This weekend's Barron's has the usually bearish Alan Adelson put up a big warning in "Signs of a Top?"
Market sentiment following the surging December is characterized as "explosive optimism." Indeed, forecasts from Goldman Sach's Jim O'neill's 20% stock market gain and "Year of USA" proclamation, to various market gurus that Barron's has assembled, to the recent low in VIX all seem to agree on a very good year ahead.
Could this be the sign of a temporary market top before the real economies produce sufficient results to support it?
This is probably the most important question to ask heading into the first week of 2011. Perhaps the December surge was really just an amplified "window dressing" and short-covering effect when all the under-performing portfolio managers tried to buy the year's big winners and short sellers ran for the cover. If so, these stocks are over-bought and can see sell offs in January.
As noted by Adelson, one important area to watch is indeed the commodities-related stocks which seem to have not reflected the new policy stand by China trying to reign in inflation and the potential bubble in property markets. China has raised interest rates multiple times and bank reserve requirement multiple times. And RMB has not appreciated much. It seems pretty clear that the easy bank-lending policy of the crisis era is now on reverse.
Yet, from copper, iron ore, to other industrial metals and the companies engaged in their productions, the market continues to assume an ever-expanding appetite out of China. FCX has hit 120/share! Can this continue in the new year? If that reverses, it could be a leading signal for things to follow. For a good anlysis of the copper market, and a fair warning, see this Seeking Alpha article.
Showing posts with label Weekend Reading. Show all posts
Showing posts with label Weekend Reading. Show all posts
Saturday, January 1, 2011
Sunday, April 18, 2010
Focusing on earnings
The first week of the earnings season turned to be rather eventful.
Intel and JP Morgan reported fantastic results that pushed the market higher. Google's somewhat disappointed.
March housing starts was a positive surprise, even though it's still way below average.
Friday was a bomb. SEC's charge against Goldman, combined with weak reading on consumer sentiment sent the market sharply down, erasing the gain for the week. Goldman story will linger on for months, as it's a poster child for Wall Street's greed and power. Everybody will be jumping up and down on this unfolding saga, and people are expecting more and more followup scandals and discoveries... the political risk of owning bank shares is getting even higher.
For bank stocks, two things to focus on. (1) We can avoid these Wall Street concepts. I've sold off JPM and BAC for that reason. I've stayed with my long-term holding WFC, for it has a very small I-banking business inherited from Wachovia Securities, and the rest is doing very well. I still think it could become the largest bank stock in market cap. (2) Pick up some of the bank stocks such as GS if they are excessively over-sold, so that the political risk is well-compensated. One of the Barron's articles argues that GS already looks under-valued after Friday's selloff. I agree somewhat, but the article may have underestimated the political fervor. Similarly, JP Morgan also looks expensive. Jaime Dimon's approach to dealing with Washington may not help. These Wall Street firms don't seem to get it: Washington will not leave them alone to do business as usual, doesn't matter what they say or do.
Last week, Sandra Ward had an article on Barron's about how retail investors are finally following the lead of institutional investors in getting into equity funds. It's well worth a read. I think there is more to come, which can turn out to be a powerful factor for the stock market.
James Paulsen's thesis on the recovery appears to be intact. This week, he re-confirmed the view by observing that "Despite persistent, widespread economic anxiety, the contemporary recovery appears remarkably normal." That is, there is no "new normal."
According to Tax-Refund Monitor,
Investors with a long term view informed by economic data will be in an advantageous position to play this market. Stay in the market, raise some cash when your winners become too large, and pick up good stocks when they're wacked by short-term forces. This is a sound strategy that I've played with with good results.
On Monday my favorite builder SPF will report Q1 earnings at market open. I'm somewhat optimistic. Citigroup, Goldman Sachs and Wells Fargo will report too. During the week there will be existing home sales and new home sales reports. It'll be very interesting.
Intel and JP Morgan reported fantastic results that pushed the market higher. Google's somewhat disappointed.
March housing starts was a positive surprise, even though it's still way below average.
Friday was a bomb. SEC's charge against Goldman, combined with weak reading on consumer sentiment sent the market sharply down, erasing the gain for the week. Goldman story will linger on for months, as it's a poster child for Wall Street's greed and power. Everybody will be jumping up and down on this unfolding saga, and people are expecting more and more followup scandals and discoveries... the political risk of owning bank shares is getting even higher.
