7.27.14: Update on SP 500 Corrections – Recent Weakness in the Taxable High Yield Bond Market

July 27, 2014 at 4:01 pm | Posted in HYG, JNK, Russell 2000, S&P 500, SP 500 corrections, Taxable High Yield | Leave a comment

SP500corrections

The above link is our/my internal spreadsheet noting the last few year’s history of SP 500 corrections.

Note how in 2014, we’ve seen two very brief SP 500 corrections, although some might not even call them “corrections”, but the random action of Wall Street.

Here is a link from Bespoke this past week on the diverging prospects of taxable high yield bonds and the SP 500/Russell 2000.

Hopefully readers can see the chart. Bespoke commentary notes that since June 23rd, which was the peak for high yield prices, junk bond prices and the SP 500 have diverged. Bespoke thinks the junk bond market could be telling us more about the prospects for the Russell 2000 than the SP 500 though.

Is the corporate high yield (i.e. junk-bond market) telling us something right now ?

My own opinion is that the SP 500 needs a good flush, but our client portfolio’s are weighted towards the higher market cap end of the SP 500, such as the SP 100, which we think offers better risk / reward than the Russell 2000 today, and we’ve felt like this for some time.

We sold out of our high yield ETF’s in 2013, and have no positions of any kind in taxable high yield at present.

From the macro, or “top-down” perspective, the US economy continues to improve, but the glide path off the March, 2009 low is a slower-growth trajectory than previous recoveries given the constraints and constrictions on the financial system, and the return of what-could-be-considered normal real estate markets. This is all very healthy, just slower growth than expected.

The major developed and emerging markets are returning to growth too, particularly Western Europe and related economies after the 2010 and 2011 sovereign debt crisis.

China (Shanghai) looks close to a breakout if you look at the charts, although their economic data should be taken with a grain of salt.

12 – 18 months from now we could be looking at a robust US economy, Western European economies which have fully recovered and have healthy budgets (i.e. a stronger EU), and robust China and Southeast Asia growth.

What a horrible prospect…

Like the Timbuk 3 song, our opinion today is “The Future is so Bright, I Gotta Wear Shades”, but I also think we need another solid, 7% – 10% SP 500 correction to the stock market, to restore the balance.

In terms of sentiment, newsletter sentiment is pretty bullish, while individual investor sentiment is neutral-to-bearish. That is an interesting dichotomy.

Let’s see if the recent weakness in the taxable high yield market, has it right or wrong over the next few weeks. We are entering into a seasonally weak time for the stock market, from late July to early October.

I have been chatting this weekend via email with a blog subscriber who is retired and strictly a high-yield investor. Seems like a very sharp individual. I thought it was Martin Fridson ( a long-time authority on the high yield bond market(s)) that wrote an article years ago (probably pre 2008) that if you look at annual high yield returns (and volatility) of the Merrill Lynch High Yield Index, the risk-adjusted return over long time periods is better than the SP 500. I recall reading this article years ago, and I am not sure how 2008′s taxable corporate meltdown which drove high yield spreads to the then unheard levels of 25% YTM’s (yield to maturity),  impacted this history, but absolute yields of 5.5% – 6% today in the junk bond market, don’t interest me, even with the prospects for a stronger US economy. 8% and 10% absolute yields would get my interest, all other things being equal.

I actually think the municipal high yield market offers better absolute yields today than the taxable market, although the duration on the muni high yield mutual funds is quite long. There is more interest rate risk with muni high yield funds, than most investors might be aware.

Thanks for reading and stopping by. There are a lot of blogs and tweets competing for your eyeballs today, and we thank you for stopping by ours…

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

7.26.14: SP 500 Weekly Earnings Update: Solid q2 ’14 Earnings So Far, Stock Price Reaction Less So…

July 26, 2014 at 7:51 pm | Posted in AMGN, Earnings, Earnings estimate revisions, FB, Weekly Earnings Update | Leave a comment

Per Thomson Reuters, the “forward 4-quarter” estimate for the SP 500 this past week was $127.07, exactly the same as past week.

The p.e on the forward estimate remained at 15.5(x), given the flat SP 500, which closed this week at 1,978.34 versus last week’s 1978.22.

The PEG ratio remains at 1.76(x).

The SP 500 “earnings yield” also remained flat at 6.42% versus last week’s 6.42%.

But, the year-over-year (y/y) growth rate on the forward estimate rose to 8.85% versus last week’s 8.51%.

Good news – that forward growth rate is so key (in my opinion).

