8.18.14: SP 500 Weekly Earnings Update: SP 500 on Track for 10% Earnings Growth in 2014

August 18, 2014 at 2:38 pm | Posted in Fwd 4-qtr growth rate (SP 500), Weekly Earnings Update, WMT | Leave a comment

Apologies for the delay in getting this out this week.

The forward 4-quarter estimate for the SP 500 fell slightly for the week ended 8/15/14 to $126.58, from the prior week’s $126.78.

The p.e ratio on the forward estimate is now 15.45(x). The PEG ratio is 1.64(x).

The “earnings yield” on the SP 500 as of Friday’s close was 6.47%.

The year-over-year (y/y) growth rate on the forward estimate fell to 9.40% from the prior week’s 9.53%. Still healthy and closing in on 10%, which is where I would expect we will end 2014.

Analysis / commentary: For q2 ’14, the y/y earnings growth for the SP 500 is officially over 10% to 10.1% (if Citigroup’s numbers are excluded), per Thomson Reuter’s This Week in Earnings. The growth rate of the forward estimate is now also closing in on 10% which means consensus analyst expectations are getting more optimistic, despite what is a subdued growth rate of high single digits.

Q2 ’14 earnings season officially ended with Wal-Mart’s (WMT) report this past week. 466 of the SP 500 have now reported q2 ’14 earnings.

Because of the delay in getting this out to readers this weekend, we will keep the summary short and sweet.

Although we waffled on the forecast, we thought SP 500 earnings growth could hit 10% in 2014, and with p/e expansion t0 2(x) that growth rate or 20(x) earnings, the SP 500 could still have a decent year.

We are expecting a strong q4 ’14 both for SP 500 earnings and for the return on the SP 500.

Watch the July ’14 high for the SP 500 of 1,991. A heavier volume trade above 1,991 and our q4 ’14 rally could have started early this year.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

8.14.14: The Industrial Sector – Taken A Beating

August 14, 2014 at 9:44 pm | Posted in AA, BA, Basic Materials, CAT, DE, F, FCX, FDX, GE, Industrials, MMM, S&P 500, X | Leave a comment

When we wrote the weekend earnings update and linkfest, Industrials were one of the more oversold sectors, and we promised an update on the group to readers.

Industrial’s are roughly 10% of the SP 500 by market-cap weight.

Here is both a history of the last 8 quarters of Industrial earnings growth, as well as the estimated earnings growth for the next 5 quarters:

Estimated (as of 8/8/14):

q2 ’15: +10% (the 10% is down slightly from the July ’14 +11.5)

q1 ’15: +13% (the current growth estimate up from the 12.3% on July 1)

q4 ’14: +12% (the 12% estimate for q4 ’14 has been constant all year, since Jan 1 ’14)

q3 ’14: +9% (the q3 ’14 estimate also has been flat all year, in the 9% range)

q2 ’14: +11.1% (highest growth rate since Oct 1 ’13, which was 9.7%, upside surprise for q2 ’14 with most Industrials having reported)

Actual (as of q2 ’14):

q1 ’14: +3.9%

q4 ’13: +14.2%

q3 ’3: +8%

q2 ’13: +1.4%

q1 ’13: +3.1%

Q4 ’12: -4.5%

Q3 ’12: +5.3%

Q2 ’12: +14.8%

Avg: +5.77%

The fact that GE is labeled an Industrial has always fascinated me, with the majority of its assets being financial-related, so I often wonder given GE’s$260 bl market cap, how the earnings impact the sector reports. (Need to find that out).

As the numbers fall out currently, although they are always subject to revision, the expected growth is looking above average for the next 5 quarters, versus the historical 8 quarters.

For client portfolio’s currently, we have a neutral weight in Industrials, but the stocks have pulled back nicely the last three months, despite the healthy quarterly earnings growth.

In my opinion, the drop in crude oil is a positive for the sector, any prolonged strength in the dollar would be a negative.

The revenue growth for Industrials is +2%, towards the lower end of the distribution range for the SP 500′s 10 sectors.

We’ve been adding some Industrial names this week, and am not finished yet, so I cant be more specific for readers. Clients always come first.

