Thursday, May 18, 2017

Results of the "Trump Trade"

Now that the Wall Street Journal and others have declared it dead, it is interesting to consider what exactly the Trump trade was.  As Josh Brown put it, the election provided finality, but the “Trump Trade” never really existed.  A decisive victory either way could have been bullish for the markets.  In our Q4 2016 investor letter, we said that the election conclusion was simply a catalyst for a much needed rotation.  The catalyst was difficult to predict, but the eventual rotation seemed likely.  So, now that it is dead, where does that leave us? 

The below chart shows the S&P 500 P/E and PEG as of 11/4/2016 (prior to the election).


Pre-Trump Rally, defensive sectors like Consumer Staples, Utilities, and Telecommunications all looked relatively expensive based on PEG ratios while some (not all) cyclical sectors appeared relatively cheaper.  The post-election performance (yellow bar below) reflected a reversion to the mean for each of these sectors with the most expensive underperforming while the least expensive outperformed.


So, where does that leave us today with the recent “death” of the Trump rally?  Relative sector valuations look more similar.  Utilities still appear moderately expensive, but Telecom has taken its place as the clear outlier (due to lower growth expectations).  Everything else is hovering around a PEG of 1.  We are back to “normal”.



The election served as the catalyst for this rotation, but it may have come regardless of the ultimate victor.  With earnings growth looking very strong for Q1, most sector valuations now appear reasonable.  The slight bias towards defensive sectors (Utilities, Staples, and especially Telecom) makes sense given the widespread caution throughout much of the last few years of this bull market.  The overall market is not cheap, but if earnings come in as expected, only a few sectors look particularly expensive.


Monday, May 15, 2017

Momentum Strategy Leading Again

It is back to the future for the market as momentum is once again a leading investment strategy just as it was in 2015. Momentum fell out of favor in the run up to the election and into year-end 2016; however, momentum is once again leading the S&P 500 Index this year. The momentum strategy may be overbought near term with the RSI near 80.



Thursday, May 11, 2017

Brick And Mortar Retail Is A Mess At The Moment

It seems anything associated with brick and mortar retailing is an investment that will do anything but go up. The brick and mortar retailers themselves are struggling to figure out how to compete in the internet age. Macy's (M) reported disappointing earnings today and the stock closed down 17%. After the market close, Nordstrom (JWN) reported results with earnings up 37%, yet same store sales were down a worse than expected .8%. After hours Nordstrom's stock is trading down 3.5%. The green line in the below chart represents the FTSE NAREIT Equity Regional Mall Index (FN22). This index is struggling along with the brick and mortar retailers as well.



Saturday, May 06, 2017

Indexing Investment Strategy Becoming Increasingly More Risky?

Indexing ones investments has turned into the investment strategy of choice for a number of investors. According to a recent Wall Street Journal article, in 2016 82% of new investments coming through financial advisers (more than $400 billion) went into index funds and ETFs. This statistic was highlighted by Consuelo Mack on a recent WealthTrack segment where she interviewed David Winters of the Wintergreen Funds. Winters addresses several points about the potential risks and factors surrounding index funds, one risk called look through expenses and the other about index investing ignoring company fundamentals. I did not necessarily buy into the look through expense argument; however, the issue with indexing 'ignoring company fundamentals' is a very valid one. The WealthTrach video is provided at the end of the post.


Friday, May 05, 2017

Higher Oil Prices Contend With Too Much Supply And Higher Energy Efficiency

Almost to the day one month ago, when oil was trading at $52.25/bbl, I noted higher oil prices faced strong headwinds. I mentioned several factors that would likely result in lower oil prices, with the largest being the oversupply of oil in an environment where drilling activity was picking up. Fast forward to today and the price of spot WTI has fallen 12.8% to $45.55/bbl. Additionally, supply does not seem to want to abate as the rig count has increased to 870 rigs this week versus 839 in the month ago article.


A faster pace of supply growth continues to be the overriding issue although demand continues to increase as well, but yet to reach pre-recession levels. Certainly, the below trend rate of economic growth is playing some role in the lower overall demand for petroleum products.


Another factor in the slowing rate of demand growth is energy efficiency improvements made to a number of petroleum consuming parts of the economy. One significant area of improvement is in the area of vehicle gas mileage. This is important as gasoline is the main petroleum product consumed in the U.S. and accounts for nearly 47% of petroleum consumption.

