9.13.14: SP 500 Weekly Earnings Update – Bonds and the Dollar Take Center Stage

September 13, 2014 at 3:14 pm | Posted in Basic Materials, Consumer Staples, Industrials, interest rates, Technology, US Dollar, Weekly Earnings Update | Leave a comment

 

Per ThomsonReuter’s “This Week in Earnings”, the forward 4-quarter estimate fell to $125.80 from last week’s $126.34, or a decline of $0.48 on the week.

The p.e ratio on the forward estimate as of Friday’s close is 15.78(x) and the PEG ratio is now 1.73(x), still relatively attractive.

The earnings yield (some think this is a proxy for the equity risk premium) rose to 6.34% last week, from 6.29%.

The year-over-year growth rate on the forward estimate fell to 9.13% from last week’s 9.15%. This is the 7th straight weekly drop for the forward estimate growth rate.

The high of 9.58% from 8/1/14 to the low of 9.13% this week, is a 45 bp change in growth or roughly a 4.7% decline in the forward growth rate since August 1.

Analysis / commentary: Since the late July ’14 high of 1991 for the SP 500 on July 24th, to the SP 500 close of 1985 on Friday, the SP 500 has moved a whopping total of 6 points in roughly 6 – 7 weeks. We are in the proverbial dead zone for earnings releases from now until early October ’14 although Fed-EX (FDX), Lennar (LEN) and Oracle (ORCL) report this coming week, which is a good cross section of Industrial’s / Transports, Homebuilding (Consumer Discretionary), and Enterprise Technology Software, while Nike (NKE), Micron (MU) and even Costco (COST) should follow before early October ’14. (Long FDX, LEN, ORCL, NKE, MU, COST in varying weights.)

Here is the progression in q3 ’14 SP 500 earnings over the last 3 weeks:

9/12/14: +6.5%

9/5/14: +6.7%

8/29/14: +8.3%

As analysts talked to management’s and evaluated their earnings model’s at the end of August, it resulted in a reduction in q3 ’14 earnings growth.

However, this is still pretty much “normal” in terms of the degree of reduction into a quarter’s earnings releases.

Taking a more panoramic view, here is the change (as of Friday, September 12th, ’14) in full-year 2014 SP 500 earnings growth estimates by sector, since July 1 ’14:

Consumer Disc: +7%, +8.6%

Cons Staples: +4.9%, +5.9%

Energy: +7.4%, +9.4%

Financials: +3.2%, +6.6%

Hlth Care: +15.2%, +11.95% (big upward revisions to estimates since July 1, thanks mainly to biotech)

Industrials: +9.3%, +8.8% (despite the dollar strength, hasn’t hurt Industrials – upward revisions since July 1 – very surprising)

Materials: +8.3%, +8.6% (another sector, slight downward bias, but mainstream media telling me Materials supposed to be hammered by dollar strength)

Technology: +10.4%, +10.6%

Telco: +14.9%, +15.9%

Utilities: +7.5%, +7%

SP 500: +8.2%, +9.0%

This data analysis incorporates essentially the last three weeks of September and then q4 ’14 so we are expecting decent earnings numbers for q4 ’14 when the reports start coming in early January ’15.

Here is the issue I have with all the budding commentary on the strength of the US dollar the last few months and what it could do to SP 500 earnings: if you buying the stock of a company, that is a 3% – 5% secular grower, like the Consumer Staples, with a large percentage of revenues outside the US, then the 3rd and 4th quarter of 2014 could be impacted by US dollar strength, but the impact is “translational” right now. If you are buying the stock of a company that is growing 15% – 20% and a lot of it is overseas, the dollar strength will impact the numbers, but it is very unlikely to impact the growth rate OVER THE FORESEEABLE future.

Understand the difference between the “translational” impact of the US dollar and the “economic” impact. The economic impact of the dollar strength is like grey hair: it starts slowly and its impact is barely noticeable until after a considerable time, you are fully grey.

A strong dollar benefits importers and penalizes exporters, all other elements being equal. I wish I could access the data, but I would guess that, after 2008, and the growth of BRIC’s and such in the last decade, of total US GDP, the US is a larger “net exporter” than say in the late 1990’s when the Asian Tigers collapsed, so prolonged strength in the dollar could have a net-net negative impact on SP 500 earnings over time, if the strength in the dollar is persistent.

