In my opinion, the downgrade was both well deserved and telegraphed far enough in advance that the actual downgrade can hardly be a shock. It took a great deal of cajones from S&P to pull the trigger on the rating but they had the courage where other ratings services were blind or cowards.
Is there a silver lining, that this could finally be the wake up call to Congress to disregard politics and do whats best for the country? I would hope so but I’m not that optimistic. In my opinion, for across the aisle cooperation to occur the Tea Party would have to dilute their flawed dogmatic view on tax income which would allow Boehner greater flexibility in negotiations.
In the meantime: Equity markets are extremely stretched on the downside. According to Sentiment Trader.com the only two similar examples are the market crash of 1987 and the German invasion of France in 1940. 30 days later the S&P 500 was up 8.4% and 9.1%.
Our Gold, Silver and Swiss Franc hedges: They have worked remarkably well and while I still believe they’ll continue to work well longer term, the market for these commodities is too hot to handle right now. But I’m not a seller. The Swiss government has been stating their currency is wildly overvalued, but in turn it likely represents the most solid balance sheet currency. Considering the plight of the Dollar and Euro I don’t see any reason to reduce our SF holding.
This morning JP Morgan estimated gold could reach $2500 by year end, we’re at roughly $1700. This bulletin has the air of a buying panic which may indicate an intermediate term top. Should the S&P rally as previously stretched markets are capable of, our hedges will be a source of funds and likely decline. Keep in mind they have been in bull mode for several years and are likely to remain so, hence any pullback is an opportunity to add to holdings.
This is not the end of the world, this is not even 2008. Very soon we will likely make a volatile market bottom that will market the low water mark for equities. I don’t intend to increase equity exposure at this point, regardless of the selloff and the potential for a rebound. I believe the low water market will represent a market bottom that will be retested at least one more time, possibly more. Hence, the rebound which will likely be dramatic will be viewed as a chance to reposition our equity holdings into strong growth companies from cyclical stocks and add further hedges.
Brad Pappas
Long GLD, SLV, FXF
Very seldom do we see six straight weeks of market weakness, especially without a notable bounce in the indices. This has caused many to question the validity of the bull market and ponder the possibility of the commencement of a full blown bear market.
In my view, odds remain high – despite the pain – that we remain in a bull market and we’re experiencing a normal garden variety pullback. We remain just 6% off the high for the S&P 500 while the Russell 2000 has retreated approximately 8% while that may not sound like much its enough to place our short, intermediate and long term sentiment indicators have moved into positive territory for the first time since late last Summer. Corporate earnings growth remains very strong and unlike what we’d expect to see if entering a recession. While the risk exists that weaker than expected economic reports could result in disappointing earnings preannoucements, any rush to presume this risk could be premature.
While the economy may be going through the proverbial soft patch with intermediate term Treasuries moving below 3% yield the primary causes appear to be resulting from the flood in the Midwest, rise in the dollar, Greece/Euro, earthquake in Japan and the serious move higher in oil prices. While the floods and earthquake are temporary in nature, the rise in oil is potentially reaching the point of demand destruction. However, I do believe that these issues are now absorbed into the prices of most equities and bonds.
Risks remain though and to the shock of many, the US has been a much better place to invest your money than the beloved Emerging Markets. Inverted yield curves are showing up in many countries: Greece, Ireland, Portugal, India and Brazil. Historically speaking, inversions almost always lead to recessions.
During this period of weakness we’ve sold several holdings that had fallen in our ranking system and have begun to add new names as I believe that the odds are growing that 1250 on the S&P will hold.
Deletions:
PKOH
NTL
CPWM
XIDE
GKK
Additions:
COOL
CMT
GKK (buying back in at lower price)
IEP
ITWG
HIT
As always be careful out there.
Brad Pappas
Long all mentioned.
The first quarter of 2011 may have ended within a tight and sleepy trading range but for accounts fully invested at the start of the year you might have thought we were running on Red Bull. For the first quarter of 2011 fully invested Growth accounts returned an average +15.13% while Moderate Growth returned +11.9% net of all fees and expenses while the S&P 500 returned +5.9%.
