Record S&P 500 Momentum Unwinding as China Quashes Euphoria – Bloomberg 02-03-14

Salient to Investors:

The S&P 500 is down 4.1 percent in 2014, its worst start to a year since 2009. Of the S&P 500 companies:

  • Almost 160 were below their 200-day moving average last week, more than any time in 2013
  • 86 stocks set 1-yr highs when the index hit a record on January 15, versus an average of 112 when peaks were reached in Q3, 2013.
  • 460 climbed in 2013
  • 2 stocks have climbed for each stock that has fallen on days when the S&P 500 has risen during the last 7 months versus a ratio of 2.5 for the rest of the bull market

59 percent of NYSE companies traded below their 200-day moving averages on January  29 versus more than 80 percent above in May 2013. Bank of America said when the proportion falls below 60 percent, it is a negative signal. It went below 60 percent in April 1998, three months before the S&P 500 fell 19 percent. In 2007, the percentage of NYSE-listed stocks trading above their averages fell from 65 percent to less than 30 percent in a matter of weeks, and the S&P 500 lost 57 percent from October 2007 through March 2009.

Jason Brady at Thornburg Investment Mgmt said slowing momentum has sometimes been bullish when valuations shrink, but investors should prepare for more months like January because you need new reasons for prices to rise and maybe there are none.

Byron Wien at Blackstone and Robert Doll Jr. at Nuveen Investment say the S&P 500 is due for its first 10 percent drop since 2011.

Brad McMillan at Commonwealth Financial Network is cautious.

John Carey at Pioneer Investment Mgmt said investors are becoming more selective and favoring companies with meaningful growth in earnings prospects for 2014, so expects a more typical market with rougher swings in price in 2014.

James Paulsen at Wells Capital Mgmt said slowing momentum should be expected in a bull market entering its 6th year and after the S&P 500 rise of 30 percent in 2013. Paulsen said this is a refreshing pause and not a correction, and diminishing breadth means investors are acting with more discretion, not turning bearish.

During the 4 biggest bull markets of the last 25 years, peaks in smaller companies, banks and transportation stocks came before the S&P 500 peaked almost 90 percent of the time.

The Russell 2000 Index reached an all-time high on Jan. 22, the S&P 500 Financials Index climbed last month to the highest point since September 2008, and transportation stocks reached a record on January 23.

Economists expect the economy to grow 2.8 percent in 2014 and 3 percent in 2015, versus an average 3.3 percent since 1948.

Christopher Wolfe at Bank of America Merrill Lynch said people have become used to markets going up all the time, and while the market is ripe for a correction, there are fundamental issues as well.

Jeff Saut at Raymond James said breadth has been deteriorating and the equity market has had a heart attack, and does not think the S&P has found a short-term to intermediate-term bottom.

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Gold Analysts Get Most Bullish in a Year After Rout: Commodities – Bloomberg 01-06-14

Salient to Investors:

Gold analysts are the most bullish in a year, while short positions held by hedge funds et al rose almost fourfold from October to December 24th. The US Mint sold 56,000 ounces of American Eagle gold coins in December, the most since June sales gained 14 percent gain in 2013.

Ross Norman at Sharps Pixley said gold is primed for a short-covering rally as physical demand is very robust.

HSBC Securities (USA) said physical buyers viewed prices near $1,200 as attractive.

Mark O’Byrne at GoldCore said purchases may rise before China’s Lunar New Year festival on January 31. The World Gold Council believed China overtook India as the biggest user in 2013.

Australia & NZ Banking said the rally may stall above $1,230 as gold’s downtrend remains in place as investors continue to sell through ETPs.

Commerzbank said gold may fall to the lowest since September 2009 based on point and figure charts and a 45 degree resistance line from April.

Goldman Sachs said on December 5 that gold will rebound to $1,300 in 3 months, before declining to $1,110 in a year.

DZ Bank said on December 20 that gold will average $1,169 in 2014, the least since 2009. Credit Suisse predicts an average of $1,180 in 2014, while Barclays predicts an average of $1,310 in 2014 and $1,190 in 2015.

The IMF predicts global economic growth will accelerate to 3.6 percent in 2014 versus 2.9 percent in 2013, as Europe rebounds from recession. Christine Lagarde at IMF on December 22 raised its outlook for the US economy.

James Paulsen at Wells Capital Mgmt said growth is possible in the developed and developing world in 2014, and predicts a good year for commodities because of synchronized global growth.

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Buybacks to Dividends at Risk With Record-Low Yields Ending – Bloomberg 09-03-13

Salient to Investors:

Higher debt costs will reduce buybacks and dividend increases.

