Hedge-Fund Leverage Rises to Most Since 2004 in New Year – Bloomberg 01-14-13

Salient to Investors:

Morgan Stanley said leverage among equity managers climbed to the highest level to start any year since at least 2004. Margin debt at NYSE firms rose in November to the highest since February 2008.

James Dunigan at PNC Wealth Mgmt said leverage is increasing among hedge-funds. Gross leverage at hedge funds was 153 percent last week versus an average 152 percent in 2012 and 143 percent average since 2005. Hedge fund leverage has tended to rise and fall with the S&P 500.  Dan Veru at Palisade Capital Mgmt said many managers are just behind their benchmarks so to catch up they’re trying to utilize leverage.

Hedge Fund Research and International Strategy & Investment Group said the 15 percent rally in the S&P 500 since June was mostly missed by professional investors.

Timothy Ghriskey at Solaris is bullish on equities as valuations are extremely attractive and earnings looks good.

Peter Sorrentino at Huntington Asset Advisors sees too much optimism given earnings growth has started to slow.

Laszlo Birinyi at Birinyi Associates is bullish, and sees a greater than 50 percent chance the index will pass the record in 2013 as individual investors return somewhat.

Anurag Bhardwaj at Barclays said indicators are bullish and equity hedge funds are jumping on the bandwagon.

The S&P 500 traded at 14.8 last week versus an average 15.5 since the bull market started four years ago and the six-decade average of 16.4.

Analysts expect S&P 500 profits to increase 1 percent for Q1 2013 versus 2.5 percent forecast for Q4 2012. 22 of 27 S&P 500 companies so far reporting have exceeded analyst projections.

Equity analysts have increased price targets for S&P 500 companies that would produce a reading of 1,618.90 versus the record of 1,565.15. 15 Wall Street strategists expect the index to rise 7.6 percent to 1,534 in 2013.

The median economist expects the US to grow 2.8 percent in 2014 versus 2 percent in 2013.

Read the full article at http://www.bloomberg.com/news/2013-01-14/hedge-fund-leverage-rises-to-most-since-2004-in-new-year.html.

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Carson Block Goes Short Unafraid as Chinese Gangsters Chase – Bloomberg 12-10-12

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Carson Block at Muddy Waters said he stopped betting against Chinese companies this year after government agents hindered his analysts and harassed workers at his storage company in Shanghai. Block says China is protecting frauds by making it difficult to research short sale candidates, and has used intelligence and police agencies to deter his company and employees from continuing to do research in China. Block said Singapore is not a thugocracy.

Timothy Ghriskey at Solaris Group said Block has been the most vocal and public about the accounting problems with US-listed Chinese companies. Sahm Adrangi at Kerrisdale Capital Mgmt said the Carson Block model of very detailed reports has set a new standard in terms of writing and sharing research. James Rickards at Tangent Capital Partners said Block is looking at the crime in progress.

The SEC accused affiliates of the four biggest accounting firms of refusing to produce documents for investigations into client financial disclosures.

Read the full article at http://www.bloomberg.com/news/2012-12-10/carson-block-goes-short-unafraid-as-gangsters-in-china-chase-him.html

S&P 500 CEOs Losing Interest Advantage for Profit Growth – Bloomberg 12-10-12

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Bloomberg and Strategas Research Partners report the average S&P 500 company cut interest expenses to 2.39 percent of sales in the 12 months ended Sept. 30, the lowest since at least 2002. With borrowing expenses at record lows, companies are finding it harder to squeeze costs, causing profit margins to contract for the first time since 2009 and leaving investors more dependent on economic growth and corporate spending for equity gains in 2013.

Bears say projected revenue growth of 3.8 percent for S&P 500 companies in 2013 won’t be enough to increase profits without a decline in expenses. Bulls cite the 8.9 percent profit growth estimated in 2013, equity valuations at a 12 percent discount to the six-decade average, and an economic recovery as reasons companies will start to spend their $1 trillion in cash.

