

• How will the US jobless rate decline in an environment where the job creation machine of the US economy – small and mid sized businesses – are credit constrained and have limited access to the benefits of a weak US dollar and the global growth story?

• Will the globally oriented companies in the US follow the example of their Japanese counterparts of the lost decade of the 1990s and take advantage of their stronger economic position vis-à-vis the more domestically oriented companies and engage in pricing pressures to gain market share thereby further depressing the economic recovery ability of the smaller, more US centric companies (which thereby further inhibits their ability and willingness to hire)?

• Is the third question noted above the reason why small and micro cap sector have been lagging the market rally of late (thereby producing a price divergence and the prospects of a market correction)?

Tomorrow, I will share with you the answers I receive to these and other questions along with several thoughts and observations.

Until then, if you have any questions you think I should pose to the panel, feel free to send them to me at

Wednesday, November 4, 2009

Beyond the Sound Bite: An Interview with Michael J. Mauboussin

"In my latest interview with the Chief Investment Strategist for Legg Mason Capital Management, we discussed a bottom-up view of the markets, the sustainability of the US economic recovery, and key segments of his new book: "Think Twice: Harnessing the Power of Counterintuition", including concepts such as decision making danger zones.

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

Tuesday, November 3, 2009

A Market Derived Valuation Model

When it comes to valuing the market should an investor start with his/her conclusions and then see if the market is in agreement (intrinsic value to market value stuff)? Or should an investor start with the market’s conclusion (in the form of its current price) and then attempt to identify what would have to be produced (in the form of projected future earnings) to justify the current price?

To accomplish the former, all one has to do is turn to the media and give a listen to the myriad of talking heads pontificating on what should be by starting with what they perceive is the message of the economy (or industry or company) and then debating their conclusions with that reached by the market.

To accomplish the latter, an investor would start with the message of the market and then seek to match it with an appropriate set of inputs (such as earnings, growth rates, and a discount factor) to determine what inputs would be necessary to match the current price. To do this, an investor would need a process by which the message of the market (in the form of its current price) is the start point from which the justification for that message must be acquired. Allow to illustrate how this could work.

The accompanying table* starts with the message of the market in the form of its current price. In this case, we use the S&P 500. That price level is then inserted into a simple, yet elegant valuation model that lists what earnings would be needed to justify current price levels. Next, an important part of the equation is the discount rate is used to bring the future cash flows (operating earnings) back to their present value**. Then, the current price is projected 12 months ahead. The final step is to divide an assumed P/E ratio into the forward market price to produce a calculated earnings level to justify that future price. What you have is what subscribers to my newsletter see every week – a market derived valuation model that seeks to identify what earnings and P/E might “match” the message of the market.

Each week I plug in the current price and then move the earnings numbers up or down to produce the market derived fair value that comes close to matching the current price. What this does is help me understand the expectations of the market that are built into its current price and the appropriate earnings necessary to justify that price. From this point, I can then decide if I am in agreement with the conclusions reached or beg to differ.

Investment Strategy Implications

One can obviously argue with several elements of the valuation model. For example, one might disagree with the time period used. Another might conclude that some of the assumed inputs, such as the discount rate (which is also the assumed required return for large cap stocks), are inappropriate. Then there is the use of a terminal value, the time period involved (just over 3 years hence), and its inputs (4% growth rate).

While valid, this is beside the point in the sense that by placing the market’s implied valuation via its current price into a valuation model that attempts to match the market’s implied value with the appropriate earnings necessary to justify the current market price enables an investor to challenge or accept the market’s conclusion (via its current price).

You can choose your metaphor - chicken or the egg, cart before the horse. Sometimes, focusing on the message of the market first enables one to hear more clearly.

*click image to enlarge
**Note: The growth rate is calculated as a result of the earnings inputs and the discount factor. This is important as we want to keep the focus away from our opinion about what should occur and on what the market says will occur.

Thursday, October 29, 2009

Pumping Iron

My Minyanville article this week, "Barbells Will Strengthen Your Portfolio", describes the barbell approach to the current stock market climate using large and mega cap issues on one side and emerging markets on the other:

"On the assumption that my bifurcated earnings season produces underperforming mid- and small-cap sectors (resulting in the long overdue stock market correction), one very attractive investment strategy to employ while waiting would be a barbell approach with large and mega cap on one side and emerging markets on the other. The Smids (small and mid cap) would be held to a minimum.

This strategy covers both the short and near-term bases and should enable..."

To read this week's Minyanville article, click here
To view all my Minayanville articles, click here

Wednesday, October 28, 2009

Beyond the Sound Bite: An Interview with Alec Young

In my second interview with the International Equity Strategist for Standard and Poors we discussed the S&P economic outlook, the rebound in global trade, the advised investment focus on global cyclical leadership, and risks of an economic double dip.

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

Tuesday, October 27, 2009

Not So Fast

Yesterday's dramatic intra day reversal followed by this morning's early up then down stock market action has led some to conclude that the big correction has finally arrived. To that I say, "Not so fast".

As noted in several blog postings last week along with my podcast interview with Phil Roth, fully synchronized markets without meaningful divergences rarely produce declines more than that which was experienced from September 23 to October 2* (with its 3 to 5% drop).

