Top Gun FP Client Note: Gut Check Time For The Bulls
May 16, 2012 at 7:10 am · Category: Europe, Facebook, Market Commentary, Technical Analysis, Top Gun Financial Planning
NOTE: Every week or two I wrote a Client Note for my clients. I post the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.
Originally sent to clients May 15.
*****
The market continues to be stuck in a rut and has given back about 50% of its YTD gains so far in the 2nd quarter. In “The Long Awaited Correction” (April 17), I mentioned 1340 as a level many were watching. In his most recent weekend chart show, master trader Charles Kirk (www.thekirkreport.com) showed that that level has taken on added importance as the neckline of a head and shoulders topping formation. A decisive break of the neckline would suggest a measured move down to the 1250-1260 area on the S&P.
The catalyst for most of this selling pressure is renewed concern about Europe. In the wake of elections, Greece has been unable to form a new government and the previous bailout package is in jeopardy. Alexis Tsipras, leader of the radical left Syriza party which finished second in the May 6 elections, rejects the austerity measures which are a condition of bailout payments (“Contagion Fears Hit Markets - Worries Over Greek Exit From Euro Spur Slump; Specter of Collateral Damage”, The Wall Street Journal, Tuesday, May 15, A1).
Fears about Greece leaving the euro have spilled over into worries about Spain and Italy whose stock and bond markets have been hit. Indeed, the spread between Spanish and German 10 year bond yields - a measure of financial stress and risk aversion - has widened considerably in the last couple months.
The one source of excitement in the market is the coming Facebook IPO scheduled for Friday. Facebook has registered to sell 337 million shares at a price between $34 and $38 a share. This is the biggest IPO since Google’s 8 years ago and it will be quite a spectacle.
Skeptics are pointing to the frenzy surrounding the IPO and sky high valuation as reasons to stay away. Facebook had revenues of $3.7 billion and $1 billion in profit in 2011. At the midpoint of the pricing range, the market capitalization is about $100 billion resulting in a trailing P/E of 100.
While this is a legitimate concern from a longer term investment standpoint, it won’t matter on Friday. Because Facebook is selling only a sliver of the company (about 12%), the limited supply of shares combined with the insatiable demand for them should result in a highly successful debut.
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW FOR A FREE INITIAL CONSULTATION!
Top Gun FP Client Note: The Quality Of Earnings
May 7, 2012 at 6:14 am · Category: Apple, Fundamental Analysis, Market Commentary, Seasonality, Stocks, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients May 1.
*****
Everybody is talking about how good 1st quarter earnings have been. About 70% of companies have beaten analyst estimates - above the historical average. Earnings are up 6% compared to analyst estimates at the beginning of the season for up 1%.
However, despite the bottom line number, a look beneath the surface of many reports shows a low quality of earnings. In “A Preview Of 1st Quarter Earnings” (April 3), I showed how gross margin pressure squeezed Nike’s earnings and that only a huge buyback made the quarter look good.
More recently, what looked like a good 1st quarter from IBM two weeks ago on further inspection conceals more than it reveals. IBM’s 1st quarter EPS was up 15% to $2.78, handily beating analyst estimates of $2.65. A closer look, however, shows that none of this growth was from improvement in the underlying business.
Flat revenues resulted in a 3% increase in pre-tax income. Indeed, hardware revenues were down 6.7%. Only a lower tax rate (20.6% versus 25.0% in the year ago period) caused net income to be up 9%. A huge buyback which reduced diluted shares outstanding by more than 5% translated into a 15% increase in EPS. Using the same 25% tax rate as the year ago period, IBM’s EPS would have been $2.63 - 2 cents below analyst estimates. Underneath the financial engineering is a flat quarter.
Even so, after a correction in reaction to earnings, IBM’s shares are now trading above where they were before reporting.
The big standout as usual was Apple (AAPL). Last Tuesday, the juggernaut reported that they sold 35 million iPhones and 12 million iPads in the 1st quarter resulting in a $11.6 billion profit. The company continues to defy expectations that they can’t keep this up and will fall back to earth.
In addition to the other headwinds I have reviewed in previous Client Notes, we are now entering the seasonally weakest part of the year for stocks. For whatever reason, all of the S&P’s gains in the last 50 years have occurred from October through April. Stocks have actually dropped, on average, from May through September over that time period (“A Summer Rally Really Would Mean A Lot”, Justin Lahart, The Wall Street Journal, Monday April 30, C8). While this seems irrational, I can tell you from experience that seasonality does count for something on Wall Street as we learned in last year’s 4th quarter (“The Case For A 4th Quarter Rally”, October 3, 2011).
