May 1, 2013

Happy May Day!!

April was the latest in a lengthening series of uptrending months for the stock market.  The S&P 500 added 1.8% for the month, ending in a new all-time high for the index at 1597.57.  That’s a 12.0% gain, year-to-date, to which one must add another 0.7% in dividend payments.

Sailing during April was by no means smooth, however.

The index plunged by almost a percent in the twinkling of an eye on Tuesday the 23rd, when someone hacked into the Associated Press Twitter account and sent a false tweet asserting President Obama had been injured in a White House bombing.  Computers read the message and reacted instantly by issuing large sell orders.  The market quickly reversed itself as humans figured out the tweet was a fake and unplugged their machines.

Also, commodities, especially gold, sold off in a way that temporarily rocked the financial markets and had me contemplating running for cover.  The accompanying negative technical noise quickly abated, however–although not as quickly as in the case of the AP Twitter scare.

the S&P by sector

Sectorwise, the index performed as follows during the month (my overweights marked by +):

Telecom          +6.0%         +

Utilities          +5.9%

Consumer Discretionary          +2.9%          +

Staples          +2.9%

Healthcare          +2.8%

Financials          +2.7%

S&P 500          +1.8%

IT           +0.8%

Materials          +.5%

Industrials          -0.8%

Energy          -0.9%.

 

I find myself in pretty much the same position today that I was a month ago.  On the one hand, stocks have already achieved all the gains–and then some–I thought they would for the year as a whole.  On the other, the tenor of daily trading suggests that the market still wants to go up.

In addition, in the past week or two investors seem to be increasingly rotating their buying toward beaten-down, economically sensitive stocks like CAT or INTC whose return to rising profits may be a 2014 phenomenon.  I take this as a bullish sign–that increasing confidence in the market is allowing buyers to begin to extend the earnings horizon they will consider in determining what to pay for a stock today.  I don’t see this discounting next year’s earnings in a cyclical stock today as speculative excess;  it’s more a return to normal from an extended period of Great Recession-induced fear.

What about “Sell in May and go away.”?  I don’t know.  Media commentators have acquired a fondness for this British aphorism–which, of course, is an argument that it won’t hold true this year.  Rather than worry about the possibility of a near-term correction, however, I think the better course is to trim positions that have grown too large and to reinvest the money in high quality economically sensitive stocks.

My overweights?   …I’m sticking with Consumer Discretionary and Telecom.  I’m tempted to add IT but won’t.    The attraction of IT?  For one thing, there’s the rotation toward cyclicals.  For another, AAPL seems to have answered to question that has, to my mind, driven its recent underperformance, namely,”Who doesn’t own AAPL already and is willing to buy the stock?”  The answer:  AAPL itself.  I think AAPL will exert  upward pressure on the IT sector.  Even though it’s the sector’s largest constituent, I’m not sure that’s enough.

 

April 1, 2013

The S&P 500 had another strong month in March, reaching a new record high in the process.  The index has recovered all the Great Recession-related losses incurred since the previous all-time high in 2007.

Some commentators, wanting to throw a little cold water on the achievement, have pointed out that last month’s new high is a nominal one only, that is, the index is calculated in dollars of the day and has not been adjusted for inflation.  A new real high would be maybe 5%-6% above the month-end close.

To my mind, this is purely pedantic point   …because index companies have paid out well over 10% of their market value in dividends over the past five years.

Taking a look at the index returns by sector, they fall out as follows for the past month (my overweights marked by +):

Healthcare          +6.2%

Utilities          +5.1%

Consumer discretionary          +4.8%     +

Staples          +4.5%

Financials          +3.7%

S&P 500          +3.6%  

Telecom          +3.2%          +

IT          +2.4%

Materials         +2.2%

Industrials          +2.1%

Energy          +1.9%.

A three-month view doesn’t look very different:

Healthcare          +15.2%

Staples          +13.7%

Utilities           +11.8%

Consumer discretionary          +11.8%

Financials          +10.9%

Industrials          +10.0%

S&P 500          +10.0%

Energy          +9.6%

Telecom          +8.2%

IT, ex AAPL          +5.7%

IT          +4.2%

Materials          +4.2%.

what jumps out to me

1. Healthcare.  The sector was an outperformer last year and continues to be one so far in 2013.  Contrast that with the 2012 showing of this year’s fellow defensive-group stars, Utilities and Staples, which were deeply at the bottom of the pile last year.  My first thoughts are that expectations are low and that most of the horrible stuff that could happen in the sector has already occurred and is behind it.

Utilities and Staples, in contrast, I see as being in the winner’s circle so far in 2013 mostly because they were so wretched in 2012.

2.  Are defensives leading the market?  Yes, even though this usually happens in a downtrending market (after all, they’re called defensives for a reason).  Contrary to past form, I don’t think this is happening because canny investors are thinking the market will soon begin to tumble down a cliff.  Instead, I see Wall Street as wanting to avoid sectors like Materials. IT and Energy, which normally do well when the world economy is roaring ahead.  The logical consequence of desiring to avoid sectors you think will be turkeys is overweighting what’s left.  Said a different way, I think market commentators who conclude from recent sectoral performance that the S&P is heading for serious trouble are wrong.

After five strong months in a row, some mild sideways-to-down movement for the S&P before it starts to head up again is certainly a possibility.  But recent performance patterns aren’t evidence in favor, in my view.

does this square with my 2013 Strategy view?

It does   …and it doesn’t.

So far, world economic performance and S&P earnings have both come in about as I’ve expected.

On the other hand, the S&P has already surpassed my price objective for full-year 2013.  In setting this target, I’d assumed that the market would be driven solely by earnings.  I thought–and still think–that this is a reasonable, though conservative, assumption to make.

It now appears, however, that investors are–at least for the moment–willing to pay a higher price for earnings than they have been willing to over the past couple of years.  This better mood may, or may not continue.  But I think it’s a mistake to bet that it won’t.

technical runes…

are ambiguous.  On the one hand, the resistance line of the 2007 high.  So there’s nothing but blue sky ahead.  On the other, the  S&P is now farther above its 200-day moving average than it has been since 2000.  Pick your poison, as they say.

my overweights

I’m continuing with Consumer discretionary and Telecom.  That worked in March.  Why not in April, too?

March 4, 2013

February was the month of maximum pre-sequester publicity. The two major parties filled the media with half-truths and exaggerations, aimed both at frightening the public and directing blame at their political opponents.

Nevertheless, the S&P 500 eked out a gain of 1.1% for the month despite the fact that the sequester did go into effect at month’s end.Business activity continued to slow during February. Most consumers appeared relatively unfazed, however.

the sequester

It’s important to put the sequester into context:

–The consensus view of economic forecasters is that the sequester could clip about 0.5% from GDP this year. It’s not yet clear, to me anyway, whether the administration’s principal tactic will be to try to soften the economic blow, or to score political points by making spending cutbacks as visible and disruptive as possible.  My guess is the latter.  This is just how politics works. The investment significance is that economists’ estimates not likely to be short of the mark.

–Of every $1 Washington spends, only $65 comes from taxes and other ordinary inflows.  The other $.35 is borrowed and runs up the already huge federal debt.  The sequester will clip a mere $.02 out of that dollar. Relatively speaking, it’s just a drop in the bucket. The heavy lifting of tax reform and spending reduction is yet to come. (Just as a reminder, of the Federal $1.00, $.25 goes to the military and about $.20 each to Social Security and Medicare/Medicaid. Balancing the budget without touching these would mean obliterating everything else.)

the S&P

While the sectoral breakout of returns of the S&P 500 didn’t show an aggressive cast during February, it wasn’t particularly defensive either. The returns are as follows:

Consumer discretionary +3.1%     

Staples +3.1%

Telecom +2.6%          

Industrials +2.1%

Utilities +1.6%

Financials +1.1%

Healthcare +1.1%

S&P 500 +1.1%

IT +.4%

Energy 0

Materials -1.7%.

Three aspects of February performance stand out to me:

–the market was up, despite continuing dysfunction in Washington

–year-to-date performance is defined more by what sectors have not done well, rather than those which have. Consumer discretionary, Healthcare, Staples and Industrials are at the top of the performance list. But two others have outperformed. Utilities and Telecom are slight laggards, but both remain within easy striking distance of the index. So far, however, IT and Materials are real clunkers—probably because the two are the most dependent on robust economic growth.

–there’s more to the IT story, though. An unsually large number of IT firms have reported 4Q12 earnings that exceeded market expectations. Despite this, IT stock performance has been weak. This is partly due to the continuing underperformance of AAPL, whose stock carries about a 10% weighting in the sector. APPL fell 13.9% in January and 3.4%in February. Even ex-AAPL, however, the sector doesn’t come anywhere near the 6.2% gain of the S&P since New Year’s Day.

What’s going on? I suspect it’s that the quantum leap in INTC microprocessor performance for ultrabooks and tablets that’s in the offing won’t be available on the shelves until the year-end holiday season. The same thing for the next iteration of the Xbox and Playstation. So there’s no reason for  consumers to buy now. And businesses, especially those with government contracts, remain cautious.

Where to from here?

I think we drift, with a gently upward bias.

I think the market has already discounted all of the earnings growth we are likely to see this year for the S&P 500. Normally, that would mean a correction–downward pressure on stock prices until investors could see the possibility of a 7%-10% gain.  But I think that downward pressure is being counteracted almost completely by bond investors who want to diversify away from fixed income and into stocks. Why not have done this when stocks were half today’s prices?  Don’t ask me. But better late than never, I guess. In any event, I don’t think this source of upward pressure is going to go away soon.

Sector overweights?

In today’s environment, I think it will be harder to make money through sector allocation than it has been for the past four years. Still, I’m going to give it a try by overweighting Consumer discretionary and Telecom.

February 1, 2013

The first month of 2013 is now in the books, and it’s been a very strong one for stock investors.  I’ve read, but haven’t verified, that this has been the best start of a year for the s&P 500 since 1994.

Continuing strength in the housing market, the rise of the euro (bolstering the chances that the quarter of the S&P’s profits that come from Europe will be good) and a budding rebound in the Chinese economy are the main reasons why, in my view.  The fact that Washington mitigated part of the “fiscal cliff” by canceling some scheduled tax increases–while kicking the can down the road on dealing with the federal debt–probably also lightened the mood.

In addition, there are continuing reports that individual investors, after cling for four years to their cash and their bonds, are showing renewed interest in stocks.  I’m not sure we should regard this as a major force moving stocks higher, but it certainly doesn’t hurt.

The breakout of the S&P returns (capital changes) on a sector basis is as follows:

Energy          +7.6%

Healthcare          +7.3%

Financials          +5.8%

Consumer discretionary          +5.6%

Staples          +5.6%

Industrials          +5.6%

S&P 500          +5.2%

Utilities          +4.7%

Materials          +3.8%

Telecom          +2.2%

IT          +1.3%.

Patterns?  Information?  It’s always dangerous to try to interpret January all by itself, because the month is always influenced by bounceback from tax-motivated selling of losers in December and by tax-selling of winners nursed into the new year.  Nevertheless, three things stick out to me:

1.  Energy was the biggest loser of 2012 (as you can see by scrolling down to last month’s commentary).  Although there are interesting new developments on the energy front, I’m not sure Energy’s first place showing is any more than a temporary bounceback from last year’s weak performance.

2.  Financials continue to show strength.  They’re not my cup of tea, but continuing improvement in the value of the mortgage loans they have on the books may keep them in the top half of sectors for a long while.

3.  IT came in dead last.  It’s a sector I like.  But even correcting for the negative affect of AAPL, which is the largest constituent of the sector, and which underperformed the S&P by about 20 percentage points during the month, would only push IT one notch higher in the rankings.  And that comes after a (mildly) sup-par outcome for 2012.  Time for a rethink on my part.

My model portfolio had its worst month ever, losing about 20 basis points to the index.  Having IT as a double overweight can do that to a person.  I’m going to take a month off, returning to a completely neutral position for February while I think things out. I continue to believe that the main themes for 2013 will be housing, China and the euro.  The question is how to translate that into sectoral allocation.

January 2 2013

Happy New Year!!!

a strange December

December is always a month that contains crosscurrents, all relating to the end of the calendar year.

Investors do year-end tax selling.  Professional portfolio managers, annual bonuses already nailed down–for good or ill–will be willing to make aggressive changes to their portfolio structures in preparation for the year to come.  Then, of course, almost everyone takes the final two weeks of the year off, allowing markets to bob up or down on low volume and making it subject to speculative influences.

The December just ended had two additional distorting factors:

–the impending rise in taxes on capital gains and dividends, which caused some corporations to make large special payouts during the month (these don’t appear to have affected the S&P total returns for 12/12–maybe they’re not in the data?); and

–investor worries that partisan infighting would cause Washington  to drive over the fiscal cliff,  triggering a domestic recession.  Memories of loony legislators who argued four years ago that our best course of action would be to allow the banking system to collapse did little to put these fears to rest.

This is not an airing of grievances.  Festivus has come and gone.  I want to point out that I think there’s more to gain from an analysis of full-year 2012 than the month of December.  I’m going to concentrate on the former to start out and only make a comment or two about the latter at the end.

2012 results

The sector price returns for the S&P 500 in 2012 were as follows (my suggested overweights marked by +):

Financials          +26.3%

Consumer discretionary          +21.9%          +

_______________________________

Healthcare              +15.2%

S&P 500          +13.4%

IT               +13.2%               +

Telecom          +12.5%

Industrials          +12.5%

Materials          +12.2%

_______________________________

Staples          +7.2%

Energy          +2.3%

Utilities          -2.9%.

My first observation is that, despite lots of angst throughout the year, 2012 was an excellent time to be owning stocks.

Sectoral results can be broken out into three general groups.  Financials and Consumer Discretionary outperformed handily.  Half the sectors were bunched around the index return.  And Staples, Energy and Utilities all exhibited substantial underperformance.

In hindsight, the recipe for outperformance was simple–overweight either Financials or Consumer Discretionary (or both) and/or avoid Staples, Energy and Utilities.  On a sectoral basis, nothing else mattered much.

Is there any sense to the way the sectors fell out?

What is/was the market telling us?

My intention in answering these questions is not to delve deeply into details (as I might in talking about an individual stock) but to remain on as broad and simple a level as possible.

I’m not a big fan of Financials, but I think the big positive factors were increased clarity about the rules banks would be operating under and better visibility about what’s on the balance sheets.  Another year of economic recovery didn’t hurt the fundamentals.  And this may be a case of a laggard catching up.

Consumer Discretionary is the least risky of the up-market sectors because it is driven by lots of purchases by just about everyone, rather than on huge orders from a small number of large companies.  Recovery last year spread out somewhat from the wealthy to more ordinary Americans.  Pickup of the housing market, which helped buoy consumer confidence, was another tailwind.

Utilities are the first place anyone goes to look for income.  But the sector is all played out.  A harbinger for Treasuries?

Energy is more or less a function of oil prices.  They, in turn, rise or fall on economic activity in emerging economies, which were not so hot in 2012.

Staples have unusually large exposure to the EU.  € weakness has translated into lower profits.  Cheaper raw materials have not been a complete offset.  And in non-inflationary times it’s extremely difficult to raise prices.

The overall message?

The ticket to success would have been to concentrate on US consumers and the repair of the US banking system.  Trying to play strong global economic growth through commodity sectors would have been a losing bet.  So, too, would have been looking solely for income in the utility sector.

the December S&P

Would December results have delivered the same message?  Here is the sectoral performance order:

Financials          +4.6%

Materials          +2.9%

Industrials          +2.3%

S&P 500          +0.7%

Energy          +0.5%

Consumer discretionary          +0.2%

IT          -0.1%

Utilities          -0.2%

Healthcare          -0.4%

Telecom          -1.1%

Staples          -2.5%.

On December 31st, when traders saw the first signs that a deal to avoid the fiscal cliff might come about, the S&P was up 1.7%.  Staples, Financials, Utilities Telecom and Healthcare all lagged.  Aggressive sectors were all up about 2%, with IT leading at +2.2%.  In other words, the market’s final hurrah for 2012 didn’t change the month-long pattern significantly.

If we take the shift toward more aggressive sectors seriously, it would imply a market expectation of either higher relative economic growth outside the US in 2013 than inside, or higher absolute growth in the global economy in toto this year vs. last.

More on this topic in the days to come.

model portfolio

The model portfolio?  For the year it gained a modest 20 basis points vs the index, based entirely on the overweight in Consumer Discretionary.  For January I’m actually going to do something.   I want to close the overweight in CD and double the overweight in IT.

December 2, 2012

Keeping Score for the month of October was a casualty of Superstorm Sandy.  Things were so messed up around here–I can even hear the sound of chainsaws clearing away debris as I’m writing this on a Sunday morning more than a month afterward–that I’m only realizing the omission now.  …oh well.

A brief recap of October:  The S&P 500 was down about 1.4%.  Telecom and IT, both falling more than 5%, were the big losers.  Healthcare, Financials and Utilities were the relative winners, with the latter two posting absolute gains as well.  The pre-Halloween market was showing the greatest hostility toward tech/cellphone names as it expressed fears of continuing global economic slowdown.

The end result for November, in contrast, was relatively benign.   The S&P 500 headed south right after the election, but reversed course after a week or so, posting a capital changes (i.e., not counting dividend payments) return of +.28%.  The total return (i.e., including dividends) of the index for the month was +.58%.

A somewhat geeky note:  dividends added .3% to the index return in November.  That’s more than normal.  Annualizing the November figure would imply a dividend yield on the S&P of a whopping 3.6%.  The yield on a recurring basis is closer to 2.1%-2.1%, I think.

The November boost is the effect of companies making large one-time payouts of cash, mostly sitting around in US banks–although COST, for one, appears to be borrowing $3 billion to fund its special dividend.  They’re figuring the jump in the Federal income tax on dividends that’s sure to come for 2013 will be large enough that it’s better to return the money to shareholders now.

November performance

Let’s look at the sectoral breakout of the S&P 500 for November (with my overweight sectors marked with +).

Consumer discretionary          +3.0%         +

Materials          +1,5%

Staples          +1.4%

Industrials          +1.3%

IT          +.8%          +

Healthcare          +,3%

S&P 500          +.3%

Telecom          -.9%

Financials          -1.1%

Energy          -1.8%

Utilities          -5.0%

For a change, I don’t think there are any overarching themes at work in shaping the month’s results.  Rather, the sector numbers show a combination of bottom fishing for cheap stocks (IT) and industry-specific factors.  Rebuilding the tri-state NY area after Sandy, for example, will use a lot of materials.  Utilities are being hit both by the idea that their dividends–the principal attraction for many of them–will become less valuable, after tax, next year.  Those in areas affected by Sandy will likely also be squeezed by being forced to modernize rickety infrastructure, while getting little in the way of rate relief.

What I found most interesting in the month was the ability of the index over the second half of the month to absorb bad news and still close flat or slightly up.

