Category Archives: Recent Market Action

Nasdaq at 5000: significance?

March 3, 2015 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , , 1 Comment

Yesterday, almost 15 years (!!!) after peaking at the height of the Internet bubble in March 2000, the NASDAQ closed above 5000, and traded within a percent of its old high of 5048.

Meaning?

We should first note that this is not your older brother’s NASDAQ.  Many former stars have flamed out;  healthcare and services companies, which were a footnote back in the last century now make up about 40% of the index.  So the rebound hasn’t been achieved by the same group of companies that sagged in 2000.

Typically, reaching an old high brings out a rush of selling, as disgruntled holders “trapped” in losses finally break even and cash out.  Yes, looking in the rearview mirror and waiting for breakeven is a little crazy.  But the tendency is cemented deep in the modern psyche–in fact, it’s the first thought habit I tried to break when training analysts and PMs–and everyone has it.

Still, I can’t imagine that many people hanging on this long.  After all,  emotional buyers/sellers had the excuse  of a lifetime in 2009 to dump out losing holdings.

Because of this, I don’t expect the typical breakeven purge.

Nevertheless, reaching a significant milestone almost always induces the market to pause and reflect.  It’s like having a clean canvas and hesitating to place the first brush stroke   …or like knowing you have to set out in a new direction but not wanting to take the first step.  A certain amount of milling about takes place before the eventual break above the old high.

Because of this, I expect NASDAQ will have some initial trouble establishing new high ground, for this reason.

Two points to remember:

–in 2000, NASDAQ stocks were priced in the stratosphere.  They collapsed after spending on tech stuff came to a screeching halt.  that happened in large part because the feared Y2K worldwide computer meltdown didn’t happen.

Today, prices are reasonable, the index is much more diversified and economic growth appears steady, albeit slow. So I think a repeat of the 2000 swoon is highly unlikely.

–once any price breaks through all the old highs, investors eventually realize that, from a market technician’s point of view, there’s no more resistance to upward movement anywhere.  It’s all blue sky.  So prices begin to motor strongly ahead.

Macau casinos, February 25, 2015

February 25, 2015 By in Casinos, China, Entertainment, Hong Kong, Macau, Recent Market Action Tags: , , , , Leave a comment

Macau casino stocks in Hong Kong took a drubbing overnight, continuing weakness shown by US parents in Wall Street trading yesterday.  The US stocks are down again as I’m writing this.

Why?

Analysts had been estimating (guessing/hoping is probably a more accurate description) that the amount lost by gamblers during the current Lunar New Year month would come in at slightly more than half what they left at the tables during the comparable period last year.  With the month nearly gone, data so far indicate that the actuals will come in at somewhat less than half the 2014 take.  Hence the selloff.

If there’s a positive story for the Macau casinos–and I think there is a strong one–it has little to do with whether this month is good or not.

Current weakness is the result of  a campaign by Beijing that’s now deep in its second year.  The idea is to restore faith in the Communist Party by discouraging flashy over-the-top consumption by the politically well-connected.  It’s also aimed at quashing corrupt local government get-rich-quick schemes involving crazy real estate developments and unneeded, heavily polluting basic industry projects.  This two-pronged attack, which has had a negative effect on high-roller gambling in Macau, has lasted much longer than anyone, myself included, had predicted.  The February-to-date casino results seem to indicate that Beijing has not yet taken its foot off the regulatory accelerator.

The positive case has three parts:

–the development of the Cotai Strip along Las Vegas lines is creating a new, more lucrative, less volatile gambling market in Macau.  It’s for middle-class Chinese visitors who want a gambling vacation that also includes resort dining and entertainment.  This business has been expanding very rapidly.  It now accounts for about three-quarters of the SAR’s gambling profits.  Non-gambling attractions in Macau are still in their profit childhood.  In pre-recession Las Vegas, however, resort profit equaled that of the casinos.  So there’s plenty of room for expansion

–at some point–who know when–the current anti-corruption campaign will abate and high-roller business in Macau will begin to stabilize and then gradually expand again.  Beijing’s crackdown began in 2013 but only started to cause serious high-roller attrition in Macau in late spring last year.  So positive year-on-year earnings comparisons are unlikely before autumn.

–the stocks are reasonably priced–cheap, if you believe the first two points.

The Macau casino stocks are now what I would call a value idea–meaning that we have a good sense of what will happen but are pretty much at sea about when.  High dividend yields argue that we’re gin paid to wait.

One technical note:  the stocks hit relative low points about a month ago and have come back to those lows over the past few days.  It would be a sign that they may be finally bottoming if they can stay above the month-ago lows as the weak February results are officially announced.   Technicians would regard a breakdown below these lows would be a good thing in the US, but bad news in Hong Kong.

small cap or large, in the US today?

February 23, 2015 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , 1 Comment

I think today’s US stock market circumstances favor medium-sized companies over their larger brethren.

Several reasons:

–large stocks have outperformed smaller ones for the past several years

–historically, the relationship between PEs for large and smaller cap stocks is all over the map.  One reason for this is that large and small seem to take turns having multi-year runs as the focus of investor interest.  At present, there looks to me to be no overall price advantage for either group.  Not the most ringing endorsement for small, but at least valuations don’t appear stretched

–large stocks are more likely to have exposure to Europe, where currency weakness is wreaking havoc on the results in US dollars of operations there.  Smaller companies are more likely to be predominantly focused on the US, where growth is better –and just now reaching down to second-tier firms—and currency isn’t an issue

–brokerage house analysts, who are a notoriously bullish lot, have been reducing their earnings estimates for 2015 sharply, based on 4Q14 earnings reports and managements’ forward guidance.  Much of the decline is due either to energy or currency, where analysts should arguably have done a better job.  Still, the picture that’s emerging for 2015 from Wall Street is of flat-to-barely-up earnings per share for the year.  This implies to me that portfolio managers will be willing–eager, actually–to give a hearing to niche companies they haven’t needed to bother with until now–provided they can show, say, 10% eps growth.

 

As a result, in looking for new individual stocks, I’ve been shifting my eye toward smaller cap names (also toward te h, but that’s another post…).

One caveat:  my experience is that small cap is a catchbasin for a class of perennially weak companies that manage to stay in business, but who are unable/unwilling to create earnings growth.  These may also be highly illiquid.  These can be interesting targets for seasoned value investors with long investment horizons.  The rest of us should stay away.