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Archive for the 'Current Market Thoughts' Category
I’ve updated Keeping Score for January 2012
Published February 3, 2012 Current Market Thoughts , Keeping Score , Portfolio management , Recent Market Action , Strategy Leave a CommentTags: business, Current Market Tactics, economy, finance, investment strategy, Keeping Score, market tactics, Portfolio management, stock market
technical analysis: the Super Bowl indicator
Published February 2, 2012 Current Market Thoughts , Portfolio management , Technical Analysis Leave a CommentTags: finance, investing, Super Bowl indicator, Technical Analysis
what it is
It’s a joke …literally.
The Super Bowl indicator was invented during the 1980s by Robert Stovall, then a prominent Wall Street investment strategist. He wanted to satirize technical analysts and mathematical economists, both of whom were trying to find simple–but infallible–leading indicators of future stock market performance, and the customers who were willing to believe whatever these gurus told them.
What could be more preposterous, he thought, than claiming that the results of a football game were the key to stock market performance during that year? Not much. So that’s what he decided to assert.
the Super bowl indicator has two rules
The Super Bowl is, of course, the contest for the overall NFL championship between the winners of the National Conference (NFC) and American Conference (AFC) titles. Stovall’s first Super Bowl rule is:
–the stock market makes gains for any calendar year in which the NFC team wins; it makes losses when the AFC team is the victor.
The only problem with this rule is that it didn’t fit the facts when it was promulgated. The Pittsburgh Steelers of the AFC won the Super Bowl in 1974, 1975, 1978 and 1979. The S&P had gains during last three of these years.
This prompted Stovall to add a nuance, through a second rule:
–the Baltimore (now Indianapolis) Colts, Cleveland Browns, and Pittsburgh Steelers all count as NFC teams, even though they are in the AFC.
Why is that? It’s obvious …to explain away 1975, 1978 and 1979.
Stovall’s rationale? The present NFL is the product of the 1966 merger of the larger “old” NFL and its smaller rival, the American Football League. The “old” NFL became the NFC; the AFL became the AFC. But the AFC was smaller. To make the two conferences equal in size, three “old” NFC teams–the Colts, the Browns and the Steelers–were transferred into the AFC in 1970. What counts, Stovall said, is where the teams started out, not where they’re playing now. That got him the results he needed.
(Another effect of this tweak is to classify 60%/40% in favor of “up-market” teams, bringing the league composition more in line with the rhythms of the inventory cycle–and consequently with the percentage of time Wall Street typically spends rising or falling. I’m pretty sure Stovall didn’t care.)
my thoughts
Two things strike me as strange about the “indicator.”
First, 80% of the time the Super Bowl and Wall Street have been in alignment.
The second is that Wall Street appears to have lost its sense of humor where football is concerned. No one seems to remember that this is a spoof of technical analysis and mathematical economics, not a serious tool. Google “Super Bowl indicator” and see for yourself.
I know professional investors are deeply superstitious, but really… This is almost as bad as investing based on the winner of the Emperor’s annual poetry contest (another weird story).
two more years of emergency-low interest rates!
Published January 31, 2012 Current Market Thoughts , from growth to value: the life cycle , growth vs value , Recent Market Action , Shaping a portfolio for 2012 , Strategy Leave a CommentTags: bonds, business, Current Market Tactics, economy, Federal Reserve, finance, FOMC meeting, investing, investment strategy, money, stock market
the January 25th Fed meeting
Last week’s meeting of the Federal Reserve’s Open Market Committee had two important results:
1. Chairman Ben Bernanke said the Fed funds rate, which has been at effectively 0% for just over three years (since December 16, 2008–how time flies) will likely remain at or near the current low rate into 2014.
2. The Fed gave more detail than ever before on its thinking about prospects for the US economy and the appropriate level for the Fed funds rate.
The Fed thinks:
–the long-term growth rate of the US economy is +2.4%-2.5% a year (vs. 3%+ a decade ago). The agency is content, however, to allow growth at somewhat above that rate from now into 2014.
–the appropriate long-term level for the Fed funds rate is about 4.5%, which amounts to a 2.5% real rate of interest (“real” means after subtracting inflation from the nominal rate). This contrasts with the current rate, which is a negative real rate of about 2.5%.