Analysis / commentary: with a little less than half the SP 500 having reported q2 ’14 earnings, (229 companies per Thomson), the y/y growth rate in q2 ’14 earnings is +6.5%, or excluding the Citigroup charge, +8.2%. Personally, I would have been surprised with 10% earnings growth for q2 ’14, but I’m surprised we are at 8.2% with half the SP 500 having reported to date. The bulk of earnings will have been reported by mid-August ’14 or another 3 weeks from now.

By sector, here is how the actual earnings growth has evolved by sector, from what was estimated July 1, 2014. (The first column is the q2 ’14 earnings growth rate as of Friday, July 25th, the 2nd column is what was estimated for q2 ’14 on July 1, ’14):

Cons Disc: +4.4%, +6.2%

Cons Spls: +6.8%, +5.1%

Energy: +9.4%, +10.8%

Fincl’s: -8%, -2.6% (Citigroup charge was huge – a 1.7% reduction to the SP 500 per Thomson)

Hlth Care: +15.8%, +8.2%

Industrials: +11.3%, +8.3%

Basic Mat: +10.9%, +9%

Technology: +14.6%, +12.3%

Telco: +6.5%, +9.2%

Ute’s: -0.9%, -0.4%

SP 500: +6.5%, +6.2% (+8.2% currently if Citi’s 98% earnings decline is excluded)

Ranking from highest y/y earnings growth to lowest for q2 ’14:

Health Care: +15.8%

Technology: +14.6%

Industrials: +11.3%

Basic Mat: +10.9%

Energy: +9.4%

SP 500: +8.2%

Cons Spls: +6.8%

Telco: +6.5%

Cons Disc: +4.4%

Ute’s: -0.9%

Fincl’s: -8%

Consumer Discretionary (i.e. retail and auto’s) has been lagging all year. Financials are likely bottoming from an earnings perspective.

Health Care is still the king though, in terms of earnings growth. Expected full year 2014 earnings growth is still the tops in the SP 500 at +14.5%, and it has only improved as the calendar has unfolded, while full-year 2014 for the SP 500 is still expected in the 8.8% – 9% range. Pfizer (PFE) and Merck (MRK) report this week, along with Amgen (AMGN). We sold Merck and Amgen earlier in 2014. Still long PFE and Johnson & Johnson (JNJ). We would need to see a decent correction to biotech to add to the sector via an ETF. Amgen is the most reasonably-valued biotech name, but it is more “pharma-like” at this point. AMGN is trying to make the transition from a value company to a growth company. The huge run in AMGN from $50 in late 2011, to over $100 was driven by mediocre operating results and a huge share buyback plan. The Onyx acquisition was done for the pipeline. Share repo’s and the dividend increases will be more modest going forward. It isn’t as easy as it looks, to change a company from a capital-return driven theme to a growth company driven by revenue growth.

A number of Dow 30 stocks were down 3% – 5% this week, per our technical software provider, Worden.

Given the stock’s reaction to earnings reports this week, a lot of this news could be discounted in current prices already. Facebook (FB) reported a stellar quarter on just about every metric, and while the stock made a new all-time high, the reaction was tepid given the magnitude of the upside surprise. (Long FB)

Thanks for reading. We’ll have more before the weekend is out.

Trinity Asset management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

7.25.14: Is the Summer Correction Here ? Large-Cap vs Small-Cap Relative Value

July 25, 2014 at 10:13 pm | Posted in Biotech, CSCO, GE, GS, Morningstar data, Russell 2000, S&P 500, Valuation | Leave a comment

It is late Friday night, after the market has closed and I’m awaiting the Thomson Reuters data for the Weekly Earnings Update you can find on this blog every Saturday.

CNBC gave the Goldman call a lot of play today, with their short-term market call that over the next 3 months, global equities, on a risk-reward basis, could underperform or suffer a negative return.

More fascinating was that the cautious equity outlook was based on a potential selloff in bonds.

A whole lot of people have been calling for higher interest rates since March, 2009, (including my notes to clients) and have been patently wrong.

The rationale I thought was gutsy for Goldman, and I admire their backbone. Call for higher interest rates to push equity prices lower is a prediction made many times over the past few years, and has been routinely wrong.

———-

One interesting stat that jumped out at us in preparing this blog post last week was that for “large-company stocks”, which Morningstar defines as the SP 500, the “worst” 10-year rolling return period was from 1999, 2008 and that was a -1.38% return. That was the worst 10-year period ever for the benchmark.

To his credit, when we were both writing for TheStreet.com in early, 2009, my friend Norm Conley of JAG Capital in St. Louis noted in early 2009 this exact fact. I remember his post and I remember us talking about it offline.

The Russell 2000 or the small-cap benchmark, continues to trade like it has a piano on its back. We put on the R2k for a trade in 2013, and sold in early 2014, and are waiting on lower prices for the benchmark.

In 2013, the SP 500 rose nearly 32%, the Russell 2000 approximately 38%.