The point of the Weekly Earnings Update this week is that, the mainstream media is going to beat the strong US dollar theme into the ground with attention, and some of it will be good and worthwhile. There could be a large shift to stocks with US domestic revenues, which according to Briefing.com, there is about 100 companies in the SP 500 with 100% of their revenues within the continental US.

Interest rates are another issue: the yield on the 10-year Treasury rose 15 basis points this week to 2.61% from 2.46% – that is a big change. 2.65% seems to be the mid-point of the range from the 12/31/13 high of 3.00% and the August 15th low of 2.30%.

A stronger dollar and higher interest rates are two potentially “valuation suppressing” events happening concurrently in the US economy this past week. Through the end of 2014, the SP 500 earnings data looks pretty good. Mainstream media has to sell “fear” to get your attention. We can use this to our advantage in client portfolios. I still like and look for a strong 4th quarter, 2014, rally for the SP 500.

Before q3 ’14 earnings are actually reported in mid-October, expect the SP 500 earnings growth rate to bottom around 5%, still pretty decent relative to the last few years.

So far q4 ’14 SP 500 earnings growth estimates haven’t seen much downward pressure.

We haven’t made many adjustments to clients sector weights all year. Worries about the dollar right now, are more opportunity than actual impact, in my opinion.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

 

 

 

9.11.14: Evaluating Bond Market’s Liquidity Risk – the Silent Killer

September 10, 2014 at 5:42 pm | Posted in Bond Market Liquidity, Bond Market(s), HYD, HYG, MCO, Municipal Bond market, Municipal High Yield, Taxable High Yield | Leave a comment
Click to enlarge

Click to enlarge

High blood pressure is widely known as “the silent killer” for good reason. This blog post is a continuation of our blog post from 8/5/14 on liquidity in the bond markets.

Today as an RIA managing individual investor money, and reading more about liquidity risk in the fixed income markets, I’m wondering if moving client’s fixed-income to predominantly a cash / municipal strategy at this point isn’t the right approach as taper ends.

Despite the weekly August employment report last week, Fed Governor testimony seems to have become progressively more hawkish. Seriously, only Janet Yellen’s opinion matters in terms of the timing and degree of rate hikes, but despite little indication of an acceleration in the various inflation measures, the drumbeat grows for “normalizing” interest rates.

Is the end of QE3 and the end of taper impacting liquidity in the bond markets ? It could be. I think “quantifying or measuring liquidity” or lack thereof is difficult, particularly at the retail level, and even the bigger firms might try to measure it, but there has to be a degree of uncertainty around all of it. As one Supreme Court Justice once said around adult entertainment, “I can’t define it, but I know it when I see it.”.

Here is the point of all this: last May ’13, when Fed Chair Ben Bernanke announced the Taper, and then again in late July, early August ’14, the taxable high yield market, as evidenced by the iShares, IBoxx HYG (taxable corporate high yield ETF) hit two sizable air pockets where the bottom just fell out of the market.

In 2013, the HG suffered a 7% drop in a little over 6 weeks, as the HYG fell from a little over $96 to $89 in that time period. The drop in 2008 was far greater in absolute terms, from $100 in early May ’08 to $65 by December ’08 or roughly 35% in total, but a 7% drop in 6 weeks, if allowed to continue seems equivalent to a 35% drop over a 7 month time frame.

A long-time friend and former colleague runs a $2 billion taxable portfolio here in Chicago. I asked this individual for their comments about liquidity (understandably, this person and the firm would prefer anonymity ). Also Blackrock did an excellent whitepaper on the topic in June ’14 which they sent to me for usage and attribution on this blog. Here is a quick highlight of the Blackrock whitepaper’s important points (as I see them):

  • Trading liquidity has been on a downward slope;
  • Market liquidity, particularly in corporate bonds has declined since the Financial Crisis in 2008. Bl;ackrock termed the situation in corporate bonds as “challenging”;
  • Because of regulation and the requirement to hold more capital against these “risk” activities, traditional liquidity providers such as banks and dealers (not sure if Blackrock is alluding to broker / dealers) “have pulled in their horns” in terms of providing secondary trading liquidity to the markets;
  • While outstanding corporate debt has jumped 77% to $9.8 trillion in the 7 years ending 2013, perhaps in the market’s attempt to fill the liquidity gap, electronic trading of corporate bonds, has more than doubled since 2009. Per the Blackrock paper, this is still less than 14% of total turnover as of the end of 2013. The Blackrock paper did not give the growth rate of the electronic trading levels;
  • The BlackRock Paper also discussed equity liquidity but we’d prefer not to address that issue or its components at this time;