As the first chart below shows, since 2014, consumers have consistently driven more miles, year over year. This has translated into continued growth in total vehicle miles driven on a rolling 12-month basis and finally surpassing the pre-recession peak in 2015.


The efficiency is most evident in the below chart the shows miles per gallon for all vehicles (red line) along with gallons consumed per vehicle in a given year (blue line.) Improvement in both of these areas has slowed the growth in the demand for petroleum products.


In conclusion, a below trend pace of economic growth and efficiency improvements have served as a headwind to higher oil prices, especially in an environment were drilling activity is increasing. The article from a month ago also discussed the potential oil price headwind resulting from a stronger U.S. Dollar, vis-à-vis, a potentially higher interest rates. This may become a more significant factor next month as the odds of a Fed interest rate hike in June are now around 75%. 


Saturday, April 29, 2017

Credit Card Firms' Earnings Reports A Sign Of Potential Weakness With The Consumer

The first reading for Q1 2017 GDP came in at a weak .7% at an annualized rate. A particularly weak component of the report was consumer spending which rose only .3% and is the weakest level for spending since the fourth quarter of 2009. The blue portion of the bars in the below chart represent the consumer contribution to GDP and the weak report in Q1 2017 is evident.


Over the past few years, first quarter GDP numbers have been weak for a number of reason. However, many believe there are issues with the government's seasonal adjustment factor. Nonetheless, is there something else impacting the consumer which could indicate potential headwinds lie ahead for the economy and is being reflected in recent credit card data?

This past week, several financial firms reported earnings, Synchrony Financial (SYF), Capital One Financial (COF) and Discover Financial Services (DFS) and each company has a sizable portion of their business in consumer credit cards. Earnings for both SYF and COF were anything but positive relative to expectations. DFS earnings were not too weak and the company reported only a small earnings miss. Below are some comments from the company conference calls and/or earnings press releases.

Capital One Financial:
  • Net income fell 22% to $752 million while its earnings per share of $1.54 came in 39 cents below the average estimates of analysts. The company increased its loan loss provision by 30% year over year to $1.9 billion, as the 30-day plus delinquency rate climbed 28 basis points, to 2.92%. Meanwhile, net charge-offs rose 28% to $1.5 billion and its rate of net charge-offs to total loans increased 42 basis points to 2.5%. Most of the delinquencies and charge-offs were in the bank's credit card and auto loan portfolios (emphasis added).
Synchrony Financial:
  • First quarter net earnings totaled $499 million or 61 cents per diluted share versus average analysts' estimates of 73 cents. Our results were impacted by the 45% increase in the provision for loan losses we experienced this quarter. The reserve build from the fourth quarter equalled $322 million. The reserve builds for the next couple of quarters are likely to be in a similar range on a dollar basis to what we saw this quarter.While most of the build continues to be driven by growth and the normalization we are seeing in the portfolio, lower recovery pricing in the quarter also drove approximately $50 million of additional reserves or 7 basis points of coverage. The net charge-off rate was 5.33% compared to 4.74% last year. we now expect NCOs to be in the 5% to low-5% range this year (emphasis added.)
In regards to lower cost recovery, this refers to credit card companies selling troubled credit card debt to third party collection firms. As noted in the Synchrony conference call,
  • Company saw an incremental decline in recovery pricing this quarter. We believe it's driven by a combination of factors, including just the fact that you've got increased supply in the market. As charge-offs start to normalize across the industry, which we've seen, you've got that dynamic. So you've got just increased supply in the market, which we think is impacting the price.
Bank of America:
  • Total net charge-offs of $934MM increased $54MM from 4Q16. Increase driven by consumer due to seasonally higher credit card losses, while commercial charge-offs were relatively flat. Net charge-off ratio increased modestly from 4Q16 to 0.42%, but declined from 1Q16. Provision expense of $835MM increased $61MM from 4Q16, driven primarily by consumer (emphasis added.)
Discover Financial (DFS) also reported weaker earnings of $1.43, but the miss was only 3 cents. DFS also cited caution on credit and indicated credit card portfolios are normalizing to a higher more historical loss rate. DFS also increased the company's provision expense.

