4.13.14: Has Character of Stock Market Changed, and More Links to Read

April 13, 2014 at 4:42 pm | Posted in GE, GOOG, GOOGL, HYD, HYG, IBM, Municipal Bond market | Leave a comment

One element to watching the stock market every day is to get a feel for the pattern of the market, and then watch and see if that pattern continues. Every correction for the SP 500 since 2011 has been fairly limited in scope. We did an Excel spreadsheet a few months back on the length and depth of recent corrections, which is attached here: SP500corrections.

We haven’t updated the spreadsheet after the January, 2014 correction since I don’t think we’ve finished the move (or at least the churning) that has signified this year’s stock market action. In other words, the fact that we saw a 6% – 7% correction through the first 5 weeks of the year, the SP 500 then bottomed and rallied through the month of February, but the market still hasn’t decisively moved higher supported by breadth and leadership, likely means this correction isn’t over.

The question we ask then, “has the character of this stock market changed ?” Id say yes, it has. The rally off March, 2009 market lows has been partially lead by small-caps and biotech’s, both of which have broken down of late. The biotech ETF’s (BBH, IBB) are testing testing their respective 200-day moving averages, so the action this week for that sector is critical. q1 ’14 earnings start this week. I don’t think they will be as bad as the current headlines suggest, but yiou can have strong years of SP 500 earnings growth, like 1994 and 2011, and yet the SP 500 does very little in terms of the annual total return.

However, the prospect for a prolonged bear-market that the SP 500 just exited from in May, 2013, when it broke out to an all-time high seems highly, highly unlikely.

Frankly, I’d be greatly surprised at a 20% correction in the SP 500, given its 15(x) forward p.e ratio and the expectation that SP 500 earnings will grow 8% in calendar 2014.


Josh Brown, with his notes from the Jeffrey Gundlach lunch.  Start at the bottom or the summary section first and work your way up. Josh is one of the best and most prolific writers in social media today.

Charlie Bilello, CMT on asset-class returns in 2013 and 2014, and more importantly, found at the bottom, the correlation therein. It is a completely different year in 2014.

Ryan Detrick, a “money” contributor in the financial media if there ever was one, on the action in small caps, and the prospect for positive prospective returns. The Russell 2000 is testing its 200-day moving average, or getting close to it. How the index acts around the 200-day average will speak volumes about its prospects. The Russell 20900 is trading about 70(x) earnings, while the SP 500 is trading at 15(x) forward earnings. The importance of market cap – don’t forget it.

Great tweet by Norm Conley of JA Glynn on the really long-term picture of the market. Stay with large-caps.  Norm also thinks technology will do ok despite its streak of underperforming the Russell 1k Growth index. Here is Norm’s tweet on this topic. The constant cacophony in the financial press about “tech” greatly oversimplifies investing in the sector. Two of our top 5 holdings are Facebook (FB) and Microsoft (MSFT), two tech stocks with completely different valuations. For our clients, it is cheaper “old tech” (PC’s, networkers, software companies) versus, more expensive “new tech” (i.e. social media), etc. (Long FB and MSFT)

Jeff Kleintop, Strategist at LPL Financial, on the cheap Cyclical stocks. Technically, GE is an Industrial, but it is still ruled by GE Capital. GE is down 10% year-to-date (excluding the dividend) and is testing its 200 day moving average. There are better cyclicals to own.

The two big tech heavyweights that will report this coming week are GOOGL and IBM (long both). IBM, one of 2013 underperformers, and still down about 5% for its 1-year return is up 5% year-to-date. GOOGL is just the opposite, with the stock being up 60% in 2013, and now down roughly 8% in 2014.

The average investor and diversification, found on Bloomberg View (@BV). The issue I have with this is the 20-year returns. Distorted by the 13 year SP 500 bear market ? If starting today, given “reversion to the mean”, etc. how would you position a portfolio ?

Ukarlewitz with some good graphs supporting all that was said above.

This Week on Wall Street blog. Note Gray Morrow’s April 11th column. Our sentiments exactly.

Jeff Miller, of A Dash of Insight: always a must-read, but takes a while to get through given his voluminous links. This week’s A Dash is pretty good. Jeff is worried about corporate earnings, which I don’t think he needs to be. As we’ve mentioned many times though, corporate earnings are not correlated directly and immediately to SP 500 returns.

Moody’s recent Leveraged Finance Interest notes that high yield bonds are NOT cheap, although default rates remain low. Moody’s Liquidity Index also signals continue benign conditions for high yield. Frankly, we’d rather own municipal high yield here than taxable. Nuveen’s Muni High Yield Fund has a higher absolute yield at 6.11% versus the HYG’s 5.93% and the JNK’s 5.86% yields, not to mention the US high yield composite index yield of 5.26%. For taxable accounts, muni high yield should be less risk and more reward, as Detroit, Puerto Rico and even Chicago clean up their respective pension and credit messes. As corporate high yield becomes more “covenant lite”, muni high yield, particularly the Chicago GO bonds you would think, which are secured by (my) property taxes, would look relatively much stronger.

