Monday, January 16, 2017

CEO Confidence Surges Higher

Early this month The Conference Board reported the fourth quarter 2016 Measure of CEO Confidence. The fourth quarter reading was reported at 65 and is the highest reading since the first quarter of 2011. Readings above 50 indicate more positive than negative responses.



Sunday, January 15, 2017

A Chart Supporting Market Bears

For investors and analyst it is important to read and evaluate perspectives that run counter to ones own in order to increase the likelihood they are not missing something in their analysis or thinking. For example, the equity market has essentially moved higher, uninterrupted, since the end of the financial crisis low in 2009 and the bull market seems to want to continue; however, is there something suggesting the bull market may be nearing an end? Many of the technical aspects of the market support an additional move higher though and just one bullish chart is noted below.


Charles Kirk, author of The Kirk Report, was recently asked if there is a market technical pattern that runs counter to the many bullish chart patterns currently in play for the market. Kirk provides good weekly technical commentary in his subscriber report each week. In this week's subscriber report, he included a chart similar to the one below. The chart shows a Fifth Wave exhaustion pattern and a potential bearish head & shoulders pattern developing.


Much of the current technical market action does remain bullish. From a fundamental perspective, earnings and economic reports are also exhibiting an improving trend. In spite of the broad number of bullish indicators, reviewing potential negative signals that might run counter to ones own views can provide insight into potential market turning points.


Saturday, January 14, 2017

Trying To Market Time Is Fraught With Risk

The U.S equity market has certainly had a nice recovery since the financial crisis low in 2009. The magnitude and length of the recovery may have some investors contemplating selling their equities in favor of sitting on the sidelines until the next pullback.


A few charts have circulated in the blogosphere recently noting the positive impact on an investor's total return if they simply miss a few of the worst down market days. I have not come across a definitive set of parameters that ensures the positive success of this type of strategy; however, the benefits appear quite substantial. On the other hand, as attractive as 'cashing out' of the market may seem, getting back in can be even more difficult.

The below chart shows the price return of the S&P 500 Index (blue line) plotted against the return if an investor simply avoided the five worst market days each year (green line) and the return if an investor avoided the five best market days each year (red line) going back to 1980. As the chart clearly shows via the red line, positive equity market returns in any given year are generated on just a handful of days. Missing those few up days each year almost certainly guarantees an investor will lose money, or substantially underperform, over the long run if they attempt to time in and out of the market. So what should an investor do?


Fidelity recently prepared a report, Six Habits of Successful Investors, that contains useful strategies for investors that will increase the probability of growing ones wealth. In an effort to summarize some of the article, a key is having a long term plan that works in both up and down markets and one that an investor can follow during market swings. Having the discipline to follow the plan can mean increasing ones investments during down markets. And importantly, diversification is beneficial as some asset classes will hold up better when other asset classes experience downside volatility. For example, as difficult as it may seem to own bonds as rates are rising, the right allocation can serve as a shock absorber when equities decline. The entire Fidelity article is a worthwhile reading. At the end of the day though, timing in and out of stocks is almost assuredly a loser's game.


Friday, January 06, 2017

Buy The Rumor, Sell The News

The old investing adage “Buy the rumor, sell the news” comes to mind following the “Trump Rally” to end 2016. As we all know, President-Elect Trump has not yet been sworn into office and yet, the year-end climb in US markets has been mostly attributed to his policy proposals. This makes sense as the market is always forward-looking, but it is important to keep in mind that it often overshoots in the near term. As a prime example, the chart below shows the relative performance of the Utilities sector against the S&P 500 in the three months before (left) and after (right) the two most recent Fed rate hikes. The line moving higher indicates Utilities outperforming the S&P 500 and lower indicates Utilities underperforming.  As any market participant would tell you, this conservative/high income sector should suffer from an increase in interest rates. And it did, but all of the underperformance came before the actual event (Fed rate hike) and subsequently, Utilities dramatically outperformed (short-term).