Comments from the taxable PM:

  • Liquidity is a big issue in all the markets currently;
  • Liquidity in high grade is decent but it quickly evaporates in tough environments as dealers have significantly reduced the amount of capital they are committing to positioning bonds ( supports the Blackrock conclusions);
  • Liquidity in high yield is an issue, not just in the way down, but also on the way up. This summer’s selloff was probably half fundamental (Ukraine) and half illiquidity. This individual thinks that the 2013 decline was mostly liquidity driven, which makes sense from my perspective, given the economic data was still on upward sloping trajectory;

Intuitively, fewer participants, more risk aversion, and unattractive absolute yields might make any market illiquid.

The scary part of all this is that all institutional participants seem to be acting in unison. If all the major players try and exit the market at once, where would this leave the individual investor or the small advisor ? (You can guess I’m sure).

Although it will be the subject of a separate blog post, the municipal market might be a relatively “safer” place, than the corporate bond market, particularly if interest rates should rise sharply, and new issuance volume should evaporate.

Today, the HYD or the Barclay’s MarketVector Municipal high yield ETF yields 5.32% (per Morningstar) while the HYG yields 5.70% (also per Morningstar).

A rapid rise in interest rates (which like the arrival of Godot, has been waited on with baited breath since 2009) could be significant in terms of liquidity for the bond markets.

When I look at the taxable bond markets, since liquidity risk seems unquantifiable, or at least is difficult to quantify in terms of “spread to Treasuries” are absolute yields worth it today, particularly in high yield ?

Be careful out there…

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

9.8.14: Dollar Strength – What’s The End Game ?

September 8, 2014 at 10:56 pm | Posted in Consumer Discretionary, Consumer Staples, Industrials, UUP | Leave a comment
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I do wish there was a better way to track or trade the US dollar, but for the last few years, I’ve watched the UUP or the PowerShares Dollar Bull ETF, which consists of a DeutscheBank Long US Dollar Futures Index.

The weighting of the basket is critical. According to this write up found on the Invesco website (date unknown), the UUP consists of contracts or weights on the following currencies in the following percentages:

  • Euro – 57.60%
  • Yen – 13.60%
  • British Pound – 11.90%
  • Canadian dollar – 9.10%

The weights fall sharply from that point.

Today’s big news was on the British Pound, which fell sharply after a pre-vote survey revealed that Scotland might vote themselves out of the UK. I don’t know if you call it secession or abdication, but Scotland seemingly wants independence from England and the British Empire.

All three of the top-weighted currencies have suffered weakness over the last few years, first starting with the yen and shinzo Abe’s election, which has weakened the yen from near 80 to today’s 104 level, to Euro’s weakness of late (the Euro traded as high as 137.50 – 138 in mid March to early May ’14), and then today’s action in the Pound.

After having waited for years for the dollar to rally, (and it seems like it has been weak since early in the Bush Administration) we could be in the early stages of a long-term dollar strengthening, particularly as the 10-year Treasury yield, which closed at 2.46% today, has a higher yield than many 10-year sovereign credits.

Note on the above chart how the UUP is trading above its 200-day weekly average for the first time in early 2013, but the ETF is also approaching the downtrend line off the 2009 and 2010 highs. Volume was heavier in the UUP today, with today’s trading volume at 1.14 ml shares traded versus the longer-term average of 868 million.

Discussions about the dollar, inflation and the Fed can often make the writer look very smart, but often lead nowhere in terms of investment usefulness.

Watch the UUP and how it trades around the downward sloping trend-line. If you see a higher volume move above the trend-line, readers can use the UUP to hedge some of their Consumer Staples/Discretionary and Industrial longs. Where dollar movements tend to have the biggest impact on financial results is with companies that are mid-single-digit secular growers, like a Procter & Gamble (PG) or Philip Morris (MO) or the soup or cereal companies.

Also remember too, that currency impact is at first translational, but it takes a long time to be “economic”. Think back to the mid 1980’s and President Reagan’s strong dollar policies. The strong dollar caused a tremendous amount of capital to flow into America, but after a year or two the dollar strength began to create the Rust Belt, and decimated large US exporters, like the steel companies, and the Midwest manufacturing belt.

Don’t overestimate the dollar’s importance, but don’t underestimate it either.