Speaking of credit, yesterday, here in Chicago I had a chance to listen to Professor Joel Litman of Valens Credit, a firm which publishes credit default swap spread info relative value opinions on stocks, based on credit analysis. Personally I think this is an excellent analytical framework in which to view the world, and cash-flow and balance sheet analysis is part of our analytical analysis in valuing stocks for clients. It was a great presentation by Professor Litman. Here is the website for Valens-Credit.

So where does that bring us to today ? We will be looking to short the IWM into any earnings rally this week. The SP 500 and the large-cap universe look much better than their smaller-cap brethren. The non-stop Treasury rally has been a killer for balanced accounts this year although Friday’s close for the 10-year Treasury yield is sitting right at long-term resistance. If the 10-year Treasury yield trades through 2.62%, then 2.40% or the March ’12 high yield is the next stop.

The 2-Year Presidential Cycle appears to be the best analog for 2014 thus far as we wrote about in January ’14. Predicting the future is far more complex than analyzing the past, so we are taking a cautious approach, and will likely get more aggressive as we move into the end of the 3rd quarter, and after the mid-term elections.

q1 ’14 earnings will not be as bad as currently expected, per our Weekly Earnings Update published yesterday. Technology, Industrials, Basic Materials, Consumer Discretionary are the sectors we like. Note the positive earnings revisions for tech for q2 ’14.

Just as we were ready to publish this summary on Sunday afternoon, a WSJ headline pops up about Ukranian forces killed by pro-Russian troops in East Ukraine. Putin is Saddam with a brain. He is killing his own capital markets and the chance for his own people to prosper and benefit from global growth. Is it an issue for the markets ? We’ll find out shortly.

Thanks again for reading and stopping in. There are a lot of blogs competing for your eyeballs.

Trinity Asset Management, Inc. by;

Brian Gilmartin, CFA

Portfolio manager






4.12.14: SP 500 Earnings Update: Q2 ’14 Earnings Looking Better

April 13, 2014 at 4:17 pm | Posted in AA, Financials, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuter’s This Week in Earnings, the “forward 4-quarter” estimate for the SP 500 rose last week to $123.04, or $0.27 from last week’s $122.77.

The forward p.e is now 14.75(x) and the PEG ratio has slipped to 2.15(x).

The “earnings yield” on the SP 500 is 6.78%, the highest earnings yield on the SP 500 since 10/18/2013.

The year-over-year (y/y) growth rate on the SP 500 rose to 6.86%, also the highest since 12/27/13′s 7.45%.


With the flood of q1 ’14 earnings expected to start this week, it is pretty clear that the slashing of earnings estimates for this quarter has followed the normal pattern and we should expect a pop in y/y growth for q1 ’14 as we roll through April and May ’14.

As of Friday, 4/11/14, the expected y/y growth for q1 ’14 earnings was expected at +0.9%, down from +6.5% as of January 1, 2014. Revenue growth is actually expected to come in a bit stronger at +2.7%. (Factset’s numbers are different, and lower. Factset is expecting an estimated earnings decline of -1.6% as of Friday, 4/11/14.)

It has been no surprise that q1 ’14 earnings growth for the SP 500 has been slashed to the bone, with consensus now expecting the lowest y/y growth since q3 ’12.

By the middle to end of May ’14, I expect actual q1 ’14 EPS growth to be in the 3% area.

Here is how q1 ’14 earnings growth look today, versus Jan 1 ’14:

Cons Disc: +5.6% +14.5%

Cons Spls: +3.2%, +9.3%

Energy: -6.1%, -0.4%

Fincl’s: -3%, +5.9%

Hlth Care: +3.8%, +5.8%

Industrials: -0.2%, +5%

Basic Mat: -0.8%, +9.8%

Technology: +2.4%, +7%

Telco: +13.4%, +14.2%

Utilities: +7.5%, +1.5%

SP 500: +0.9%, +6.5%

Ranked another way, from highest to lowest expected q1 ’14 earnings growth:

Telco: +13.4%

Ute’s: +7.5%

Consumer Disc: +5.6%

Hlth Care: +3.8%

Consumer Spls: +3.2%

Technology: +2.4%

SP 500 +0.9%

Industrials: -0.2%

Basic Mat: -0.8%

Fincl’s: -3%

Energy: -6%

q1 ’14 Revenue Growth estimates by Sector:

Hlth Care: +7.8%

Cons Disc: +4.5%

Ute’s: +3.5%

Telco: +3.2%

Tech: +2.8%

SP 500 +2.7%

Cons Spls: +2.5%

Basic Mat: +2.4%

Industrials: +1.5%

Energy: +0.6%

Financials: -1.2%

Q1 analysis / conclusions: it is little wonder Utilities and Telco were the best performing sectors in q1 ’14 given the numbers. Utilities saw sharp improvement (i.e. upward revisions to growth estimates) in expected earnings growth through q1 ’14, one of the only sectors to do so. The problem is Telco and Ute’s are just 3% of the SP 500 respectively. Financials and Technology are roughly 35% of the SP 500 respectively. I think the selling in Consumer Discretionary has been too severe. Basic Materials actually improved in terms of the y/y growth estimate between April 1, and Friday, April 11th, thanks to upward revisions in Alcoa’s EPS, post the April 8th earnings report. I do think Basic Mat is a safe-haven sector for this year.  We’d avoid the big banks, although we remain long BAC and JPM. JPM’s Friday, April 11th earnings report wasn’t pretty. We like the exchanges better than the big banks going forward.

