The Advisor Weekly. Charles Sherry, M.Sc. F i n a n c i a l J u m b l e, L L C

Transcription

1 The Advisor Weekly Charles Sherry, M.Sc. Striving to provide the best tools that can be used to authoritatively communicate unfolding financial and economic events. November 18, 2013 F i n a n c i a l J u m b l e, L L C w w w. f i n a n c i a l j u m b l e. c o m C h a r l e f i n a n c i a l j u m b l e. c o m /

2 Table of Contents p.2 The upcoming week p.3 NewsFlash! p.6 Valuation target P/E ratios and returns p.7 Bubbles and the case for the bear p.11 Yellen s dovish testimony p.12 Keeping the fed funds rate at zero markets warm to the idea p.13 Manufacturing and the trade deficit p.15 A broad look at the economy modest momentum heading into the govt shutdown FOR INVESTMENT ADVISOR USE Page 1

3 Report Previous Forecast Day Housing Market Index** Monday Employment Cost Index 0.5% 0.5% Tuesday Bernanke speaks Consumer Price Index 0.2% 0.0% Wednesday Core CPI 0.1% 0.2% Retail sales** -0.1% 0.0% Sales ex-autos** 0.4% 0.2% Business Inventories 0.3% 0.4% Existing home sales** 5.29 mln 5.10 mln FOMC Minutes** Producer Price Index -0.1% -0.1% Thursday Core PPI 0.1% 0.1% Philly Fed Index Global PMIs** Weekly jobless claims 339k 334k Leading Indicators 0.7% -- Source: Bloomberg, Barron s forecasts subject to change; Releases in red merit extra attention **more likely to impact markets October housing reports begin to roll in that should provide a first look at how the govt shutdown affected homebuilder sentiment (Housing Market Index) and existing home sales think FHA loans/flood insurance seems likely to delay some closings FOMC Minutes what s the Fed thinking on tapering, communications strategies (forward guidance); yet, the Yellen appointment will probably prevent any tapering in 2013; her testimony was dovish see page 11. Retail sales consumer spending accounts for almost 70% of GDP; outside autos sales have been sluggish, and early earnings reports from major retailers have been mixed. Inflation data will be in focus not because inflation is a problem but because continued low readings on the CPI are more likely to keep monetary policy very accommodative. Bernanke speaks I don t expect Bernanke to make any substantive comments on the direction of policy, as he s about to pass the policy baton to Yellen. Global PMIs Europe s recovery remains very shallow, as growth slowed in Q3; keep an eye on China FOR INVESTMENT ADVISOR USE Page 2

4 growth Veteran s Day (Thomson Reuters) Q3, 9 of 10 ten S&P 500 sectors are expected to post positive earnings Energy is the only sector reporting an aggregate earnings decline, largely due to struggling oil refiners. Nov 12 (Reuters) A Reuters poll after the Oct jobs report showed economists at several primary dealers thought the Fed would cut its bond purchases as soon as January 2 weeks ago, a similar poll found the majority felt the Fed would hold off until next March Post Thursday Yellen testimony we d probably see a different result: maybe March (Bloomberg) The Fed will probably dial down its bond buying to $70 billion at the March meeting, according to the median of 32 economist estimates (post labor report) Again, survey was done pre-yellen testimony Might we see the 6.5% unemployment threshold also be lowered to 6.0% as a QE taper trade-off? (NFIB) Business optimism slips in Oct NFIB Small Business Optimism Index 105 Credit conditions still tight vs much of 1990s and 2000s Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: National Federation of Independent Business FOR INVESTMENT ADVISOR USE Page 3

5 Dueling Fed heads (Bloomberg) Fed s Lockhart taper is on the table for the Dec meeting, repeat remarks from prior Friday Yet, other remarks suggest odds are low: o Wants to see progress towards inflation target o Believes govt shutdown makes economic data less reliable until Dec (Reuters) Fed's Kocherlakota: Reducing bond buys now would hinder recovery He hammered home a theme he s brought up in at least three speeches since September: the Fed should do "whatever it takes" to bring the economy back to full employment quickly, even if it means pushing inflation temporarily above the Fed's goal. Nov 13 (WSJ) Macy s beats on top- and bottom-lines Promotions help in what it called the tepid economic climate. It saw particular strength in October, so we are entering the (WSJ) Top ECB official all options on the table Q4 with confidence. o Given Nov/Dec, that s a European Central Bank could adopt negative deposit rates, asset purchases if needed plus. (Bloomberg) U.S. soon will be world's biggest oil producer, The ECB's charter forbids it from financing governments, and the bank must respect such legal constraints. However the rules "do not exclude that you intervene in the markets outright," the official said. IEA says The U.S. will surpass Russia and Saudi Arabia as the world s top oil producer by 2015 U.S. oil production is at 24-year high per EIA Nov 14 (MarketWatch) Euro-zone (EA17) GDP slows from 0.4% q/q in Q2 to 0.1% in Q3 Euro-zone, European (EU28), and U.S GDP quarter-over-quarter Mild euro-zone recession Europe crawls Annualized pace slows from Q2 s 1.2% to 0.4% in Q3 Source: Eurostat FOR INVESTMENT ADVISOR USE Page 4