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113
CALL NOW FOR A FREE INITIAL CONSULTATION!
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Top Gun FP Client Note: The Long Awaited Correction
May 7, 2012 at 5:58 am · Category: Europe, Market Commentary, Sentiment Analysis, Technical Analysis, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients April 17.
*****
Stocks finally had the long awaited correction after the first quarter melt up. From Tuesday April 2nd through Tuesday April 10th, the S&P dropped 60 points (4%). That might not seem like a lot but it represents a 37% giveback of the year-to-date gains peak to trough. The correction in Europe started earlier and was significantly deeper amounting to 10% on the Euro Stoxx 600.
As highlighted in “A Preview Of 1st Quarter Earnings” (April 3), the two catalysts were concern about a weak 1st quarter earnings season as well as renewed fears of Europe’s sovereign debt crisis.
Technically, this is just a normal correction within a healthy uptrend. Markets don’t go straight up or straight down but have countertrend moves which restore equilibrium between the supply and demand for shares. Traders have keyed in on the 50 day moving average - currently at 1377 - as a source of support.
The representative view that this is a normal and healthy correction was perfectly expressed by Dave Zier, one of the top investment advisors in the country, and Larry Kantor, Barclays Head of Research, on CNBC last Tuesday.
The trend followers are also continuing to give the market the benefit of the doubt. Many of them seem to be focused on 1340. That level was first breached on the heels of the strong January Jobs Report on Friday February 3rd and has served as support since then. A decisive break would wipe out all of the gains from March and February.
As everybody knows by now, I am less sanguine. While I covered half of our large S&P short position last Tuesday to get ahead of bulls who would view the correction as a buying opportunity, I am using today’s rally to put it all back on plus a little extra for good measure.
*****
After keeping up with the indexes through February despite becoming increasingly bearish, March was a bad month for Top Gun:
March ‘12 Returns
Top Gun: -7.76%
S&P: +3.13%
DJ Total: +2.94%
Contrary to what you might think, this was NOT primarily because of my bearish perspective on the overall market. 77% of the loss was attributable to a big hit taken by a stock in which we have an oversized position.
This was the second worst month in Top Gun’s history on both an absolute and relative to the market basis. The only worse month in terms of absolute returns was October 2008 (-12.19%). However, the S&P was down -16.83% that month. The only worse month relative to the market was July 2009 when Top Gun was down -3.58% while the S&P was up +10.56%.
Here are the returns for the 1st quarter:
1Q ‘12 Returns
Top Gun: -0.64%
S&P: +12.00%
DJ Total: +12.54%
I will attach the performance chart to the next Client Note and it will be on the website within a week or so as well.
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113
CALL NOW FOR A FREE INITIAL CONSULTATION!
Top Gun FP Client Note: A Preview Of 1st Quarter Earnings
May 3, 2012 at 1:22 pm · Category: Europe, Fundamental Analysis, Inflation, Stocks, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients April 3.
*****
With the 1st quarter having ended last week, the next big item on the Wall Street calendar is earnings season. Early indications suggest it will not be a good one.
Helping us get a gauge are two important companies whose fiscal quarters end a month early: Federal Express (FDX) and Nike (NKE). Both companies reported earnings two Thursdays ago (March 22).
While the surface numbers looked okay at both companies, a closer inspection shows some worrying trends. At FedEx, US volume in its key Express division declined 4% year over year. Only a 9% increase in US revenue per package made the economics work.
Basic economics teaches that, all other things being equal, price increases lead to a decrease in quantity. You can only increase prices so far before customers cut back and find substitutes. Indeed, FedEx customers seem to be substituting Ground shipment for Express to some extent. Also note that sharp drops in volume at FedEx’s Express division have correlated with each of the last two recessions. (Note: the chart includes domestic and international Express volumes).
A similar kind of thing can be seen in Nike’s report. While the top line represented by revenues and future orders were quite strong (both +15%), a 2% decrease in gross margin squeezed Nike’s bottom line. Earnings per share were up 11% but that includes a 4% reduction in shares outstanding from significant stock buybacks. Despite the strong top line, cost pressures resulted in only a 7% increase in net income.
Both stocks are down slightly since reporting while the overall market is up slightly.