Borrowing costs for S&P 500 companies fell to 1.4 percent of sales the last 12 months, a record low in 11 years of data. Corporate bond yields are increasing the most since 2009 and are at 4.3 percent versus the 5.7 percent average since the start of the financial crisis and 6.9 percent average in the decade before the start of the bull market.

Paul Zemsky at ING Investment Mgmt said part of the profitability story will start eroding and will have more of an impact on financial transactions, like buybacks and dividends.

The median economist expects the Fed to taper in September.

Birinyi Associates said authorized US stock buybacks reached a 6-year high of $505 billion so far in 2013 after more than $1.7 trillion of repurchases since 2009, but announcements have slowed to less than $50 billion in each of the past two months versus over $68 billion average in 2013 thru June. Repurchases dropped 3.2 percent to $118.5 billion in 2003, the last year before the Fed started raising rates.

The 100 stocks in the S&P 500 with the most buybacks relative to market value have beaten the index since March 2009, advancing 236 percent versus 141 percent for the benchmark.

Companies that increased dividends every year for the last 25 years rose 169 percent in this bull market. The dividend yield on the S&P 500 averaged 2.12 percent for the 12 months through May, 0.38 percentage points higher than the 10-yr Treasury.

Earnings per share for S&P 500 companies were over $100 a share in 2012 versus $60 in 2008 as net income rose faster than sales, margins expanded for 9 straight quarters from 2009 through 2011, and interest expense fell to 1.4 percent of sales in the last 12 months versus 2.4 percent in September 2012.

Profit expansion slowed to an average 4.2 percent the last six quarters versus the 28 percent mean during 2010 and 2011.

Kevin Caron at Stifel Nicolaus said with profitability close to peak levels, to get earnings to rise further, who else are you going to fire? What else are you going to cut? Caron said the trillion-dollar question is what drives the rally from here?

James Paulsen at Wells Capital Mgmt said when the Fed starts raising rates, and suddenly all the Armageddon stories are no longer, greater confidence in the economy would lead to an acceleration of corporate activity into capital investment. and by the time rates get back to normal, US executives will want to reinvest in their business instead of buying stock.

Analysts project S&P 500 earnings will growing at 10.6 percent in 2014 and 2015, or twice the pace of 2013.

P-E ratios for the S&P 500 rose to 16 times earnings in the last 12 months, versus the average of 15.5 times since March 2009, 18.8 times mean in the 2002-2007 rally, and 28.1 times in the last two years of the 1990s.

The most indebted companies in the S&P 500, which had beaten the index by 6 percentage points through May, have declined 3 percent in the last 3 months, versus a 0.1 percent gain in the Index.

Mark Luschini at Janney Montgomery Scott said companies should have locked in record-low borrowing costs by now, and if they haven’t taken advantage of this window of low rates already, shame on them.

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Rate Surge With Rising U.S. Confidence a Positive Sign – Bloomberg 08-20-13

Salient to Investors:

James Paulsen at Wells Capital Mgmt said concern that a surge in US bond yields will curb US growth is overblown because higher borrowing costs coupled with gains in confidence are a healthy sign for the economy. Paulsen said confidence is at the center of everything here and that since 1967, stocks have risen at a 12.8 percent annualized rate in months when bond yields and the Conference Board’s consumer confidence measure rise in tandem, and when borrowing costs increase and confidence drops, stocks have fallen at a 6.4 percent rate.

Adrian Miller at GMP Securities said the back-up in interest rates is not yet at a level that would creep into the psyche of the consumer as being a problem.

Drew Matus at UBS Securities said bond yields and equities are going up because the economy is doing well, not necessarily because of expectations of what the Fed may or may not do.

Freddie Mac report the national average 30-yr fixed mortgage rate was 4.40% last week.

Mark Luschini at Janney Montgomery Scott said a fundamental underpinning to this recovery has been the recovery in the housing market, so rising rates could choke rising household net worth and be counter productive for the Fed.

Joseph Carson at AllianceBernstein said since 1960, only 8 times has the ISM index seen comparable out-sized gains in production and orders that did not reflect rebounds from sharp declines a month earlier: 6 occurred in the very early stages of an economic recovery following a recession, and in all cases GDP picked up over the next year. Carson said the unexpectedly strong manufacturing survey, which usually signals the start of the cycle, is surprising given we are in the fifth year of this cycle. Carson said the recent jump in interest rates reflects reassessment of both economic performance and the Fed’s intentions.

The Citigroup Economic Surprise Index reached the highest level of the year.

Stephen Stanley at Pierpont Securities said we have not seen the disaster that some had feared and now the Fed has the opportunity to taper and the market is prepared for it.