So how is q2 ’14 looking today in terms of expected y/y earnings growth ? Here is the change between January 1 (2nd column), and April 11th (first column) for q2 ’14. Expect growth to be cut for the 2nd quarter as we move forward into the summer, but the important metrics are the change for each sector and the degree of upward / downward revisions in terms of the percentage change:

Basic Mat: +17.7%, +20% (Basic Mat bottomed in q2 ’13, with July ’13 earnings reports. Horrid numbers across the board)

Tech +12.9%, +12.8%

Telco: +12.7%, +12.9%

Energy: +12.7%, +19.1%

Cons Disc: +10%, +13%

SP 500: +8.2%, +9.7%

Industrials: +7.9%, +8.4%

Con Spls: +7.6%, +10.6%

Hlth Care: +6.2%, +5.2%

Utilities: +2.2%, +3.6%

Financials: +1.6%, +2.1%

Analysis/Conclusion: as q1 ’14 financial results get reported, all eyes will turn to q2 ’14, since SP 500 companies will guide to q2 ’14 and full-year 2014. I can tell already, q2 ’14′s absolute level of earnings growth today, will be at or above q1 ’14, given that we are starting q2 ’14 with a +8.2% expected growth rate. q2 ’14 earnings will get reduced as we move through the quarter, but I expect when we hit July 1, 2014, that we will see +3% – 4% growth rate to start the reporting season. Technology is a pleasant surprise as earnings growth estimates have been revised higher for q2 ’14 since Jan 1, as has Health Care. Technology, Health Care, Basic Materials, and Industrials, continue to look good through q2 ’14. We are staying away from Financials, at least in terms of new money, although we could be putting new money into exchanges.

Financial’s will have a tougher year in 2014, than they did in 2013.

Whatever happens to the major equity markets this year, it wont be earnings-related. Growth expectations are still pretty subdued: you have to remember, in the late 1990′s, Technology earnings were growing 40% quarter in and quarter out during the late 1990′s.

Expect some Consumer Discretionary stocks to pop with solid earnings reports and q2 guidance. That is the sector – which includes retail – that has the most upside to me.

This is a broad brush analysis of q1 and q2 ’14 earnings. We expect 54 SP 500 companies to report q1 ’14 earnings this week, at least 20 of which will be Financials.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




4.10.14: The Punishing and Unrelenting Bid in the Treasury Market

April 10, 2014 at 7:56 pm | Posted in Bond Market(s), HYG, interest rates, Municipal Bond market, TBF - inverse Treasury, Uncategorized | Leave a comment

Last Friday morning, April 4th, 2014, when I saw the 194,000 and then the 32,000 upward revisions in the payroll number, I thought, “This number might get Treasuries to back up a little” which was absolutely the wrong thought by the end of the day.

This week, particularly on Wednesday, when I saw the equity indices bounce after the Fed minutes I thought “We could see some selling in Treasuries, finally”, which was not correct.

This morning when I saw and heard the 300,000 and the sharp drop to get to that number from Rick Santelli at the CME, I thought “Finally, might get this Treasury bid to relent some”, which as of 2:35 pm on Thursday afternoon is the exact wrong thought.

When the 10-year Treasury finished 2013 at 3.03% on 12.31.13, I thought, “2014 should be another tough year for Treasuries, maybe as bad 2009″ when in fact so far this year, the 10-year Treasury was up 6% in q1 ’14 and is up again since the start of the quarter despite the stronger economic data.

This has been our worst trade all year, and here are some possible reasons:

1.) Not only does inflation remain subdued, disinflation continues. It seemed like the Fed was starting to worry about “accelerating wage inflation” until Friday’s March ’14 jobs report showed average hourly earnings fell to 0%, from February’s +0.2%. So much for the inflation worry;

2.) Talk of deflation in Europe is rampant but it could simply be a function of a Financial Media in Europe being far worse than what we have here in the US. Supposedly the Spanish 10-year Sovereign paper is now yielding less than Treasuries, which could be bringing other buyers that were European yield-oriented into US Treasuries;

3.) Treasuries are valued over the long-term in “real-return” perspectives: a 2% inflation rate should result in a 4% 10-year Treasury yield to allow the holder of debt the long-run real return of Treasuries of 2%. At 2.60%, the 10-year Treasury is telling us that the “real” inflation rate could be between 0.5% and 1%.