I don’t think this is because Wall Street suddenly has high hopes for economic help from either political party.  In fact, Washington is the source of the downward pressure the market is feeling.  (To me, Washington continues to act in pretty much the same way as the Japanese government did during the opening years of that country’s continuing economic slump.  That’s now 23 years long, and counting.  Not a comforting thought.  But this possibility is not, and should not be, a current market worry, in my opinion.  More about this in another post.)

Instead, as I wrote in my October 1st Keeping Score, I think the market is beginning to notice signs of life from emerging markets, especially China, and, of all places, from the EU.  A consensus seems to be forming–rightly or wrongly, I don’t know–that the US will somehow avoid recession despite political gridlock and that a better housing market + some business spending will create a bit of  positive economic energy.

The picture of 2013 that is starting to emerge:  gains in the half of S&P 500 profits that come from abroad, a US half that should be underweighted but which won’t perform badly enough to wreck the overall party.  More about this in my annual strategy posts.

The model portfolio?  October was a poor month (loss of about 10bp to the index), mostly due to a sagging IT sector.  November reversed most of those losses, as Consumer discretionary outperformed smartly.  Year to date, both sectors are outperformers, Consumer by a mile, IT by a little bit.

No changes.

October 1, 2012

Another good month ends a solid quarter in what has been so far a surprisingly strong stock market year.

One obvious reason for keeping score is to see how we’re doing, not only in absolute terms but also against a benchmark index we’ve selected for ourselves.  A second, closely related, one is to consider making changes to our sector positioning–or to one or more of our individual stock holdings–if we’re underperforming.

A third is to us the numbers to try to describe what investors in the aggregate must be thinking in order for the market to be performing in the way it is.  From that description we can get ideas about whether to go with the flow or make deliberate contrary bets.

Look at September.  What’s important, I think, is not so much the sectors that did well, but the ones that underperformed.

Telecom          +3.9%

Healthcare          +3.8%

Materials          3.6%

Energy          +3.3%

Financials          +3.3%

Consumer discretionary          +3.1%      +  ( = a model portfolio overweight)

S&P 500          +2.4%

Industrials          +1.5%

IT          +1.2%          +  (the second overweight)

Staples          +1.1%

Utilities          +.9%.

Energy and Materials, which tend to do well when the market believes we’re in a period of strong overall growth, are outperforming.  If we look over the past three months, however, the direction of these two sectors is less clear.  And Industrials, the third sector that benefits from broad economic strength, has been a laggard.

Looking at underperformers, on the other hand, the message is very clear.  Staples and Utilities, the ultimate defensive groups, continue to be at the bottom of the pile–as they have been all year.

Take a three-month view, to get a somewhat larger perspective.  The sectors rank as follows:

Energy          +9.5%

Consumer discretionary          +7.1%          +

IT          +7.0%          +

Telecom          +6.8%

Financials          +6.4%

S&P 500          +5.8%

Healthcare          +5.6%

Materials          +4.5%

Staples          +3.1%

Industrials          +3.0%

Utilities          +1.6%.

Which sectors are consistent during the two time frames?

Which change?

On the positive side, Telecom, Energy, Consumer discretionary and Financials are winners during both periods.

On the negative, Industrials, Staples and Utilities are all losers.

Materials and Healthcare go from underperforming to outperforming.  IT goes in the other direction.

What to make of all this?

What kind of economic environment is consistent with these patterns of sectoral performance?  It seems to me the sectors are saying:

–it’s not a time for defensive stocks, except for Telecom, whose character is being transformed by the smartphone boom

–it’s also not a time to bet that companies are going to be making heavy investments in Industrial plant and equipment.  IT investment may even be beginning to sag, implying that business cash flows are flattening out or even starting to shrink a bit.

–Energy and Materials are both signaling that economic growth is getting better (presumably in areas like consumer that don’t necessarily depend on new capital spending).  So too is Consumer discretionary, which has been consistently outperforming throughout the year.

My read:  the S&P is saying that investors are thinking that, while world economies may not be great, they’re starting/continuing to get better.

one step further

Let’s say I’m correct in interpreting what S&P prices are saying.  We still have to ask two questions:

–is the market correct in what it’s thinking?, and

–is the market’s assessment something to bet on, or are its beliefs so long in the tooth that the correct move is to bet against them?

my thoughts:

For almost the first three years from the market bottom in March 2009 (just about the point I began writing this blog) the best positioning was to emphasize broad economic recovery, emerging markets and wealthy consumers.

For the past six or nine months, it has been better to focus on the US (not simply US-listed equities, but stocks that have their profit centers in the US) and on the broadening of domestic recovery to include average Americans.  During this time, it’s also been important to deemphasize the EU and emerging markets.

I think we’ve now reached another, more subtle inflection point.  The worst is probably over for China, where new Communist party leadership is now in the process of being installed.  The EU has probably touched bottom as well, although, unlike China, the bounceback in Europe is likely to be a very protracted affair.

Even the US political outlook seems to be clarifying itself, with a weak Democratic incumbent pulling ahead of an even more flawed Republican challenger in the general election.  This doesn’t suggest that the country’s fiscal problems will be solved.  It simply lessens uncertainty about the tack Washington will take next year.

Therefore, it’s ok to begin to extend a portfolio’s reach again to international operations, especially those in Asia.

September market action seems to me to reflect pretty accurately the underlying economic fundamentals.  These conditions appear to me likely to prevail for a while yet.  It’s too soon to take a contrary position.

The model portfolio?  It lost a little in September, with gains in Consumer discretionary more than offset by losses from IT.  No changes, though, despite my comments in the paragraph above.  If worldwide economic growth is stronger than I anticipate, IT will be a principal beneficiary.

September 5, 2012

What I find striking about the August performance of the S&P 500 is that it delivers a simple, modest–but clearly–bullish message. at a time when economic and political affairs around the world appear unusually opaque.  Look at the numbers:

IT          +4.8%

Consumer discretionary          +4.2%

Financials          +3.0%

Materials          +2.2%

S&P 500          +2.0%

Energy          +1.9%

Industrials          +1.1%

Healthcare          +0.8%

Staples          -0.7%

Telecom          -2.5%

Utilities          -4.8%.

The key points:

–the index is up for the month

–the best sectors are ones that typically star when economies are expanding, but not rip-roaring upward

–the next set are the more highly cyclical sectors–Materials and Industrials

–the laggards are the sectors that perform well when things aren’t going so well.

Year to date figures deliver much the same message.  Telecom ranks higher on the list, and Energy and Materials lower.  But the overall index is up 11.9% through the first eight months of 2012.  Toss in dividends and that becomes 13.5%.

Where to from here?

I’ve been noticing that many market commentators have been recently turning bearish.  Some are very specific about an impending downturn in the S&P 500, predicting that the fall will begin within days.

The reality is that no one can predict short-term market movements consistently.  The interesting thing is that so many would be seeking publicity about such flip-of=a=coin predictions.

Three factors suggest that the market will struggle from here:

1.  1400-1420 has proved to be a significant barrier to market advance in the recent past.

2.  Virtually all mutual funds in the US end their accounting year on Halloween.  From mid-September through mid-October they do their yearend housecleaning. They also sell winners if they want to make their yearend distribution of profits a bit bigger; they sell losers if they want to make it a bit smaller.  Both choices involve selling.  Since everyone knows this is happening, buyers typically retreat until after this activity is over.  As a result, mutual fund selling typically temporarily depresses the S&P by several percentage points.

However, my understanding is that mutual funds are still swamped with tax losses incurred in selling they did to meet redemptions at the market bottom in 2008-2009.  Until such losses are used up, no distributions are possible.  So I don’t think mutual funds will be a source of downward pressure this year.

3.  Uncertainty about the US election and the “fiscal cliff” that looms ahead in January.  Yes, these are significant worries.  On the other hand, focus on them suggests enough positive news has developed in the EU and China to knock them out of the #1 spot.

Yes, I think the market will struggle to advance over the next couple of months.  But I know I could easily be wrong.  And for all but the most speculative short-term traders, temporary concerns aren’t a good reason to change the fundamental orientation of a portfolio.

The model portfolio had a good month, with overweight sectors IT and Consumer discretionary at the top of the outperformer list.  No changes.

August 2, 2012

Looking just at the sectoral performance of the S&P 500 for July, this was an oddball month. The index finished up by 1.3% for July, but the index-beating sectors were mostly the defensive ones.  Take a look at the sectoral returns:

Telecom          +5.5%

Energy          +4.1%

Staples          +2.6%

Utilities          +2.5%

S&P 500          +1.3%

IT          +1.0%          +

Healthcare          +.9%

Industrials          +.4%

Financials          +0.03%

Consumer discretionary          -.3%          +

Materials          -1.33%.

What’s going on?

I think there are two factors involved:

–European leaders have made very strong statements about their commitment to preserve the Eurozone.  These may ultimately turn out, as have all previous pronouncements, to be just so much hot air.  But they at least sound convincing to me.  At the same time, 2Q12 earnings season for the S&P is making it clear that the US economy is slowing down to a greater degree than the consensus (including me) had thought just a few months ago.  In relative terms, this is a plus for the EU.

Combined with the realization of just how cheap Eurozone companies have become (a dividend yield of over 5%), this situation has investors flirting with the idea of increasing equity exposure to the EU.  Buying US Staples, many of which have large EU presence, is a relatively low-risk way of doing so.

–Slowdown in the US implies three shifts:

–away from highly economically sensitive names (something that has been going on for a long time),

–toward the strongest firms in each sector (so a de-emphasis of sectoral positioning), and

–toward areas benefitting from structural change.

In particular, investors are seeking to avoid fallout from the GOOG/Samsung vs. AAPL smartphone wars by buying the shares of VZ and T, whose relative situation is improving as the Android vs.iOS conflict plays out.  Hence, the outperformance of Telecoms.

August is vacation month…

…in Europe, anyway.  It’s also the time when Japan shifts into low gear to watch the national high school baseball tournament (not that the rest of the world notices any trading falloff from this source anymore).  Usually, however, by the third or fourth week of the month, the markets begin to make it plain how they see the final stanza of the year playing out.

My guess is that we’ll see a continuation of the slow growth theme.  That would imply a continuing heightened emphasis on price, an insistence on high quality of earnings, and a search for growth that isn’t dependent on the business cycle.

At some point, the markets will begin to factor in the results they expect from the presidential election in November.  And there’s always the traditional late September market swoon to consider.  But there’ll be time enough for that a month from now, I think.

My model portfolio?  

It’s been overweight IT and Consumer discretionary.  Year-to-date, that’s been a good place to be, but this month that emphasis cost 10bp in relative performance.  Although I’m still an owner of VZ, and therefore should be thinking harder about Telecoms, I don’t see any reason to make changes, though.

July 2, 2012

crosscurrents galore

June started off on a sour note, as the S&P 500 dipped to 1266 on the second day of last month’s trading.  With the perspective of four weeks of hindsight, that decline appears to have completed an 11% correction that started in early April.

Two major factors were involved.  There was a typical yin/yang response to the 30%+ gain the S&P had made from October-March.  And, one by one, the economic lights appeared to be turning down in the major geographical regions of the world–China, the EU and, finally, the US.

From that point, however, the market gained 7.5%, posting a 4% gain for the month as a whole.

On the other hand, the bulk of the net advance, 2.5 percentage points, came on the final trading day.

S&P sectors

For the month as a whole, sectoral returns on the S&P 500 were as follows (overweights in the model portfolio indicated by +):

Energy          +5.6%

Healthcare          +5.6%

Telecom          +5.4%

Financials          +4.9%

Materials          +4.6%

S&P 500          +4.0%

Utilities          +3.8%

Industrials          +3.5%

Staples          +3.3%

IT          +3.0%          +

Consumer discretionary          +1.8%          +

June 29th

Trading on June 29th was not only strongly positive.  It also made a difference in the monthly place order of every S&P sector.  The direction of the shift is very clear.

Moving up:

Energy, Materials, Industrials, IT, Financials and Healthcare. Ex Healthcare, which moved on the Supreme Court decision, all are aggressive, pro-GDP growth sectors.

Moving down:

Telecom, Utilities, Staples, Consumer discretionary.  The first three are traditional defensive sectors.  CD is the most defensive of the up market sectors.

Most sectors moved one notch.  Utilities fell three.

a turn in EU sentiment?

Clearly, the reason for the strength, not only in the US but in all world equity markets, was news from the latest Eurozone crisis summit meeting.  I’ve lost track of the number of times EU leaders have met to discuss this topic so far–14?, 15?  In any event, expectations for any positive outcome weren’t high.  But for whatever reason, world markets began to focus on what the EU has been repeatedly signaling over the past several weeks–that its members are negotiating seriously for the first time about having the EU as a whole taking responsibility for the debts of the weaker countries.

What markets appear to be saying is that it no longer makes sense to make the flat-out bet that conditions in the EU will become progressively worse.  This doesn’t mean that a solution to the region’s debt problems will magically appear overnight or that EU economic growth will suddenly become robust.  It just means that taking the negative position is no longer a sure-fire winner.  So investors are adjusting their extremely defensive–or maximum short–portfolio positions.

unduly negative sentiment?

I’m not a frequent watcher/listener of financial talk shows.  The very confident way in which they spout crazy and nonsensical stuff ends up getting me scared.  Still, in my occasional encounters in June, it’s struck me that the media have been radiating especially intense–and uniform–negative sentiment.  For example:

–I saw the Wells Fargo equity strategist, Jim Peterson, on CNBC early in the month.  He was invited to appear on a morning show mostly to make fun of him for having predicted the S&P would end the year in positive territory.

–Tom Kean of Bloomberg’s morning Surveillance program started to sound to me like a boiler room broker, frequently interjecting the latest negative news on EU bond yields in order to create a panicky mood among listeners.

–I heard a striking number of analyst interviews where the reporter said something like “How can you possibly say that, when…” in response to any optimistic observation.

In all these cases, there was no spirit of inquiry in the “news” programs. The interviewer portrayed himself as an expert.  The analyst/strategist was portrayed as obviously wrong if he disagreed with the interviewer’s beliefs.

the charts

The rise of the S&P 500 came to a screeching halt when it hit the 1400 level.  I think it established the lower end of a trading range last month at around 1280-1300.  At the current 1362, we’re somewhere in the middle, as likely to go up as to go down.

where to from here?

The US economy, as measured by new job creation, has clearly been slowing over the past month or two–in a way that I, for one, hadn’t expected.  There’s no consensus about why this is happening.  Is it because pent-up demand for labor created by the layoffs of early 2009 have finally been satisfied, as Ben Bernanke is suggesting? Is it because US employers have become worried by recession in Europe and slowdown in China?

While the slowdown persists, equity markets will be more vulnerable to the emotions of short-term traders.  The picture that’s positive for stock may well be that:  we find the EU is not as bad as today’s prices assume; we find the same to be true of China; and we begin to see that the US, too, will have an up year for growth in 2013.  Each development adds more underpinning to a market advance.

Near-term visibility for earnings will not be as good as I’d hoped, however.  I see no reason to change my positive market view, which is based on the resilience of the consumer and on innovation in IT, rather than the expectation of strong worldwide GDP growth.  But I’m thinking I have to monitor both economic developments and my stocks more closely than usual.

model portfolio?

It had a bad month.  IT and Consumer discretionary were dead last among sectors during June.  Final-day trading didn’t do much good, either.  It merely allowed the two to swap ninth and tenth places.  The model portfolio lost 8 of the 30 basis points in outperformance it had accumulated through May.  No changes.

June 1, 2012

Score one for the bears in May

After a surge beginning early last fall–when global investors celebrated, incorrectly as it turns out, their conviction that the EU crisis had been put to bed for the final time–the markets flattened out in March and April.  Then they took back some of their gains in May.

sectoral performance

Not only did world markets decline in May–the S&P 500 was a relative “winner” at -6.3%–but they showed a clear defensive pattern.  The relative performance order of the S&P sectors was as follows (my overweights marked by  + ):

Telecom          +2.6%

Utilities          -.1%

Staples          -1.3%

Healthcare          -3.9%

Consumer discretionary          -5.9%        +

S&P 500          -6.3%

Industrials          -6.4%

IT          -7.9%        +

Materials          -8.0%

Financials          -9.4%

Energy          -10.6%.

Energy and Finance

To my mind, the two notable sectors are Energy and Financials, the two worst-performing sectors for the month.

The physical process of oil extraction requires that relatively steady amounts of petroleum be brought to the surface during any given period of time.  Supply and demand have been very closely balanced for years.  Small changes in demand can, therefore, make large changes in the price.  World markets appear to be betting that even a mild slowdown in economic activity will push the price of crude down dramatically.

The markets also seem to believe that we’ll ultimately find out that banks have more exposure to the EU than even they realize now.  JPMorgan’s multi-billion dollar hedging accident won’t have discouraged that view.

panicky EU sellers

The month has been marked by panicky selling, which I think has the fingerprints of Europe all over it.  Asian markets like Hong Kong seem to me to have, as usual, been particularly negatively affected.  Even in the US, daily trading has been opening with declines, followed by afternoon rallies after European market participants have gone home for the day.

FB

The botched Facebook IPO is, in one sense, not much more than a colorful sideshow.  The mistake, if that’s the right word, the underwriters made was to increase the dollar amount of an already large offering by a whopping 40% at the last minute.  That took out every potential buyer, leaving no demand to be satisfied once the stock started trading.  The far greater damage is to the trust of retail investors in their brokers after seeing themselves sandbagged with many times the expected amount of FB in their accounts on the IPO morning.  Then, of course, they had to stand by helpless as the NASDAQ trading snafu prevented them from selling.

EU

The main issue the markets are facing is, for once, the obvious one–will the EU hold together?  Ever the optimist, I think the answer is yes.  The main bone of contention is that Germany wants a commitment from all parties to closer political integration before bailout money flows;  the rest of the EU wants the money before the commitment.  The only near-term positive I can see on this front is that the situation seems to be coming to a head.

not all gloom

Although the market tone is clearly bearish, not all signs are gloomy.  For instance,

–Hedge funds are sifting through the carnage of the EU stock markets looking for bargains.  Trian Fund Management, for one,  has recently shown up on the share register of Intercontinental Hotels Group PLC (I own a little of IHG).

–Reasonable, though not overwhelmingly positive, news continues to come from the US economy.  This is one reason US stocks have been a relative safe haven.

–Technically, the S&P 500 seems to want to hold the line at around 1300.

the model portfolio?

It underperformed, but by only a few basis points.  That’s much less than I would have expected.  What’s more interesting–though a bit off the topoic of Keeping Score-is the good performance of big telecoms in the US and of dividend-paying stocks in general.

No changes.

May 1, 2012

Happy May Day!!!

After four straight up months, the S&P 500 flattened out in April.  Notice, too, that, in contrast to its orientation earlier in the year, there was a distinctly defensive cast to the market last month.  The one exception–Consumer Discretionary, which continued to shine.

There was more than that to April, though.  Looking inside the sectors, the worst performing stocks were generally the ones that depend on global growth; the best stocks were plays on broadening economic recovery in the US.