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Americans With Best Credit in Decades Drive U.S. Economy – Bloomberg 08-05-13

Salient to Investors:

Joseph Carson at AllianceBernstein said:

  • Household finances are in the best shape in decades, and the US is entering a new, stronger growth phase as healthier finances revive borrowing, spur consumer spending, generate business investment and jobs.
  • Household wealth measured by net worth rose to $70.3 trillion in Q1, up almost $20 trillion from its recession low.
  • The two-quarter average for the financial-obligations ratio was 15.2 percent in March, matching the lowest since at least 1980.
  • Household liquid assets rose by $10 trillion in the past 4 years, and the ratio of coverage for liabilities is 2.43, the highest since 2000.
  • Credit demand and supply have been slow to recover because the housing rebound was delayed, unlike after most recessions, but home sales are rising, foreclosures have waned and banks are more willing to lend against an asset that’s gaining value.

    The rebound in housing and employment needs to be sustained for credit to pick up.

  • All the easy monetary conditions won’t work if the consumer does not take advantage of credit and banks are not willing to lend.

James Paulsen at Wells Capital Mgmt said:

  • The credit-driven cycle is good for investors and could help the S&P 500 to double-digit gains in 2014 after an advance of as much as 20 percent in 2013.
  • Financials like banks will continue to outperform as they are at the heart of the credit-creation process, which is becoming noticeable.
  • Industrial, materials and tech stocks are attractive.
  • Consumer cyclicals have less room to rise after outsized increases, but if unemployment falls close to 6 percent, expect a lot more demand for credit and spending.
  • The improvement in borrowing and lending is not yet strong enough to get front-page coverage

  • We won’t get another bubble economy or Gekko environment.

Keith Leggett at  the American Bankers Association said bank-card delinquencies in Q1 were the lowest since June 1990, and said we are on the cusp of a trend toward more risk-taking, with consumers becoming a bigger contributor to economic growth.

Michelle Meyer at Bank of America said property prices may jump 11.8 percent in 2013 after climbing 7.3 percent in 2012, and mortgage debt as a share of disposable income will continue to fall. Meyer said consumers will provide a bigger lift to consumption over time as the housing recovery helps to heal households’ balance sheets.

Barry Bosworth at Brookings said Americans said the Fed may keep the federal funds rate near zero until 2015.

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Hedge Funds Bought Gold in Biggest Rally Since 2011: Commodities – Bloomberg 07-14-13

Salient to Investors:

Dan Denbow at USAA Precious Metals & Minerals Fund said Bernanke’s comments put positive feeling back into gold and all commodities.

Standard Chartered said the cost of borrowing gold reached a 4 1/2-year high in London last week, and may be a bullish – gold may rally above $1,400 by the end of 2013.

Deutsche Bank said the worst of the selloff may have passed, but Goldman Sachs and Credit Suisse are forecasting more declines. Money managers’ holdings of short contracts reached the highest since the CFTC data begins in 2006.

John Goldsmith at Montrusco Bolton Investments said the prospect of higher interest rates and a stronger dollar mean the recent gains may be short-lived.

Imports of copper by China rose to a 9-month high in June. Michael Haigh at Societe Generale said the decade-long bull market in commodities may extend for an additional 15 to 20 years, driven by urbanization and growing populations in countries including China and India.

James Paulsen at Wells Capital Mgmt said he would be a buyer of commodities, as demand hinges on whether the emerging world does a little better in half2, and it will.

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What’s Good for U.S.-China-Japan Hurts Emerging Markets – Bloomberg 07-09-13

Salient to Investors:

Fed tapering, China’s credit squeeze, and Japan’s reflation ultimately prime the three biggest economies for less volatile and longer-lasting expansions, but near-term, emerging markets, commodity producers, and economies that need cheap cash or weaker currencies, including the euro area, could suffer.

Stephen Jen at SLJ Macro Partners said that parts of the world are moving, creating frictions and divergence, and more volatility for financial markets.

The IMF says the gap between developed-and emerging-market growth rates will remain close to the narrowest in a decade, at 3.8 percent in 2013, while a slowdown for emerging markets will slow global growth to 3.1 percent in 2013.

Morgan Stanley says the new environment leaves emerging countries like Brazil, Mexico, South Africa, Turkey and Ukraine, vulnerable to a sudden stop in which capital flows are thrown into reverse.

Holger Schmieding at Berenberg Bank said we are seeing significant progress in the global economy, so people need not worry because the gradual return to a more balanced global growth should be good rather than bad for almost everyone in the medium term.

