Out Today

I have to be out today unexpectedly.  I will make up for being away from the turret by posting tomorrow!

Things Are Getting Better {07.30.14}

The Bureau of Economic Analysis {BEA} calculates that GDP grows 4% in 2nd Quarter versus estimates of 3%.  Revises 1st Quarter GDP up to a negative 2.1% from a negative 2.9%.  Personal consumption increases 2.5% versus 1.9% estimates and a revised 1.2% in the first quarter.  Here's the key takeaway from the BEA's statement.

"The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment."

In other words with the exception of Federal government expenditures, spending increased across the board.  It's important to remember that these GDP numbers will be revised, likely lower.  But these are good numbers.  They support the theory that the economy's contraction in the first quarter was largely weather related.  These economic increases {should they not be revised incredibly lower in the future} are supportive of stocks going forward as they indicate the economy is on track for growth.

Link:  Business Insider:  GDP Surges 4% in Q2.

an tSionna: {China}

Two Chinese ETFs.

The top chart is the Chinese SPDR S&P China ETF {GXC}.  It is a broad based ETF made up of Chinese companies.  The long-term chart above going back to 2002007 shows this ETF breaking our of multi-year resistance this month. 

The next chart is the iShares China Large-Cap ETF {FXI}.  One thing to note about FXI is that 8 of its top 10 holdings are classified as financials so in some ways FXI is a look into investors opinions about the Chinese financial system.  It looks like FXI wants to test multi-year resistance soon.  This is something we need to watch.  If these break outs hold then these ETFs have the potential to be on the way to pretty nice performance over the next few years.  Not saying that has to happen of course but these now need to be on investor's radar and watch lists.

*Long ETFs related to FXI and GXC in certain client and personal accounts.  Please note these positions can change at any time.

an tSionna: Seven Optimistic Economic Charts

In the "Things are Getting Better" Department, I urge you to go read this post over at Quartz.com.  It's too long for me to put up here so it's better to go review the original.  The article puts up seven charts that show how the economy has gotten better.   A few of these charts {jobs, autos and unemployment} are statistics we've pointed out before.  A few review other data and themes.  Anyway it's hard not to walk away from the data feeling better about things.

an tSionna: Real Estate

From Chart of the Day.  Chart shows the inflation adjusted run-up and collapse of real estate prices in the last decade.  It then shows the subsequent advance since prices bottomed around the turn of the decade.  Probability suggest we won't see the same sort of steep gains we've seen since prices bottomed around 2010, but this kind of data is one of the reasons we are long term positive on assets connect with housing such as homebuilder  ETFs.  

*Long homebuilding ETFs in client and personal accounts although positions can change at any time.  Nothing in this post should be construed as investment advice.  If something you see here interests you then we recommend you either consult your financial advisor, do your own homework on the subject or better yet, hire us!

Link:  Chart of the Day: Home Prices.

Active vs. Passive Styles of Investing

Don't tell me that "you can't beat the market" because there are certain investors that are able to do exactly that.  Peter Lynch of Fidelity Magellan fame certainly did well in his 23 year run.  Bill Miller of Legg Mason famously beat the S&P 500 fifteen years in a row.  Lynch retired at the top of his game.  Bill Miller made a disastrous bet on financials during the teeth of the last bear market and had significant drawdowns during that time.  Most recently the performance of Leon Cooperman's Omega Partners has garnered notice.  Cooperman has posted returns net of fees of 14.6% from January 1992 through June of this year.  The S&P's return during that same period is 9.3%.  Of note however, is that betting on Cooperman {assuming you could get into his funds} meant sticking with him during some periods of significant drawdowns as well.  He significantly underperformed the market in 1994 and was down substantially in 2008, although he did better than the S&P 500.

However, it should be noted that these gentlemen {and a few others I'm sure} are the exception to the rule.  Most active managers in don't beat the markets.  Year to date most styles of hedge fund investing are nowhere near the S&P 500's return.  Now it could be that given a particular investment style of the fund that is not it's intention.  But it is still useful to remember that the investors in these funds are typically paying a 2% management fee plus a performance bonus of 20% on the profits of the funds.  That's a lot to swallow in an environment where you could have earned over 6% this year and paid a fraction of that cost.

It's not much better with mutual funds.  As chronicled in a recent New York Times article, S&P Dow Jones Indices took a recent look at this in a study titled "Does Past Performance Matter?  The Persistence Scorecard".  I'll refer you to both the article and the study for the exact methodology,  however, the study found that among other things only a very small percentage {just 0.07% of 2,862 funds} beat the market during the underlying period.

We at Lumen Capital Management, LLC  favor ETFs which track indices for our investment strategies for just the reasons listed above.  Does that mean all active management is bad?  Of course not.  There can be instances where an investor wants exposure to an asset class or strategy where only an active manager will suffice.  For example in a classic hedge fund, i.e a manager with a long short strategy, it is to be totally expected that in a year where the markets are going gangbusters that he or she will underperform.  That fund's mission isn't to keep up with the averages, its to provide you a downward cushion in the event of a decline.   But for the most part almost anything an investor wants to do today can be replicated with a more passive approach for a lot less in expenses.  That's the way I see it and I'm happy to debate that point with anybody that wants to do so.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Divergence

Something to watch going forward is the divergence that has started to occur between some of the major market indices.  I've shown above the difference between a few of the major asset classes and the Russell 2000 which is the small cap market index.  Those that watch money flows are concerned when you see these sort of divergences because it has often in the past signaled a market top or at least a period of market consolidation.  We'll continue to watch this in the "weight of the evidence" that is our our overall analysis.  It's not the only thing that matters but it is a component of the matrix that makes up our big picture view of things.

