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Independent Financial Advisor / Professional Investor- with over 25 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Market Update 5/18 1stQ Earnings Wind Down  19 comments
    May 17, 2014 12:53 PM | about stocks: JPM, LAZ, BAC, C, AAP, CPA, CTRP, MU

    1st quarter '14 earnings reports are reaching their end with 464 of the SP 500 companies now having reported. Per Thomson Reuters, the y/y earnings growth for the SP 500 is +5.5%, far stronger than the 2.1% expected on April 1 '14, after the brutal Midwest and East Coast winter.

    The p.e ratio on the forward estimate as of Friday's close was 15.25(x). The PEG ratio remains at the low end of the recent range at 1.86(x).

    As I wrote last week, Technology and Healthcare are two sectors that are showing the best relative earnings growth since Jan 1, '14:

    Here is the progression of Technology and Health Care earnings for q1 '14 as of May 9th, April 1, 2014, and Jan 1, 2014:

    Technology: +9.3%, +2.5%, +7%;

    Health Care: +11.9%, +3.7%, +5.8%;

    Its easy to see, as of April 1, 2014, the consensus estimates had grossly underestimated growth for the two sectors.

    At the beginning of this year , estimates I was receiving from analysts I follow indicated that S & P 500 earnings could grow 9-10% in 2014. Those forecasts were ahead of consensus estimates that were being tossed around on the street.

    Now, after seeing the q1 '14 revisions and the expectations for q2 '14 remaining relatively stable, the last two - three weeks, I am starting to conclude the 9% + on the SP 500 earnings growth this calendar year, given the economic data, is doable.

    The 64,000 question is --what p.e expansion might we see on that 9% earnings growth ? That remains a mystery, as it usually does.

    In 2013, the SP 500 grew earnings 7% y/y, and yet the SP 500 increased 32% y/y. That of course was a great example of P.E expansion.

    So far this year, the market's flat return might well be a function of allowing earnings growth to catch up to the index appreciation, and has nothing to do with earnings forecasts for this year. In my view, that is quite healthy.

    To that end, The S & P 500 decided to break out from the trading range it was in with new highs recorded for the S & P 500, the Dow 30 and the Dow transports this past Monday.

    Since mid-April the S&P 500 has been "caught" in a 1.5% range while it churned along all within a 'hair" of those new all time highs. And as mentioned last week the carnage beneath the S&P was quite extensive. This "internal" correction, as I called it, may just have been what the doctor ordered to have the major averages break to new highs.

    The fundamental picture improves with two more positives that are signaling an improving economy:

    Small business lending surges Small-bank loans have risen 15.1% from their 2011 low to a record high; in contrast, large-bank loan growth remains sluggish. This new high in small-bank loans in part reflects the build-out of Middle America, i.e., the manufacturing and energy renaissance, with manufacturing employment expanding 5.6% from its early 2010 low, the largest increase in more than 30 years.

    In the face of significant regulatory/oversight headwinds that are particularly hitting large banks, the strength in small-bank lending is an important support for overall economic growth. Overall core bank lending continues to be healthy, with year-to-date bank loans up at a 7.4% annual rate. Consumer credit growth also is accelerating but continues to be concentrated in non-revolving student loans as banks' willingness to make consumer installment loans remains tepid.

    Overlooked by many, but just as important, A synchronous global economic expansion is occurring --- Spanish unemployment shrank by 111,000 in April, more than double consensus, prompting Prime Minister Rajoy to state the trend of jobs destruction has been broken. Spain's services PMI also jumped well above consensus to 56.2, the sixth straight monthly reading above 50 and the highest reading in more than seven years. French and UK services PMIs also rose, while Germany's slightly missed forecasts but was still a robust 54.7. Globally, 78.8% of PMIs were in expansion territory, with 70% increasing year-over-year.

    As usual, with the positives, comes the "wall of worry" comments from many, that stock & bonds can't go up together.

    Stocks and bonds are both in positive territory this year. Now many are suggesting that "something has to give". The suggestion is that "Bonds are trying to tell us something."

    This is because there is a belief by some that stocks and bonds must move in opposite directions because stocks are associated with risk and bonds are associated with stability.

    And it is true that bonds generally do very well when stocks fall. But that doesn't mean that bonds always fall when stocks rise and vice versa.