4.) The Fed’s favorite inflation indicator, the PCE deflator, was – the last I heard – near 1.2%, although I’m too lazy to look.

Nuveen’s muni high yield fund available from Schwab (NHMAX) is yielding 6.11% and that is a tax-exempt yield. The HYG is yield 5.93% and is down a whopping 0.20% despite the crushing of stocks, which tells me the credit market is taking equity market in stride.

Waiting on a bear market in Treasuries has been like Waiting on Godot. Part of the reason could be that there has been so many similarly positioned as Trinity has been with little duration risk, lots of short-term paper, and scared of a back up in rates. Seriously, if you go back to 2003, and the early days of the start of Gulf War II, Rick Santelli would give the JP Morgan portfolio manager survey every Tuesday morning, and there would consistently be a 90% – 93% bearish sentiment reading on Treasuries, meaning 90% – 93% of managers would be short their duration benchmark.

The crowd has been wrong again, and we’ve been a part of the trade.

Very frustrating, and ugly, The TBF Inverse Treasury has been our worst trade year-to-date. We sold our small-cap’s, and Goldman Sachs, and some other “hot” stocks and sectors, but managed to tinkle into the wind with a 10% – 15% Treasury short.

Just had to vent. This too shall pass.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




4.8.14: Alcoa reports tonight after closing bell

April 8, 2014 at 12:52 pm | Posted in AA | Leave a comment

Alcoa (AA), the iconic aluminum smelter, reports their q1 ’14 financial results after the bell tonight.

No longer the Dow icon it was since AA was booted from the Dow in 2013, which perhaps not-so ironically may have marked a long time low for the shares, AA has rallied 63% from it’s early October ’13 low as of earlier this week.

Here is our earnings preview on Alcoa, as published on Seeking Alpha earlier this week.

Also, here is an interview we did on CNBC Asia almost exactly one year ago, saying how we continued to hold Alcoa for clients, given the stock’s price to tangible-book-value.

Note at the end of the interview that the young anchor jumps in, and with all the certainty that the sun rises in the east, calls Alcoa a “value trap”.

In 2006 or 2007 (can’t remember which year), AA printed $3 per share in EPS and traded up to $47. Yes, the world has changed, and I’m still trying to figure out what AA’s true earnings power might be today, versus 10 years ago, but the most important fact about the numbers is that forward EPS estimates have stabilized and that EPS revisions have started to turn higher. That hasn’t been the case for some time, since early 2011.

So far in 2014, the market is “rewarding” commodity names, and value stocks over growth stocks, with AA meeting both criteria. I do think AA could make another run at the Spring, 2011 high of $18.47.

The downstream business should be strong, and the upstream business still an issue, given that AA recently announced the closing of another smelter.

Thanks for reading and looking in.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



4.6.14: Interesting Reads from Other Bloggers

April 6, 2014 at 9:50 pm | Posted in AA, AGG, AMGN, Biotech, Financial sector, JPM, MRK, PFE, WFC | Leave a comment

In 2011, the SP 500 earnings grew 15% year-over-year, but the SP 500 corrected 20% from the spring through early October, 2011. The p.e compressed from 13(x) to 11(x) from the first week of January, 2011 to the first week of October, 2011. The SP 500 total return in 2011 was 2.11% to be exact. What I’m wondering, is 2014 a year like 2011 ? Good earnings, friendly bond markets, but the stock markets are a tough place to make money.

Usually when we write about stock or market technicals, I always get Gary Morrow’s opinion first (@garysmorrow). He was out of pocket this weekend. It sure looks like Friday was a key “outside reversal day” for the SP 500, and we posted on it, on this blog here after Friday’s close, 4/4/14.

Sometimes a chart just jumps out and grabs you: here is BC Lund’s chart of the SP 500 – like a plane coming in for a landing.

When SP 500 up 5 quarters in a row, future returns are not great, per this chart by Ryan Detrick, Schaeffer’s excellent technician.

Todd Salamone, also of Schaeffer’s wrote his weekly forward-looking piece. Be sure to read p.2 and the sector, sub-sector rankings. Too late to buy Electric Utilities in my opinion. We’ll wait on Ute’s and the XLU.

Both Coal and Steel performed well this week: Peabody Energy (BTU) was up 7% this week, and one of our recent buys. We’ve never owned a coal stock before owning BTU, which was bought in the last month. One of our best buys in 2013, was starting to buy US Steel (X) under $20, some of it bought near $17 in July ’13. X is still in a trading range under its January 2, 2014 high at $31.15. (long BTU and X)

After scraping the relative performance bottom for 3 years, commodities really coming alive in 2014.

Josh Brown (@reformedbroker), still one of the best social media communicators and market commentators out there. Here is his best of TRB this past week.

