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  • May 23-- New Highs For S & P /DJ Industrial Avg., Transport Avg. Still Lags.

    For months, many (myself included) have been highlighting and waiting for the eventual break-out (up or down) from the sideways consolidation pattern that had tightened its grip on equities, and many believed that when it came, we would get a high-volume explosion to propel us away from the mire.

    Instead, the only way I can really describe the market action after the S & P broke to the upside is that it, too, has been anticlimactic. I am not at all dismayed by that. However, the "traders' look at this and cite the 'thin " volume (here we go with the 'light volume" worries). with no BIG follow, thru shake their heads, and aren't convinced of anything.

    But, In my view, its just more of the same, yhis has been the character of this entire bull market run and how things have unfolded along the way. It's not a wild breakout with fanfare and blowing horns. A wild breakout on heavy volume might well have signaled buying exhaustion at an intermediate top. The fact that it don't happen that way is well, business as usual.

    So, progress is progress, after all, and while the move hasn't impressed the pundits (that's fine with me ), that does not mean we cannot still see the internal energy of the market released in a slow and steady manner.

    So, unless we fall back into the sideways mess, I remain optimistic and will gladly take boring profits over exciting losses any day.

    Of note while the DJIA and the S & P tagged new highs on Monday, the bond market sold off heavily. The thought that the bond market will take down the stock market didn't work that well on Monday.. In my opinion the bond market isn't telling holding the "keys" to equity performance. I have said it before " The bond market isn't telling us anything."

    I mentiond this on April 11th , just before earnings season began

    A "Key" for the market's next move ?

    Industrials, Technology and Financials are three cyclical sectors that have held the S&P back recently.

    I am watching the price action in these sectors for they will surely be needed to help the S & P lift to the upside.

    Financials and Technology are now involved in this recent upswing and in fact leading this move higher. Take a look below on the earnings scorecard and it's no wonder why they are moving higher.

    NASDAQ Financial Index has broken out to the upside, surpassing the previous high made in '07. Many portfolio managers are of the opinion that the Financials are likely the only value sector currently.

    Corporate Earnings (Data gleaned from Bespoke Research)

    Nearly 2,400 companies have reported earning since the Q1 2015 reporting period began on April 8th. For all companies that have reported across sectors this season, 60% have beaten consensus EPS estimates, while 49% have beaten revenue forecasts.

    The earnings beat rate is about inline with the historical average, while the revenue beat rate is about 10 percentage points lower than the historical average.

    That's a negative for corporate America as we enter the middle of 2015, that the market is now wrestling with.

    In terms of earnings beat rates, the Energy and Materials sectors have seen the weakest beat rates, while Technology, Consumer Staples and Consumer Discretionary have the strongest beat rates.

    Regarding revenues, Energy, Materials and Utilities have the worst beat rates, while Technology and Financials have the best.

    The Financial sector stands out because its revenue beat rate is strong while its earnings beat rate is weaker than market average.

    Health Care stands out as well with both solid earnings and revenue beat rates.

    I'll add - In my view, Healthcare related stocks should be an oversized weighting in an investors holdings. After all, these companies aren't subject to how many widgets are produced, how many homes are built, cars manufactured and the like, consumer whims ,etc., etc. Yet many disdain the large cap biotech growth companies that are a integral part of the healthcare sector.

    A breakdown - S & P 500 companies vs ALL companies reporting

    2,400 companies that have reported versus the 423 S&P 500 companies that have reported. The earnings beat rate for S&P 500 specific companies is much higher than the earnings beat rate for non-S&P 500 companies. For all companies that have reported, the beat rate is 60%, but it's 67% for just the S&P 500 companies.

    A reason to look at large cap healthcare ----

    80% of Health Care companies in the S&P 500 have beaten EPS estimates, while the beat rate is just 62% for all Health Care companies. I reiterate my bullish stance on companies like CELG & GILD

    The spread is the same for the Energy sector - 72% of S&P 500 Energy stocks have beaten EPS while just 50% of all Energy stocks have beaten EPS. So one can conclude that the large cap oil names is another place to look for opportunity. OXY, CVX, XOM will also offer good yields.