Investment Strategy Implications

As noted in my Minyanville article last week, earnings expectations remain high for all size categories of stocks for the remainder of this year into next. This is where I suggest the investment strategy focus should be placed. A bifurcated earnings season in which second tier (and lower) US centric companies fail to beat expectations should portend seriously negative economic outcomes in the coming year. Reminder: 2010 will be a highly political year. 10%+ unemployment with virtually no wage growth can evolve into a protectionist broth with a very bitter economic taste.

From a stock market perspective, this concern MUST be reflected in the price action of the stocks BEFORE the real economy fact. The actual manifestation of this should come in the form of a price divergence between large and small cap issues. To date, no such non confirmation divergence has occurred. Until such an occurrence, the odds of something more than an air pocket decline in stocks (as described above) are remote.

This is the essence of combining fundamental with technical analysis. Or, to paraphrase Orson Welles, "I will sell no stock before it's time."

*click image to enlarge

Thursday, October 22, 2009

Minyanville article: Big and Small Companies: Divergences You Must Follow

This week's Minyanville article brings into sharp focus the points made on this blog and in the media these past week's re bifurcated earnings season and stock market divergences.

excerpt from article: "As investors move deeper into the thick of earnings season, the perspective as to its meaning for near-term stock-market action becomes of great value. What I'm referring to specifically is to watch for any divergence in earnings performance between big and smaller companies..."

To read this week's Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, October 21, 2009

Beyond the Sound Bite: An Interview with Don Rissmiller

My third interview with the Chief Economist at Strategas Research Partners focused on my bifurcated earnings outcome, the US employment situation, the political dynamics of 2010, the dual exit strategies of monetary and fiscal policy, and the inevitability that the deficit bill will come due, among other topics.

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

Tuesday, October 20, 2009

Resetting the Market Top Call

You may recall that starting mid September the posts on this blog focused on a market pullback of the more moderate type (3 to 5%) followed by a run to new recovery highs. This was articulated again during my October 2nd appearance on CNBC at precisely the time when the S&P 500 was 5% off its intra day high of 1080. What followed was the expected run to new highs. What did not follow, however, was the probability that concerns over a bifurcated earnings season (big stocks meet or exceed consensus forecasts while the Smids on down do not) would produce a non confirmation high as big and mega cap make new recovery highs while the Smids on down do not, thereby generating a non confirmation and the increased prospects for a more substantial (as in 15 to 20%) decline.

As the accompanying charts* show, both the US size indices as well as various global indices all confirmed the new recovery high. Therefore, when it comes to making the (inevitable) market top call (melt ups notwithstanding) we are back to square one – a pullback (this time perhaps more than 5%) followed by another up move to new recovery highs with a keen eye toward the non confirmation vital to a major market top.

Investment Strategy Implications

Fully synchronized markets producing confirmation moves means the probabilities for a major market top at this time are quite low. This is one of the major points brought out in my podcast interview with Phil Roth last week.

So, while the bulls are sipping the sweet returns of a most liquid(ity) kind, as was the case in mid September a pullback of a more moderate flavor is all the bears are likely to taste.

*click images to enlarge.

Thursday, October 15, 2009

V - TV on

My segment begins at the 4:30 mark.

Note: If the video isn't available immediately, try reloading the page. If that fails to work, visit

Wednesday, October 14, 2009

Beyond the Sound Bite: An Interview with Phil Roth, CMT

It's always good to check in with the Wall Street veteran and Chief Market Technical Analyst for Miller + Tabak, who stills sees an absence of public and traditional institutional investor participation in the equity markets, no trend divergences to signal a major market decline ahead, recognition that a 10% correction can materialize without warning, expectation that gold can double or triple from current levels, and a country, sector, and style outlook.

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

Thursday, October 8, 2009

Minyanville article: Momentum Readings Suggest Top Is Coming

This week's Minyanville article re the odds of a stock market top due to bifurcated earnings season ahead is posted.

To read this week's Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, October 7, 2009

Beyond the Sound Bite: An Interview with David Rosenberg

"Hope always seems to spring eternal in liquidity-driven financial markets. That is very much the case today in the aftermath of the biggest liquidity injection in modern history." So writes Stephen Roach, Chairman, Morgan Stanley Asia in today's FT. And liquidity is where my interview with David Rosenberg, Chief Economist and Strategist with Gluskin Sheff & Associates begins. We go on to discuss the state of the global consumer and new frugality, the continuing process of deleveraging, the probabilities of top line growth, and asset valuations, among other timely topics.

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

Tuesday, October 6, 2009

New Delhi TV tonight

Haven't had your fill of Vinny the short term bear, then tune in to New Delhi TV at 9:30 PM (eastern) tonight.

Two Technical Analysis Risks to this Rally

Last week’s Divergences on the Horizon posting gave the long and near term context for concern re the cyclical bull rally since March. This week I would like to zero in on the very short term price action in the form of two charts that I believe illustrate the key technical analysis areas to keep a close watch on.

The first chart* highlights the divergences point mentioned last week. Since the S&P 500 hit its intra day of 1080 on September 23rd, the five indices tracked (represented by the large cap S&P 500 (SPX), mega cap S&P 100 (OEF), mid cap S&P 400 (MDY), small cap S&P 600 (IJR), and micro cap (IWC)) have followed the proper correction rules as the higher risk sectors (MDY, IJR, and IWC) dropped more than the lower risk sectors (SPX and OEF). However, now that we are in the midst of a rebound rally (that must exceed its first rebound high of 1070 – more on this shortly), the higher risk sectors must follow the rally rules and outperform to the upside. As the first chart shows, the price action is showing signs that the second tier on down sectors are not doing what they’re supposed do – revert back to outperformance. Maybe they will. And that is precisely the point, and the tie in with earnings season.