The S&P 500 P/E ratio of 14.5 is 12 percent below its average since 1954. Margins were 13.6 percent in Q3 2012 versus 8.3 percent in Q3 2009. Lower interest costs have helped profits climb for 10 straight quarters, surpassing analyst estimates every quarter in 2012. The average analyst expects earnings to increase 8.9 percent in 2013 and 12 percent in 2014. The average economist expects GDP to grow 2 percent in 2013 and 2.8 percent in 2014.

Nick Sargen at Fort Washington Investment Advisors says the consensus view is there’s little room for margin expansion,so profit growth must come from growth in the U.S. and global economy.

Timothy Ghriskey at Solaris says revenues need to accelerate to boost margins, which are driven by the economy.

Brian Barish at Cambiar Investors said cash levels and rising corporate spending on capital goods are signs that stocks are spring-loaded to rally should the economy match forecasts. Barich said valuations may help takeovers rise in 2013 as the opportunity for highly accretive cash-based M&A is substantial, and sees slow and steady profit growth.

Jason Trennert at Strategas in New York said margins have reached a level historically represented peaks, and doesn’t see the interest rate environment getting much more favorable. Trennert said the Street’s high EPS estimate for 2013 must be substantiated by margin expansion, strong top-line growth, or a combination of both – hard to see given peaking margins and 4 percent nominal GDP growth.

Read the full article at http://www.bloomberg.com/news/2012-12-10/s-p-500-ceos-losing-interest-advantage-for-profit-growth.html

Black Monday Echoes as Computers Fail to Restore Confidence – Bloomberg 10-19-12

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Investors have pulled $440 billion from U.S. equity mutual funds since 2008.

E.E. Geduld at Cougar Trading says crashes happen when investors become convinced they’ve lost control – the volumes we can now handle are gigantic, but the exit door hasn’t changed in size.

Timothy Ghriskey at Solaris Group said volatility scares people to death, and there’s no such thing as a free lunch – you can theoretically protect yourself on the downside, but when things come unhinged, nothing’s going to protect you.

Within 10 years of the 1987 crash the Dow average had quadrupled and investors were enjoying the biggest bull market ever. Procter & Gamble and McDonald’s are up more than 800 percent since 1987.

After falling 999 points on May 6, 2010, the Dow ended the day down 348, and rose 6.5 percent through the end of the year.

Read the full article at http://www.bloomberg.com/news/2012-10-19/black-monday-echoes-with-computers-failing-to-restore-confidence.html

Bank Profit Leading S&P 500 as U.S. Income Growth Falters – Bloomberg 10-08-12

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Bloomberg survey of analysts shows they are most bullish on stocks farthest from their highs – banks. Financial institutions remain 58 percent below the record of February 2007 while analysts raised estimates for profit growth to 21 percent for Q3 and 32 percent for Q4 on signs of a housing recovery. Revenue per share is less than half the amount in 2007.

Bulls say banks will continue to rally as the Fed stimulus boosts earnings. Bears say gains will be limited to traditional lenders as increased regulation will drag down firms that depend on trading and underwriting for revenue.

Michael Shaoul at Marketfield Asset Mgmt said transactional volume increases for consumer, housing and business credit will increase earnings among regional lenders, while those outside of the purer banking model face too much regulation.

Real-estate loans of 7,246 federally insured banks have fallen to $4.09 trillion from the record $4.81 trillion reached in 2008.

More than 30 companies in the 81-stock  S&P 500 Financials Index have been dropped or added in the last five years as their prices plunged and banks merged. Financial companies make up about 13 percent of S&P 500 earnings.

Walter Todd at Greenwood Capital said loan growth is not robust but is picking up, and the fundamental backdrop for domestic-oriented banks will continue to improve.

The growth in earnings has been slowing since the start of 2011 and was flat in Q2.

Peter Kovalski at Alpine Woods Capital Investors said the improvement in home lending reflects a short-term rise in refinancing driven by the Fed and profits show no real growth.