    Interestingly, there is virtually no difference in the earnings beat rates for S&P 500 and non-S&P 500 stocks in the Tech and Consumer Discretionary sectors.

    Overall, the Health Care and Technology sectors have posted the healthiest results so far this season.

    Note that the reverse is true on the Revenue side of things. The "beat rates for S & p 500 names is lower than all companies reporting., This makes perfect sense since the multinationals in the S & P 500 were affected by the Forex issues with the rising USD.

    The Economy

    Last Friday's Industrial Production (NYSE:IP) report for the month of April showed a decline of 0.3%, which was notable in that it represented the fifth straight monthly decline in this indicator.

    There have been plenty of other periods where we have seen such extended declines, all seemingly precursors to a recession. All in all, IP in the current streak is only down 1.0% from its high, whereas in each of the prior streaks IP was down a median of 6.26%

    So what does this tell us about the current period? While the relationship between five month declines and recessions is alarming, there are a number of important caveats.

    For starters, Industrial Production measures activity in the manufacturing sector, and that sector's weight in the overall economy has consistently declined over time. IP covers activity in the manufacturing, mining, and utilities sectors, those sectors have seen their overall weight in GDP almost cut in half from a peak of 32% in 1953 down to 16% in 2014. That is food for thought and demonstrates the danger of over reacting and running with a "headline".

    So while weak exports due to the strong dollar and the crash in energy prices have hurt the manufacturing sector, the rest of the economy looks to have fared a little better.

    This can be further illustrated in the recent moves in the ISM Manufacturing and Non Manufacturing indices. While the ISM Manufacturing index has seen a significant decline from 57.9 down to 51.5 in the last six months, the ISM Non Manufacturing index is actually up over that same time period (56.9 to 57.8)!

    When oil prices started declining late last year and the dollar started rising, it was widely expected that some areas of the economy would benefit while others lost, and the action in the ISM indices clearly illustrates this.

    That being said, I think it's way too early to extrapolate the current five month streak of declining IP and say it is the beginning of a recession. I'll be called a 'cheerleader " and a perma-bull for that statement, BUT I don't see other evidence or data points to suggest the economy is ready to totally roll over.

    To that end, Housing starts surprised with a big surge for the April Numbers. Not a huge surprise to those who were hanging their hats and theories that the poor "Starts' in the March period were hampered by weather. This report surely lends credence to that theory.

    Building permits rose more than expected in April, largely reflecting the normal volatility in the multi-family sector. Single family permits, the key figure in the report, rose 3.7% (to the highest level since December), reflecting a further recovery from weather-related weakness in the first two months of the year. Permits were higher in all four regions

    +7.1% in the Northeast, +1.0% in the Midwest, +3.1% in the South, and +6.0% in the West.

    You should be aware that the housing "starts" data can be unreliable at times, that building permits are reported much more accurately than starts, and that April construction figures were expected to reflect a further recovery from bad winter weather. However, the large jump reported in permits was eye-popping.

    Economic data that came out on Thursday was weaker than expectations. Initial Jobless Claims were a bit higher than expected, Existing Home Sales a bit softer than expected ( note that it was to less inventory, not demand) and May US Markit PMI Manufacturing data came in at 53.8 vs. expectations looking for a 54.5 print. Nothing earth shattering here.


    We can now add the Japanese economy to the list of positives from the Eurozone that I reported last week. 1St Quarter GDP there rose at a 2.4% annualized rate, beating expectations.

    The Technicals -

    Despite the market being in drift mode for the past nearly three months, and a 150 point trading range for the past seven months, the bull market continues. The wedge pattern shown below has been broken to the upside, but as stated earlier not very convincingly. Medium term support remains at the 2085 and 2070 pivots, with resistance forecasted and pegged @ 2131 and 2198 pivots.

    However before we get too carried away here, a test of support and the possibility of testing the 2040 level on the S & P may be in the cards. If we do drop and test support levels, I believe we can see new highs develop down the road.

