Thursday, June 23, 2011

Talking Head Time:

In this interview with Tracy Byrnes, I bring back a point I made on a number of occasions in the past - the conflicted position of the US worker, who also happens to be the US consumer. In a globalized world, one wins (consumer) while the other loses (worker).

To view the interview, click here.

The Stock Market, King Lear, and the Meaning of Nothing!

Apparently in saying nothing yesterday the Fed Chairman did say something. By denying more financial morphine for risky assets, the markets reacted as King Lear did when his beloved daughter, Cordelia, said the same to him. The moral of this story: When the truth produces the tantrum, sanity is surely in question.

Wednesday, June 22, 2011

Badda-beep, badda-bap, badda-boop, badda-Ben

So, Chairman Bernanke spoke today. And what did he say? Well, it kind of reminds me of this scene from "The Godfather":

Sonny: Hey listen to this…the Turk wants to talk. Eh gosh…imagine the nerve of the sonofabitch, eh? Craps out last night, and wants a meetin’ today.
Tom: What did he say?
Sonny: What did he say…Badda-beep, badda-bap, badda-boop, badda-beep…

The Fine Art of Valuing the Stock Market

When I appear on* today with Tracy Byrnes, one of the items I hope we discuss is the accompanying valuation table (click image to enlarge).

Then are several ways to employ this table but perhaps the most useful way is to:

1 - Start with today's price level for the S&P 500.
2 - Then find those P/E and projected operating earnings in present value section (right side) of the table that roughly match today's price.
3 - Now look at the future value (left side) of the table. That is where the market projects it will be 12 months hence.
4 - Decide if you agree or disagree with the market's conclusion.
5 - Let the debating begin.

Valuation is a subjective process that attempts to bring into the equation what investors forecast earnings will be AND what they (and this is key) believe the appropriate P/E that should be applied to the forecasted earnings. There are many factors to be taken into consideration. For example, an above average P/E (say 17) can mean:

1 - It is appropriate in terms interest rates, growth rate of earnings beyond the next 12 months, quality of earnings, and degree of risk (global macro), Therefore, the current level of the market is far too pessimistic at 17 times $85.
2 - It is appropriate as earnings will tumble but, for a variety of additional reasons, the P/E will anticipate that the earnings decline will be short lived.
3 - It is inappropriate as rates will rise, risk is and will be far greater in the not too distant future, and the growth rate in earnings will disappoint. Therefore, a lower P/E is more appropriate.

And that's only a start. Other P/E and earnings mixes lead to other combination of factors.

What the accompanying table provides is a way to reverse engineer that process by starting with the current level of the market and then identifying what the current level suggests.

Therefore, taking yesterday's close, the following P/E and operating earnings closest are:

14 x $102 (average of $100 and $105)
15 x $95
16 x $90
17 x $85

As step #5 says, "let the debating begin".

*To view the 12 noon eastern time appearance, click here.

Tuesday, June 21, 2011

If Sam Is Right…

“From April 29, 2011 through June 10, the S&P 500 recorded six straight weekly declines and fell a total of 7.2% in price, spooked, in our opinion, by a potential debt default by Greece and the projected downshifting of global economic growth. Since 1950, the S&P 500 experienced 14 other times in which it declined six weeks in a row. In the seventh week, the “500” gained an average ½ of 1%, and advanced in 11 of 14 observations. Last week’s performance made it 12 of 15 times, as the market rose 0.04%. History now says, but does not guarantee, that in the coming six weeks the S&P 500 will rise slightly more times than it falls, but that the market will end up slipping around 1% from where it concluded its six week selloff.”

Sam Stovall
Chief Investment Strategist, Standard and Poors
“SECTOR WATCH: Does Volatility Offer a Clue to Market Declines?”
June 21, 2011

On Friday, I wrote "Timing The End of the Bull Market", which put a Mega Trend* timeframe on the end of the sideways market and prospective end of the bull market. Now, along comes the above information from that fountain of historical analysis, Sam Stovall.

