Posts by Maxwell Meyers
Maxwell Meyers at Talking Numbers 10 mths ago
Something mysterious is brewing in the markets.
While the U.S. economy is kicking into high gear, the S&P 500 is stuck in reverse, down slightly on the year despite a massive two-day rally. Even more mysterious is the fact U.S. stocks are badly trailing European and emerging markets despite the fact that Europe and many economies in the emerging world are in deep trouble.
So what gives? Are U.S. equities signaling an economic slowdown?
“The market has already priced in an optimistic outlook,” said Gina Sanchez, founder of Chantico Global.
“You’re looking at expectations that were at 3 percent for growth for 2015. Those have actually been revised up to 3.2 percent and this is already priced into this market.”
“While earnings are OK, multinationals are getting hit by the strong dollar,” said Sanchez, a CNBC contributor.
She also noted that U.S. stocks are at the higher end of historical evaluations, while beaten-downemerging economies are trading at P/E ratios that look comparatively cheap.
What’s wrong with this picture?
The euro is at two-year lows against the dollar. Crude oil is trading near its five-year lows. And, the U.S. 10-year bond yields are below 2.5 percent. Yet stocks are at record highs. In a typical market, that doesn’t happen, and that’s why some traders are getting nervous.
“It’s starting to get a little pricey,” said Gina Sanchez, founder of Chantico Global. According to Sanchez, U.S. stocks have been the chief beneficiary of global central easing, which she contends has pumped a lot of cash into U.S. denominated assets.
“There definitely is a preference right now for U.S. stocks, U.S. Treasurys – everything U.S. is really hot right now relative to Japan, Europe, and the rest of the world,” Sanchez said . That has helped drive up valuations for U.S. stocks to levels not seen since the last financial crisis. The S&P is currently trading at a 17.3 multiple, well above its historical average. In order for stocks to remain reasonably valued, Sanchez believes the U.S. economy will have to grow much faster, something that seems increasingly unlikely amid the backdrop of a slowing economy.
Since hitting its peak just a month ago, U.S. stocks have shed $2 trillion of it's value, as a torrent of selling has sent the Dow negative on the year, and the S&P 500 and Nasdaq flirting with official correction levels.
The sudden losses, which are the steepest since Standard and Poor’s downgraded America’s long-term credit rating in the summer of 2011, have traders searching for terra firma and asking aloud where the bottom is. Of course, picking bottoms is anyone’s guess, but one well-noted market contrarian says there are three things happening in the market right now that suggests we might be close to one.
Larry McDonald, the senior director at Newedge was prescient in calling out the excesses in the financial system.
Three things are happening right now that could signal a temporary floor, says the author of “Colossal Failure of Common Sense.”
First off, McDonald believes the Fed is in the midst of possibly moderating its stance in regards to stimulus policies.
What’s worth $1.2 trillion? Apple, writes billionaire investor Carl Icahn in his latest letter to company CEO Tim Cook.
At that price, Apple would be worth three times the current market cap of Exxon Mobile, nine times that of Disney’s and roughly the same value as the gross domestic product of the United States in 1970.
BY THE NUMBERS
If Apple is worth worth $1.2 trillion
“If Apple were worth that much, it would comprise 7.4 percent of the S&P 500 today,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “That would be a modern-day record. It’s absurd,” Silverblatt added. The current record-holder of the largest company in the S&P 500 is IBM, which in 1985 comprised 6.4 percent of the index.
That’s a lot of iPhones.
But is a $1.2 trillion valuation irrational in it of itself?
“He’s assuming everything goes right,” said Piper Jaffray’s Gene Munster. “It’s not crazy. But it is aggressive, and it will take years to get there.”
What do you do when gas is expensive and your jobs prospects are iffy?
You tend to stay in and not eat out. And that could explain in part why casual dining stocks have lagged the market this year. Cheesecake Factory, Darden and Buffalo Wild Wings have posted respective year-to-date losses of 7 percent, 8 percent and 16 percent while the broader market has returned 4 percent.
Casual Dining Stocks vs. The Market
But recently, those stocks have become more appetizing to investors, as an improving economy and tumbling oil prices have put more cash in consumers’ pockets. Since hitting its high in June, crude prices have fallen nearly 20 percent, and wholesale gasoline prices have dropped 28 percent. Darden and Cheesecake Factory have eked out gains in the past month, while the S&P 500 has been getting clobbered.
So if the economy continues to improve, and commodity prices continue to fall, will investors continue to gobble up shares of casual dining stocks?
Technically, the charts look unexciting, at least according to one noted technician.