The below chart compares the performance of the credit card firms to each other and the S&P 500 Index. The lower than expected earnings results had a negative impact on the prices of the stocks as can be seen below.


As the below table shows, credit card delinquency rates are below historical levels. On the other hand charge-off rates are trending higher and near economic late cycle levels.



Supporting a leveling off for charge offs and delinquencies is the fact the household debt service ratio remains at a very low level.


With charge-offs and delinquencies normalizing to higher and more so-called normal levels, maybe some stability is near. The fact companies are reporting lower loss recovery rates is also an indication of broader weakness in the credit card sector of the consumer economy. Recovery rate weakness occurs as the supply of delinquent credit card receivables increases and third party collection firms can pay credit card companies less for this type of loan paper.

Given the much weaker GDP report in the most recent quarter and the weakness beginning to show up in credit card portfolios, these are yellow flags that investors should monitor for signs of further economic weakness. The current expansion is now the third longest since World War II and the economy will not expand forever. At this point though, based on other recession variables we review, we do not foresee a recession looking out the next 18 months or so.


Thursday, April 27, 2017

Investor Sentiment Turns More Bullish

Since my post published nearly two weeks ago on widespread market bearishness and a potential indication of a market turning point, the S&P 500 Index has bounced higher by 2.6%. True to form, this overly bearish sentiment was followed by higher equity prices. Also, sentiment has improved with the AAII bullish sentiment reading reported at 38.05% today, a 12 percentage point increase. This improvement in sentiment has also seen the bull/bear spread flip to more bulls than bears at +6 percentage points versus last week's -13 percentage points. Although bullish investor sentiment has improved, the reading is not at a level suggestive of 'irrational exuberance."



Sunday, April 23, 2017

Dogs Of The Dow Falling Further Behind

It has been several months since updating the performance of the Dogs of the Dow investment strategy. The strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds the basket for the entire next year. The popularity of the strategy is its singular focus on dividend yield. The strategy is somewhat mixed from year to year in terms of outperforming the Dow index though. Over the last ten years, the Dogs of the Dow strategy has outperformed the Dow index in six of those ten years.
 
As we noted in our early February post, it is important for investors utilizing the strategy to be aware of the strategy's bets in terms of stock and sector exposure. Through Friday's close, the 2017 Dow Dogs return of 2.0% trails the return for both the Dow Jones Industrial Average Index and the S&P 500 Index, 4.6% and 5.4%, respectively. Relative to the Dow Jones Industrial Average, the 2017 Dow Dogs are significantly over weight energy (19% versus 6.2%) and energy has been weak this year as can be seen in the energy holdings in the below table. Additionally, the strategy is overweight in telecom through its holding of Verizon. Other differences can be seen in the earlier post.


At least during the first four months of 2017, the pursuit of higher yielding stocks via this strategy has yet to be an outperforming one.


Saturday, April 22, 2017

Emerging Markets Poised To Outperform

In our Spring 2017 Investor Letter we briefly commented on first quarter investment changes we initiated in client accounts, specifically, adding exposure to emerging markets. Expanded commentary follows on some of the rational for this change. Simply because an asset class or stock is cheap does not necessarily suggest the asset should be purchased; however, valuation does tend to matter in the long run. The below chart was referenced in our Spring Investor Letter and the top pane of the chart shows the relative valuation of the MSCI Emerging Market Index versus the S&P 500 Index favors emerging markets.


Additionally, when comparing the forward earnings growth expectations for emerging market equities and S&P 500 equities, emerging market companies that comprise the MSCI Emerging Market Index are expected to grow earnings nearly three times faster then S&P 500 companies.


With respect to emerging markets, their prices seemed to be discounting the improvement taking place in global economies and the consequent benefit that should accrue to emerging market economies and thus emerging market stock prices themselves. Certainly, if global trade slows significantly, emerging market economies will be negatively impacted. However, our firm's view is developed economies will continue to grow over the next several years, even if at a below trend pace, and emerging economies will benefit. As the below chart shows, GDP growth in the emerging and developing economies has started to turn higher indicating a faster pace of economic growth than advanced or developed economies.


This faster pace of economic growth tends to persist over multiple years. As a result, some investors are beginning to recognize this as emerging market equity performance on a year to date basis is outperforming a number of developed markets as can be seen in the below chart.