Jim Paulsen at Wells Capital Mgmt says the “good” yield rise reflects mounting confidence by the Fed and investors in the US economy – since 1967, whenever the 10-yr bond yield has been below 6 percent, any increase typically has been associated with improving sentiment. Paulsen said higher interest rates should not materially impact economic activity, and the stock market may continue to provide favorable results.

Blackrock said tapering is actually healthy given that an expansion in the Fed’s balance sheet beyond $3 trillion has failed to spur much growth in credit or the economy. Peter Fisher at BlackRock says emerging markets again may suffer, as the weaker yen is drawing investment away from these countries and toward Japanese equities.

Stephen King at HSBC said the UK, Russia and the euro area periphery may suffer from unwanted yield increases as it will make it costlier for governments to finance their debt and for consumers and companies to access credit. King said a sudden spike in bond yields might send some economies off the rails altogether, and the US could suffer a backlash if trade dries up as a result.

Michael Saunders at Citigroup said less US-led stimulus could hurt economies that took advantage of easy money to run up current-account deficits and borrowing imbalances. Outside of China and the Middle East, emerging economies have aggregate current-account shortfalls of 2 percent of GDP, the highest since the late 1990s. Saunders said many emerging-market countries face the long-absent challenge of rising capital needs with worsening fundamentals at a time when global-liquidity conditions may not be easing further.

Nomura said China, Hong Kong and India are in a high-risk danger zone if a pullback by the Fed prompts investors to punish Asian countries that have weak economic fundamentals and are too slow to reform.

Oxford Analytica says Hungary and Poland are at risk because foreign investors have large holdings of local-currency debt, while Turkey is especially vulnerable because of its reliance on foreign cash to finance its large current-account deficit at a time when political tensions are rising.

HSBC and Goldman Sachs say China will grow 7.4 percent in 2013.

Shane Oliver at AMP Capital Investors said China may be trying to make economic performance more consistent and so avoid the mistake the US and Europe made in not tackling excesses before they sparked crises.

Julian Callow at Barclays said China accounts for one-sixth of global output, but a domestically driven Chinese slowdown would be much more significant than this implies, given China’s role as a major importer of commodities and capital goods, and in supporting business confidence across Asia. Callow says China accounted for 43 percent of worldwide growth from 2007 to 2012. Callow says cheaper commodity prices would be good for advanced nations but would hurt producers.

Deutsche Bank says China accounted for a quarter of worldwide demand for major raw materials in recent years. Bank of America Merrill Lynch says Chinese purchases of copper, coal, iron ore and oil are closely connected to loan-growth conditions and so are at risk if the credit crunch continues.

Larry Hatheway at UBS says companies and countries that produce materials for transportation, power and property development will be particularly hit. Over 80 percent of exports to China from Russia, Brazil, Australia, Canada and Indonesia are for domestic use. Hatheway says a slowing China would have a disproportionate impact on commodity producers and chunks of emerging markets.

Takuji Okubo at Japan Macro Advisors says Abenomics is essential and seems to be on the right track.

Lena Komileva at G+ Economics said Japan is exporting deflation risk to Europe, increasing competitive pressures when much of Europe is suffering chronic growth deficiency.

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Schwab Topping Goldman Sachs Presages American Return to Stocks – Bloomberg 06-09-13

Salient to Investors:

Shares of discount brokers are gaining the most since 2003 relative to the S&P 500, a sign that small investors are joining the 4-year bull market. Discount broker stocks beat the market by at least this much in 1997, 1999, 2003 and 2009, years in which the S&P 500 rallied an average of 14 percent from June 10 through December. Inflows into stock mutual funds totaled $108.5 billion during the last six months of 1997, $91 billion in 2003, and $12.3 billion so far in 2013.

Bulls say this shows individuals are preparing to buy shares, bears say buying by individuals who missed the rally indicates we are close to a top.

James Paulsen at Wells Capital Mgmt says when the retail investor finally gets more confident about the future, flows follow.

Jerome Dodson at Parnassus Investments said the huge run-up in stocks this year and the appearance of an improving economy getting better will attract more people wanting to enter which tends to push the market higher.

S&P 500 earnings are forecast to rise 6.6 percent in 2013 and 11 percent in 2014, while banks in the S&P 500 will rise 6.2 percent in 2013 and 5.6 percent in 2014.

James Butterfill at Coutts said trading by private investors provides no insight into the direction of the market because the inflows we are seeing are coming on the back of very low volume.

US equity trading is down 1 percent to 6.38 billion shares per day on average in 2013 versus the average of 8.13 billion from 2009 through 2012.

TD Ameritrade’s Investor Movement Index is bullish and at the highest level since June 2011.