These two reports seem like a good preview of what to expect going forward as analysts expect only a 1% increase in earnings for the S&P 500 overall. Exclude Apple and estimates drop to -2%.
Counting on a stronger second half of the year, analysts are forecasting a 16% increase in 4th quarter earnings. This is expected to be accomplished primarily by an expansion in profit margins (“Wall Street Is Keeping Its Hopes Alive”, Ahead Of The Tape, The Wall Street Journal, April 2, C1). The inflationary pressures evident in FedEx and Nike’s earnings reports suggest that this is unlikely to occur.
It is also important to keep in mind that while the ECB’s two Long Term Repurchasing Operations (LTROs) - which pushed more than €1 trillion into the European banking system - succeeded in stabilizing their sovereign bond markets the last few months, Europe’s problems have not gone away (see my “The Bear Market of 2012″, originally sent November 21, 2011). One indication of this is the divergence in performance between Northern and Southern European stock markets. For example, Germany’s Dax 30 was up 18% in the first quarter but Spain’s Ibex 35 was down 6.5%.
While the lemmings on Wall Street keep pushing the market up day after day, the facts make clear that the day of reckoning nears.
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113
CALL NOW FOR A FREE INITIAL CONSULTATION!
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Top Gun FP Client Note: Keynes Critique Of Wall Street
March 28, 2012 at 6:40 am · Category: Business and Investment Philosophy, History, Sentiment Analysis, The Investment Advice Business, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients March 20.
*****
When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.- John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 12
In Chapter 12 section 5 of his The General Theory, Keynes penned one of the best critiques of Wall Street ever written. Given the current market environment, I think this is an excellent time to review his arguments.
Wall Street does a poor job valuing investments for a number of reasons Keynes argued. First, the level of fundamental knowledge among professional investors is low. With so many stocks in the investment universe, it is rare for a professional investor to know many in any great depth. In contrast to a business owner who knows every detail of his business, most professional investors have a superficial knowledge of a large number of stocks.
Second, Wall Street is incorrigibly short term oriented: “day-to-day fluctuations….. have an altogether excessive, and even an absurd, influence on the market.”
Third, valuations determined by an ignorant and short term oriented crowd are subject to mass psychology. Since conviction lacks strong roots, “the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning….”
This is even more true now with many investors having sworn off fundamental analysis and trading on the basis of technical analysis only. These traders are primarily trend followers, buying or selling based not on any fundamental or economic analysis but on the trend of the market itself. This significant market constituency accentuates market swings in both directions.
Fourth, the market is dominated by professional investors judged by a fickle clientele over short periods of time. As a result, professional investors don’t have the luxury of waiting for an out of favor investment or thesis to come to fruition. They have to perform now or they will lose their clients: “They are concerned, not with what an investment is really worth to a man who buys it ‘for keeps’, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.”*
Fifth, I would add that the market suffers from a bullish bias. Since the great 1982-2000 bull market, professional investors have been conditioned that every selloff is a buying opportunity because at some point the market always recovers and makes new highs. It was during this period that Stocks For The Long Run and buy and hold became the conventional wisdom.
The market’s incredible resiliency is to a large extent the result of an obsequious government that can be counted on for bailouts and stimulus in the event of any stormy weather. The decisive event in this context may be Alan Greenspan’s Federal Reserve Statement before the market opened on the morning of Tuesday October 20, 1987 - the day after Black Monday - which read: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” From that point on, the great bull market never looked back. Bernanke has done everything possible to maintain confidence in The Greenspan Put.
* Keynes notes only that this is how professionals actually invest. The sociological explanation is mine.
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW FOR A FREE INITIAL CONSULTATION!
Top Gun FP Client Note: The Day After Tomorrow
March 12, 2012 at 5:01 am · Category: Energy, Europe, History, Market Commentary, Technical Analysis, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients March 5.
*****
Complacency often sets in when the market is making small and persistent gains like it is now. Environments like this can persist, but when a selloff occurs it can be shocking and the drops are often relatively large.- Rob Hanna, March 2 (via The Kirk Report)
Last week we made nominal new bull market highs. The S&P hit 1378 at the open on Tuesday before closing the week at 1370.
I remember when the same thing happened in 2007. The market peaked out in mid-July with highs at 1555. After a nasty correction, the market reversed course and made nominal new highs in October before the bear market began in earnest.