Norm Conley of JAG Capital Management puts out some of the most meaningful tweets each week, like this one here. I put Norm in the same class as Ryan Detrick and Josh Brown.

Given our Weekly Earnings Update yesterday, the SP 500′s valuation isn’t that bad. The SP 500 is trading at 15(x) forward earnings, with modest growth expectations of 7% – 8% for 2014. The Barclay’s AGG the bond market equivalent of the SP 500 finished slightly negative on the week, while the HYG (iShares High Yield Corporate Index) finished slightly positive. If there is a real problem in the stock market, you’ll see it in the credit markets first.

The whole “countdown to the 10% decline” is getting more vocal. Here Norm Conley compares this SP 500 rally to historical mega-rallies.

Jeff Miller and his weekly “Weighing the Week Ahead” post. Another must read. I try not to make short-term predictions over a weekly time frame, but Jeff is skilled at it. We had a read a few stories about the Fed worrying about “wage acceleration” or what my old money and banking prof’s used to call, “demand-pull” wage inflation. Note Jeff’s comments about wages.

This Week on Wall Street blog, that is a compilation of Gary Morrow and some of his Southern Cal hedge fund friends. Love the chart work.

Bob Lang at Explosive Options had a great call this week on APC. Huge rip on litigation news. That is a good call by Bob. I hate trading litigation and the courts. That is a dangerous game. A perfect example was SCOTUS and the ACA opinion. Seemingly 95% of the opinions I heard prior to that opinion, thought that ACA would be overturned by SCOTUS.

q1 ’14 earnings start this week with Alcoa (AA). Here is our AA earnings preview published on Seeking Alpha last week. We have been long AA for years. The company printed $3 in EPS and hit $46 – $47 per share in 2006, 2007 and hasn’t been back close since. AA is trading about 1.25(x) tangible book value but is still a discount to book value. The stock is up 63% since the early October ’13 lows, which fits with the rotation to both value stocks and the commodity theme. The early Spring, 2011 high for AA was over $18 per share. (long AA)

JP Morgan (JPM) and Wells Fargo (WFC) report Friday, April 11th, pre-market open. These are very different banks. Here is our earnings preview on both. In the comments following our preview note how not one Seeking Alpha subscriber defended JPM. Revenue growth remains an issue for the entire Financial sector. (Love the Dirty Rotten Scoundrelgenital cuff” reference. I crack myself up at times. I just wonder if people ever read this far). (Long both stocks, more JPM than WFC. Think Exchanges outperform banks over next 3 – 5 years though, with more to come on that topic.)

My buddy Josh Brown, The Reformed Broker, and a guy I truly respect and admire given the quality and quantity of his output every week, differ on the outlook for the Financial sector in 2014. I think Financials saw their time in 2013, and loan loss reserve releases (LLR’s) have now been depleted and run their course. However let’s see what JPM and WFC do on Friday morning and let’s see what percentage the LLR’s are of the total EPS gain for each bank. The fact is I could be wrong on Financials in 2014 and there could be more LLR releases to come.

Let’s see if this Pfizer news moves the stock on Monday, April 7th. This announcement was eagerly anticipated this week, which likely means that both longs and shorts were in the stock late last week. Pfizer was the first to unlock the Animal Health business (Zoetis) and now Merck and others are following. There is still negative revenue and EPS growth at PFE, so there is some thought that by reporting in 3 different segments, PFE is prepping for a spin-off in the next few years, of the legacy or value business. (long PFE, MRK, sold our AMGN.) Cash-flow valuations are very reasonable on L/C pharma. Both PFE and MRK sport 7% free-cash-flow yields although both are returning 130% – 140% of their free-cash-flow to shareholders in the form of dividends and share repo’s.

Jay Chitnis out of YieldQuest does some interesting work every week. We somehow got on his email list and enjoy reading his stuff.

Ukarlewitz does great work, but my impression is that he is always bearish.

Summary / Conclusion:

The big question remains have we topped out temporarily and is the market finally going to get it’s 10% correction ? I think the proposition that we are somehow headed into a long-term bear market is nothing short of preposterous. It is still amazing that all this bearishness persists despite the fact that the SP 500 traded to an all-time high this week. Treasuries rallied on Friday, despite the decent March ’14 jobs number. Credit spreads seem to remain well bid. So do tell, what has changed about this market ? The growth stocks are correcting – isn’t that supposed to happen ?

Reading some of the above links, I’m torn between Ryan Detrick’s 5 straight up quarters for the SP 500 and then prospective returns, and Norm Conley’s chart about inflation-adjust SP 500 and the mega-rally compares.

For me, the more a pattern becomes recognizable and expected by the Street, the more likely it is to be broken. I think we need a deeper correction and some real fear and bearishness to keep the longer-term rally intact.