Laszlo Birinyi at Birinyi Associates says individuals will push stocks higher as flows tend to multiply late in the rally, when gains force skeptics to capitulate, in the last ‘exuberance’ leg.

US equity ETFs have attracted $79 billion in 2013, on track to the highest annual inflow since at least 2009.

The Stoxx 600 Financial Services Index is up 12 percent in 2013 versus the 5.6 percent advance for a gauge of European banks – the last time gains in European brokerages exceeded banks by that much, in 2006, the Stoxx Europe 600 Index rose a further 14 percent in half2 2006.

Colin McLean at SVM Asset Mgmt said the inflows do not indicate the end of the rally because there is still a lot of money to come in.

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Tech Stocks Are Cheapest in Seven Years – Bloomberg 04-29-13

Salient to Investors:

Tech, energy and financial stocks are the most inexpensive industries in the S&P 500 with multiples of less than 14 times earnings. US tech stocks, the second-best industry of the past decade, are at 13 times projected earnings, the lowest level versus the S&P 500 in at least 7 years.

Analysts expect earnings at the 70 companies in the S&P 500 IT Index to fall 5.5 percent in Q2 2013 as consumers and government agencies cut spending. 74 percent of 273 S&P 500 companies so far reporting have beat estimates.

In quarters when tech stocks rallied the most or second-most in the S&P 500, the US expanded 3.2 percent, versus 2.4 percent on average since 1989 and 0.8 percent on average when tech stocks trail the S&P 500.

Bulls say tech stocks tend to lead during expansions and are too cheap. Bears cite less corporate and government spending on technology as growth weakens in Europe and China. Bloomberg Industries says Obama’s proposed budget would reduce IT spending by $2.5 billion by 2015.

Walter Todd at Greenwood Capital said tech has been nothing short of terrible and says we need to see the downward revisions abate before we can get sustainable outperformance.

Peter Sorrentino at Huntington Asset Advisors expects the economy to flatline for a while and managers will sit on their budgets until the end of 2013 – there is no catalyst for ramping up production.

James Paulsen at Wells Capital Mgmt said tech stocks are a bargain and predicts a rally as companies buy back shares, despite being nervous about the large-cap tech growth stories, but expects to see much extra spending start before the end of 2013.

Bloomberg Industries and OMB say the US government will spend less on IT in the next 3 years.

The median economist expects GDP to grow 2 percent in 2013 versus 2.5 percent annualized growth in Q1 .

Economists expect Europe to fall 0.3 percent in Q2 2013 versus a 0.5 percent decline in Q1 2013.

Chris Hyzy at US Trust said capital expenditures in corporate America, corporate China, corporate Europe, are what drive the tech profits, and that has been flat.

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Silver Slump Splits Hedge Funds From Ingot Hoarders: Commodities – Bloomberg 04-16-13

Salient to Investors:

Hedge funds have a net-short position on silver for the first time since at least 2006, but holdings in ETPs are within 1.3 percent of the all-time high reached in mid-March 2013. Silver entered a bear market on April 2. The median analyst expects silver to rise to an average of $31.25in Q4.

53 percent of supply goes into products so faster economic growth should be boosting prices, but instead manufacturers are relying on inventories at a 15-year high. Standard Bank estimates China has stockpiles for 18 months of industrial use, up from 4 months in 2009.

Stanley Crouch at Aegis Capital said silver will catch a few panic bids but that will be limited because people are realizing that the world is not coming to an end, though demand lags supplies.

Charles Morris at HSBC Global Asset Mgmt said silver is the leveraged bet on gold – if it is not good for gold, it is not good for silver either.

Goldman Sachs cut its gold price estimates on April 10 and Societe Generale said the metal is in bubble territory on April 2. Barclays, Credit Suisse, Danske Bank and BNP Paribas predict lower average prices in 2014 than in 2013.

The composite economist expects the global economy to accelerate every quarter in 2013.

Nik Bienkowski at Boost ETP said retail investors account for 60 percent of silver ETP purchases in the US.

Barclays says supply outpaced demand by a combined 15,247 tons in the past 4 years and expects a 5,512 ton surplus in 2013. Barclays says industrial demand will rise 1.7 percent to a 3-year high in 2013, and another 2.8 percent in 2014.

CPM Group said China almost tripled mine production since 2000 and imported 28 percent less metal in February, the fifth decline in 6 months. Economists expect China to grow 8.1 percent in 2013, the second-slowest pace in the past decade.

James Paulsen at Wells Capital Mgmt said the major overriding force is the risk premium and it has come out of both gold and silver as the US shows signs of growth. Paulsen said whether industrial demand will be able to offset the drop in prices because of waning safe-haven value is the big question.

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