Remember, Transport’s were rolled into the Industrial sector about 10 years ago. Trannie’s are a big oil decline beneficiary. (Frankly, I think SP 500 could add Basic Materials, and the Auto OEM’s to Industrial’s, although I understand why the auto co’s are Consumer Discretionary. )

We’ll have more over the weekend.

The bottom-line or short conclusion is that I think Industrials are a global-growth play, and that there is value in the Industrial sector today. Basic materials, too.

Thanks for reading and stopping by. Hope this helped your investing a little bit.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

8.13.14: SP 500 Correction History Update

August 13, 2014 at 3:43 pm | Posted in S&P 500, SP 500 corrections | Leave a comment

SP500corrections

The above link updates our correction history.

The current correction, at which the SP 500 peaked at 1,991, is still “in process” until the SP 500 takes out that key level.

Today’s market action with the Dow +105 (as this is being written), and the SP 500 +14 to 1947.65 certainly looks good now.

1,947 for the SP 500 is roughly the 50% level of the current 7/24/14, 1,991 high for the SP 500, and last week’s 8/17/14, 1,904 low.

Our Weekly Earnings Update found here is still flashing very much green for the prospect for stock prices.

The fact that q4 ’14 earnings growth for the SP 500 has now been revised higher since both July 1 and April 1 ’14.

Even 2015′s expected earnings growth has been stable over the last 6 months, versus steady downward revisions over the last 3 years.

SP 500 earnings are just one metric, but an important one…

Trinity Asset management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

8.12.14: Where is the Inflation 5 years into the Economic Recovery ?

August 12, 2014 at 2:02 pm | Posted in Bond Market(s), HYD, Municipal Bond market, Municipal High Yield, Taxable High Yield, TBF - inverse Treasury, TLT | Leave a comment

Our two “top-down” trades that have gone wrong in 2014, have been the yield curve flattening, where we thought rates would continue to move higher into 2014, and the retail / consumer discretionary trade, which we thought would end with the ugly winter of December, 2013 through March, 2014.

The yield curve flattening could be a function of many things including low interest rates in Germany, Japan and Canada, but ultimately I’ve always felt that Treasury’s and bond prices in general are usually (and ultimately) determined by inflation and inflation expectations, which at least here in the US and Europe, seem to be diminishing rapidly, after a brief pop in expectations this Spring.

It doesn t make much sense to hold a fixed-income security yielding 2.5%, when inflation expectations are rising above 2%.

As of last week, here are the government bond yields that Treasuries are competing with:

Germany: 1.06%

Japan: 0.52%

France: 1.49%

Canada: 2.08%

US 10-year: 2.42%

However what has truck me the last two weeks are the inflation gauges or cost components of key indices that are now coming in lower than expectations:

* The Nonfarm Productivity Index reported last week, showed unit labor costs growing +0.6%, versus the 2% expected. Unit labor costs were WELL below expectations.

* Average hourly earnings in the July payroll report was expected at +0.2%, and instead came in flat.

From my understanding the Fed has always worried more about “demand-pull” wage inflation, than “cost-push” commodity inflation, and Yellen has said there appears to be quite a bit of unutilized slack in the labor force.

However, it is very tough for us to add duration to client accounts with the 10-year Treasury trading at 2.42%.

We’ve split the baby so to speak, by adding some high-yield municipal bond funds, ETF’s and closed-end funds, (both high yield and investment grade muni CEF’s) from which we have gained for clients, both yield, some duration, and what we feel is decent relative value in the fixed-income space.

Im a little worried about Emerging Market debt (either local or dollar) given the dollar’s continued relative weakness. A period of robust dollar strength would help us gauge how Emerging Market funds and ETF’s perform, and correlate.

A trade in the 10-year Treasury through the 2.40% yield level on good volume, and we would be out of the TBF, a frustrating trade for sure this year.

In 2013, our TBF long helped offset some of the stress of the Bernanke Taper, which started in May, 2013, and really helped our fixed income performance in balanced and bond accounts for the year. In 2014, as you would expect, the TBF has been a drag on results, despite the 6 straight strong jobs reports.

So where is the inflation that so many expected 5 – 6 years into a decent, but not robust, US economic and labor force recovery ?