The surprise victory of Donald Trump in the Presidential election brought about a dramatic market rotation that benefited cyclical sectors like Financials and Industrials. Cyclical sectors outperformed due to the widespread belief that Trump’s pro-business policies could boost domestic economic growth. 


This rotation may prove to be wise and Trump’s policies may boost the U.S. economy, but in the near term, we would not be surprised to see some of this rotation temporarily undone. The market has been driven higher by policy speculation; actual legislation may prove the wisdom of “Buy the rumor, sell the news.”


Thursday, January 05, 2017

Buybacks Decline In Q3 2016, But Cash At Record Level

At the end of December S&P Dow Jones Indices reported information on S&P 500 buybacks and dividends for Q3 2016. The preliminary report noted quarter over quarter buybacks decline 12% and year over year buybacks fell 25.5%. The continued decline in buybacks may be a result of companies retaining cash due to the uncertainty surrounding the November election. Dividends were up fractionally QOQ and up 3.5% on a YOY basis. However, in spite of the decline in buybacks, Howard Silverblatt of S&P Global noted,
"cash reserves also set a new record for the third consecutive quarter, as S&P 500 Industrial (Old), which consists of the S&P 500 less Financials, Transportations and Utilities, available cash and equivalent now stands at $1.49 trillion, up 8.2% from the prior record of $1.37 trillion. The current cash level is nearly double [that] of expected 2017 operating income, giving corporations leeway in their expenditures."


Other key highlights from S&P Dow Jones Indices' report,
  • Information Technology continued its buybacks dominance, even as its overall percentage of S&P 500 buybacks decreased to 23.2% ($26.0 billion) in Q3 2016, from 23.6% ($30.1 billion) in Q2 2016.
  • Apple (AAPL) spent the most on buybacks in Q3 2016, at $6.0 billion, down from $10.2 billion in Q2 2016 and $13.3 billion spent in Q3 2015.
  • Microsoft (MSFT) was second, with $4.4 billion, up from $3.7 billion in Q2 2016.
  • Energy saw its contribution increase but overall expenditures decline, to 1.20% ($1.34 billion) in Q3 2016, compared to 1.09% ($1.39 billion) in Q2 2016 and 6.07% ($8.8 billion) in Q3 2014.
  • Industrials decreased its expenditures by 39.4% ($13.3 billion) from $21.9 billion in Q2 2016.
  • Consumer Staples which decreased its expenditures by 28.4% ($8.4 billion) after $11.7 billion in Q2 2016.


Tuesday, January 03, 2017

Winter 2016 Investor Letter: Rising Confidence And The Populist Movement

In our Fall 2016 Investor Letter we discussed how emotions tend to run high around certain periods like the recent U.S. election. We noted in that newsletter that emotional investment decisions can drive investors to reduce their stock market exposure and harm long term returns. Certainly, the equity market performance following the the November election was one that strongly rewarded investors that stuck with their investment discipline.

Our recently published Winter 2016 Investor Letter discusses the broad improvement in confidence that is showing up in a number of economic variables. The improvement in consumer confidence is important as the consumer accounts for nearly 70% of economic activity. Also included in the newsletter is commentary around the rise of the "Populist Movement' from the BREXIT vote in June to the Italian Referendum in December. While we take no stance on the merits of such movements, it is undeniable that recent elections have dramatically altered the state of western politics and the policies that may be pursued will have an impact on ones investment portfolio as we review the year ahead.


For additional insight into our views for the market and economy, see our Investor Letter accessible at the below link.


Equity Market Technicals Still Leaning Bullish

Yesterday I wrote that investor sentiment is broadly more bullish at the start of 2017 versus the beginning of 2016. Elevated bullish sentiment tends to be a contrarian indicator and can coincide with near term market tops. Now having noted the heightened sentiment measures, but shifting to a technical view of the market, some market excess has been worked off in the last few weeks of December with the S&P 500 Index down 1.4% since December 13th.


As the above chart shows, the late December weakness has created a bull flag formation during this two week period with the market trending lower. Additionally, the Money Flow Index (MFI) has retraced to a more neutral level while the stochastic indicator is near an oversold level.