The Russell 2000 is underperforming the SP 500 this year, and my hope is that the large-cap sector continues to offer very-good relative value, particularly relative to small-caps.

At one point this March – April ’14, we read that the trailing p.e on the Russell 2000 was roughly 80(x) (that could have been near the biotech peak this spring), while the trailing p.e on the SP 500 at the same time (and it hasn’t changed much, since) was 17(x) trailing earnings.

The point being, and given the above stat about the 10-year roiling return, the relative value of US equities improves nicely as you walk up the market cap asset classes.

Bespoke did a short blurb in last weekend’s summary missive, noting that for those who are looking for a correction based on Russell 2000 weakness of late, in fact the SP 500 tends to be higher 3 – 6 months later historically after R2k underperformance, and R2k underperformance is not a precursor to large-cap underperformance.

I remember in the late summer, fall of 1997 how small-cap’s fell apart and underperformed badly and the SP 500 kept chugging right along.

Before we would buy the Russell 2000 in terms of an asset allocation of dollars for clients, I’d need to see it bump along the bottom of the relative performance rankings in terms of equity asset classes, not just for a quarter or two, but for a few years.

The value and the opportunity in my opinion, still resides in the large-cap and the mega-cap leaders of the 1990′s. Look at GE – it is still trading at less than 50% of its 2000 high of $60 per share. Cisco (CSCO) too, although we own more GE for clients than Cisco. (Long both.)

Thanks for reading. Wrote longer than expected.

Back with more tomorrow on the q2 ’14 and Weekly Earnings Update.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

 

7.19.14: SP 500 Weekly Earnings Update: Factset Notes Revenue Upside Surprises (Havent Seen in a While)

July 19, 2014 at 2:21 pm | Posted in Earnings, Earnings estimate revisions, Energy sector, Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), GS, JPM, S&P 500, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuter’s, ‘This Week in Earnings” the forward 4-quarter SP 500 estimate rose to $127.07 last week, from the prior week’s $126.75.

The p.e ratio on the forward estimate is now 15.5(x) and the PEG ratio (P.E-to-Growth ratio) of the SP 500 has fallen to 1.76(x) the lowest since July 6th, 2012′s PEG of 1.48(x).

On July 6th, 2012, the forward 4-quarter estimate for the SP 500 was $110.94, and the p.e ratio was 12.2(x). (I’d love to tell readers that the PEG has some predictive value regarding forward returns for the SP 500, but through late 2012 and all of 2013 the PEG was within the high 2′s, low 3′s range.) What the PEG ratio might speak to is the unending cacophony by CNBC guests about the “record p.e” ratio on the SP 500 and SP 500 valuation. The fact is, in my opinion, using SP 500 earnings data, the SP 500 trading at 15.5(x) forward earnings earnings, with expected growth of 7% – 9% this year, just doesn’t seem that expensive.

The earnings yield on the SP 500 for our Fed model fans, as of July 18th, 2014, is 6.42%. The earnings yield on the SP 500 has steadily fallen as the appreciation in the SP 500 has been faster than the annual earnings growth.

Most importantly, the year-over-year (y/y) forward 4-quarter growth rate on the SP 500 jumped to 8.85%, the highest y/y growth rate since Jan 13, 2012′s 9.40%.

As we wrote on this blog last week here, the y/y growth rate of the SP 500′s forward estimate is something that needs to be monitored.

Analysis / commentary: Bespoke had some good graphs and commentary on the low volatility we are seeing across many markets, not just the SP 500, but at some point we should have a healthy 5% – 7% correction in the SP 500, as we have had since the summer meltdown of 2011. Healthy markets correct, and the SP 500 still needs a good flush. If memory serves, it has been over 360 – 370 trading days since the SP 500 has touched its 200-day moving average.

Financial earnings this week, including JP Morgan (JPM), Goldman (GS), Bank of America (BAC) and even GE (yes you can think of GE as a financial) had decent earnings reports, in my opinion. Year-over-year earnings growth for Financials has fallen from -3% last week to -8% as of Friday, July 18th, but we now think this will be the bottom for the sector. According to Thomson Reuters, the Citigroup (C) charge cost the SP 500 1.7% in expected q2 ’14 total SP 500 earnings growth.

Per Facstset, and despite JPM’s warning in mid-quarter about the fixed-income market trading slowdown, Capital Markets within Financials are reporting the highest y/y growth at 22%.

The SP 500 is now expecting 5% q2 ’14 y/y earnings growth, but if we ex Citigroup (C) from the SP 500, expected earnings growth increases to 6.7%. (Thomson Reuters did not provide C’s impact on just the Financial sector’s expected growth. Assume it is quite material.)