Should we experience a bifurcated earnings season (see September 23rd blog posting "V Shaped Rally ≠ V Shaped Recovery"), the price action of the large versus mid and lower cap sectors should complement the real economy results. If so, a major divergence will occur as large caps make a new high BUT the Smids on down do not. Stay tuned.

The second chart illustrates a key point referenced in this week’s “Sectors and Styles Strategy Report”**, which deals with the potential of a failing rally. At present, all systems look like a go for a new high and the aforementioned potential divergences. However, a failing rally in the form of a lower high cannot be ruled out.

As the second chart* shows, the key price point in the S&P 500 is 1070 – the lower high reached last Tuesday. The risk here is for yet another lower high producing the bouncing ball down the stairs effect – lower highs followed by lower lows. This pattern, it should be noted, is usually not easy to identify until after the fact. To spot the failing rally during the fact requires a look at the power behind the move in the form of the index’s momentum and MACD, both of which are mediocre at best (for spacing purposes not shown but take my word for it, it is so).

Investment Strategy Implications

On September 24th I made the following short term forecast, “Three percent to 5% down right now, followed by unconfirmed new highs, followed by a 15% to 20% correction. Can’t get more specific than that. Now, let’s see what unfolds.”

Well, here we are. The first part of the forecast has delivered, now let’s see what follows.

*click images to enlarge
**subscription required. Click here for more information on the subscription services of Blue Marble Research.

Bloomberg radio today

Vinny the short term bear takes his views to Bloomberg radio's Taking Stock with Pimm Fox at 4:00 (ET) today, if you're so inclined.

Friday, October 2, 2009

CNBC Today

Vinny the short term bear returns to CNBC's "The Call" at 11:10 AM (eastern), if you're so inclined.

Note: Make sure you watch to the end as you will hear a new investment phrase.

Thursday, October 1, 2009

Minyanville Article: Sustainability Should Top the Economy's To-Do List

This week's Minyanville article last week's posts along with yesterday's Beyond the Sound Bite interview with Subodh Kumar.

"I'm becoming increasingly convinced that the upcoming earnings season will produce bifurcated results with larger companies generating at or above consensus results while smaller, more US-centric companies come in at or below consensus readings..."

"With credit availability still constricted, deleveraging still underway, and consumer balance sheets still in repair, expecting a robust economic advance and a further equity marketrally to emerge out this soup of stress is a concoction only for the most optimistic and most hidebound to formulaic thinking (such as low inflation justifies above average P/Es)..."

To read this week's Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, September 30, 2009

Beyond the Sound Bite: An Interview with Subodh Kumar, CFA

In a most insightful third interview, the Chief Investment Strategist of Subodh Kumar & Associates provides a comprehensive review of the global economic climate, the importance of the recent German elections and the connection to deficits and central bank exit strategies, and a stock market preference for emerging markets.

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

Tuesday, September 29, 2009

Divergences on the Horizon

To help visualize key aspects of the commentaries posted on this blog recently, the accompanying 2 charts illustrate important patterns that investors should keep a close watch on.

The first chart* covers the price action since the early March lows of this year for the three major US style categories – Mid (MDY), Small (IJR), and Micro (IWC) cap – and perhaps the single most important non US market, China (FXI). What is quite clear is that the higher risk categories have outperformed the lower risk, larger cap group S&P 500 – SPX) by a considerable margin. This is what is known in many circles as the beta trade: higher beta = better performance.

The second chart shows the beta trade continuing over the past three months, but not for all indices tracked. The beginnings of a meaningful divergence appears to be underway with China as price performance has begun to trail the four predominantly US indices.

Investment Strategy Implications

What you want to keep your eye on is any more substantial divergences between the big boys (SPX) and their lower quality/higher risk brethren and various global markets. As noted in last week’s commentaries, I expect such divergences to begin to emerge as earnings seasons unfolds and reveals an underwhelming performance by the higher risk US companies (represented by MDY, IJR, and IWC).

The wild card is the other index listed – China. I am in the camp that is more than a touch reluctant to drink the “China is great, no problem here” Kool-aid – a fact that the price action of the index may reveal in the coming months.

*click images to enlarge

Friday, September 25, 2009

A Message to New Visitors

Recently, the number of visitors to this blog has increased substantially. I suspect this is due to several recent appearances in the media.

No doubt many are viewing the content posted on this blog for the first time. To those I have one recommendation - Please read as many blog postings (and the interviews I conduct on the sister blog, Beyond The Sound Bite) as possible as no one blog posting (or interview) contains all thoughts and conclusions. Only by reading (or listening to) as many postings as necessary can one gain the full measure of the methodology employed and the thought process that underpins the conclusions reached.

Have a good weekend.

Thursday, September 24, 2009

Minyanville article: What A Correction Can Do For You

This week's Minyanville article combines the past two days worth of comments and links them together with last week's (Sept. 15) "air pocket" correction forecast.

"If you’re uncertain as to the central rationale being made by the bulls for this overvalued equity market getting even more overvalued, here’s the argument in a nutshell:

Low levels of both core inflation and interest rates suggest that the normalized P/E on stocks should be..."