1.) Some say it is demographics;

2.) Some say the consumer is still stretched, which I see in some of my own clients;

3.) Some say the continued productivity gains by personal and corporate technology are holding inflation at bay;

4.) At the consumer or retail level, I have to think the twin retail giants of Amazon (AMZN) and Wal-Mart (WMT) are crushing pricing power throughout US retail. (Here is our Wal-Mart earnings preview from Seeking Alpha); (Long WMT and AMZN)

5.) Some say it is the continued deleveraging of the US economy stemming from the worst deflationary crisis since the Great Depression (i.e. 2008′s meltdown);

As a portfolio manager, there is always one trades every year that eats away at you, and this year it has been the TBF and Whole Foods (WFM, which are actually two trades), both of which could be suffering from similar afflictions.

I think the 10-year Treasury is at a key level in the low 2.40′s. We’ll let the market tell us where it wants to go.

Thanks for reading. Today’s post was just “thinking out loud”.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

8.9.14: Surveying the Blog and Twittersphere – Articles We Found Interesting

August 10, 2014 at 1:05 am | Posted in CSCO, HYD, HYG, Municipal High Yield, Retail, Taxable High Yield, Weekend Link Fest, WMT | Leave a comment

We haven’t done a Linkfest in a while. Tadas Viskanta’s “Abnormal Returns” is the gold standard amongst the blog distributor’s, but our goal is not to compete with or even try and emulate Tadas’s regular product.

Instead the goal is to simply re-distribute the best of what we see come across our horizon in terms of blogs, tweets, etc., every once in a while, and maybe readers will benefit. We try and add a new source of good content every few months, someone or some source that we thought had good intelligent market commentary, that was somewhat actionable, and worthwhile.

* The best article I read all week, and in fact probably in the last month, by one of Barry Ritholtz’s employees. I actually talked about in a meeting with a new prospect on Friday, August 8th, 2014. From 1995 through 2000, the SP 500 rose – on average – 25% per year. During the next 10 years, the SP 500′s cumulative return, from March, 2000 through March, 2009, was a cumulative -1.38%;

* So much focus on high yield bonds of late. Christina Padgett of Moody’s distributed Moody’s regular North American leveraged Finance Update. I missed the conference call in late July. Moody’s Analytics on their August 7th, 2014 note said that high grade (investment grade) spreads could widen “somewhat” from their recent 109 bp lows, while high yield’s (below investment grade) recent 418 bp’s could widen to 425 by year-end 2014. What struck me was that, that widening doesn’t seem very worrisome. Although after the last decade of stock and high yield returns, everyone is a worry wart these days, Moody’s also noted that the US high yield default rate in June ’14 was 1.9%, which COULD or might average 2.5% 1h ’15. My thought was that if the HYG is yielding 5.79% as of Friday, August 8th’s close, and the high yield default rate is just 1.9%, expected to rise to 2.5%, that leaves 3.5% of excess spread on just the HYG, on just the expectation of defaults increasing ?

Maybe the selling in high yield is now overdone. At 6.5% or 7% on the HYG, we’d certainly give the asset class a hard look. I’m tempted even now…

That is what I think so many miss individual investors miss on the high yield analysis: while selling the record low spread-to-Treasuries for the asset class is somewhat prudent, the fact that defaults stay very low as the Fed continues ZIRP (zero interest rate policy) means the excess or record low spreads, may not be that worrisome. A lot of high yield debt is being refinanced at these record low rates, which takes pressure off the balance sheet and helps ease default risk.

The HYG hasn’t traded below its 200-week moving average since late 2011, or when we had the last recession scare, until this week. This week the low on the HYG was $91.32, while the 200-week moving average is $91.42.

Does anyone think a recession is imminent ?

I actually like municipal high yield better than taxable. Absolute muni high yields are higher than taxable, just by a few bp’s, but that is saying something. John Miller, Nuveen’s muni high yield manager has done a great job this year.

* Jeff Miller’s A Dash of Insight is always a must read. The new release is not out yet this weekend. Here is last week’s blog update.