    After highlighting the negative divergence that the DJ Industrials has shown for a while now, I would be remiss if I did not comment on what the situation looks like today.

    That is because the Transports did violate the 8580 support level that I penciled in back in April.

    I was prompted by a fellow participant here on SA to check out the action in the transports versus the recent moves in WTI.

    I came up with the following:

    DJ transports on Jan 2 was 9098, today 8500 down 6.5%

    WTI (from EIA data) Jan 2 $52.72 now $59.8 up 13% and if you look at when oil cratered in the 4th Q '14 from $93 down to $53 the transports traded in reverse of that move and rallied from 8496 to 9098

    So it does appear traders are NOW fixated on WTI when valuing the transports. That wasn't the case in early 2014 when the DJ 20 rallied from January 1 (7287) to September 1 (8496) or 17% while WTI on January 1 was $92 and on September 1 was $93 , and during that time frame WTI traded up to $107

    A totally different mindset - OR - are transports just being re-assessed after the big upward moves in 2013 (38% ) and 2014 (25%) that I've mentioned in past missives.

    Very interesting for sure and I don't see the transports caving the entire equity market as other sectors have taken over as leaders.

    Crude Oil

    Plenty of the cries (again) for 'oil " debt issues to rear their ugly head. Of course the first sign of any weakness like we saw earlier in the week gave a shot of adrenaline to the folks that are calling for oil stocks to be sold. I might add it's the same voices that called for panic selling in the sector at the beginning of the year. That was just about the same timeframe when many savvy investors were putting energy names IN their portfolios.

    The Technical side of the story ---

    My take -- If any weakness presents itself it is merely the fact that Crude oil is simply consolidating a 40% move off of the lows. There is nothing "magical " or 'telling" about that development.

    & On the fundamental side ---

    I have always maintained, that many analysts seem to get the demand side of the equation wrong. The headline that the Saudis just exported crude at a level not seen in 9 years, and this report about a Chinese deman surge seems to add more strength to that side of the story.

    For those who like to track the "whales" when it comes to investing, here is an interesting position just added by one of the best -- Seth Klarman

    "New Stakes" from his recent 13f filing:

    Pioneer Natural Resources: PXD is a fairly large (top-five) holding - It's 8.70% of his US long portfolio stake established this quarter at prices between $135 and $167. The stock currently trades well within that range at $155. For investors attempting to follow Baupost, PXD is a good option to consider for further research.

    I bring up this stock because it seems many "Short sellers" have ramped up their rhetoric following in the footsteps of Mr. David Einhorn and his recent presentation dissing the U.S. fracking industry. It's simply more pundits acting like parrots and attempting to mimic his ''call".

    While I have the utmost respect for Mr. Einhorn and his accomplishments, I am always wary when a public presentation is made by a "short seller". Of course these "public spectacles" are always done AFTER their position is in place.

    I have owned PXD in the past, suggesting purchase in the $175 - $180 level in 2013. It advanced to the $230 level, and of course like all other E & P companies in the Oil sector succumbed to the precipitous drop in Crude.

    So while many are shorting here along with Einhorn in the $150 area it will be interesting to see how this plays out. I believe the 'short " story is flawed and IF I had to pick a side I would be leaning to the "Long" side of this argument. Knowing full well that Mr Einhorn will be back to toot this horn again on the state of the U.S. oil fracking industry and perhaps put more pressure on these stocks.

    On the one hand we have someone quietly building a position in what could be seen as an undervalued situation. While the other side is making public presentations after establishing a position on the "short side" to ramp up the negativity and sell the "agenda".

    As always, be wary of what a "short seller" is "selling" .

    Alibaba - BABA

    I've been a supporter of this story for a while, specifically mentioning the shares last week

    Alibaba - - has broken it's recent price downtrend when the price jumped from $80 on its latest solid earnings report. It's now up 10% since then, and I believe we are in the first inning of this game. I am involved for the Long Term, the shares look poised to trade up to the $90 -95 level.

    That level has been achieved with a close this week @$93. I am increasing my short term price target to $96- $98. BABA is part of my 2015 portfolio "Ideas" playbook.

