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  • Who's Got The Bigger Story: Sports Or Financial Markets? (A View On Recent Markets Selloff)

    The stories aren't too different! Denver Broncos' Super Bowl performance and today's financial markets' performance can't be described in any flattering terms that I'm aware of!

    Well, at least the markets showed up to play.

    Ok….enough w/metaphors.

    Some thoughts on recent market moves:

    After January's 5% drop in the Dow, today's 2% selloff is bringing the stats awfully close to the 10% level that market pundits dub 'correction' territory. Given the strength of today's move, both breadth and depth, the 10% mark doesn't seem too unreasonable to consider.

    In my view, this corrective move is long overdue.

    As I argued for some time in the final months of 2013, the market was reaching levels where valuations were supported by far too optimistic views of future earnings growth, and far too mild perceptions of global headwinds. The terms that I've been using to describe our portfolio positions have all included some version of 'cautiously optimistic', or 'defensively optimistic', noting that, in general, the world has become a healthier economic place in recent years, with global companies facing superb opportunities for new markets (hence "optimistic"), but plenty of reason to be sober about those growth prospects and to not price in overly optimistic views into equity valuations (hence, "defensive"). Earnings season has been one of the key catalysts for the recent selloff, adding to the already deep concerns that markets have for the impact of Fed tapering on Emerging Market countries. Both issues have hit with a vengeance since 2014 began, first with earnings being ok but underwhelming and often coming with bleak guidance for future prospects, coupled with several Emerging Market countries continuing to see tapering inspired capital flight, which triggered the falling dominoes of sinking currencies, more stress on funding current account deficits, rising imported inflation, and counter-cyclical central bank policies as defensive responses.

    The question is where do we go from here? Is this the beginning of a 2008-style market rout? Or is it a healthy re-calibrating of equity valuations with global realities?

    At this time, I believe it's the latter. In general, company balance sheets are in excellent condition, having used the past few years of low-interest rate environment to either pare down debt levels or to refinance to lower costs. Operating leverage is also quite strong, as companies have cut costs and forced themselves to operate 'lean and mean'. The inflating impact on margins has been a good thing. But among the 'defensive' arguments is that companies can only squeeze expenses for so much and for so long. At some point, if there isn't sufficient revenue growth, then it's likely that margins will shrink, along with EPS, and then equity prices.

    The selloff since New Year's, in my view, is creating equity valuations that are more in sync with the combination of global opportunities and global challenges. With the historically high levels of cash that I've been holding in the portfolios, among other things, I've been adding to companies in the Discretionary space that are likely to benefit from a growing middle class in many EM countries around the world. I'm continuing to look for and add to companies that play into the US energy infrastructure buildup that is likely to underpin the growth of domestic based sources of all kinds of energy. I'm looking to add to key players in the alternative energy space, in particular, solar. I'm focused on the tech sector, with a preference for companies with a global reach, masterful innovation skills, and likely to be at the forefront of next-generation products and technology.

    These kind of market selloffs are not fun to experience. And the day-to-day mark-to-market on positions can be humbling. But unless signs emerge that would materially alter the view that I've expressed above, I'm viewing the pain of recent weeks as an opportunity to add value to the portfolios. As things evolve, I will keep you posted, and as always, if you have any questions, please let me know.

    Best,

    Ed

    Please continue to visit Soos Global Market Musings for updates.

    (Sign up to "Follow by Email"! And share with others!)

    (Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
    Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
    Additional Disclaimer: currently long many stocks/ETFs. Positions may change at any time without notice.

    Feb 03 6:00 PM | Link | Comment!
  • More Actors On Stage, But The Real Curtain Goes Up Tomorrow!

