Tag Archives: investment performance

taper on, taper off, taper on: what to do?

September 23, 2013 By in Analyzing performance, Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , Leave a comment

tapering

Months ago, the Fed hinted that it was warming up to start on the long road to money policy normality.  No, it had no intention of raising interest rates from the current level of zero (the plan is to start in 2015)   …but it would soon begin to “taper” the size of the extra money it is regularly pumping into the economy at the rate of $85 billion a month.

The consensus expectation was that the Fed would officially announce the start of tapering, and the size of the initial reduction ($10 billion less?), last Wednesday.  Instead, the Fed said it would prefer to wait for more positive economic news and was going to do nothing.

The S&P rallied by 1.5% in the minutes after the news broke.

It gave back all but .2% of the advance when Fed officials clarified that all they meant to convey was that tapering will probably begin next month.

what to make of Wednesday-Friday trading

In one sense, the large market moves are just typical short-term trader craziness.  As individual investors with a longer time horizon, we can’t allow ourselves to be distracted from the fundamental fact that we are now entering a period of rising interest rates.  So we should basically ignore what’s going on.

In another, however, a sharp swing in short-term sentiment like this, followed by a reversal, may give us a look at more permanent patterns in market money flow that might otherwise remain below the surface.

what to do

Take your equity portfolio, stock by stock, and look a how each issue performed over the three-day period.

This is relatively easy to do if you have the tickers for your stocks entered into a service like Google Finance  (the one I use, even though Yahoo Finance charts are better).  Just right-click on the ticker to open the stock chart in a new tab, set the chart to the past three days and compare the stock to the S&P.

If a stock outperformed when the market was going up and also when it was going down, that’s a good sign.

If the stock outperformed during one period and underperfomed during the other, and it ended up more or less unchanged, you have no information.  A big net plus is good; a big net minus is bad.

If the stock underperformed when people were bullish and underperformed again when people were bearish, that’s a reason to rethink whether the positive investment case for the stock remains intact.  The stock may well be perfectly fine, but this is a red flag.

the overall market

To give you some context for thinking about last week, over the three days only on S&P sector, Telecom (the smallest sector) lost ground.  The stars of the index were:

Utilities (also a small sector)          +1.1%

IT          +.8%

Consumer discretionary          +.5%

Growth stocks (as measured by the Russell 1000 Growth index) gained .6%.  Value stocks (Russell 1000 Value) were flat.

Small stocks (Russell 2000) marginally underperformed large (Russell 1000).

 

Among my holdings, WYNN and LOW were up, GIL and HOG were down.  I’m a little surprised about LOW, since it should be very sensitive to rising interest rates.  I’m slightly concerned about HOG, but only because I would have guessed it would be an outperformer, but for now I’m just going to put it on a somewhat shorter leash.

 

 

where is the stock market headed?: Wall Street strategists vs. analysts

May 13, 2013 By in Industry Analysis, Investment firms, securities markets, sell-side analysts vs. strategists, stock market, using research Tags: , , , , , , , , , , Leave a comment

 Factset:  what Wall Street thinks

Last week I got a press release from Factset, a financial data collection and analysis service, on the topic of where the S&P 500 is headed over the coming twelve months.  The short answer from Factset:  brokerage house analysts think the market is going up a little bit, strategists think the market is going down–again by just a touch.

I’m going to write about this over the next few days.  My short answer:  if history is any guide, neither outcome is likely.  The market seldom drifts along.  It either goes up a lot, or down a lot.

strategists vs. analysts

Who are these people?

First of all, they’re both sets of “researchers” who work for brokerage houses.  Now, they don’t call brokers the “sell-side” for nothing.  The number-one job of any sell-side researcher–analyst or strategist–is to persuade customers to do their trading business with their firm.  In other words, they’re primarily salespeople.  That’s important because it means that at least to some degree they both tailor what they say to fit what their buy-side audience wants to hear.

strategists

Strategists are typically economists or statisticians by training, although they are also sometimes former portfolio managers (snide pms would probably say failed portfolio managers).