A strong move above that trend-line for the UUP and I do think we have entered a new phase for the US dollar, particularly if interest rates start to rise. The 10-year Treasury today, despite the relatively weak equity market, closed above the 2.45% level  again this afternoon.

Thanks for reading. Not sure we are on the cusp of anything significant, but it pays to pay attention.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

 

9.7.14: SP 500 Weekly Earnings Update: Q3 ’14 Earnings Revisions Return to Normal

September 7, 2014 at 6:32 pm | Posted in BA, BAC, Consumer Staples, Earnings, Earnings estimate revisions, Financial sector, HON, Industrials, Sector Earnings Growth Estimates, UTX, VZ, Weekly Earnings Update | Leave a comment

Per Thomson Reuter’s This Week in Earnings, the forward 4-quarter estimate for the SP 500 rose to $126.34 this past week, $0.06 higher than last week’s $126.28.

The p.e ratio on the forward estimate as of Friday, 9/5/14 was 15.9(x), with a  PEG of 1.74(x) as of Friday’s 9/5/14 close.

The earnings yield on the SP 500 as of Friday, 9/5/14, was 6.29%.

The year-over-year growth rate on the forward estimate fell again this week to 9.15% from last week’s 9.18%. It is something we are watching, but with a consistent 9% growth rate, there is no reason to sound the alarm. Here is the last 6 week’s steady decline in the forward growth rate:

9/5/14: +9.15%

8/29/14: +9.18%

8/22/14: +9.25%

8/15/14: +9.40%

8/8/14: +9.53%

8/1/14: +9.58%

The y/y forward growth rate jumped sharply in July ’14 as q2 ’14 earnings started to be reported. The calendar q3 ’14 started with a 8.5% forward growth rate.

Actual q2 ’14 earnings growth, if Citi’s charge is excluded grew 10.2%, the best growth rate since late 2011.

One note of clarification for the reader: remember to distinguish between actual earnings growth (i.e. q2 ’14 earnings that have been reported) and forward earnings expectations. (Sometimes I jump back and forth without clearly delineating between the two.)

—————-

Analysis / commentary: Analyzing earnings data is like the three blind men and the elephant: depending on your perspective and time frame, earnings data can look good or bad and leave you with varied conclusions. 3rd quarter ’14 earnings expectations have been getting slashed since the first of September, which is what we didn’t see in during the 2nd quarter, and through the month of June. It is NOT unusual to see this kind of reduction as we get closer the flood of earnings. It was unusual to see the pattern we saw in the 2nd quarter, where we didn’t see the sharp reductions in q2 ’14 earnings estimates as we moved through the quarter, which was probably a function of the first quarter’s weather-related reductions in earnings.

In other words, for q3 ’14 earnings expectations, the reductions so far as we are just 4 weeks from the q3 ’14 actual earnings reports, is pretty normal.

Q3 ’14 expected earnings growth for the SP 500 is +6.7% as of 9/5/14, versus the 11% expectation 9 weeks ago on July 1.

Here are the numbers:FCearningsRTofCHANGE

A new spreadsheet has been created to show not only the estimated growth rates by sector for a particular quarter, but also the “rate of change”, of the growth rate. This is important, because it tells me which sectors might be seeing transitions in earnings growth or periods where earnings estimates, which had been seeing reductions are starting to stabilize, or where sectors that might have been seeing earnings increases, are also starting to change.

Most sectors are showing sharper rates of change since July 1, versus the change since April 1, which is consistent with the pattern normally seen within the SP 500.

Consumer Staples and Telco are a little different though: both sectors seem to be seeing slower rates of change since July 1, which for Consumer Staples might be counterintuitive since the dollar has been strong, and Telco could be seeing stable estimates given the product announcement due from Apple on September 9th, and the presumed launch of the Apple iPhone 6, which is expected to be due out in September (and this is purely a guess on my part.) We updated Verizon’s financials and earnings estimates this past week, and VZ’s earnings estimates are still moving higher.

Financials still look ugly but I think that Bank of America’s settlement with DOJ might be impacting the sector. If the charge is taken in q3 ’14 for BAC’s mortgage issues, basically it will offset the bump or extra growth we were seeing from JP Morgan’s q3 ’13 charge, which was inflating q3 ’14’s Financial sector earnings growth estimate.