Factset notes that with 82 of the SP 500 companies having reported, the “revenue beat rate” of 70% quarter-to-date is at a record high. That would be a significant change to the quarterly patterns if its holds up through the end of July and mid-August, 2014.

Per Factset’s John Butters, Energy, Financials and Healthcare are the sectors with the greatest upside surprises. (Energy’s revenue upside surprise is unexpected I would imagine. Bodes well for sector, but was it a function of Iraq-driven bump in crude oil prices in q2 ’14 ?)

Although less than 20% of the SP 500 has reported, the big takeaway this week was that the Financials are in good shape, expectations may have gotten too low, and the Capital Markets may not be dead, even with low volatility. We sold Goldman (GS) last January ’14 in all accounts and will remain out of the name until the stock trades into the mid $140′s. If you want to play capital market activity, JPM, and BAC and even MS will work, and could be nice trades through year-end 2014. (Long JPM, BAC).

Energy’s numbers are looking better too. We’ve never been good investors in the group, and while Exxon and Chevron are thought to be the low-beta names, and thus thought to be safer, we will avoid for now. I think the oil services like Schlumberger, Halliburton and Baker Hughes are too extended technically (long only HAL in the Energy sector, and BTU, which could be Energy or Basic Mat).

Conclusion: q2 ’14 earnings are off to a decent start. 2014 full-year SP 500 earnings growth is still expected at 8.7% per Thomson Reuters. The revenue upside noted by Factset is a pleasant surprise. Let’s see if it holds up through the bulk of earnings this week. It is a positive that the dollar estimate rose week-over-week in the first heavy week of earnings reporting by SP 500 companies. The improvement in the y/y forward growth rate for the SP 500 continues. Remember though, in 1994, the SP 500 grew earnings 19% and the SP 500 rose 1% in that calendar year, as the Greenspan lifted interest rates 6(x) in that remarkable year. SP 500 earnings are a fundamental positive for this market, but the SP 500 is also overdue for a decent correction.

The corporate high yield market has started to correct. The HYG (high yield ETF) is officially oversold. Typically, credit market corrections precede equity market corrections.

Thanks for reading and stopping by. A lot of blogs and websites compete for your eyeballs today. Thank you for reading ours.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

7.18.14: How Bond Positions Can Reduce Portfolio Volatility

July 18, 2014 at 6:17 pm | Posted in AGG, Asset allocation, Bond Funds, Bond Market(s) | Leave a comment

You always want to be careful when making blanket statements around any investing topic, but if one studies the math around stock and bond volatility, an easy way to reduce portfolio volatility is to add fixed-income securities to a portfolio or pool of assets.

Morningstar did the math in their annual classic, “Stocks, Bonds, Bills and Inflation” Handbook.

From 1926 through 2012, here are the Summary Statistics (per Morningstar) of annual returns and standard deviations for various stock / bond allocations:

(The first column is the geometric mean, the 2nd column is the arithmetic mean, and the 3rd column is the standard deviation):

100% Large-Company stocks: 9.8%, 11.8%, 20.2

90% stocks / 10% bonds: 9.6%, 11.2%, 18.2

80% stocks / 20% bonds: 9.0%, 10%, 14.5

70% stocks / 30% bonds: 9%, 10%, 14.5

50% stocks / 50% bonds: 8.3% 8.9%, 11.3%

30% stocks / 70% bonds: 7.4%, 7.8%, 9.2

10% stocks / 90% bonds: 6.3%, 6.7%, 9.0

100% L-T govt Bonds: 5.7%. 6.1%, 6.7%

* Source: Morningstar, SBBI for 2012, published in 2013

A couple caveats for readers to consider or what I think might be thoughtful commentary: the long-term government bond is the 30-year Treasury, which is a pretty volatile security, and more so today given the generational low coupon, so if Morningstar were to use the 10-year Treasury or even ETF’s these days, some of these standard deviations might be considerably lower. Also, readers always have to consider “context”. A deep value portfolio in 1999 that consisted of gold mining stocks and other deeply out-of-favor sectors, might have had a considerably lower standard deviation moving through the 2000′s than a 60% / 40% balanced portfolio of large-cap growth stocks and longer-term Treasuries.

If Morningstar re-ran the stats, with a SP 500 / Barclay’s Aggregate rather than the 30-year Treasury, I wonder how the standard deviation would change. I’m sure someone has run the calculation.

Another point which readers need to consider is that, given the 32 year old bull market, which you can say started roughly in 1982 (thinking long-term Treasury) versus the 12 years consolidation within the SP 500 that just ended in 2013, when the SP 500 broke out above the March, 2000 and October, 2007 highs, you have to wonder how safe the “bond” part of the portfolio remains today.

