“Fiction reveals truths that reality obscures.” - Jessamyn West (1902-1984)
The curiosity continues to build as many wonder if the recent upside run is fully justified. As usual with any mild correction, the thoughts and concerns of a trend shift begin to resurface. Last week’s action emphasized a potential trend reversal, especially with some bottoming in US Dollar, and sharp commodity declines. At this junction, it only takes a few minor knocks to get heads turning towards a cautious state. The suspense is already brewing after the lackadaisical Volatility Index (VIX) got a wake-up call last week. The “turbulence” indicator witnessed its calmest point of 14.27 on April 28, 2011. Since that point, the Volatility Index ended the week at 18.40, following a noteworthy spike. Therefore, it is worth asking this question: Can a herd-like mentality of trend following sustain itself in the weeks ahead?
As a start, the momentum buying in the past few months can be categorized by the following three key themes:
1. Shift Towards Hard Assets
As witnessed for several years, there is an increased rotation to Gold and Silver while reducing exposure to paper assets in the developed world.
2. Demand for Higher Yields
Investors that are fed up with low interest rates are desperately searching for an alternative. Therefore, managers are forced to step up risk exposure with the hopes of the attainment of desired returns.
3. Search for Growth
Longer-term participants project higher growth potential in emerging markets.
These well-documented trends are interrelated and soon to be challenged. Interestingly, the low rates that are influenced by central bankers greatly contribute to the themes above. Similarly, these policy driven actions explain the synchronized pattern among asset classes. In addition, inflation worries are becoming a popular global discussion, and it is nearly inevitable for that to turn into a political matter. As central bankers begin to address the inflation issues, these dominant themes may fail to satisfy the consensus expectation. Basically, this current condition showcases that the pace of the market’s appreciation is not in-line with the economic recovery. For now, timing is the tricky part, but staying alert for a series of catalysts is essential for a risk manager. Meanwhile, value oriented investors may find that entering here is less enticing when reviewing the pricing of specific ideas. Perhaps, an 8-12% broad market correction can make the playing field more attractive to those looking to accumulate US stocks at reasonable to low prices.
Specific Ideas:
AWR (Amer States Water): Having stayed mostly idle in the recent 2009-2011 recovery, the stock price of this water company are far from being overpriced, at least on a relative basis. This conservatively managed company has paid dividends for 57 years while being in a less glossy industry. Growth-like returns may not be visible in the near-term, but bargain hunters are likely to take a closer look.
UMPQ (Umpqua Holdings): Technical indicators would argue for an attractive intermediate-term outlook for shareholders of this Portland, Oregon, based bank. UMPQ’s longer-term core business is appealing on a fundamental basis despite the fragile conditions of the financial service sector. Recovery in lending (desperately needed for business managers) bodes well for a company that’s cleaned up its balance sheet, while in the past few quarters.
ROCK (Gibraltar Industries): A profitable first quarter is barely hitting the radar of many observers. Owners of this stock gain exposure to a manufacturer of buildings as part of an infrastructure play. Cost reduction efforts contributed to a recent 12% (1st quarter) increase in sales growth. Any pending weakness around $11 per share offers an early look at a buying opportunity.
Article Quotes:
“As unequal as America was before the Great Recession, the crisis, and the way it has been managed, has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise. But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all. As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a “land of opportunity” than even “old” Europe.” (Project Syndicate, May 5, 2011)
“I take strong exception with Bernanke's framework. His analytical focus rests upon the policy response to a crisis, while the lessons of history point rather directly to uncontrolled credit expansion and attendant speculative excess as the root cause of major financial crises. It is crucial to have a framework—a doctrine of clearly defined "rules of the game"—that protects the integrity of the system against the type of excesses that risk a crisis of confidence and systemic collapse (such as massive federal deficits and a ballooning central bank balance sheet). This is foreign to current Federal Reserve doctrine…. We're in need of some rules. We need rules that would ensure that the Fed never again accommodates a doubling of mortgage credit in about six years. We need rules that ensure that the Fed is not complicit in double-digit-to-GDP federal deficits and a doubling of federal debt in less than four years.” (Asian Times, Doug Noland, May 3, 2011)
Levels:
S&P 500 Index [1340.20] – Charts point out early signs of vulnerability, especially above 1340. Day-to-day action should determine the magnitude of a pending pause. Yet, the overall trend is positive from longer-term indicators.
Crude [$97.18] – A sharp and ‘bubble’-like decline as the commodity fell from $110 to $97. The 3-month run is under pressure as the confirmation of recent moves is eagerly awaited in upcoming trading days.
Gold [$1486.50] – Indication of pausing while the uptrend is setting up for a correction. Next noteworthy target is the 50-day moving average of $1454. A major move below $1400 may trigger worries of this run.