Industrials haven’t traded well. See Barron’s article this weekend on Boeing. We agree with the bullishness, just for different reasons. It seems like Aerospace names like BA, UTX, HON, and the defense names have suddenly gone cold. (Long BA, UTX.) The sector earnings estimates tell me that little has changed.

Long piece this weekend. Want to keep these short and digestable.

Thanks for reading – hope you got something out of it.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

 

 

 

9.4.13: Chart of 10-Year Treasury Yield (TNX) – Tells You Everything

September 4, 2014 at 11:24 pm | Posted in Bond Market(s), interest rates, TBF - inverse Treasury, TNX | Leave a comment
Click to enlarge

Click to enlarge

Hopefully readers can see the weekly chart of the 10-year Treasury Yield, from the TNX or the CBOE 10-Year Treasury Yield Index contract.

It looks like a perfect “hold” or save in terms of the 10-year Treasury Yield 200-week moving average, which is the red line that contract bounced off both on August 15th, with a trade down to 2.30% and then August 28th, when the 10-year yield dipped again to 2.32%.

Even David Tapper came out today and noted that the bond rally was ending, as this news piece from Seeking Alpha details.

We are still long a position in the TBF or the unlevered Inverse Treasury ETF, but have reduced the position. If you look at the above chart, the TNX is was oversold on a  weekly basis, which is where we like to be a buyer. (The TBF position really detracted from balanced account performance in 2014, and I’m not happy about it. )

In terms of fundamental catalysts, tomorrow morning’s August nonfarm payroll number suddenly has everyone’s attention. Most economist’s seem to be between 220,000 and 250,000 new jobs created by the US economy in 2014.

The 10-year Treasury yield has failed to make a new low for 3 weeks now. Could the turn be at hand ? Rick Santelli keeps pointing out the importance of the 2.45% yield level for the 10-year, while Karl Snyder, CMT, also highlights the 2.45% – 2.46% level in the 10-year yield.

The point is we are right “there”: we are at an important point in the cycle. The 10-year and 30-year Treasury have rallied almost 9 months now, in a huge curve-flattening trade, that had us positioning client rates this year.

A number over 300,000 tomorrow and I would suspect Treasuries will take it hard. The tone I am hearing from various Fed Governor comments, is growing increasingly hawkish, even as Fed Chair Yellen remains balanced.

A number under 200,000 and we could re-test 2.30% again.

Actually a more important tell would be a weak number, and a decline in Treasury prices. We’ve had 6 months of Treasury’s rallying on stronger data.

The 10-year Treasury Yield chart) TNX hasn’t been this oversold since late 2012.

Thanks for reading. We’ll know more at 7:30 am central time, Friday, 9/5/14.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

9.1.14: A Quick Look at the SP 500 by Sector Market Cap

September 2, 2014 at 1:38 am | Posted in Financial sector, Financials, S&P 500, Sector Earnings Growth Estimates, Technology | Leave a comment

As a former analyst, now portfolio manager, being a data geek goes hand-in-hand with assessing various market, sector and individual security risks.

Often, if the data cant be found in one place, a spreadsheet is created to track various data sources, just to see where the data leads.

BespokeSP500 sector data

A look at the spreadsheet using the Bespoke/Schwab data, it shows the majority of sectors within the SP 500 are “overbought” if you measure risk by the % of stocks trading above their respective 50-day moving averages. (Long SCHW for clients)

What caught my attention though, was the current market cap weightings by sector. A client asked recently where the risk was in the market – not an easy question to answer – but if you look at the period from 2000 t0 2008, one tip-off to the bear markets was the growing weight of the troubled sectors within the SP 500.

Technology as a percentage of the SP 500 grew to 33% of the market cap of the index at the peak in March, 2000. Fully 1/3rd of the benchmark was Tech, with many not surviving the Tech recession of 2001 and 2002. Technology, as a sector, grew earnings and revenues routinely between 30% – 40% in the late 1990’s, only to see that crumble in 2001 and 2002, when Technology earnings growth fell 60% for two years.

Financials suffered the same fate in 2007, with the sector approaching 30% of the benchmark during the mid 2000’s thanks to leverage and asset growth. (Todd Harrison, the founder of Minyanville, and a former trader with Jim Cramer’s hedge fund, Cramer & Berkowitz, made this point many times in his newsletter in the middle of the last decade, in terms of the growing weight of Financials as percentage of the SP 500, being a major red flag. )

If you look at the data in the spreadsheet, what struck me was the weights of the sectors are within reasonable ranges, but so are the sector earnings growth rates. Technology and Financials, the two troubled problem children of the last decade, are now 35% of the SP 500 combined, in 2014, versus their individual weights in the last 14 years.

