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Denis Ouellet, CFA  

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  • Why Large Caps Now: Strong Fundamentals And Attractive Valuations [View article]
    Curb your enthusiasm, especially with forward earnings.

    Jul 7, 2011. 01:39 PM | Likes Like |Link to Comment
  • The latest AAII survey shows U.S. individual investor bullishness at its lowest level since QE2 was launched, down to 24.4%, and bearishness also at its highest since August, up to 47.7%. But unlike prior market corrections, where investor sentiment typically follows price, Bespoke notes that sentiment has led prices lower during the current pullback.  [View news story]
    Jun 9, 2011. 11:54 AM | Likes Like |Link to Comment
  • “Such soft patches are not that uncommon,” and that's all we're in right now, Philly Fed's Charles Plosser says. “Temporary factors” such as the Japan quake, Middle East events, and higher food and energy prices have all had an impact, adding that the economy withstood a similar “bump in the road” last year. Growth should rebound to 3.0-3.5% over the rest of the year, he says.  [View news story]
    Everything is transitory. See THE ECONOMIC AFTERLIFE at
    Jun 9, 2011. 09:57 AM | 1 Like Like |Link to Comment
  • ICSC Retail Store Sales: -1% W/W, vs. -2% last week. +3.1% Y/Y, vs. +3.2% last week. "The wettest comparable week in 10 years pulled weekly same-store sales down 1%, but the report sees strength ahead for seasonal goods.  [View news story]
    Chain store sales have retreated 3.8% since April 23rd, 1.6% using the 4-week m.a. Sales have fallen back below the 515 level, right back into the 495-515 channel of 2010.

    Chart at
    May 24, 2011. 08:06 AM | 1 Like Like |Link to Comment
  • Are Commodity Prices Peaking? [View article]
    The most important factor behind the trend in non-energy commodity prices is the rate of growth in world industrial production as this chart from the San Francisco Fed shows.

    Given recent stats on IP and new orders in the US and in Europe, world IP growth should be sustained, unless China’s recent PMI surveys do not change direction soon.

    See charts at
    Mar 30, 2011. 12:43 PM | 2 Likes Like |Link to Comment
  • Stocks are cheap right now (I, II)... oh really? "The cheapness argument falls on its face once we realize that pretax profit margins are hovering close to an all-time high of 13.3%, almost 58% above their average of 8.4% since 1980," Vitaliy Katsenelson writes. When the Fed stops easing this June, then "we will see what kind of legs the economy and stock market really have."  [View news story]
    Interesting but incomplete analysis. I checked what happened to S&P 500 EPS and the index itself while the margins were being squeezed.

    In 3 of these 4 “mothers of all margin squeezes”, S&P 500 EPS kept growing. Shrinking margins do mean profits grow more slowly than revenues but, as the chart above shows, not necessarily that multiples “usually”contract. In fact, based on the evidence from the chart, the jury is about evenly split on multiple movements when margins contract meaningfully from current high levels. History convincingly shows that PE multiples are primarily a function of interest rates, therefore of inflation rates and trends thereof (see S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years).

    It is also important to note that often margins did not go straight down, staying elevated for periods of 9-15 months after peaking. Furthermore, in all four instances, equities did rather well, at least in the early part of the margin contraction period.

    I transposed on a semi-log earnings chart the 7 instances when the Philly Fed “Margins” index reached extreme levels. The “R” on the chart indicates US recession periods. S&P 500 profits have, in fact, declined after the “Margins” index rose smartly but only when there was a US recession, negating the usefulness of the indicator.

    So, simply saying or implying that elevated profit margins are bearish is incomplete analysis to say the least.

    Complete analysis:
    Mar 24, 2011. 10:53 AM | 3 Likes Like |Link to Comment
  • More Signs of Weakness, Inflation in China's Economy [View article]
    I am concerned that China`s inflation problems may be underestimated and could require tougher medicine. The quality of data is low.It requires better analysis, continuous monitoring and readings between the lines (my blog has a "CHINA WATCH" and an "INFLATION WATCH" features for continuous monitoring).

    Not heavily bearish at this point but worried and trying to alert investors that fighting inflation is no slam dunk, even for Chinese.
    Mar 9, 2011. 08:20 AM | Likes Like |Link to Comment
  • David Rosenberg: Margin Squeeze Coming [View article]
    If one starts digging and uncover a potential problem, one should not stop digging and just cry wolf. Let’s keep digging this margin call.

    There is no strong and consistent historical evidence that the Philly Fed or GDP "Margins Index" help predict declining profits and/or equity prices.