For bank stocks, two things to focus on. (1) We can avoid these Wall Street concepts. I've sold off JPM and BAC for that reason. I've stayed with my long-term holding WFC, for it has a very small I-banking business inherited from Wachovia Securities, and the rest is doing very well. I still think it could become the largest bank stock in market cap. (2) Pick up some of the bank stocks such as GS if they are excessively over-sold, so that the political risk is well-compensated. One of the Barron's articles argues that GS already looks under-valued after Friday's selloff. I agree somewhat, but the article may have underestimated the political fervor. Similarly, JP Morgan also looks expensive. Jaime Dimon's approach to dealing with Washington may not help. These Wall Street firms don't seem to get it: Washington will not leave them alone to do business as usual, doesn't matter what they say or do.
Last week, Sandra Ward had an article on Barron's about how retail investors are finally following the lead of institutional investors in getting into equity funds. It's well worth a read. I think there is more to come, which can turn out to be a powerful factor for the stock market.
James Paulsen's thesis on the recovery appears to be intact. This week, he re-confirmed the view by observing that "Despite persistent, widespread economic anxiety, the contemporary recovery appears remarkably normal." That is, there is no "new normal."
According to Tax-Refund Monitor,
... taxes withheld in March showed a very large increase over February. There were no changes in law or withholding schedules ... it often indicateds activity has accelerated, but is not yet being captured in the labor-market data. ...Last Friday's WSJ, however, did have an article on "Tech Leads Jobs Recovery" that shows that Silicon Valley is ramping up hiring on tech talents.
Investors with a long term view informed by economic data will be in an advantageous position to play this market. Stay in the market, raise some cash when your winners become too large, and pick up good stocks when they're wacked by short-term forces. This is a sound strategy that I've played with with good results.
On Monday my favorite builder SPF will report Q1 earnings at market open. I'm somewhat optimistic. Citigroup, Goldman Sachs and Wells Fargo will report too. During the week there will be existing home sales and new home sales reports. It'll be very interesting.
Saturday, April 10, 2010
Weekend reading: Cautiously optimistic for Q1
What might be in store for the first quarter corporate earnings? For sure, many (perhaps more than 50%) will beat. More important, revenue picture should continue to improve, along with profitability. But most important of all is the outlook. Do companies feel more optimistic about the business, and they will thus invest more and create more jobs?
We'll be reading and watching these outlooks.
Perusing through this weekend's Barron's. Surprised to find something missing: Where is the deeply sarcastic perma-bear Alan Adelson? Has the market advance towards 11000 finally convinced him? Or is he taking a nap? Anyway, it's hard to continue to press for a pessimistic view in front of all the improving economic data and more importantly the markets.
The cautiously optimistic Michael Santoli is alive and well with his continuing caution for a potential correction. This time, we obviously agree. We think Q1 could have some surprises. The generally optimistic mood could have set it up for "buy on rumor, sell on news" kind of trade. But if the fundamental pictures are sound, we should see opportunities in post-earning blues. This is our thinking for raising cash last week.
Santoli mentions China being a factor. We do see RMB rising within a bigger band. The move won't be large. China needs to release some inflationary pressure that has been building up. And to transform itself into more consumption oriented, China should empower the consumers a bit. On this front, the Obama administration seems to be handling it well by pursuing an engagement policy, despite all the protectionistic noise.
If RMB rises substantially over the course of 2010, say another 5-10%, the increased raw material purchasing power should help crude, copper, steel, and other raw material producers. We want to be overweight in these areas.
See Big Picture for an interesting discussion on market sentiment.
We'll be reading and watching these outlooks.
Perusing through this weekend's Barron's. Surprised to find something missing: Where is the deeply sarcastic perma-bear Alan Adelson? Has the market advance towards 11000 finally convinced him? Or is he taking a nap? Anyway, it's hard to continue to press for a pessimistic view in front of all the improving economic data and more importantly the markets.
The cautiously optimistic Michael Santoli is alive and well with his continuing caution for a potential correction. This time, we obviously agree. We think Q1 could have some surprises. The generally optimistic mood could have set it up for "buy on rumor, sell on news" kind of trade. But if the fundamental pictures are sound, we should see opportunities in post-earning blues. This is our thinking for raising cash last week.