    Some people have a misunderstanding of the correlation between stocks and bonds. They aren't perfectly negatively correlated, which would mean one rises when the other falls. Stocks and bonds have close to a zero correlation historically, which means there is basically no relationship in their movements.

    So they can rise together, fall together or move in opposite directions with no real pattern. In fact, on average, they have risen together more than not.

    These are the percentages of time that the annual returns from the S&P 500 and 10 year treasuries rise in the same year by decade. Nearly 60% of the time both stocks and bonds rise in the same year at the same time.

    So one can draw the conclusion that Stocks and Bonds can rise together and maybe "nothing has to give " and bonds aren't telling us anything at all. And so the "wall of worry" goes on --

    I have heard from more than one pundit, that 'stocks" have performed best when leadership is coming from the small-cap "risky" names. With that, the cries came from many due to the weakness in the small caps - particularly the Russell 2000. (RUT) , that this would eventually "take down" the other averages.

    That said, the SPX has shown historically, and at present, that it can "hold its own" amid weakness in the risky names. I can go back to a year like 1994,where circumstances were similar as the "risky" names in the (RUT) carved out a bottom while the SPX was flat in that year.

    I will note that for the moment the RUT looks like it has potentially put in a "double bottom".

    Only time will tell if the (RUT) can stabilize here and push higher. With RUT support at the important 1,080 level as the index finally reaching official correction mode with last Friday's lows, it seems buyers have emerged. A follow thru here and this could add more fuel to push the other averages higher as well. A breakdown, and the bears may have their self fulfilling prophecy come true with a potential for weakness to spread to the large caps.

    From a contrarian perspective, the short-term sentiment backdrop is supportive of equities, as rallies usually occur when least expected. Retail players aren't expecting a rally, nor are option speculators, as is evident from the lack of equity call buying relative to put buying. And I mentioned two weeks ago, the "short" positioning of Hedge fund managers regarding the Russell.

    However, until this technical picture is resolved, I continue to believe the current market backdrop is a good one for employing a call writing strategy. On Monday the S & P hit a new high - plenty of volatility followed and with Friday's close the average had basically gone nowhere.

    I maintain a portfolio that highlights selling calls here on SA . So far it has generated approximately $24,000 in profits since June 5th of last year on an investment of $100,000. In comparison , the S & P is up 16.7% in the same time period. It is an actual portfolio, and the results are documented and updated as trades develop here on this blog.

    Selecting the right stocks and writing calls against that position can be like printing money.

    I was asked this past week if the latest Dow Theory buy signal signaled an "all clear" as we enter into the summer season. (By the way we just had another Dow Theory "buy" signal this past Monday) Just as I mentioned earlier, a "rally" can come when we least expect it, so too can we be sideswiped by a correction that can come "out of the blue". And we need to respect that fact.

    Added to the "mix" this week were bearish calls from Ralph Acompora & David Tepper, and of course they dominated the media headlines. However all throughout this bull market its is amazing how quickly mainstream financial media "pundits" or experts turn bearish. And so here we are once again with an underlying bearish tone out there.

    I am confident that IF we do get a correction of any magnitude it will NOT be caused by earnings.. As I mentioned earlier I am becoming more confident about the second half of this year regarding corporate profits.

    I continue to see plenty of "divergence" in many indicators I track and so it is extremely difficult to say if the next push will be higher or will we see another drawdown with summer doldrums approaching. Next week could be telling regarding the next market move.

    The way I am positioning my portfolio right now is to take advantage of the volatility and 'sideways' action of the market by selling calls to provide income.

    I am also initiating positions on stocks that are on my radar and "buy " list as they sell off due to volatility.

    (NYSE:AAP), (NYSE:LAZ), (NASDAQ:MU),(NYSE:CPA),(NYSE:RIG),(NASDAQ:CTRP) are all candidates .

    My call on the financials has been wrong to date, They have been laggards as interest rates have remained lower that anticipated and that is a negative for bank profits.

    However an "investor" has many assets working for them and others that they anticipate will also work for them in the future. I believe the bank stocks fall into this latter category.

    Admittedly, I was wrong with the rate environment staying at these levels for this length of time after the Fed initiated a reduction in their asset purchases. So be it, BUT with the banks (NYSE:C),(NYSE:JPM),(NYSE:BAC) at these undervalued levels, I suggest it is a time to accumulate, rather than avoid, as the present low interest rate environment won't be here forever, and that will play into exceptional earnings for these companies in the future. They are hardly overvalued here.