This recent outperformance is occurring at a time when emerging markets have underperformed the U.S. market on a rolling 3-year annualized basis for the past five years. The second chart below shows the rolling 1-year returns versus the S&P 500 Index and the rolling 1-year returns have begun to favor emerging markets in 2017.



In investing, there are no certainties; however, with global economies seeming to become more synchronized with respect to economic growth, emerging markets could have a performance advantage over developed markets over the course of the next several years.


Friday, April 21, 2017

Brick & Mortar Retail Struggles Attributable to Growth In E-Commerce

Today another retailer announced it will be closing up shop, Bebe Stores, Inc. (BEBE), making it the 15th retailer to go under this year. By the end of May BEBE plans to liquidate its approximately 180 stores. This nearly matches the 18 retail bankruptcies for all of 2016.


With the consumer accounting for nearly 70% of economic growth in the U.S., are the struggles of brick and mortar retailers a sign of a weakening consumer? What the data seems to be suggesting is overall retail sales are growing at a decent pace. According to the U.S. Department of Commerce's most recent report on retail sales, it is noted, "Total sales for the January 2017 through March 2017 period were up 5.4 percent [versus] the same period a year ago. What is occurring though is consumer buying habits have transitioned to online or e-commerce sales versus a trip to the brick & mortar sores/malls.

The two below charts show the break down of e-commerce sales and brick & mortar sales on both a dollar basis as well as a percentage basis.



As the blue line in the above chart shows, brick & mortar retail sales are growing at a greater than 2% YOY pace. Certainly this is a slower rate of growth versus a few years ago; however, it is growth nonetheless. On the other hand, the growth in e-commerce sales is moving forward at a mid-teens pace and has done so for over five years. Consequently, the brick & mortar retail headwinds are mostly attributable to the changing buying habits of consumers and their preference for the convenience online shopping provides.

This shift in buying habits, and now driven by Amazon, is covered in the below video presentation. The video covers Amazon and its destruction of retail and highlights the destruction of “brands’ that is occurring as a result of the growth in the preference of e-commerce buying.


Friday, April 14, 2017

Widespread Bearishness Indicating Market Nearing A Turning Point?

Bearish sentiment has over taken what was a bullish environment that unfolded after last year's election. The sentiment change can be attributed to a number of factors, such as continued gridlock in Washington, U.S. bombing campaigns in several countries overseas, etc. Most of the return generated by the equity market over the past two years has occurred since the election in November of last year. In spite of what seems like pervasive investor bearishness​ in stocks, the S&P 500 Index is down only 3.0% from its high at the beginning of March as can be seen in the below chart.



Saturday, April 08, 2017

Higher Oil Prices Face Strong Headwinds

Since March 27 spot WTI crude oil has moved higher by 11% increasing from $47.02/bbl to $52.25/bbl. This rise in price has occurred during a period when crude inventory levels in the U.S. continue to rise. This increase in crude inventory levels is taking place at a time when the drilling rig count continues to increase as well. Historically, an increase in rig count has coincided with higher crude prices; however, inventory levels were much lower in the past when the rig count began to rise.



Thursday, April 06, 2017

Spring 2017 Investor Letter: A Stable First Quarter

Our Spring 2017 Investor Letter reviews the low volatility first quarter. Prior to March 21st, the S&P 500 went 109 straight days without closing down more than 1% en route to a 6.07% gain for Q1 2017. The first quarter market gains also came with unusually low volatility as measured by the VIX Index; the key index for measuring short-term volatility. Pundits have largely attributed the steady post-election market climb to the pro-growth policies of President Trump, but that does little to explain the even stronger performance in international markets. Developed international markets (represented by the MSCI EAFE index) ended the quarter up 7.39% and emerging markets, which presumably would be hurt by President Trump’s protectionist policies, were up 11.49%. The Investor Letter reviews a number of important economic variables noting the soft data points have certainly spiked higher and potentially pulling along the hard economic data points.


For additional insight into our views for the market and economy, see our Investor Letter accessible at the below link.


Sunday, March 19, 2017

GDP Growth Above 3% Is Attainable

One component of the Trump administration policies is to improve the growth rate of the economy through an infrastructure spending policy, reducing taxes and regulations and increasing spending on rebuilding the military. While campaigning he stated his policies would return the economic growth rate, GDP, to 3%. A number of economists, along with the Federal Reserve, indicate moving the growth rate of the economy to 3% will be a difficult task. To put the 3% growth rate into perspective though, up until and through the financial crisis, the long run GDP growth rate was nearly 3.5%. Since the financial crisis though, the growth rate has averaged 1.8%.


