“Malaise” seems to be the word of the day as markets cope with incompetence in both business and political realms.
Will the leak caused by BP in the Gulf ever end?
Will the war in Afghanistan as highlighted by Rolling Stone ever end or remain in FUBAR?
Will the Obama administration ever make job creation are real priority rather than lip service?
Will China (which is much more important than Europe) achieve the soft landing in its economy?
Despite the chatter about “double dip recessions” economic data just doesn’t support the dd premise. Growth isn’t robust but it moderate and lumpy and expectations have pulled back sharply in expectations since the start of the year……..a good thing.
Capital Goods orders were up 2.1%.
Durable goods orders were up 0.9% and now have been up in 5 out of the last 7 months and up to 20% ytd.
“Malaise” as been bantered about now on CNBC and Jim Cramer is not the type of attitude existent at market tops but more often at market bottoms when economic blemishes are visible to all and the bulls have turned to bears.
The soft patch we find ourselves in presently could change in quick order should something good happen.
Earnings have been growing nicely but have been largely ignored this year. We’re using an earnings estimate of $90 for the S&P 500 in 2011 which makes the market 12x times 2011 earnings. Historically the S&P has been nominally valued at 15.3x earnings with comparable interest rates and inflation, and up to 17x. There is significant upside potential looming and with negativity growing rapidly the bottom in the current correction may be soon. My best guess is the “real” rally would likely be in the 4th quarter but the risk at present is not great by my estimation.
“In speculation, interestingly enough, contrary-mindedness is often a virtue. A layman might suppose that profits lie with the majority. Because the mass of people have the weight of the money, he might imagine that the crowd would tend to be on the winning side of things. Not for long, in my experience. If the majority confidently knows something, that one thing is probably already reflected in the structure of prices, and the market is vulnerable to a surprise. Markets are moved by the unexpected and the unexpected is what the crowd isn’t anticipating. The financial future may be imagined, but it can never be positively known. What people know is the past and present, and they often project the familiar out into the unknown, with unsatisfying results”
— Jim Grant, Minding Mr. Market: Ten Years on Wall Street With Grant’s Interest Rate Observer
Yield on high yield debt rose in the month of May the most since February 2009 while Investment Grade debt was little changed. High Yield is now back above 10% which accounts for a spread of approximately 7% versus medium term treasuries. However, attractive yield spreads aside high yield will perform along with the economy and its inherent risks.
One of the potential trends we have our eyes on is a serious rise in long term treasury yields. In an interview with St. Louis Federal Reserve head Bill Poole on Bloomberg, Poole remarked that with the Fed having no where to turn in lowering short term rates if the economy soften significantly the Fed might consider buying long term treasuries to lower their yields which will flatten the yield curve.
Asset Allocation: At present we remain at a 70/30 ratio of stocks to bonds which has been the case for close to a year. Models suggest that a move to 55% equities might be in order but the timing is questionable. Should the Advance / Decline line of the stock market not surpass the January high, we will likely pare back our equity stakes. The A/D line typically peaks before major market highs and for the past year has been rising quite nicely. However if the stock market were to become bifurcated with a smaller number of stocks advancing it would be a warning of trouble ahead.
NY Times: China Leading Global Race to Make Clean Energy
Be careful out there
Long JNK, HYD, HYG, SHY
Yesterdays rally confirmed our more constructive intermediate term outlook as the S&P 500 pushed above the 200 day moving average on a 90% up day. We have not seen a cluster of 90% up days since 2009 during the strongest points of the rally. Bears will comment that it was a fake rally due to high frequency trading, but as the coach of the New England Patriots Bill Belichick would drolly would say: “It is what it is”.
Yesterday while driving home I remembered a conversation from the mid 1990’s with a major SRI fund manager who insisted upon owning a major oil company despite their environmental screening policies. His rationale was that this particular company was the best of the lot, the most progressive within the space. Care to guess what that company was? Hint: my initials.
Being that I’m somewhat of a financial geek I get excited when our model identifies companies that are also identified as promising by other proven investment models. Case in point is IDT Corp. which also ranks very high on the esteemed
Piotroski model
as well as our own. We don’t own the stock for clients at present but will begin to look closely at it.
Also, will be breaking down a host of Green Tech firms looking for revenue acceleration. Stories about this morning about the promise of Green Tech but unless revenues start to move higher its only a trade and not an investment.
All the best,
BP
This blog has been relatively inactive for the past two months as I try to determine its future.
From my perspective there is and has been a great deal of hyperbole regarding “green” stocks that fundamentals such as valuation and balance sheet strength are essentially ignored.
There may always be companies with better technologies but if the price is high relative to value the chances are strong that unless you’re a very short term trader you’ll eventually have a significant loss. While there is no perfect formula for investing, not all methodologies are created equal nor do they produce the same results in the long run.
Our methodology revolves around growth at as low a cost as reasonably possible. Many of our investments are socially “neutral” where the investment has little or no social, environmental or humane impact. Ideally we would all love to own a very green proactive portfolio but the volatility and risks associated with being totally proactive are simply too high. The bottom line is you must make money for yourself in the long run hence we blend both old school fundamental analysis with environmental screening.