    Market Musings...Thursday, January 9, 2014
    Lots of news for markets this morning (see below), mostly of the 'good' variety (mostly).
    The preponderance of data is seemingly favorable to equity markets, and that's an encouraging way to go into tomorrow's employment data. Earnings season is already underway, but will kick off unofficially tonight with Alcoa's release, which will be followed in coming days/weeks with a barrage of earnings by other companies that need to be watched closely for top-line growth in sales and bottom-line earnings growth, and in between, what is happening to margins!! Many market commentators routinely focus on the overall market P/E being at or near historical levels, and conclude that there's plenty of upside for equity markets, even from recent record highs, as long as earnings grow. But one risk that could unravel that view is if companies face modest sales growth and can no longer squeeze expenses enough to keep margins as high as they've become, and therefore not be able to drop as much to the bottom line. Furthermore, much of the EPS data is benefiting from the abundance of stock-buyback programs which reduces the number of shares outstanding and in turn raises the EPS ratio which in turn lowers the P/E ratio.
    So when the curtain comes up on corporate earnings for Q4 2013, that's high on the list of things that I'll be focused on: sales growth, margin compression, earnings, stock buyback announcements, etc. Stay tuned for more detail, especially on specific portfolio holdings, in coming days, and in the meantime, please share your thoughts either broadly by commenting below, or privately w/me through the 'chat' or 'email' features on the right side of this blog.
    Thanks!
    Ed

    • China's CPI inflation was less than expected. Inflation has been a persistent yet sporadic problem in China, often led by spikes in food prices. This abated in today's report and many believe it has to do with efforts that the central government has already made to crack down on everything from inefficiency to fraud. The markets, however, appeared to shrug off the good news, as some pointed to soft PPI, a measure of wholesale prices, as deflating 1.4% y/y, raising concerns about the real strength in the Chinese economy.
    • Indonesia's central bank held rates steady, which while expected, is in stark contrast to the several rate hikes that the central bank has had to do since June 2013 in order to defend its currency and combat inflation. Indonesia, and other countries such as India, are important to watch with regard to the impact that US tapering has on capital flight from their countries, depreciation of their currencies, and in turn, the counter-cyclical policy responses that their central banks are forced to do. Also of note in Indonesia was their successful bond sale this week which met w/huge demand, mostly from US investors. According to the FT, January is already the busiest month for Asian bond issuance, particularly helpful to countries who are dealing w/current account deficits!
    • Europe is enjoying a plethora of good news, starting with Germany's stronger industrial output data for November. In addition, there were stronger than expected readings on Eurozone confidence surveys of both consumers and businesses. Add to that, a bond auction by Portugal that met with enormous demand, allowing the yields to fall further, and raising prospects for Portugal to exit their bailout program on schedule. A similar statement could be made about Spain's bond auction today: strong demand and record low yields! And both the ECB and Bk of England left policies unchanged at their respective monthly meetings today.
    • US, while waiting for tomorrow's all-important Non-Farm Payroll number, got another uplifting employment data point with the decline in Jobless Benefits by 15k, beating estimates. That comes on the heels of yesterday's stronger than expected ADP numbers.

    Please continue to visit Soos Global Market Musings for updates.

    (Sign up to "Follow by Email"! And share with others!)

    (Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
    Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
    Additional Disclaimer: currently long many stocks/ETFs. Positions may change at any time without notice.

    Jan 09 3:36 PM | Link | Comment!
  • The Global Macro Theater...What's On Stage?

    Market Musings....Tuesday, January 7, 2014
    No earth-shaking events have occurred of late to alter the global macro view of a world that is growing, albeit slowly, held back by persistent hangovers of the ill-effects (high unemployment, troubled national budgets and debt levels, and abundant capacity under-utilization) of the 2008 financial debacle, along with geopolitical headwinds that keep tensions high in the energy-rich Middle East region, and more broadly in conflicts between China and Japan, or North Korea and South Korea. The flood-gates of global central bank stimulus have helped keep the global economic engine running, and while massive liquidity raises concerns about potential inflation, at the moment, there appears to be more concern about DE-flation than IN-flation! As such, the ECB and the BOJ are expected by most market participants to continue with their feet on the accelerator, while the Yellen Fed is expected to taper its tapering to a slow rate creep higher rather than a rate spike.