To read this week's Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, September 23, 2009

V Shaped Rally ≠ V Shaped Recovery

Yesterday’s posted interview with David Malpass brings into sharp focus a key aspect of the US economic recovery that far too few investors are tuned into. Specifically, the underappreciated dynamic that second, third, and lower tier companies (the backbone of employment growth in the US) may not deliver the much anticipated above consensus earnings results this and future quarters ahead. Moreover, as the backbone of employment growth, weakness in second, third, and lower tier companies act as a depressant on wages, hours worked, and consumer sentiment. Therefore, how the US (and global economy) will reach a sustainable recovery without the US consumer is a riddle wrapped in an enigma.

Lacking a large exposure to global markets (where the growth is and where the weak US dollar helps deliver strong short term results), the SMIDS (small and mid cap companies) on down are vulnerable to disappointing investors with at or below consensus earnings results next month. In this regard, David points out in the interview that above consensus earnings results this coming 3Q09 for large and mega cap multi nationals may come to pass via pricing power pressures on all companies offset by volume growth courtesy a cannibalization of the units growth to lower tier companies.

(As a reminder, 2Q09 bottom line results surprised to the upside thanks to cost cutting, as top line growth was largely in line with expectations. In the current quarter ending next week, expectations are for above consensus earnings results produced by top line growth that surprises to the upside (with cost cutting is largely done). With the US economy still on its knees, it is hard to see how US domestic top line growth (revenues = price x units sold) can surprise to the upside. How this happens for companies that will not benefit from global markets (and a weak dollar) is a mystery soon to be revealed.)

Investment Strategy Implications

In a liquidity driven stock market, all logic goes out the window – for a while. Justifications for over valued markets abound. And buy high to sell higher becomes the music that all performance based investors must dance to. Phrases like “melt up”, thanks to expectations that the $3.5 trillion sitting in near zero percent money market funds will be forced into equities, is the support rendered for P/E ratios that warrant above average (i.e. 15 times) levels. Sound familiar?

In such times, a prudent investor is a contrarian investor. Momentum driven/fast money “investors” awaiting sideline money to sell to on the basis of melt ups and a sustainable global economic recovery rooted in a deleveraging US consumer may turn out to be a fantasy bubble about to burst.

Tuesday, September 22, 2009

Beyond the Sound Bite: An Interview with David Malpass

I have decided that an early publication of my interview with David Malpass, President of Encima Global, is warranted as a key element of our discussion centered on the importance of small businesses and the state of the US economy.

Recognized but under-appreciated by most investors, the engine of job creation in the US is far from healthy. While big and sound businesses have had their access to capital restored and have business models centered on the global markets (which is where the growth is), small and mid sized businesses in the US do not enjoy such good fortune. And while some might argue that the process the global economy is going through is a form of creative destruction, David astutely points out that bankers' quest for safe investments runs the risk of cutting into the muscle of the economy - not to mention the role such credit starvation will play in the stagnation of wage growth and employment. With an national election on the calendar next year (and the Democrats poised to take a mid term beating), the political dimension to this issue will almost certainly take center stage.

The investment strategy implications are not just in the broad macro economic sense. In tomorrow's commentary I will elaborate on this point. Until then, I encourage you to give the 14 minutes 8 second informative and insightful interview a listen (or two).

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

Monday, September 21, 2009

Vinny on Bloomberg radio

Bloomberg radio "Taking Stock" at 4:35 (ET) today.

Thursday, September 17, 2009

Minyanville Article: Take Action to Make Portfolios Walk the Talk

This week's Minyanville article focuses on one of the practical aspects of managing a portfolio - what to do when you have a sector (or asset class) that you don't like for the long term but believe can outperform in the short term?

"Whenever I appear in the media, be it electronic or print, I answer the questions posed by the interviewer from the wellspring of research that I conduct every hour of every working day. I pontificate with the best of them. I am, in effect, talking the talk.

However, having a point of view regarding the economy and markets -- however sound, articulate, and well thought out -- is the start, not the end point, for investment decision-making..."

To read this week's Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, September 16, 2009

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 investment significance re the wide gap between operating earnings and GAAP earnings, reasons to doubt China's published growth rate, the sustainability of the rally in gold, and a major contrarian call on healthcare.

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

Tuesday, September 15, 2009

When, Not If

Now that the S&P 500 has hit my full year target of 1050 (made last December 30 as published in the Wall Street Journal’s “MarketBeat” blog) - with 3 months still left to go, I might note, cyclical bulls (like me) who have turned increasingly more cautious over the past two months (as stocks moved well passed their fair value targets) continue to sell into the rally. The portfolio consequences of this sell-into-strength decision are two fold – reduced profits and reduced exposure to a pullback.

As stocks moved higher into overvalued territory, the first course of action was to maintain a portfolio’s equity exposure (assuming it was less than 100%) to the total assets managed, which for accounts managed by my company was in the low 90% range. When stocks continued to march ahead these past few weeks, the course of action shifted to reducing the equity exposure, which now stands in the mid to upper 80% range.

This modified market timing (a/k/a sector and style tilting) works best in portfolios geared for the long term and subscribe to the diversification with a tilt approach to managing money*. Eventually, stocks that have taken a shine to the stratosphere will feel the gravitational pull of profit taking, common sense, and a cooling down of the animal spirits momentum “investing”. A correction then ensues.