Santoli mentions China being a factor. We do see RMB rising within a bigger band. The move won't be large. China needs to release some inflationary pressure that has been building up. And to transform itself into more consumption oriented, China should empower the consumers a bit. On this front, the Obama administration seems to be handling it well by pursuing an engagement policy, despite all the protectionistic noise.
If RMB rises substantially over the course of 2010, say another 5-10%, the increased raw material purchasing power should help crude, copper, steel, and other raw material producers. We want to be overweight in these areas.
See Big Picture for an interesting discussion on market sentiment.
Saturday, February 27, 2010
Weekend reading: Real economy, not financial, the key for 2010
This last week saw some mixed economic data: Q4 GDP was revised upward from 5.7% to 5.9%, durable good order surged, but consumer confidence dropped, along with dismal new and existing home sales.
Growth in GDP is likely to slow after the big spurt.
Personal consumption expenditure 71%
Private domestic investment 11%
Government consumption and investment 20%
Net export -2%
Government has already stepped up its role, and may not be able to do much this year. Business investment can probably go up more. Technology sector is most promising. Foreign demand is likely to stay robust, as emerging market consumer spending has already overtaken US to become the largest spender in the world economy. But to grow, US will still need domestic consumers to open their wallets more. That hinges on jobs and assets (mostly home values and financial asset values). US needs both the income and wealth effects working.
All of these point to the essential need for interest rate to stay low, and US dollar to stay weak. In other words, the global rebalancing compells US to act more like China and vice versa.
The banking system is more or less stabilized. FDIC is still mopping up the mess and will continue to do so for the rest of the year. If the real economy improves, banks are likely to lend more, especially given the record yield spread. That's when the positive feedback loop will start working and growth will accelerate. Bet on that.
Growth in GDP is likely to slow after the big spurt.
Unlike past rebounds driven by the spending of shoppers, this one is hinging more on spending by businesses and foreigners. Businesses boosted spending on equipment and software at a sizzling 18.2 percent pace, the fastest in nine years.
And foreigners snapped up U.S.-made goods and services, which propelled exports to grow at 22.4 pace, the most in 13 years.According to the GDP release from the commerce department, here is the broad makeup of the US economy:
Personal consumption expenditure 71%
Private domestic investment 11%
Government consumption and investment 20%
Net export -2%
Government has already stepped up its role, and may not be able to do much this year. Business investment can probably go up more. Technology sector is most promising. Foreign demand is likely to stay robust, as emerging market consumer spending has already overtaken US to become the largest spender in the world economy. But to grow, US will still need domestic consumers to open their wallets more. That hinges on jobs and assets (mostly home values and financial asset values). US needs both the income and wealth effects working.
All of these point to the essential need for interest rate to stay low, and US dollar to stay weak. In other words, the global rebalancing compells US to act more like China and vice versa.
The banking system is more or less stabilized. FDIC is still mopping up the mess and will continue to do so for the rest of the year. If the real economy improves, banks are likely to lend more, especially given the record yield spread. That's when the positive feedback loop will start working and growth will accelerate. Bet on that.
Sunday, February 14, 2010
Weekend reading: Up and up!
The new year has brought about a pervasive bearish tone on the stock market and among commentators. So it's rather refreshing to read Barron's interview with an informed optimist, James Paulsen, the Chief Strategist of Wells Capital Management.
A warning is in order. Many of these economists and strategists, once have taken a position, will be hard pressed to change their perspectives. Because they've built up a vested interest in that view, they often have to defend it, over and over again. Another reason for doing so is, if you change your view too often, the listeners get confused and get lost. The ability to sort through many of these rather conflicting views and opinions can be crucial for investment decisions. This ability is something we have come to define as "Interpretation Quotient" at IQR. This blog strives to increase our investment IQ this way.
With that in mind, let us see what Mr.Paulsen has to say about the US economic recovery.
After noting the pervasiveness and the support for the pessimism in our conventional wisdom, Mr.Paulsen comes to the first substantive statement about why corporations will have a leading role to play in this recovery: "Companies have the greatest profit leverage that they've had in decades. Right now, the level of cash flow relative to capital spending on corporate balance sheets is at a 50-year high."