The AAPL effect?  That stock underperformed the S&P last month by about 260 bp.  That means it clipped 8 bp off the S&P 500 performance and around 40 bp from the IT sector index results.  In other words, AAPL didn’t move the needle much.

sectoral performance in April

Sectoral performance in April broke out as follows (with my overweight sectors marked by +):

Telecom          +4.2%

Utilities          +1.8%

Consumer Discretionary          +1.2%        +

Staples          +.1%

Healthcare          -.3%

S&P 500          -.8%

Energy          -1.0%

Materials          -1.0%

Industrials          -1.1%

IT          -1.9%          +

Financials          -2.5%

Contrast this with year to date results for the index:

IT          +18.8%          +

Financials          +18.4%

Consumer discretionary          +17.0%          +

S&P 500          +11.2%

Materials          +9.5%

Industrials          +9.4%

Healthcare          +8.1%

Staples          +4.9%

Telecom          +4.9%

Energy          +2.4%

Utilities          -1.0%.

Two reasons for the contrast:

–renewed fear of EU banking problems, which did in the financials, and

–macroeconomic indicators that suggest growth in the US is slowing from the pace of the first quarter.   The consensus thinking, which I’m not 100% convinced is correct, is that unusually warm winter weather in the northern half of the US pulled economic energy usually seen in the spring back into January and February.

On the other hand, we’re well into quarterly earnings reporting season.  So far, results are coming in, in the aggregate, considerably better than the expectation that there would not be much yoy change.

Bubbling below the surface of results that will probably average 6% better than a year ago are two allied patterns:

–much bigger positive surprises by some stocks, and much bigger negative surprises by others, along with

–strong market reaction, both positive and negative, to the results.

At this point in the market cycle, these individual stock plusses and minuses are likely to be more important than the sectoral patterns.

what to do

Despite the negative macro indicators, I don’t expect the type of summer swoon this year that we experienced last summer.  Instead, I think we’ll remain flattish until we have a better read on what 2013 will be like.  Most relative gains will come from good selection of individual stocks.

I also think we’ll continue the present pattern of outperformance by US-oriented companies, especially those which benefit from a recovery that is slowly broadening to encompass more and more families.

model portfolio

The model portfolio?  No changes.

Last month, underperformance by IT almost completely offset outperformance by Consumer Discretionary, leaving only a couple of basis points of relative gain on the table.

April 2, 2012

Another up month for the S&P in March.  Gains for the index since the October 2011 lows now amount to 30%+.  That’s an eye-popping result for a six month period, although we did start the count from the bottom of a three-month long 20% market swoon.  In fact, on a total return basis (including dividends, not just capital gains), the index is now right around an all-time high, having recouped all its losses from the Great Recession.

What’s just as noteworthy is that the financial sector, which comprised a quarter of the index in 2007, now amounts to no more than 15%–implying that the rest of the S&P is substantially higher today than at the previous market peak.  To my mind, it’s also interesting–and possibly important for us as investors–that while the economy felt frothy in 2007, it feels anything but that now.  If my perception is correct, and not just a reaction to my writing this on a rainy day, it would suggest further index gains are in store.

March S&P results

The sectoral composition of returns for the month seems to me to continue to reflect some optimism, but not a whole lot.  The breakout (with my overweights marked by +) is as follows:

Financials          +7.3%

IT          +5.0%          +

Consumer discretionary          +4.4%          +

Healthcare          +4.3%

S&P 500          +3.1%

Staples          +3.0%

Industrials          +1.2%

Utilities          +1.0%

Telecom          +1.0%

Materials          +.1%

Energy          -3.4%.

1Q12 S&P figures

For the first quarter, the industry breakout is some what similar, although March shows one significant change.  The 1Q12 figures:

Financials          +21.5%

IT          +21.1%          +

Consumer discretionary          +15.5%          +

S&P 500          +12%

Industrials          +10.7%

Materials          +10.6%

Healthcare          +8.4%

Staples          +4.8%

Energy          +3.4%

Telecom          +.6%

Utilities          -2.7%.

what the numbers mean

The constant winners for both the month and the quarter are Financials,IT and Consumer discretionary.  The big losers in relative terms are the defensive groups.  Energy is in a world of its own.  The notable index shift in March is that Industrials and Materials, which are typically stars during times of especially robust economic growth, are beginning to sag.

where to from here?

To maintain a positive stance on the stock market, I think investors have to deal with, and resolve in a positive way, two issues:

1.  Is the rise in US government bond yields that we’ve seen in March the beginning of the normalization of interest rates from the emergency lows of the past few years?  My guess is that it is, despite Mr. Bernanke’s wishes to the contrary.  But my view is very preliminary and subject to being revised as new data come in.  If what I’m thinking is correct, the rate rise could be a multi-year process.

Typically, during periods when rates have risen back to “normal” levels, stocks have gone sideways to up.  Accelerating economic profits prompt the rate rise.  They also act as a counterweight to the negative effect on equities of the higher cost of money.   In today’s world, with so many hedge funds willing and able to use financial derivatives, the ride could be faster than normal–and therefore bumpier.

2.  What are economic prospects for 2013?  Typically, investors don’t need to think about the following year until summer.  But 12% market gains through  March aren’t typical, either.  That’s the reason 2013 is taking center stage earlier than normal.

I find this a much more difficult issue than interest rates.  As Mayor Bloomberg of NYC pointed out in a Wall Street Journal  op-ed piece last week, both national political parties are telling their adherents fanciful stories about how the government deficit will simply disappear without much effort–stories that the tellers must know are untrue.  By inaction (sharp fiscal contraction is set to go into effect on January 1), or by actually drinking the kool-aid they’re peddling, will Washington turn what should be a mild up year in 2013 into a train wreck instead?  I hope not, but I don’t know.

The model portfolio?  Putting 2.5%  more than the market weight into IT and another 2.5% into Consumer discretionary would have gained a bit over 10 basis points in performance for the month.  For the quarter, the addition would have been just over 30bp.  No changes.

March 1, 2012

February was another good month for the S&P 500, although the market appears to have encountered very strong resistance around the 1365-1370 mark during the last week.  This corresponds with the high point achieved by the index in May 2011.

Round numbers on the Dow also always seem to create psychological resistance on the way up, so–for once–the Dow may be the more important index to pay attention to for the time being.  Certainly, my reading of the S&P during the early days of the market’s swoon in 2008 doesn’t turn up anything significant technically about 1365-1370.

The S&P clearly carried over its bullish tone of January into February.  Sectoral performance (with my overweights market by +) was as follows:

IT          +7.1%          +

Energy          +5.5%

Financials          +4.8%

Consumer discretionary          +4.5%          +

S&P 500          +4.1%

Telecom          +3.7%

Staples          +1.7%

Industrials          +2.3%

Healthcare          +1.0%

Utilities          -.01%

Materials          -.6%.

Year to date, the index is up 8.6%.  IT (+15.3%), Financials (+13.2%) and Consumer discretionary (+10.7%) are the clear stars.  Last year’s defensive darlings are now riding in the caboose, with Utilities and Telecom actually in negative territory so far in 2012.

One oddity about these results.  By itself, Apple now constitutes 4% of the entire S&P and almost 22% of the IT sector, having risen by 34% since January 1st.  Close to half the performance of the IT sector so far in 2012 is due to Apple.  Perhaps more remarkable, though much less influential in index performance, Microsoft, #3 in size in the S&P and #2 in the IT sector, is running contrary to form and has risen by 22% over the past two months.

Where to from here?

The S&P is up by 27% from its October low, so we’re due for a period of consolidation.  That may what’s in store for us in March.  Reaching 13,000 on the Dow may have been the trigger for a pause.  But the US economy is clearly getting a second wind, and both the EU and Japan have begun significant monetary stimulation of their economies.  There may be limits to how fast zombies can walk, but their economic situation is better than it would otherwise be.  So my guess is that any water treading or mild slippage that we experience now is only a prelude to further strength later on.

Also, if Jim Paulsen is correct–and I think he is–that 2012 will be a year when investor confidence is restored, then it’s possible that buyers will factor in more than today’s earnings into stock prices, buoying them further.

My model portfolio?  Overweighting IT and Consumer discretionary by 2.5% each has added about 25 basis points to performance so far in 2012, two-thirds of that from IT.  That’s not bad for a strategy that’s hugging relatively close to the index.  No changes for this month.

February 3, 2012

January was a very positive month for the S&P 500.  Yes, the month started off with its typical seasonal peculiarities.  There was the “January effect,” meaning the bounceback of small, illiquid underperformers from depressed levels reached during year-end tax selling in December.  And taxable investors did their usual aggressive trimming of their 2011 winners, once they nursed capital gains into 2012.

But, as I see it, the market quickly shrugged off  these temporary negatives, for four reasons:

–the economic recovery in the US is continuing to broaden,

–investors have begun to believe (correctly, in my view) that the domestic housing market is finally bottoming after almost five years of decline,

–the Fed is promising ultra-low interest rates well into 2014–making fixed income less attractive, and

–the worst of the Eurozone financial crisis may be behind us.  At the very least, we’re entering the endgame where, no matter what happens, uncertainty will be over.

sector performance

By sector, with my portfolio overweights marked by +, the S&P 500 played out in January as follows:

Materials           +11.1%

Financials          +8.0%

IT          +7.6%          +

Industrials          +6.9%

Consumer discretionary          +5.9%          +

S&P 500          +4.4%

Healthcare           +3.0%

Energy          +1.5%

Staples          -1.7%

Utilities          -3.7%

Telecom          -3.9%

not just a reaction to 2011 performance

Arguably, the January performance of Materials and Financials is merely bounceback from a horrible 2011.  But Consumer Discretionary and IT were both outperforming sectors last year.  And they’re still in the plus column, so last month wasn’t simply a reversal of 2011 form.

As I’ve written elsewhere, I don’t think we’re starting a new bull market today.  Rather, I think we’re in the unusual position where not all economic sectors turned at once.  We’re now getting something akin to the booster stage of a rocket firing.  I think this second stage still has some life in it–to 1400 on the S&P?

the Eurozone

One fly in the ointment–the continuing EU financial crisis.

I find the Eurozone mess hard to handicap.  My hunch is that Greece isn’t salvageable, but that Italy is taking the first steps in a fundamentally positive economic restructuring.   I’m guessing that most market participants already operating with something close to this assessment in mind, but I have no concrete evidence.  Stock prices are certainly acting in line with this, though–as if there won’t be much negative market fallout as/when a decisive break with Greece occurs.

Still, we all must at least consider how to guard/should one guard against the chance that news from Europe will be a lot worse than this.

My decision has been to keep a bullish orientation, but underweight Europe.  I’m trying to focus on sectors and individual securities that embody a specific secular growth idea, and not just the bet that overall economic conditions will be robust (by the way, I don’t imagine they will be).  I’ve also identified stocks to sell quickly in case the situation shows signs of marked deterioration.  This stance is kind of aggressive, but then I’m a growth investor.  What else would you expect?

a word about the model portfolio overweights

The model portfolio had a good month, up 25 basis points or so vs the market.

January 3, 2012  looking at full-year 2011 

The numbers pretty much speak for themselves.  For the full year, sectoral returns for the S&P 500 are as follows:

Utilities          +14.8%

Staples          +10.5%

Healthcare          +10.2%

Consumer discretionary          +4.4%

Energy          +2.8%

IT          +1.4%

Telecom          +.8%

S&P 500          0%

Industrials          -2.9%

Materials          -11.6%

Financials          -18.4%.

It’s not a perfect bear market pattern, but it is bearish.  The index is flat rather than down, for one thing.  IT and Consumer discretionary outperformed, for another.  But seriously defensive sectors–Utilities, Staple, Healthcare–all outperformed dramatically.  The most economically sensitive–Materials and Industrials–underperformed.

Year-to-date through September gives a clearer bearish picture, since the index did rally by 11%+ in the fourth quarter.  Here are those figures:

Utilities          +7.2%

Staples          +1.0%

Healthcare          +.8%

Telecom          -5.2%

Consumer discretionary          -6.7%

IT          -7.5%

S&P 500          -10.3%

Energy          -12.4%

Industrials          -16.1%

Materials          -23.0%

Financials          -25.9%.

Practically all of this damage was done during the third quarter.  The drop began in early July.   Through the October 3rd intraday low, the index loss was just over 20%.  And the performance pattern was the typical bear movement characteristic of investor belief in an upcoming recession.

Most of the downdraft, it seems to me, was caused by worries over the EU, although the August Job Situation report–no job growth at all in the US–also made for scary reading.  Those poor figures were revised up substantially in subsequent months, however.

Depth of decline and sectoral performance both argue that 3Q11 is at least part of a bear market.  Sectoral performance characterizes 2011 as a whole as a bear phase, as well.

The three pertinent questions for us today are:

–can a bear market come and go in three months?   …experience says “no,”  at least for garden variety business cycle bears.  They last on average for nine months to a year.

–have we already seen the lows?

–how much further time has to pass before investors can safely become more bullish?

More about this in my strategy for 2012, which begins tomorrow.

January 2, 2012

December is usually roiled by investing crosscurrents…

…and is therefore a hard month to read.   Specifically:

–taxable investors, both individuals and (mainly financial) corporations, do their yearend tax selling during the month.  They get rid of clunkers and use the tax losses generated to offset gains created when they trim winners that have grown too large.

–far-sighted investors, understanding that their performance for the current year is already effectively locked in, make strategic portfolio changes in preparation for the following year, and

–less reputable professionals use the light volumes of the year’s final week to manipulate the prices of the positions they hold–a process they euphemistically call “window dressing.”  Yes, this is illegal in most places.  No, it’s not ethical or nice.  But it still happens  …because it boosts the fees the manipulator collects from clients or the bonus he is paid by his employer.  Among stocks, the places to look for suspicious price movements of this type are among small-cap stocks and in markets outside the US.

This year’s December fluctuations

were also influenced by the continuing turmoil in the EU.  I’ll write about this in greater detail over the next week or so in my strategy for 2012.  Basically, though, I see two opposing movements:

–On the plus side, I think the period of maximum uncertainty about the Eurozone is behind us from an equity investment point of view.  I don’t mean everything will be peachy in the E-zone in 2012–far from it.  But I think we now know enough about where events are headed to make intelligent guesses about what will occur, and therefore can assess whether individual stocks are cheap or expensive.  I think potential buyers have already begun to nibble.

–On the other hand, some large EU-centric investors probably still have portfolios that they find to be too risky overall or that have weightings they consider structurally unsound.  They’re not getting new money in soon, in my opinion, so the only way they can rebalance is to sell the riskier securities (equities and EU-periphery bonds) they hold.

The net result of all of this?  …a defensive month that ended a very aggressive quarter.

S&P 500 returns by sector

for December are as follows (my overweights marked, as usual by + or ++):

Telecom          +3.7%

Utilities          +3.0%

Healthcare          +2.8%

Staples          +2.4%

Financials          +1.6%

Consumer discretionary          +1.0%          +

Industrials          +.9%

S&P 500          +.9%

IT          -.9%          +

Energy          -1.1%

Materials          -2.4%.

The raw numbers say that in December investors wanted to shun Materials and really wanted to own Telecom and Utilities.  The straightforward interpretation (which I think is also the correct one) is that this is simply a reversal of behavior over the prior two months.  During October-November Materials were up by about 17%–in an S&P up 11%–and Telecom and Utilities trailed badly (both up 4% or so).

One may be tempted to read the S&P’s focus on domestically-oriented industries as a function of increasing investor fears about Europe.  I don’t think that’s right.  Staples, perhaps the most EU-centric sector, was very strong in December. And despite the hysteria in the media, equity returns for the quarter in sectors sensitive to world economic growth were exceptionally good, both in an absolute and a relative sense.

My model portfolio?  …a few basis points of loss, due to the underperformance of IT.

More tomorrow.

December 2, 2011

an amusement park ride

During November Wall Street was like one of those giant rollercoasters you see at most amusement parks–all twists and turns, thrills and chills, and at the end of the ride you’re deposited at the same spot where you got on.  The only differences are that:  Wall Street gives us the experience for free, and we don’t enjoy it.

The same analysis can be made for 2011 as a whole, so far.  The year started off with a 9% rise, followed by a 20% fall ( from May-October–arguably an entire bear market compressed into an atypically short time frame), followed by a 14% upward bounce back to around flat–where we are currently.

Had the month of November ended a day earlier, it’s not clear whether anyone would have taken this “no harm, no foul” approach to analyzing 2011′s stock market gyrations, though.

November 30th was an extraordinarily strong day.  Look at two sets of numbers below.  The first is S&P performance by sector in November through the 29th, followed by performance for  the full month.  The numbers break out as follows:

through November 29th

Staples          +.04%

Utilities          -2.2%

Telecom          -2.4%

Healthcare          -2.9%

Energy          -3.6%

Consumer discretionary          -3.9%     +

Industrials          -4.3%

S&P 500          -4.6%

IT          -5.6%     +

Materials          -5.7%

Financials          -10.9%.

For the month through November 30th, US stock market performance by sector looks like this:

Staples          +2.4%

Energy          +1.7%

Telecom          +.8%

Healthcare          +.7%

Industrials          +.6%

Utilities          +.5%

Materials          -.1%

S&P 500          -.5%

Consumer discretionary             -.9%

IT          -1.9%

Financials          -5.0%.

What a difference!

Stocks rallied sharply on November 30th on three ideas, in my view:

–the EU is finally going to take concrete action to address its financial crisis,

–China is shifting away from a restrictive money policy,

–a continuing string of stronger-than-expected economic signs in the US means the economy is getting better, faster.

shifts in ranks

The one-day surge of 4.3% in the S&P was enough to drop Utilities by 4 spots in the monthly rankings.  It also raised Energy by 3 places and Materials and Consumer discretionary by 2 each.

Financials and Materials, the two worst sectors year to date, were the best two on November 30th; Staples and Utilities were the worst on the day, but remain the two best performers for 2011 to date.  This sort of reversal is to be expected during a buying surge.  The more interesting moves were by Energy and Industrials, which were the only other two sectors to outperform on the 30th.

What to make out of this?

I don’t think anything is really conclusive.  I have two reactions, though.

–if we push day to day volatility to the side, the S&P had been going up for about a month, until an avalanche of selling (out of the EU, I think) halted its progress.  Investors have been waiting for a sign that this selling has been exhausted.

–it seems to me that at the same time the market has been rotating away from secular growth names toward more business cycle-sensitive areas.  This is partly due to valuation, but also partly to expression of the idea that the next major development in world economies will be that news is surprisingly good, not bad.  At the very least, the market seems to me to be saying that there’s no longer any money to be made by betting that things will get worse.  That’s what I think the significance of the performance of Energy and Industrials is.

I think most of this optimism comes from the US economy, which seems to be healing itself despite the lack of help from Washington.

The reversal of money policy in emerging markets like China and Brazil from contractionary to expansionary is also a classic bullish sign.