–although the process of normalizing interest rates will probably begin before the end of 2014, the Fed is unlikely to raise the funds rate above 1% until at least 2015.
–despite the immense monetary stimulation going on now, inflation will not be an issue. It will remain at 2% or below.
–the “natural” rate of unemployment, that is, full employment, is 5.5% of the workforce (in theory, the 5.5% is friction in the system–like people in transit from one employment location to another, or who decide to take a short break between jobs…).
According to the Fed’s projections, the unemployment rate will remain above 8% until some time in 2013. It probably won’t crack below 7% for at least the next three years.
implications
The forecast itself isn’t a shocker. The Fed has been talking about slow but steady progress for the economy, with no inflation threat, for some time. The real news is that the Fed expects the current situation to persist into 2105, a year longer than it had previously indicated.
1. To my mind, the biggest implication of the Fed announcements is that it makes less sense than ever to be holding a lot of cash. How much “a lot” is depends on your economic circumstances and risk preferences. But the Fed is saying that a money market fund or bank deposit is going to yield nothing for the next two years and well under 1% for the year after that. Yes, you have secure storage in a bank and substantial assurance you won’t make a loss, but that’s about it.
To find income in liquid assets–as opposed to illiquid ones like, say, rental real estate–you have to look to riskier investments, dividend-paying stocks or long-dated bonds. That in itself is nothing new. Savers have been reallocating in this direction for the past couple of years. Last week’s Fed’s message, though, is that it’s much too early to reverse these positions. If anything–and, again, depending on personal circumstances and preferences–investors should think about allocating more away from cash.
2. When the process of normalizing interest rates is eventually underway, the yields on long-dated bonds and dividend paying stocks will be benchmarked–and judged–against cash yields of 4%+. For stocks, a static dividend yield of 3% won’t look that attractive. At some point, low payout ratios (meaning the percentage of earnings paid out in dividends) and the ability to increase cash generation will become key attributes. Both are indicators of a company’s ability to raise dividends.
3. It’s my experience that when the Fed begins to tighten, Wall Street always underestimates how much rates will rise. Last week, the Fed told us that when the Fed funds rate goes up this time, its ultimate destination is 4.5%.
4. Investors taking a top-down view, that is, looking for the strongest economies, will have to seek exposure outside the US–which will only look good vs. the EU and Japan. The main issue is demographics–an aging population. It’s probably worthwhile to try to figure out what characteristics of the latter two economies, both of which have older populations than the US, are due to social/cultural peculiarities and which are due to aging. The second set of traits may well turn up in the US market as well.
5. The mechanics of how growth stocks and value stocks work may change in a slower-growing economy. It’s hard to know today how that will play out. True growth stocks may be harder to come by. Value investors who say they buy asset value of $1.00 at $.30 and sell it at $.70 may have to buy at $.20 and sell at $.60 if there’s less room for second- and third-tier companies to succeed.
I think it’s way too soon to be worrying about anything other than #1. The rest are thoughts to be filed away for next year, maybe.
two investor sentiment surveys: straws in the wind or contrary indicators?
Published January 25, 2012 Current Market Thoughts , Recent Market Action , Strategy , Technical Analysis Leave a CommentTags: business, Current Market Tactics, economy, finance, investing, investment strategy, investor sentiment, market tactics, Portfolio management, stock market, Technical Analysis
investor sentiment
Investor sentiment is a funny indicator. Outside the US, investors try to figure out what way the tide of sentiment is flowing so they can set their portfolios to benefit from the prevailing direction. Inside the US, on the other hand, professional investors try to determine the direction of sentiment so they can bet against it.
Surveys, of course, have the limitation that they tell you what the respondents have to say. Normally secretive professionals may simply not respond, so you may end up surveying interns rather than senior managers; or they may not give their true opinions, for fear their views will be incorporated into the consensus before they are able to exploit them to the fullest.
Once you’ve set your portfolio, whether you then seek publicity for your largest holdings is a matter of personal preference or taste. I would prefer not to do so, although I don’t regard the practice as border-line unethical, as some do.
two surveys
Anyway, I’ve come across two peculiar investor sentiment surveys recently.