* Barry Ritholtz on the “Structural Bull Market”. Barry cites Jeff Saut, a pretty good market forecaster. I happen to be in this camp, as I noted here using Blackrock data 6 weeks ago.

* Ryan Detrick on yesterday’s oversold bounce. Detrick is seriously one of the best short-term and statistical concierge’s I know. We sold a little into Friday’s pop on the 5 am Vladimir Putin comment about easing the tensions with Ukraine. Why is Vlad suddenly credible ?

* Paul Hickey’s Bespoke is a another very credible research house. Subscriptions costs are reasonable too. The weekly Bespoke Report letter published every Friday afternoon, between 30 – 40 pages in length, is one of the best weekly market summaries I’ve ever read. Bespoke noted this week, the largest weekly drop in newsletter bullish sentiment since February, ’14, which from 55.6% down to 50.5% in the last week. What has been interesting about this survey over the last few years is that while newsletter writers are bullish, the average investor has remained tilted bearishly as measured by the AAII data. AAII bearish sentiment jumped this week to 38.23% – the highest bearish sentiment in a nearly a year.

That – in my opinion – is the hallmark of this bull market, off the March, 2009 low: average investors are still cowed, and intimidated. I graduated from college in 1982, and only knew a bull market until 2000, and then in 2008, I really knew a bear market. With last week’s 4% drop, fear gauges spiked and bearishness ramped. We haven’t seen a 20% correction since mid-2011.

* Per Bespoke, as of Thursday night, just 23% of the SP 500 were trading above their 50-day moving averages. Fear and risk come on in a hurry.

* Norm Conley of JAG Capital out of St. Louis on the continued attractiveness of Technology. Russell 1000 Tech continues to outpace the Russell 1,000 Growth index. Here is another post from Norm on the forward operating EPS of the 10 SP 500 sectors. Norm uses this to make the case for Tech, but I think Basic Materials looks pretty good too.

* The drubbing Industrial stocks have taken after q2 ’14 earnings releases is puzzling. There has to be opportunity there. More to come on the Industrial sector this week.

We are going to cut it off here late on Saturday afternoon. There are a lot of blogs and such out there, competing for your eyeballs. Thanks for taking a minute to read ours.

We had a decent bounce in the SP 500 later this week. One of our worst positions this year has been the TBF or the unlevered or Inverse Treasury. Gary Morrow, one of our favorite technicians notes the double-top in the IEF Friday, August 8th, on “This Week on Wall Street”, a blog to which he contributes run by Doug McKay. I’m hesitant to get long duration here, since the TLT also traded down to the late May ’14 yield of 2.38% – 2.3 this week and could not trade through. The late selloff in Treasuries Friday afternoon with the SP 500 ramp, was probably more position squaring.

I feel like this equity market correction isn’t over, but another sharp leg down in the SP 500, and we’d be buying for a year-end rally.

A lot of retail reports this week, including Macy’s (M), Nordstrom (JWN), Kohl’s (KSS) and Wal-Mart (WMT) – tough sector all year long. Cisco too. (Long WMT with about a 2% position, and long a small position in CSCO.)

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

8.9.14: SP 500 Weekly Earnings Update: q4 ’14 Earnings Growth Shaping Up Very Nicely

August 9, 2014 at 2:29 pm | Posted in Weekly Earnings Update | Leave a comment

Per Thomson Reuter’s, “This Week in Earnings”, the forward 4-quarter estimate for the SP 500 fell this week to $126.78 from last week’s, $127.00.

The p.e ratio on the forward estimate is 15.2(x), while the PEG ratio is 1.60(x).

The earnings yield on the SP 500 is 6.56%, versus last week’s 6.6%.

The year-over-year (y/y) growth rate of the forward estimate fell to 9.53%, from last week’s 9.58%.

Analysis / commentary: With 450 of the SP 500 having reported, ex the Citigroup charge, q2 ’14 earnings growth is 10% as of Friday, August 8th, 2014, a growth rate we haven’t seen since 2011. Yahoo Finance ran a story in early July saying that q2 ’14 could hit 10% and I didn’t think it would happen. My best guess for q2 ’14 was 9% – 9.5%, which could still happen since q2 ’14 earnings season doesn’t officially end until this week’s Wal-Mart (WMT) earnings report, but the fact is earnings are solid. The point is YahooFinance’s forecast was right on the money.