And the EU seems finally to be starting to do enough to address its financial crisis that investors can convince themselves that, while Europe may not pull its own economic weight for a long time, at least its difficulties won’t undermine the rest of the world.

how am I responding? 

For now, I’m sticking with the sectoral portfolio structure I have, overweight IT and Consumer discretionary.  Within that structure, I’m trying to shift a bit away from secular growth names to somewhat larger and more mature firms that stand to benefit from stronger and more widespread economic growth.

The model portfolio’s performance?  It lost a few basis point.  Like the gains from October, there’s nothing much to write about.  I continue to be overweight IT and Consumer discretionary.

November 2, 2011

October strength

Despite receiving the trick of a 2.5% decline on Halloween instead of a treat, October was an unusually gratifiying month for stock prices.  True, the start was rocky, with the S&P 500 breaking through the 1100 support line intraday on October 4th before rallying to close at 1124.  But, again intraday, the market darted briefly above 1292 on October 27th–before weakening to close the month at 1253.

Reasons for the strength?  Although in now appears to have been at least a bit premature, the main driver was investor belief that the EU had finally taken decisive action to solve its debt crisis.  In addition, macroeconomic indicators and reports by publicly traded companies about their September quarter results both indicate that the world is is better shape than the consensus had thought.  Not only are corporate profits better than anticipated, but the US economy seems to be gradually pulling itself out of its mid-year stall.

sectoral breakout

The sectoral breakout of October S&P 500 returns is as follows:

Materials          +17.6%

Energy          +17.0%

Financials          +14.2%

Industrials          +13.9%

Consumer discretionary          +11.8%          +

IT          +11.5%          +

S&P 500          +10.8%

Healthcare          +5.6%

Staples          +4.3%

Utilities          +3.5%

Telecom          +1.8%.

Several things strike me about the list:

–the very wide spread between outperforming and underperforming sectors,

–the message of belief in a general economic upturn implied by the sectoral performance, and

–the contrast between this month’s performance and the year to date, the latter showing an extreme defensive bent.  I’m not going to list them all, but the best sectors ytd, even after October, are:  Utilities (+11.0%) and Healthcare (+6.5%).  The worst are:  Financials (-15.5%) and Materials (-9.4%).  The S&P itself is -0.35%.

model portfolio

The model portfolio, which I reinstated at the beginning of last month by overweighting Consumer discretionary and IT, outperformed a tiny bit during October, thanks mostly to performance on Halloween.  Not worth bothering even to add up the few basis points, however.

I think the markets will be flattish for a while yet, so I’m keeping the same overweights.  The idea is that these two sectors stand to benefit from mild economic strength.

what I’m doing now

I have taken one new step in my personal portfolio, however.  I’ve reduced the size of my largest positions.  I’ve already had an unpleasant surprise in the results from DeNA in Japan (I’ve shifted money away from DeNA toward Gree because of this).

I don’t expect horrible trouble with the stocks I own.  I just think they’re not all the one-way streets they’ve been since early 2009, even if the Greece situation turns out ok.  So although I continue to have large sector exposure, I’m toning down my stock-specific risk.

The elephant in the room is Greece.  I don’t know yet what the upcoming referendum is all about.  Is it a way for PM Papandreou to keep himself in office? (in which case I’m not too concerned)   Or is it that he believes that as it stands now Greek citizens won’t abide by the austerity measures the Greek government has agreed to? (in which case, we all should be worried).

The real issue isn’t the economy of Greece or its sovereign debt, of course.  It’s the European banks and the amount of the credit default swaps they may have to pay off on if Greece defaults.  The world really doesn’t want to know how many other Jon Corzines there are out there.

My current thinking is that a Greek default won’t happen and that, even if it does, it won’t be another Lehman-like catastrophe.  But no one knows.  And there stands to be at least be a period of really ugly trading in financial markets if Greece does default.

I regard my main job as gathering enough information to make my typical optimistic spin into an informed decision.  I’m doing nothing too defensive yet, but I’ve also got to be planning precisely what my defensive strategy should be.

More on that, and MF Global, in the coming days.

October 2, 2011

A tough month to end a brutal quarter.  The S&P 500 fell 7% during September and lost 13.9% for the last three months.  What’s notable about both periods is not only the extent of the declines, but also the sharply defensive rotation among sectors.  The performance breakout of the index during September is as follows:

Utilities          -.1%

Telecom          -1.3%

IT          -3.4%

Staples          -3.7%

Healthcare            -4.7%

Consumer Discretionary          -7.0%

S&P 500          -7.0%

Industrials          -9.4%

Financials           -11.6%

Energy          -12.6%

Materials          -16.6%.

For the full September quarter, the sectors played out as follows:

Utilities          -.4%

Staples          -4.9%

IT          -8.0%

Telecom          -9.2%

Healthcare          -10.5%

Consumer Discretionary          -13.3%

S&P 500          -14.3%

Energy          -20.9%

Industrials          -21.5%

Financials          -23.1%

Materials          -25.0%.

Two aspects of the three month view jump out at me.

The first is how tightly grouped the four worst sectors–all among the most highly economically sensitive ones–are in their underperformance.  This suggests to me that the current selling isn’t expressing anything particularly complex or difficult to understand.  It’s all fear of a weakening world economy.

Also, there are two outlier industries.  IT is performing unusually well.  This, I think, has to do with recognition of the profit potential inherent in the structural change–high-speed mobile, tablets, cloud computing–now occurring in technology.  In contrast, financials have almost continuously been among the worst performers.  Two reasons:  fallout from the role of financials in creating the 2007-09 crisis, and possible exposure to the ongoing fiscal troubles in the EU caused by Greece.

Where to from here?

As I’ve written elsewhere, I think the current weakness is caused by dreams of a quick resolution to global economic problems confronting the reality that the cost of repair is going to be slow growth for an extended period of time.  That is, I don’t think the selloff is the first stage of a cyclical bear market caused by impending recession.

Of course, if we have another month like September, this may be a distinction without a difference in terms of market level.

Even if so, there is a distinction to be made in terms of time.  If I’m correct that what we’re experiencing is a one-time downward adjustment to slower growth over the next few years, the market will settle out in short order and fear will quickly dissipate.  The recent pattern of wide performance difference between defensives and economically sensitives will end, as well–meaning that picking well-managed companies with bright futures will be profitable again.

On the other hand, if this is the first stage of a bear market, chances are that the current period of indifference to long-term fundamentals of individual stocks could last well into the first half of next year.  Market levels may not  decline much from here, but stocks could drift without much direction for a longer period than I now expect.

I’m going to change the model portfolio away from neutral.  I want to overweight Consumer Discretionary and IT.

September 1, 2011

Day five without water, internet or television—and for many of my neighbors without electric power. A bad end to a very strange month.

August debuted to the the tail end of an embarrassing, dismaying (and, as it turns out, consumer-confidence-shattering) display of partisan bickering in Washington over the debt ceiling. Then came the S&P downgrade of US government debt, deep panic in Europe over failure of leaders there to address the crisis in Greece, and further evidence of a slowdown in growth in the developed world.

Needless to say, it was a down month for the S&P 500. The final tally, by sector, is as follows:

Utilities +1.7%

Staples +.4%

Telecom -1.4% (the decline due to T’s fall on the final day of the month)

Healthcare -2.4%

Consumer Discretionary -5.5%

S&P 500 -5.7%

IT -6.2%

Industrials -6.8%

Materials -6.9%

Financials -9.7%

Energy -10.0%.

My first reaction to the figures is that this is the classic shape of a down-market month. The market as a whole loses a significant amount, but the pain is felt mainly in the economically sensitive industries. In fact, one interesting aspect of August is that the month’s losses are almost entirely in the cyclicals. The defensive industries are barely changed in price.

But the month-end numbers aren’t the whole story of August—not by a long shot. The index plunged during the initial trading sessions of the month, halting just above the 1100 line. Twice, the index rallied a bit and weakened again toward 1100 before spurting up above the 1200 mark as the month ended.

To appreciate the depth of the negative emotions being acted out during August, we have to look at the index at one of its low points. I’ve chosen August 22nd.  On that day, the month-to-date sector performances broke out as follows:

Utilities -3.1%

Staples -3.7%

Telecom -4.3%

Healthcare -9.2%

S&P 500 -13.2%

IT -13.7%

Consumer Discretionary -13.9%

Industrials -15.8%

Energy -17.1%

Financials -18.9%

Materials -22.2%

The order in which the sectors ended this period is almost the same as for the full month. But the numbers for the economically sensitive industries on the 22nd are really ugly. They’re almost an entire bear market for them in three weeks!

Also, look at the spread between the best and worst industries. For the full month, the difference is 10.7 percentage points. For the first three weeks, the difference is 18.1 percentage points, almost double the final result.

To my mind, all this is evidence of significant stress—stress of a type I don’t recall seeing since early 2009. It’s clearly a negative sign. The question is how one should interpret it.

My guess is that August’s price movement is a resetting of expectations for earnings growth in 2012 downward from the 10%-15% advance the consensus had expected. Three reasons:

–the current slowing down of the US and EU economies

–the national mood in the US toward government budget balance, even if this means removal of fiscal stimulus

–belief that Washington and Brussels can easily make the economic situation worse, but don’t have the skills or desire to make it better.

I don’t see the resetting as a prediction of a deep economic downturn but rather one of either very slow growth or stagnation. As an investor, this would be an acceptable outcome, since it would imply a sideways-moving market where I can make money by picking stocks. That’s what I’m planning for.

One other, technical analysis, point:

some market commentators are saying that the return late in the month to test the 1106 low made during the first week constitutes a “double bottom,” and evidence of a major change in market direction from down to up.

Maybe, but I don’t think so. Not enough time has passed from the initial low. I think we’re still trying to establish a floor for the market.

The model portfolio? I think I’ll remain neutral for another month.

July 31, 2011

This has been one peculiar month.

It began with a continuation of late June’s rocket-like ascent of the S&P 500.  That advance was sharp enough to send visions dancing through my head of the S&P beaching the 1350-50 ceiling that has kept the index in a trading range for the past half year.

The upward movement stalled, however.  The market sagged a bit.  But it began to perk up again when June-quarter corporate reporting season turned into a parade of bullish earnings statements–despite the fact that the latest GDP information shows the US economy to be barely keeping its head above water this year.

Then the debt ceiling debate broke out in Washington.  In response, the S&P began the downturn that, to me, looks as if it may have the index testing 1250 again.

The near-term worry is the possibility of a (very inconvenient) federal government shutdown sometime in August.  The more fundamental economic issue for the US is how it will transition from being the dominant super-power of the twentieth century (a result of having survived WW II with its industrial base intact) to being relevant in a current-century world order where China, India and Latin America are all credible economic rivals.  We know from history what happens if this process turns out badly–we become another UK or Japan, lost in dreams of past glory.

What we’re now seeing in graphic detail is how big of an impediment to that progress the current denizens of Washington, on both sides of the aisle, are.  You know there’s trouble when the Tea Party starts sounding like the adults in the room.

With all the day to day changes in sentiment, how did the S&P perform for the month?   …it lost 2.15% on a capital changes basis, lowering the year to date return to +2.75%.

On a sectoral basis, the month’s returns break out as follows (with model portfolio overweights indicated by + and ++):

IT          +1.6%          ++

Energy          +.6%          +

Utilities          -1.1%

Consumer Discretionary          -1.5%          +

Staples          -1.7%

S&P 500          -2.2%

Materials          -3.4%          +

Financials          -3.7%

Healthcare          -4.0%

Telecom          -6.7%

Industrials          -7.0%          +

If the market is “talking” to us through relative sectoral performance, what are its main messages?  (Remember, we can’t automatically assume the market is an accurate predictor of the future.  It can–and does–change its mind.)  My read:

–global growth strong enough to make Materials prices go up and demand for Industrial machinery soar isn’t on the cards

–the countercyclical rally in Healthcare and Telecom is over

–the global Consumer will continue to spend, even if the more highly cyclical business sector pulls the reins in

–Energy demand will stay strong

–the IT message isn’t obvious at the sector level.  We have to look at individual companies to see a pattern.  I think it’s that growth is mobile internet- and cloud computer-driven.  More mature technologies, particularly ones that depend on demand from government, are following the lead of the general Industrial sector.

The model portfolio? 

It gained something under 10 basis points vs. the market.  Doesn’t sound like much, but surprisingly good for an aggressively pro-cyclical portfolio during a down month.  IT was (for a change) the big positive, more than offsetting the damage done by the Industrial sector.

Changes?

Yes.  For the first time in over two years, I don’t have any strong opinion about the general direction of the S&P over the next few months.  I continue to believe that world economies, including the US, are in better shape than GDP figures suggest.  But I think that the way events play out in Washington will exert an important influence on near-term stock prices.  And I have no idea what will happen there.  So I’m erasing all my overweights and becoming completely neutral.  I’m happy to sit on the sidelines and just watch for a while.

July 1, 2011

Six months in the books!

So far we’ve had:

earthquake and tsunamis in Japan that disrupted world industrial supply chains;

fighting in Libya that stopped the flow of the easy-to-refine crude oil that European refineries depend on;

riots in Greece as the EU struggled to get an agreement on refinancing Greek sovereign debt;

worldwide economic slowdown;

deadlock in Washington on upping the debt ceiling, raising the possibility of default on Treasuries.

S&P performance for the first half…

Despite all this bad news and uncertainty, the S&P gained 5% for the six months on a capital changes basis, 6% on a total return basis.

S&P sectors performed as follows for the half-year (overweights in the model portfolio are indicated by + and ++):

Healthcare          +12.7%

Energy          +10.4%          +

Consumer discretionary          +7.6%          +

Industrials          +6.9%          +

Utilities          +6.7%

Staples          +6.3%

S&P 500          +5.0%

Telecom          +4.4%

Materials          +2.6%          +

IT          +1.6%          ++

Financials          -3.7%.

So much for easy patterns.  Both winners and losers are a mix of both highly economically sensitive and slow-but-steady defensive areas.

A couple of things jump out at me, though:  how poorly Financials and IT have performed, and that its surge over the past few months has placed Healthcare in the top spot, year to date, with a 7.7% relative gain over the market.

…and for June

For the month of June, the sectors fall out as follows:

Consumer discretionary         -.3%          +

Materials          -.5%          +

Utilities          -.5%

Industrials          -.8%          +

Healthcare          -1.3%

Telecom          -1.5%

S&P 500          -1.8%

Energy          -1.9%           +

IT          -2.6%           +

Staples          -2.9%

Financials          -2.9%.

On the surface, the June results are even more of a puzzle.  But June was a month of two halves–a bearish one early on where defensive sectors were stars, followed by a recovery of economically sensitive shares in the second half of the month.

Where to from here?

Earnings season starts again this month.  A few weeks ago I thought that results would be strong, but that company guidance would be at best so-so, given the negative effects of the earthquake/tsunamis in Japan rippling through the world and the general slowdown that the economies of the industrialized world seem to be undergoing.  In recent days, there are some signs of revival, however.  So guidance may not be as lackluster as I’ve been supposing.

Still, I don’t see any percentage for a CEO in saying he’s super-bullish, even if he is.  So I suspect that the S&P will remain in its current trading range of 1250 – 1350ish until we’re closer to the start of fall.  I’m also guessing that the market will test the upper limit of this range before probing for the low end–if it ever gets to trying the latter.  While I already have sold covered calls on a tiny amount of my position (something I’m content to do as an individual, but would never have done as a professional), I continue to maintain an pro-cyclical stance in my portfolio.

The model portfolio?  It gained a few basis points against the index for June, something I wouldn’t have expected two weeks ago.  For the first half as a whole, it remains the slightest bit higher than the S&P, with the miserable performance of the IT sector being the main deterrent to a better outcome.

No changes.

June 2, 2011

On the surface, June looks like a “ho-hum” month, with the S&P posting a mild 1.2% decline.  Not unexpected, following a January-April period that saw the S&P 500 gain more than 8%.

sharp sectoral rotation

Peek under the hood even a tiny bit, however, and the facts are  anything but.  A very clear rotation toward defensive laggards shows itself, as you can see from the following sector returns (as usual, all model portfolio overweights are marked by + and double overweights by ++):

Staples          +2.4%

Healthcare          +2.2%

Telecom          +1.6%

Utilities          +1.6%

Consumer discretionary          -.5%

S&P 500          -1.4%

IT          -1.8%

Materials          -2.9%

Industrials          -3.0%

Financials          -3.4%

Energy          -4.6%.

In a pattern we haven’t seen before during the bull market that started over two years ago, every defensive sector outperformed the index by a minimum of 300 basis points.  The economically sensitive sectors didn’t exactly get clobbered (the S&P was saving up a lot of that for yesterday, June 1st) but they all underperformed, except for the least cyclical of the bunch, Consumer Discretionary, which eked out a 90 bp relative gain.  The closer the sector was to representing global GDP growth power, the worse it did.

what, if anything, does this mean?

The numbers are easy enough to lay out in a table.  The real question is what to make of them–and whether to alter portfolio strategy as a result.

There are three straightforward interpretations of the data:

–One is that what we’re seeing is the normal two-steps-forward-one-step-backward motion of the market.  Laggards are having a temporary day in the sun, based on their low relative valuation vs. economically sensitive market leaders.  If we’re in this camp, we might ascribe recent signs of a flagging US economy to lagged supply chain-related effects of the March earthquake/tsunamis in Japan.  We might also say that pent-up demand is petering out and we’re settling in to a more sedate, but more sustainable, growth path domestically.

–A second is that the sharp sectoral contrasts are the first signs of a change in direction for US stocks–that the business cycle domestically has exhausted itself and we’re seeing the first act of a bear market that will play itself out over the coming nine-twelve months.

–The third is that the movement makes the most sense if we’re looking through the eyes of trading-oriented chart followers–market participants who pick stocks more by chart patterns than economic fundamentals–have decided that this summer will follow the pattern of last year’s (a 10%+ decline, followed by sideways movement until September).  If so, recent softer economic numbers have been the trigger for the market rotation we’re seeing, not the cause.

I find myself torn

Just a few days ago, I wrote that I thought this year’s “sell in May and go away” summer doldrums would be milder than those of 2011, when some investors seemed to fear that the US would fall back into recession.  I was encouraged by the fact that the market was shrugging off economic indicators suggesting a slowdown in growth, and that we’d gotten through most of May without a repeat of the sharp decline that that month brought in 2011.

So the May sectoral results surprise me.  On the other hand, I think the market is at a critical juncture in technical terms.  In my view, we either hold around here, or the next stop is the 1260-1270 area on the S&P.  That would represent a 9% correction from recent highs, with defensive sectors continuing to outperform and economically sensitive ones picking up the rear.  The next few days will likely give important new information.

At this point, though, I can’t bring myself to believe that the business cycle has played itself out.  If we’re in the process of resetting the market at a lower level, the only fundamental reason I can come up with is that investors around the world are viewing Washington’s increasing dysfunction as actively and permanently damaging the country’s economic prospects.

watching and waiting

Anyway, for now, I’m content to watch and wait.  I’m not making any portfolio changes.