DXY – US Dollar Index [72.93] – The bleeding appears to have paused moderately. After making annual lows on May 4th, the week ended with a sharp spike.
US 10 Year Treasury Yields [3.28%] – Nearly a 3 month decline in yields is beginning to dampen the recovery above 3% that began in fall 2010.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Saturday, May 07, 2011
Monday, May 02, 2011
Market Outlook | May 2, 2011
“The two most powerful warriors are patience and time.” - Leo Nikolaevich Tolstoy
Playing Field
Some point out the disconnect between economic health and stock behavior. This discrepancy is not easily visible as perception presents a positive story. A similar disconnect might exist between recent earnings optimism and current market pricing. Interestingly, a short-term oriented mindset is known to favor “momentum” and, in turn, reflect a lower volatility. Meanwhile, investors waiting for a better buy point will be required to exhibit patience and inquire on the influential themes. Similarly, those seeking to take profits from recent gains will have to show grit and fight greedy urges. At this junction, speculating on either side of the direction is not comforting for decision makers. Instead, most money managers are inclined to accept the trend while getting more clues from earnings chatter and monthly economic data.
Too Familiar Pattern
The acceleration of stock indexes mirrors commodity prices, which questions if risk aversion truly exists in this cycle. Instead, ‘fear’ has slowly subsided with each upside movement since March 2009. The skeptics fear that either a distorted message is transmitted or we’re entering a fragile state in this cycle. Yet, the S&P 500 Index is setting up to revisit the 1400 range as the next target. Perhaps, then can we measure the conviction of new buyers as it may serve as a vote of confidence.
The glaring aspect of this run is not the actual upside move but the continuation of an established and synchronized trend. Interestingly, the themes from most of the 2000’s remain dominant these days. The energy related run is reflected in Crude prices as well as the Oil Service index. On the same note, Gold is making new all-time highs in a well-documented explosive move. Finally, the US Dollar weakness is decelerating, and US interest rates are not moving significantly—a macro combination that is too familiar for experts as well as casual observers.
The Challenge
Finding distinct ideas in liquid markets is not easy, especially for bargain hunters. There is a risk of overpaying in a market (S&P 500 Index) that has risen by nearly 35% since July 1, 2010. Being a contrarian alone does not provide a full answer, especially for those seeking growth-like returns. Being selective in specific ideas is an approach worth considering, especially from a longer-term view. Importantly, traditional indicators may suggest overbought/overvalued conditions, while irrational behavior can persist longer than imagined. Thus, balancing the logical reality from the perceived reality is the challenge in weeks ahead.
Specific Ideas:
PSEC (Prospect Capital): A private equity firm that offers a small cap exposure in financial services. In this business cycle, the company is geared to capture opportunities related to venture capital, lending, and capital raising. The stock price is not stretched and removed from all-time highs of $18.97 in 2006.
VIVO (Meridian Bioscience): A profitable company in the diagnostic test kits for respiratory and gastrointestinal diseases. This is a small cap healthcare firm that pays out dividends and is run by highly rated management. A projected 16% growth rate appeals to long-term investors as any weakness closer to $22 offers an attractive entry point.
HWAY (Healthways, Inc.): After a sluggish 2 + years, early signs of a recovery were stirred in recent earnings announcement by increasing contracts from traditional health plans and employer markets. The short-term optimism is a sign of confidence in healthcare reform. In addition, pure fundamentals, such as the price/cash flow, are below industry average.
Article Quotes:
“Given the extraordinary fiscal and monetary indulgence that has been heaped upon the economy in recent years, it is tempting to believe that the world has changed in ways that make structured, historical, value-based analysis inappropriate. But in my view, this gives far too much long-term credit to short-term phenomena. It's certainly true that we ought to adapt to the possibility that valuation "norms" will be higher (and long-term return expectations will be lower) in the face of persistent policy efforts to elevate asset prices and foment bubbles. Still, our estimates of expected market returns have remained very accurate even in the most recent decade, so the lesson is not that valuations don't matter, or that 2+2 no longer equals 4 (our long-term return estimates are essentially basic algebra), but rather that policy makers may engender higher valuations and lower long-term return prospects more frequently in the years ahead than they have in the past.” (John P. Hussman, Ph.D, May 2, 2011)
“Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment. Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men.” (The Economist, April 28, 2011)
Levels:
S&P 500 Index [1363.61] – Ongoing multi-year recovery by making new highs. Breaking above 1350 to reaffirm further strength.
Crude [$113.93] – A surging run as the commodity is up 35% since late February 2011. Charts suggest that prices are stretched in the near-term.
Gold [$1535.50] – New all-time highs, yet again, for another week. Currently, the index is 14% removed from its 200-day moving average.