Given all the pundit commentary on CNBC, earnings and earnings data is reminiscent of that oft-quoted, country-house lawyer phrase, “I can argue it either way”.

Earnings data is often twisted to be used by both bulls and bears alike.

Revenue growth for q2 ’14 is now expected at 4.4%, still small in percentage terms, but a little bit stronger than the 3% – 3.5% coming into the quarter.

Since July 1, q3 ’14 and q4 ’14 earnings estimates have NOT seen their typical erosion. This bodes very well for the remainder of the year. It isn’t a forecast or prediction, but I expect q4 ’14 to see the typically strong SP 500 action in what is typically the seasonally strongest part of the year anyway. The fact that not only are q3 and q4 ’14 earnings not getting revised lower, but are staying constant, is a very positive indicator.

———————

Here are q3 and Q4 ’14 SP 500 earnings growth expectations as of Friday, August 8th, and then July 1:

q3 ’14: +9.3% today, +11% as of July 1

q4 ’14 +12.2% today, vs +12% as of July 1.

q4 ’14′s expected earnings growth is actually higher on August 8th, than on July 1 – that is big.

———————-

We’ll be out with more over the weekend, and early next week.

Thanks for reading.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

8.5.14: Is Liquidity Becoming an Issue for Fixed-Income Markets ?

August 5, 2014 at 6:36 pm | Posted in Bond Market(s), HYD, HYG, interest rates, Municipal Bond market, Taxable High Yield | Leave a comment

Having been fortunate to be invited to a fixed-income roundtable this morning to hear John Miller of Nuveen’s High Yield Muni Fund, Denise Simon, Managing Director at Lazard Asset Management, who is responsible for Emerging Market Debt, and Richard Gilmartin (no relation) of Wellington, although it could be attributed to no speaker individually, the underlying tenor of the comments indicated that the fixed-income markets could be seeing a growing liquidity issue.

One of the speakers noted that recently they had put $2 million in bonds out for bid, and it moved the quoted prices.

Given the size of these firms and the dollars under management, I cant believe that $2 ml is a big position to put out for bid-wanted.

Here is a piece Josh Brown published on Twitter today on Goldman’s recent call, which may be tangential to the discussion.

Gary Morrow, a well-known technician and I were chatting last night about the air pockets seen in some CEF’s like JRO, and others yesterday. JRO fell 2% yesterday, even though curve steepening should help the floating-rate complex. JRO remains above the 50 and 200-day moving averages, technically.

Our fixed-income portfolio’s are currently split between individual muni bonds, of pretty high credit quality, JRO, a closed-end bank-loan fund of Nuveen’s, some closed-end muni funds of Nuveen and Blackrock and some short duration, muni and taxable bond funds of Blackrock and PIMCO. Clients are also hedged against higher rates via the TBF, the unlevered inverse Treasury ETF.

We have a little muni high yield (Nuveen’s managed by John Miller which has been a stellar performer this year), but no taxable high yield, which we have been out of for most of 2014. As of yesterday, the high-yield ETF, HYD, was actually yielding 20 basis points more than the HYG or the taxable high yield ETF, which is one indicator of the relative attractiveness of muni’s over corporate’s today.

Most equity corrections are preceded by credit-spread widening and this correction is no different. Taxable high yield took a beating last week.

We are staying with higher-quality funds, CEF’s, and asset managers for clients.

Liquidity risk is hard to pick up on from the retail perspective.

I had to say when I heard that this morning, it made me a little nervous.

Could this be due to the Fed taper ? Could the withdrawal of $10 bl per month, be having that much of an impact ?

My friend, Jeff Miller of NewArc Capital and a great blogger once told me that the QE was less than 1% – 2% of total Treasury volume every month, so you wouldn’t think that “taper” would be the cause of this sudden tightening of liquidity.

Needless to say, our antennae our elevated.

This could still be a very normal SP 500 correction. It was badly needed, and late July, August and September are the seasonally worst months for stocks as it is.