Sunday, March 12, 2017

Market Advance May Have Stalled On Concerns Around Timing Of Tax Reform

For the first few trading days in March, the equity market seems to be consolidating the gains achieved in February. Sideways or small market pullbacks have been a common pattern for the market since the election. For the most part the market has corrected over time (sideways movement) versus a steep contraction during the post election advance. This type of market pattern can be frustrating to investors waiting for a more significant pullback so cash can be deployed into the market. As the below chart shows, the type of pattern formed for the market is what is know as a bull flag chart pattern and this pattern has developed again with this month's trading action.


Sunday, March 05, 2017

Better Investing Members Net Sellers Of Apple

Periodically I provide a review of what individual members of Better Investing are purchasing. My last review or update was in August last year and BI members reported their top purchase was Apple (AAPL). Another purchase back in August was Southwest Airlines (LUV), so BI members seemed to be ahead of Warren Buffett's interest in airline stocks. In regards to Apple, BI members are reporting they are net sellers of the stock now. Amazon (AMZN) has been a favorite for some time and continues near the top of the list. CVS Health (CVS) has experienced weakness recently and BI members are reporting they are net purchases of this stock at the moment. Below is a list of the current Most Active stocks reported by Better Investing members.


Wednesday, March 01, 2017

Time To Reduce One's Equity Exposure?

The U.S. stock market has been on a steady climb higher since the November election. From 11/8/16 to 3/1/17 the S&P 500 Index has moved higher by 11.96%. This double digit return in a short period of time has some investors asking if this is an appropriate time to reduce equity exposure.


Sunday, February 26, 2017

Sentiment In An Elevated Market

With the weekend nearly over and any research or reading completed, most investors now know the Dow Jones Industrial Average has been on a rare eleven day winning streak. What makes this more amazing is this is occurring as the market hits new highs with each close. One conclusion drawn from this seems to be the market is nearing a correction or consolidation point and I will be the first to admit, a pullback in the market would certainly be healthy. Since the U.S. election on November 8, the S&P 500 Index is up 10.6%, a return investors would find acceptable for an entire year. The strong and sustained market advance has led to a number of technical and sentiment readings approaching what seems to be elevated levels.

First, below is a chart of the S&P 500 Index along with its 200-day moving average. The chart shows the S&P 500 Index is trading above its 200-day moving average be an amount reflective of an overbought market.



Monday, February 20, 2017

The Significance Of The S&P 500 Yield Falling Below The 10-Year Treasury Yield

For most of 2016 the dividend yield on the S&P 500 Index was greater than the yield on the 10-year U.S. Treasury. Historically, this has served as a positive sign for forward stock price returns. With the strong equity market returns in 2016 and the move higher since the election, the S&P 500 yield is now lower than the 10-year Treasury. In addition to the move higher in stocks, bond prices have declined as well (a higher yield) resulting in bonds now having a higher yield than the S&P 500 Index.


Sunday, February 12, 2017

Recent Outperformance Of Low Volatility A Sign Of Risk Off Ahead?

Since the election in the U.S. it has been a 'risk on' environment for stock investors. Last week though, the Powershares Low Volatility ETF (SPLV) broke out of a sideways trading range to the upside. At the same time, the Powershares High Beta ETF (SPHB) remains trapped in a sideways range. Might the move higher in the low volatility ETF be a signal there is underlying action by some investors to be more defensive in anticipation of a potential pullback on the horizon? The third chart below compares the high beta ETF performance versus the low volatility ETF performance since the election and high beta has far outperformed low volatility.