    It's wise to keep looking at situations that have merit and don't marry the fact that we are at all time highs to a strategy that stops looking for those opportunities.

    Best of Luck to all !

    May 23 9:10 PM | Link | 2 Comments
  • "Cape Shiller PE", "Buffet's Market Cap To GDP Ratio" - Is The Equity Market Overvalued ?

    Oh, the "overvaluation" headlines, they have been, and continue to be everywhere.

    Lets take a look at two of the most popular "overvaluation" metrics that have been presented by some market participants for quite some time now.

    It's time for me to once again dispute the utter mention of the CAPE Shiller as a tool for valuing the equity market.

    Cape Shiller - CAPE (Cyclically adjusted PE)

    Adherents of CAPE were telling anyone who would listen that US equities were as much as 40% overvalued as of July 2009, some 12,000 DJIA points ago. It is THE metric the bears favor, and have been misled by for years now.

    For the past 25 years, the Shiller ratio's signals have been almost uniformly wrong. Since 1989, the S&P 500 has multiplied eightfold, while total returns, including dividends, have increased the value of an average equity investment 12 fold.

    Investors who followed Shiller's methodology, however, would have missed out on almost all these gains. For the Shiller price-earning ratio showed the stock market to be overvalued 97 percent of the time during these 25 years. Even during the two brief periods when the Shiller ratio was below its long-term average - in early 1990 and from November 2008 to April 2000 - it never sent a clear buy signal.

    Here is why it has been and always will be wrong for use as a tool in valuing the stock market.

    The Shiller CAPE , is a cyclically adjusted PE ratio that takes the trailing ten years worth of data in the hopes of smoothing out the expansions and recessions over the course of the cycle.

    Here is an example that many of us lived through and can relate to.

    Corporate earnings over the past decade have clearly been negatively influenced by three, once-in-a-lifetime events: the bursting of the technology and housing bubbles and the Great Recession. That the S&P 500 is currently priced near its all-time record high of 2,125 implies average trailing 10-year earnings of about $78 per share using the Shiller methodology.

    But the S&P 500 actually generated earnings of $113 per share in 2014, and the estimates are for $123 in profits for 2015. So it appears that the Shiller P/E intentionally underestimates earnings by about 50%, because its variables fail to smooth or normalize earnings to account for these cyclical troughs.

    Despite the devastating collapse of the housing market and the Great Recession, the S&P 500 has doubled over the past decade. But just as it has done for 25 years the CAPE's inflated relative valuation signal would have kept investors OUT of the equity market, depriving them participation in one of the greatest value creating eras in stock market history.

    The CAPE assumes a normal business cycle. I don't believe I will get much of an argument from anyone when I state that the period from 2007 thru 2009 was anything but normal. Because of that fact, the mid cycle recovery is going to be much longer than your "typical' business cycle.

    When someone mentions CAPE Shiller as a tool to value the stock market, RUN, and don't look back.

    Another favorite of the naysayers is the constant quoting of Warren Buffett's favorite stock market valuation tool,

    ""The market capitalization to GDP ratio.""

    Now I don't mean to dismiss Mr Buffet and his thoughts on this approach to the equity market. But, I believe other factors now make this method of valuation questionable. However, many still staunchly use this tool to state the market is in fact overvalued.

    Missive from Cumberland advisors; (With my thoughts thrown in)

    The longer-term trend level of S&P 500 value to US GDP is about 95%. The current level of the S&P 500 is about 105% of GDP. So at first view it would appear that the US stock market is richly priced, but not by very much.

    But history suggests that "headline' type of analysis may not be really complete. The range of about 35 points from peak to trough in the ratio of stocks to GDP has held roughly constant for the last century.

    The 1929 high was an extreme overshoot. The World WarII-era, 1942 low was an extreme undershoot; it occurred after Pearl Harbor and before the Doolittle bombing raid on Tokyo. So at today's 105% we are not much above the range.

    But something else has happened since the 1982 low. The foreign-sourced profit share of American corporations has risen from 10% to 30%. Thus an additional 20% of profits now being earned by American corporations originates from their activity abroad.

