10.26.13: Weekend Reading Worth A Look

In their weekly summary email which hits the inbox late each Friday night, Bespoke noted that all the sectors of the SP 500 remain very overbought. In fact, according to Bespoke, the SP 500 has now rallied 519 trading days since 10/3/2011 without a 10% decline. While there have been other longer streaks in which the SP 500 has gone without a 10% decline, but to have the SP 500 and all 10 of the SP 500 sectors trading 2 standard deviations above the 50-day moving average is very rare, and per Bespoke, dating going back to 1990, there have only been two others days (!) where this has happened. (Barron’s cited this Bespoke study as well, which I didn’t read until Sunday morning.)

We sure could use a stock market flush, say 5% tops, and if this year’s pattern is any clue, bearish sentiment should skyrocket.

We are thinking about and doing our homework on the laggards of 2013, for potential outperformance in 2014: IBM (IBM), Intuitive Surgical (ISRG), and Oracle (ORCL) are three that come quickly to mind. General Eletric (GE), too although it has not been too great of a laggard. The Basic Materials and Energy sector, also qualify.

 The GLD has pushed back above its 50-day moving average. Ryan Detrick writes about gold’s seasonally strong performance every November here .

Ryan Detrick in an interview on YahooFinance talks Amazon (AMZN – long the stock for a while) with Matt Nesto. What you rarely hear about AMZN is that – while trading at 100(x) forward earnings, it is also trading at 28(x) trailing cash-flow. Yes, still expensive, but Nike (NKE) and UnderArmour (UA) are more expensive consumer brands or retailers at higher cash-flow valuations. UA is trading at 50(x) trailing cash-flow, and NKE is trading at over 30(x) cash-flow. Amazon is trading 2(x) revenues too. We dont want to cherry pick our valuation metrics, but AMZN isnt that expensively valued when looking at the cash-flow metrics.  

AAII data is 49% bullish, with bearish sentiment down from 24.9% to 17.6% (per Bespoke). Further makes a case for a needed correction.

Josh Brown on Twitter’s expected valuation vs peer group. I wonder if the Twitter IPO takes some money out of Facebook (FB) and LinkedIn. We are long FB, one of our best calls this year. I think the Twitter IPO will be a feeding frenzy. CNBC showed the arrival of Twitter’s CEO at Morgan Stanley headquarters on Friday. How is that for hype ? A guy being dropped off in front of an office building. Phil Pearlman of Yahoo Finance talk Twitter on Friday, 10/25. Phil makes a good point about share count orv TWTR float.

Josh Brown (or John Brown as I referred to him last week on the blog), talks about the Financials and the release of loan loss reserves (LLR’s) adding to earnings. We covered this on the October 12th blog attached here. Start with “Staying with Financials” section. You could tell there was reserve releases occurring simply by looking at the difference in revenue growth for Financials, versus the earnings growth for the sector for 2013. 2% – 3%, versus 15% – 25%. Tom Brown debunked this “quality of earnings” issue which is attached on the October 12th, blog. (Sorry, buddy, I know your name isn’t John.)

 Once again, Norm Conley with the chart of the week, on sales growth of Russell 1000.

Gary Morrow and a bunch of guys in SoCal started this blog, This Week on Wall Street. Here is the updated link.

Pulled from Bob Brinker’s twitter Feed, here is a Barron’s article on municipal bond funds. We sold our interest rate trade this week, including TLT, IEF, MUB and HYG, Thursday morning. The 10-year Treasury has rallied from 3% to 2.50% and yet the equity market keeps going higher. We kept the NUV (Nuveen muni closed end fund) and the MEN (Blackrock MuniEnhanced Leveraged CEF) given their discounts to NAV. If we get a sharp equity selloff Treasuries could rally further, but a trade below 2.4% and we would get worried about the equity market. Neither of our closed end muni funds holds any Puerto Rico paper of material size (to my knowledge), and per our research source.

Kristin Bentz, great retail analyst, kept me out of JCP. Thinking about Abercrombie for a trade. Setting up technically for a bounce. The @TalentedBlonde will probably keep me out of ANF too.

Blackstone executive thinks we are in the midst of an “epic credit bubble”. Moody’s credit group says volume is strong, liquidity is good, but covenants are hardly stretched. The HYG is back above its 200 day moving average.

We think we need one good stock market flush to set us up for a robust year-end 2013 stock market rally. We’ve had a good year for clients and made up a lot of ground performance-wise. We’ve had a good year on the fixed-income side of the balanced accounts too.

My own guess is that we are in a period like 1992 – 1993, where the SP 500 returns next year will be less robust but hardly negative. Outside of Washington, things just aren’t that bad.

Apple (AAPL) and Facebook (FB) report early this week. Technology has been a good sector to be in for upside surprises.

Thanks for reading,

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Potrfolio manager




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