The model portfolio in May?  It underperformed across the board, by a total of about 15 bp.  That’s enough to wipe out all the modest gains it made from January through April.  ..oh, well.  No one said you can have ice cream for every course of the meal.

May 1, 2011

April produced three important stock market developments, in my opinion:

1.  Reports are showing that the economic consequences of the earthquake in Japan in March are playing out pretty much as I had sketched out in my March 20th post     …for most industries, financial markets initially overestimated the extent of supply disruptions, the two exceptions being autos and TEPCO’s delivery of electricity to the affected region.

2.  US-listed companies continue to report positive earnings surprises, based by and large on their non-US operations, two years after the stock market low in March 2009.  This is very unusual–and indicates either the strength of the global economy or the weakness of the current crop of brokerage house securities analysts.  Normally analysts become tired of missing results on the low side and add progressively more “padding” to their estimates.  As a result, it becomes progressively harder for companies to deliver positive earnings surprises.  But global firms continue to do so.  That’s very bullish.

3.  S&P entered the political debate about the US government budget deficit.  On April 18th, the rating agency announced it might be forced to downgrade its credit rating on Treasury bonds if Washington doesn’t take swift corrective action.  Combined with the flow of positive investment news on Japan, I think the S&P press release marks the close of the period of Wall Street worry about TEPCO.  Like a notice from the credit card company that you’ve exceeded your card’s borrowing limit, I think the S&P announcement gave the deterioration of government finances a much higher degree of reality–and urgency–in the mind of investors than it previously has had.  The deficit is now a (maybe the) front-burner worry.

As a result of #3, I think we should look both at the month as a whole and at the period after the S&P announcement to see any differences in trading patterns.

Looking at the full month first, the sectoral performance of the S&P 500 played out as follows (with, as usual, the overweights in the model portfolio indicated by + and ++):

Healthcare     +6.4%

Staples     +5.1%

Consumer discretionary    +3.9%          +

Utilities     +3.8%

IT     +2.9%          ++

S&P 500     2.9%

Industrials     +2.7%          +

Materials     +2.1%          +

Energy     +1.5%           +

Telecom     +.7%

Financials     -.1%

Compare these figures with the post-S&P announcement market, from the close on April 18th to the end of the month:

Energy     +6.0%           +

Industrials     +5.4%          +

IT     +5.3%          ++

Materials     +5.2%          +

Healthcare     +5.1%

S&P 500     +4.5%

Consumer discretionary     +4.3%          +

Utilities     +4.0%

Financials     +2.9%

Telecom     +2.8%

Staples     +2.5%

The differences?

–the constants are IT and Healthcare as outperformers, Telecom and Finance as underperformers,

–Energy, Materials and Industrials, all global industries, shift from negative relative performers to positive,

–Consumer Discretionary and Utilities, both domestic-oriented industries, shift from relative gainers to relative losers.

In addition, the US$ weakened significantly.

To be honest, I’d expected a market reaction to S&P but–as I wrote on April 19th–I wasn’t sure what kind.  The shift in where Wall Street is putting its money seems to be saying investors think Washington will do something about the deficit.  It won’t be enough to fix the debt problem, hence the currency decline and the outperformance of companies with significant non-US exposure, but it will be enough to avoid a full-blown debt crisis–hence the market rise.

This sounds plausible, if a little on the optimistic side.  And it’s probably enough for the moment to structure a portfolio by.  It’s important to remember, though, that this is only Wall Street’s best guess about what will happen, not a guarantee that this benign outcome will come to pass.  So we’ve got to be alert for changes to the situation.

The model portfolio?  …it ended the month losing a few basis points to the index.  It was more than 10 bp behind the benchmark during the defensive/domestic-oriented trading of the pre-S&P announcement market, but made up most of the loss in post-S&P trading.

While I’m worried because I think that what Washington does about the deficit will be an important determinant of future market performance, and I note that the S&P has decisively broken through resistance at 1330-1340–therefore, stocks may be a little on the pricey side–I’m not going to alter my pro-cyclical stance.  No changes.

April 1, 2011

I’m back from spring training.  The Devils aren’t going to make the NHL playoffs; the Eagles and Bulldogs (3rd and 1st seeds, respectively) have both been upset and knocked out of the NCAA hockey championships; the Giants and Tim Lincecum have already lost to the Dodgers.

That bad news out of the way, the S&P 500 has proved surprisingly resilient during a tumultuous month of March.  The market has shrugged off the continuing fighting in Libya.  Conflict there has shrunk the supply of easy-to-refine crude oil used in refineries in southern Europe, sparking France’s call for UN/NATO intervention into the struggle to overthrow Muammar Gaddafi.

The failure of fix nuclear reactors owned by Tokyo Electric Power in Fukushima after the devastating earthquake and tsunamis offshore Japan initially caused the S&P to break down below 1300 and touch 1250.  But the index has rebounded very sharply to end March at 1325.9, or down a mere 11 basis points on the month.

Two factors appear to me to be behind this bullish market tone:  the continuing steady accumulation of data that show the US economy is recovering, and the resulting heightened awareness on the part of (mostly individual) investors that they own too many bonds and not enough stocks.

The performance of the S&P sectors for March, with as usual overweights in the model portfolio indicated by + and ++, was as follows:

Telecom     +5.2%

Industrials     +1.7%          +

Healthcare     +1.7%

Materials     +1.7%          +

Energy          +1.5%          +

Staples     +1.1%

S&P 500     -.1%

Consumer discretionary     -.6%          +

Utilities     -.2%

IT     -2.7%          ++

Financials          -2.7%.

Taking a slightly longer view, the March 2011 quarter as a whole, sectors performed in this order:

Energy     +16.3%          +

Industrials     +8.2%          +

S&P 500     +5.4%

Healthcare     +5.0%

Consumer discretionary     +4.4%          +

Materials     +4.1%          +

Telecom     +3.5%

IT     +3.2%          ++

Financials     +2.8%

Staples     +1.7%

Utilities     +1.6%.

My observations:

1.  On a three month view, overweighting Energy was the key to success.  Almost nothing else would have mattered, although you wouldn’t have helped yourself by having lots of defensive stocks, like Utilities or Staples.  Periods like this, where index performance is dominated by one sector, aren’t that unusual (think: Financials from 2004-07 or IT stocks from 1998-1999).  I’m not willing to put more eggs in the Energy basket, because I see opportunities elsewhere in the market, but I don’t think Energy’s day in the sun is anywhere close to over.

2.  As has been the case since the bull market began in March 2009, technicals have been as good a guide to the market as anything else.  The market corrected by about 7% in February-March and bounced off support at 1250.  The most surprising development, in my mind, is how quickly and decisively the market has rebounded above 1300–a level where I thought the advance would face some resistance.

3.  I think it will be important to divide March into pre- and post-Fukushima to get a better grasp on the leadership during the rebound.  At the very least, this will reveal what other investors are thinking.  I’ll be posting on this topic in the next couple of days.

4.  Before having done the analysis, my impression is that the US market’s reaction to Fukushima and possible disruption to industrial supply chains that have Japan as key links has so far been highly emotional and pretty superficial.  My bias is to attribute this to the dearth of experienced securities analysts on Wall Street. The numbers will tell whether this is right or not.

5. My primary belief is that politics may make for entertaining conversation, but it rarely has important investment implications.  Actually shutting down the government during the current Federal budget dispute in Congress might have short-term negative for securities markets, however.  And the investigation that’s beginning about the Obama administration shutdown of the proposed Yucca Mountain nuclear waste storage site as a political favor to help Harry Reid be re-elected may also have unanticipated consequences in a post-Fukushima world.  I don’t see either as any reason to alter basic portfolio composition, however.

6.  To some extent, we’re in the same situation as we were six or eight weeks ago–with the market discounting most of the good news that’s likely to develop during 2011.  The biggest difference is that we’re that much closer to the Jule-July period when investors’ thoughts will begin to turn to 2012.  I don’t think there’s any reason to change from a a pro-cyclical portfolio posture, but there’s no reason, in my view, to make a very aggressive bet that the market will continue the sharp upward course it has been on the past couple of weeks.

the model portfolio

The portfolio lost 6 basis points to the index in March.  Energy, Materials and Industrials were all plusses, but were offset by the large overweight in IT.

For the March quarter, the portfolio gained about 40 bp.

No changes.

March 4, 2011

Go, NJ Devils!!

February was another strong month for the S&P 500, which tacked on a 3.2% gain to the 1.4% advance posted in January.  Sources of the optimism?  Despite gruesome weather–floods or deep snow–in many of the most highly populated areas of the country, consumer spending in the United States continues to recover.  The Fed now thinks the economy is on a self-sustaining upward path.  Job creation, mostly by small- and medium-sized businesses, is expanding to the degree that it now seems  strong enough to make a dent in the sky-high unemployment rate.

The Facebook/Twitter revolution has spread to Libya, after effecting a change of government in Egypt.  Investor worries about Middle East turmoil have shifted from concern that unrest in Egypt would spill over into oil producing countries to concerns about the impact of the loss of the extra-high quality crude that Libya sells to the rest of the world will have on prices (see my post on this subject). In hindsight, it might have been better for the country if, instead of invading Iraq and Afghanistan with Powerpoint generals whose skills seem to run more toward bureaucratic infighting than combat leadership, G W Bush had put Mark Zuckerberg in charge.

Fears about Libya knocked the index back from the 1340+ level it had attained two-thirds of the way through the month.  But the S&P has proved (so far) surprisingly resilient, bouncing back up from around 1300 three times since then.

Still, as you’ll see below, the sector performance of the S&P 500 during the month was a bit peculiar.  Only Energy and Consumer Discretionary outperformed the benchmark.  The returns themselves, with the model portfolio overweights marked, as usual, with + and ++, are as follows:

Energy          +6.7%          +

Consumer Discretionary        +5.8%          +

S&P 500          +3.2%

Healthcare          +2.8%

Financials          +2.8%

Materials          +2.5%          +

Staples          +2.4%

Telecom          +2.3%          ++

Industrials          +2.0%

IT          +1.8%          ++

Utilities          +.8%

Year to date, only Energy (+14.6%), IT (+6.0%) and Financials (+5.6%) have outperformed the S&P’s 5.5% gain.

The model portfolio eked out a (very) small relative gain of about 5 basis points for the month.  The overweights in Energy and Consumer Discretionary offset relative losses that came from IT, Industrials and–to a lesser extent–Materials.

No changes.

I’ll have more to say about the present condition of the stock market when I update Current Market Tactics on Sunday.  But I think we’re at an interesting juncture.

For now, I’ll just comment that I’ve been expecting a modest pullback in the market for some time, solely because of the strong performance of the S&P since last September.  Egypt, and now Libya, have given investors all the excuse they’ve needed to start selling.  But any bearish sentiment has fizzled out pretty quickly–in a way I don’t think would have occurred last year.  What has changed?  My guess is it’s individual investor money returning from bonds and, to a lesser degree, from emerging markets.

February 3, 2011

Welcome to the Year of the Rabbit!!

January performance

You can detect in January’s price action the effect of profit-taking by taxable investors in shares of last year’s big winners (look at Consumer Discretionary names, for example).  A more striking aspect of the month, in my opinion, is that the S&P continued to build on the positive momentum we have seen since the end of last summer.

In fact, returns for the month would have been considerably higher, more on the order of +4% than the 1.4% actually posted, had it not been for worries about political developments in Egypt that emerged late in the month.

The sectoral returns for the S&P for January (with, as usual, my overweights marked by + and ++) are as follows:

Energy     +7.5%          +

Industrials     +4.3%          +

IT     +4.3%          ++

Financials     +2.8%

S&P 500     +1.4%

Utilities     +1.1%

Healthcare     +.4%

Materials     -.2%          +

Consumer Discretionary     -.7%          +

Staples     -.8%

Telecom     -3.9%

My model portfolio had a very good month, gaining about 30 basis points vs. the index.  Overweights in Energy, Industrials and IT all had positive influences on performance that far outdistanced the negative effect of the poor-performing Materials and Discretionary sectors.  I’m still happy with the structure I have, so  …no changes.

What about Egypt?

I don’t know much.  As a general principle, though, it’s important to be clear on whether you’re wearing your hat as a human being or your hat as an investor.  In the latter role, the key question to not get yourself sidetracked, but to focus only on what matters to the profits of the stocks you own.  A general answer is that in world economic terms–or even in terms of an emerging markets index–Egypt is too small to make any difference.

The only real issue I see is whether whatever happens in Egypt ends up diminishing the flow of oil from the Middle East to the rest of the world.  My guess is no.  I could hedge my bet a bit by buying an oil stock with minimal Middle Eastern exposure, but I’m not going to.  (My personal opinion is that none of the media or stock market commentators we are hearing have the slightest idea of what they’re talking about.  I also don’t get why the US winds up supporting police states.  But that’s me wearing my human being hat and isn’t relevant to investing.)

Where do stocks go from here?

I believe strongly that we’re still in a bull market.  I also think that this will be an average year, with the S&P 500 ending 2011 about 10% higher than when it opened January.  That implies that there’s less than 10% to go for between now and then.  So I can easily see stocks going down from today’s level before they resume their upward course. On the other hand, there is a large inflow of retail money now under way.  That may serve to make the upside greater than I think–and possibly temper any downside movement.

In either case, however, I think it will be more important to be in the right sectors, and to be holding growth stocks rather than value names, than it will be to be 100% correct on how much upside the index has from this point.

January 4, 2011

Happy New Year!!!

It’s hard to believe that another year has passed.  2010 certainly was a complex one in terms of market action, featuring a strong start for the S&P, a summer swoon and a significant rebound from September on.  We had (crazy) talk early in the year of V-shaped recovery (meaning an economy bounceback just as fast as the collapse of 2008-2009) with rampant inflation soon to f0llow.  Then we went through a phase where the worry du jour was deflation and economic stagnation.  We ended the year with somewhat more somber expectations for 2011 than we had in January, though a much more hopeful view than we had in the summer.

To me, December was a surprisingly strong month.  Yes, this is usually a good period for S&P returns.  But it is usually preceded by a selloff in October–which didn’t take place in 2009.  The monthly returns by sector (with my overweights marked by + and ++) are as follows:

Financials     +10.6%

Materials     +10.2%     +

Energy     +8.9%     +

Telecom     +7.6%

Industrials     +7.6%

S&P 500     +6.5%

IT     +5.2%     ++

Healthcare     +4.3%

Consumer discretionary     +4.0%     +

Staples     +3.8%

Utilities     +2.8%.

For the full year of 2010, the S&P ended at 1257.64, a 12.78% gain on a price changes basis.  Dividends added 2.28% to that, bringing the total return on the index for the twelve months to 15.06%.  An above average year, and more than the consensus would have expected even as fall began.  The sectoral breakout of returns on a price-changes basis is:

Consumer discretionary     +25.7%

Industrials     +23.9%

Materials     +19.9%

Energy     +17.9%

S&P 500     +12.8%

Telecom     +12.3%

Financials     +10.8%

Staples     +10.7%

IT     +9.1%

Utilities     +.9%

Healthcare     +.7%.

For the year, the sectors look to me to fall into three clusters:

–energy, materials, industrials and consumer discretionary were clear outperformers

–healthcare and utilities were significant laggards, and

–the remaining sectors were clustered around the index.

A professional would probably be less cavalier about calling IT, at +9.1%, “around” the index.   He/she might, in fact, regard the thought that IT might return less than the S&P as their biggest insight of the year.  But we have lives.  For you and me, I think the description is apt.

You should also note that the returns have the same general bullish cast they have had from March 2009, only not to the same sharp degree.

The hypothetical portfolio?  It gained a few basis points for December, with IT and Consumer Discretionary (ouch!) underperformance erasing most of the relative gains in the other overweight sectors.  For the year as a whole, the portfolio outperformed by about 40 basis points.  A gain, yes, but a bit less than half the relative performance gain during 2009.

I don’t see any reason to change weightings yet.

I’ll be filling out my picture for 2011 in detail over the next week or so.  In the meantime, my thumbnail sketch:

–build a portfolio anticipating a 10% up year, but thinking results may–like 2010–be a bit better than that

–figure the US will have positive surprises, emerging markets’ relative gains will slow, and worry about the EU

–remember that the current bull market will enter year three in about two months.  It’s not too soon to look for signs of decelerating economies (there are none that I see so far)–but way too soon to take any action

–the US market has already started to rotate away from value names toward growth ones.  This movement may be more significant for performance in 2011 than sectoral allocation.  In other words, you may have to take the risk of owning individual stocks this year to make big relative gains.  I’m not necessarily recommending that you do, but it’s possible that sectors will show little differentiation from each other and the S&P this year.

December 2, 2010

The San Francisco Giants are now the World Series champions, having defeated the favored Texas Rangers in five games!!!

The S&P 500 started out strongly inNovember but a late-month swoon, prompted at least in part by troubles in Euroland and worries about fighting between North and South Korea, pushed it slightly into the red.  That’s more than ok with many professional investors.  The S&P is still up 7.9% on a total return basis year to date.  So unless the relative movement of the individual index constituents in your portfolio has pushed you from outperforming to underperforming, you’re probably content to close the books on 2010 and enjoy the holidays.  Besides, the higher the market goes in 2010, the harder it will be to show positive performance in 2011.  And, of course, expectations were pretty low for investing profits in 2010 for most of the year so clients will likely very be happy with up 8%.

Despite the fact that the S&P lost ground in November, it wasn’t the aggressive sectors but the defensive sectors that took their lumps during the month.  This is the opposite of what one might expect, and is certainly a different pattern than we’ve been seeing for down months over the past year and a half.

Here are the sectors listed in order of their performance for November.  As usual, the sectors I’ve been overweight in the imaginary portfolio I’ve been running on this page are market by + for overweight and ++ for doubly overweight.

Energy     +5.1%          +

Consumer discretionary     +2.4%

Materials     +.9%          +

Industrials     +.8%          +

S&P 500     -.2%

Financials     -.9%

Staples     -1.4%

Telecom     -1.4%

IT     -1.8%     ++

Healthcare     -3.2%

Utilities     -3.6%.

It’s hard to know what to make of this pattern.  My guess is that the defensive sectors had a catch-up rally during the late summer and early fall, but that’s over so they’ve begun another period of underperformance until valuation differences cause another rally.

Ireland and the Koreas aside, the notable event during November for the stock market is the increasing heavy weight of evidence that the US economy is starting to expand at an increasing rate.  Leading indicators suggest that this rebound, driven by increasing consumer spending, will accelerate into 2011.

Let’s pretend that we have no fundamental information for a minute, and just look at the charts.  After surging to just under 1230 on November 5th, the S&P bounced back down almost immediately.   It looks like it is settling in at the 1175-1180, where it spent much of October.  The index has also had two impressive intraday rallies on the 29th and 30th that pushed the index back to 1180 despite what seems like early-day selling coming out of Europe.