*Long ETFs related to the S&P 500, mid cap and small cap indices in client and personal accounts although positions can change at any time.

A Good Read

Given yesterday's events, if you have time go read Josh Brown over at the Reformed Broker today.  Josh is out with an excellent article, "How Geopolitical Threats Affect the Stock Market".  In my opinion Josh nails what goes on in periods like this.

an tSionna {07.17.14}

*Long ETFs related to the S&P 500 in client and personal accounts although positions may change at any time.

Future Earnings

We talk a lot about the importance of future earnings to stock market performance.  We've noted the strong correlation between market gains and earnings increases.  Dr. Ed Yardeni over at his excellent blog noted yesterday this same trend.  The chart above is his as well as the excerpted commentary below.

"Helping to mitigate corrections have been the steady uptrends in the forward earnings of the S&P 500/400/600 to new record highs. Forward earnings did it again last week. What is different this time is that estimates for 2015 have stopped falling. Over the past three years, annual estimates mostly fell, yet forward earnings moved higher because the coming years’ estimates remained higher than the current years’ estimates. In calculating forward earnings, the former get more weight and the latter get less weight as time passes. 

Another positive is that S&P 500 forward revenues remains on an upward trend and rose to a new high during the week of July 3. Estimates for 2014 and 2015 have been rising recently and are expected to grow 3.4% and 4.4%, respectively. With the exception of Emerging Markets, the US stands out as having one of the best-looking forward revenues profiles among the various major global MSCI composites. It has the best profile for forward earnings. The US forward profit margin is at a record high, yet still trending higher."

One final comment:  Note that according to Yardeni, the only region of the world with a better forward revenue per share profile than the US are emerging markets.  Emerging markets have had a better 2014 but they still are locked in a trading range {albeit at the higher end of that range}, are still trading below their 2007 highs and still have not taken out their highs last set in 2011.  Not saying that means the stocks are going to run but think it's fair to note the discrepancy between revenue growth and stock price performance.

Link:  Yardeni:  The US Stands Out.

*Long ETFs related to emerging markets and the S&P 500 in both client and personal accounts although these positions can change at any time.

Happy Bastille Day!

Happy Bastille Day for our compadres in Division 6 at the Hotel California and to Lt. English over in Division 1. 

And here's our annual tribute to France.  Say what you want about the country but they have a great national anthem!  Le Marseillaise!

I have to be out tomorrow so my next post will be Wednesday.

Things Are Getting Better

In the "Things are Getting Better" department,  the Government reported yesterday that job openings rose in may to the highest level in almost seven years.  That same report showed that the number of unemployed job seekers per opening also fell to its lowest level in six years.  Here's some other charts that continue to illustrate economic improvement.

Civilian unemployment continues to decline to 6.1%.  Just eyeballing the chart that looks to this untrained eye as pretty close to the average since 1950.  

Initial jobless claims also continue to fall.  Again to this untrained economist this chart also looks like its getting pretty close to it's average rate.

As I look at it, each person who gets a job is one more person off the government's rolls, has money to spend and can also pay taxes.  All of this is healthy for the economy and probability suggests healthy for markets longer term.

No posting here now until Tuesday.

The Mother's Milk

Earnings are the "mother's milk" for stocks.  One of the highest correlated indicators for stock market performance is increased earnings.  There is a strong history of market advances and earnings increases.     Of course the inverse is also true When estimates are declining stock prices tend to do the same. That's why we pay so much attention to both year end earnings and forward 12 month earnings.  Today courtesy of the great website Fundamentalis, we will review what's going on with this important part of the market's valuation.  

Because of the rollover of the quarter, we will now focus on forward estimates that look out to the middle of next year.  Earnings bump up over 9% next year according to Fundamentalis and Thomson Reuters.  The forward earnings estimate for the S&P 500 looking out to that point is currently $126.77.  That implies the following on this estimate with the S&P trading at 1,936.

Current PE:                   15.27        {Four Quarter Forward Estimates}

Earnings Yield:               6.54%

Dividend Yield:              1.86%

Current Expected Price Cone of Probability out to 06.30.2015:   1,775-2,200.

The current yield on the 10 year US Treasury is 2.57%.  {Down .01 basis points from our last review.}

The Cone of Probability is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, also are those estimates rising or falling, dividend yield, earnings yield and the current yield on the US 10 year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time.  

An Historical Look At Earnings

The mother's milk of stock market performance is corporate earnings.  If you want to know why stocks have been on a roll over the past two years, it's been the continued increase in corporate earnings.  {More on this tomorrow.}  Corporate earnings are now at historic levels.  Here's Chart of the Day's chart {above} and their commentary:

"With earnings season just around the corner, today's chart provides some long-term perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged to all-time record highs. To further illustrate the significance of the current corporate earnings recovery, consider that the run-up in real earnings from Great Depression lows to credit bubble peak took over 74 years. The run-up from financial crisis lows to today has been similar in magnitude (actually slightly more) but was accomplished in a mere five years. In the end, S&P 500 earnings are currently at all-time record highs."

Link:  Chart of the Day.com: Earnings.   {Paywall on main site.}

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.