Chad Morganlander at Stifel Nicolaus said financial shares may fall as economic growth remains sluggish and Europe’s debt crisis worsens. Bank stocks will have a tough time providing long-term leadership until household credit is created without monetary or fiscal stimulus.

Charles Bobrinskoy at Ariel Investments says that while regulation requiring higher capital cushions to protect against losses and more scrutiny by the government will constrict bank earnings growth, investors may be undervaluing their potential as all this is priced into the stocks creating a lot of upside.

Real-estate loans 90 days or more past due totaled $112.5 billion in Q2, more than twice the level at the end of 2008, they dropped 2 percent in Q2 and 0.8 percent in Q1.

On September 25, Chris Kotowski at Oppenheimer said credit quality – the prime mover of bank fundamentals – is poised to get better than average, and recommends overweighting banks as steady loan growth and margins.

Credit card debt 90 days past due declined every quarter except one since June 2010, while the $7.5 billion outstanding is less than half the amount at the start of 2010.

Timothy Ghriskey at Solaris forecasts much more improvement for bank earnings as the economy continues to improve, and stock prices follow earnings.

Read the full article at http://www.bloomberg.com/news/2012-10-07/bank-profits-leading-s-p-500-as-u-s-earnings-growth-sputters.html

Euro Crisis Hits Profits Globally as P&G Cuts Forecast – Bloomberg 06-25-12

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Europe’s debt crisis is pressuring global earnings.

Analysts predict S&P 500 companies will report a 1.1 percent average drop in Q2 earnings, the first decline in 11 quarters and after a 6.2 percent average increase in Q1. A stronger dollar threatens earnings as U.S. exports become more expensive.


Tim Ghriskey at Solaris Group doesn’t expect favorable corporate outlooks given Europe and slowing growth in the U.S. and China.

Mark Luschini at Janney Montgomery Scott said Philip Morris is a canary in the coal mine for many companies who will use currencies as an excuse for declining profit.

Read the full article at http://www.bloomberg.com/news/2012-06-24/euro-crisis-hits-profits-globally-as-p-g-cuts-forecast.html

U.S. Stocks Fall Amid Concern Europe’s Crisis Will Worsen – Bloomberg 06-25-12

Salient to Investors:

George Soros called on Europe to buy Italian and Spanish bonds, warning a failure by leaders meeting on June 28 to produce drastic measures could spell the end of the euro.  Wayne Lin at Legg Mason says the EU summit won’t produce anything extraordinary, that Soros’ views are extreme, and  expects more volatility.

Europe’s debt crisis is putting pressure on corporate earnings globally with companies cutting forecasts and signaling profits will fall at more companies this year.

The MSCI World Energy Index is down 9.6 percent in 2012, more than any other group, and is up 45 percent since the market bottom in 2009, less than any other industry with earnings tied to economic growth. U.S. energy stocks are at the cheapest levels relative to the Standard & Poor’s 500 Index since 2009. Growing consumption of energy has been met with even bigger gains in supply – U.S. crude inventories are the highest since 1990 and natural gas prices are down  38 percent in 12 months amid a glut spurred by hydraulic fracturing.


Analysts expect S&P 500 companies to report a 1.1 percent average drop in Q2 earnings, down from their estimating a gain last month – would be the first decline in 11 quarters after a 6.2 percent average increase in the Q1.

Tim Ghriskey at Solaris Group says it is very unlikely companies will issue favorable outlooks given Europe and slowing growth in the U.S. and China.

Bears say energy producers, about 10 percent of global stocks, will keep equities from advancing. Bulls say the market will rally when their shares rebound.

Jim Russell at U.S. Bank Wealth Management says the S&P 500 will not make meaningful progress until the energy sector bottoms and begins to move higher Russell says energy stock valuations are cheap but the fundamentals have yet to bottom.

Read the full article at http://www.bloomberg.com/news/2012-06-25/u-s-stock-index-futures-decline-before-house-sales-data.html