Tuesday, November 25, 2008

Chart of the Day: Capitulation Phase Over?

Actually this is the Chartiest of the Day report. Carter Worth on CNBC gave his reasonings for the market lows being hit on Oct 1oth follow by the lower low on Nov 21st which technically confirmed the Oct low since it only stayed below for 1 day. Carter was pretty accurate on the way down so I have faith in the guy. Interesting view which makes it seem like you should accumulate stocks around the S&P 840 low and look to sell any big gains at close to 990 at least for now. The market has clearly oversold, but he makes some good points on why the market won't rally big for now.

He also said that because we've breached the lows of Oct. 10, in the short term, the market will be directionless. “The capitulation phase of the bear market is over. Now we’re heading into the apathy phase,” he says. “We’re stuck in a range with 990 being the top and 790 being the bottom.”

Interesting comments on BMY. BMY has been one of our favorites in the Net Payout Yield portfolio.

Thursday, November 20, 2008

Stat of the Day: Dividend Yields above Bond Yields

In the last 45 years, the market has never seen the dividend yield of stocks even approach the 10 yr Treasury yield. Though this chart doesn't show it, the last time the dividend yield exceeded the bond yield was 1958. Whats even more incredible is that dividends aren't nearly as popular over the last 10 years. The Net Payout Yield would drastically exceed the bond yield now due to huge buybacks. This is definitely not the time to abandon stocks for low yielding bonds. Its exactly the time to buy some aggresive small caps or Net Payout Yield stocks if you want less risk.

Wednesday, November 19, 2008

More Signs of a Housing Bottom in Orange County

Interesting article in the LA Times about a real estate boom in Santa Anna. 10x the sales volume of last year and houses receiving multiple offers sure sounds like a bottom. When somebody has to make an offer on 3 houses before getting a house, its difficult for the market to fall. Definitely a sign of demand outstripping supply at the current levels though its key to note that its 45% below the peak levels. Still, investors will have more confidence in banks once the housing market has hit bottom. Banks also will be more willing to lend money. Also, its interesting to note how bearish the article is about possible future declines due to job loses and such. Overly bearish if you ask me.

  • All told, 357 homes in Santa Ana were in escrow in October, almost 10 times the volume of a year ago.
  • Debini said the house they bought was actually the third they bid on. All of the foreclosed houses they pursued drew multiple offers, and they were outbid in their two previous attempts, she said.

Tuesday, November 18, 2008

Stat of the Day: Biggest PPI Drop on Record

Today we got yet another record: the largest PPI drop ever. At a drop of 2.8%, Wholesale prices are dropping at a dramatic rate. These reduced costs should help most businesses save money and increase profits leading to additional spending. The previous low was Oct of 2001 yet another period that was the near the lows of a bear market.

The market continues to match or set records that were last reached at market lows whether Yield Curves, Valuations, or Costs. These indicators alone never tell us when the bottom has been reached, but they all add up to being much closer to the bottom then the top.




Monday, November 17, 2008

Stat of the Day: Off the Charts Yield Curve


Another indication of the whackiness in this market. The yield curve is now off the charts bullish. This usually has a very positive impact on future bank earnings, but in a market where lending is limited its difficult to determine if the impact will be like normal cycles. Typically banks are encouraged to lend like crazy because the spread is so positive for them, but that isn't happening this time because of the financial crisis. You can bet though at some point in the future, this yield curve will help return the market to growth and inflation. In fact, its likely to cause irrational investments as it always does at the peaks and troughs.

This number is off the charts because of the huge compression in the rates of the T-bill. Its unlike anything the market as seen even in the last 25 years. Anytime this ratio gets above 2 it becomes very bullish for the future economy. The markets tend to forget that in periods of extreme bullishness or negativity that such monetary realities will cause a dramatic shift in the future economies direction.

