Tag Archives: market tactics

April 2014 Employment Situation

May 5, 2014 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action Tags: , , , , , , , 1 Comment

Last Friday at 8:30am est, as usual, the Bureau of Labor Statistics released its monthly Employment Situation.  The figures for April were, I think, unadulterated good economic news.  The country added +288,000 jobs last month, +273,000 in the private sector and 15,000 in government.  Revisions to estimates of job gains for February and March were upped by a total of +36,000, as late submissions from participants in the government’s elaborate Establishment Survey were tallied.

These figures seem to me to show that the horrible winter had a much greater negative effect on hiring (and consumer spending) than the consensus had thought.

Maybe “unadulterated” was an overstatement, though.  In addition to its Establishment Survey, a set of regular reports from a group of companies and government agencies that generate the job gain numbers, the BLS also does a Household Survey.  It’s a set of interviews with randomly selected individuals, from which, among other things, the BLS determines the unemployment rate.  The Household Survey numbers tend to bounce all over the place from month to month.  Last month, for example, the HS indicated that about a half million people stopped being discouraged workers and rejoined the workforce; this month the HS indicated all of them, plus another 300,000 got discouraged again and moved out of the workforce.

Why these people would go looking for work in the freezing cold and then stay home once the sun came out is unclear.  But that’s what the HS said they did.  And the lost 800,000–the reason the unemployment rate dropped to 6.3%–is the datum (like the word?) market pundits have seized on.

“They can’t be serious, can they?” is my first thought.  Then I remember the mind-dulling irrelevance of most financial tv/radio and conclude, sadly, that they can.

Why isn’t Wall Street greeting the Employment Situation more warmly?  I think it has nothing to do with the “lost” 800,000 workers.  Rather, I think investors know the ES numbers are strong–and are evidence in favor of the Fed’s belief that the domestic economy is swell enough to leave intensive care.  This implies that the slow move to higher interest rates will continue apace.

stock market implications

Potential acquirers have a new reason to speed up their activity to lock in financing for their acquisitions at low rates.  So M&A will pick up.

We’ll have more days like Friday–flattish overall market action, with strong moves, both up and down, in individual stocks based on company-specific news, especially the quality of their earnings reports.

 

 

thinking about Amazon (AMZN)–and concept stocks in general

April 29, 2014 By in Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , , , 1 Comment

I’ve watched AMZN since its inception, although I’ve never owned the stock.  What I find especially fascinating is that it has been a “concept” stock–one where the possibility of spectacular earnings growth is always there, but the reality seems to somehow always be just around the next bend–for close to two decades.

I think the stock has particular significance for investors in general–owners or not–at present, for two reasons:

–Yesterday afternoon I happened to be home and noticed a small crossover SUV I didn’t recognize parked outside our house.  After a while, an unmarked white panel truck drove up.  The driver came to our door, rang the bell and left.  It was a package from AMZN, containing–unusually for AMZN–a bunch of different stuff (gummi bears and two kinds of SD card, if you have to know) in one box.

The driver then opened up the back of the truck and began transferring packages to the crossover.  Welcome to  the newest wrinkle in AMZN’s logistics system.  No uniforms, no big trucks, no handheld package control computers.  Just guys with cars stitched together into a (low-cost) delivery network.  I’d been seeing the panel truck for months.  This is the first on-the-fly transfer I witnessed, though.

I read this as AMZN’s response to the successful campaign by bricks-and-mortar retailers to have states enforce the sales tax laws with AMZN.  I don’t think this has helped the b&m people at all.  I think it’s been a windfall for smaller online retailers, though, and for companies that use AMZN for distribution, two groups that are so far flying under the sales tax radar.

AMZN’s competitive response has been to reduce delivery costs, with (presumably negative, if it’s successful) implications for the post office, Fedex and UPS.

–More important for me, AMZN shares fall into the group of “story” stocks that have been sold off very heavily since February.  So I think we can draw conclusions about the whole group by examining AMZN (not a rock solid premise, but, I think, the best we’re going to be able to do).

Two features stand out to me.

First, nothing much has changed with the company, even though the stock has lost a quarter of its value in the selloff.

Second, the list of major holders consists of the most prominent institutional money managers in the country. So the selloff is not being induced by a small bunch of crazy, risk-prone hedge funds.  In addition, most of the big names (ex Fidelity) had already been lightening their positions late last year.

As far as trying to figure out how far the selloff might go, we can look at a fundamental component and an emotional one.  On the fundamental side, pre-Great Recession AMZN shares tended to trade at about 30x cash flow.  In recent years, that figure has been closer to 50x.  A return to 30x cash flow would imply a price of around $300, or about where we are now.  Personally, I don’t see why I should pay 30x cash flow for anything but a startup.  But arguably most of the air has already been taken out of the AMZN balloon.

The emotional side is where looking at price charts and volumes traded comes in.  In the case of AMZN, there has been a sharp pickup in volume over the past couple of days,  That’s usually an indicator of the panicky selling that marks a bottom.

From my own perspective, the selloff has gone on longer, and has been deeper, than I would have thought.  But that’s par for the course for me.  And I’m not feeling very uneasy about stocks in general–which is my go-to indicator that I should be starting to buy.  Of course, this may be because the overall market has been holding up very well. Selling has been confined to a relatively small subset of stocks.

For now, my strategy remains to ride out the storm, not buying in a big way but not selling either.  To my mind, it’s way too late for me to do the latter.  But I’d like more confirmation before becoming more aggressive.