Watch how the biotech’s trade around their 200 day moving averages, i.e. the BBH, and the IBB, both biotech ETF’s. I do think that is the key tell. (none)

But that is just me…

Thanks for reading and looking in. There are many blogs that want you attention these days. We appreciate you reading ours.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager










4.5.14: SP 500 Earnings Update: Forward 4-Quarter Estimate Increases to $122.77

April 5, 2014 at 3:13 pm | Posted in AA, JPM, Weekly Earnings Update, WFC | Leave a comment

With the roll into the new quarter, the “forward 4-quarter” estimate (Per Thomson Reuters) increased $4.12 this past week to $122.77 from last week’s $118.65.

This bump or increase is normal or expected, although $4.12 is the largest sequential increase I’ve seen in some time.

The p.e ratio on the forward estimate given Friday’s SP 500 close at 1,865.09 is 15(x).

The PEG ratio is now 2.33(x), in-line with PEG’s of the last 12 – 18 months.

The “earnings yield” is now 6.58%.

Most importantly, the y/y growth of the forward estimate jumped to 6.59%, above last week’s 6.09% and stopping a 3-week slide. The y/y growth rate of the forward estimate has now been stuck between 6% – 6.5% since January 1, 2014, after hovering between 7% – 8% for November and December, 2013.

Noticing the $4.12 sequential dollar increase in the SP 500 EPS the first week of April, here is the sequential increase in the forward 4-quarter estimate since early, 2013:

q2 ’14: to $122.77 or $4.12 increase / 3.4% increase

q1 ’14 to $120.77 or a $3.83 increase / 3.2% increase

q4 ’13 to $119.04 or a $3.58 increase / 3% increase

q3 ’13 to $116.67 or a $3.53 increase / 3% increase

q2 ’13 to $115.25 or a $3.41 increase / 2.96% increase

q1 ’13 to $113.88 or a $5.05 increase / 4.4% increase

Being a data geek of the highest order, I need to delve into the data further, work back further and see what it tells me, but as the reader can quickly see, it looks like earnings growth is starting to accelerate, still modestly, but it certainly isn’t falling apart.


Q4 ’13 earnings for the SP 500 grew 9.9% y/y, the highest rate of growth since 2011. Revenues in q4 ’13 grew 1% y/y, with the Financial sector revenues falling 10% y/y thanks to the Health Insurance and Industrial REIT’s.

In q1 ’14, the y/y growth estimate for SP 500 earnings is just 1.1%, versus expected revenue growth of 2.7% %. We expect that when the majority of q1 ’14 earnings are reported by mid-May, 2014, actual earnings growth will be closer to 3% – 5%.

Here is how q1 ’14 earnings estimates have changed since January 1 for the 10 SP 500 sectors: (first column is the sector, the 2nd column is the expected sector earnings growth as of April 4, the third column is the expected growth as of January 1)

Cons Disc: +5.8%, +14.5% (estimates have been hit hard. SBUX doesn’t look good technically. Still think the selling is overdone for the sector and within retail.)

Cons Spls: +3.3%, +9.3%

Energy: -5.3%, -0.4%

Fincl’s: -2.7%, +5.9% (We are still seeing litigation charges come through for big banks and Financials. I do think ’14 will be a tougher year for sector)

Hlth Care: +3.7%, +5.8% ( We are staying with large-cap pharma like PFE and MRK.)

Indus: +0.2%, +5% (Surprised at the estimate slashing)

Basic Mat: -0.6%, +9.8% (Commodity stocks have been some of best year-to-date performers)

Technology: +2.4%, +7%

Telco: +12.8%, +14.2%

Utilities: +7.7%, +1.5% (the only sector to see higher growth revisions through q1 ’14)

The bloodletting in biotech in terms of the correction in the stocks is emblematic of the difference between the market and earnings. For full-year 2014, Health care has actually seen earnings growth revised higher, but the sector, led by biotech’s has gotten pounded.

Alcoa (AA), JP Morgan (JPM) and Wells Fargo, (WFC), report Tuesday after the bell, and Friday morning respectively.

We should see revisions for the Financial sector after these two big banks report when we look at the data next week.

I do think that q1 ’14 earnings estimates are too low, and we should see the typical upward drift through the quarter as earnings are released.

We will have our eye on changes for full-year 2014 as the 1st quarter numbers are released.

Thanks for reading and stopping by.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

4.4.14: Outside Reversal Day for SP 500 – Not Good

April 4, 2014 at 9:01 pm | Posted in Biotech, S&P 500, SP 500 corrections | Leave a comment

The SP 500 opened up to a new all-time high this morning, trading as high 1,897.28 and above yesterday’s high near 1,893, and then selling got ugly as the day progressed, with the SP 500 closing at 1,865.09, below yesterday’s low of 1,882.65.

Today would qualify amongst technicians as an outside reversal day.

The March employment report was roundly received as being pretty solid this morning, with 192,000 new new jobs created in March ’14, and another 37,000 jobs added from the two prior month’s being revised higher, so if there was a worry about this being a Fed matter, then we wouldn’t have seen a 1/2 to 3/4 point rally in the 10-year Treasury.

