12.8.13: Others you Must Read

Why we love Ryan Detrick of Schaeffer’s Investment Research. What is typical for years following a year where SP 500 was +20% ? Right here is your answer.

We added to TBF (Treasury short ETF) on Friday. We like scaling into positions. Check Gary Morrow’s chart at the bottom of his blog (This Week on Wall Street). I think it is only a matter of time before Treasury’s and interest rates break. If not next week, then for sure by the end of q1 ’14. Economic data slowly improving, SP 500 earnings slowly improving, and still not a whiff of inflation. The Fed can stick with QE, but the bond vigilantes will handle the rest…

Speaking of bonds and interest rates, Soberlook with their charts of credit spreads here. We sold out of all of our high-grade bond funds and high-yield funds, and have moved to individual bonds (primarily muni’s, even for taxable accounts) and closed-end funds.

Illinois muni’s come to market this week. Big week for the state, ranked 1st in unfunded pension liability and pension abuse. Jeff Carter, a local CME trader and Angel investor comments here and here. According to a recent article on Bloomberg, Illinois GO bonds trade at BBB levels. Might get a reprieve this week, but longer-term this isn’t going away.

We downloaded our index data today: Barclay’s Aggregate (the bond market’s equivalent to the SP 500) year-to-date return as of 11/30/13: -1.47%. Barclay’s US High Yield Index YTD return: +6.87%. Nice spread. We’ve been trading the HYG and have no positions currently. We’ll let the interest rate game play out for a bit.

Quick question: what was the 5-year total return for the 1 – 3 month T-Bill as of 11/30/13 ? 9 basis points…. (yes, per our index data.) Oct – Nov ’13 is 5-year anniversary of the 2008 Great Recession, and ZRP.

Great link from Josh Brown and Factset on the Financial sector. Since we’ve written about this pretty extensively over the last year, I’d like to add two points: 1.) Financial’s still not expecting much revenue growth (which is true for most of the SP 500), so the above-trend earnings growth is still all LLR (loan loss reserve) releases, which even Josh has mentioned as a potential negative to the sector. 2.) The 2014 sector estimates have turned positive for Financial’s (meaning full-year growth estimates are being revised higher for Financial’s) which is somewhat surprising, but we’ll take it. Our Financial sector overweights haven’t done that well including Goldman (GS), which cant seem to trade over $170, Schwab (SCHW), which cant seem to trade over $25, CME (per Gary Morrow, looks primed to break higher. Check his Twitter Feed at @garysmorrow), and JP Morgan (Eric Holder’s piggy bank to single-handedly fix the federal deficit);

Jeffrey Kleintop, Strategist at LPL, and a guy who constantly puts out quality info, thinks stocks perform best when GDP averages 3% per his 12/12/13 piece. When I read this our thought immedialy jumped to the 3rd quarter, 2003, when US GDP grew 8%. It was the early stages of the post tech bubble collapse, and the first full quarter after the start of the 2nd Gulf War in March, 2003. In the 3rd quarter of 2003, the 10-year Treasury yield jumped from a low near 3% (3.07%) to 4.67% by the end of the 3rd quarter. To Jeff’s point the 10-year Treasury yield will tell you when GDP growth is creeping up faster than the data might imply.

The Chicago Federal Reserve actually has a research piece out on Bitcoin. Check the website.

Helene Meisler, a great technician from www.TheStreet.com, (@hmeisler) notes on Twitter that Whole Foods (WFM) had a key reversal on Friday. Check our Twitter feed from last week (@TrinityAssetMan) and you’ll see we added to WFM and HPQ on Wednesday or Thursday I believe. WFM is one of the oversold stocks we could find. Here is Helene’s chart, sent to us for blog purposes:

Click to enlarge
Click to enlarge

Per Helene’s chart, it looks like there is a downside gap near $63, that needs to be filled. You can own WFM for the $6 – $7 trade. WFM lowered guidance for 2014 on their November earnings call, and I am seeing more competition for Whole Foods in the area north of Chicago as Plum Market, Mrs. Green’s, Mariano’s, Trader Joe’s, and a host of others have continued to open stores in high density areas such as Lincoln Park, and the North side of Chicago. Pick your poison, swing trade or longer-term hold. Following WFM’s guide lower, analyst EPS estimates were revised lower from 18% to 15% for fiscal ’14, and revenue estimates were reduced from 14% to 13%. Not that severe in my opinion. (Long WFM, bought more this week)

Jeff Miller, is a sharp guy, and one of our regular reads. We talk regularly about earnings. His blog, ” A Dash of Insight” is one of the most popular on www.seekingalpha.com. This latest post is a good read. Jeff concluded before I did that the pattern around forward earnings estimates is that, 12 – 18 months out the forward estimates are typically too high, and then within 3 months of the quarter, until we start seeing that quarter’s results, the earnings estimates get reduced too much. Anecdotally then, I think that the realistic earnings estimates individual companies are those that are 6 – 9 months ahead, and represent that line on the graph where “estimated” most approximates future actual earnings. But to qualify that, I think so much depends on the macro environment, and what is happening in the market. The earnings environment the last 8 quarters is that analyst’s have consistently been too negative, and Sp 500 earnings growth is slowly beginning to accelerate. (My conclusion,. not Jeff’s.)

Phil Pearlman has become a mentor (a word which I absolutely hate). He tweeted a good article on bubble’s this past week, with the rationale that we aren’t currently in an equity market bubble, which I agree with, and unfortunately, I couldn’t find it on Twitter. Phil is working on a getting a group up and running on YahooFinance, that will add value to readers. Should be a good site, from what he has told me.

Guess what the 2013 SP 500 Composite Total Return was YTD through 11/30/13 ? +29.13%. Your index data return will be higher than the actual return you will get on an index fund, since dividends are assumed to be reinvested at the return on the index. In other words, the bogey used for performance calculation, is always higher than an actual index fund return (and presumably, the index return doesn’t include management fees.) I’ve had clients since 1997, still with me, and I’ve wondered just how many extra basis points of return I’ve needed to beat the SP 500, versus what they would have gotten on a Vanguard or Schwab SP 500 index fund. (I torture myself with internal discussions like this…)

Finally, don’t forget to support Drexel Hamilton, the investment bank and brokerage house that hires disabled vets for its sales and analytics team. Great little firm with a truly noble and worthwhile mission, to make money for clients, but also to employ those vet’s that were wounded or permanently handicapped on the field of battle. Met Mark Forney, one of the DH sales team at a dinner in Chicago in early ’13. Very interesting guy. Former Secret Service agent for 3 Presidents. Mark emailed me this week, and the Hilton IPO is pricing later in the week. Never was a big hotel/airline/travel investor. Don’t know much about the sector. We will watch the IPO though to see how it performs.

Thanks for reading. In this day and age, there is always someone competing for your eyeballs. Hopefully you found something in our regular reading that will help you be a better investor, trader, or thinker.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

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