Couple that with the fact that there is more than $1 trillion of cash sitting on corporations balance sheet, and the favorable financing condition, we can see why companies are ready to charge ahead.
Next logical question is then why would companies increase their production and hiring, if demand for their products are not there? This is of course one of the main arguments in many pessimists' views, that the consumer's psychic has been seared forever by the devastating financial crisis which has knocked down his wealth and income somewhat permanently through home value decrease, 401k erosion, restrictive borrowing and unemployment. Given that 70% of the US GDP is US consumption, the conventional wisdom has it that we'll see at best sub-par growth for the years to come.
To this question, Mr. Paulsen comes to the second substantive statement: "Household-debt levels remain a problem. But I think the issue has been overdramatized. During the bust, the biggest problem wasn't so much the people who lost their jobs as unemployment surged from 5% to 10%; it was the other 90% of the folks who had a job but were scared out of their wits. They just quit spending. Now, however, their paralysis is abating."
He goes on to observe some tentative signs why US consumers are likely to return to the mall, more so than expected. Add to that the contributions from inventory rebuild, stabilization of the housing and auto industries, government spending, and export growth, he makes his case that we could see real GDP growth at above 5% level for 2010. That's 1-2% more than many expect. Greater growth bodes well for the stock market.
Additionally, the demand for risk assets are likely to increase gradually, because "Liquid-asset holdings of households and businesses now stand at around $10 trillion. That's a record, relative to GDP. This money is likely to act as a slow-release Tylenol tablet over the next several years, leeching into the market and driving stock prices higher."
That's the third substantive statement.
The mother of all challenges facing the US is the huge budget deficits hanging over our heads. To that Mr. Paulsen makes his fourth, rather surprising statement: "I don't think we're in an Armageddon situation. We've run large deficits as a percentage of GDP in the past, such as in 1975, when the deficit blew out to 6.5% of GDP and people thought the world had come an end. If you look back in U.S. economic history, the five years after the deficit peaks invariably have torrid growth. Same for the peak in unemployment, which we recently hit. Remeber: President Clinton left us in the late 1990s with budget surpluses and low unemployment, yet the succeeding decade was nothing to write home about in terms of either growth or stock-market performance."
That is a powerful contrarian argument.
It will be most interesting to analyze these arguments alongside PIMCO's thesis of the New Normal, that we're entering a post-crisis era of slow-growth because of de-leveraging, re-regulation and de-globalization.
Both will need to be taken with a grain of salt.
A warning is in order. Many of these economists and strategists, once have taken a position, will be hard pressed to change their perspectives. Because they've built up a vested interest in that view, they often have to defend it, over and over again. Another reason for doing so is, if you change your view too often, the listeners get confused and get lost. The ability to sort through many of these rather conflicting views and opinions can be crucial for investment decisions. This ability is something we have come to define as "Interpretation Quotient" at IQR. This blog strives to increase our investment IQ this way.
With that in mind, let us see what Mr.Paulsen has to say about the US economic recovery.
After noting the pervasiveness and the support for the pessimism in our conventional wisdom, Mr.Paulsen comes to the first substantive statement about why corporations will have a leading role to play in this recovery: "Companies have the greatest profit leverage that they've had in decades. Right now, the level of cash flow relative to capital spending on corporate balance sheets is at a 50-year high."
Couple that with the fact that there is more than $1 trillion of cash sitting on corporations balance sheet, and the favorable financing condition, we can see why companies are ready to charge ahead.
Next logical question is then why would companies increase their production and hiring, if demand for their products are not there? This is of course one of the main arguments in many pessimists' views, that the consumer's psychic has been seared forever by the devastating financial crisis which has knocked down his wealth and income somewhat permanently through home value decrease, 401k erosion, restrictive borrowing and unemployment. Given that 70% of the US GDP is US consumption, the conventional wisdom has it that we'll see at best sub-par growth for the years to come.
To this question, Mr. Paulsen comes to the second substantive statement: "Household-debt levels remain a problem. But I think the issue has been overdramatized. During the bust, the biggest problem wasn't so much the people who lost their jobs as unemployment surged from 5% to 10%; it was the other 90% of the folks who had a job but were scared out of their wits. They just quit spending. Now, however, their paralysis is abating."
