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

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

 

 

 

 

 

 

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