This suggests that positive domestic earnings news is offsetting worries about European and Asian political troubles.  It’s too early to be sure that the 1175-80 line will hold, but my guess is that it will.

The hypothetical portfolio?  It gained about 10 basis points vs. the index for the month.  Overweights in energy, materials and industrials more than offset the negative effect of underperformance by IT.

I’m actually making a portfolio change this month.  In late summer of 2009, I removed the overweight I had in Consumer Discretionary.  Arguably my biggest mistake with the hypothetical portfolio to date.  My reasoning was that profit recovery would come first for business and only later for the consumer.  While this may be what actually occurred in the US economy, Consumer Discretionary has nevertheless been the shining star of Wall Street since my move.  The sector as a whole is in first place, up almost 21% year to date.  It has outdistanced the index by 15 percentage points, and the next closest sector, Industrials, by more than five.

Even though you’re supposed to buy low and sell high, I’m reinstating the overweight in consumer discretionary.  I’m doing this based on the idea that a resurgent consumer during the holiday season and into 2011 will drive even further outperformance.  On an emotional level, I don’t feel that good about this move.  Logically, though, I think I should make it.  Let’s see how it works out.

October 31, 2010

Happy Halloween!

Go, SF Giants!!

As Octobers go, this one was a very smooth ride.  Mutual funds were, as I’d expected, not the big sellers they usually are this time of year.  Corporate earnings reports have been salted, so far, with a few more earnings disappointments than has been the case in previous recovery quarters.  But beneficiaries of dollar weakness and those with exposure to emerging markets or the high-end consumer continue to surprise on the upside, even as the overall US economy’s expansion remained at a sub-par 2% rate.

This mix produced a gain of 3.7% for the S%P 500 of 3.7%–3.8% on a total return basis (i.e., including dividends).  Year to date, the index has gained 6.1%–7.8% on a total return basis–making 2010 look more and more like a statistically “normal” year, despite the sometimes violent ebb and flow of investor sentiment since January.

On a sector basis, October was a typical bullish month for this recovery, with aggressive sectors outperforming and defensive ones lagging.  The results break out (capital changes, not total returns) as follows (with overweightings in the hypothetical portfolio marked by + and ++):

Materials     +6.6%     +

IT     +6.5%     ++

Energy     +5.6%     +

Consumer discretionary     +5.5%

S&P 500     +3.7%

Staples     +2.8%

Industrials     +2.6%     +

Healthcare     +2.1%

Financials     +1.4%

Utilities     +.9%

Telecom     -.1%

The hypothetical portfolio (meaning if you had 87.5% of your money in an S&P index fund or ETF and the rest in sector funds, 2.5% where each + is, above) gained about 20 basis points vs. the index for the month, pushing it squarely into the plus column for the year.  Industrials, which have ben market leaders in 2010, faltered a bit in October.  But the other overweight sectors, which have not made much of a positive contribution year to date, finally decided to add significant outperformance.

(Why 87.5%?  The portfolio started out at 85/15, but in the fall of last year I began to think the Consumer Discretionary sector had provided all the outperformance it was going to in an economy that would be marked by weak consumer spending.  So I removed the +–and left the portfolio at 87.5/12.5 since then.  This has been by far my biggest mistake of the past year. More about this in this year’s post-mortem analysis.  However, it’s interesting to note the consumer’s resilience in an economy with 9%+ unemployment. )

No changes for this month.

Where to from here?

Usually, the S&P rallies through yearend from the depressed level of mid-October caused by mutual fund selling.  But the selling didn’t occur this month.  Other taxable investors–corporate and individual–usually do their tax selling in November and December.  But this is typically not a defining characteristic of the period.  I hear a commentator from the Wall Street Journal saying a few days ago that mutual funds were saving up their selling of winners for their new tax year to begin on November 1st.  But if I’m correct–and I’m pretty sure I am–that funds have large realized loss carryforwards, that selling should have been done in October, to use the deductions in the earlier tax year, not held over into the new one.

By far, however, the most crucial task for an investor at this time of year is not to try to figure out the twists and turns of the market over the next few weeks, but to figure out how to position the portfolio for 2011.

I’ve already begun to write about this, under the heading of Strategy: Shaping a portfolio for 2011.  My thoughts, so far:

–I think next year will be another positive year.

–I’ve mentally pencilled in +10%, but that’s the kind of default number you put down when you have to say something and can’t think of anything better.

–In order by relative strength, world economies you can invest in will look a lot like 2010, that is:  the Pacific, the Americas, Europe.

–There’s no reason for the US$ to be particularly strong, but maybe all the bad news is already out on the table.

–The passage of time since the worst for world economies will likely give consumers in Asia and the Americas more confidence.  Government austerity programs in Europe may have the opposite effect.

–The consensus always underestimates the resiliency of the American consumer and the innovativeness/adaptability of US corporations.  The offsetting factor in the present instance is the depth of the damage done to the US economy over the past ten years by Washington and the big banks.  Gridlock would be the optimal result of the upcoming election, in the view of the consensus.  I agree.

For now–meaning until I get a better idea, I’m assuming that 2010 will end, and 2011 will begin, pretty much with things as they are now.  But stock markets are futures markets.  This is, they factor into today’s prices stuff that may happen three, or six, or twelve months from now.  As investors’ horizons extend more and more, the market becomes more susceptible to a change in the investment pecking order as investors begin to discount the next big economic change.

Suppose, for example–and this is purely (for now) just an example, world stock markets began to think that the US economy would being to perk up and Asia would begin to slow down.  They would likely reflect this view in a substantial reversal of winning and losing sectors.  The dollar might rise.  And money might start flowing back into the US market from abroad.

Stuff like this always happens.  That’s not the issue.  And it catches the consensus unaware every time.  The real questions investors have to work on are:  what the next big idea is; how to play it; and, if you can’t figure anything better out, how to defend/hedge yourself against it happening.

More on this in the coming weeks.

October 5, 2010

The S&P 500 rose by 8.8% on a capital changes basis (8.9% including dividends) in September.  According to people who look up these things, that makes it the best September in over seventy years.  The market also showed the pro-cyclical configuration of industry winners that has been missing from the S&P for a while.

The good month pushed the S&P back into the black, year to date, at +2.3%.

These strong gains come during a period of normal seasonal weakness.  I don’t think this fact means much, though.  I’ve suggested in other posts that the yearend mutual fund selling that usually dominates trading during the second half of September and the first two or three weeks of October would be a non-factor in 2010.  Why?  Accumulated realized losses are so large for the industry that no amount of selling winners will offset them and allow funds to make annual distributions.  So why bother.         So far, this idea is turning out to be right.

In my mind, three factors are behind the market rise:

–fears that the US economy will fall back into recession–never plausible, but then most fears aren’t–have receded,

–the dollar has fallen against the euro and the yen by about 10% over the summer.  This means the value in greenbacks of foreign earnings, which make up over half of the S&P’s total, has gone up.

–investors are beginning to factor into prices the possibility that 2011, which is right around the corner, mill be an up year for profits.

I think the second of these is the most important, although I perceive it to be the least talked about.

The sectoral returns for the S&P 500 for September (with the usual + and ++ for overweights in the hypothetical portfolio (no new name yet, sorry)) are as follows:

IT          +12.1%     ++

Industrials          +11.2%     +

Consumer Discretionary          +11.0%

Energy          +9.1%     +

Healthcare          +8.8%

S&P 500          +8.8%

Telecom          +7.9%

Materials          +7.5%     +

Financials          +6.0%

Staples          +5.4%

Utilities          +2.6%

The hypothetical portfolio, which will be happy to see the end of 2010, gained about 20 bp during September.  This brings it bak up to within a few basis points of even with the index, year to date.  I don’t see any reason to make changes.

Looking ahead, but only a bit, September-quarter earnings report season will soon be kicking off.  This one will likely display very good absolute numbers.  How it will sack up against analysts’ expectations is harder to call.  On the one hand, the dollar decline plus continuing robust growth in emerging markets will be positives.  On the other, analysts eventually catch on to the fact that the trend has changed for the better and get tired of missing reported results badly.  So they will tend to pad their estimates, raising the possibility that the positive earnings “surprise” factor this quarter won’t be that large.  Analysts can’t go too wild, however.  There are companies who’ll insist that analysts not deviate from published company guidance (which is considerably below what the firm hopes to achieve), on pain of loss of access to top management.

My guess is that, barring the unlikely event of surprisingly bad corporate earnings, the upcoming reports will help sort out winning and losing firms and sectors but have little overall effect on the market level.

Technically speaking, I think 1150 on the S&P 500 is the new 1100, an area of resistance that the market will struggle to break through on the upside.  1100 is the new 1050, an area of support.  Perhaps more importantly, I think that as investors gain more confidence that the global economy is healing itself, they will begin to release their death-grip on the charts and begin to look at earnings growth and PE levels more closely.  If that’s correct, the charts will gradually lose their power.

1200 by yearend?  Too low a target?

September 3, 2010

This is the start of year two for Keeping Score.  Happy Anniversary!

As I’ve mentioned in other posts, August is a peculiar month for stocks because its combination of industrial downtime, vacations and various festivals mean that around the world the most senior investment professionals–the ones who make the most important decisions–are away from their desks for most of the month.

Nevertheless. this year August had a distinctive tone to it.  Not only did defensive sectors continue the outperformance they showed in July, but Telecom and Utilities were up during a period when the S&P was down 4.8%.

the numbers

Sectoral returns for the month, with overweights in the hypothetical portfolio market by + and ++, are as follows:

Telecom     +2.3%

Utilities     +.9%

Staples     -1.6%

Healthcare     -1.8%

Materials     -2.9%     +

Consumer discretionary     -4.1%

Energy     -4.7%     +

S&P 500     -4.8%

IT     -7.2%     ++

Industrials     -7.3%     +

Financials     -7.9%

observation

First of all if we try simply to describe what went on in August,  before attempting to decipher what the market is saying, I’ m left with three observations:

1.  Looking only at the chart of the S&P 500, the index reached around 1120 early in the month but couldn’t move higher.  Once that resistance was felt, stocks promptly moved south.  They spent the last few days of the month trying, equally unsuccessfully, to penetrate below 1040, before rebounding sharply during the opening two days of September.  Since the beginning of June, the index has been repeating this same general pattern.

2.  On a sectoral basis, the market is rotating toward Telecoms and Utilities, two former whipping boys of the first phase of the bull market.  The August figures alone don’t show this all that clearly, since one would expect defensives to outperform while the market is going down.  On a two month basis, though, the index is up 1.8%, while Utilities are up 8.3% and Telecoms up 10.4%.  The only other sector that can match this strength is Materials, which is up 9.0% for the two months.

The worst sectors on a two-month basis, and the only ones to lose money over the period, are Healthcare, Financials and IT.  Unlike the three star sectors, the clunkers all move vs. the market as one would expect.

interpretation needed

1.  Up until the past couple of months, this market has been a chart reader’s paradise.  No fundamentals needed, just follow the pattern of rising highs and rising lows.  At this point, however, I think that by choosing your points of reference you can “see” just about anything you want in the price movement patterns.

The pertinent market question is when we break out of the current trading range, do we break out to the upside or the downside.  The masters of this sort of voodoo say (I think) that if the tops are descending and the bottoms are relatively flat, then the breakout will be to the upside.  If the tops are flat, and the bottoms are rising, it’s the reverse.  All well and good.  But look at a chart of the S&P and tell me which is the case.  It all depends on what points you include or exclude from your chart lines.

2.  A related question.  Is the market rotating into Utilities and Telecoms, both defensive sectors, because they’re defensive or because they’ve barely moved since March 2009 and most of the rest of the market has skyrocketed.  In other words, is this movement based primarily on relative valuation.  Sure, there has to be a sense that the aggressive sectors have gone cold for the moment.  But is the main idea for professionals that they can pick up a little outperformance by playing a countertrend movement, or are they beginning to bet that the bull market party is over?  More important, if it’s the second, are they right?

my thoughts:  not much change from last month

It seems to me that the recovery from the global financial crisis has gone about as expected so far.  In contrast with the rebound from an inventory cycle downturn, where real GDP goes up 5%-7% for a quarter or two on pent-up demand before settling back to around 3% growth, we’ve had a crippling crisis, so we’ve had a couple of quarters of 4% before settling back to the hard work of eking out numbers above 2%.

I find it very hard to imagine that the US slips back into recession any time soon.  I find it even harder to imagine that the rest of the world–which is, as expected, doing a lot better than the US, and which accounts for half the revenues of the S&P 500–will do so, either.

My best guess is that S&P 500 earnings are up 10% next year, we’ve become reconciled by then to slowly rebuilding the US economy and the S&P is 20% higher than it is now.

What troubles me about this forecast is that it is so much more bullish than I perceive the consensus to be.

I have a second thought.  Maybe the next few years turn out to be a repeat of the second half of the Seventies.  That was a time when the index didn’t do much of anything but investors like Peter Lynch of the Fidelity Magellan Fund made a fortune.  Then the trends that moved stocks up were the move to the suburbs, the rise of specialty retail, disinflation.  Now the important themes may be the affluent consumer, the creative destruction caused by the Internet, companies with vibrant foreign businesses, dividend-paying stocks.If the latter idea turns out to be closer to the mark, it may take the extra effort of selecting individual stocks with good prospects–not just sectors–to beat the market handily.

I think a key factor supporting either of these scenarios is for the S&P to establish a base.  The next month or two will determine whether it will be at the 1040-1050 level or not.

Take a look at my post on market patterns in September-October.  My guess is that this month and next will be a stronger period than average.  More on this point.

the hypothetical portfolio

It gave back most (about 17 basis points) of July’s gains.  Energy was a neutral influence during the month.  Relative losses in Industrials offset relative gains in Materials.  IT did virtually all the net damage.

No changes.

August 1, 2010

What a difference a month can make!  July reversed all June’s losses and then some.  It was also a quite distinctive month, marked by a broad sectoral participation in the advance that has been very atypical of the market in the recovery from the lows of March 2009.  The S&P 500 index itself gained 6.9% for the month.  As you can see from the numbers below, seven of the ten S&P sectors beat the index.

Only one sector, healthcare, was a conspicuous laggard.  Even telecom and utilities, which have been outperforming in down months and underperforming in up ones, beat the index.  Consumer staples, which is contending with profit slowdown issues caused by the slump in the euro, and financials, which appear to have guessed incorrectly in their trading operations that the US economy would accelerate in the second quarter (and that therefore stocks would go up and bonds would go down), were the only other sectors to fall below the benchmark.

The July returns by sector for he S&P 500 are as follows (with overweight sectors in the hypothetical portfolio (a better name is in the works) indicated by + and  ++:

Materials          12.2%     +

Industrials          10.3%     +

Energy          8.0%     +

Telecom          7.9%

Consumer discretionary    7.7%

Utilities          7.4%

IT          7.2%     ++

S&P 500          6.9%

Financials          6.6%

Consumer staples          5.8%

Healthcare          1.3%.

Note how closely bunched most sectors are around the index.  Only Materials and Industrials on the upside and Healthcare on the downside are significantly away from the index.

What does this mean?  At the risk of forcing the data to say more than is warranted, I draw two conclusions.

First, stocks as an asset class went up in July, because the market regarded the S&P at around 1000 as being too cheap, even given downward revisions in consensus expectations for near-term growth in the US economy.

Second, two sectors stand out.  The market really likes Industrials (more than 9 percentage points better than the index so far this year) and dislikes Healthcare (more than seven percentage points below the index).  By and large, other outperforming sectors were playing catch-up last month.

The hypothetical portfolio gained a little more than 25 basis points vs. the index during July, half of that from the outperformance of the Industrial sector.  Again, no changes for August.

Where to from here?

Over the past several months I think Wall Street and other global investment centers have been trying to come to grips with two issues.  The economic recovery in the US is going to be far different from the inventory cycle pattern.  The latter typically has shown a quarter or two of 5%-6%-7% real growth, as consumers make purchases deferred during recession, before fading back to increases of 3%-4%.  In this recovery, we may already have seen the peak surge of “pent up” demand in overall growth of around 3% and are experiencing the fade back to 2%-2.5%.

Second, profits in the US stock market are no longer closely correlated with the domestic economy. For example, in the case of WYNN, which I wrote about on Friday, over 100% of earnings come from China.  US operations continue to make losses.  Because of this phenomenon, it seems to me that the US market can go up even if the US economy doesn’t follow suit.

Related to this second point, publicly listed corporations are making it clear that demand is not strong enough for them to expand capacity and hire more workers in the US.  But it is strong enough for them to restore salary and benefit cuts and maybe grant raises.  This implies that consumer spending, which makes up the bulk of the domestic economy, will rise–not because more people have some discretionary income, but because some people (read: the 90%+ of the workforce now employed) will have more income.

This is an unusual situation for the US and may present a serious social problem.  But–taking of my hat as a human being and putting on my hat as a portfolio manager–the stock market should still go up.

I don’t know how long the market will struggle with these issues.  The charts may tell us something, however.  We’re back at the magic 1100 mark.  If we can stay above it, I’d begin to believe that investors are reaching a bullish conclusion.  Personally, I think it’s not a matter of if, but of when.

July 3, 2010

Well, the best anyone can say about June is that at least it’s over.  Good riddance.

We’re at the halfway mark for the year and are down 6.7%, thanks to a 5.4% loss for the month that pushed the second quarter deeply into the red at minus 11.9%.

One way of looking at market developments during the year is to think that 2009′s dreams of a fast and painless bounceback from recession, unsullied by aftereffects of the housing crisis and the consequent damage to the word banking system, were shattered in the just-completed quarter by the harsh reality of the weakened 2010 consumer.

Yes, there may be some of that in today’s market.  An old Wall Street cliché is the mining company with no other assets that makes a major gold discovery.  The stock goes up every day until the mine opens, because speculators hatch increasingly more bullish stories about the mine’s ore quality and output potential.  Then reality intrudes as production begins.  No matter how good  the output, it can’t match the speculators’ anticipations and the stock falls.

Yes, it’s true that nothing is ever totally discounted until the event occurs.  But I don’t think this can be the whole story, though.  True, recovery in the US seems to be shifting into a lower gear.  But the path of the economy isn’t that different from expectations of three or six months ago.  Corporate profits have mostly been considerably better than analysts have anticipated, as well.

One candidate for what else may be going on is that there’s a new balance being set between the interests of short-term traders and long-term investors.  Taking the (considerable) risk of assuming something is different this time, it may be that in today’s market we have more short-term traders, who like and profit from, dramatic movements in the index, and fewer long-term investors, who in theory should be indifferent to short-term market movements but who in practice don’t like them.

Where would traditional active investors have gone?–to index funds, ETFs and, ironically, to hedge funds (who are like traditional active managers, except for having higher fees and lower returns).