Performance momentum and values peaked in mid February. Since that time accounts have been in a range of plus or minus 5% as it appears the markets are in a period of digestion after the substantial Fall- February rally. A pause such as what we’re experiencing is entirely normal.
The global bull market remains intact with the U.S. markets now being the primary leader in developed markets. Contrary to the last two years, Emerging Markets have been lagging and this lack of performance accounts for the large bias to U.S. stocks in our equity models. In January I mentioned the possibility of a market top in August based on Presidential and 10-year cycles. Anticipation of future events is always precarious and at present there is no serious fundamental data point validating an August top. If this were August rather than May, I’d have to give the markets the benefit of the doubt since earnings remain strong and interest rates have receded in line with the selloff in commodities. In addition, lending and money supply growth have accelerated which points to a healthier economy and monetary environment.
As long as earnings growth continues I believe the odds are quite high that our portfolios are merely treading sideways till the next leg up due to the increasing strength in corporate earnings growth – see chart.
Major winning holdings included (return percentages are approximations):
Travel Centers of America 147%
Town Sports International 78%
Sunrise Senior Living 74%
Material Sciences 61%
Five Star Quality Care 63%
Oscar Wilde: “Experience is the name everyone gives to their mistakes”
Multiband Corp. -35%
YRC Worldwide -23%
Bon-Ton Stores -19%
TAM S.A. -15%
Fundamentals for growth still look good: Be it Libya, the tragic tsunami and earthquake in Japan, federal debt limits or stagnant housing and employment, this isn’t the Perils of Pauline it’s the modern day world of investment management. There are always numerous intelligent reasons to build a bunker and hide out in the wilderness. Investors wonder why the U.S. markets can continue to rise but I would suggest the market is pinned to earnings growth which has been strong and continues to be so. Making money with investing is never easy, too often it seems like climbing Kilimanjaro but you have to keep your eye on what markets are responding to and realize that most market and economic talk is just blather.
Earnings growth remains strong with year to year growth approaching 18% and if you exclude Financial stocks which are dealing with their particular issues, the rate of growth is 20%, which is pretty good. In addition, the full year 2011 estimate for S&P 500 earnings is approaching $98 and if this figure is maintained or exceeded then eventually investors will have to take this into account. At present with the S&P 500 valued at 1337, it’s selling for just 13.6 times 2011 earnings of $98 below the average of 14.7 times earnings. It would appear that we could see further gains before year end and that market high of 2008 of 1400 will be breached, fulfilling what may likely be the most vicious whip-saw in our lifetime. Before I move on, it should be stated that the Russell 2000 index which is dominated by small stocks has already reached 2008 levels.
Reinforcing the view that the markets are not overstretched at this point: From Bespoke Investment Group – Of the 25 prior S&P 500 bull market rallies since 1928 our gain of just over 101% with a duration of 781 days the current rally is 11th in terms of duration and 9th in terms of return. In fact, the average return since 1928 excluding the present rally is 101.6% over 890 days, so all in all we’re very average to this point.
There are many ways to gauge investor sentiment which is valuable since major market bottoms and tops generally see investor extremes. At present the public has yet to embrace this rally despite its longevity. Mutual fund cash inflows continue to show almost a 6-1 tilt in favor of bonds over equity mutual funds. We would expect to see a radical reversal of these figures at a major top when investors would be abandoning bonds and betting the house on equities. While that may never happen during this market cycle, the potential for major cash inflows into equities from the sale of bonds and money markets (as investors realize that 3-4% yields will not achieve their retirement goals) represents a major source of buying power potential.
To sum it up: Despite the slight downward drift in equities since the February I’m not losing any sleep. Downward drifts in the midst of major bull markets are as common as overcast weather in May for Colorado. The major market direction remains higher propelled by rapid earnings growth but S&P 500 target of 1400-1425 probably has a likelier chance later this year in the 4th quarter. Markets are typically choppy in the May to October, a period full of sound and fury but little progress. Should earnings growth sustain itself into the 4th quarter, the present day period will likely be the pause that refreshes.