Within the SP 500 today, (actually the SPY), of the top 10 holdings within the key benchmark, which comprise about 18% of the benchmark, Technology has just 2 names in the top 10, with a weighting of 5.5%, while the Financial sector has 2 names with a weighting of 2.5%. (It depends on how you treat GE, though).

The point of this blog update tonight is that, sector weightings can be a major red flag for the market risk.

In reality today, we have a very “democratic” stock market, with normal growth rates within the sectors and normal sector weightings.

The SP 500 could see a 10% – 15% correction anytime, but I don’t think we will see a period of prolonged negative returns like we was from March, 2000 through March, 2009, given the above data.

No one seems to think we could have a long period of just long, boring, stock market returns.

Again, that is just an opinion. We’ll keep updating the spreadsheet and putting it out for readers every few months, just to see what we see.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

8.29.14: SP 500 Weekly Earnings Update: Still Looking for $120 for full-year 2014 EPS

August 29, 2014 at 11:37 pm | Posted in S&P 500, Sector Earnings Growth Estimates, SP 500 forecast(s), SP 500 Revenue Growth, TOL, Weekly Earnings Update | Leave a comment

With 493 of the SP 500 having reported 2nd quarter earnings, the “forward 4-quarter” estimate slipped a whopping $0.05 this week to $126.28 from last week’s $126.33.

With the SP 500 closing at an all-time high today of 2003, the p.e ratio on the SP 500 increased this week to 15.9(x), while the PEG ration finished the week and month at 1.73(x).

The earnings yield on the SP 500 fell this week to 6.305 from last week’s 6.35%.

The y/y growth rate on the forward estimate fell again this week to 9.18%, has now fallen for 5 straight weeks and has declined 40 bp’s from 8/1/14’s peak of 9.58%.

The July 11 ’14 y/y growth rate was 8.53% so the growth rate accelerated through July ’14 and has now decelerated through August ’14.

Am I worried ? No, given the absolute growth rate is still a healthy 9.18% and close to a 3-year record high, but this is why we track it.

I’d rather see it rise slowly and steadily over time.

Analysis / commentary: 2nd quarter earnings growth will finish at +10.2% excluding the Citigroup charge, and q2 ’14 revenue growth will likely finish up near 4.6%, both of which are good metrics. Health Care was the sector stand-out: from July 1 ’14 through August 29, 2014, Health Care growth increased from 8.2% to 18.6% – that is a big upside surprise.

Per Thomson Reuters, the top-down estimate for 2014 is currently projected at $117.49. The bottoms-up estimate for calendar 2014 (also per Thomson Reuters) is currently projected at $119.25. My guess is, when 2014 is all reported by 4/1/15, the actual SP 500 EPS will be at least $120.

$120 versus 2013’s $109.68 is 9.5% y/y growth for 2014, with the SP 500 trading today at just under 16(x) the forward estimate.

Let’s say the SP 500 p.e expands to 19(x) or 2(x) the expected growth rate for 2014 EPS of 9.5% given the above numbers, then you/we/ I could make a good case for a 12 – 15 month target on the SP 500 of 2,340 or another 17% higher from here.

It feels funny to write that, as in it might be the source of great ridicule upon my person or character, but I also wonder how many would have ventured forth on CNBC in March, 2000, and without hesitation or equivocation, have said to sell all your Technology exposure and buy gold ?

The math is the math.

It could be wrong too.

One of the reasons, I suspect the SP 500 has had trouble expanding to 2(x) its growth rate, is that Financials haven’t really participated as actively as they have in past bull markets. As a sector, Financials did well in ’13, but have turned punk for the most part in 2014.

Sentiment has turned bullish this week too – don’t like to see that.

More on this over the weekend.

We get more retail reporting this coming week. The only company we will really be locked in on will be Toll Brothers, (TOL) the high-end homebuilder, that reports Wednesday, 9/3/14 pre-market.