This is material for a later post.  For now, let’s look at S&P performance for this month and year-to date.  The number (with the hypothetical portfolio overweights market by + and ++):

Telecom          -.4%

Utilities          -1%

Healthcare          -1.9%

Staples          2.8%

S&P 500           -5.4%

Energy          -5.8%           +

Financials          -6.0%

IT          -6.2%          ++

Industrials          -7.1%          +

Materials          -7.1%           +

Consumer Discretionary          -9.8%

Performance clearly ran along conceptual lines, with defensives as a group outperforming and economicially-sensitive underperforming.  Two items of note:  after a dreary relative fifteen months, defensives were a mile ahead of the index in June.  Also, consumer discretionary lagged the index, and the other aggressive categories, significantly.

For the quarter–I’m too lazy to list all the sector performances–the S&P was down 11.9%.  All sectors were down.  Utilities, Telecom and Staples significantly outperformed.   Consumer Discretionary inched ahead of the S&P; other sectors mildly underperformed, except for Materials, which fell 15.7% for the three months.

year-to-date figures

I find these numbers interesting.

Industrials          -2.0%           +

Consumer Disc.          -2.3%

Financials          -4.3%

Staples          -4.3%

S&P 500          -7.6%

Utilities          -9.2%

Healthcare          -9.8%

Telecom          -11.0%

IT          -11.0%          ++

Energy          -13.2%          +

Materials          -13.7%          +

What should we make out of this?  I don’t think there’s any definitive signal from the performance pattern, but three things stand out to me.  Global commodity industries, materials and Energy, are at the bottom of the pile.  One can think that speculators in the commodities underlying these industries are flattening out their books.  Whether this is in response to excessive risk-taking earlier in the year, or to genuine signs of economic slowdown worldwide remains to be seen.

Industrials, Consumer Discretionary and Staples, and Financials form a second grouping.  These stocks are substantially ahead of the index year-to-date.  Given that US-based Industrials make mostly products for consumers, the message from the index is that being linked to the US consumer is the best place to be.  That’s odd., since I would have thought a weak consumer in the US is among Wall Street’s biggest current worries.  This nexus bears close watching.

Everyone else, traditional defensives, Utilities, Telecom and Healthcare,  + IT, is  below the index but not by much.  This is also a curious group.  What jumps out to me is that on a six-month view there’s been no reason to buy defensives, despite the ugly market we’ve had recently.  IT has done poorly despite the rebound in corporate IT purchases now underway and the continuing success of smartphones.  Part of the underperformance is due to a sharp selloff of the sector in January.  Otherwise, the sector seems to be an aggregation of both big winners and big losers.

The hypothetical portfolio?  –another 15 basis point loss to the index, with all overweight sectors in the actively managed portion of the portfolio underperforming.

Where to from here?

From a technical point of view, it seems to me that the market is trying to settle itself into a trading range.  It has found a ceiling for itself at around 1100 on the S&P 500 and is now looking for a floor.  Prior to the recent signs of slower growth in the US, that would probably been around 1050-1060.  Now it may be 1000.  We’ll see in the next couple of weeks of trading.

Changes to the portfolio?  None.  Professional money managers are probably flattening their sector bets.  Depending on temperament, they may be upping their exposure to individual stocks vs. the index to keep the same general risk level (and potential for outperformance) or flattening their stock bets as well.  My experience is that doing this probably reduces the ultimate returns on the portfolio.  But it lowers volatility and minimizes second-guessing from institutional clients and/or their pension consultants.   So in a funny sense there’s a business reason for doing so.  But not one I care to employ.

May 30, 2010

As hazardous to equity investors’ wealth as May might have been—a loss of 8.2% on the S&P 500 apparently qualifying it as the worst May in seventy years (irrelevant, though useful cocktail party conversation)—at least it wasn’t dull.

Parts of downtown Bangkok burned.  The Koreas, North and South, threatened war.  As the Euro continued to sink, pundits planned euro/dollar parity celebrations.  Workers throughout Europe protested austerity measures proposed to help rescue the EU.  Then, of course, we had the “crash of 2:45,” or “flash crash” one day when one set of computers decided to sell and, detecting this, most buyers withdrew their bids—so the S&P dropped 5% and rebounded completely within a ten minute span.

On the brighter side,  iPads and smartphones are selling like crazy worldwide.  A welter of new corporate and government releases support the idea that a slow, but self-sustaining, economic advance has begun in the US.  And, toward the end of the month, signals began to emanate from China that contractionary economic policies are coming to an end there.

Form a technical point of view, I think we were due for a correction after the vigorous market advance that started in mid-February.  That’s just par for the course.  Three things make this one notable, to me anyway, among the bumps in the road we’ve encountered over the past 14 months:  its depth, its duration in time, and the suggestion toward the end of the month that hedge fund credit limits are being tightened (to me, the collapse in commodity prices and the end of month market gyrations smack of forced selling).

The break with the past pattern of declines makes the bottom harder to call.  I think it’s more important to note that many stocks are very attractively priced.  Europe-based international firms are the latest to be tossed into the bargain bin.

Turning to sector results for the month, every sector is in the minus column.  The pecking order is about what one would have expected, with defensive sectors at the top and aggressive ones at the bottom.  One exception: Consumer Discretionary outperformed.

The numbers, with hypothetical portfolio overweights marked by + or ++, are as follows:

Telecom          -3.9%

Staples          -4.7%

Utilities          -6.1%

Healthcare          -7.0%

Consumer Disc          -7.1%

S&P          -8.2%

IT          -8.3%     ++

Financials          -9.3%

Materials          -9.7%     +

Industrials          -9.8%     +

Energy          -11.8%     +

The hypothetical portfolio underperformed for the month by about 17 bp., dropping into the red versus the market, year to date, by about 20 bp.  C’est la vie.

As I’ve written elsewhere, I’m more bemused than frightened by recent market action, although I will admit to a few twinges in the pit of my stomach while looking at price action of the past week or so.  (Fear would actually be a good thing, since for me it’s usually an indicator that a downdraft is just about over.)  I’m convinced we’re still in a bull market.  So, no changes.

May 3, 2010

April was another positive month for the S&P 500.  The index gained 1.48% on a capital-changes basis.  The advance allowed the S&P to break through above the 1200 level, thereby restoring itself to the territory where it was trading at the time of the Lehman collapse in September 2008.

The market maintained the pro-cyclical bias it has had for more than a year.  The returns by sector, with overweights for the hypothetical portfolio indicated by + and ++, were as follows:

Consumer discretionary       +6.0%

Energy          +4.4%     +

Industrials          +4.1%     +

Utilities          +2.3%

IT          +1.8%     ++

S&P 500          +1.5%

Financials          +1.3%

Materials          +.4%     +

Telecom          -1.4%

Consumer staples          -1.6%

Healthcare          -3.9%

So far this year the sectors of the S&P have settled into three distinct groups.  The index is up 6.4% through the end of April.  Industrials and Consumer Discretionary, the clearest traditional beneficiaries of recovery in the US–and therefore the most aggressive bets for equity investors–have each risen by about 17%.   Healthcare, Telecom and Utilities, all defensive groups, are in the minus column.  The rest are clustered around +3%.

Domestic economic news continues to be good.  Profit growth for publicly-traded companies remains surprisingly strong.  Businesses are starting to rehire, so that they can keep up with expanding industrial demand.  The consumer is feeling more secure and is beginning to spend a bit more.  It’s becoming clearer to domestic economists, however, that the journey back to health for retail spending is going to take  another year at the very least.  I’ve held this view for a long time.  But, while correct, this insight hasn’t been of much use in the stock market, where consumer stocks have been rock stars.

The Greek crisis may be reaching its worst point.  Let’s hope, anyway.  It’s telling that troubles in Euroland have had very little impact on the US stock market.  The negative reaction to Greece has played out first and foremost in the price of Greek government bonds, and to a lesser degree in the price of the euro and EU stocks.  Arguably, the weakness last month in consumer staples stocks with significant European exposure is attributable to euro weakness.  But this is the way a bull market works–investors discount the positive news and ignore the rest.

The hypothetical portfolio?  It gained a little less than 15 basis points vs. the market for the month.  Strong gains in Energy and Industrials, plus more modest outperformance by IT, were tempered by weakness in Materials.

Changes?  None that I want to make.

Read tomorrow’s update of Current Market Tactics for more detailed thoughts on what I think the market is doing now.

April 4, 2010

March was a very strong month for the S&P 500 and brought the index into positive territory, year to date.  More significant, March marks a year of generally uptrending markets, interrupted only by mild corrections during June-July and January-February.

The index gained 5.88% during the month, with the pro-cyclical sectors, which we have become accustomed to seeing at the front of the pack, being there again.  The sectoral results for the S&P for the month (with overweight sectors in the hypothetical portfolio marked with + and ++) are as follows:

Industrials          +8.9%     +

Financials          +8.8%

Consumer disc          +7.7%

Materials          +7.6%      +

IT          +6.8%      ++

S&P 500          +5.9%

Telecom          +5.4%

Staples          +3.6%

Energy          +2.9%     +

Healthcare          +2.5%

Utilities          +2.4%

Unlike February, when some economic statistics began to cast doubt on the sustainability of recovery, March produced almost uniformly strong numbers despite disruptive weather in many highly populated areas of the US.

The hypothetical portfolio gained about 10 basis points versus the index.  Strength in Industrials, Materials and IT more than offset (continuing) weakness in Energy.  Again, the Consume Discretionary sector has been strong, despite continuing evidence that the current recovery is a tepid one.

I’ve given more thought to, and done more work on, the question of how long a pro-cyclical stance–which has been the key to success over the past year–will remain a viable strategy.  More on that in the revision to Current Market Tactics that I’ll post tomorrow.  For now, suffice it to say that I’m making no changes to the portfolio’s weightings.

March 1, 2010

Well, we made it through February.  The month didn’t seem like a whole lot of fun, though.

We started out, after a couple of days of stabilization, by dropping down the elevator shaft, breaking below 1050 on the S&P 500.  At the same time, worries intensified that the large amount of Greek government debt–plus the fact Athens supplied falsified national accounts to Brussels to make things look better than they were–would bring down the EU, in an encore of the Asian debt crisis of 13 years ago.

On top of all this, US unemployment claims began to rise again (maybe weather related, but a worry nonetheless).   And consumer confidence dropped sharply toward the end of the month.

If we had all this information on January 31st, how many of us would have guessed that the stock market would be up in February?  Probably not that many.  Yet, the S&P did post a gain of 2.9% for the shortest month of the year, and it displayed the bullish sector orientation that has been its hallmark for almost a year.

Here are the sector-by-sector results for February (with overweight sectors market by + or ++):

Consumer Disc.     +5.3%

Industrials              +4.6%    +

Materials                 +4.2%    +

IT                               +4.0%    ++

Financials              +3.4%

S&P 500                +2.9%

Cons.Staples          +2.7%

Energy                      +1.9%  +

Healthcare              0.0%

Telecom                  -1.3%

Utilities                   -1.9%

This is a very familiar table.  The economically sensitive stocks are at the top and the defensives are at the bottom.

You might observe that bounceback from the pummeling they received in January is part of the reason aggressive stocks are at the top of the list for February.  That’s a valid point.  But year-to-date (sorry, not listed), Industrials and Consumer  Discretionary are the strongest sectors, and (what’s new?) Telecom and Utilities are the weakest.

One might (actually, should) also observe that–again, year-to-date–consumer-related industries like Industrials (I know, but if you read the lines of business for these companies, they make lots of consumer stuff) Consumer Discretionary and Consumer Staples are the strongest, and IT is pretty close to the bottom of the pile.  What does this say for my contention that the economic recovery in the US will be led by industry and only followed with a lag by the consumer?  Not that much.  I’m not ready to change m mind, but my idea is clearly out of step with what everyone else is thinking.

The hypothetical portfolio?  It gained about 10 basis points for the month, partially reversing its losses of January.  No changes for March.

What’s my biggest worry right now?  I’ve got a little one and a big one.  The lesser concern is the weakness of the euro.  That’s good for European growth but bad for US companies with EU exposure.  In a real-life portfolio with individual stocks, I’d be shifting my holdings, particularly in consumer sectors, still keeping companies with non-US exposure but not those heavily dependent on earnings from Europe.

My bigger worry is a conceptual one.  In the stock market, nothing is forever.  Things that were true eventually become false–sometimes gradually, more often suddenly.  And the structure of the hypothetical portfolio has been right for almost a year.  While this doesn’t exactly mean the strategy is living on borrowed time, it will be at some point.  And I don’t have great conviction (yet, at any rate) about what the next big change will be.  Any ideas?

(By the way, the first modern thinker I’m aware of who made the concept that things change into their opposites the centerpiece of his reflections was Hegel, in the early nineteenth century.  He was followed by his disciple, Marx, through whose political writings the idea spread to large parts of the world.  Of course, there was also Schopenhauer, Freud…

George Soros, admittedly a master marketer, claimed, in a moment of stunning chutzpah, that the idea was his own invention in The Alchemy of Finance. This is a lot bigger whopper than Al Gore saying he invented the internet.   But no one in the investment community appears to have noticed.)

February 2, 2010

The S&P 500 opened 2010 the same way it closed 2009 (ignoring the last few hours of trading)–with surprising strength to the upside.  The good times lasted a little less than two weeks, until the index seemed to run into a brick wall at 1150.  After bouncing off that level a couple of times, the market reversed direction during the last third of the month, losing about 7% in value by the 29th.

What’s going on?

The market always moves in a two steps forward, one step backward rhythm.  We’ve had nothing but giant steps frontward since a correction in late June-early July.  So we were due for a counter-trend move downward.  Here it is.

How deep will the fall be?  How long will it last?  No one really knows.  We can’t gather our stocks together, give them a rousing pep talk and then expect them to reverse direction and start rising again.  We have to let the selling run its course. (As I’ve mentioned in Current Market Tactics, a period like this is usually an excellent chance to upgrade a portfolio.)

If I had to try to explain what’s happening, my guess would be that–thinking in the simplest possible terms–equity investors came into the year thinking that the S&P would end 2010 at a level of 1250 or so.  When the S&P reached 1150, that implied that new buyers could expect a gain of about 8% from holding stocks for a little less than a year.  This wasn’t enough reward to take the risk of buying, so the market couldn’t go up.  Given that it virtually never stands still, there was only one way it could go–down.

If the previous paragraph is correct, the market will settle in when there’s enough space between it and 1250 for investors to make a significant gain.  If “significant” is 20%, then the market will stabilize at around 1050.  If the number is 15%, then the index level is 1070.

I’ve been tempted to delete this section, but have decided to leave it in.  Whatever the details, my opinion is that what we’re in is just a correction in an ongoing upward market.  Our main concern as investors should not be with every twist and turn in the road–the 5%s and the 10%s–but with the longer-term picture–the 30%s and the 50%s.  The little moves just take too much time and effort.

The S&P 500 lost 3.7% for the month.  The general pattern in pullbacks like this is that the more aggressive stocks fall the most, defensive stocks the least.  Stellar performers in the up phase fall to earth the hardest, laggards (you can’t fall off the floor) the least.

Most sectors held true to form last month, during a time when no sector posted a positive return.  Exceptions can often be instructive, although I don’t now know what to make of January’s outliers.

Industrials and Consumer Discretionary, although both economically sensitive sectors, outperformed.  They’re also more closely connected than the sector names would suggest, since many US-traded industrials ultimately serve the consumer sector.

Telecom and Utilities, which seemingly operate in an alternate (read:  loser) universe of their own, underperformed–telecom by a very large amount.

Here’s the S&P performance, by sector, for January.  As usual, the overweights of the hypothetical portfolio are marked by + or ++.

Telecom          -9.3%

Materials          -8.7%     +

IT          -8.5%     ++

Utilities          -5.1%

Energy          -4.5%     +

S&P 500          -3.7%

Consumer Disc.          -3.0%

Financials          -1.5%

Consumer Staples          -1.3%

Industrials          -1.2%     +

Healthcare          -.4%

The month was a mixed bag for news.  Most company results have been outstanding, showing strong operating earnings and (for the first time) rising revenues.

On the other hand, the € has plunged after the new government in Greece revealed that the prior administration had falsified the national accounts, so that the debt-laden nation actually has a budget deficit of 12.7% of GDP, or about twice what had been previously reported.

The failure of Congress to embrace any freeze on spending increases for even the tiniest portion of the Federal budget has underlined how difficult it will be for the US to get its fiscal house in order.  Democrats lost the Massachusetts senate seat held by the Kennedy family for many decades in this most Democratic of Democratic states to an unknown Republican.  This has sent shock waves through Washington, frozen legislative action on health care and called the entire Democratic national agenda into question.  (Given that most investors believe gridlock in Washington is the best one can hope for, it’s not clear whether this is good or bad.)

To the hypothetical portfolio:  It lost about 35 basis points to the market during the month.  Results would have been worse, were it not for the outperformance of the overweighted Industrial sector (all other overweights underperformed).

Changes?  I’m making none.  I gave a fleeting thought to putting the + I took from Energy last month back to work.  But I’m content to let the current selling run its course.  I’d also want to add the + to IT, which I think would violate the spirit of this very conservative portfolio.

January 11, 2009

Results from April 1 to yearend

Here are the sectoral results for the S&P 500 for the time the hypothetical portfolio was in operation during 2009:

Financials       +90.6%

IT        +58.2%          ++

Consumer Disc.        +56.6%          ++ until end-September, then equal

Materials        +54.7%          +

Industrials        +51.2%          +

S&P 500        +43.3%

Staples        +27.2%

Energy        +26.4%          equal until end September, then + or ++

Utilities        +23.0%

Healthcare        +18.5%

Telecom        +13.9%

I’ve done a more careful calculation of the portfolio performance, which came in at just over 110 bp ahead of the index.  Why the difference from my earlier estimate?  During the year I had been only doing month by month numbers.  I finally entered the December 31st index and sector data into my spreadsheet, which allowed me to see the added positive effect of the outperformance achieved from April-July in a market that continued to rise.  I knew the “extra” outperformance was there.  I just didn’t know how much.

The best thing the portfolio did was to heavily overweight TI.  The worst mistake was not to overweight financials.  I also should have let well enough alone in September.  Instead, I made two errors, one by removing the overweight in Consumer Discretionary and one by creating an overweight in Energy.

January 5, 2009    HAPPY NEW YEAR!!!

Wall Street marked time for most of December, before rising into new recovery high territory around 1230 on the S&P 500 late in the month, and then dropping sharply in the last few hours of trading on December 31st.

The overall result for the month?–the S&P gained 1.8%.

December and January are both influenced by the actions of taxable investors.  In December, they typically sell losers, or match gains and losses by selling a few winners as well.  In January, taxable investors usually sell winners they have nursed into the new tax year.  And investors of all stripes tend to buy the shares of companies beaten down in the prior month’s tax-loss selling (a phenomenon that has become known as the “January effect”.)

What struck me about December was not so much tax-selling as the pattern of sector performance during the month.  Unlike the relentless buying of economically-sensitive sectors that has marked the market almost every day since March, during last month two defensive sectors, Telecom and Utilities, had their day in the limelight, along with two cyclical counterparts, IT and Consumer Discretionary.