Hedge Funds Raising Cash

Lots of reports have contributed the huge market declines in Sept and Oct to liquidations and forced selling by hedge funds. Based on this article, it's becoming very clear that alot of hedge funds have over liquidated. Though funds aren't required to report cash positions the numbers add up to a good portion of funds already having sizeable cash positions. In some cases such as BP Capital, funds have already moved to mostly cash.

These drastic moves put alot of cash available for reinvesting in the market once a rebound occurs. Adds more fuel to the argument that an eventual rally could be just as fast as the deline. Below are some samples of firms that have drastically reduced their reporting holdings during Q3 and in most cases the cash position has been identified as 30, 40, 50% and sometimes even more. That money can't remain on the sidelines forever and at least for these funds the selling will be limited going forward.

  • Hedge-fund manager David Tepper entered the third quarter with $3.1 billion of U.S. stocks and exited with $648 million, selling most holdings to reduce risk and raise cash as carnage spread across the financial markets. The firm, which switched some money to bonds, has between 30 percent and 40 percent of assets in cash.
  • Atticus Capital LP, based in New York, disclosed that its holdings declined to $510 million from $8.1 billion. The firm, run by Timothy Barakett, 43, sold out of 39 stocks while adding no new holdings. ConocoPhillips, MasterCard Inc. and Burlington Northern Santa Fe Corp. were the three largest positions he exited, with a combined market value of $2.68 billion as of Sept. 30. David Slager, 36, who manages the Atticus European Fund, told investors that more than 50 percent of his fund was in cash or U.S. Treasuries after he lost 43.5 percent year-to-date.
  • At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7 billion. Jones said markets face more selling from managers.
  • SAC Capital Advisors LLC of Stamford, Connecticut, said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30. Founder Steven Cohen, 52, had about half the firm's assets in cash in mid-October, after his main fund fell 5 percent through September.
  • Louis Bacon's Moore Capital Management LLC said the value of its 13F securities fell 69 percent to $1.4 billion, while at Jana Partners LLC, a firm overseen by Barry Rosenstein that makes activist investments, they fell to $2.1 billion from $5.9 billion. Both firms are based in New York.
  • Jeffrey Vinik, who once ran the Fidelity Magellan Fund, disclosed that his Boston-based Vinik Asset Management LP held $1.8 billion at Sept. 30, down from $11.8 billion at June 30.

Monday, November 10, 2008

China Stimulous Plan - $586B




By now I'm sure just about everybody has heard about the details of the stimulous plan out of China today. A lot of debate has taken place over whether its really new spending or mostly just a rehash of existing plans such as the earthquake rebuild. Regardless, the Chinesse economy is likely to benefit from these additional funds being spent. APWR is our favorite stock based on this news as any increase in demand in China will just further stress the power grid in mainland China requiring the services of APWR. APWR has been crushed due to its speculative appearance and the drop in the China markets, but it has a huge $800M backlog plus another potential $300M deal in the works. Not to mention, APWR is just now producing windmills that will provide for a substantial boost to the bottom line.

Looking for a stock that will indirectly benefit from this stimulous plana and you need look no further. Even the chart is starting to look more bullish.

GM Target Set at $0

Not sure I've seen a analyst come out with a $0 target, especially on a DOW stock. According to this article, Deutsche Bank cut GM to 'sell' with a target price of $0. While Obama has already stated that he is behind some sort of help for the ailing US automakers, the pressue seems high that taxpayers not be impacted. These analysts seem to think GM might get a AIG type of deal where the shareholders are basically diluted out of existense. The issue is that any GM deal needs to get major concessions from labor to make them able to compete with the likes of Honda and Toyota. Otherwise, why not let them go bankrupt and see what happens to their labor deals. Constantly saving overpriced contracts will never solve the problem.

Either way, I'd stay away from the stocks of GM and Ford until this all shakesout.