    See "MARGIN CALL!" at
    Feb 22, 2011. 04:04 PM | Likes Like |Link to Comment
  • ICSC Retail Store Sales: +2.2% W/W, vs. -1% last week. +2.5% Y/Y, vs. +1.6% last week. Weekly sales came in far stronger than expected, as shoppers were seemingly undeterred by the bad weather that had retail forecasters braced for a pullback.  [View news story]
    Weather was clearly a factor in recent weekly sales trends but the 2.2% bounce last week only brought sales back to the low end of the last 12 months band. The 4-week moving average declined slightly and is only 2.1% above last year.
    See chart at
    Feb 8, 2011. 08:14 AM | Likes Like |Link to Comment
  • ICSC Retail Store Sales: -1% W/W, vs. -1.2% last week. +1.6% Y/Y, vs. +2.8% last week. Soft sales for a fourth straight week were due to heavy cold weather. Based on this, the Y/Y sales growth forecast for January is trimmed to +1.5-2%.  [View news story]
    Weekly chain store sales fell 1.0% last week, the fourth consecutive weekly drop. Chain store sales declined 2.9% in January. The 4-week moving average is now only 2.3% above its January 2010 level.
    Throughout the month, retailers have blamed the weather for the poor sales. Other more fundamental factors are also at play. Gasoline prices have jumped 15% since the fall while food inflation has picked up since September 2010, both important non-discretionary expenses eating into discretionary income.

    see chart at
    Feb 1, 2011. 08:42 AM | 2 Likes Like |Link to Comment
  • Auto sales in 2011 are off to a strong start in the U.S., says Edmunds chief Jeremy Anwyl, with SAAR up sequentially to 12.8M vehicles - unusual, as December numbers usually benefit from year-end sales. Korean makers (HYMLF.PK) are seeing the biggest gains, and rising fuel costs could end up displacing the country's current most popular vehicle, Ford's (F) F-150 truck.  [View news story]
    Bad weather just before year-end has seemingly pushed some December sales into January, explaining why January is stronger than December. This morning’s US weekly chain store sales suggest subdued consumer spending in January.

    Jan 19, 2011. 01:44 PM | Likes Like |Link to Comment
  • ICSC Retail Store Sales: -0.1% W/W, vs. -3.2% last week. +1.4% Y/Y, vs. +3.5% last week. "Ice and snow hit store sales hard", leading to the slowest Y/Y rate since May.  [View news story]
    Weekly sales (seasonally adjusted) peaked right after Christmas and declined at the bottom of the 495-515 channel established since April 2010. Sales have shown little momentum at year-end and the 4-week moving average has turned down well below its previous peaks.

    See chart at
    Jan 19, 2011. 08:02 AM | 1 Like Like |Link to Comment
  • "After an 86% gain in 21 months the market looks overbought, overextended and overvalued," Comstock Partners says. Although the combination of QE2 and the tax-cut compromise is being touted as the great elixir that will spur economic growth, PragCap believes that growth will be "subdued and temporary."  [View news story]
    Equity markets are about profits and PE multiples. Only economists are capable of saying that " the market looks overbought, overextended and overvalued" without even mentioning profits, PE multiples or any other valuation yardstick.

    The reality is that equity are cheap at 15x trailing EPS (13.5x ex-cash). Excluding the 1950-1957 period when the US economy swung from deflation to high inflation back to deflation, and the 1983-85 post hyper-inflation years, US PEs never get below 13.5 (and rarely below 15 for that matter) unless inflation is above 3.8%. Since 1950, when inflation has been below 3.5%, PEs have averaged 18x. (

    Based on the "Rule of 20" (, US equities are 20% undervalued.

    The economy may not be what we would wish it was but it is mending (e.g. Aug-Nov retail sales). Add the Bernanke QE puts and the economic background is not all dark.
    Dec 17, 2010. 10:37 AM | 3 Likes Like |Link to Comment
  • ICSC Retail Store Sales: -2.1% W/W, vs. +0.5% last week. +2.6% Y/Y, vs. +3.5% last week. Consumers took a break from shopping last week, but pent-up demand should lead to accelerated sales throughout the month for a full-month Y/Y growth rate of at 3-3.5%.  [View news story]
    Big decline after a good Thanksgiving. Chain store sales tumbled 2.1% last week (ended Dec. 4) to their lowest level since February 2010. The 4-week moving average is up 3.1% YoY. Gallup polls provide some hope: the 3-day m.a. spending polls troughed December 2 and bounced back on December 5. Gallup’s 14-day m.a. remains up.
    Check out my chart at:
    Dec 7, 2010. 08:36 AM | 1 Like Like |Link to Comment
  • Oct. Personal Income and Outlays Income: +0.5% vs. +0.4% expected, -0.1% prior. Personal spending +0.4% vs. +0.5% expected, +0.2% prior. PCE core price index flat in-line with expected and unchanged from prior.  [View news story]
    This morning’s eco data were quite positive for the consumer side of the economy. Like exactly on cue, labor income is accelerating just as transfer payments are flattening out.
    Recent news on US employment became generally more positive (see yesterday’s post Harbingers Of Stronger U.S. Job Growth). This morning, we learned that initial jobless claims declined 34, 000 last week to 407,000. The four-week moving average fell by 7,500 to 436,000 from the prior week’s revised average of 443,500. That was the lowest level since August 2008.

    Average weekly hours have been rising steadily in 2010. Hours worked are now pretty close to their pre-crisis level which could incite more employers to hire. Meanwhile, hourly earnings are also accelerating.
    Pretax income is thus rising more rapidly. The YoY rate of change is now 4.1% in October.
    PDI rose 3.8% YoY in October.
    The savings rate has averaged 5.8% so far in 2010, 6.0% since April within a range of 5.6% and 6.2%. It was 5.7% in October.
    As a result, PCE have been rising steadily. They have grown 1.7% since June, an annualized rate over 5.1%.
    See full post and charts at
    Nov 24, 2010. 11:37 AM | Likes Like |Link to Comment