    However, US GDP does not include the foreign GDP that is the source of that additional 20% profit share. In other words, our domestic GDP generates only 70% of profits; thus using GDP alone to value the stock market is ignoring the growing foreign GDP that has become very significant.

    What can be inferred by that presentation?

    The Negative story ---

    Maybe the current level of stock prices is forecasting that the profit share from foreign sources is going to decline abruptly, while the domestic share is not going to grow.

    That is possible, but I do not see any forces in place to disrupt earnings to that magnitude to make it happen. Maybe the taxation of American corporations is about to go up significantly so that after-tax profits will decline. That is possible, but is that really likely ? I don't think so. We have the highest Corporate tax rate in the world. Many are talking about decreasing our burdensome taxation of U S corporations.

    Now the positive set-up ---

    And in my view the more likely scenario based on history. The profit share from abroad will continue to grow, as it has for the last 30 years, and that US corporations will continue to gain global market share. Or, at least, we can infer that they will hold their own. They may gain by acquisitions, as we just saw with Monsanto. Or they may gain by market penetration, as we just saw with Apple in China & elsewhere around the globe.

    How they gain is not the important issue from the perspective of the stock/GDP ratio. As long as they gain, this measure of stock market value remains a critical macro indicator. If these assumptions are close to being right, the adjusted trend for the stock/GDP ratio would actually be below the current level rather than above it.

    Adjusted for the profit share change, the stock market is fairly valued, not richly priced. And IF the foreign-sourced earnings trend continues upward, the S&P 500 Index could easily go higher than it already has.

    And maybe THAT is what the market is also seeing, that many can't comprehend as they stand and watch the S & P go higher. All the while scratching their heads over the recent economic news here in the U.S., which has been tepid at best.

    Please take a look at the presentation I rendered just last week on the recent "positives " from the Eurozone.

    Allow me to throw out some additional thoughts with comparisons to historical norms.

    Now lets take a look at the environment as it exists today and compare it to "history" to help determine the markets valuation.

    Since 1960, Treasury yields have ranged from 15.7% in 1981 to 1.4% in 2012, with an average of about 6.5%. Benchmark 10-year Treasury yields are now currently at 2.20%, which is some 65% below normal. When you plug these metrics into the "Fed model," the S&P 500 is 59% undervalued relative to Treasury bonds, using trailing P/E's.

    Same story with inflation. Since 1960, the core Personal Consumption Expenditure (PCE) index-the Fed's preferred measure of inflation-has ranged from 10.2% in 1975 to 0.9% in 2010 on a year-over-year basis, for an average of 3.3%.

    Core PCE is currently running at 1.3% through March 2015, 60% below normal. Using the so-called "Rule of 20" methodology, below-trend core inflation at current levels would translate into a forward P/E of about 18.7 times, which suggests that stocks are about 8 and 12% undervalued, respectively, on estimated 2015 and 2016 EPS.

    In summary, over the past 55 years, the average trailing P/E for the S&P 500 is 16.5 times, with average benchmark 10-year Treasuries yielding 6.5% and average core PCE inflation at 3.3%.

    But with interest rates and inflation now well below normal at 2.20% and 1.3%, respectively, I am comfortable targeting above-average P/E's in the upper teens on forward earnings. So far the market is agreeing with that assessment. No, this it isn't wild euphoria that we are witnessing.

    Stocks are no longer as dirt cheap as they were at the bottom of the Great Recession with an 11 P/E. And they shouldn't be after the run we have just witnessed.

    BUT, given the relatively benign levels of both interest rates and inflation, particularly when compared with the return potential of other asset classes, such as cash and Treasuries, equities offer moderately attractive valuation prospects over the next 12 months or so even at S & P 2120.

    I have been and continue to position myself using what I feel are the tools which reflect the present environment we are in.

    All the while dismissing the theories and tools that have not worked and are ignoring key elements of what is happening in the global world today out of the equation.

    Best of Luck to all !!