He goes on to observe some tentative signs why US consumers are likely to return to the mall, more so than expected. Add to that the contributions from inventory rebuild, stabilization of the housing and auto industries, government spending, and export growth, he makes his case that we could see real GDP growth at above 5% level for 2010. That's 1-2% more than many expect. Greater growth bodes well for the stock market.
Additionally, the demand for risk assets are likely to increase gradually, because "Liquid-asset holdings of households and businesses now stand at around $10 trillion. That's a record, relative to GDP. This money is likely to act as a slow-release Tylenol tablet over the next several years, leeching into the market and driving stock prices higher."
That's the third substantive statement.
The mother of all challenges facing the US is the huge budget deficits hanging over our heads. To that Mr. Paulsen makes his fourth, rather surprising statement: "I don't think we're in an Armageddon situation. We've run large deficits as a percentage of GDP in the past, such as in 1975, when the deficit blew out to 6.5% of GDP and people thought the world had come an end. If you look back in U.S. economic history, the five years after the deficit peaks invariably have torrid growth. Same for the peak in unemployment, which we recently hit. Remeber: President Clinton left us in the late 1990s with budget surpluses and low unemployment, yet the succeeding decade was nothing to write home about in terms of either growth or stock-market performance."
That is a powerful contrarian argument.
It will be most interesting to analyze these arguments alongside PIMCO's thesis of the New Normal, that we're entering a post-crisis era of slow-growth because of de-leveraging, re-regulation and de-globalization.
Both will need to be taken with a grain of salt.
Saturday, February 6, 2010
Weekend reading: What might Wall Street become?
East Coast is experiencing a heavy snow storm. Washington and Philadelphia metro areas got more than 20 inches. Power is down for some areas. My area is relatively light. We had about 5-6 inches today, but more is on the way. Not very enjoyable, for sure. Can't really go out, so I have more time to read.
I have a few things to look into this weekend, but let's talk about Wall Street, because Barron's has a cover story about Wall Street's Rising Stars. No, it's not the top-prized bankers in the remaining bulge-bracket firms like Goldman, JP Morgan, etc., but the up-and-coming small- to mid-size banking and trading firms that are filling the void left by the collapse of firms like Lehman and Bear Stearns. These much smaller outfits saw a great opportunity amid the turmoil between 2007 and 2008, and they acted on it by recruiting talents away from the big firms that they normally would not have a chance to do.
It was step-up time. And these smaller firms are flying under Washington's radar screen. They don't have the legacy problems the big guys have: Look at the public outrage on bonuses.
A good friend of mine who used to work at Bear has been telling me how tiring it has become at JP Morgan, and lamented about the days when Bear was just about the right size for a senior professional like him. Perhaps opportunities are on the way, if they have not already arrived.
During the credit crisis, Washington took control. But even after the firms paid back the bail-out money, the politicians still don't want to let go of their heavy hands. Wall Street has become a very political place. Well, it is so only if you're too big.
The reality is, for the economic recovery to take hold, financial services will need to come back in a big way. Credit needs to flow more, and more freely, to the most productive places and the most credit-worthy individuals and businesses. The shadow-banking system will somehow need to be repaired or replaced. You can curse about CDS and CDO, but they play an important economic function by redistributing credit risks. The issues for regulators are probably not so much about limiting size and lines of businesses, but more about measuring and regulating the aggregate risks, and promoting competition.
The "too-big-to-fail" problem can't be solved by the "Volker Rule." Size per se is unlikely the issue, the concentration of credit risk is. Concentration of risk can happen within a small firm too, for instance, LTCM. By breaking up the remaining banks, regulators may very well get more lost as to where the risks are actually concentrated.
Regardless of what the politicains are going to do, Wall Street is rebuilding itself. Yes, the "fat cats" must get leaner and serve the shareholder interests better. But, that should be done via more competition and shareholder activitism.
The age of more diverse players on Wall Street should be good for the economic recovery and good for the industry. May be.