As the above excerpted quote describes, we now have the historical context from which the current market can be framed. Now, let’s tie what Sam has provided with my Friday posting:

If Sam is right, the timing will be uncanny. A convergence will take place in which the historical will meet the technical at the junction of time and space (price and moving averages - the Mega Trend*). If this unfolds in anything close to this manner, the resolution of the sideways market (consolidation or distribution) will be all the more clear.

*Use search function above left to read more about the Mega Trend.

Friday, June 17, 2011

Timing The End of the Bull Market

''Let me tell you about the very rich. They are different from you and me.''
F. Scott Fitzgerald, "The Rich Boy"

Like the very rich, bull market tops are different than bear market bottoms.

Whereas bear market bottoms tend to be panicky affairs (probably has something to do with real losses versus opportunity costs), bull market tops tend to be drawn out affairs. In the process of forming its top, the dying bull experiences 3 distinct phases – sideways, rollover, and breakdown. The time period between each phase varies but a look at the last 2 traditional market tops during the first two phases - sideways and rollover - should help time the next market top.

The first 2 charts illustrate that the time period of sideways to rollover was 11 months (1999 – 2000) and 8 months (2007), respectively. The third chart shows that the current sideways US stock market action (S&P 500) is six months in the potential top making. If sideways evolves into the rollover phase (when price crosses the moving averages, the shorter term moving average crosses the longer term one, and both moving average point downward – a/k/a my Mega Trend*), one could assume it would take place sometime in the not too distant future (did someone say September?).

Until we get a definitive rollover of the sideways action, only the amazingly clairvoyant know for certain that the current sideways market is a distribution (meaning top) and not a consolidation phase**.

*Use the search function on the top left to find prior commentaries describing the Mega Trend.
**A consolidation phase is the pause that refreshes as the resumption of the bull market gets underway.

Thursday, June 16, 2011

Super Bulls - Welcome Back to Earth!

Lately, life has not been kind to the super bulls who, just a few months ago, were all aglow with expectations of record busting highs for stocks. Triple digit S&P 500 operating earnings times above average (>15) P/E ratios = Big bucks!! Who said, “Greed, for lack of a better word, is good”, was dead?

Never mind the fact that the root causes of the damage wrought by the Great Recession were never fully and properly addressed. Who cares if, metaphorically speaking, treating the cancer in the global economic patient with antibiotics and morphine will most likely not work? Corporate profits, courtesy the global technological and labor arbitrage plus robust, if somewhat suspect, emerging economies growth, are off to the races. And, when combined with the Bernanke put, lofty P/Es (>15) times robust earnings = great returns.

So, what has really happened these past several months?

The valuation levels you see in Table 1 provide the parameters for fair value for the S&P 500. At yesterday’s closing price, Earth at its historical P/E (15 times) rate times a more realistic (yet, still record busting) operating earnings (for the next 12 months) = fair value.

It may not be Heaven, and it hopefully won't devolve into Hell, but Earth is where the markets have settled in - for now.

Wednesday, June 15, 2011

It’s The Demand, Stupid

“One thing you’ve got to understand is that we do not hire workers for the sake of hiring workers. We hire them to do jobs,” Mr. Goodnight said. “If we don’t have the work coming in, nothing will make me hire another person.”
Frank W. Goodnight, President, Diversified Graphics, a publishing company in Salisbury, N.C., quoted in today’s NY Times article, “A Slowdown for Small Businesses”

This morning, two reports (see links below) were published that illustrate the economic dilemma the US (and, therefore, the global) economy finds itself in – there just ain’t enough demand out there.

This is nothing new. But with the government stimuli clock running out, the viability of an organically driven, private sector led sustainable economic expansion hangs in the balance. The recent US economic data has put a sharp spotlight on the decelerating US economy. The crisis in Europe is stuck in its own feedback loop, with the outcome quite uncertain. Then, there’s the hot, hot, hot emerging markets with inflation topping the economic list of worries (to be sure, there are lots of other risks that many bullish investors choose to ignore).