    May 20 7:00 PM | Link | 2 Comments
  • May 16th- Disappointing Retail Sales - S& P At A New High, Reminder- It's A "Global Economy"

    Plenty of folks seem to be permanently grumpy about the state of the economy. I try to be the guy trying to highlight some of the good in a pretty weak recovery, but this economy just can't get any respect. I find myself thinking about this on the heels of the April employment report which was pretty good. But if you look at the news headlines it "missed expectations" and was actually a "net negative" because of past revisions. And that seems to be the story of this recovery.

    To further illustrate that the pessimistic point of view is still pervasive, here is a comment I saw on SA right after that jobs report. The negatives always are highlighted

    "ONLY 85k jobs a month ago? Please give me a break... No one is talking about this though ... What a joke..."

    So while there are some bright spots out there the majority seems to continue to convince themselves and anyone that will listen, that things just aren't that good or that the next big crisis is right around the corner. The scars of the financial crisis continue to plague many and those memories run very, very deep.

    While I have highlighted the many "positives" on this blog over time, citing them as reasons to stay in the Equity market during this bull run, admittedly there are issues that need to be reconciled by the markets.

    In what has become a recurring theme lately, Retail Sales for the month of April missed expectations. While economists were expecting sales to grow 0.2%, they were actually unchanged versus March. Ex Autos and Ex Autos and Gas, the miss relative to expectations was even larger at 0.4 percentage points. With this week's weaker than expected report, headline Retail Sales have now missed expectations for five straight months, which is the longest string of consecutive misses since at least 2001.

    A breakdown by Market sectors from Bespoke

    Sectors that saw the biggest share growth in retail sales this month were Bars and Restaurants, Motor Vehicles and Non Store Retailers (Online). In the case of autos, that sector now accounts for more than a fifth of total sales. Americans are also now going out to eat more than ever as Bars and Restaurants have seen their share of total sales rise to a record 11.73%.

    With this latest disappointment it ramps up the "woes of the economy " barrage from the "Bears", and as they see it, it has to send the major stock market averages lower.

    But Wednesday's stock market action with the S & P "flat" on the day on the soft Retail Sales numbers left a lot of people scratching their heads. The follow through to new highs for the S & P on Thursday and Friday, left many in total disbelief.

    I don't think it's time to throw in the towel on the economy just yet.

    This week's National Federation of Independent Businesses survey measuring Small Business Optimism beat, reading 96.9 versus 96.0 expected and 95.2 previous. The beat was welcomed given the relationship between small business optimism and the medium-term growth trend.

    Optimism, growth, and small business hiring all tend to move in the same direction, while having similar inflection points. Therefore the decent bounce-back in optimism suggests first quarter growth's disappointment should be quite temporary as the trend remains positive

    Small businesses have indeed been an important contributor to payrolls growth. Not only did they add jobs much faster than large businesses at the height of the last economic cycle, they cut fewer jobs during the recession and have added jobs much faster in the ensuing recovery; per ADP data they're 42% of total employment and hitting new highs each month in terms of total employed, while payrolls at large businesses are still 3% below all-time highs.

    The Global Economy

    While many are fixated on the headlines that are garnering all of the attention, In my view here is what some market participants are focused on and "why" the S & P is "hanging" in there to the surprise of many.

    • The Eurozone

    Last week, I mentioned the Eurozone as potentially giving investors some positive surprises this year. The Eurozone GDP outpaced the U.S in the first Q, posting its fastest rate of growth in almost 2 years.

    U.K unemployment came in at the lowest level since the financial crisis.

    U.K. Industrial Production surged in the latest report.

    Italy has joined the "expansion" party, and not to be outdone, France's economy outpaced both Germany and the U.K.

    Spain just reported its seventh consecutive gain in GDP.

    Shhh, don't tell anyone , but the "worries" of a collapsing Global economy just got some relief. In my view THESE developments are part of the reason for the resiliency in the U.S. markets.

    • The U.S dollar

    is now down 5 straight weeks. The headwinds on multinational earnings just got a "breather'.

    Back here in the U.S.

    Allow me to suggest some other data points back here in the U.S. to consider.