Here is the index performance by sector for the month (as usual, overweight sectors in the hypothetical portfolio are marked with + and ++).

IT          5.6%     ++

Utilities        5.2%

Telecom        4.6%

Consumer Disc.        4.3%

Healthcare        1.9%

S&P 500        1.8%

Materials        1.4%     +

Industrials        1.1%     +

Staples        -.7%

Energy        -1.0%     ++

Finance        -1.6%

Thoughts about the month:

Economic news, both in the US and in the rest of the world, has been a bit better on balance than expected.  Prospects for the technology industry appear to be particularly good.  Treasury yields have been rising along with the dollar, as investors appear to be beginning to anticipate (very far in advance, I think) a move to by the Fed normalize (i.e., raise) short-term interest rates from the present intensive care state.  So far, this has had little negative effect on stocks.

I’m in the process of writing a series of posts on shaping an equity portfolio for 2010.  See them for more details.

The hypothetical portfolio?  It outperformed the S&P 500 by about 4 basis points in December.  The IT overweight produced 19 basis points of outperformance, more than enough to offset the drag on performance from the other three overweight sectors, al of which lagged the benchmark for the month.

I’ve just made a rough calculation of the hypothetical portfolio’s performance from April through December.  It looks to be slightly under 100 basis points, or 1%.  That would be $1,000 for every $100,000 invested.  It’s not enough to retire to Florida on, but it’s not nothing.  And, after all, what can you expect from working for half an hour or so a month?

Once I’m finished with my 2010 review, I’ll do a more careful analysis.

Changes for the month–I’m tempted to do nothing–again.  But I’ve decided instead to remove one of the +s from Energy.  Two reasons:  the sector isn’t performing in the way I’d expected, and we’re entering the weakest season of the year for oil prices (the heating season in the northern hemisphere is almost over, as far as oil refiners are concerned anyway, and the driving season doesn’t get under way until April, so prices end to sag from January-March).

December 2, 2009

November is typically a good month for the market as it enjoys a bounce back from mutual fund yearend selling.  The “good month” proved true again in 2009, although it’s not clear to me that mutual funds were heavy sellers in October.

What was really notable for November, though, was that the winners and losers for the time period didn’t adhere to the straightforward aggressive-stocks-outperform/defensive-stocks-lag pattern that we’ve seen since the S&P bottomed in March.  healthcare and telecom were among the winning sectors; IT and energy fell behind.  The utilities sector seems to be the only one continually denied a place in the sun, as was the case again in November.

The results for the month, by sector, are as follows (as usual, the overweights in the hypothetical portfolio are marked with + and ++):

Materials     11.3%    +

Healthcare     9.1%

Industrials     8.7%    +

Consumer disc.     6.7%

Telecom     6.4%

S&P 500     5.7%

IT     5.0%    ++

Financials     4.2%

Utilities  4.2%

Staples     3.8%

Energy 2.9%     ++

The hypothetical portfolio underperformed the S&P by about 7 basis points.  My decision to add to the Energy overweight is the main culprit, and offset gains from being mildly overweight Materials and Industrials.

Thoughts about the month:

The Reserve Bank of Australia just raised short-term interest rates there for the third time this year.  This is yet another sign that economies in the Pacific are rapidly returning to normal.

The dollar continues to decline, falling by 4.2% against the yen and by 2.0% against the euro during November.  I think further dollar weakness is in prospect, at least until the US economy is strong enough that the Fed can begin to talk about raising short-term interest rates from their present crisis-low levels.   This implies that companies with foreign businesses or an export orientation will likely continue to have superior earnings growth.

The returns from Black Friday and Cyber Monday are in.  At $42 billion+, Black Friday was about flat with last year’s spending.  Cyber Monday was up better than 10% year on year, at close to $1 billion (although personally, I’ve probably gotten 10x more Cyber Monday email coupons than I got last year.  How about you?).

Frugality is this year’s watchword so far.  Electronics are in, clothing is out.  Department stores, which I think offered the largest bargains, appear to have been the biggest winners.   I continue to think that companies that sell primarily to younger consumers will do the best, although there isn’t much evidence so far to prove or disprove my thesis–other than sales of the iPhone and Call of Duty:  Modern Warfare 2 .

As you can read in my posts on Dubai World, the mini-emerging markets scare just before Thanksgiving is proving to have little effect on the rest of the world.  I suspect, though, that we’ll be hearing about political and financial developments within the UAE for a long time to come.

As for December, I see no need to make any changes in the hypothetical portfolio, so I’ll just stand pat.  If this year follows past form, investors will work for the first two weeks or so and then begin to close up shop to celebrate the holidays and recharge their batteries in anticipation of the new year.  In the beginning of the month, the market may go up, but will typically drift thereafter as fewer and fewer market participants remain at their desks.

November 2, 2009

This October was a strange month.

Because virtually all mutual funds end their fiscal years on Halloween, and since funds are required to distribute their income and realized capital gains to shareholders, fund companies typically use October to adjust the size of the distributions they will make.  Either they sell winners to adjust upward, or they sell losers to adjust downward.  But whatever the situation, they usually sell.

Although the timing of the sales varies from year to year, it’s almost always completed before the last week of the month begins–assuming no emergency arises.  That’s to try to make sure no trading problems spill over from one fiscal year to the next.

This year, though, the first half of October was very strong.  After that, stocks drifted down under what I’d regard as light pressure until the last few days of the month, when selling accelerated.  Maybe that just shows that the sellers weren’t mutual funds.

In analyzing the month’s price action, one would expect that economically sensitive stocks would outperform while the market was going up, and underperform as investors started to take profits.

But that expectation of mine didn’t quite hold true, either:

financials, industrials and utilities were all very weak throughout the month;

on the other hand, consumer staples, one of the worst areas to be in through most of this year, was strong during both halves.

Here are the numbers for the S&P by industry (as usual with overweights marked by + and++):

———–thru 10/19———-10/20 on———-total

S%P 500             3.9…………(5.6)…………(1.9)

staples                4.1………… (2.9)………… 1.0

energy                10.5 ………..(6.5) ………….. 3.2         +

IT                         3.2 …………(3.4) ………..(.4)            ++

healthcare           2.7………… (4.9)…………(2.3)

consumer disc.         4.3 ……….(6.4)…………(2.5)

telecom               (3.5)…………(1.5) ………..(4.8)

materials              5.1 ……….(9.5)…………(5.3)              +

industrials             3.2……….(7.6) ……….(4.7)               +

utilities              2.8………..(5.9)……….(3.2)

financials             2.2 ……….(8.0) ……….(6.0)

The hypothetical portfolio outperformed by about 10 basis points.  The positive effects of the overweights in energy and IT more than offset the negative contribution from the overweights in materials and industrials.

Thoughts about the month:

General economic indicators, as well as listed company comments, both continue to confirm that the worst is past for the world economy and a recovery has begun.  Australia and India have already begun to raise interest rates, with other countries doubtless soon to follow.  Rumors have begun to circulate that even the Fed has become comfortable enough to begin considering how to alter the wording of its post-meeting statement to signal that ultra-low interest rates won’t last forever.

At the same time, it’s clear that the US, as ground zero for mortgage abuses, and the UK, where most of the related securitization abuses occurred (to immense profit through employment and taxation), will lag in the upturn.  This is what recent falls in consumer confidence may be signaling–people may be working out that a high school diploma and a friend at a construction site or in a local plant aren’t going to be the job guarantees they have been.

From a stock market point of view, the final quarter of the year is usually a strong one.  With the S&P up 26%, year to date, that may not be true this time around, although I still don’t see any need to adopt a defensive posture.

If I had to make a guess about 2010, I’d expect that we’ll be at 1300 on the S&P 500 by December next year.  That would be about a 15% gain, which I think would be reasonable.  We should certainly be seeing a more vibrant consumer by that time.

I think the really uncharacteristic performer during the month was the industrial sector.  I’m not quite sure why, other than if you take what we call “industrials” in the US and examine what they make, a lot of it is oriented toward the consumer.  But that’s not new news.

Changes to the portfolio:  I’m going to reduce industrials to market weight and put the + that results into energy.  I’m tempted to take the + I removed from consumer discretionary and notionally buy the Vanguard emerging markets index fund with it, but for now, I won’t.

My wife told me I shouldn’t say that investing is boring, as I mentioned last month, pointing out that I have spent the better part of her and my lives doing this.  Maybe I should say instead that investing is a zen-like activity, at least in the sense that you have to remain calm and unemotional to be successful.  You can’t get too high or too low, in reaction to the random ups and downs of the market.  And you also have to remember that it’s a mistake to become too emotionally attached to a given stock or a given point of view.  The object of investing is to make money, not to be right all the time–or to get the emotional enjoyment that other parts of life should bring you.

October 2, 2009

September was a strong month for the stock market, again.  The shape of performance by sector was a carbon copy (talk about an old phrase–maybe “clone” would be better) of the results the market has shown since the lows in March–economically-sensitive stocks were relative winners and defensive, i.e., not so cyclical, were relative losers.

In my experience, the relentless nature of the cyclical outperformance is unusual.  Normally, the stock market is a two-steps-forward, one-step-backward affair, where the groups that will dominate during a market cycle alternate with their weaker brethren in achieving short-term outperformance.  But the defensive groups have scarcely had a turn at bat over the past six months.

September and third quarter industry group performance (overweights in the hypothetical portfolio markets marked with + and ++):

………………………………September             3rd qtr

industrials                    +6.6%        +21.2%        +

consumer discretionary   +5.2%     +18.9%

materials                     +4.7%        +21.0%            +

energy                           +4.6%       +9.5%           +

technology                       +4.5%     +16.7%        ++

S&P 500                         +3.7%     +15.6%

consumer staples           +3.3%      +10.5%

telecom                             +2.8%    +3.9%

financials                       +1.9%      +25.1%

utilities                            +1.1%       +5.0%

healthcare                          +.9%     +8.9%

The hypothetical portfolio gained about 15 basis points vs. the index during September, as the four overweight sectors all outperformed the market.

On a one-month basis, it has been a mistake to remove the overweight in the consumer discretionary sector, which was second only to industrials in performance last month.  A portfolio with weightings untouched from the end of August would have outperformed by another 7 basis points.

Thoughts about the month:

Financials had a sub-par month for the first time in a while.  At the end of August, I said I thought the market had been working its way through the financial sector, starting with the best and rotating into progressively weaker ones as the higher-quality names appeared a bit too pricy.  By August, I  thought the market had reached the bottom of the barrel.  At that point, typically either the market starts the process all over again, starting with the strongest names, or investors lose interest in the sector for a while.  The latter appears to have happened in September.

The dollar weakened by about 3% against the yen and the euro during September.  The new Japanese government said it won’t intervene in the currency markets to stop the yen from rising against the dollar.  China continued to announce potential deals to turn part of its huge dollar pile into physical assets–the latest being a $50 billion arrangement to purchase Nigerian oil.

I think gradual dollar weakness will continue to be a feature of the economic environment for a long time to come.  It’s notable that, the consumer sectors aside, all the outperforming areas of the market have been–and I think will continue to be–beneficiaries of dollar weakness.

Signs that the US economy is stabilizing, and that in much of the rest of the world growth is starting to pick up, continue to emerge.  Most important, after a years-long slide, housing prices in most markets around the country seem to be ticking up.  Economists appear to be in as close to total agreement as they get that the US recession has ended.  Oddly enough, despite this, and despite the fact that investment grade bonds appear to me to be very expensive, investment industry statistics seem to show that individual investors continue to shun stocks and embrace bonds.  Go figure.

The mutual fund tax selling that typically marks September-October may be beginning now.  The decline that marked the opening day of the month is particularly eye-catching.  If so, we could have a couple of weeks of decline, followed by a lull toward the end of the month as funds close their books (remember, the accounting year for most mutual funds ends in October).  Typically, the market regains lost ground in the December quarter.

Although the financial turmoil of 2008 seems like a distant memory, it only reached a boiling point twelve months ago.  The associated economic weakness was only starting this time last year.  Therefore, earnings comparisons are likely to become steadily more favorable over the next six months, as the stability of 2009 results is contrasted with the chaos of 2008.  So, the potential for positive earnings surprises is high.

Changes to the portfolio:  None.  Yes, this is boring.  But if it’s not boring, it’s not investing.

September 4, 2009

August was another interesting (read: peculiar) month.  virtually the entire performance story was financials.  The S&P 500 rose by 3.7% during the month.  Sector returns (the hypothetical portfolio overweights marked with +s), in order, were:

financials     + 15.05

industrials    +4.0%                                     +

materials      +3.7%                                     +

consumer discretionary    +3.3%                ++

technology  +2.4%                                     ++

healthcare    +2.1%

consumer staples     +.8%

energy   +.4%

utilities   +.2%

telecom  -2.4%

Of the ten sectors, only two did better than the market, one tied and the rest did worse.  Note, also, that the defensive sectors were at the bottom of the pile again.  The market “vote” in favor of cyclical recovery continues relentlessly.

Our hypothetical portfolio?  It underperformed the S&P by about 10 basis points.  Our two mildly overweight sectors did fine, but they were more than offset by our heavily overweight sectors, technology and consumer discretionary, which underperformed the index.

Thoughts on the month:

The world, ex the US and UK, is signaling it is getting ready to emerge from recession.  China was the first, months ago.  The two big resource economies, Australia and Canada, as well as France and Germany are all now beginning to discuss in public how to raise short-term interest rates back to normal.  Not the US, though, which makes sense, since we’re the epicenter of the economic problems.  My guess is that the budding economic differences causing differing interest rate policies will manifest themselves on Wall Street and in the City in currency weakness in sterling and the dollar, rather than decline in the local stock market averages.

Retail in the US has been spotty.  Yes, it has been better than analysts have expected, but the improvement–if that’s the right word–comes from cost-cutting.  Normally, Wall Street dislikes this sort of earnings performance, since the gains are non-recurring–you can’t cost-cut your way to profits forever.  Nevertheless, the sector has done very well.  This makes me nervous about our portfolio’s heavy overweight.

Financials are another matter.  Here, I’ve made a major error by thinking they would be poor performers.  What to do?  My own experience with this sort of situation is that the group will continue to do well until I add to my financial exposure (the last bear capitulating), at which point the group will immediately begin to underperform.  So I’m in a no-win situation.

On a more positive note as far as the portfolio is concerned, I think Wall Street was scraping the bottom of the barrel last month–Citigroup, AIG, Fannie Mae, Freddie Mac–to find financials to buy.  (Many times in a sector move, the stocks “ripple” upward–the best stocks go first, the mediocre ones second, and the worst ones last.  Then, either the upward movement starts all over again with the best stocks, or the move runs out of steam.)  This could mean the move in the financials is coming to an end.  Or it could just be another aspect of the infinite ability of the human mind to delude itself.

Experience has taught me that the solution to a dilemma like this is to not accept the problem set up this way.  I should probably retain my weighting but replace a portion of my index position with an individual stock, either STD or BBV (I own the latter).  If the market shows its typical seasonal weakness this month an next, I may be able to do this at more favorable prices.  Bottom line: for now, I should just watch.

The Shanghai stock market?  As I’ve written elsewhere, its decline is not a harbinger of economic weakness in China.  It’s a (temporary) reaction to tightening money policy.

The Japanese election?  Japan will continue to stagnate, unless the Democratic Party of Japan finds a way to increase the workforce, like allowing immigration (fat chance!–they’re paying foreigners now to leave) or giving women equal opportunity, or it makes workers more productive–meaning allowing the market to reorganize inefficient companies.  My guess–same-old, same-old.

Changes to the portfolio:  I’m removing the overweight from consumer discretionary and reinvesting the money in the index.  The heavy overweight in technology, and the overweights in materials and industrials remain unchanged.

August 1, 2009

In the course of writing my Shaping a Portfolio for 2010 series of posts in the beginning of April, I outlined what I thought would be an appropriate equity strategy for the following months.  I suggested keeping 85% of the money you would allocate to equities in an S&P 500 index fund; putting 2.5% each in sector funds for technology, consumer discretionary, industrials and materials; and placing the final 5% into two individual stocks, one in technology and one in consumer discretionary.

It’s now four months later.  How is that strategy panning out?

The return of the S&P 500 from April through July has been 25.0%.  In a world where I think the average annual equity return will be below 10%, this is a huge amount.  This is partly a reflection of how horrible the preceding, panic-filled months had been.  But we can see now that the upturn was fueled not only by a gradual calming down of investor angst (no thanks to television investing commentators, who fan the flames of the emotion de jour) but also by the first signs that the economy might no longer be in free fall.

Sector returns, in order, have been:

financials                               +60.2%

technology                             +30.1%

consumer discretionary          +30.0%

industrials                              +28.5%

materials                                +27.5%

energy                                    +15.7%

consumer staples                   +15.3%

utilities                                   +14.1%

healthcare                              +12.3%

telecom                                  + 7.0%.

To me, two things jump off the page:

–how good financials have been (which I didn’t expect), and

–the sharp dropoff in performance once the list reaches the energy entry.

An aggressive professional investor (not us, but someone who has craft skills and is willing to put in 50 hard hours of work on this week after week), given my starting point, might well have increased the emphasis on the sectors that were doing well and made financials into an overweight.  But, if so, he would probably be paring these back tactical overweights now.  In any event, though, this is not a thought for anyone, like ourselves, who has a life apart from the stock market.

Our performance?  I’ve realized I have to set up a section about Portfolio Management, in which I’ll talk about how to measure performance.  But for now, trust me when I say that, assuming no sector outperformance or underperformance from individual stock selection, the equity structure I suggested would have about returned 25.7%.  (A really precise calculation would include, among other things, the timing of dividend payments in what are called “daily linked returns.”  These are a pain in the neck to do and, I think, aren’t really necessary.)

Is this good?  I’d say yes…maybe yes! The way I look at this is that the deviations from the index have been relatively small, so the risk of the portfolio hasn’t gone up by much.  The amount of time invested, maybe measured by Current Market Tactics posts, in monitoring the portfolio hasn’t been too onerous.  And 70 basis points (each basis point is 1/100th of a percent) of outperformance is more than the average professional achieves in a typical year.  Put another way, for a few hours of time I have $700 that I wouldn’t otherwise have for every $100,000 invested.

Given my very strong belief that successful investing is mostly boring, this is nothing we should get super-excited about.  But it’s not bad.  Let’s see if we can repeat this success.

Where to from here?  For now, I don’t see any reason to change the portfolio structure at all.  I expect the next major market-moving event will be the reemergence of sales growth, with the leveraged positive effect that will bring for the profits of business cycle-sensitive sectors.  The very wide spread between outperforming an underperforming sectors since April may tempt some to rotate the portfolio in anticipation of some catch-up from the laggards.  But that may not happen.  And I think, for anyone but the most nimble (read: lucky), the risk of being in bad position as and when the market makes another upward move is too great.