Tuesday, June 30, 2009

Four Steps to 1050

The Fourth of July is just four days away. So, how about a four step process to investment fireworks for this summer?

The media is attributing today’s stock market swoon as being driven by this morning’s disappointing report on US consumer sentiment. No doubt it is a contributing factor, however, a single data point does make a trend, for when one expands their time horizon beyond the day a decidedly bullish trend has emerged over the past 8 weeks as the above table clearly shows.

Investment Strategy Implications

The investment implications for the above consensus results rests in the likely upward adjustments economists will make to their forecasts, which will in turn produce increased earnings expectations from bottom up analysts. As noted previously, this would occur for the following reason:

Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise is that, in the aggregate, current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, economists change their outlook, which in turn cause individual company analysts to adjust that macro economic component of their industry and company forecasts. However, since this process occurs with a meaningful lag, investors can gain a competitive advantage by anticipating changes to earnings forecasts as the above or below consensus reports are filtered into the forecasts.

In regards to current earnings expectations, consider the following statistic from contrarian value investor and behavioral finance expert, David Dreman (from last week’s NYSSA conference): from 1973 through 2008, the average analyst forecast error is 39%. That means that 2Q09 operating earnings for the S&P 500, currently estimated by bottom up analysts at approximately $14, may actually come in as high as $19.50 or as low as $8.50.

In light of the above consensus data noted above, the lag component of the forecasting process, along with an increasing number of economists estimating that the trough of the recession was reached this quarter, it would not surprise me if the 2Q09 earnings reports tilt more toward the higher number. Should that occur, then all the angst heard over the past few weeks re low volume would dissipate rather quickly as some of the $3.5 trillion still sitting in money market funds moves off the near zero percent interest rate sidelines.

And if that were to occur and stocks made a strong move to the upside, then old school market technicians will ring the bullish bell as completed bottoms and moving average signals will abound.

So, here is how a major bull market begins in earnest:

1 - Above consensus macro economic readings produce
2 - Above consensus earnings reports which
3 - Moves funds moving out of money market funds which produce
4 - Bullish readings by old school market technicians which results in

1050 or higher in the S&P 500.

Let the fireworks begin!

Thursday, June 25, 2009

Market Technicians Assocation webcast: "Market Signals with ETFs"

At noon US eastern time today, I have the privilege of conducting a webcast presentation for the Market Technicians Association titled "Market Signals with ETFs". You are invited to join the free 45 minute session as an electronic attendee: listen to the presentation and ask questions.

The topics I will be discussing include:

* Why stocks have an inherently upward bias
* Portfolio strategies such as diversification with a tilt
* Technical analysis tools and ETFs
* The three forces that have empowered all investors

To attend as a guest, click here

Thursday, June 18, 2009

Minyanville article: S&P Watch: Higher Earnings in Coming Months?

"In my blog post yesterday, I referred to valuation points made here and previously and tied them to the earnings reports from second quarter, which will kick in next month. Since we're in the pre-announcement period, investors should be alert for any early warnings signs that earnings will be at or below expectations. Only at-earnings- or above-earnings reports will provide the fundamental juice to power stocks higher from currently fully valued levels...."

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

Wednesday, June 17, 2009

Marking Time


As dramatic as yesterday’s market decline was, there are several reasons to conclude that a market that was clearly fully valued (see last week’s postings) was one that was susceptible to any signs of economic and/or political areas of concern.

On the economic side of the equation was last week’s negative reading in my Macro Economic Consensus Trend indicator (see accompanying table and description below). After many weeks of net positive readings, last week’s negative -3 net contributed to taking some of the positive froth out of the fully valued market.

As for the political dynamic, more than a few areas of concern – Iranian election results, the loose screw in North Korea, and the US President and media Star in Chief with his major government initiative du jour – was more than the market could bear.

However, as important as all these factors are, it does appear that the more significant event that will determine the sustainability of the cyclical bull market will be the earnings reports, which begin next month. For 2Q09 earnings will provide the most direct sign that the above consensus economic data generated over these past months (noted above) has interpreted into higher corporate profitability. And it is higher profits that will be needed to justify the expected 1050 for the S&P 500 that current market levels imply.

Investment Strategy Implications

Investors can hoop and holler, wish and hope, and stocks can surge and plunge, but the proof will be in the 2Q09 pudding as to whether the anticipation of economic stabilization and higher corporate profits embedded in a fully valued market come to pass in the form of higher stock prices. Until then, marking time is the more likely outcome.

*Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise for the above analysis is that current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, earnings forecasts will adjust accordingly – with a lag. As economists change their outlook, the individual company analysts, taking their economists’ changed outlook, will follow suit and change their forecasts accordingly. By monitoring the data in real time, an investor can gain a competitive advantage by anticipating changes to earnings forecasts as the above or below consensus reports are filtered into the forecasts.

Friday, June 12, 2009

Quotable Quotes: Muscle Men


If Ken Lewis is to be believed, then Bernanke and Paulson pulled no punches in muscling BofA into the Merrill deal. Therefore, a few words on muscle.