    The naysayers have pounded the theme that its a global economy when the eurozone was falling apart stating that investors need to pay attention to that fact. Now that Europe is slowly improving, many of them surprisingly can't comprehend the positives it brings to U S corporations and their profits. So they sit and wonder how the S & P doesn't crater when a retail sales number disappoints.

    The stock market looks ahead and does NOT care about the absolutes of anything, it merely is looking at "change". At the moment it sees the examples I mentioned as a change for the positive on the "Global Front".

    Over the course of the last 7 years with the inception of QE, there has been a series of excuses for why the horrible inflation predictions turned out to be so bad. The most prominent excuse is that the bad inflation predictions weren't wrong, but merely haven't been right "just yet".

    This is a classic move in economics & to some extent "human nature". If you want to ensure that you'll never be wrong you make a prediction, but never apply a time line. That way you can always kick the can on your prediction and say you haven't been wrong, but merely early.

    Sadly, this IS the modus operandi of many authors and participants here on SA and elsewhere.

    We can also extrapolate the 'inflation" example to the major Stock market averages as plenty are still on the 'crash is yet to come" bandwagon. In early 2013, it became fashionable to say that U.S. stocks were reaching extreme levels of overvaluation. Since the start of that year stocks are up 55%. If you missed out on that rally because you got scared out of stocks, that's about five years' worth of average historical market gains that were missed.

    Listening to them is a wonderful way to go bankrupt in the financial markets and I suggest this way of operating is deployed by morally bankrupt individuals.

    According to some of these these experts when asked -"now where did the inflation that all were counting on go" ? The answer---inflation is all in stock prices, right? This is the most common retort about where the inflation went. The theory is that it hasn't gone into consumer prices because it's all gone into stock prices.

    Absurd. Yes, it's true that the supply of bonds has been reduced which has created a portfolio rebalancing effect thereby increasing demand for other assets. But the key to rising stock prices in the last 7 years has been a boom in corporate profits, not QE. After all, please just ask yourself what would have happened if corporate profits had continued to sink like a rock after 2009. Would the rally in stocks really have been all that sustainable even with QE? I seriously doubt it.

    The reason why QE hasn't resulted in high inflation is because it does not have a powerful transmission mechanism through which it can directly impact private sector balance sheets. The current asset swap program simply changes the composition of the private sector's balance sheet and relies on various side effects (like wealth effects) to filter through the economy. These side effects alone are clearly not enough to cause surging consumer price inflation and I am quite confident that we don't have to worry about some "lag effect" from QE here. Yet as I have stated here recently, many are still harping on and resurrecting their ill fated "inflation" theories. Seven years should be long enough for us all to begin questioning the logic of so many of these flawed arguments, including the wizards presenting them now.

    A message for the morally bankrupt folks that are pounding the table for investors to beware of Inflation:

    The April core PPI report and this headline - "The Producer Price Index for final demand fell 0.4 percent in April".

    I'll add ---

    The PPI Report and the Jobless claims data, taken together, suggest an improving labor market that is not currently creating inflationary pressure, a rather favorable combination for equity investors.

    Lets not forget about the cries and headlines around showcasing the "fear" of rising interest rates around the world and what the global bond markets are telling us.

    I can write three more paragraphs here, but why waste time on these pundits. Let me just summarize my thoughts by saying these are the same folks that were warning that the global fixed income markets were signaling recession/depression when the 10 yr was 1.66%.

    Now with the 10 year @ 2.27% its fear mongering at its finest. Let me remind everyone that the 10 Yr was 3% at the start of 2014 and spent most of the year exactly where it resides today .. recall that 2014 wasn't such a bad year for equities. Conclusion: its all "noise".

    When I think about drivers of market returns, there are three main components investors should consider - fundamentals, sentiment and trends. I think investors have a reasonable understanding of valuations (although many place too much emphasis on them) and people are starting to come around to the importance of behavioral finance. It's the power and magnitude of market trends that remains under-appreciated.

    In early 2013, it became fashionable to say that U.S. stocks were reaching extreme levels of overvaluation. Since the start of that year the S & P is up 55%. If you missed out on that rally because you got scared out of stocks, that's about five years' worth of average historical market gains that were missed.