    China's recent PMI data, both for Manufacturing and Services, were below expectations and slowed from prior months, but still broadcast expansion. Couple that with the "Plenum" reforms which, while playing out over an extended period of time, are aimed at keeping China on a path for further re-balancing of growth towards domestic spending, less 'shadow banking bubble' risk, more financial discipline at all levels, and GDP growth at 7+%. Time will tell, and everything is in the execution of the plan, but if it plays out well, there's room for optimism that China could emerge in '14 as more of a global engine of growth.

    Japan's meteoric stock market rise in '13 has to be troubling to anyone who believes in "what goes up, must come down", but beyond simple truisms, the economic rationale might be that the equity markets have seemingly fully priced in a total and complete success of Abe-nomics! Any shortfall in economic optimism along the way, for example, after the imposition of the new sales tax this spring which could slow growth, might cause the equity markets to give up lots of the built-in success premium. Granted, US tapering, which is likely to keep the USD strong vs the Yen, should help Japanese exporters, but that theme has been the wind in the sails of the Nikkei to date. One has to wonder how much further a weak Yen can propel the Nikkei, especially when imported energy bills are climbing!

    Europe continues to ride the wave set in motion in the Summer of 2012 with Draghi's "we'll save the Euro at all costs" seeming guaranty. This extended period of relative calm in European markets, especially given how low rates have been, has helped on several fronts. Spanish and Italian 10yr yields have been enjoying levels at just over 4% for some time, helping meaningfully on their respective debt burdens. That said, the story of the Eurozone is really one of the Tale of Two Cities, with one "City" being Germany, reviled for relying on export growth for its own economic success and not doing enough to promote domestic spending, and the other "City" being peripheral countries (and France) who are still bogged down with fiscal deficits, huge debt overhangs and massive (and tragic) levels of unemployment. Can the Draghi parachute for the Euro continue to not only hold it up but also catch a rising wind gust to propel it even higher? And if it does, will that choke off exports from the EZ that are crucial for fiscal targets? How Europe has avoided the riots in the streets that we witnessed back in 2011 and to a lesser degree in 2012 is amazing, but just because it hasn't happened doesn't mean it's no longer a real risk to the European outlook.

    Middle East tensions won't help. Turkey is feeling the ill-effects of the Syrian civil war on its border, and Iraq is breaking down into heightened levels of sectarian violence, all while Israel and Lebanon have lethal clashes at the border, and while Iran continues to support Hezbollah and the Syrian Asad regime. Throw into the mix a rather violent war in South Sudan, and you have a heightened oil-supply-disruption risk, which given how dependent Europe, China and Japan are on Middle Eastern oil, could disrupt the current economic optimism.

    Collectively, the assessments above produce the cautiously optimistic view that we've had on equity markets for some time. The 'cautious' part of that view has had us holding higher levels of cash than we have historically. The 'optimistic' part of that view has had us investing in various global macro thematic value opportunities in a number of places such as the tech, energy and consumer discretionary sectors. Ultimately, how we pivot in terms of more or less 'caution' vs 'optimism' will be heavily influenced by earnings: what earnings expectations are priced into stocks vs what earnings are likely to be. We'll be sharing more on this as Q4 earnings season gets under way later this week.

    In future Market Musings, we'll discuss our investment themes in more specific detail and the positions that we've taken to express those views. In the meantime, we'd love to hear your thoughts! Please share them broadly via commenting below, or privately to us via the 'chat' or 'email' options to the right.
    Thanks!
    Ed

    Please continue to visit Soos Global Market Musings for updates.

    (Sign up to "Follow by Email"! And share with others!)

    (Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
    Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
    Additional Disclaimer: currently long many stocks/ETFs. Positions may change at any time without notice.

    Jan 07 11:36 AM | Link | Comment!
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