On the assumption that a correction will eventually occur (and it will), the timing of the correction may be domain of the foolish and the insightful but the process is not. From experience investors should assume that one of the following will likely occur:

Air pocket – investors rise one morning to find stocks gap open to the downside in a big way. Volatility rises as price action becomes more erratic with many whipsaw movements. Bye bye steady up, hello wild and wooly.

Sudden but moderate – a decline starts and continues as market pundits proclaim the healthy qualities such a Goldilocks version of corrections exhibits.

Erosion – the decline sneaks up on you. Slow, steady, and highly corrosive. The flip side of the past several months.

Of the three possibilities listed above, I would opt for #1, the air pocket. However, whatever correction does emerge, investors are best served by being clear about their portfolio strategy action steps before, during, and into a correction. I have articulated the general outlines of my approach. What’s yours?

Investment Strategy Implications

Eventually, stocks will experience a pullback. The gravitational forces of profit taking, common sense, and a cooling down of the animal spirits momentum “investing” will help markets absorb and reflect on where the fair value for an asset class belongs. At 1050, expectations now put stocks at 1170 (10% discount factor) 12 months hence, which means that operating earnings need to reach $78 by 3Q10 – a number that only the most optimistic of forecasters has recorded. Alternatively, there are those who argue that a higher than normal times P/E (15 times) is appropriate (e.g. due to low inflation, good rates of return on equity, large amounts of liquidity still sitting on the sidelines), despite the fact that so much remains highly uncertain.

All things considered, When, Not If appears to be a good investment conclusion to reach at this time. And being a contrarian investor (as opposed to a follow the crowd momentum “investor”) means taking money off the table is a prudent course of action at this time. As the performance results to your left show, this has been a fruitful course of action to follow.

*see my August 27 Minyanville article

Friday, September 11, 2009

Bloomberg radio

Vinny the short term bear on Bloomberg radio at 3:30 (eastern), if you are so inclined.

Thursday, September 10, 2009

Minyanville article: Out of the Woods, Into the Swamp

"By all accounts, the global economy appears to be out of the woods. But, does that mean we're now in the clear? Perhaps the move out of the woods doesn't lead to a wonderful open field, but into a swamp: a swamp of economic uncertainties and unresolved issues.

In a swamp, there are many sinkholes and other dangers waiting to.."

Plus: (correction) Vinny the short term bear returns to Bloomberg radio tomorrow (3:30 PM eastern).

To read this week's Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, September 9, 2009

Beyond the Sound Bite: An Interview with Susanne Trimbath, Ph. D.

My interview with the CEO and Chief Economist of STP Advisory Services includes her libertarian perspectives on the virtuous circle, the risks in the Fed's exit strategy, key consequences of financial innovation, and the next global financial crisis: public debt. Dr. Trimbath is also the author of "Beyond Junk Bonds: Expanding High Yield Markets".

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

Tuesday, September 1, 2009

A Tale of Two Septembers

Here are the stock market performance facts re September, courtesy Wall Street’s keeper of the historical keys, Sam Stovall:

“Investors may have a reason to fear a set-back in September. No matter if you look back to 1990, 1970, 1945 or 1929, the S&P 500 posted its worst monthly performance in September, losing 1.3% on average since 1929 versus an average monthly advance of 0.54%. What’s more, the “500” has declined an average 56% of the time, versus only 42% for all months, making September the worst month for frequencies of declines. However, during the 14 Septembers immediately following the end of bear markets since 1932, instead of posting the average 1.3% decline, the S&P 500 gained a median 2.0%. What’s more, the frequency of declines – at 36% following the end of bear markets – was substantially better than the average 56% for all years. Yet history should always be looked upon as a guide, not gospel.”*

While nearly every investor knows the first fact cited by Sam – that September tends to be one nasty month for equities – what many may not know is the second point he makes: how September tends to perform AFTER the end of the bear. And therein lies the decision-making rub – especially for those of us who don’t buy into the Barton Biggs’ strongly bullish argument** that above historical average P/Es are appropriate in the current climate AND earnings are likely to surprise to the upside – the combination sweet spot for equities.

Investment Strategy Implications

When markets reach the outer band of their valuation range, crosscurrents are more likely. Additionally, given the highly correlated nature of the markets (thanks to the dominance of momentum investing among professional investors), sharp swings at market extremes become more common. Moreover, after months of progressively higher highs, with virtually no correction along the way, one could and should assume that such a relatively low volatility environment will come to an end.

And in that end, September may turn out to be as changeable as the season it ushers in: putting in a bullish first half followed by a sharp move to the downside to end the month. Head fakes abound as a tale of two Septembers unfolds.

*Sector Watch, August 31, 2009
**Bloomberg Surveillance, August 28, 2009

Thursday, August 27, 2009

Minyanville article: Four Ways to Beat the Market

"You can’t beat the crowd by being the crowd. Yet, time and again, this is exactly what most investors attempt to do.

The investment manifestation of this is called momentum investing -- buy high to sell higher. Yet the foundation of this approach is anchored in a self-delusional belief that one can..."

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, August 26, 2009

CNBC Today

Vinny the short term bear on CNBC at 11:10 AM (eastern), if you're so inclined.

Tuesday, August 25, 2009

The 3 Phases of this Bull Market

The stock market rally since early March appears to have three distinct phases to it.

The first phase was the backing off from the economic abyss. The second phase was a bounce to fair value normalcy. The third phase (the one we are in now) is what I would call the return to business as usual phase (or “Recession. What recession?).