In addition, average hourly earnings in this morning’s report fell to 0% y/y growth, down from last month’s +0.2%. Accelerating wage growth was an area of worry for the Fed. Maybe not anymore.

We’ve had outside reversal days before in this 5-year stock market rally and they’ve quickly turned into false alarms.

The action in the Nasdaq today was truly ugly. The Russell 2000 which is dominated somewhat by biotech’s, looks broken. However, the biotech ETF, the BBH, isn’t yet through its 200 day moving average.

All this could be is a rotation out of 2013′s winners and into 2013′s laggards.

We’ll be out with our weekly earnings update tomorrow morning.

I don’t think SP 500 earnings, or earnings growth is the issue regarding this correction.

Thanks for reading, and looking in…

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


4.2.14: Tune In with Bob Lang of Explosive Options and Me, Thursday, 4/3/14 after the Market Close

April 2, 2014 at 11:22 pm | Posted in Bob Lang Webinar, CAT, IBM, ISRG | Leave a comment

Bob Lang, the founder of Explosive Options (see the link here) has asked me to be his featured guest on Thursday, April 3rd after the closing bell.

Bob is a friend from our days writing together on TheStreet.com, and has had me on the show once before. I am grateful for his friendship and generosity.

We are about to enter earnings season next week, starting with Alcoa (AA) Tuesday night, April 8th after the bell, and the flood of earnings starts the following week, April 14th, 2014.

We will cover our thoughts on the q1 ’14 earnings season, as well as all of what 2014 earnings portend given how estimates look currently, with Bob on Thursday night on the webinar, as well what is working in 2014 and what isn’t thus far, three months into the year.

A lot of 2013′s laggards have started to move higher including Intuitive Surgical (ISRG), IBM (IBM) and even Caterpillar (CAT).

We will also likely talk about Micron’s earnings which will be released after the bell on Thursday, the Friday, March ’14 employment report and the bond markets including Treasuries, corporates and such.

Hopefully Bob is up for all of this. No doubt he has some topics of his own to cover.

Use the above link and tune in after the bell on Thursday, April 3rd, 2014. We will make the discussion worthwhile, interesting and informative.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager






4.1.14: CCAR, the Big Banks and the Exchanges: The Exchanges control their own Destiny

April 1, 2014 at 9:13 pm | Posted in BAC, CME, Explosive options, Financial sector, Financials, JPM, WFC | Leave a comment

CCAR is the Comprehensive Capital Analysis and Review (CCAR) instituted by the Fed and regulators after the Mortgage and Housing Crisis of 2008, that simply means that banks have to get “permission” from the Fed before paying dividends and repurchasing stock.

Much like a sad Oliver Twist replication, “may I have some more, please ?” the banks must now come hat in hand to the Fed, and ask for permission  to return capital to shareholders. In effect, Ive thought this made the banks public utilities, where the local utility must get “permission” for a rate increase, prior to implementing.

Because of this, while we’ve always been a big bank and financial investors, I also wonder if we will get to a day like Jeremy Grantham articulated or talked about post-2008, where he said that Bernanke, and Paulson should have required the banking system to raise capital in 2007, (naturally all suggested in perfect hindsight, after we had a near collapse of the banking system.)

The point is can the Fed now call a top for the credit cycle and require TBTF (Too Big to Fail) and other SIFI institutions to raise capital out of the blue ? What if the Fed forces too much capital to be raised and shareholders are thus diluted and crushed based on “Federal Reserve regulation”, and the credit cycle isn’t as bad as expected.

Big Brother is watching. And free-market capitalism has lost another leg to stand on (maybe).

The point being that although we own more banks for clients than the exchanges at present time, the exchanges in my opinion are better risk-management institutions, given their mark-to-market function. Craig Donohue, the CEO of the Chicago Mercantile said in the aftermath of 2008 – 2009 that exchanges would have been able to monitor the degradation of the swaps that were mostly over-the-counter (OTC) at that time, and forced the counterparties to put up collateral against the swaps. Because a lot of these counterparties were valuing or pricing their own swaps, (and hence maybe reluctant to write down a Lehman credit swap), the move by regulators today is to standardize these contracts and put a lot of these activities on the exchanges where they can be more “marked-to-market” and see some adult supervision.

Exchanges have taken a beating yesterday and today presumably in light of the “60 Minutes” high-frequency-trading (HFT) documentary run Sunday night. Using inflammatory and hyperbolic terms like “the market is rigged” Michael Lewis has pegged the HFT’s as electronic pirates. Ive heard both sides of the debate.

The reason the exchanges are taking a beating today is that if HFT is curtailed (and it very well could be) or even slowed down, it is highly likely volume on the exchanges will fall, since HFT was entirely based on speed to an exchange, and then millisecond trading of a  very high number of shares to execute the spread or the arbitrage at razor this margins. While that represents my inadequate knowledge of the subject matter it is clear that volume will likely slow or drop as HFT gets scrutinized by congress and various futures and financial regulators, the trading will get slower and the volume will drop.