After this correction, given the underlying strength in corporate earnings, i.e. SP 500 earnings, I’m expecting the typically strong 4th quarter for 2014.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

8.3.14: SP 500 Earnings Update: Q3 and Q4 ’14 Earnings Estimates Continue to Impress

August 3, 2014 at 2:57 pm | Posted in F, Weekly Earnings Update | Leave a comment

 

Per Thomson Reuters’s, “This Week in Earnings” the forward 4-quarter EPS estimate fell $.07 this week to $127.00 even, from $127.07 the past two weeks.

The forward p.e ratio as of Friday, August 1, 2014 is 15.2(x).

The PEG ratio this week fell to 1.58(x) from last week’s 1.65(x). (We recently upgraded our desktop PC and converted all our Microsoft applications to Office 365. The conversion, which occurred around July 11th, altered some of our formula’s in the spreadsheet (and i’m not sure if it was my error, or something about the conversion itself that altered the formula’s), but one of our calculations ended up picking up the next column over as the numerator on eth PEG calculation since July 11th. Here are the correct PEG ratio’s for the last 4 weeks in the first column, and this is what we initially reported on the blog, until the error was caught:)

Week of 8/1: 1.58 vs 1.58 (correct formula)

Week of 7/25: 1.65 vs 1.76

Week of 7/18: 1.76 vs 1.82

Week of 7/11: 1.82 vs 1.82

Thanks to the 2.70% decline in the SP 500 this week, the earnings yield on the SP 500 rose to 6.6%, versus last week’s 6.42%.

Here is the very pleasant surprise: the year-over-year growth rate of forward earnings has started to accelerate: this past week’s y/y growth rate was 9.58%. Because we had formulaic errors with the growth rate calculation, our previous calculation was actually understating the improvement in the y/y growth rate. Here is the last 4 week’s actual y/y growth rate versus what we originally reported:

Week of 8/1/14: 9.58% vs 9.58% (correct formula and calculation)

Week of 7/25/14: 9.41% vs 8.85%

Week of 7/18/14: 8.57% vs 8.85% (of all the metrics recalculated, only the week of July 18th was lower with correct formula)

Week of 7/11/14: 8.53% vs 8.51%

The point being that the y/y growth rate has actually been understated the last few weeks.

The actual y/y growth rate in the forward 4-quarter estimate as of 8/1/14 (as measured against 8/2/13′s forward estimate of $115.96) is now 9.5%, and more importantly, keeps growing. (Whether we carry out the calculation to 1, 2 or 3 decimal places is subject to debate. I prefer two decimal points if only to get the illusion of precision. Remember too, earnings can be restated historically. )

Analysis / commentary: The high yield bond market really took a beating this week, which we gave a heads up on last week here. The auto’s like Ford (F) and GM (GM) look toppy, crude oil is getting hammered, and the Energy complex took a beating this week. The Industrial’s also took a beating this week and despite reporting good earnings, the stocks have gotten hammered, so the cyclical, “return to global growth” sectors are correcting for sure. (Long F, GM, underweight Energy, and thinking about lifting our neutral weight in Industrial’s to an overweight.)

However, given the earnings we are seeing and the trends in that forward growth rate, we don’t think this is a “recession, earnings-related” longer-term issue. Whatever the problem with this market in other words, it isn’t earnings-related.

We are keeping an eye on q3 and ‘q4 ’14 earnings estimates and neither quarter is seeing the negative revisions that have been typical the last 2 -3 years. That is a very good sign. With roughly 378 of the SP 500 having reported q2 ’14 results already, revenue growth has crept up to 4.3% for q2 ’14 and the y/y SP 500 earnings growth (per ThomsonReuters) ex Citigroup is now 9.4%. Good news for sure.

Bottom-line in terms of a short and sweet summary, as of the earnings data and trends today, the earnings picture is improving.

We think this stock market correction was badly needed and expect it to be temporary, but will adjust quickly if the duration or severity is worse than expected.

I have a 2-hour ride before a client meeting in Rockford, Illinois so this weekend’s update has to be cut short.

Thanks for reading and stopping by. There are a lot of blogs and tweets competing for your eyeballs, and I’m grateful you are taking the time to read ours and hope you find www.fundamentalis.com insightful.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

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

 

 

 

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