From where I sit, the first two phases were justified on many levels. Both phases featured massive amounts of government intervention combined with strong technicals to produce a rally to fair value. The elimination of the tail risk of the Great Depression II was followed by the above consensus macro economic readings (my MERI indicator), which was reinforced by the above consensus earnings results of 2Q09. Stocks rose to a reasonable fair value. So far, so good.

Unfortunately, at this point the seeds of questionable earlier decisions began to bear fruit. (Now, this going to sound very libertarian, so here goes.) Instead of pursuing the necessary cleansing process that all excesses produce, the Obama administration (which includes the US Treasury and the “independent” Federal Reserve) opted for a massive debt transference from the private to the public sector with the hope that time will heal all wounds. Along with this decision to socialize the bad behavior of the private sector most responsible for the crisis, the financial services industry, the Obama administration supported its core structure built on the laissez-faire era of the past two decades, accepting the largely unsubstantiated argument that financial innovation is a vital and necessary good for the economy.

With the government’s tacit support of the status quo, the investment mood shifted from fear and concern to hope and then enthusiasm.

The evidence of this mood shift back to the animal spirits days of yore came from a logical source – the financial services industry, the very sector of the global economy that provided the financial innovation grease to the out of control freight train of credit. And what better symbolic locomotive than Goldman Sachs, whose earnings report of July 14th whistled the bad old days were back in action. At this point, the Obama administration swung into action – with silence.

With its absence of outrage, the increasingly politically tone deaf Obama administration sent the public policy signal that its okay to bring the world economy to its knees, its okay to get bailed out with taxpayer money, its okay to shrink the competitive landscape (via Bear and Lehman’s demise), and its okay to return to the way things were – big profits and in your face fat bonuses.

The product of this wink and nod to Wall Street was the backlash at town hall meetings, which were as much about fairness as they were about healthcare reform concerns, a paranoid view of government, and a reactionary view of what constitutes being an American. It also produced an enthusiasm for stocks and an implied return to the bad old days.

Investment Strategy Implications

When you combine all these factors with the massive amount of investment capital ($3.5 trillion) still sitting in the near zero interest rate money market sidelines, the rising belief among many institutional investors that P/Es above their historical average are justified in the current low inflation environment, and the fledgling confidence that the global economy is on the mend* (along with the blind faith that the economic data from China is real), it is understandable how valuation levels could get to where they are today – stretched.

The investment question then becomes, “Is this a solid enough foundation upon which sustainable bull markets are built?” I have my doubts.

*I suggest reading Nouriel Roubini's comments in yesterday's FT.

Thursday, August 20, 2009

Minyanville article: Why Stocks Will Stop Defying Valuation Gravity

"Romantics have a word that best describes the stock market’s current levitation act: nostalgia. The newly emboldened buy-the-dips crowd, flush with cash and longing for the bygone days of beta-inspired rates of return, perceived the recent market swoon as yet another opportunity to defy valuation gravity and are apparently attempting to levitate stocks to new highs. Will it work?..."

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, August 19, 2009

Beyond the Sound Bite: An Interview with Thomas P. Au, CFA

My interview with the author of "A Modern Approach to Graham and Dodd Investing" and Chief Economist at Pittsford Venture Group includes a historical perspective on why stocks are overvalued, the importance of value investing using book value and dividends, the exceptional use of optionality into valuation models, and the factors surrounding the uncertainty of top line (revenue) growth.

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

Tuesday, August 18, 2009

The End User Dilemma

Back on August 3rd subscribers to my weekly newsletter - Sectors and Styles Strategy Report - read the following:

"China may become the bigger fly in the bullish ointment. Unlike the US, China has spent all of its stimulus package money not on consumer demand related areas (where it is most needed) but on more infrastructure projects. Since the US consumer is and will remain in balance sheet repair mode for a while and developed economy consumers (Europe and Japan) reluctant and/or unable to pick up the slack, end user (consumer) demand must materialize from emerging economies. With savings rates very high in China and other developing economies, expectations of V-shaped global economy recovery of a sustainable nature (meaning balanced and asset bubble free) seem fairly unlikely.

Therefore, a close eye should be kept on China and the very real prospect that a bubble burst may occur in that country. Should such an event occur, the global growth story becomes highly suspect, and equity values based on a global V-shaped recovery and expansion very problematic."

At the end of the day, somebody has got to buy something from someone else. The government may be the lender of last resort but it is not the buyer of last resort. That title belongs you and me - the consumer. And, despite its best Keynesian wishes, the prospect of demand being a guaranteed result of fiscal stimuli remains an unresolved mystery. Therefore, as helpful as next year's conveniently politically-timed US stimulus package will be, it cannot be, nor should be, counted on as lifting the world economy out of its end user dilemma. Moreover, government schemes like "cash for clunkers" get you only so far. They're like a life preserver keeping one's economic head just above the water, and nothing more.

Investment Strategy Implications

When stocks moved away from the abyss a certain sense of relief was taken to a modestly enthusiastic extreme. The more optimistic drank the valuation kool-aid of born again bullish investment strategists. "The more things change, the more they remain the same" became the mantra as business as usual replaced the panic-driven mindset - business most unusual.

With the past few days of market decline, perhaps reality will begin to sink into the valuation equation. Hopefully (but not likely), the vital focus on what is necessary for a sustainable global economic recovery will take center stage. And with it a concentrated effort to appreciate the end user dilemma.