Strategists normally work “top down.”  That is, they use data about the macroeconomy to make forecasts about GDP growth and  the course of interest rates.  They then derive expected future earnings growth for the overall stock market and the price earnings multiple at which they think the market will trade.  That gives them a forecast of the future stock market price.  For the S&P over the next year, Factset says the strategists’ consensus is down, but my less than 10%.

Based on their analysis, strategists also recommend sector- and industry-based portfolio structure.  In conjunction with analysts, the may also suggecst individual stock holdings.  They may also help set policy–like the official forecast of the oil price–that analysts more or less adhere to in making their company earnings forecasts.

Strategists are normally much more conservative than sell-side analysts.  Their earnings growth projections are almost always lower than analysts’.  Clients occasionally permit strategists to be bearish, and–as is the case now–to say the market is headed south.  But a prolonged bearish tilt is almost like buying a ticket for the unemployment line.

analysts

Analysts are specialists in specific industries or economic sectors.  They may have academic training in engineering or other subjects pertinent to the industry they cover.  They may have worked in the industry, often in strategic planning or M&A.  They’re invariably deeply knowledgeable about company financials and about the competitive dynamics of their coverage. They often also have privileged access to the top management of the firms they analyze.

That access usually comes at a price.  Analysts can come under considerable pressure not to deviate–either up or down–from the official earnings guidance announced by these firms.  A “sell” recommendation can sometimes trigger a violent reaction from the company in question.

Many investors–childishly–don’t like to hear bad news about the companies they own.  At the same time, the analyst won’t earn much if he doesn’t have good things to say about at lease some firms in his industry.  As a result, analysts tend to err very substantially on the side of optimism.  They turn bearish, even for a short time, at their peril.

year-ago predictions

Industry analysts make projections of earnings growth and set stock price targets for the companies they cover.  They don’t make projections for the S&P.  Factset gets an implicit analyst forecast for the market by aggregating the analyst projections for each company in the S&P 500.

Getting a strategist forecast is much more straightforward.  Factset just takes a median.

Anyway, in April 2012 the implied analysts’ forecast for the S&P was much more bullish than the strategists–at +11.9% vs. +2.6%.

No surprise there.

What is a surprise (“shock” may be a better word), however, is that the analysts were a lot closer to the actual S&P 500 results of +13.8% (capital changes only).

year-ahead projections for the S&P

That’s tomorrow’s topic.

what is a “long-term hold”?

April 30, 2013 By in Getting financial advice, long-term hold, Portfolio management, Trading Tags: , , , , , , Leave a comment

I was listening to radio news yesterday morning when a commentator from the Wall Street Journal  said that many brokerage house analysts are beginning to recommend both Amazon (AMZN) and Apple (AAPL) as “long-term holds”.

What does this mean?

Well, it’s not a compliment.  It’s a way saying “sell” while not putting the word in print.

Why would an analyst be so indirect?    …because if his recommendation on a company’s stock  is “sell,” then the company in question is likely to deny him access to company information, refuse to return his phone calls, decline to appear at conferences he organizes (see my post)  …and do any other stuff it can think of to hurt his career.

Extremely petty, it’s true.  But it happens.  At least with the “hold” recommendation the analyst has a shot a plausible deniability.  He can say to the CEO or CFO that the company is so spectacular that its stock is temporarily overvalued.  All his recommendation is meant to convey is that investors should wait for a slightly lower entry point.

Of course, that’s not what “long-term hold” means.  It’s broker-speak that can be broken down into two parts:

–“long-term” means there’s absolutely nothing attractive about the stock in the short term–meaning the next year or so.  At best, the stock will be dead money.

–“hold” means the stock is not a “buy.”  Over the time frame specified, the stock will likely move in line with the market.

Therefore,

–“long-term hold” means the stock in question is dead money in the short term and, in addition as far forward as the mind can imagine there’s no reason to think the stock ever has a chance to outperform the market.

So, although the term sounds innocuous, in practical terms there’s no worse recommendation than this.

Of course, we can take the discussion one step farther and ask whether analysts’ recommendations have any predictive value.  My take:  analysts typically know a lot about the companies they cover and the industries they’re in.  Only a very few know much about how the stock market behaves.  A lot of times, their recommendations are lagging indicators.