Blanket statistics such as these often ignore the “reversion to the mean” perspective we wrote about here in late June, 2014.

I’m also puzzled as to why Morningstar didn’t provide stats on the standard 60% / 40% asset allocation, which for years was the recommended allocation amongst plan sponsors and large pension funds.

As even Morningstar concluded, when measuring risk by standard deviation, a 70% equity / 30% bond portfolio has 1/3rd less “risk” (14.5 vs 20.2) than a 100% large-cap equity portfolio, all other things being equal.

Still judgment and homework are always your best bet when making longer-term decisions around investing.

Thanks for reading. We will be out with our Weekly Earnings Update probably on Saturday, July 19th.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

7.11.14: SP 500 Earnings Update: The Forward Growth Rate and Why It Is Important

July 12, 2014 at 6:52 pm | Posted in AA, Basic Materials, Earnings, Earnings estimate revisions, Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), S&P 500, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuters, the forward 4-quarter estimate for the SP 500 fell $0.02 this week to $126.75 from last week’s $126.77

The actual SP 500 index fell 90 bp’s or a little less than 1% on the week.

The p.e ratio on the forward estimate is now 15.5(x) and the PEG ratio is 1.82(x).

Expected full year earnings growth is still expected at 7% using the top-down consensus EPS estimate.

Given the decline in the SP 500 this week, the earnings yield on the SP 500 rose 6.44% from last week’s 6.38%, although still well under the record July ’12 high of 8.25%.

The year-over-year growth rate on the SP 500 slipped to 8.51% from last week’s 8.66%. The y/y growth rate of the forward estimate is still at the higher end of its recent range, and the highest y/y growth rate since 2012.

The forward growth rate is a key metric and you will read why in a minute.

This week we heard from Alcoa (AA) and the stock rose 6.61% on the week. The Wells Fargo (WFC) earnings report isn’t included in this week’s data. (Long AA, WFC)

Next week we hear from a plethora of financials on q2 ’14 results.

Analysis / commentary: This week I read another article on Twitter debunking forward earnings estimates, mainly the forward p.e ratio. With fellow alum’s from TheStreet.com, Jeff Miller of a Dash of Insight and a decent-sized money manager and Rob Martorama, of RightBlend Investing, an advisor group was formed with bimonthly conference calls and this week we tackled earnings estimates and earnings data as generally disseminated in the financial press.

We wrote an article sometime in 2013 here on www.fundamentalis.com, saying how following the absolute level of earnings is meaningful, but it was a false tell in 2008. In effect, doing our weekly earnings work and watching the dollar level of the forward estimate led us to wrong conclusions about the health of the stock market (not to mention some serious denial on my part about what other indicators were flashing.)

In October, 2007, the forward estimate for the SP 500 was roughly $100 and by July, 2008 it had fallen$2 to $98, by the third week of July. However, after analyzing the data for 2007 and 2008, here is what I found in terms of the y/y growth rate change:

10/31/08 -18%

8/29/08 -2.63% ( just two weeks before Lehman collapse)

6/27/08 +0.23%

5/30/08 +2.54%

3/28/08 +2.75%

2/29/08 +4.83%

2/1/08 +5.76%

12/28/07 +3.39

11/2/2007 +9.98%

Every bear market is different. The fact that – looking at it in hindsight – the forward earnings growth rate was flashing yellow back in late 2007, early 2008, looks conclusive now, but wasn’t so much back then.

What SP 500 earnings analysis is not:

a.) A timing tool;

b.) A reliable leading economic indicator;

Treat SP 500 earnings analysis as a doctor treats a patient’s vitals, like body temperature, pulse, blood pressure, etc. It is an important part of the overall risk assessment, but isn’t to be relied upon exclusively.

Earnings analysis is an important metric to equity and market valuation, but the fact that anyone might think the data is predictive of the market, might be an erroneous conclusion. The fact that someone has a 103 degree temperature doesn’t mean the are going to die, just the same as it doesn’t precisely mean that someone with a body temperature of 98.6 is going to live another day.

The forward growth rate is an important tell, as the 2008 analysis indicates, however in 2012 the forward growth rate slowed from 10% in January, ’12 to 0% by August, September of 2012 didn’t stop the SP 500 from trading higher right through the slowdown.

We have found the most valuable part of the analysis to be watching relative and absolute changes in sector earnings growth. Note on the blog our call on the Financial sector for 2013, in the fall of 2012. The fact that the SP 500 revisions were working lower, and yet forward Financial estimates remained stable, was a green light for me to overweight Financials in client accounts coming into last year.

Same with Basic Materials in 2014: while the revisions have been downward for q2 ’14 for the sector, absolute expected growth of +8.4% is the third strongest sector in the SP 500 for q2 ’14 and the sector is lapping very easy comp’s versus q2 ’13. Note how strong Alcoa’s earnings were versus estimates this week.

