Monthly Archives: March 2009

How To Look At A Day Like Today

March 10, 2009 By in Current Market Thoughts, Recent Market Action, Strategy Tags: , , , , Leave a comment

What Happened

Stocks were up very sharply in the US and Europe today.    Reading the news commentaries tells us that this was about the banks.  Citigroup said it has been profitable in January and February, with revenue up maybe a third compared with performance during last year.  Rep. Barney Frank said the “uptick rule” might be reinstated.  And Fed Chairman Bernanke talked about how new financial services’ regulation might work.

I don’t think you can say anything definitive about a single day.  But if we look a little deeper than the news services, we may find some hints about the way the mind of the market is working.  We probably don’t want to do anything with information we develop, but we may find something worth watching further.

According to Google, the financials were up 9.54%.  (They weren’t the best-performing industry group, however. Conglomerates were, but that’s where GE (+19.7%) finds a home.)  Suppose financials make up 10% of the S&P.  If so, they would account for 95 basis points of the 6.37% index rise.  This implies the rest of the market was up about 6%. 

What were the outperforming industries, in the market ex-financials?  –technology and transport, two areas highly geared to the overall health of the world economy.  The laggards?  –consumer staples, healthcare, utilities, the most defensive groups, all around +2%.  The rest were clustered around 5.5%.  Not much to say, other than this is a broad vote in favor of the more aggressive, economically-sensitive groups.

Very mature companies like Intel, Microsoft or Cisco all outperformed Apple and kept pace with much “growthier” firms like Research in Motion.  In other words, buying wasn’t tilted toward individual firms’ growth prospects.

This wasn’t people trying to rush money back into the market by buying whatever they could find in bulk, either. Market cap didn’t seem to make a difference in performance, with small- and mid-cap stocks doing at least as well as their bigger counterparts.  Volume seems to have been higher than in the recent past, but not by much.

EMM, the i-share for the MCSI Emerging Markets Index, was up 8%+ today, and another .5% in after-market trading.  Again, a vote in favor of a more cyclically-oriented market.

The most interesting pattern I can find is that stocks with unusually good prospects under almost all likely economic conditions, that have outperformed significantly since 2009 began–stocks like IBM, Activision, Monsanto–have lagged today, both in regular trading and in the after-market.

What To Conclude

This may be splitting hairs, but if the cause of today’s rally is the belief that Citigroup’s slightly better health means the worst is over for the global economy (in other words, temporary insanity), then I’ll watch tomorrow but have no reason to think I should position myself more aggressively.  If, on the other hand, the Citi announcement is the trigger for a rally that traders should have waited until June for, then I still think I should do nothing, but I’m less concerned that a fizzled rally will bring us to new lows.

What will I be looking for?  a market that doesn’t yo-yo so much during the day, a flat close, more strength in cash-rich techs and some give-back in the more leveraged cyclicals.

PS.  I took a quick look at the Japanese market at the end of its first hour of trading.  A similar pattern to our market. Banks and exporters are up about 5%; firms with purely domestic Japan, like telecoms, are flat or down slightly.

More (minor) Evidence of Bottoming

March 9, 2009 By in Current Market Thoughts, Recent Market Action, Strategy Tags: , , , Leave a comment

1.  One of the main goals of brokerage research analysts is to get noticed by institutional investors.  While trying to get attention, there’s almost no penalty for coming to a conclusion that’s wrong–because everyone understands what is going on.  And even if you become famous, clients usually forgive and forget.   So a reasonable strategy for the sell side is to make a strongly out-of-consensus prediction.  If it comes true, you’ve struck gold.  If not, it’s a case of “no harm, no foul.”  

A typical portfolio manager gets enough market research, market commentary, etc. each day to make a stack at least two feet high if it were all on paper.  I’d imagine reporters have a similar experience.  This means that in normal times,  the startling but unlikely prediction gets a quick glance at the summary paragraphs and then the “delete” key–or maybe just “delete.”  At times of great stress, when investors have seriously lost their bearings (usually right at turning points in the stock market), however, these attention-getters are printed out and read on the train ride home.

When these things get taken seriously, particularly if they make it into the press, they can be wonderful contrary indicators. Perhaps the most famous of these was the “Death of Equities” cover story in Business Week in 1979.  Bears and bulls have also adorned magazine covers at just the wrong time.