6 (Forbes) Copper, a key industrial metal, slips to 3-month low Supply issues and slowing in China China makes up about 40% of world demand (BLS) Productivity rises 1.9% in Q3; unit labor costs slip 0.6% (Bloomberg, Investor Relations) Walmart and Kohl s disappoint; WMT announces aggressive holiday plans to drive sales after 3-straight sales disappointments; Kohl s cut full-year profit guidance Nov 15 (WSJ) China to introduce market reforms, including an easing in its one-child policy Suggests continued low inflation (BLS) Import prices ease Import Price Index percent change from one year ago Percent Import prices -15 Import prices ex-fuels -20 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Bureau of Labor Statistics Modest import deflation Import prices fall 0.7% in October, down 2.0% y/y Ex-fuels, prices 0.0%, down 1.3% y/y, largest drop in almost 4 years FOR INVESTMENT ADVISOR USE Page 5

7 P/E Ranges & Subsequent 12 Month Returns (since 1940) <8x: Average 18.6% Median 18.8% 8x to 10x Avg 8.9% Median 6.7% 10x to 12x Avg 9.7% Median 9.6% 12x to 14x Avg 11.2% Median 13.4% 14x to 16x Average 12.6% Median 14.6% 16x to 18x Average 5.4% Median 9.1% 18x to 20x Average 5.9% Median 6.5% >20x Average -0.43% Median 4.43% Business Insider So how do stocks perform in the subsequent 12 months (going back to 1940) given a particular P/E ratio? 1. < 8 and subsequent 1-year returns are the best; greater than 20 and subsequent returns are the worst No surprise! 2. Interestingly, the second best return: P/E between 14 16, followed by P/E between a. See the chart above 3. Trailing 12-month P/E = (WSJ Market Data) There s a certain randomness to performance FOR INVESTMENT ADVISOR USE Page 6

8 The Case for the Bubble and the Bear NYSE margin debt and the S&P 500 Index $ billions Mar '00 peak Oct '07 peak NYSE margin debt S&P 500 Index S&P 500 1, Jan-90 May-93 Sep-96 Jan-00 May-03 Sep-06 Jan-10 May-13 Data Source: NYXdata.com, St. Louis Federal Reserve 1,600 1,400 1,200 1, Source: Morgan Stanley It s been a theme for much of the last 2 ½-years too much optimism being tempered by a slow growing U.S. and global economy, which forces analysts to cut profit estimates. FOR INVESTMENT ADVISOR USE Page 7

9 The Panic/Euphoria Model (Other PE) Source: Haver Analytics, Citi Research US Equity Strategy; Business Insider Closing in on euphoria, complacency is high According to Citi, the model's components include "NYSE short interest ratio, margin debt, NASDAQ daily volume as % of NYSE volume, a composite average of Investors Intelligence and the American Association of Individual Investors bullishness data, retail money funds, the put/call ratio, CRB futures index, gasoline prices and the ratio of price premiums in puts versus calls." FOR INVESTMENT ADVISOR USE Page 8

10 It s not just stocks prices for farmland in the Chicago Fed s District Double-digit gains going back to 2010 Source: Chicago Federal Reserve and investment grade Scotch* runs up in price Source: Whiskey Highland *Honestly, I didn t know there was such a thing as investment grade scotch FOR INVESTMENT ADVISOR USE Page 9