The reason the previous highs have so much power has to do with technical analysis. Everybody knows that 1370 is the high from last April/May. Traders see a breakout as confirmation of the bull market while a failure could be interpreted as a double top. Therefore, everybody is fixated on what the market is going to do here.
However, even though we are back at previous highs, the market’s internal strength is not as good as it was last year. The number of new NYSE highs has declined at every market peak during this bull market since April 2010. Then, about 650 NYSE stocks - out of a little more than 3,000 - made new 52-week highs. That November the number was just under 550. Finally, at this February’s point of highest momentum, only 450 NYSE stocks made new highs. What this means is that fewer and fewer stocks are leading the market higher. Conversely, more and more are failing to participate in the rally.
For example, did you know that Caterpillar (CAT) accounted for 166 of the Dow’s 760 point 2012 gain (22%) through Friday? Include IBM and United Technologies (UTX) and you’ve accounted for 48% of the Dow’s year-to-date gains. The most important leading stock - and now the biggest - is Apple (AAPL), up 35% on the year through Friday. Remove these leading stocks and the rest of the market is not doing nearly as well as the large indexes would suggest.
One example of declining breadth that is starting to get more attention is the laggard Russell 2000 index of small cap stocks. Indeed, while the S&P managed to squeak out a small gain last week, the Russell dropped 3%.
The big event last week was the ECB’s Long Term Refinancing Operation (LTRO) II. This is the ECB’s attempt to support Europe’s banks and sovereign governments (see “Europe’s Bond Sales Mark ECB Success Story”, The Wall Street Journal, March 2, C1). Add the €529 billion taken up last Wednesday to the €489 billion in December and the ECB has injected more than €1 trillion in to the banking system in the last 3 months. No wonder European sovereign bond yields have come down. This is the European version of Quantitative Easing.
One consequence, however, is the rise in oil prices. Oil is now at $107/barrel causing me to pay $4.379/gallon to fill up my car on Saturday at a Shell station in San Carlos, CA. Oil is a cost to consumers and businesses, squeezing other discretionary spending and profit margins. John Burbank, head of San Francisco’s Passport Capital hedge fund, spoke about the causes and consequences of higher oil prices two Fridays ago on Bloomberg.
Today belongs to the short term traders trying to squeeze every last dollar out of this move. The day after tomorrow belongs to the bears.
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW FOR A FREE CONSULTATION!
Top Gun FP Client Note: Dow 15,000
February 21, 2012 at 6:45 am · Category: Business and Investment Philosophy, Fundamental Analysis, Sentiment Analysis, Stocks, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients February 15.
*****
Based on cyclical patterns of market history, the odds are better than two chances in three that the Dow Jones Industrial Average will reach 15,000 or higher over the next two years. Based on the same cyclical patterns, there’s about a 50-50 chance that the Dow could hit 17,000 or more.
The market history draws on 141 years of equity performance, from which a fairly straightforward cyclical pattern can be discerned: a strong tendency for periods of worse-than-average returns to be followed by periods of better-than-average, and vice versa. Since the past five years have been squarely in the worse-than-average category, better-than-average returns in the two-year period just begun are now likely.
The cycles, then, are based on simple arithmetic: two-year intervals following intervals of five years. Also, five-year intervals that are worse-than-than average are objectively defined as belonging to the lowest quartile of all five-year periods in the 141 years tracked. Two-thirds of the time, after a five-year period like the one we’ve just seen, the market rises fast enough to lift the Dow to 15,000 or higher from present levels over the following two years. The same pattern applies to Dow 17,000 or higher, except that happens just half the time.
- “Enter The Bull”, Gene Epstein, Barron’s, February 11
The cover of Barron’s this weekend read “Dow 15,000″ in large print. The article by Gene Epstein reviews the research of Wharton Professor Jeremy Siegel, author of Stocks For The Long Run, to make a historical case that there is a 70% chance that the Dow reaches 15,000 within two years.
The argument is straight forward and compelling. Siegel uses his stock market data going back to 1871 to break the market into 136 5-year periods. The 5-year period ending in 2011 falls into the bottom quartile of 5-year periods based on returns. For the 33 previous bottom quartile periods, the median return the following two years is 20%. Therefore, they argue, the Dow has a 50/50 chance of reaching 17,000 within two years. In 23 of the previous 33 bottom quartile periods, stocks returned 11.7% or greater the following two years. Therefore, the Dow has a 70% chance (23/33 = 70%) of reaching 15,000 within two years. In only 3 cases were the following two year returns negative.