“What do you think an artist is? An imbecile who has only his eyes if he is a painter, or his ears if he is a musician, or a lyre at every level of his heart if he is a poet, or, if he is merely a boxer, only his muscle? On the contrary, he is at the same time a political being, constantly alert to the heartrending, burning, or happy events in the world, molding himself in their likeness.”
Pablo Picasso

“Action is transitory a step, a blow, The motion of a muscle, this way or that 'Tis done, and in the after-vacancy We wonder at ourselves like men betrayed”
William Wordsworth

“The last three or four reps is what makes the muscle grow. This area of pain divides the champion from someone else who is not a champion. That's what most people lack, having the guts to go on and just say they'll go through the pain no matter what happens.”
Aaaarnold Schwarzenegger

“The function of muscle is to pull and not to push, except in the case of the genitals and the tongue.”
Leonardo Da Vinci

Have a good weekend.

Thursday, June 11, 2009

Minyanville article: Playing the Valuation Game

In this week's article for Minyanville I elaborate on the Fully Valued Market blog posting of Tuesday (see below) as well as describe the behavioral finance aspects of forward looking valuation analysis:

"After several months of glorious advances, stocks have stagnated of late. Trading in a largely narrow range, stocks appear to be searching for a reason to move. Some expect them to advance, while others anticipate, at best, a long-overdue (meaningful) correction, or, at worst, a test of the lows we saw last November and in early March of this year. Both camps can find plenty to support their points of view..."

"The 2 central points I'm attempting to make are these: First, like technical analysis, forward-looking valuation analysis contains the message of the market. Second, investors are better served debating the future, which is contained in the valuation message of the market, rather than the present or the past.

Market methodologies such as valuation analysis and technical analysis shift the focus away from..."


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

Wednesday, June 10, 2009

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

In yet another excellent and insightful interview with the Wall Street veteran and Chief Market Technical Analyst for Miller + Tabak we explored the prospects for a completed market bottom, the absence of public participation in the equity markets, investors sentiment, which sectors, size, and styles look attractive and which look unattractive, and some thoughts on the fixed income market, the US dollar, and the strong chart pattern of Gold.

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

Tuesday, June 9, 2009

A Fully Valued Market

excerpt from this week's "Sectors and Styles Strategy Report":
The huge disconnect continues. As noted in last week’s report and in several blog postings, the financial markets are signaling not just economic stabilization but a robust (V shaped) recovery. Whether this comes to pass remains to be seen. However, very supportive at and above consensus macro economic reports strongly suggest that earnings expectations will do more than stabilize – they should rise in the coming weeks and months. While such action will provide the real economy results to the markets’ expectations, much of the value has been realized as noted in the three valuation models used (page 2).

The plus side of the equation is the anticipation of more Mega Trend bullish signals (pages 4 and 5). However, (from a fundamental analysis perspective) unless one believes that a P/E greater than 15 is appropriate, then stocks are likely to enter more of a trading range with rotation and sector selection being key.

Here’s how the full value argument plays out:

15 times $70 = 1050
1050 minus 940 (current S&P level) = 110
110 divided by 940 = 11.7%, which is right around the historical return for large cap stocks of 12%.

Hence, fair value has arrived. Unless, of course, higher earnings and/or higher P/Es are expected. Such a view is not held here.

Note: To learn more about the benefits of subscribing to the "Sectors and Styles Strategy Report" newsletter, which includes the market beating Model Growth Portfolio (see charts to your left) - click here.

Friday, June 5, 2009

Minyanville article: Reading Economic Reports for Bullish Signs

In this week's article for Minyanville I describe a macro economic process that I developed over the past several months that helps identify the direction of future economic forecasts and the resulting future earnings forecasts:

"A "sense" of something is not the best way to make investment decisions. Gut feelings are all well and good, but they're hardly the primary basis upon which investment decisions should be made. Yet, a sense of where the economy -- and therefore earnings and stocks -- are headed is all most investors end up with when it comes to reading the daily economic reports that so influence the market. Take today's employment data, for example.

Many investors find macro-economic data such as this interesting, and they know it's important as it provides a sense of where the economy might be headed. However, beyond a sense of the economy, most investors lack the ability to..."


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

Wednesday, June 3, 2009

Beyond the Sound Bite: An Interview Marty Fridson, CFA

My podcast interview with the CEO and co-CIO at Fridson Investment Advisors explores some of the topics to be discussed at next week's New York Society of Security Analysts' 19th Annual High Yield Bond Conference, his views on the trends and directions of the high yield market since our interview one year ago, quality issues in the high yield market, and the trend toward activist government.

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

Tuesday, June 2, 2009

The Big Disconnect

excerpts from this week's "Sectors and Styles Strategy Report":
"A huge disconnect is underway. The financial markets are signaling not just economic stabilization but a robust (V shaped) recovery. This is most evident in the accompanying two charts – the yield curve and the TED spread.

The yield curve suggests a robust recovery is in the cards while the TED spread shows a return to pre credit/economic crises levels. When you add to this equation the prospects that numerous Mega Trend bullish reversals appear to be just days to weeks away (see report), the “fundamental justification for a more bullish outlook in the coming months” noted last week get stronger with each passing week. Yet, bottom up earnings expectations remain mired in the low to mid $50 range (see page 3 in report), despite the steadily improving above-consensus macro economic reports.

Investment Strategy Implications

Stocks appear on the verge of major bullish signal, while fundamentals appear to support the technicals. All that’s left is a completed bottom with Mega Trend reversals in tow."

Note: To learn more about the benefits of subscribing to the "Sectors and Styles Strategy Report" newsletter, including the Model Growth Portfolio (beat the S&P 500 four years in a row - see charts to your left) - click here.