This is Earnings Season

The week ended January 31st 2014 had over 300 companies report earnings; companies such as Apple,Yahoo, Amazon, Google, Ford, Visa, and MasterCard reported revenue and earnings results. While mostly positive, the S&P 500, as a measure of the broad stock market, lost 20 points in what seems to be a consolidating phase after a few weeks of  retreating. Q4 earnings reports have been decidedly positive, with 64% of companies reporting results above Wall Street estimates and financials leading the charge by outperforming the expected 28% earnings growth. This would seem to be the fuel that equity markets need to make new highs. Alas, the S&P 500 has retreated over 2% in 2014 and brushed off record bank profits and consistent impressive earnings of companies. The market seems to be driven largely by macro factors in the early goings of this year which presents a prime opportunity for value stock pickers.

Investors must be cautious as the low hanging fruit may be low for a reason. For example, the tech golden child Apple reported a $0.50 beat off a $14.00 basis and saw the stock retreat over 10% to $500. An uninformed value investor would swoop in to buy a great company at a discount, but they would overlook the company’s failure to meet expectations for iPhone sales (its largest revenue producer and main driver of growth). While iPhone sales were at record levels (51 Million,) they were short of the 56 Million expected which sent the stock tumbling. The growth priced into the stock’s price had to be re-adjusted down causing the stock's tumble. Similarly, Yahoo inc. missed its top line expectation while reporting better than expected earnings, and the stock retreated.

While this investing environment allows investors acquire great companies for amazing value, we must exercise caution in the decisions because a company’s bottom line does not always tell the entire picture of its operations.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right. 

-F 

Returning to the unfamiliar

Since I've been buried in six volumes of riveting finance concepts developed by the CFA Institute, the markets have gone on quite a rally. Whenever it seemed to have reached some sort of exhaustion point and a correction was imminent, there was some sort of force pushing the indices to new all time highs. Perhaps irrational exuberance or a justified rally, this market has been quite different than what we've seen in the last two years. But what has defined this market rally, similar to previous ones, is investor risk appetite. This behavior has been fueled by various statistical evidence that proves that we are indeed experiencing a gradual economic recovery which has been fed by the federal reserves' determination to provide liquidity and increased risk appetite in the economy.

These events have fueled this market for several months and continue to destroy the accounts and patience of investors with decidedly short positions, and strangle fixed income investors who rely on yield. During this interesting market rallies we have seen some quite exciting stories; Japanese stocks have soared with the debasement of the yen, and then pull back slightly, Google has continued to inch towards world domination (My friend actually referred to the whole internet as Google), the tech giant Apple has been humbled in the markets, Elon Mosks' Tesla has defied EV critics and proved "profitable", precious metals have been destroyed while other commodities have seen incredible pull backs in certain areas and volatility in others, and finally the highly anticipated "tapering" of the QE initiative is being discussed extensively in the media.

Of course the main measure of the integrity of any market move is the quality of the companies earnings. Q1 earnings reporting were average overall; 65.2% of the companies in the S&P 500 beat bottom line expectation, but top line figures saw an average decline of 1% and only 49% of companies reporting above expected revenues. Furthermore, analysts revised down earnings expectations for Q2 but left estimates for earnings growth for the year at approximately 6%. The news has not been overwhelmingly bullish nor bearish , but the underlying feeling of economic expansion has led to a broad market rally.

I believe this puts the market at a disequilibrium and presents active investment professionals some trading opportunity. Owing to the idea that all stocks are not created equal, I put it to you that there are some stocks showing tremendous value potential and others that are generously valued, and a stock picker with great market timing will be able to take advantage of this disequilibrium. Over the next few weeks i will look to profile some companies which i believe fit into these categories and give my rationale behind each thesis.

That is not to say that this is an active managers market in the least bit, Passive investment strategies will find ample opportunity to re-enter this market in pull-backs, but as we have recently witnessed, pull backs come scarce and shallow in this medium term bull market. The 3 weeks from May 20th to June 6th was the largest pull back the market has experienced since april, with stocks barely retreating 5%. The Dow barely broke below its 50 DMA before employment numbers released on June 6th lent a beacon of hope to which investors hung on and ignited a rally.