    Stay the course , best of luck to all !

    Disclosure: I am long JPM, LAZ, BAC, C, AAP, CPA, CTRP, MU.

    Additional disclosure: I am long numerous equity positions, all can be seen here on this blog

    Stocks: JPM, LAZ, BAC, C, AAP, CPA, CTRP, MU
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Comments (19)
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  • Robert Duval
    , contributor
    Comments (7852) | Send Message


    Balanced commentary.


    Couple of questions regarding possible summer events.


    One would be on Greece (Grek) -- in free fall. Any comment?


    Next would be on inflation expectations -- and do you see them becoming an issue and the Fed "behind the curve"


    I've read that view -- just very recently.


    One symptom would be -- as we move into summer driving season -- oil /gas prices getting too high. They are awfully resiliant.


    17 May 2014, 01:07 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10763) | Send Message
    Author’s reply » M,


    i suspect we can add Greece to the wall of worry - so far the other euro markets are pretty flat -- so that contagion seems contained for the moment..


    I have also read some articles and the inflation concern is out there and a big challenge for the fed.. It is something we all will have to watch ...


    Inflation has to be kept within the feds guidelines , and I believe if anything the threat of higher inflation is what may keep some of the fed officials up at night..
    17 May 2014, 01:19 PM Reply Like
  • Robert Duval
    , contributor
    Comments (7852) | Send Message
    Simple history would suggest the Fed will end up behind the curve.


    What is a little confusing as the CPI goes up are long treasuries going straight up. Strange.
    17 May 2014, 01:33 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10763) | Send Message
    Author’s reply » M,astarr


    thanks for stopping by


    We are in strange times , regarding the Fed - admittedly no one has ever been sown this road before, we are in
    uncharted waters - I'm holding out for "it all doesn't have to end badly" - we shall see


    17 May 2014, 08:49 PM Reply Like
  • Robert Duval
    , contributor
    Comments (7852) | Send Message
    Yes, definately.


    I am certainly constructive on America going forward -- but on markets I believe there will be -- likely -- an "digestion period" as markets are weaned from the influence of QE -- even if that influence is purely psychological.


    In the end I believe both the economy and markets will adapt and get through it -- but I wonder if they left the program in place too long, and PE multiples expanded too quickly.


    Combined with contractionary fiscal policy, a pullback seems like pretty good odds -- at some point.
    17 May 2014, 09:28 PM Reply Like
  • astarr66
    , contributor
    Comments (263) | Send Message
    " Stocks and bonds have close to a zero correlation historically, which means there is basically no relationship in their movements.". Excellent point!


    No mention your secular bull belief.....


    I look forward to your weekly market insights. Thanks.
    17 May 2014, 01:40 PM Reply Like
  • User 7415181
    , contributor
    Comments (1040) | Send Message
    Thanks for the weekly!


    For my 401k, I'll wait to the end of the month to make any changes, but right now I noticed that the relative strength of the Vanguard intl fund just passed the total market fund I've held on to for the last year (I assume because vtsmx also has a chunk of small cap in it). And their total bond fund just broke through the 300 sma to the upside. Weirdness! But your article explained reasons why just fine.
    17 May 2014, 03:00 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (3050) | Send Message
    F&G, good article.


    There are some cautious moves in the bond market, but at this point IMO the long term picture is still positive. Short term, we will see volatility. Plenty of opportunities for long term investors to continue accumulating quality companies on the dips. Stay focused on companies with low PE's but good long term growth. Like (BA) - up a lot in the past few months. They have 10 years of orders to fill folks. Yup. Ten years. (NOC) & (LMT) are doing good too. Foreign countries are replacing their old fighter jets? And the US keeps right on buying the latest ones too. Look at the other stuff (NOC) makes. Defense spending may be tightening but then we will just get more bang for the buck - notorious wastage in the defense contractor arena.


    It will be another few months before we will know who is right in the bond market, so the summer will be interesting. IMO, there is still a case to be made for the glass half full. With the election in India, good things will be happening there with their efforts to modernize the electrical grid, increase production, improve roads, etc. There is a huge middle class in India, well over 300 million people. Let's hope they continue to munch on (KKD) (MCD) and buy USA made products while they drink (PEP) & (KO). People in India are feeling very positive about the future.