I don’t care to go into detail refuting the argument. I will only point out that 30% of the time, the historical record would suggest we don’t reach Dow 15,000 and 10% of the time it suggests we will be lower two years hence. In addition, within the 5 years ending in 2011, we have already had an excellent 2-year period (2009-10).
More interesting to me is the light the cover sheds on sentiment. The magazine cover indicator is one of the most well known on Wall Street and says that we tend to see covers like this at points of extreme sentiment. The most famous example is Business Week’s “The Death of Equities” which appeared in August 1979 near the end of the nasty 1970s bear market.
This week must be a week of round numbers because the other number everyone is talking about is Apple $500. Apple closed above $500 on Monday and everybody is speculating on what it means. Is it time to sell Apple? What does it mean for the overall market?
The most common argument against Apple now seems to be that it is just too big to keep going up. With a market cap of almost $500 billion, Apple is now the most valuable company in the world. It is worth more than Microsoft and Google combined.
I say “So What?” Fundamentally, the limit on a company’s sustainable valuation is earnings not size. Analysts are forecasting Apple to earn $40 billion this fiscal year. It earned $33 billion in calendar 2011. With almost $100 billion in net cash on its balance sheet, Apple is actually still undervalued. Just because we have never seen anything like this before, doesn’t mean it can’t happen.
Consider the comparison to Microsoft and Google. Combined those two companies have a market cap around $450 billion. Subtract $80 billion in net cash and you are paying $370 billion for their businesses - about the same as Apple after backing out its cash ($487 billion market cap - $97 billion net cash = $390 billion). Together they earned $35 billion in calendar 2011 - $2 billion more than Apple.
If you could own Apple or Microsoft and Google, which would you choose? It’s a tough question and one that reasonable people can disagree on. Apple is growing faster but Microsoft and Google’s market positions may be more firmly entrenched. At any rate, the comparison does not prove Apple’s size or valuation to be absurd.
It is, however, important to distinguish Apple’s tremendous performance from that of the rest of the market. Because of Apple’s great size and earnings, it is distorting numbers for the overall S&P 500. A number of analysts are now reporting numbers for the S&P and the S&P excluding Apple. Note that for all the companies in the S&P 500, earnings are on track to post a 6.6% year over year increase for the 4th quarter. Exclude Apple and the growth rate shrivels to just 2.8% (“Apple’s Size Clouds Market”, The Wall Street Journal, February 15, C1).
THE BOLDEST OFFER IN INVESTMENT MANAGEMENT HISTORY:
Starting now I will guarantee at least the return of the S&P 500 in 2012 after fees to the first $1 million in new investor money.* That is, for those investors, I will make up out of my own pocket any deficit between the performance of your account after fees and the performance of the S&P 500 this year. I will sign a contract with you to this effect. You will thereby be guaranteed at least the return of the S&P 500 and any upside to it will be yours as well.
* New clients only
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW (916-224-0113) TO TAKE ADVANTAGE OF THIS
INCREDIBLE OFFER!
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Top Gun FP Client Note: Everyone Is Wrong
February 21, 2012 at 6:23 am · Category: Business and Investment Philosophy, Fundamental Analysis, History, Market Commentary, Sentiment Analysis, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients February 8.
*****
When everybody thinks alike, everyone is likely to be wrong.- Humphrey Neill, The Art of Contrary Thinking
Last Friday’s positive Jobs Report and the resulting breakout to new highs has led to a bullish capitulation.
Bull market sentiment was on full display on CNBC on Tuesday. On Street Signs, Paul Hickey of BeSpoke Investment Group and Josh Brown of Fusion IQ - two investors who also write excellent and well trafficked blogs - could hardly contain their enthusiasm. Later on Mad Money, Cramer compared the current market to the great bull market of the 80s and 90s.
In this context, we shouldn’t forget that the current rally is almost identical with one that occurred during the same period last year. Starting December 1, 2010, the market took off on a euphoric 12 week joy ride carrying it from 1180 all the way up to 1343 on Friday February 18. That was followed by some chopping around, nominal new highs on the last day of April and the first day of May, followed by the August plunge.
This year, the current run began on November 28 at 1159 and has carried us all the way to 1347 as of Tuesday’s close (Feb 7). The rally is currently in its 11th week.