Our largest holding is the Chicago Merc (CME), long held as a beneficiary of rising rates given the CME has 99% market share of the Treasury complex. ICE’s acquisition of the NYSE – Euronext was a shrewd move, but the old NYSE trading floor is going away. Since the CME went public in late 2002, early 2003, it has been clear the future of any kind of trading, (commodity or otherwise) trading is electronic and on screens, not open outcry.

ICE is getting very interesting here, with its Energy complex and now cash-equity clearing business, from the NYSE.

Our three exchanges that we follow fundamentally and track intrinsic value, are CME, ICE and CBOE.

We think CME’s intrinsic value is closer to $90 per share, while we have ICE’s intrinsic value near $295, while Morningstar has an intrinsic value on ICE near $200. The uptrend off the ’09 low for ICE on the weekly chart doesn’t show support until $150. I dontb think it will trade that low. At $193 ICE is hitting its 50-week moving average.

The CBOE is still overbought and the HFT scrutiny perhaps wont impact it to the degree it will the other exchanges.

We don’t follow the Nasdaq (NDAQ) but that exchange seems to be getting the brunt of the selling with HFT scrutiny.

We are going to develop this theme to a greater degree over the coming weeks and months. We may get a good shot at buying some exchanges at good valuations over the next 90 days. For now I’m staying with JPM, BAC, and WFC, but might start picking away at some ICE. The important theme to remember about the exchanges vis-à-vis the banks is that the exchanges control their own future. I think they are better positioned for the next 10 years, HFT notwithstanding.

(Comments and criticisms welcome please. If you are a floor trader or exchange member, please send me your comments.)

Finally join Bob Lang and I for an “SP 500 earnings” discussion at Explosive Options where Bob runs webinars on a variety of interesting topics. Thursday after the close we will talk about SP 500 earnings, what q1 ’14 will look like, and what it portends for the rest of 2014. This is the 2nd time Bob has been kind enough to invite me on the show, so we hope to make SP 500 earnings and where to invest for the rest of 2014 an interesting topic for listeners.

Thanks for reading today and giving us a minute of your time. A lot of blogs compete for your eyeballs, so “thank you” for reading ours.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




3.31.14: How our Top 5 Holdings Performed in q1 ’14

March 31, 2014 at 7:28 pm | Posted in AA, Facebook (FB), JPM, MSFT, SCHW, TBF - inverse Treasury | Leave a comment

We took in about $300k in new money in q1 ’14. Thank you to both long-time and new clients for your trust and confidence.

Our Top 5 equity positions performed pretty well in q1 ’14. Although we don’t download index data until the 8th or 9th of April, q1 ’14 should be a continuation of the decent relative and absolute performance we generated for clients in 2013.

Here are out Top 5 equity holdings as of 3/31/14, and their quarterly return per our technical software: (the quarterly return doesn’t include the dividend):

4.29% MSFT +11% in q1 ’14 (MSFT’s April ’14 earnings report will be key. The stock has moved on Ballmer leaving. Now we need growth.)

3.43% SCHW +6% in q1 ’14 (we still like Chuck, as retail returns to the equity market)

3.29% Facebook +9% in q1 ’14, the gain was far bigger a month ago. (The growth-to-value theme has taken steam out of FB);

3.23% Alcoa (AA) +20% return in q1 ’14. Monster move as commodities and growth-to-value rotation has helped stock. We’ve owned Alcoa forever, since the ’09 bottom. Painful until now.

2.89% JP Morgan +4.5% in q1 ’14. The big banks are now like utilities. They have to come to the Fed for dividend and stock repo “permission”. That is ugly or socialism, depending on how you look at it.

Our worst trade so far in q1 ’14 was the TBF, which is 3.82% of client accounts, mainly balanced accounts and it fell 7.8% in q1 ’14.

Our all-equity accounts should look better than our balanced accounts given the TBF drag. The curve-flattening trade in q1 ’14 didn’t help at all.

One astute reader of our earnings work noted the “6%” SP 500 earnings growth number this weekend, while I later used 8% in reference to 2013′s return. The difference is the JP Morgan litigation charge taken in q3 ’13 by the big bank. When using operating EPS for the SP 500 just that one charge cost the SP 500 dearly, given JPM’s size in the SP 500. When using the SP 500 EPS growth numbers for 2013, (the simple math) 6% is the growth in EPS, including the JPM litigation charge, 8% if we exclude JPM.

The above holdings and positions can change at any time.

We will continue with our “growth and value” style for clients. q1 ’14 is a perfect example of how the two styles can complement each other. We expect yield curve steepening in q1 ’14, particularly if the Friday’s job number is strong.

Thanks for reading. We are planning for choppy but flat markets overall for the next 2 quarters of 2014. The 2-year Presidential Cycle is a good analog for the year, but let’s see how q1 ’14 earnings look.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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