4.6.14: Interesting Reads from Other Bloggers

In 2011, the SP 500 earnings grew 15% year-over-year, but the SP 500 corrected 20% from the spring through early October, 2011. The p.e compressed from 13(x) to 11(x) from the first week of January, 2011 to the first week of October, 2011. The SP 500 total return in 2011 was 2.11% to be exact. What I’m wondering, is 2014 a year like 2011 ? Good earnings, friendly bond markets, but the stock markets are a tough place to make money.

Usually when we write about stock or market technicals, I always get Gary Morrow’s opinion first (@garysmorrow). He was out of pocket this weekend. It sure looks like Friday was a key “outside reversal day” for the SP 500, and we posted on it, on this blog here after Friday’s close, 4/4/14.

Sometimes a chart just jumps out and grabs you: here is BC Lund’s chart of the SP 500 – like a plane coming in for a landing.

When SP 500 up 5 quarters in a row, future returns are not great, per this chart by Ryan Detrick, Schaeffer’s excellent technician.

Todd Salamone, also of Schaeffer’s wrote his weekly forward-looking piece. Be sure to read p.2 and the sector, sub-sector rankings. Too late to buy Electric Utilities in my opinion. We’ll wait on Ute’s and the XLU.

Both Coal and Steel performed well this week: Peabody Energy (BTU) was up 7% this week, and one of our recent buys. We’ve never owned a coal stock before owning BTU, which was bought in the last month. One of our best buys in 2013, was starting to buy US Steel (X) under $20, some of it bought near $17 in July ’13. X is still in a trading range under its January 2, 2014 high at $31.15. (long BTU and X)

After scraping the relative performance bottom for 3 years, commodities really coming alive in 2014.

Josh Brown (@reformedbroker), still one of the best social media communicators and market commentators out there. Here is his best of TRB this past week.

Norm Conley of JAG Capital Management puts out some of the most meaningful tweets each week, like this one here. I put Norm in the same class as Ryan Detrick and Josh Brown.

Given our Weekly Earnings Update yesterday, the SP 500’s valuation isn’t that bad. The SP 500 is trading at 15(x) forward earnings, with modest growth expectations of 7% – 8% for 2014. The Barclay’s AGG the bond market equivalent of the SP 500 finished slightly negative on the week, while the HYG (iShares High Yield Corporate Index) finished slightly positive. If there is a real problem in the stock market, you’ll see it in the credit markets first.

The whole “countdown to the 10% decline” is getting more vocal. Here Norm Conley compares this SP 500 rally to historical mega-rallies.

Jeff Miller and his weekly “Weighing the Week Ahead” post. Another must read. I try not to make short-term predictions over a weekly time frame, but Jeff is skilled at it. We had a read a few stories about the Fed worrying about “wage acceleration” or what my old money and banking prof’s used to call, “demand-pull” wage inflation. Note Jeff’s comments about wages.

This Week on Wall Street blog, that is a compilation of Gary Morrow and some of his Southern Cal hedge fund friends. Love the chart work.

Bob Lang at Explosive Options had a great call this week on APC. Huge rip on litigation news. That is a good call by Bob. I hate trading litigation and the courts. That is a dangerous game. A perfect example was SCOTUS and the ACA opinion. Seemingly 95% of the opinions I heard prior to that opinion, thought that ACA would be overturned by SCOTUS.

q1 ’14 earnings start this week with Alcoa (AA). Here is our AA earnings preview published on Seeking Alpha last week. We have been long AA for years. The company printed $3 in EPS and hit $46 – $47 per share in 2006, 2007 and hasn’t been back close since. AA is trading about 1.25(x) tangible book value but is still a discount to book value. The stock is up 63% since the early October ’13 lows, which fits with the rotation to both value stocks and the commodity theme. The early Spring, 2011 high for AA was over $18 per share. (long AA)

JP Morgan (JPM) and Wells Fargo (WFC) report Friday, April 11th, pre-market open. These are very different banks. Here is our earnings preview on both. In the comments following our preview note how not one Seeking Alpha subscriber defended JPM. Revenue growth remains an issue for the entire Financial sector. (Love the Dirty Rotten Scoundrelgenital cuff” reference. I crack myself up at times. I just wonder if people ever read this far). (Long both stocks, more JPM than WFC. Think Exchanges outperform banks over next 3 – 5 years though, with more to come on that topic.)

My buddy Josh Brown, The Reformed Broker, and a guy I truly respect and admire given the quality and quantity of his output every week, differ on the outlook for the Financial sector in 2014. I think Financials saw their time in 2013, and loan loss reserve releases (LLR’s) have now been depleted and run their course. However let’s see what JPM and WFC do on Friday morning and let’s see what percentage the LLR’s are of the total EPS gain for each bank. The fact is I could be wrong on Financials in 2014 and there could be more LLR releases to come.

Let’s see if this Pfizer news moves the stock on Monday, April 7th. This announcement was eagerly anticipated this week, which likely means that both longs and shorts were in the stock late last week. Pfizer was the first to unlock the Animal Health business (Zoetis) and now Merck and others are following. There is still negative revenue and EPS growth at PFE, so there is some thought that by reporting in 3 different segments, PFE is prepping for a spin-off in the next few years, of the legacy or value business. (long PFE, MRK, sold our AMGN.) Cash-flow valuations are very reasonable on L/C pharma. Both PFE and MRK sport 7% free-cash-flow yields although both are returning 130% – 140% of their free-cash-flow to shareholders in the form of dividends and share repo’s.

Jay Chitnis out of YieldQuest does some interesting work every week. We somehow got on his email list and enjoy reading his stuff.

Ukarlewitz does great work, but my impression is that he is always bearish.

Summary / Conclusion:

The big question remains have we topped out temporarily and is the market finally going to get it’s 10% correction ? I think the proposition that we are somehow headed into a long-term bear market is nothing short of preposterous. It is still amazing that all this bearishness persists despite the fact that the SP 500 traded to an all-time high this week. Treasuries rallied on Friday, despite the decent March ’14 jobs number. Credit spreads seem to remain well bid. So do tell, what has changed about this market ? The growth stocks are correcting – isn’t that supposed to happen ?

Reading some of the above links, I’m torn between Ryan Detrick’s 5 straight up quarters for the SP 500 and then prospective returns, and Norm Conley’s chart about inflation-adjust SP 500 and the mega-rally compares.

For me, the more a pattern becomes recognizable and expected by the Street, the more likely it is to be broken. I think we need a deeper correction and some real fear and bearishness to keep the longer-term rally intact.

Watch how the biotech’s trade around their 200 day moving averages, i.e. the BBH, and the IBB, both biotech ETF’s. I do think that is the key tell. (none)

But that is just me…

Thanks for reading and looking in. There are many blogs that want you attention these days. We appreciate you reading ours.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager










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