On Tuesday February 15, 2011 after the close I wrote “Get Ready For A Nasty Correction”. On cue, the market peaked 3 days and 15 S&P points later. It’s deja vu all over again.
During bull stampedes like this, certain perennial market platitudes are inevitably espoused as justification. One is that the market is telling us that the economy is strong. This is false. The market is not a true reflection of economic reality but of the views and actions of market participants according to their weight. The great Bernard Baruch said it best more than 50 years ago: “What registers in the stock market’s fluctuations are not the events themselves but the human reaction to these events, how millions of individual men and women feel these happenings may affect the future. Above all, the stock market is people” (Baruch: My Own Story (Henry Holt & Co: 1957), pgs. 84-5).
The other market cliche that is always mouthed at times like these is to invest according to what the market is doing not what you think it should be doing. This is the philosophy of the short term traders, the intellectually narrow lemmings who dominate the current market. However, the truly great investors know that sometimes you have to be contrarian and go against the crowd. Wayne Gretzky famously said: “I skate to where the puck is going to be, not where it has been.” That’s what the great Michael Steinhardt did when he bought treasuries in the early 1980s and it’s what John Paulson did when he shorted the housing bubble.
One important clue of a growing divergence between the stock market and economic reality is the weakness of 4th quarter earnings. Net profit margins excluding financials and utilities declined from a peak of 8.95% in the 2nd quarter of 2011 to a blended 4th quarter estimate of 8.23%. Because much of the profit growth during the current bull market has come from cost cutting and not revenue growth, margin deterioration calls into question future profit growth. Second, the blended earnings beat rate so far is 60% - the lowest since the last two quarters of 2008 (“Profits Showing Weakness”, Jonathan Cheng, The Wall Street Journal, February 6, C1).
Enjoy it while it lasts because this bull run’s days are numbered.
*****
Now is a good time to report our recent returns because I am sure many will assume that the above is the product of sour grapes from someone who has been left behind. Nothing could be further from the truth.
At the start of the 4th quarter I wrote what turned out to be one of the best calls of 2011: “The Case For A 4th Quarter Rally” (October 3, 2011). We were long in late September and early October and perfectly positioned for the October reversal. While I ratcheted down my bullishness after October, we were still net long through year end. As a result, 4th quarter returns were as follows:
Top Gun: +6.60%
S&P: +11.15%
DJ Total: +11.36%
Even though I was bearish heading into the new year, we still managed a good January:
Top Gun: +4.82%
S&P: +4.36%
DJ Total: +5.03%
While these returns might not seem notable compared to the market return, it is important to remember that I was bearish in 2011 and we were mostly unscathed by the August plunge. The proof of this is our returns since the current bull market highs at the end of April/beginning of May. Returns for May ‘11 through Jan ‘12 are as follows:
Top Gun: +11.38%
S&P: -3.75%
DJ Total: -4.59%
THE BOLDEST OFFER IN INVESTMENT MANAGEMENT HISTORY:
Starting now I will guarantee at least the return of the S&P 500 in 2012 after fees to the first $1 million in new investor money.* That is, for those investors, I will make up out of my own pocket any deficit between the performance of your account after fees and the performance of the S&P 500 this year. I will sign a contract with you to this effect. You will thereby be guaranteed at least the return of the S&P 500 and any upside to it will be yours as well.
* New clients only
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW (916-224-0113) TO TAKE ADVANTAGE OF THIS
INCREDIBLE OFFER!
Top Gun FP Client Note: Lower Lows Mean Lower Highs
February 21, 2012 at 5:58 am · Category: Federal Reserve, Market Commentary, Stocks, Technical Analysis, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients Saturday, January 31.
*****
The technical question now posed by a chart of the S&P 500 is:
Was the nasty selloff in August and September the beginning of a bear market or a correction in an ongoing bull market?
My bias is the former while the majority subscribe to the latter. Technically, to confirm a continuing bull market we need to be making new highs which we have not done yet. As you can see in the attached chart, the intraday high of the current rally is 1334 made last Wednesday (Jan 25). That is still lower than the bull market high (May 2 ‘11: 1370) and the highs from last July (July 7 ‘11: 1356, July 21 ‘11: 1347).
Since Wednesday, there has been a mild correction which is perfectly natural after such a strong move. However, after a bit of rest and consolidation, we will have to make new highs to confirm a bull market. If not, this could be the end of a sucker’s rally that will catch almost everybody leaning the wrong way and be followed by a nasty reversal.