–The first comes from the Chartered Financial Analyst Institute. The Institute conducts a series of exams on academic portfolio theory, passing all of which results in the test-taker qualifying for a CFA charter (suitable for framing) that attests to the holder’s knowledge of the concepts. Once the province solely of professional portfolio managers and securities analysts, the current 90,000+ holders of the CFA designation are much more widely distributed through the various functions of investment-related organizations and the academic world.
Conclusions from the Global Market Sentiment Survey:
–Almost two-thirds of the 58,000 respondents to the survey expect the world economy will show no growth in 2012. 34% expect economic contraction; 29% think the world will tread water this year.
–About 60% expect that equities won’t be the highest return investment asset this year. Among the competing alternatives, precious metals gets the most votes for top-performing asset, followed by commodities, bonds and cash. Sentiment on this topic is split geographically, as well. Of investors in the Americas, 45% think equities will have the best returns in 2012; elsewhere, the proportion is only about a third.
The second survey is one conducted by a popular small-cap service I recently subscribed to. Asked what they thought the probable returns for the S&P 500 this year might be, the most frequently given answer was a loss of 20%.
the respondents
As to the second survey, I was very surprised at how negative subscriber sentiment appeared to be. I also looked at a couple of other surveys, one of which had some respondents saying small caps were too risky to invest in–yet, as subscribers, they were paying for information about small-cap stocks. I don’t know what to make of that.
The CFA survey had one remarkable characteristic. Half of the respondents had either not yet passed all the exams or had held their charter for two years or less. Another 19% had been CFAs for five years or less. These are not portfolio managers or senior analysts actually making investment decisions. They’re much closer to being the man in the street.
my thoughts
I think the relative inexperience of the CFA survey respondents means that they’re much more indicative of what the man in the street thinks than of what the “smart money” is doing. In a section about employment opportunities, over half the respondents from Europe said that the job situation has deteriorated. 39% of those in Asia Pacific said the same. So it’s also possible that the respondents have been unable to distinguish between their own career outlook and prospects for world equities. My guess is that their macroeconomic and asset market answers are contrary indicators.
The (potentially oddball) respondents to the small-cap survey? Clearly a contrary indicator, in my opinion.
All in all, two small reasons to want to be bullish.
INTC: 4Q11, prospects for 2012
Published January 24, 2012 Current Market Thoughts , earnings conference calls , Industry Analysis , Portfolio management , Stock ideas , Technology Leave a CommentTags: business, company news, emerging markets, finance, INTC, INTC 4Q11, Intel, investing, investment strategy, money, stock market
the report
4Q11
After the close of trading in New York on Thursday January 19th, INTC reported 4Q11 results. Revenues came in at $13.9 billion. Profits were $3.4 billion, eps $.64. Both figures were down slightly quarter on quarter during what’s normally the company’s seasonally strongest period. Eps surpassed the Wall Street consensus of $.61, though. Wall Street’s habitually somewhat downbeat stance toward INTC was certainly influenced by the firm’s early December warning that near-term orders for its PC chips were being cancelled by device manufacturers who are unable to get enough hard disk drives to make new PCs.
On a non-GAAP basis (adjusting for acquisition-related goodwill), eps came in at $.68.
Investors were pleased with the results. INTC shares rose by about 3% in a flat market on Friday.
full year 2011
During 2011, INTC achieved lots of all-time financial highs, including: revenues at $54 billion; net income at $12.9 billion; eps at $2.39 (non-GAAP, $2.53).
one-time factors
There are two:
–Historically, INTC has used the week as the basic time period for its accounts rather than the month. Because 52 weeks x 7 days/week = 364 days, or not quite a year, this approach requires the company to have occasional 53-week years to keep their accounting in sync with the calendar. 2011 was one of those “extra-week” years. That probably added $.05 to 2011 eps.
(By the way, INTC has just shifted to the month as its basic time measure, so the “extra week” adjustment will no longer be necessary.)