I have a few things to look into this weekend, but let's talk about Wall Street, because Barron's has a cover story about Wall Street's Rising Stars. No, it's not the top-prized bankers in the remaining bulge-bracket firms like Goldman, JP Morgan, etc., but the up-and-coming small- to mid-size banking and trading firms that are filling the void left by the collapse of firms like Lehman and Bear Stearns. These much smaller outfits saw a great opportunity amid the turmoil between 2007 and 2008, and they acted on it by recruiting talents away from the big firms that they normally would not have a chance to do.
It was step-up time. And these smaller firms are flying under Washington's radar screen. They don't have the legacy problems the big guys have: Look at the public outrage on bonuses.
A good friend of mine who used to work at Bear has been telling me how tiring it has become at JP Morgan, and lamented about the days when Bear was just about the right size for a senior professional like him. Perhaps opportunities are on the way, if they have not already arrived.
During the credit crisis, Washington took control. But even after the firms paid back the bail-out money, the politicians still don't want to let go of their heavy hands. Wall Street has become a very political place. Well, it is so only if you're too big.
The reality is, for the economic recovery to take hold, financial services will need to come back in a big way. Credit needs to flow more, and more freely, to the most productive places and the most credit-worthy individuals and businesses. The shadow-banking system will somehow need to be repaired or replaced. You can curse about CDS and CDO, but they play an important economic function by redistributing credit risks. The issues for regulators are probably not so much about limiting size and lines of businesses, but more about measuring and regulating the aggregate risks, and promoting competition.
The "too-big-to-fail" problem can't be solved by the "Volker Rule." Size per se is unlikely the issue, the concentration of credit risk is. Concentration of risk can happen within a small firm too, for instance, LTCM. By breaking up the remaining banks, regulators may very well get more lost as to where the risks are actually concentrated.
Regardless of what the politicains are going to do, Wall Street is rebuilding itself. Yes, the "fat cats" must get leaner and serve the shareholder interests better. But, that should be done via more competition and shareholder activitism.
The age of more diverse players on Wall Street should be good for the economic recovery and good for the industry. May be.
Sunday, January 31, 2010
Weekend reading: The economy is not homogeneous
My weekend reading didn't produce much insight for next week. There is a lot of political noise out of US and China over the last few weeks. The economies are murky. I tend to believe that the developments are slightly positive: underneath the government supports the private sectors may be slowly adjusting for an upturn.
PIMCO's "new normal" thesis can't be ignored. It argues that we're entering a low growth period in the next years or decades due to de-leveraging, re-regulation and de-globalization. US consumers will no longer play the leading role of economic growth, banks and other financial companies will not be able to help fuel the growth with easy credit, and thus much of the globalization processes that happened before will be slowing down.
PIMCO is an astute yield curve player. Their edge is in getting the big picture more or less right. But even good arguments like these can be carried too far. US and the world economies are not homogeneous. There will be sectors, and within a certain sector some businesses, that can flourish in such environment. Technology may be one. Even within a beaten down sector such as housing, one may be able to spot one or two home builders that have adjusted to the new reality and are prepared to grow again.
In the US the place to look closely is California. Despite its fiscal disaster and high unemployment rate, it still has a vibrate tech sector, and its housing market somehow has managed to find its footing. I've lived both in the Bay Area and SoCal for the past 14 years. I think if the recovery is real for Cal, it'll be real for the US. If the "new normal" thesis is broken, it will be broken in California.
PIMCO's "new normal" thesis can't be ignored. It argues that we're entering a low growth period in the next years or decades due to de-leveraging, re-regulation and de-globalization. US consumers will no longer play the leading role of economic growth, banks and other financial companies will not be able to help fuel the growth with easy credit, and thus much of the globalization processes that happened before will be slowing down.
PIMCO is an astute yield curve player. Their edge is in getting the big picture more or less right. But even good arguments like these can be carried too far. US and the world economies are not homogeneous. There will be sectors, and within a certain sector some businesses, that can flourish in such environment. Technology may be one. Even within a beaten down sector such as housing, one may be able to spot one or two home builders that have adjusted to the new reality and are prepared to grow again.
In the US the place to look closely is California. Despite its fiscal disaster and high unemployment rate, it still has a vibrate tech sector, and its housing market somehow has managed to find its footing. I've lived both in the Bay Area and SoCal for the past 14 years. I think if the recovery is real for Cal, it'll be real for the US. If the "new normal" thesis is broken, it will be broken in California.
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