One reason for my suspicion is the low quality of the rally. Last week I pointed out that it is being led by sectors like financials and homebuilders.
In addition, the move from December 20th through January 25th which took us from 1205 to the recent highs has been on light news flow and low volume. NYSE Composite Volume during that period averaged 3.5 billion shares compared to 4.3 billion shares for the rest of the comparable part of 2011 - an 18% decrease.
On the bullish side of the ledger, many are pointing to a Golden Cross that will take place at today’s close. This is when the 50 Day Moving Average crosses above the 200 Day Moving Average and is supposed to signal a bullish trend. Combining this bullish indicator with the lower highs mentioned earlier creates a lot of tension on the charts which should be resolved in the next month or two.
Propelling the current rally to new highs last week were two important pieces of bullish news. The first was a blowout quarter from the preeminent stock - and company - in the market today: Apple (AAPL). It is not going too far to say that this company is changing the world. Their products have that intangible “must have it” quality and people across the world are buying them in unheard of quantities.
The second was a dovish surprise from The Fed which promised to keep interest rates “exceptionally low” for at least another 3 years (”at least through late 2014″ - FOMC Statement, January 25).
As news circulates that Facebook plans to file for an IPO tomorrow, I continue to suggest that you unfriend the market.
THE BOLDEST OFFER IN INVESTMENT MANAGEMENT HISTORY:
Starting now I will guarantee at least the return of the S&P 500 in 2012 after fees to the first $1 million in new investor money.* That is, for those investors, I will make up out of my own pocket any deficit between the performance of your account after fees and the performance of the S&P 500 this year. I will sign a contract with you to this effect. You will thereby be guaranteed at least the return of the S&P 500 and any upside to it will be yours as well.
* New clients only
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW (916-224-0113) TO TAKE ADVANTAGE OF THIS
INCREDIBLE OFFER!
Top Gun FP Client Note: The Best Of All Possible Worlds
January 28, 2012 at 9:29 am · Category: Market Commentary, Sentiment Analysis, Stocks, Technical Analysis, Top Gun Financial Planning
NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients Saturday, January 21.
*****
This market continues to defy all naysayers. On Wednesday (January 18th), the S&P closed above 1300 for the first time since July 28, 2011. It is now up 4.7% on the year (through January 27th) - the best start since 1987.
One red flag, however, is the low quality of the rally. The rally is being led by the worst performers of 2011 while the high quality stocks which did well last year are lagging.
One example of this is the homebuilders. The Dow Jones US Home Construction Index, which consists of 7 homebuilder stocks, is up about 60% since October.
Another example is the outperformance of the financials. Bank of America (BAC) is up 27% so far this year.
Also of concern is the less than great start to earnings season. Through Friday (January 20th), 55% of companies reporting earnings beat estimates (18% of the S&P has reported so far). That is below the average of the last 4 quarters (69%) and the 10 year average (62%). The most notable miss was Google (GOOG) which got slaughtered on Friday (-8%).
Next week is the biggest for 1st quarter earning with 119 S&P companies reporting. It is hard to see how we will avoid a correction if earnings continue to come in below expectations.
Finally, sentiment is starting to become quite bullish. It’s been quite a while since I heard investors as bullish as Michael Yoshikami and Stephanie Link on Friday’s Closing Bell.
Monday is the first day of the Chinese New Year and this is the Year of the Dragon which is supposed to be lucky. Asians are forecast to flock to the casinos. Stock investors may as well do the same thing because at this point the stock market is a lottery ticket.
THE BOLDEST OFFER IN INVESTMENT MANAGEMENT HISTORY:
Starting now I will guarantee at least the return of the S&P 500 in 2012 after fees to the first $1 million in new investor money.* That is, for those investors, I will make up out of my own pocket any deficit between the performance of your account after fees and the performance of the S&P 500 this year. I will sign a contract with you to this effect. You will thereby be guaranteed at least the return of the S&P 500 and any upside to it will be yours as well.
* New clients only
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113
CALL NOW (916-224-0113) TO TAKE ADVANTAGE OF THIS
INCREDIBLE OFFER!
More on this topic
(What's this?)
Economist Gary Shilling: S&P 500 will drop 43% this year?
(Value Investing, 4/11/12)
Sell in May and Go Away? No Way!
(Wall Street Daily, 5/10/12)
Stocks Keep Rallying
(Random Roger's Big Picture, 2/14/12)
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