Thanks for reading our/my little corner of the world. There are a lot of blogs and Twitter handles competing for your eyeballs. Thanks for reading ours…

We’ll be out with much more over the weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

8.27.14: Bernanke Says 2008 Worse than Great Depression

August 27, 2014 at 1:14 pm | Posted in Great Depression | Leave a comment

http://blogs.wsj.com/economics/2014/08/26/2008-meltdown-was-worse-than-great-depression-bernanke-says/

The above link was copied and pasted from a Real Time Economics Wall Street Journal tweet yesterday, after Gentle Ben testified in the AIG litigation recently.

I think former Fed Chair Bernanke was right in concluding that 2008’s recession, if left to run its course, would have been a far greater calamity for the US economy than the Great Depression, but for different reasons:

1.) The money markets and the commercial paper market was at real risk of failure, which means SP 500 companies couldn’t have rolled short-term high quality CP;

2.) Far more Americans through 401(k)’s and pensions, had exposure to the stock and bond markets than Americans had in the late 1920’s and early 1930’s;

3.) A 70 year bull market in home prices came to a crashing halt, the first national real estate depressions since the 1930’s. While the US economy was thought to be a primarily agrarian economy during the Great Depression, single-family homes as a percentage of household net worth, would have been far greater in 2007 – 2008 than in the 1930’s;

4.) The truly shocking action for me wasn’t the Lehman default or even the Bear Stearns default, but the drop in Northern Trust’s and State Street’s stock in late September, early October, 2008. Northern Trust traded up to $88 in September ’08 only to collapse to $33 within a two week time frame. NTRS and STT are “global custodian” banks and thus are huge custodians (recordkeepers) for corporate pension plans and such, with far bigger assets in custody and administration than assets under management. If The Reserve Fund had broken the buck, there would be have been true calamity in the Street and although it is simply a guess, I would have thought that the US unemployment rate would have seen 50% easily, at least over the near term;

5.) The Reserve Fund was, at that time (I believe) in 2008, one of the world’s largest money market funds, and if the Reserve Fund had “broken the buck” which means that if the Reserve Fund’s NAV had moved below $1 per share, it could have resulted in a run on money markets that would have made the bank run and the Bailey Building & Loan run (“It’s A Wonderful Life”) look like a day in the park. (The aftermath of what happened with the Reserve Fund in 2008 is that today, the SEC is contemplating and is close to letting money market fund NAV’s (net asset values) float. The thought is that the $1 money market price creates a “moral hazard” and what I told a client recently is that what retail investors will likely wind up with is whole array of “ultra-short” bond funds as money market funds, which do fluctuate minimally in price.)

6.) Although some of the fiscal policy has been horrid since 2008, I do think that one of the root issues in the economic recovery following 2008 has been the true “shock” of the drop in real estate and household wealth. Remember consumption is 2/3rd’s of GDP and with the capital markets and the real estate markets, being two of the greatest wealth-creation vehicles post WWII (not to mention the value of an education), it is taking years for the consumer to restore their savings and confidence.

7.) The fact that “disinflation” (a declining rate of inflation) and deflation continue to be an issue 5 years after the stock market low and the substantial economic recovery, is indicative of lingering overcapacity. Part of that is due to the life-cycle of technology which has dramatically accelerated productivity and shortened tech product cycles (not to mention kept a lid on inflation) and part could be demographics and the Aging of America (it is a bigger debate);

8.) The Great Mistake in the 1930’s by the Federal Reserve is that they actually withdrew liquidity sometime in 1935 – 1936, which resulted in another downturn in the US economy in the late 1930’s just prior to WW II. In other words, Fed policy errors actually exacerbated the Great Depression, rather than shorten it. Both Janet Yellen (I’m sure), just like Ben Bernanke are / were both aware of the Fed’s policy mistakes and are obviously loathe to make the same mistake. The fact that there isn’t an meaningful inflation today just makes the Fed’s ability to maintain ZIRP (zero interest rate policy) and low rates that much easier. However it will end at some point, and we will get some inflation, I would suspect.

Most intelligent investors blame leverage on the 2008 collapse, but I think it was far more involved than that. It just wasn’t that simple.

In client meetings the last few years, Ive been telling clients that there is less than a 5% chance that they will see the 2008 confluence of events happen again in their lifetime (probably less).

Certainly I could be wrong, but I continue to think the US economy, and the US stock market, particularly the SP 500 is in a perfect glide slope of healthy, albeit subdued growth, low inflation, and a healthy respect for stock volatility and negative sentiment on the part of retail investors.

One commentator from PIMCO called it the “Goldilocks economy” and the metaphor seems appropriate.

