Things must be even better than I thought in yesterday’s post and there has been a conga line of pom-pom-waving analysts on GE/CNBC this morning telling us how UNDER valued everything is because we just don’t see the BIG PICTURE. As Bespoke notes in their chart of the S&P and its new highs, you want to see more and more stocks hitting new highs to sustain a rally but my question is - with the market now at 17-month highs and making new highs every day - what’s up with the other 370 stocks?
In an ordinary market I wouldn’t question it, but this is not an ordinary market. Fifty-two weeks ago we were at 666 on the S&P and stocks were making DECADE lows. Here we are with the index up almost 80% off that bottom and we can’t pull a lousy 52-week high from 2/3 of the index??? We’ll be keeping an eye on this indicator to see how things pan out, but notice that when the market fell there were no doubts - 80% of the stocks made 52-week lows last fall - now THAT’S a sell-off. That’s the kind of dramatic numbers you expect to see in a dramatic market move - not this wimpy 40% stuff - let’s see some conviction, people!
Apple (AAPL) is convicted - they are up 191% from their lows and AAPL is 15% of the Nasdaq so, all by themselves, AAPL has accounted for 28% of the Nasdaq’s move from 1,265 to 2,389 (89%). Travelers (TRV) is also moving with conviction, up 54% since last March and adding 160 much-needed points to the Dow, a great swap for Citi (C), which would have only added about 24 had it remained in the index. Cisco (CSCO) replaced GM (because they are soooooo similar) and they too have been a great trade for the Dow, up 100% off the March lows and slapping 104 bonus points on the index.
Ah, now we see how our industrials can do so well despite all the unemployment and lower cap utilization and lack of demand and high commodity input costs - we just shuffle the deck until we find a set of cards that work! Even so, as I’ve pointed out this week, the Dow has been lagging the Nasdaq and the Russell by a wide margin and the NYSE and S&P have been kind of pokey too. The Nasaq can be explained by the 28% AAPL boost but what is up with the RUT?
Hopefully someone with time on their hands will read this and analyze it over the weekend because I really am curious as to why the Russell is up more than 100% off the March lows. Even more interesting, why is the Russell 2000 (the index we see often) up 9.64% for the year while the Russell 1,000 is up just 5.43% and the Russell 3,000 is up just 6.12%? Fifty percent outperformance is a lot - one might even think that there was some sort of targeting going on (if one believed in such things).
When you think about street criminals and what they’ll do for a few thousand dollars, it becomes less shocking what bankers will do for a few million. - Felix Salmon
Citigroup’s equity strategists turned negative on the financials yesterday, saying:
Once the fierce cyclical relief rally is done, perhaps investors focus back on the structural problems faced by the problem child. This may be ongoing balance sheet problems (Financials now), or continued over-valuation (IT in the last cycle). This would argue that those investors who took a brave top-down view and moved Overweight Financials as they called the 2009 market surge should now be reducing exposure and moving back towards a more stock-picking approach within the sector.
Maybe they’re just mad they got kicked out of the Dow or maybe it’s the way the Daily Show eviscerated them in this clip (4:00 in):
Fortunately, the free-money train came into the station yesterday and the Senate agreed 68-29 to pass the first $20Bn of a series of jobs creation bills and the House W&M committtee approved extensions for Build America bonds, which generates tremendous (some would say usurious) fees for the IBanks. I am, of course, not against jobs creation bills, but I am against bills that call themselves jobs creation bills but will not actually create any jobs. What this particular $20Bn is doing is pumping $20Bn into the federal highway construction fund to make up for low gasoline tax revenues due to the 10% drop in demand for gasoline since last year. I guess we could stretch this to say we are SAVING (or creating) jobs by not starving the highway program, but REALLY - we can give AIG (AIG) $170Bn so they can pass it off to Goldman (GS), et al. This whole thing is very much like dumping an endless supply of coal into a steam train - it works great until you either run out of water, or the engine explodes…
Speaking of overheating - the BRIC markets, as measured by the MSCI Developing Nation Index, is now outpacing the MSCI World Index by a record 15% (down from 17% earlier in the week) on a price to book basis. The premium, which has lasted 10 months, was 15 percent yesterday, compared with an average discount of 36 percent since Bloomberg began compiling the data in January 1995. Inflation is also rising in India and Brazil, increasing pressure on those nations’ central banks to raise borrowing costs. India’s inflation accelerated to a 16-month high in February, while consumer prices in Brazil rose at the fastest pace in 21 months.
James Rickards of Omnis says China is in the midst of “the greatest bubble in history,” joining Jim Chanos, Ken Rogoff and others in warning of a potential crash in China’s economy. Even the World Bank suggests that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to dampen inflation fears. The only other time emerging market equities traded at a premium for at least 10 months, was the period leading up to June 2008 - right before we collapsed - MSCI’s developing nation gauge trailed the developed index by 12 percentage points over the next six months, according to Bloomberg data.
How insane are the valuations getting? Turkiye Garanti Bankasi AS (OTC:TKGBF), Turkey’s biggest bank by market value, is trading at a price-to-book ratio 32 percent higher than San Francisco-based Wells Fargo & Co. (WFC), the largest U.S. home lender. That compares with an average discount of 22 percent since 1999. Brazilian clothing retailer Lojas Renner SA is valued at 21 times analysts’ earnings estimates. Gap Inc. (GPS), operator of the Old Navy and Banana Republic clothing chains, trades at 13 times, Bloomberg data show. Baidu (BIDU) earned $153M last year on $468M in sales and is valued at $19.7Bn (128 times earnings) while Google (GOOG) made $6,500,000,000 on $23,500,000,000 in sales and is valued at just $180Bn (27 times earnings) even though Google can buy BIDU (if China let them) for less than a single month’s profits.
So is Google perhaps a $2Tn company or is BIDU, perhaps, a tad over-valued - along with most of the emerging market plays. We took a disaster hedge on EDZ (ultra short emerging markets) on Tuesday because if China falls or Greece falls or Turkey falls or Russia falls or Brazil falls or the Global economy falters - we’ll be in very good shape!
Asia held up nicely this morning with the Nikkei pulling back 1% but the Hang Seng and Shanghai held flat. Europe is also doing nothing ahead of the US open and our open is doing nothing in the futures, so it looks like it’s going to be a REALLY dull day. "Only" 457,000 people lost their jobs last week and continuing claims are "just" 4,579,000, so no worries there. We have Leading Economic Indicators at 10 along with the Philly Fed, followed by Chicago’s Fed Report at noon and, after the market closes, we get a peek at the Fed’s balance sheet as well as the money supply.
Let’s continue to be careful out there. Cash is king through the weekend and I posted as much this morning in our $100K Portfolio Update, where we are still 92% cash. Perhaps we missed an opportunity this month or perhaps we saved a lot of heartache - we’ll see next week.