By my count, using ThomsonReuters data, 22 Financials report this week, including most of the major banks. Financials, as a sector, are expected to report -3.5% y/y earnings growth. 2015 Financial sector estimates look pretty stable, but we will have a better feel as we move through the 3rd quarter.

Thanks for reading this weekend. Watch the forward growth rate with our earnings data, but don’t rely on any single metric exclusively.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

7.7.14: Trends in SP 500 Sector Revenue Growth

July 7, 2014 at 1:17 pm | Posted in S&P 500, SP 500 Revenue Growth | Leave a comment

Finally got motivated and put this spreadsheet together on recent sector revenue trends within the SP 500:

FCSP500revgro(qtrly)

The Thomson Reuters data can help investors identify – from a top-down perspective – which sectors they may want to be overweight.

Our best call the last two years, was turning bullish on financials in the 3rd – 4th quarter in 2012, and then turning more cautious in late 2013, early 2014.

Financials have had a tough 2014 so far. The lack of liquidity and slow action in the bond markets has hurt the traditional banking / trading firms in q2 ’14 and the HFT issue hit the exchanges, not to mention the low VIX and low volume. I thought the exchanges would be a place to hide within Financials this year.

Technology has been a pleasant surprise in ’14. Apple and Intel sure helped. (long AAPL, INTC).

Here was a blog post from earlier in 2014 on revenue growth, and then an update from last week here.

Today’s blog update provides even further detail, and we will keep the sector info updated for readers.

The Fed may not really get anxious until we see a return to high-single-digit revenue growth in the SP 500.

The fact is SP 500 revenue and earnings remain pretty subdued, and we are seeing just modest p.e expansion in the index itself.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

7.5.14: Weekend Readings – Blogs, Tweets and Others You Must Read

July 6, 2014 at 12:17 am | Posted in AA, Basic Materials, CNBC, FCX, HYD, HYG, Weekend Link Fest, X | Leave a comment

This week, Alcoa starts off q2 ’14 earnings season on Tuesday night after the closing bell. Let me get this straight: when AA was part of the Dow 30 and led off earnings season, it mattered, but now that it has been dumped from the Dow 30, was up 14% in q2 ’14 and 40% YTD as of June 30, ’14, no one cares ? Here is our earnings preview on AA’s q2 ’14. I am struggling here with Alcoa’s intrinsic value, i.e. what will the world look like in 24 – 36 months ? The first stop is the April, 2011 high of $18.47. How the stock trades around that level is critical.

Can’t resist: here is the tape on a CNBC segment I did with Oriel Morrison of CNBC Asia on Alcoa last spring. Note the cocky young anchor who injects himself at the end of the interview and refers to Alcoa as a “value trap”. The instant this kid shot his mouth off, I knew I was right to be long Alcoa, and remained that way. (long AA)

Another great piece from Josh Brown’s feed, from the Motley Fool. Couldn’t agree more.

Great tweet from Norm Conley on the Energy outperformance. We missed it, but made up for it with names like Alcoa, Intel, Microsoft, etc. for the first 6 months of 2014. Stormin’ Norman Conley notes that as of June 25th, Energy was at 729-day relative sector strength high. Cant buy it here (no way). Will remain underweight energy. (Long HAL, AA, MSFT, INTC)

From Soberlook, the Copper chart and from Bob Brinker’s Twitter feed, the chart of loan growth (loans and leases from bank credit0 from Soberlook. Hard to believe GDP fell in q1 ’14 given this chart. The Copper chart could explain the recent action in FCX. Jim Cramer gave FCX a thumbs-up this week based on one of his technical analyst’s recommending. Good call.

This Week on Wall Street’s blog talks about the employment report and shows a TNX graph. We had a blog post this week here on the 10-year Treasury yield. This Week on Wall Street features Gary Morrow’s excellent technical analysis work, as well as Doug McKay and a few other contributors. I will be Doug McKay’s guest on his Friday morning, July 11th weekly radio show. Looking forward to talking about our fundamental analysis and stocks and charts.

Jeff Miller looks to be taking the weekend off. A Dash of Insight and “Weighing the Week Ahead” hasn’t been updated as of this writing Saturday night, July 5th. Jeff has a social life. I do not.

Basic Materials is just 3% of the SP 500 by market cap. Here was our article from June 8th on our 4 favorite stocks within the sector. Alcoa (AA), US Steel (X), Freeport (FCX) and Peabody (BTU). Peabody could really be an energy stock: it depends on where you want to classify it. DuPont (DD) warned on Agriculture weakness. Wondering if it spills over into Chemicals too. Chemicals is about 70% of Basic Materials, but we are long just the industrial metals. (Long AA, FCX, X, BTU, KOL, SLX)

Anyone looked at a chart of the DJ-15 Utility Average ? If that is a rate tell, watch that 10-year yield. The only sector in the red on Thursday, post non-farm payroll.