Thursday, August 13, 2009

Minyanville article: Dabbling in the Dark Art of Chart-Pattern Reading

"I've stated several times that I'm not a chart-pattern guy. I've found that trying to predict the future of any asset via the patterns its chart reveals yields, for me, a 50/50 proposition. Yet, there's some merit to chart-pattern recognition -- many others do follow the dark art. Therefore, since the name of the investment game is to outwit your unseen investment opponent (that’s how you generate alpha), seeing what they see (and possibly believe) can be a productive exercise.

To illustrate, let’s look at a basic chart of gold..."

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Tuesday, August 11, 2009

Beyond the Sound Bite: An Interview with Michael Sheldon, CFA

My interview with the Chief Market Strategist with the wealth management firm, RDM Financial Group, includes the prospects of a sub-par economic recovery due to rising US consumer savings, deleveraging, increased regulation, and increased risk aversion, the structural advantages of emerging economies over developed economies, and the longer-term risk of deflation.

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

Friday, August 7, 2009

Minyanville article: Four Ways to Play If Your Assets Are in Cash

"Now that buy-the-dips has made it an investment hell for those with large sums of cash (and a very low exposure to stocks), I want to offer not words of encouragement (hang in there, bears stuff), but an investment opportunity that may ease some of the pain if you missed the rally and now don’t know what to do. Before I describe this investment, let me touch on a few points that may help place the current environment in context.

There are 2 points in market cycles when investors who have a high percent of their assets in cash are most unsure how to proceed. One point is when..."

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, August 5, 2009

Beyond the Sound Bite: An Interview with Gillian Tett

My interview with the assistant editor of the Financial Times and author of "Fool's Gold" includes key aspects of financial innovation, the consequences of a reluctance to lend by financial institutions, the utility qualities of the financial services industry, and the transitional nature of both the financial services industry and the global economy.

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

Tuesday, August 4, 2009

NYSSA Market Forecast

When: Today, 12:30 to 2 PM (lunch from 11:30 to 12:30)
Where: New York Society of Security Analysts offices (1177 Ave. of America's, NYC)
Who: Mary Ann Bartels, Todd Harrison, Brad Hintz, and Don Rissmiller; moderated by Vinny Catalano
What: GEM - government, economy, and the markets; plus - China; financial services industry; hedge funds, and more

To learn more about the event, click here

To attend, show up (website registrations have ended).

Thursday, July 30, 2009

Minyanville article: Buyer Beware - The Bottom Is Not In Yet

"My article for Minyanville this week focuses on a subject that is very much a part of the investment equation for most investors - emotions. "Stocks are on a tear again today hitting new recovery highs, as passionately bearish investors just tear their hair out. And that emotional quality is the subject of this article.

In philosophy, “I think, therefore I am” is a truism. In investing, however, it seems that many investors subscribe to the variation, “I feel, therefore I invest." And therein lies the subjective rub that imposes the belief of what "should be" and alters the objective view of "what is."..."

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, July 29, 2009

The Macro Economic Reports Indicator: Not A Good Omen

Since peaking on July 10, the Macro Economic Reports Indicator (first introduced on this blog on June 17) has stagnated. Including the two major macro economic reports issued thus far this week (consumer confidence and durable goods orders), the indicator now sits a full 3 points below its July 10 peak (see table*). This is not a good omen for future earnings expectations.

Investment Strategy Implications

With so much stock market value built into future earnings reports, below consensus readings in the macro economic sphere suggest a heightened risk factor to future earnings reports coming in above expectations – a necessary ingredient for higher equity prices.

As noted in yesterday’s blog posting, earnings need to be rather robust over the next six to twelve months to justify current equity valuation levels. When macro economic reports, especially the kind that were issued thus far this week, come in well below consensus expectations (not to mention the sizable downward revision in today’s durable goods orders), investors are advised to proceed cautiously.

*click image to enlarge

Tuesday, July 28, 2009

It Ain’t That Simple

15 times $70 = 1050
1050 minus 10% = 945

This is the fair value math for the S&P 500. An appropriate P/E times a believable operating earnings number (12 months forward – mid 2010) minus an appropriate discount rate (stocks are, after all, a discounting mechanism). Of course, one can debate the inputs and the appropriate discounting time period, but the methodology is flawless.

Embedded in the methodology are elements that should (but often don't) go beyond simple business cycle, industry, and company analysis. Factors such as:

• A new world economic order
• A new financial services business model
• The appropriate amount of government intervention

Factors that I will discuss at next Tuesday’s New York Society of Security Analysts “Market Forecast” luncheon.

Unfortunately, these macro factors are not part of most investors’ toolkits. Beyond how such macro factors will impact the shape of the business cycle, big think subjects (such as, What economic philosophy will be the guiding force now that laissez-faire/cowboy capitalism is no longer the dominant principle?) have no way of being incorporated in your standard research methodology. Beyond the subjective aspects of such information, it is difficult to impossible for many investors to fit a new world economic order, for example, into your standard discounted cash flow model. Put differently, there’s no CAPM for the obvious yet out of the box factors that move economies and markets. Yet, they do matter.

Investment Strategy Implications

By all accounts, stocks are more than fully valued. Only those with the rosiest of glasses can envision earnings and P/Es greater than those listed above. Then again, a return of animal spirits overriding the highly uncertain transitional macro elements noted above is not out of the question – especially with $3.5 trillion* still sitting in near zero percent money market funds.