–Thailand produces about 40% of the world’s hard disk drives. Massive flooding there during 4Q11 took many HDD factories out of commission. In early December, unable to build PCs without storage, device makers began to cancel orders for the INTC chips slated to go into those machines. INTC thinks we’re now passing the worst of the HDD shortage and that Thailand will be back at full HDD production late in 2Q12. INTC is adamant that component supply, not a falloff in demand, is the problem. Assuming the company is correct–and I see no reason to doubt it–the result of the cancellations has probably been to shift $.10 – $.15 a share in earnings for INTC from 2011 into 2012, as well as to make the firm’s 2o12 eps more second-half loaded than normal.
prospects for 2012
INTC expects another up year in 2012, with revenues advancing by “high single digits” and gross margins expanding by 1.5 percentage points to around 64%. Despite a massive increase in R&D spending to $10.1 billion this year (up by 21% from the 2011 level) this company guidance probably implies eps on a GAAP basis of $2.60 ($2.75, non-GAAP). If we correct for the one-time factors I’ve cited above, I read the guidance as being for flattish eps on, say, 5% revenue growth.
my thoughts
down Memory Lane
At the peak of the internet bubble in 2002, INTC was a $75 stock. It traded at 36x eps (a relative multiple of 2.4x the market) and yielded .1%. After a decade of wretched relative performance, the stock is now trading at less than 10x 2012 earnings, yielding 3.4% and at a price earnings multiple discount to the market of about 25%.
If you think that’s bad, in early October 2011 INTC was trading at 7.3x 2012 eps and yielding 4%+, more than the 30-year Treasury! Interestingly, despite Wall Street skepticism, INTC shares are enjoying their longest period (and one of only a few) of relative strength in the last decade.
where to from here? (I wrote this on Sunday January 21st)
I think there are four potential positive points to the INTC story:
1. valuation. …low PE, high dividend yield, massively cash generative operations
2. demand for PCs. …that emerging markets have reached wealth levels where average citizens are able to afford PCs. According to INTC, two-thirds of PCs worldwide are currently being sold to customers in emerging economies. None of these markets are as yet well-penetrated. So this business, INTC’s biggest by unit volume, appears to me to have much better growth prospects than is commonly thought. Ultrabooks, using reference designs supplied by INTC, may well be an added plus.
3. servers/the cloud. …the continuing evolution of the internet is creating strong demand both for the INTC chips that drive sophisticated servers for the cloud and for those used for general corporate purposes. These tend to be advanced (read: expensive and high-margin) chips.
4. INTC’s immense technology investments. …in 2012, INTC plans capital expenditures of $12.5 billion, in addition to R&D outlays of $10.1 billion. In 2011, those figures were $10.8 billion for capex and $8.3 billion on R&D. The two-year total comes to $41.7 billion!
Three possible consequences:
–increasing INTC’s already large technological lead over other manufacturers
–creating chips that will be accepted by makers of cellphones and tablets. For instance, Lenovo has announced its first INTC-powered smartphone for the mainland Chinese market.
–creating an environment for collaboration on design of increasingly complex multi-function chips, either with independent design firms or with device manufacturers. In other words, INTC would use its advanced chip fabs to attract and lock in customers. …like AAPL?
It seems to me that at $20 a share, Wall Street was factoring into the INTC stock price a belief that:
–none of its turnaround efforts would be successful,
–that the parlous state of the PC market in the US and Europe is indicative of the global market for these devices,
–that INTC parts will be displaced by ARMH components, and therefore
–that INTC will gradually go out of business.
the stock
To buy the stock at $20 a share, you’d only have to believe that stories of INTC’s demise have been greatly exaggerated.
At the current $26 or so, in contrast, it seems to me the price already factors in a grudging acceptance that the PC business may not be on its deathbed. I don’t think, however, that the value of the server business is fully reflected. Nor is there anything, in my view, for the possibility that ultrabooks may expand the PC category or that INTC will have any success cracking the smartphone or tablet market. Wall Street analysts are merrily downgrading the stock, meaning they don’t want to be seen as endorsing any of these possibilities.
$30 a share seems to me to be the next price objective. At that level, I think the idea that the current business, PCs and servers, is viable would be in the quote. But I don’t think there would be very much for new products. In addition, I don’t think that very many have considered the thought that, after more than a decade of foundry success, the economic winds may be shifting in favor of integrated design/manufacturing firms like INTC or Samsung.
My bottom line: INTC is no longer the one-way street it was in October, but I think it still has very attractive prospects. I have no desire to sell any of the stock I own. On the other hand, given the strong run it has made over the past four months, the size of my holding, and the possibility that good news probably won’t arrive before 2H12 begins, I don’t feel a powerful urge to buy today. I do think the stock will outperform the S&P over the coming year, though.