Ute’s the best sector year-to-date, Consumer Discretionary the worst.

Muni high yield selling off the last few days too. Remember muni high yield funds and ETF’s are longer-duration vehicles. High yield muni’s are longer-dated bonds, 20 – 30 years, much longer than taxable high yield. The HYD or Market Vectors High Yield Muni ETF is already testing its 200-day moving average. Some of that could be Puerto Rico too. Moody’s downgraded PR to a Ba2 credit. The great Puerto Rican state is headed for default.

Michelle Coffey, MarketWatch Editor on the 10 Stocks that powered the Dow 30 to 17,000. The number doesn’t really matter – the valuation really does though.

Using our Weekly Earnings Update, posted yesterday, July 4th, 2014, the valuation on the SP 500 still seems reasonable from an “earnings yield” perspective, (think ERP and Fed model) and the 16(x) forward estimate p.e for what will highly likely be 8% – 10% earnings growth for the SP 500 this year. The SP 500 isn’t really all that overvalued in our opinion, although a 5% – 10% correction would be perfect, pre 4th quarter.

Love this chart from @361Capital. A return to global growth is a theme we’ve been hammering for a while, at least 2 years.

Need to jump. It is Saturday night and I need a life.

Headed for a 6 am 1/2 mile swim in Lake Michigan tomorrow morning, and a 12 – 14 mile bike ride before breakfast. Did my first Sprint Tri last weekend, the Chicago ITU Invitational. Had great splits in the swim and the bike, then totally gassed on the run. Need to improve those times. Bad knees are going to limit that run improvement.

Thanks for reading and stopping by. There are a lot of sites competing for your eyeballs. We appreciate you taking time on our blog.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

 

 

7.4.14: Weekly Earnings Update: Expect q2 ’14 SP 500 Earnings Growth in 9% – 9.5% Neighborhood

July 4, 2014 at 3:25 pm | Posted in AA, Earnings estimate revisions, S&P 500, Sector Earnings Growth Estimates, SP 500 Revenue Growth, Weekly Earnings Update, WFC | Leave a comment

Because of the quarterly bump into the July quarter, (and, according to Thomson Reuters), the forward 4-quarter estimate this week rose to $126.77, or $3.80 higher than last week’s $122.97. Here is last week’s Weekly Earnings Update, which talks about the the expected quarterly bump in SP 500 earnings.

The P.E ratio on the current $126.77 forward estimate is now 15.66(x).

The PEG ratio on the forward estimate has now slipped to 1.81(x), given the 15.66(x) PE and the year-over-year growth of the forward growth rate of 8.66%.

That PEG print of 1.81 is the lowest since January, 2012 low of 1.49(x).

The earnings yield on the SP 500 is 6.38%.

The y/y growth rate of the forward estimate fell 3 basis points this week from last week’s 8.69% this week’s 8.66%. That is important for readers to note: even though we saw almost a $3 – $4 increase in the forward estimate, the forward growth rate laps the July ’13 quarterly bump and includes the increase for the first week of July, 2013, so monitoring the forward growth rate, tracks the “rate of change” of the forward estimate.

Analysis / commentary: 2nd quarter, 2014 earnings growth for the SP 500 is now expected at +6.2%, per Thomson Reuters, and +4.9% per Factset. Both Alcoa (AA) and Wells Fargo (WFC) report this coming week, with Alcoa Tuesday night and Wells Fargo Friday morning pre-open, but the flood of earnings starting with Financials really starts the week of July 14th. I read an article on YahooFinance that says that “double-digit profit growth” MAY return in the 2nd quarter of 2014. My own opinion is that, it could be close, but if we did get to 10% y/y earnings growth for the SP 500 for q2 ’14, I’d be surprised. (Long AA, WFC)

It is realistic for the 3rd quarter, 2014 to see +10% y/y earnings growth since we will be lapping the JPM settlement charge from 2013, which resulted in an EPS print in q3 ’13 of -$0.17, when core EPS was closer to $0.24 per share and operating EPS (ex the litigation settlement) was roughly $1.24 per share. If you wonder about JPM’s importance to the SP 500 as a whole, because of the aforementioned litigation charge, SP 500 earnings rose 6.2% in full-year 2013, instead of the 6.8% that the index earnings would have increased, ex the JPM charge (and that is according toe Gregg Harrison of ThomsonReuters). Financials and JPM are a substantial chunk of the SP 500 total earnings, which is certainly understandable given the banking system’s and the financial system’s importance to the SP 500. (Long JPM)

The point of this being, expect an “easy compare” to push the SP 500 growth rate over 10% in q3 ’14, and then I really believe q4 ’14 will be easily over +10%, given the +11.9% expected q4 ’14 earnings growth rate today.