Monday, January 02, 2017

Investor Sentiment More Bullish Than A Year Ago

In 2015 investors had to contend with a very volatile equity market during the summer months. On August 24, 2015 the Dow fell 1,000 points intraday before closing down 588 points. This volatility extended into October with the end result, the S&P 500 Index was up only 1.4% for all of 2015. This level of volatility and flat returns left investors anything but bullish going into 2016. As fate would have it, investors faced another market decline to begin 2016 as the S&P 500 Index fell 11.4% before bottoming on February 11, 2016. Fast forward to the end of 2016, and after an equity market that returned 12.0% for this past year (S&P 500 Index), broad measures of investor sentiment are much less fearful as 2017 begins as can be seen in the below chart and raises the question whether much of near term returns are already priced into the market.



Saturday, December 31, 2016

The Final 2016 Dogs Of The Dow Performance And the New 2017 Dow Dog Changes

The 20.5% return for the 2016 Dogs of the Dow exceeded the performance of both the Dow Jones Industrial Average and the S&P 500 Index in 2016. The Dow Dogs returned 20.5% versus 16.4% for the Dow Index and 12.0% for the S&P 500 Index. The best performer of the Dogs was Caterpillar (CAT) up 42.2% with the weakest performer being Pfizer up only 4.5%.


For the coming year, 2017, two of the existing Dow Dogs, Procter & Gamble (PG) and Wal Mart (WMT) will be replaced by Boeing (BA) and Coca-Cola (KO). Boeing has a dividend yield of 3.65% and Coke has a dividend yield of 3.38%.


Most Read Articles From Our Blog In 2016

Below is a list of the most read articles on our firm's blog in 2016. Our generally bullish view on the equity market for 2016 proved rewarding for our clients. We stuck to our bullish call in January when the market was down 8% as noted in the second article link below. When the market began to sell off again into late May, we highlighted our view that equity market headwinds were positioned to subside as noted in the first article link below. Our year-end Investor Letter will be released on Tuesday and will contain additional thoughts on 2016, but more importantly, our outlook for 2017.

To our clients and readers, we wish all of you a Healthy and Prosperous New Year.

Equity Market Headwinds Positioned To Subside - May 20, 2016

Maximum Fear May Be Near - January 15, 2016

Oil And Equity Price Trend Conundrum - August 2, 2016

Is The Value Style Outperformance Sustainable? - March 12, 2016

History Suggests Record Equity Market Highs Do Not Mean Investors Should Sell Stocks - August 11, 2016

Tobin's Q Below 1.0 In Q3 2015 - January 2, 2016

Jobs Were The Missing Link? - August 5, 2016

Value Stock Outperformance May Indicate Stronger Economy Ahead - July 17, 2016

Another Month Of Equity Outflows - September 2, 2016

Bullish Investor Sentiment Lower Than Level Reached In 2009 - May 26, 2016

The FANG Basket Of Stocks Gets Derailed - February 28, 2016


Wednesday, December 28, 2016

Recent Returns Remain Far Below the Longer Term Average

It wasn't until 2013 that the S&P 500 Index broke out 17 year time frame the annualized return (price only) for the S&P 500 Index is approximately 2.59%.



Thursday, December 22, 2016

Has Broadly Improved Sentiment Pushed The Equity Market To An Extreme?

The market's advance since the presidential election has certainly been remarkable. Much of the gain is being attributed to anticipated policies being proposed by a new Trump administration. Obviously none of the proposed policies have been put in place as of yet, but the market is already weighing in with positive expectations. A common thought is whether or not the market has gotten ahead of itself. Given the rapid rise in such a short time period, the market certainly seems to be ahead of itself. However, from a return standpoint, it may not be as can but seen in the below chart. Over the last two years the market's return totals just over 8% and all of the return has come since the election. This makes the average return over the last two years only about 4%.


Much of the positive market sentiment has been driven by a strong improvement in various consumer and business sentiment indicators. Below are a couple of charts showing the spike in a number of sentiment indicators.