Saturday, February 11, 2017

Positive Sentiment And Fundamentals Rests On Positive Political Expectations

I believe there are two broad issues at play that are having a positive influence on equity prices. The first issue is a fundamental one and related to a much improved corporate earnings picture. Looking solely at companies in the S&P 500 Index, Thomson Reuters publishes a weekly report summarizing the quarterly earnings reports of companies. Friday's report notes,
  • Q4 '16 earnings are expected to increase 8.4% on a year over year basis. The financial sector is projected to show the strongest YOY growth at 20.8%
  • Of the 357 companies in the S&P 500 that have reported earnings to date for Q4 2016, 68.3% have reported earnings above analyst expectations. This is above the long-term average of 64% and below the average over the past four quarters of 71%.
  • 48.3% of companies have reported Q4 2016 revenue above analyst expectations. This is below the long-term average of 59% and below the average over the past four quarters of 51%. Revenue growth for Q4 '16 is estimated to equal 4.4% YOY.
The second issue influencing the market is the dramatic positive shift in sentiment by both consumers and businesses. I could probably show a dozen different charts that support the positive shift in sentiment with just two of them below. The first one measures CEO Confidence and it had one of  the largest month over month increases in the measure's history. The second one shows consumer sentiment jumping higher subsequent to the election as well.


Monday, February 06, 2017

Room For More Debt?

As was mentioned in a previous post, S&P 500 companies have taken advantage of cheap debt to fund continued capex and share buybacks since the recession.  This has driven total debt to new all-time highs.  Though there has been much concern about the "abuse" of low interest rates to create a rally fueled by buybacks, it does not strike me as much of an issue.  In fact, it makes sense for companies to take advantage of cheap debt to lower their WACC with the potential side effect that they shift their capital structure.  Interestingly, however, the capital structure has not shifted with this proliferation of cheap debt.


Sunday, February 05, 2017

Dogs Of The Dow 2017: Know The Strategy's Bets

The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds them for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

As we noted in a year end post, the Dogs of the Dow strategy in 2016 did outperform both the S&P 500 Index and the Dow Jones Industrial Average Index last year. However, the strategy is somewhat mixed from year to year in terms of outperforming the Dow index though. Over the last ten years, the Dogs of the Dow strategy has outperformed the Dow index in six of those ten years. For investors utilizing the strategy it is important to be aware of where ones bets are in terms of stock and sector exposure.

Essentially one months has passed in 2017 and the Dogs of the Dow strategy is underperforming both the Dow index and the S&P 500 Index. Below is a table noting the year to date performance of the current Dogs.



Sunday, January 29, 2017

YTD Equity Market Declines In 83% Of All Up Years Since 1945

CFRA Research, in conjunction with S&P Global, recently published a report on the probabilities of a market pullback. A number of interesting data points are outlined in the report, but a few interesting ones are as follows:
  • "during bull markets since 1945, the S&P 500 experienced a pullback (a decline of 5.0%-9.9%) once a year, on average,"
  • "a correction (a 10% to 19.9% decline) every 2.8 years, and,"
  • "a bear market (-20%+) every 4.7 years."
  • "the S&P 500 suffered a YTD price decline in more than 80% of all years in which the S&P 500 recorded a positive annual performance since WWII."
As further proof that the market does not move higher in a straight line, the CFRA report notes the S&P 500 Index incurred a year-to-date price decline in 83% of all up years since 1945.


Also interesting in the report is the fact that 70% of all year-to-date declines occurred in the first quarter of the year and approximately a third of all the year-to-date declines occurring in January.

The entire report is a worthwhile read as it contains data on the market's performance after surpassing millennial points.

Source:

Pullback Probabilities
CFRA research
By: Sam Stovall, Chief Investment Strategist
January 17, 2017
https://goo.gl/teukJW


Saturday, January 28, 2017

Market Breaks Out Of Sideways Trading Range To The Upside

Over the course of the last three trading days this week, the S&P 500 Index and Nasdaq broke out of the trading range in place since mid December. We highlighted this range in a recent post that noted sizable corrections are unlikely when earnings are improving.



Friday, January 27, 2017

Buybacks vs. Capex

The below chart shows that through the end of 2015, S&P 500 companies were contributing a similar percentage of revenue to capex as they were back in 1995 (6.495% in 2015 vs. 6.5% in 1995). This same percentage capex contribution, however, is now only covering 113.4% of depreciation, when it covered 132.73% at the end of 1995.


[Note: going back to 1980 or 1990 shows that companies are clearly investing significantly less in capex since then, but for the purposes of this post it was sufficient to show that it is relatively unchanged in the past twenty years.] 