*A hefty 41% of the market value of the S&P 500

Thursday, July 23, 2009

Imagine This

The above consensus earnings results produced thus far – 109 companies in the S&P 500 (29% of market cap) 10.3% above estimates* – are doing their thing and moving the fence sitters off the fence. No doubt some of the $3.5 trillion sitting in near zero interest rate money market funds is finding its way into equities. In the process, an overbought stock market gets even more overbought – moving right into the S&P 500 resistance zone of 950 – 1000.

As investors reacquaint themselves with their animal spirits, let’s do something constructive and take a moment to assess the investment significance of the aforementioned 10.3% above estimates fact.

Coming into this week, 2Q09 operating earnings estimates for the S&P 500 were around $14 – annualized to be $56, right in the zone of the consensus number for the full year. Well, if the actual results are coming in at 10% higher, then $14 becomes something closer to $15.50, which pushes the annualized number to approximately $62. Accordingly, investors might want to consider the following:

If companies can produce results that are 10% above estimates in the dismal and economically stressed second quarter of this year, what are they likely to do as the global economy continues to make progress toward stabilization and growth? Moreover, what are the likely corporate results for 2010 when the bulk of the US fiscal stimulus package (some $700 billion) kicks in?

Under such conditions, it is conceivable that the $75 S&P 500 operating earnings estimated by the folks over at Goldman (noted in my Tuesday blog posting) may actually be more than a touch on the low side!

Investment Strategy Implications

Stocks are extremely overbought and a move below 900 for the S&P 500 (versus a surge above 1000) is still the higher probability at this time. However, it is advisable that investors understand and respect the potential of a period of explosive earnings from now through the end of 2010.

While much can happen between now and then, the results for 2Q09 produced thus far are providing the evidence of such a scenario – one that is not on the radar screen of most investors, analysts, and investment strategists.

*Sam Stovall, S&P, July 22, 2009

Wednesday, July 22, 2009

Minyanville article: Three Reasons Investors Should Curb Their Enthusiasm (for Financials)

"Investor spirits for Financials may have been buoyed by the recent earnings results of the major banks, however, there are at least 3 reasons why such enthusiasm should be tempered. Let’s start with the dustup that's emerging between fund giant BlackRock (BLK) and the investment banks."

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Tuesday, July 21, 2009

When Goldman Talks, Investors Listen

For the past two months, I have made the argument that above consensus macro economic data would lead to above consensus earnings results and that investors would see the evidence of this as 2Q09 earnings season got underway. Based on the reports issued thus far, this argument has won the day as above consensus earnings results have matched the above consensus macro economic reports preceding them. Accordingly, stocks responded.

The second part of my argument was that such positive data would eventually encourage bottom up analysts (along with many investment strategists and top down economists) to reassess their more cautionary views and begin to raise their full year earnings expectations for this and next year. This, too, has begun to occur – none more significantly than from the investment strategy folks over at Goldman.

In a research report published yesterday, the Goldman strategists raised their estimates of S&P 500 operating earnings for this and next year - from $40 to $52 and from $63 to $75, for 2009 and 2010, respectively. In the process, the group estimated the target fair value for the S&P 500 at 1060 – ten points above my best guesstimate for the year (as reported in the Wall Street Journal on December 30, 2008) and my more evolved view of the same number based on the simple math of the historical average P/E of 15 times a mid 2010 estimate of $70 = 1050. As John McLane (“Die Hard”) might say, “Welcome to the party, pal”.

With Goldman in tow and many fence-sitting traditional money managers and individual investors being forced to reconsider the wisdom of leaving $3.5 trillion in money market funds earning 0.1%, the more meaningful investment strategy question is “Where are we in the stock market cycle?”

Investment Strategy Implications

As expressed in this week’s research report to subscribers, stocks are clearly in extreme overbought territory at the top end of the range. A completed bottom has not occurred. Therefore, stagnation (at best) or a pullback (most likely) appears to be in the very short-term offing for stocks.

That said, each week provides more evidence that the global economy has moved further away from the economic abyss of early March. Now that monetary stimulus and creative governmental action has done its work, the bulk of the fiscal stimulus package (conveniently timed for the 2010 election cycle) will provide the needed power to move the economic needle from stabilization to growth.

Aided by the global growth story (from emerging economies) as well as the likely positive forces of the wealth effect (from higher financial asset values), corporations, having demonstrated their ability to manage solid results in times deep economic distress, should be able to generate very satisfactory earnings results in an overall improving global economic climate - including a modest contribution from the US consumer.

So, where are we in the stock market cycle?

Stocks appear to be well into a transitional phase – one in which sector (style, country, and regional) rotation will (must?) produce the new leadership necessary for a new bull market to sustain itself to 1050 and beyond. The rotation to new leadership coupled with a completed bottom are the stock market signs most worthy of investor attention.

Thursday, July 16, 2009

Minyanville article: Why The Bear Will Become The Bull

My article for Minyanville this week puts in context the above consensus macro economic and earnings reports, the bottom building process for stocks, and the transitional nature of the economy and markets.

To read the complete Minyanville article, click here
To view all Minayanville postings, click here

Wednesday, July 15, 2009

Beyond the Sound Bite: An Interview with Todd Harrison

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
To listen to this week's interview, click here

Tuesday, July 14, 2009

2Q09 Earnings Season: So Far, So Good…

…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.