All the best,
Brad Pappas
At the time of this article RMHI was long the following securities: CLUB, SRZ and FVE.
Past performance is no guarantee of future results. Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks. The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Rocky Mountain Humane Investing, Corp. does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice
“Don’t want to be an American idiot
Don’t want a nation under the new media
And can you hear the sound of hysteria?”
Green Day “American Idiot”
Investing has always been a process that included controlling your emotions. When you have them under control not only do you tend to make better decisions, they also tend to be much more profitable. Investors love the chorus of “buy low and sell high” but when emotions take over, the reverse is generally what happens. Its always hard to buy at the bottom, if it was so easy then we’d be a nation of very successful investors but the undisciplined investor is far from successful.
Consider the plight of the investor who took his lumps in the crash of 2008 only to give up on equities and turn to bonds as a means to sooth their nerves. Bonds could never be considered an option as the primary means of replacing what was lost in ’08 but the consistent drumbeat of downbeat news bordering on the hysterical and unfounded has been consistent in both the conservative and liberal media.
Despite the extremely strong run in equities since the Spring of ’09 investors have continually been pulling out of Domestic Equity funds and their primary landing spot has been bond funds. Investors (likely based on the media) continue to believe that the another crash is just around the corner. Just last week on Fox a commentator strongly suggested that the market would crash again should the tax extensions not be granted by Congress. Last week individual investors pulled out $1.8 billion from domestic equity funds bringing total net 2010 redemptions to $81 billion, despite equity returns being resoundingly double digit for many classes! In contrast, taxable bond fund deposits have totaled $245 billion despite Treasury yields at rock bottom.
Its been our belief for months that the 30 year bull market in bonds was peaking and that a new bear market in bonds would commence, it appears we were on target. Pity the poor investor who was persuaded by the hysteria this summer to buy bonds only to see close to three years of yield evaporate.
We completely understand that investors are concerned with potential losses but solutions to losses should not come at the expense of return. Hence, the RMHI Hedging feature which we’ll be writing about at length shortly.
Be Careful Out There
Brad
Ok I must confess I don’t have a tie in for “Derek” other than being a great fan of Eric Clapton, so I’m thinking of Dominoes today with the effect of GDP to Corporate Earnings to Stock Valuations. So much for the Gloom and Deflation from this past Summer.
The U.S. economy is clearly accelerating regardless of the weakness in Europe so the recent rise in equity prices is justified IMO. In fact, I do believe that 1200 on the SPX will be surpassed and will become the next support level by this December. While I’m gratified for having nailed the recent market stop with our sales in ETF’s, that top may prove to be a momentary top along the road higher.
RMHI model portfolios have actually exceeded the peak from a month ago and are on their way to an above average year. Since the model is about being “above average” I’m not surprised just gratified. Taking a look at the fund performance list on www.socialfunds.com the top of the heap appears to be the Calvert Capital Accumulation fund which was up approximately 15% at the end of October. Our portfolios have moved almost in sync for the past 3 months and I hope this will rank RMHI as close to the top of the heap as 2007.
Otherwise:
This morning Goldman Sachs raised estimates for real U.S. GDP:
2011 GDP goes from 2.0% to 2.7% and 2012 goes to an estimate of 3.6%.
With that kind of growth, where’s the love for bonds now? If investors want to recoup losses from past years they must adjust for the resurgence of growth in the U.S. and dispense with the “fear trade” of bonds over equities. Bond investors, especially those owning Treasuries will find that there is a very high price for the concept of “safety” and that the perception of safety is a myth to begin with when you find that your pursuit is enjoined with the masses. Safety can most often be found with high investor negativity when the urge to sell is at its peak, no when its the overwhelming trend.
On the Green Investment / Socially Responsible Investment ledger our models are identifying a class of equities that appear to have our favored combination of Value plus Momentum: In particular are Battery Manufacturers and China based waste to energy plays.
Be careful out there
Brad
No Positions