With US growth decelerating, the chosen phrase is soft patch. The economic soft patch, however, could quickly turn to quicksand. And, given both the limited remaining resources in the governmental fiscal and monetary bag (not to mention the toxic political atmosphere and the consequences of austerity in a time of weak demand), the quicksand the global economy would find itself entrapped in could be far worse than most investors currently anticipate.

So, what do the two reports tell us about the state of the US economy? For one, it says that in the business world it’s a tale of two economies – one that benefits from the global growth story, the other primarily on US domestic demand. However, herein lies the dilemma for all: In the end, global growth is dependent on end user demand, which is centered on developed economies like the US as developing markets' end user demand is both too small and years away from making a significant impact on global end user demand. This is fairly clear cut to developed economies but is far less appreciated when it comes to developing economies.

Developing economies, like China, depend on two engines of growth – fixed domestic investment and exports. Fixed domestic investments eventually require end user demand. You can build only so many new ghost towns before the money runs out. Excess inventory is the chicken that eventually comes home to roost. (Tech bubble, anyone?)

As for the other engine of emerging markets growth, exports, well that depends primarily on…you guessed it, end user demand in developed economies. And the problem there lies in the fact that end user demand in developed economies (like the US and Euroland) relies on wage growth and higher employment. And that is mainly resides in the small business arena.

I’ll give you one guess as to which report published today painted a less than rosy picture? (Hint: it isn’t the big boy’s report.)

Investment Strategy Implications

As for the stock market - it may all work out. Then again, it might not. Stocks locked in the first of a potential 3 stage march to a bear market (stage 1 – sideways; stage 2 – rollover; stage 3 – breakdown) may actually resolve itself to the upside, which would make the current market action the prelude to higher highs (thereby showing that sideways was little more than a consolidation phase, which all bull markets go through from time to time).

No one knows for sure how the current sideways market action will resolve itself. I would suspect, however, that based on how the past two bear markets came about (topping process in time and manner), we should have a very good idea before this summer is over (when price and its two key moving averages – 50 and 200 day might converge) whether consolidation or distribution was the real story of our multi month sideways markets.

In regards to the economy, one thing is certain: if end user demand turns negative, the environment will become very bad very quickly. And then all that will be needed is some event somewhere (in the economic, financial, or political realm) to turn bad to ugly.

The task for President-elect Romney will not be an easy one.

Here are links for the two reports:


Business Roundtable

Not so good


One relies primarily on global growth, the other primarily on domestic demand.

Friday, June 10, 2011

Bottoms Up?

I received an email this morning re some analyst's view advising investors on the prospects of a market bottom. I may have it ass backwards, but talk of a "bottom" needs to be clarified.

A 4.9% drop (closing price to closing price) from the May 31 close within a sideways market (since the spring for US and the fall of last year for most emerging markets) is hardly the stuff of market corrections (5 to 10% or more).

With Momentum, MACD, and RSI in full retreat, more time is needed for a "bottom" to be formed (first chart).

What would be ideal (for a "bottom") is a non confirmation of Momentum, MACD, and RSI versus price. That could then lead to a good rally but not necessarily a "bottom" (as in something more than one that leads to a tradable rally) as the sideways market we have been experiencing may turn out to be a distributional range and not a consolidation phase. Technical analysis support for this possibility (distribution leads to market top) rests in the deterioration (and non confirmation) in Momentum, MACD, and RSI on a longer term (weekly) basis (second chart).

It must be noted, however, that these momentum indicators (which is what Momentum, MACD, and RSI are) are warning signs only.

The key inflection point is IF the Mega Trend reverses (price, moving averages, and their relationship to each other). That could occur late summer or early fall if the sideways markets resolve to the downside (by price breaking below its moving averages, shorter term moving average crosses longer term one to the downside, and the slope of both moving averages is downward).

These are the signs investors and traders might consider as markets debate if the real economy is experiencing an economic soft patch or something else. In other words, soft patch = consolidation, something else = distribution (followed by bear market).