11 #StockBubbles The NASDAQ and Social Media IPOs 350% 300% 250% 200% 150% 100% 50% 0% -50% 12/31/2012 3/31/2013 6/30/2013 9/30/2013 Data Source: FreeStockCharts Last Date: Yelp Groupon LinkedIn Facebook NASDAQ Composite (WSJ) Flurry of IPOs, issuance of securities a danger sign to market $51 bln in IPOs so far in 2012, the most since $63bln per Dealogic Secondary offerings at $155 bln, the most since Dealogic began recording in 1995 U.S. corporate-bond issues have exceeded $911 billion, the most in Dealogic's database. Developing-country corporate-bond issues have surpassed $802 billion, just shy of the $819 billion in the same period last year, the highest ever. FOR INVESTMENT ADVISOR USE Page 10

12 Yellen testifies Stock prices have risen pretty robustly, she said, but at current valuations, you would not see stock prices in territory that suggests bubble-like conditions. That comment (and others) seems to signal a December taper is off the table. She added that there is no set time to dial back on QE. One potential shift in policy She not seeing bubbles in other asset prices right now but could envision using monetary policy if asset prices become misaligned, i.e., bubbles form. She warned that such use of policy would be a blunt tool. For the most part, her testimony signaled a continuation of the Bernanke Fed I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy. We must keep QE in order to end QE The labor market and the economy are performing far short of potential, and inflation is running below the Fed s goal of 2% and is expected to continue to do so for some time. From the Yellen appointment to the full-court press by Fed officials to the no taper decision in Sept, markets are getting the message that the Fed is on hold for a while when it comes to the Fed funds rate. See page below FOR INVESTMENT ADVISOR USE Page 11

13 Getting its message across markets begin to believe the Fed regarding the fed funds rate 2-year Treasury yield Percent Fed PR offensive begins Bernanke provides taper roadmap Sept meeting - No taper /31/2012 2/28/2013 4/30/2013 6/30/2013 8/31/ /31/2013 Data Source: St. Louis Federal Reserve The 2-year Treasury is a proxy for the fed funds rate Taper talk sent a signal (a mistaken signal) to the market that the Fed didn t plan on holding the fed funds rate at near zero for a considerable period of time, despite vigorous protests to the contrary. Throw in the Yellen nomination, no taper in Dec, and research out last week that stressed the idea of lowering the 6.5% soft target for the unemployment rate, possibly in exchange for cutting back QE, and the markets now seem to get it the fed funds rate isn t going anywhere for a long while. Fed funds futures - implied fed funds rate Percent Fed funds futures a/o Jun 21 Fed funds futures a/o Aug 22 Fed funds futures a/o Nov 14 Fed funds futures imply a 50 bp fed funds rate by Nov 2015 a/o Nov 14 vs Feb 2015 a/o Aug Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Data Source: CME Group FOR INVESTMENT ADVISOR USE Page 12

14 Manufacturing Industrialized Production/Manufacturing 3-month annualized rate 15.0% ISM Mfg Index % % % -5.0% Industrial production 3-month annualized rate (LHS) 46.7 Manufacturing 3-month annualized -10.0% rate (LHS) 43.3 ISM Mfg Index (RHS) -15.0% 40.0 Jan-11 Jul Jan-12 Jul Jan-13 Jul Data Source: Federal Reserve, ISM 50.0 We re seeing some lift Industrial production fell 0.1% in Oct vs a +0.7% in Sept Manufacturing up 0.3% in Oct after a 0.1% increase in Sept IP percent change one-year ago vs ISM Manufacturing 15% 10% 5% 0% % -10% -15% Industrial production y/y ISM Manufacturing Index % Shaded areas mark recessions Data Source: Fed, ISM, NBER 30 FOR INVESTMENT ADVISOR USE Page 13

15 Trade gap expands in September amid the general downward trend Trade deficit Billions of $ Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: U.S. Commerce Dept. Sept trade gap rises to $41.8 bln from Aug s $38.7 bln Greater-than-forecast deficit has economists lowering Q3 GDP number The trade deficit is a part of the GDP equation Year-over-year percent change in exports Percent change Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: U.S. Commerce Dept. Sluggish export growth is a reflection of sluggish global growth Euro-zone weakness, slowing in China and other EM markets FOR INVESTMENT ADVISOR USE Page 14

16 The broad look at the economy When the 3-month moving avg slips below 0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Source: Chicago Federal Reserve A very broad look at economic activity signals an acceleration heading into the govt shutdown Sept rose 0.01 to month moving avg rose to from Aug s (trend growth = 0) What is the National Activity Index? The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) Production and income; 2) Employment, unemployment, and hours; 3) Personal consumption and housing; and 4) Sales, orders, and inventories A zero value for the index indicates that the national economy is expanding at its his historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. FOR INVESTMENT ADVISOR USE Page 15

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