    It would be a tough sell for anyone to say that stocks are "cheap" at the moment. They're not. But they shouldn't be cheap after one of the strongest bull markets in history. Investors need to reset their expectations if they think the types of gains we've seen since 2009 are sustainable. Hence my approach this year to "take what the market gives you".

    Investors have become infatuated with calling the next correction, crash or market top because so many lost money during the last crisis. The next time the market tops out it will seem so easy to have predicted it after the fact. Getting there ahead of time is the tricky part that no one has quite figured out yet with any precision.

    Technically Speaking :

    While Friday's close was another all time high for the S & P @ 2122 the average resides at the top of the range and begs the question will we really break out to the upside or drift lower ? Time will tell.

    The much talked about, troubled DJ Transports once again bounced off support.

    Perhaps the trading range scenario I penned earlier will be the way the Average consolidates the 2 years of above average gains.

    Individual Stocks

    This past week I added Occidental Petroleum - OXY @ $76.06. It was added as a Long Term hold as in my view it is a dividend aristocrat. A 3.8% yield , a 10 year 17% dividend growth rate, no debt (due to their recent spin off's) and generating more cash flow than any of its peers. The dividend was just raised in an announcement on May 5th. Given the state of the Oil business that is telling.

    I also added ARRS - @ $33.98 as an intermediate (6 - 9 Months) trading position. Arris Group is a global communications technology company, operating in three business segments: Broadband Communications Systems; Access, Transport & Supplies, and Media & Communications Systems.
    They also deploys systems and software for content and operations management ,including video on demand, (NASDAQ:VOD)
    ARRIS estimates for 2016 are sales of $5,731 million and EPS of $3.27. That equates to a forward PE of just over 10x .

    Shares jumped over 20% to $37 when the company announced the purchase of Pace a U.K. based company that provides similar services and products in the United Kingdom. Since then they have cooled off retreating the $33 level, and providing a good entry point. From here there could be a move to the low $40 level.

    I have been waiting for positive price action in DAL and maybe the shares will finally start to gain momentum to the upside. Headlines from this past week could serve to be the catalyst.

    ""Delta Air Lines to return additional $6B to shareholders through 2017""

    Delta's board announced a new $5B share repurchase program, to be completed no later than December 31, 2017. In addition, the company's quarterly dividend will increase by 50% to 13.5c per share beginning in the September 2015 quarter. These two programs are expected to return more than $6B to shareholders through 2017. Going forward, the company intends to return at least 50% of free cash flow to shareholders through 2017.

    Gilead - GILD also broke out and has now tacked on 9% in the last seven trading sessions. I remind many that this isn't your bubble inflated 20x sales biotech. It's often thrown away when the pundits come out and tell us how the Biotech industry is overvalued and should be avoided. GILD sells for 10x earnings.

    Celgene- CELG is another name that I added recently @ $109 and it looks like good value in the $113- $114 level. A biotech company with a great pipeline of drugs that grows earnings in the 25-30% range.

    Alibaba - BABA - has broken it's recent price downtrend when the price jumped from $80 on its latest solid earnings report. Its's now up 10% since then, and I believe we are in the first inning of this game. I am involved for the Long Term, the shares look poised to trade up to the $90 -95 level.

    For those looking for yield,

    MEMP has come back down to the $15 level and looks attractive with it's 14% yield. HCLP is also oversold in the $31 area. CCLP remains in a solid uptrend at the $20 level and yields 9.8%.

    Anyone following the 2015 Stock Ideas portfolio-

    I sold the USAK position this week. The stock has broken down technically, and it was decided to take the $5 loss on the position.

    As always, the intent is to be transparent, you wont hear ambiguous commentary like - "I have a position in this" or "I shorted some of that".

    ALL of the holdings mentioned will be followed up with commentary whether up or down. With this loss on USAK, the three positions that have been sold this year have produced a gain of 9%. Look for a complete update on the portfolio in a week or so.

    Best of Luck to All !!

    May 16 8:53 AM | Link | 11 Comments
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