DXY – US Dollar Index [72.93] – Making new lows for the year as weakness persists at a faster pace than multi-year downtrend.
US 10 Year Treasury Yields [3.28%] – In 2011, yields have stayed within a range of 3.20-3.40%a sideways pattern that keeps fixed income investors in suspense.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Playing Field
Some point out the disconnect between economic health and stock behavior. This discrepancy is not easily visible as perception presents a positive story. A similar disconnect might exist between recent earnings optimism and current market pricing. Interestingly, a short-term oriented mindset is known to favor “momentum” and, in turn, reflect a lower volatility. Meanwhile, investors waiting for a better buy point will be required to exhibit patience and inquire on the influential themes. Similarly, those seeking to take profits from recent gains will have to show grit and fight greedy urges. At this junction, speculating on either side of the direction is not comforting for decision makers. Instead, most money managers are inclined to accept the trend while getting more clues from earnings chatter and monthly economic data.
Too Familiar Pattern
The acceleration of stock indexes mirrors commodity prices, which questions if risk aversion truly exists in this cycle. Instead, ‘fear’ has slowly subsided with each upside movement since March 2009. The skeptics fear that either a distorted message is transmitted or we’re entering a fragile state in this cycle. Yet, the S&P 500 Index is setting up to revisit the 1400 range as the next target. Perhaps, then can we measure the conviction of new buyers as it may serve as a vote of confidence.
The glaring aspect of this run is not the actual upside move but the continuation of an established and synchronized trend. Interestingly, the themes from most of the 2000’s remain dominant these days. The energy related run is reflected in Crude prices as well as the Oil Service index. On the same note, Gold is making new all-time highs in a well-documented explosive move. Finally, the US Dollar weakness is decelerating, and US interest rates are not moving significantly—a macro combination that is too familiar for experts as well as casual observers.
The Challenge
Finding distinct ideas in liquid markets is not easy, especially for bargain hunters. There is a risk of overpaying in a market (S&P 500 Index) that has risen by nearly 35% since July 1, 2010. Being a contrarian alone does not provide a full answer, especially for those seeking growth-like returns. Being selective in specific ideas is an approach worth considering, especially from a longer-term view. Importantly, traditional indicators may suggest overbought/overvalued conditions, while irrational behavior can persist longer than imagined. Thus, balancing the logical reality from the perceived reality is the challenge in weeks ahead.
Specific Ideas:
PSEC (Prospect Capital): A private equity firm that offers a small cap exposure in financial services. In this business cycle, the company is geared to capture opportunities related to venture capital, lending, and capital raising. The stock price is not stretched and removed from all-time highs of $18.97 in 2006.
VIVO (Meridian Bioscience): A profitable company in the diagnostic test kits for respiratory and gastrointestinal diseases. This is a small cap healthcare firm that pays out dividends and is run by highly rated management. A projected 16% growth rate appeals to long-term investors as any weakness closer to $22 offers an attractive entry point.
HWAY (Healthways, Inc.): After a sluggish 2 + years, early signs of a recovery were stirred in recent earnings announcement by increasing contracts from traditional health plans and employer markets. The short-term optimism is a sign of confidence in healthcare reform. In addition, pure fundamentals, such as the price/cash flow, are below industry average.
Article Quotes:
“Given the extraordinary fiscal and monetary indulgence that has been heaped upon the economy in recent years, it is tempting to believe that the world has changed in ways that make structured, historical, value-based analysis inappropriate. But in my view, this gives far too much long-term credit to short-term phenomena. It's certainly true that we ought to adapt to the possibility that valuation "norms" will be higher (and long-term return expectations will be lower) in the face of persistent policy efforts to elevate asset prices and foment bubbles. Still, our estimates of expected market returns have remained very accurate even in the most recent decade, so the lesson is not that valuations don't matter, or that 2+2 no longer equals 4 (our long-term return estimates are essentially basic algebra), but rather that policy makers may engender higher valuations and lower long-term return prospects more frequently in the years ahead than they have in the past.” (John P. Hussman, Ph.D, May 2, 2011)
“Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment. Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men.” (The Economist, April 28, 2011)
Levels:
S&P 500 Index [1363.61] – Ongoing multi-year recovery by making new highs. Breaking above 1350 to reaffirm further strength.
Crude [$113.93] – A surging run as the commodity is up 35% since late February 2011. Charts suggest that prices are stretched in the near-term.
Gold [$1535.50] – New all-time highs, yet again, for another week. Currently, the index is 14% removed from its 200-day moving average.
DXY – US Dollar Index [72.93] – Making new lows for the year as weakness persists at a faster pace than multi-year downtrend.
US 10 Year Treasury Yields [3.28%] – In 2011, yields have stayed within a range of 3.20-3.40%a sideways pattern that keeps fixed income investors in suspense.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
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