The Bond King doesn’t appear to be too keen on bonds these days, or at least those issued by the U.S. government.
Pimco’s Bill Gross reduced his exposure to government-related bonds in his $222 billion Pimco Total Return Fund in August, while slightly increasing the amount of corporate bonds in his fund, according data posted on Pimco’s website.
Gross’ timing may have been off, but the move appears to be working out. Initially, U.S. bonds enjoyed a strong rally in August, but they’ve since been selling off sharply in September on expectations that the Fed may raise rates sooner than expected. So should you follow the Bond King out of bonds?
According to some traders, the answer is yes.
“We expect the Fed to raise rates in the second quarter of next year,” said Chad Morganlander of Stifel’s Washington Crossing Advisors. “And the ten year should move way run advance of that,” added Morganlander, who also said he expects the yield on the 10- year bond to approach 3 percent by next year. Morganlander advised investors to buy bonds with shorter maturities and higher credit ratings.
As if this record-setting rally needed another superlative, a new statistic is now making the rounds on Wall Street and getting traders to scratch their heads in disbelief.
According to Jonathan Krinsky, chief market technician at MKM Partners, the S&P 500 has gone 14 consecutive days without a move of 0.50 percent on a closing basis, the longest streak since 1995. To find a longer streak, you have to look to 1969, which saw 20 consecutive trading days without such a move. Back then, Nixon was president, “Butch Cassidy and the Sundance Kid” was the top film at the box office, and the Beatles gave the last public performance in London.
Note, the streak was broken by Tuesday's 0.65 percent decline, but the market moves have still been very muted of late. So what does this lack of volatility all mean for a market that hasn’t seen a correction of 10 percent or more since 2011?
Well, if history is any indication, perhaps more gains.
“The takeaway is this result to more upside,” Krinsky said. “At least a couple percent higher.”
So will history repeat itself?
Could too much of a bad thing actually be good? That appears to be the case with U.S. equities, which continue to rally despite a preponderance of bad news.
In the past month, The Dow Jones industrial average has jumped almost 4 percent despite a number of events (sluggish U.S. job growth, a depressed European economy, a surging dollar, Russia, ISIS) that would typically have investors running for the exits.
So what gives?
“I call it the TINA Phenomenon,” said Enis Tanner, global editor for RiskReversal.com. “There Is No Alternative (TINA) for U.S. stocks, which are once again outperforming their global peers in 2014.”
Tanner points out that a number of factors that would seemingly be bad for stocks have actually created an environment where stocks can flourish. Europe’s economic problems (and tacit backstop by the European Central Bank) have led to historically low rates across Europe.
That has helped keep rates here at home low as many European sovereign nations now sport bond yields well below those of U.S. Treasurys.
And the geopolitical turmoil in Ukraine and the Middle East has only helped suppress those low rates, as Treasurys have enjoyed a so-called fear bid.
Think the market has reached a top? Well one very old and widely followed market theory is signaling more gains to come.
Transports, which consist of stocks like railroad companies, airlines and truckers, are at record levels and are up 16 percent year to date. In fact, the group on Thursday hit a new all-time intraday high for the third straight session. and that has some bulls getting even more bullish.
“Dow theory is still good,” said Chad Morganlander of Stifel’s Washington Crossing Advisors. “It’s a good barometer for the health of the economy.”
Dow theorists contend that when transports do well, the overall market should follow. The logic is simple. As economic activity picks up, people tend to consume more, which requires people to ship, fly and truck objects around the world. In other words, these stocks are taking the pulse of the global consumer, and right now that pulse is strong, something that should hearten the bulls.
“You’re seeing it in the economic indicators,” added Morganlander. “Auto sales are strong. All the ISMs are strong. That’s a reason to stay long.”
It’s been the investment equivalent of Pavlov’s dog. The VIX spikes, and soon after, a rally in stocks quickly ensues.
In fact in the past year, the VIX, or so-called “fear index” has moved 50 percent or more off its lows four times, and each time the S&P has made meaningful moves higher.
So as the VIX now flirts with four-month highs, investors are asking a very simple question: Is all this volatility a buying opportunity, or will things be different this time?
According to one well-regarded technician, the VIX is flashing a big “buy” sign.
“Spikes in the VIX tend to indicate heightened investor fear,” said Ari Wald, head of technical analysis at Oppenheimer. “From a contrarian standpoint we use that as ‘buy’ signals, and the numbers agree.” According to Wald, since 1990, when the VIX spikes more than 50 percent off its 63-day low, and the S&P 500 is above its 200-day moving average, as it is now, the S&P 500’s performance has been more than “twice its average performance over the next one and two quarters.”