Thursday, January 26, 2017

Individual Investors Cautious On Equity Market

If the contrarian individual investor sentiment measure reported by the American Association of Individual Investors indicates anything, individual investors seem to be questioning the sustainability of this market rally. Because the Sentiment Survey is a contrarian measure, just maybe the market advance has further upside. In AAII's report this morning, bullish sentiment fell 5.4 percentage points to 31.6% which is nearing an extreme for the reading. Most of the decline in bullish responses showed up in the neutral reading as it increased 4.6 percentage points to 34.9%. This is the highest neutral rating since it was reported at 42% in early November of last year.



Wednesday, January 25, 2017

Second Longest S&P 500 Rally Since 1932

Chart of the Day's report this morning notes the S&P 500 Index return since the October 2011 low is now the second longest since the Great Depression. Specifically, their commentary notes,
"With the S&P 500 once again in record high territory, today's chart provides some perspective on the current rally by plotting all major S&P 500 rallies of the last 86 years. With the S&P 500 up 107% since its October 2011 lows (the 2011 correction resulted in a significant 19.4% decline), the current rally is above average in magnitude and the second longest rally since the Great Depression."

Notes:
- A major stock market rally has been defined as a S&P 500 gain of 30% or more (following a correction of at least 15%).
- The S&P 500 was not adjusted for inflation or dividends.
- Selected rallies were labeled with the year in which they began.
- There are 252 trading days in a year (100 trading days equal about 4.8 calendar months).


Saturday, January 21, 2017

Sizable Equity Pullback Less Likely During Periods Of Strong Earnings Growth

The return for many of the the equity indexes subsequent to the U.S. election has been stronger than many expected. However, most of the post election return was generated in the six weeks following the November 8 election with the equity market trading sideways since mid December. The post election spike higher has some investors waiting for a pullback in the market in order to invest cash that may be on the sidelines. Below are a couple of index charts that show this sideways trading range.



Monday, January 16, 2017

CEO Confidence Surges Higher

Early this month The Conference Board reported the fourth quarter 2016 Measure of CEO Confidence. The fourth quarter reading was reported at 65 and is the highest reading since the first quarter of 2011. Readings above 50 indicate more positive than negative responses.



Sunday, January 15, 2017

A Chart Supporting Market Bears

For investors and analyst it is important to read and evaluate perspectives that run counter to ones own in order to increase the likelihood they are not missing something in their analysis or thinking. For example, the equity market has essentially moved higher, uninterrupted, since the end of the financial crisis low in 2009 and the bull market seems to want to continue; however, is there something suggesting the bull market may be nearing an end? Many of the technical aspects of the market support an additional move higher though and just one bullish chart is noted below.



Saturday, January 14, 2017

Trying To Market Time Is Fraught With Risk

The U.S equity market has certainly had a nice recovery since the financial crisis low in 2009. The magnitude and length of the recovery may have some investors contemplating selling their equities in favor of sitting on the sidelines until the next pullback.



Friday, January 06, 2017

Buy The Rumor, Sell The News

The old investing adage “Buy the rumor, sell the news” comes to mind following the “Trump Rally” to end 2016. As we all know, President-Elect Trump has not yet been sworn into office and yet, the year-end climb in US markets has been mostly attributed to his policy proposals. This makes sense as the market is always forward-looking, but it is important to keep in mind that it often overshoots in the near term. As a prime example, the chart below shows the relative performance of the Utilities sector against the S&P 500 in the three months before (left) and after (right) the two most recent Fed rate hikes. The line moving higher indicates Utilities outperforming the S&P 500 and lower indicates Utilities underperforming.  As any market participant would tell you, this conservative/high income sector should suffer from an increase in interest rates. And it did, but all of the underperformance came before the actual event (Fed rate hike) and subsequently, Utilities dramatically outperformed (short-term).


The surprise victory of Donald Trump in the Presidential election brought about a dramatic market rotation that benefited cyclical sectors like Financials and Industrials. Cyclical sectors outperformed due to the widespread belief that Trump’s pro-business policies could boost domestic economic growth. 


This rotation may prove to be wise and Trump’s policies may boost the U.S. economy, but in the near term, we would not be surprised to see some of this rotation temporarily undone. The market has been driven higher by policy speculation; actual legislation may prove the wisdom of “Buy the rumor, sell the news.”