This new paradigm bags the question "is this market doomed to succeed ?" I say this because it seems that regardless of the tenor of news that is released, a market rally occurs. Bad economic numbers briefly quenches the exuberance, until investors realize that the Fed has basically guaranteed free money until numbers improve, this is followed by a rally. Conversely, good economic data is initially met with market excitement and the prospect of "tapering" or the Fed cutting the proverbial umbilical cord is completely thrown out of the window. While there are clear forces supporting the market, what will cause the ceiling to reveal it self, and how will the market retreat?


Please look out for a daily news letter coming soon to My Trading Book as well as various reports on companies and macroeconomic themes.

Till then
There's always a Bull Market somewhere.

Last 3 months

I Apologize for the long absence, as a result i would like to recap the last three months in the S&P 500. I have also decided that this blog needs structure, I will post a weekly recap and outlook moving forward.


Recent Three Month History

October 2011 was a very bullish month for the Index. The index began the month at 1131.21 points and finished the month at 1253.30 points, with a high of 1292.66 and a low of 1074.77 for a month over month return of just over 10%. This marked the largest percentage gain on the index for the year 2011 after being at its yearly low (1074.77) at the start of the month. Part of the catalyst for the October rally was an agreement to boost the European region’s rescue fund to one trillion Euros. The rally was also partially spurred by an agreement to write down 50 percent on Greek debt. Finally, U.S economic indicators showed that the economy expanded in the third quarter at the fastest pace in a year, this eased concerns about a potential double dip recession, the growth trickled down into individual equities: as three-quarters of companies that reported third quarter results beat analyst estimates and on aggregate increased sales by 11 percent.

November 2011 was a month that began with some volatility; it was followed by a bearish decline in the index during the middle of the month. The index rebounded nicely into the end of November effectively recovering all the losses incurred in the month. In November 2011 the S&P 500 opened at 1251.00 and closed at 1246.96, with a high at 1277.55 and a low of 1158.66 for a month over month return of (-0.32%). To start off the month Investors were skeptical about Greeks ability to meet austerity measures necessary for a recovery, this skepticism was brought on by a call for a referendum on the debt crisis. The market rallied on positive economic data from the U.S soon after, but quickly pulled back due to more uncertainty in Greece. These uncertainties about Greece lead investors to fear about contagion in the European region, however, fears were mitigated by positive earnings reports as well as positive news from Greece and Italy; this fueled the volatility moving into the month of November. In the Middle of the month the fear of contagion resurfaced coupled with weaker readings on economic growth a bearish drop in the Index begun. On November 28th U.S retailers announces record breaking sales over the thanks giving weekend which sparked the rally going into the end of the month. Major central banks announced coordinated actions to provide liquidity to the global financial system, they also agreed to reduce interest rates for struggling European banks to put investors at ease.

December 2011 did not bring much change. The index started the month at 1246.91 and ended the month at 1257.60, the high was 1269.37 and a low of 1202.37. The last month of the year garnered a 0.85% return. In December Standard and Poor’s warned investors about an impending downgrade for the Euro-zone credit rating, this bad news was mitigated by news that the EU would discuss increasing the region’s debt rescue fund. Although the U.S Federal reserve assured Investors that the United States economy has been growing modestly, investors feared that there was no stimulus measures to offset a worsening European debt crisis. Signs of improving economic conditions in Germany and the United States in the form of increasing GDP and reducing jobless claims coupled with reducing yields on Spanish bonds sparked a late December rally. Investors felt optimistic about 2012 which caused a “Santa Claus” rally into the end of the year.

Thus far January has been a bullish month for the S&P 500. The index opened at 1258.86 and has rallied to 1315.38 for a 4% gain. Indicators point to a growing economy in the United States. This year there has been a reduced amount of jobless claims, which signifies an expanding economy. The rally was reinforced with positive news in Europe with regards to their bond auctions. January also marked the beginning of Q4 earning season. Other major events in the month include a downgrade of French credit rating, this downgrade instilled fear in investors as France is believed to be one of the strongest economies in the EU. The most recent news out of Europe has brought hope to investors; the IMF will raise additional funds to help combat Europe’s debt crisis. This bit of great news assisted a continued bullish rally in January.