We will see SP 500 corrections over time, but I will bet in 10 years that we will look back and see this period of time as similar to post WW II economic stability and growth. Perhaps that conclusion is somewhat of a stretch given the demographics of the US economy today, but we’ll see.

Thanks for reading today. We’ve been contemplating this commentary on 2008 for some time. Watching NTRS and STT trade in late September, early October, 2008 was one of the few times, I’ve felt true fear watching the stock market. The potential collapse of the money market as was being telegraphed by the global custodian banks, would have been a horrific scenario to conceive, let along experience.

When all the books are written about the “near Great Collapse of 2008″ after 20 – 30 years of hindsight, I do think Ben Bernanke, then Treasury-Secretary Hank Paulson, and Tim Geithner will be due a huge debt of gratitude.

For a few days/weeks, educated American’s had a brief look into the abyss. It wont be forgotten by those of us that sat through it.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

8.24.14: Q2 ’14 Earnings – Like Talking Heads Song, “Same As it Ever Was”

August 25, 2014 at 12:22 am | Posted in Earnings, Earnings estimate revisions | Leave a comment

The financial media loves to talk earnings and discuss the earnings beat rates versus the earnings miss rates, etc., and such, but all you need is to look at our Excel spreadsheet, which we have kept updated, based on Thomson Reuters data, for quite a long time.

As you can see from the spreadsheet below, the q2 ’14 earnings season was just as “normal” as the last 4 years.

We have blocked the heaviest reporting period during each earnings season with dark borders.

Q2 ’14 was “Same as it Ever Was”, as the Talking Heads once articulated.

Note how during the heaviest part of the reporting period, sees the biggest jump in positive estimate revisions. Biased by endless management positivism ? Sure, but so far the revision data has been a good indicator. Also note the q4 ’13 data which was released in q1 ’14 and thus influenced by the brutal Midwest and Northeast winter, was the first quarter in a while with revisions less than 50%, which showed analysts in general had turned more cautious.

FC-eps estimate revisions

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

8.22.14: SP 500 Weekly Earnings Update: Q2 ’14 Earnings Season is Over, Growth Was Good

August 22, 2014 at 10:07 pm | Posted in BAC, Biotech, Biotech sector / earnings, Earnings, Earnings estimate revisions, Energy sector, Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), JPM, S&P 500, SCHW, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

According to Thomson Reuter’s This Week in Earnings, the forward 4-quarter EPS estimate for the SP 500 fell $0.25 this week to $126.33, versus last week’s $126.58.

The p.e ratio on the forward estimate given the 1.71% SP 500 rally is now 15.75%.

The PEG ratio rose to 1.70(x) versus last week’s 1.64(x).

The “earnings yield” on the SP 500 fell to 6.35%.

The year-over-year growth of the forward estimate fell for its 4th consecutive week, to 9.25%, down from last week’s 9.40%.

With 486 companies having reported q2 ’14 earnings, for all practical purposes q2 ’14 earnings season is over.

The year-over-year growth rate for actual q2 ’14 earnings was 10.2%, which is pretty healthy growth, the best since late 2011.

q2 ’14 revenue growth of 4.6% was also the best in the last few years.

Here is our excel spreadsheet simply tracking SP 500 revenues by sector: FCSP500revgro(qtrly)

The sectors that caught my eye in terms of revenue growth are Healthcare, Energy (upside surprise) and Basic Materials. Health Care is in large part driven by biotech.

Q3 ’14 earnings growth rates are finally starting to see the typical reductions, with 5 weeks left in the quarter.

Since July 1 ’14, q3 ’14 SP 500 earnings growth has been cut from 11% to 8.3% as of Friday, August 22nd.

Only Healthcare has seen higher revisions for q3 ’14 since July 1, from 10.5% to 11.2%.

Our final comment this week is about Financial’s: because JP Morgan took that huge charge last year in q3 ’13 for legal fees, which resulted in GAAP EPS for JPM of ($0.17) versus core or operating EPS of roughly $1.24. Now with Bank of America poised to take a $16 billion charge for Countrywide mortgage fraud issues, the +20% growth the Financial’s were looking at for q3 ’14, will likely be reduced.

Financials could be setting up for a decent 2014, if only from a clean earnings perspective. We’ve never been big insurance investors, but we do like the big banks, the exchanges, and the asset gatherers like Schwab, etc. (Long JPM, Bank of America and Schwab.)

Thanks for reading. We’ll have more over the weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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