    The next earnings season will be even better, as we get news on what people are buying in the 2nd Q. Most real estate transactions occur in the 2nd Q so maybe that will help confidence. Lots of travel expected this summer...that helps too. Some people are taking a vacation for the first time in years:




    Here's a look at what companies will be reporting earnings next week




    (FL) is reporting on Friday. I'm expecting blow out numbers, fingers crossed.


    Stay cautious, but the future is looking brighter.


    Let's all help out the economy - buy some (BUD) & (STZ) or (SBUX) eat out some place, (MCD) is good - and don't forget the donuts (KKD) & (DNKN)! And take a vacation too.
    17 May 2014, 03:02 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10763) | Send Message
    Author’s reply » User, blue


    thanks, for the commentary


    at these levels it is prudent to be cautious.. Especially if one has been in this market and reaped some rewards...


    Longer term I still believe we will be higher than we are today -- but we may go thru a pretty good pullback before that happens ......
    17 May 2014, 08:52 PM Reply Like
  • Robert Duval
    , contributor
    Comments (7852) | Send Message


    I will help the economy this year by flying my airplane with family, from the east to the west coast. Likely fly a good -- 4000+ miles at scenic altitudes. Will pass through Montana, Wyoming, Utah, oregon, washington, BC, Alberta, many more.
    17 May 2014, 03:08 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (3050) | Send Message
    Sounds great! You are flying over the most beautiful country.


    Please be careful....and have lots of fun : )
    17 May 2014, 03:12 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (3050) | Send Message
    F&G, I noticed looking at 10 year charts, that the volume in the Nasdaq, S&P, and Dow is still very low. About half of what it was pre 2008? We also know there is a ton of money still sitting in cash, on the sidelines. Brokerage companies know this, because they see it in their client's accounts. I still have about 20% cash, but some of it is to cover 3 years of living expenses because I'm careful like that.


    So when the folks out there really get back into this market....


    IMO, Dow will still go to 20,000 & S&P 500 will get to 1900 plus by the end of the year.


    The road will be rocky, bumpy and all that - but still we will get there.
    17 May 2014, 03:09 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (3050) | Send Message
    Here's one of many that I missed (DPZ). It defies all logic.


    The kids love it. I think their food is awful, but my son buys their chicken wings, pizza, etc.


    Sadly, people in other countries think (DPZ) is good too. Good tho...a real money maker. You can order the pizza online, which of course the kids love. Then it gets delivered to your door.


    Still prefer the local pizzerias we have, with the real Italianos from Brooklyn making the best pizza ever.


    One of the few good reasons to live in NJ.
    17 May 2014, 03:17 PM Reply Like
  • User 7415181
    , contributor
    Comments (1040) | Send Message
    If you must eat that, do not order anything with ham on it. I worked there circa 2000-01. Open a bag a ham and you get the worst chemical smell in the world. I cannot even begin to describe it. Not bleech and not ammonia. Something else. Something God did not intend for humans to discover. Not so with the other meats or veggies.
    17 May 2014, 05:03 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10763) | Send Message
    Author’s reply » Blue ==


    I totally missed (DPZ) , believe it or not I looked at it at 20 - never pulled the trigger --


    one that got away .. ;)
    17 May 2014, 08:55 PM Reply Like
  • krojo
    , contributor
    Comments (48) | Send Message
    Good day, this is one of the best reads i ever seen as the Author's take is so balanced.Great job as to data and info used in a clear fashion with your trades out there to back up your work. My hat off to you! Will be following.


    So refreshing to see charts as to levels with moving avg and clean overview as to data without a twist to shape it to fit your thoughts but you view tailored to the facts!


    Really good work,Thank you
    26 May 2014, 12:15 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10763) | Send Message
    Author’s reply » Krojo,


    Thanks for stopping by --Best of luck to you !!
    26 May 2014, 08:19 PM Reply Like
  • Nate Sterling
    , contributor
    Comments (620) | Send Message
    Thanks for the very well-written and informative article. I am now one of your followers. When I saw you were long MU I knew you were smart :)
    27 May 2014, 08:46 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10763) | Send Message
    Author’s reply » Hi Nate,,


    Thanks :)


    Are you also involved in MU ?
    28 May 2014, 09:02 AM Reply Like
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