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