 

 

Great Moderation 2.0??

April 15, 2014 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , Leave a comment

I stole this leadline from the FT blog of Gavyn Davies, hedge fund manager, former head of the BBC and, before that, a Goldman economist. Davies, in turn, lifted it from economist John Normand of JP Morgan.

Great Moderation 1.0

“Great Moderation” is what people began calling the period from 1984 (the recovery year after the two major oil crises of the 1970s) through 2008 (when the world financial system almost melted down).  The idea was very highly conceptual and self-congratulatory–one of those end-of-history, we’ve-reached-Nirvana sort of things.  Modern economics, it was asserted, had finally reached the point where it could control the business cycle.  Never again would developed economies overheat badly; never again would they experience deep recessions.

Obviously, this was wrong, as events of 2008-2010 proved.

In hindsight, the manual labor-intensive parts of Western economies were suffering severe structural damage as China emerged as a global economic power.  “Moderation” was being achieved only through an inappropriately loose money policy implemented by Alan Greenspan, and Mr. Greenspan’s failure to carry out his responsibility to supervise mortgage lending in the US.  For their part, the US banks, freed by Congress from the shackles of Glass-Steagall in 1989, were engaging in widespread, highly lucrative, mortgage fraud.   That enabled wild overbuilding of the domestic housing stock–employing all those displaced manual workers.

Then the music stopped.

Great Moderation 2.0

GM 2.0 is a different sort of animal, though.  The idea this time is that developed economies are barely out of intensive care, so they can’t get much sicker.  And, for the same reason, the energy necessary for wild partying just isn’t there.

The upshot of all this is that the world is in for a protracted period of slow but steady growth, with low inflation and without any sharp lurches downward.

The implications for equity markets are relatively favorable, I think.

The stock market in a slow-growth world would likely have two characteristics:

–mature companies in this sort of environment will grow mainly by taking market share away from others in its industry.  Me-too firms, whose chief virtue has been the ability to rise with the tide, will likely struggle, while innovators prosper.

–rapid growth will be hard to come by.  Firms in new areas or with genuinely novel products will be scarce and should therefore be highly prized.  Maybe not to the loony tunes level that many had soared until recently.  But, if correct, GM 2.0 is a strong argument for beginning to sort through the rubble sooner rather than later.

 

why are former high fliers crashing?

April 7, 2014 By in Current Market Thoughts, Portfolio management, Recent Market Action, stock market, Strategy Tags: , , , , , , Leave a comment

There are two forces at work that are causing the weakness in former high-flying names in the US stock market:

1.  The lesser of the two, I think, is worry by predominantly European investors that Chinese will slow more than expected and that EU economic progress will be hurt by Russia’s expansionist tendencies.  It’s less those tendencies, in my view, than the fact that Russia supplies a lot of the natural gas the EU uses, and that the delivery pipeline goes through the Ukraine.

So EU portfolio managers are becoming defensive in a very conventional way.  This means moving money out of small caps and into large, pulling back from foreign markets to reinvest at home, and shifting away from issues whose attraction is strong future growth and toward (defensive) names that look more like bonds.

2.  More important is recent Fed action in continuing its very early steps toward normalization of domestic interest rates, despite apparent first-quarter slowdown in growth.  This affects stocks in a number of ways:

–during periods of interest rate rise after garden-variety recessions, stocks in general typically go sideways.  My guess is that this is the way events will play out this time around.  But the Great Recession was so deep–and Fed monetary accommodation so huge–that to some degree we’re currently in uncharted waters.  So Wall Street is nervous.

–rising interest rates are devastating to the valuation of stocks whose price is justified mostly by earnings far in the future.  If we calculate today’s value of $1 to be paid to us in five years using current 10-year Treasury bond rates, we find it’s worth $.90.  If we use an interest rate of 5%, which is what the Fed says it’s ultimately aiming for, then that future dollar is only worth $.78.  That’s about a 15% drop.  If the dollar is only going to be paid in ten years, then its present value shifts from $.81 to $60, a 25% fall.

For many “concept” stocks no one really knows for sure the timing of future earnings.  Even experienced Wall Street securities analysts struggle to forecast next year’s earnings, so in reality they only a general sense of the way future profits may be trending.   Still, whether we have precise figures or not, rising interest rates make future earnings much less valuable to an investor today.

–it’s a commonly held belief–and a correct one, I think–that when there’s too much money sloshing around in the economy it finds its way into highly speculative areas.  Highly leveraged transactions and “concept” stocks are two examples.  The Fed’s declared intention to syphon away some of this excess should provoke–and has–selling in the most speculative end of the stock market.  This is different from the more rational idea that future earnings are less valuable as interest rates rise.  This is more like the casino is closing, so no one can make crazy bets any more.

what now?

If you’re concerned and realize you have an asset allocation problem–meaning you have too much money in stocks that are way out on the risk spectrum–you should make your portfolio more conservative.  Maybe you shouldn’t do 100% today, but you should at least do some.

When will the selling stop?  …either when the negative emotion currently in the market dissipates (it’s hard to be very fearful for an extended period of time) and/or stocks that are being sold off begin to look very cheap.  In the case of stocks whose earnings payoff is, say, five years in the future, some are starting to look more reasonable.  the market overall cheap?    …not yet, in my view.  In normal times, we’d have to see the market testing the bottom of the channel we’re in before veteran traders would step in.  That’s 5% – 6% below where we are on the S&P 500 now.