  • While further government assistance would decrease the likelihood of a GM bankruptcy, we believe any government assistance would likely significantly dilute GM's equity," Barclays' Johnson wrote in a note to clients.
  • "Of the four broad options for government assistance for GM, we believe that political pressure to protect taxpayers may lead to a solution similar to the 1979 Chrysler bailout, which was accompanied by concessions from debt holders, labor, suppliers and management," Johnson said.
  • "GM equity could be interesting longer term, but we advise near-term caution given uncertainty on the structure of any potential government aid," Patel wrote in a note to clients.

Thursday, November 6, 2008

Stat of the Day: Stock Allocation at 58%



From the chart above, Bespoke provides a nice picture of how the market has become so momentum based. Stocks fall and the allocation recommendation for stocks drops as well. Most analysts would advise the opposite if writing a textbook, but when it comes to real world applications it seems that people pull out of stocks at the lows and pile in at the highs. This is another of the historical indications we have regarding buying stocks now.

The average recommendation has dropped from 68% to 58% even though the market is back to the area of the 2003 lows. Just another indication of how the attitude towards stocks has dramatically shifted since 2000.

With gas prices and interest rates falling on a daily basis, its difficult to envision how the market will remain weak much longer. Americans like to spend and the stars are aligning for a great big shopping spree. Valuations and just too cheap to ignore.

Tuesday, November 4, 2008

The Obama Rally?

As we watch the S&P500 surge 4% to over 1,000, it has probably caught alot of people off guard expecting a further selloff with Obama likely to win the election today. The market has enjoyed a nice rally the last couple of weeks following widespread panic selling and hedge fund liquidations over the previous couple of months. We're now likely seeing a rebound as the market is now seeing more certainty with the election finally happening. The market has likely more then discounted a Obama win and is now coming to grips with the facts that the world won't end. In fact, we've lately heard that Obama will likely delay the expected tax increases until maybe 2010 at the earliest.

As usual it appears the market has priced in the worst case scenario and now is waking up the reality that world isn't going to end. After such a huge run, it's likely that the market will use the 1,000 point area as a place to pause before the ultimate rally. We'll likely see 940 or 960 on the downside and possibly as low as 900. When that happens, it will likely be the best buying opportunity we've seen in 30 years. History has generally favored strong rallies in the first year of a Democratic presidents reign especially when the prior year has seen a big selloff in anticipation of his election. Markets always over react and it's likely that 2008 was no exception.

In previoius articles, we've made a strong case for the compelling valuations in the market. Now is the time to act upon them.

Edit: Market finished strong on 11/4, but has started 11/5 off weak as weak economic news comes back to focus. ADP reported a weak jobs number and ISM Services index was sub 45 indicating a very weak Oct. Would expect the market to be weak the reast of the week retesting 940 or 900.

Edit 11/6: wow... the market reacts so fast these days. As of 11am est, the S&P500 is already sub 930 and setting for a potential move to 900. Expected this to take longer then 2-3 days. With worldwide rate cuts, the world economy is bound to start looking better in 6-9 months. Getting more and more difficult to be on the sidelines.

Dirt Cheap Valuations

Now Jeremy Siegel joins us in an article at Yahoo! Finance. This guy is known for being very conservative in his approach to the stock market and constantly warned about overvalued stocks in the late 90s. He is bullish on not only the US market but the Worldwide market. The PE ratios in part of Europe and Asia are remarkedbly low in the 7s. Check out his summary of the world markets PEs.

He makes a compelling case of using normalized earnings to value stocks. Otherwise, throw out the peak and trough or outsized gains and losses to focus on the core earnings level. Do you really want to value a stock based on the current weak economy or based on what it would earn if the economy was growing 2-3%? Just like you shouldn't value a stock based on what it earns when the economy is growing at 5%. That isn't sustainable and neither will be any valuation assigned to that growth.

  • I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.
  • Right now the "normal" level of earnings, based on trend analysis of past 15 years of earnings on the S&P 500 Index is $92 a share.
  • If the average 15 price-earnings ratio applied to these $92 per share normalized earnings, the S&P 500 Index would be selling at 1380, which is almost 50% above its current level.
  • The last time the market was at ten times earnings or less was in the late 1970s and early 1980s.