Expected Sector Earnings Growth Rates for q2 ’14:

Here is the expected sector growth rates for q2 ’14 today, July 4th, versus April 1 ’14: readers can see how the analysts adjusted expected growth rates per sector over the last 90 days:

  • Consumer Discretionary: +6.2%, +10.8%
  • Consumer Staples: +5.2%, +7.6%
  • Energy: +10.6%, +12.7%
  • Financials: -2.7%, +1.7%
  • Health Care: +8.2%, +6.0%
  • Industrials: +8.3%, +7.7%
  • Basic Mat: +8.6%, +18%
  • Technology: +12.3%, +13.7%
  • Telecom: +8.7%, +12.4%
  • Utilities: -0.5%, +2.3%
  • SP 500: +6.2%, +8.5%

As the reader can quickly see, Health Care and Industrials are the only two sectors to see upward growth rate revisions from April 1, through July 4, 2014.

How about if we re-order the sectors from highest to lowest expected q2 ’14 y/y growth rates ?

Technology: +12.3%

Energy: +10.6%

Telco: +8.7%

Basic Mat: +8.6%

Industrials: +8.3%

HealthCare: +8.2%

Consumer Disc: +6.2%

SP 500: +6.2%

Consumer Staples: +5.2%

Utilities: -0.5%

Financials: -2.7%

* Datasource: Thomson Reuters “This Week in Earnings”

Finally, how does expected q2 ’14 Revenue growth look by sector, and how does that compare to q1 ’14 actual revenue growth rates ?

  • Consumer Discretionary: +4.9%, +4.2%
  • Consumer Staples: +3.0%, +2.0%
  • Financials: -0.7%, -1.9%
  • HealthCare: +8.4%, +8.3%
  • Industrials: +2.2%, +0.6%
  • Basic Mat: +2.8%, +1.2%
  • Technology: +5.9%, +3.6%
  • Telecom: +3.6%, +3.6%
  • Utilities: +0.3%, +17.8%
  • SP 500 revenue: +3.1%, +2.9%

This weekend’s Weekly Earnings Update was longer than I thought. We’ll be out with more data and analysis of the numbers over the long 4th of July weekend.

From a 30,000 foot view, SP 500 earnings are growing nicely, I do expect the growth rate to accelerate into q4 ’14, and I do expect full-year 2014 to achieve at least 10% growth for the benchmark earnings. Whatever problems might befall the index and given the VIX and the overall sentiment I do expect a correction this summer, SP 500 earnings ARE NOT the problem.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

7.3.14: 10-Year Treasury Yield Can’t Crack 2.66%

July 3, 2014 at 8:01 pm | Posted in interest rates, TBF - inverse Treasury | Leave a comment

Despite ANOTHER strong nonfarm payroll report of +288,000 net new jobs created in June, 2014 by the US economy, the 10-year Treasury yield couldn’t crack the 2.66% level.

There are a number of quality technicians watching this level including Gary Morrow (@garysmorrow) and CNBC’s Rick Santelli.

Talking to Gary Morrow this morning after the release of today’s report, Gary related the 2.66% yield level on the 10-year Treasury was the June high yield print, and the declining 200-day moving average on the TNX (the CBOE 10-year Yield Index) resides at 2.69%.

Rick Santelli was talking the 10-year, Treasury 10-year bund spread, but he was also locked in on 2.66% – 2.67%. Rick thinks part of the demand could be coming from the attractive relative yield of 2.65% on the 10-year Treasury relative to other sovereign government debt.

Those are your risk levels. Over the 200-day m/a or 2.69% and we add to the TBF.

Fundamentally, average hourly earnings were up 2% y/y this mornings, and the average workweek was exactly the same as last month.

If you listen to Janet Yellen, wage inflation is more important to Fed policy than commodity inflation. We learned that lesson in 2007. The Core PCE deflator and the various inflation measures have ticked up a little bit, but not enough to worry Yellen.

We’ve seen multiple strong employment reports the past 3 – 4 months and no reaction in Treasuries. The inflation outlook remains benign, but it is still very tough to buy a 10-year Treasury at a 2.65% – 2.66% yield.

Per Brian Wesbury’s blog, the first 6 months of 2014 have averaged net new jobs of 231,000, the fastest first half since 1999.

Again, the 10-year Treasury has rallied this year. Pretty frustrating given the plethora of duration negativity in the market.

Check for our Weekly Earnings Update tomorrow, Friday, July 4th, 2014.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

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