Thursday, January 05, 2017

Buybacks Decline In Q3 2016, But Cash At Record Level

At the end of December S&P Dow Jones Indices reported information on S&P 500 buybacks and dividends for Q3 2016. The preliminary report noted quarter over quarter buybacks decline 12% and year over year buybacks fell 25.5%. The continued decline in buybacks may be a result of companies retaining cash due to the uncertainty surrounding the November election. Dividends were up fractionally QOQ and up 3.5% on a YOY basis. However, in spite of the decline in buybacks, Howard Silverblatt of S&P Global noted,
"cash reserves also set a new record for the third consecutive quarter, as S&P 500 Industrial (Old), which consists of the S&P 500 less Financials, Transportations and Utilities, available cash and equivalent now stands at $1.49 trillion, up 8.2% from the prior record of $1.37 trillion. The current cash level is nearly double [that] of expected 2017 operating income, giving corporations leeway in their expenditures."


Other key highlights from S&P Dow Jones Indices' report,
  • Information Technology continued its buybacks dominance, even as its overall percentage of S&P 500 buybacks decreased to 23.2% ($26.0 billion) in Q3 2016, from 23.6% ($30.1 billion) in Q2 2016.
  • Apple (AAPL) spent the most on buybacks in Q3 2016, at $6.0 billion, down from $10.2 billion in Q2 2016 and $13.3 billion spent in Q3 2015.
  • Microsoft (MSFT) was second, with $4.4 billion, up from $3.7 billion in Q2 2016.
  • Energy saw its contribution increase but overall expenditures decline, to 1.20% ($1.34 billion) in Q3 2016, compared to 1.09% ($1.39 billion) in Q2 2016 and 6.07% ($8.8 billion) in Q3 2014.
  • Industrials decreased its expenditures by 39.4% ($13.3 billion) from $21.9 billion in Q2 2016.
  • Consumer Staples which decreased its expenditures by 28.4% ($8.4 billion) after $11.7 billion in Q2 2016.


Tuesday, January 03, 2017

Winter 2016 Investor Letter: Rising Confidence And The Populist Movement

In our Fall 2016 Investor Letter we discussed how emotions tend to run high around certain periods like the recent U.S. election. We noted in that newsletter that emotional investment decisions can drive investors to reduce their stock market exposure and harm long term returns. Certainly, the equity market performance following the the November election was one that strongly rewarded investors that stuck with their investment discipline.

Our recently published Winter 2016 Investor Letter discusses the broad improvement in confidence that is showing up in a number of economic variables. The improvement in consumer confidence is important as the consumer accounts for nearly 70% of economic activity. Also included in the newsletter is commentary around the rise of the "Populist Movement' from the BREXIT vote in June to the Italian Referendum in December. While we take no stance on the merits of such movements, it is undeniable that recent elections have dramatically altered the state of western politics and the policies that may be pursued will have an impact on ones investment portfolio as we review the year ahead.


For additional insight into our views for the market and economy, see our Investor Letter accessible at the below link.


Equity Market Technicals Still Leaning Bullish

Yesterday I wrote that investor sentiment is broadly more bullish at the start of 2017 versus the beginning of 2016. Elevated bullish sentiment tends to be a contrarian indicator and can coincide with near term market tops. Now having noted the heightened sentiment measures, but shifting to a technical view of the market, some market excess has been worked off in the last few weeks of December with the S&P 500 Index down 1.4% since December 13th.


As the above chart shows, the late December weakness has created a bull flag formation during this two week period with the market trending lower. Additionally, the Money Flow Index (MFI) has retraced to a more neutral level while the stochastic indicator is near an oversold level.


Monday, January 02, 2017

Investor Sentiment More Bullish Than A Year Ago

In 2015 investors had to contend with a very volatile equity market during the summer months. On August 24, 2015 the Dow fell 1,000 points intraday before closing down 588 points. This volatility extended into October with the end result, the S&P 500 Index was up only 1.4% for all of 2015. This level of volatility and flat returns left investors anything but bullish going into 2016. As fate would have it, investors faced another market decline to begin 2016 as the S&P 500 Index fell 11.4% before bottoming on February 11, 2016. Fast forward to the end of 2016, and after an equity market that returned 12.0% for this past year (S&P 500 Index), broad measures of investor sentiment are much less fearful as 2017 begins as can be seen in the below chart and raises the question whether much of near term returns are already priced into the market.