Today an article appeared in the Wall Street Journal outlining a Goldman report that argues the Dow could fall to 5,000 before the current bear market is over.  My point isn’t whether there’s any intellectual merit to the Goldman case for a 25% drop in the market from here.  It’s that it’s headline news in the Wall Street Journal.  This may be as close as we get to a bear’s head on the front page.  I figure it may be good enough.

2.  Bear markets typically go through three stages:  hope (also called denial), boredom, and despair.  Some people think that stage three requires a cathartic, high-volume selling panic, where stocks plunge as investors give in to the fear they’ve been battling throughout the down market and offload every stock they own.

 This doesn’t need to happen.  It certainly didn’t in 1982, when the bear market ended in a whimper, instead.  Despair can also be an attitide–the loss of hope of near-term good news, a resignation to the market running whatever course it decides to take.  I mention this because I realized last Thursday that that’s the way I’ve been feeling lately.  Given that I’ve been through very ugly bear markets both here and abroad, it takes a lot for me to lose my enthusiasm for the market.  So maybe stage three is well underway.

Growth vs. Value: I. Value Investing

March 9, 2009 By in Basic Concepts, growth vs value Tags: , , , , Leave a comment

Investing is a craft skill, like being a carpenter or a shoemaker, a baseball player or a surgeon.  It’s very experience-intensive.  After they’ve been in the business for a while, professional equity analysts and managers find themselves falling into one of the two main investing styles common in the US:  growth stock investing and value stock investing.

This is mostly a matter of temperament, I think.  The practitioners of each style tend to focus on different industries and on firms at different stages of their life cycle, though, so this specialization may also be a function of background and interests outside the stock market.

I’m a growth stock investor, although I started my career as a value investor and have worked for large parts of my career in value stock-oriented firms.  Here’s my take on what value and growth consist in: Continue reading →

What To Do While We Wait For a New Bull Market

March 6, 2009 By in Strategy Tags: , , , , , Leave a comment

The Fed Has Little Good News

The Fed’s Beige Book report on the US economy has just come out again.  In it, business leaders report that the near-term outlooks is poor.  The best that they can say is that the pace of decline in slowing.  They don’t expect an upturn to start until the very end of 2009 or the beginning of 2010.

The extreme shrinkage in credit availability has made the present situation very hard for anyone to handicap.  Given how awful the economy was in December and January, there’s no percentage for any commentator to say anything optimistic and risk looking foolish later.  So the pessimism may be a bit overdone.  Still, let’s take the Beige Book as roughly correct and guess that the recession will end in late December 2009.

Discounting Future Profits

In normal times, which these are not, the US stock market begins to factor next year’s expected profits into stock prices around June or July.  We’ll probably be later than that this year.  Typically, the markets begin to pick up on the possibility of an economic turn for the better about six months in advance, which the Beige Book says would mean around the end of June.    If these two rules of thumb are correct, then we’ve got another several months at least to wait before we can see a sustained upturn on Wall Street.

While We Wait…

What can we do in the meantime?  Most people, including professional investors, succumb to the temptation to hide under the bed and not look at their portfolios.  That’s a mistake, because there are always useful stuff to do with your portfolio, even when you think your holdings are too ugly to think about.  What do I mean?

An Investing Quiz

Let me start with a practical investment problem.  Suppose you have a certain amount of money to invest.  You buy a stock at $100 a share that you think can go to $120 in the next year.  The stock drops to $90 instead, although you retain your conviction (hopefully supported by objective research) that the stock will rise to $120.  You then uncover a second, comparable stock, again trading at $100, that you think, with equal conviction as stock #1, can go to $150 in the next year.  What do you do?     Think about this before you turn the page.

Continue reading →

Rights Issue–What Is It?

March 4, 2009 By in Basic Concepts, rights issue Tags: , , , , Leave a comment

Rights Issues Are Common Overseas

In the US, investors generally want companies to finance new projects using debt, not equity.  When a new stock issue is needed, the company finds an investment banker, registers the issue and sells the stock at close to the prevailing market price to whomever is willing to buy it.

Most of the rest of the world thinks this is very peculiar, in two ways:

–Foreign markets typically want expansion to be funded through equity, not debt.

–Investors also don’t want their percentage interest in the company to be diluted without their say-so.  They expect companies to give the first chance to buy any new stock to existing shareholders, in proportion to the amount of stock they hold prior to the new issue.  This second expectation is usually enforced through company by-laws that require all equity issuance above a certain size be done through a “rights issue.”

Continue reading →