I'm laying in bed, wide awake and it's 2:00am. I have to wake up at 6am. I need to sleep, but I can't. So I'm typing away with my iPhone.
I find myself wondering about my initial thoughts on friday as the crappy Chinese, EU and US data was released.
1. Why has china allowed their official PMI to get near 50 without tapping into their +$3trillion reserve?
2. Will the EU states wait until there is another market collapse until they finally issue a infrastructure derived 'Eurobond'?
3. What will Obama do to unleash the +1trillion on corporate balance sheets to drive growth?
4. Will the US really start to attack it's crumbling infrastructure by utilizing a public/private funding initiative?
Maybe china's service growth can off set its manufacturing PMI data? Europe, or rather Germany, needs to stop dicking around. The US needs to maximize its potential.
The only positive right now (that I can tell) is that equities are re-visiting 2009 multiples, depths of Financial Armageddon multiples. At some point, valuations will matter.
Secular growth companies are trading at really really low levels. Will AAPL see a 20% reduction in eps from an economic slowdown? Will the chip makers supplying the iPhones and iPads, and other smartphones, see a 20% reduction in eps?
Anyway, I need to try to sleep.
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Monday, June 4, 2012
Friday, June 1, 2012
One-two punch, and a kick in the...
1. Official China PMI less then expected. (punch 1)
2. Manufacturing EU PMI continues to be week. (punch 2)
3. US employment data came in less then expected, and the ave weekly earnings declined a tiny bit. (Kick in the nuts. Despite the April upward revisions, the current data still stings.)
The string of 'blah' data suggests the emerging markets need to stimulate their economies, and the west needs to implement an infrastructure build via private/public funding.
2. Manufacturing EU PMI continues to be week. (punch 2)
3. US employment data came in less then expected, and the ave weekly earnings declined a tiny bit. (Kick in the nuts. Despite the April upward revisions, the current data still stings.)
The string of 'blah' data suggests the emerging markets need to stimulate their economies, and the west needs to implement an infrastructure build via private/public funding.
Wednesday, May 30, 2012
thought... GS
GS - Goldman looks really interesting here. Looks like its setting up for a pop toward 101-102.
I think the negativity bank stocks are incorrect due to the lack of exposure to Europe, stronger US housing data and better MBS data. But I understand why JPM's situation causes concern, and adds fire to incorrect assumption of fallout from Europe's banks.
The time to worry about contagion was in August to Nov of 2011, not now. If GS is firming up, JPM may benefit from the sector move. But in order for JPM to really out perform is to prove to investors that they got their shit together again.
The above is for a short-term pop, but I still very much believe the stronger US banks should at least trade at book value. For GS its around 120-130.
The time to worry about contagion was in August to Nov of 2011, not now. If GS is firming up, JPM may benefit from the sector move. But in order for JPM to really out perform is to prove to investors that they got their shit together again.
The above is for a short-term pop, but I still very much believe the stronger US banks should at least trade at book value. For GS its around 120-130.
Sunday, May 27, 2012
Market Thought... correlation
The SP500, FXI (China), Euro, WTI (oil), Copper, and BKI (BRIC) were moving in the same direction since early May.
The correlated decline in commodities, China and BRIC makes sense, as they are mostly tied to each other. (Although the BRIC, green line, index saw some divergence recently.)
The past four days saw the SP500 shift from the correlation.
Looking at the trends more closely, the Euro started the decline a few days prior to the rest (except copper). Seems like the Euro sparked the general sell-in-may action.
Regardless of what the action is currently saying, I do not fully understand why the decline in the Euro would cause the rest of the markets to decline. The decline in the Euro was highlighted by many, and the recent PMI data made it clear the Euro decline was pretty much a certainty at this stage of the crisis.
With the Euro decline, we should start to see the European manufacturing PMI begin to rise (which should correlate to the economic activity within the EU zone).
I am not sure what would cause such a strong correlation.
In a recent Market Thought post 're-evaluation', I highlighted the potential drags on the market. Looking at the trends more closely, seems to be the above correlation at work. Pointing to the declining Euro as the catalyst.
However, the correlation with respect to US equities, and possibly BRIC equities, appears to be ending.
The correlated decline in commodities, China and BRIC makes sense, as they are mostly tied to each other. (Although the BRIC, green line, index saw some divergence recently.)
The past four days saw the SP500 shift from the correlation.
Looking at the trends more closely, the Euro started the decline a few days prior to the rest (except copper). Seems like the Euro sparked the general sell-in-may action.
Regardless of what the action is currently saying, I do not fully understand why the decline in the Euro would cause the rest of the markets to decline. The decline in the Euro was highlighted by many, and the recent PMI data made it clear the Euro decline was pretty much a certainty at this stage of the crisis.
With the Euro decline, we should start to see the European manufacturing PMI begin to rise (which should correlate to the economic activity within the EU zone).
I am not sure what would cause such a strong correlation.
In a recent Market Thought post 're-evaluation', I highlighted the potential drags on the market. Looking at the trends more closely, seems to be the above correlation at work. Pointing to the declining Euro as the catalyst.
However, the correlation with respect to US equities, and possibly BRIC equities, appears to be ending.
Thursday, May 24, 2012
Market Thought... EuroBonds
The chatter is getting interesting. The renewed sense of a EuroBond turned the market.
The Telegraph has a good article highlighting the dynamic unification of EU perception, with Germany standing alone. Interesting indeed.
I never bashed the Germans for their desire to promote responsibility. EU states have been sucking the tit for far too long, but since 2007 the troubled states have been in recession. (And I would argue the economy in the PIGS has been in real recession, for the average person, since 2001-2002. I witnessed it qualitatively first hand visiting Greece year-after-year, and the systematic decline in activity within a 10-15 year period.)
Five years worth of documented recession. Over 10years worth of meager economic performance. The breaking point appears to have arrived.
Over the past 8 months, the progress in the EU, with respect to structural reforms is nothing short of historic. Governments changed hands, ideologies shifted, drastic change in policies were put in place and all of this was completed within months and without a war. The driver of reform was a couple of trillion dollar paper-losses in the markets. (I truly am fascinated by the course of recent events.)
I do not think the Germans will ignore the progress that was already created. Nor are they immune to heavy pressure. Bonds specific to infrastructure will find buyers via the Chinese. (They have not made their interest in such investments a secret.)
Will there be a EuroBond?
I fucking hope so! This maybe enough for the market to trade at a 15 multiple. Then the SP500 could be on track to close higher then 1500 by the end of the year.
With reforms in place, the only major structural hurdle left within the EU would be to implement a universal EU-wide tax collecting mechanism (like US Federal Tax).
I know the counter intuitive nature of more debt to counter the current debt, but there is validity to the strategy. Its no different than Ford massively leveraging, using the funds to reposition the company and now a few years later, has less debt than cash on its balance sheet, huge cash flow and considered investment grade.
There is light at the end of the tunnel. If EuroBonds become reality, imo, the markets are an outright strong buy. Europe will not collapse. No country will need to exit the Euro (does not mean countries can not default). European concerns will no longer be front page news, at least in the near to mid term. The SP500 will remove its massive discount.
I am beginning to feel giddy. I hope this chatter is real.
I never bashed the Germans for their desire to promote responsibility. EU states have been sucking the tit for far too long, but since 2007 the troubled states have been in recession. (And I would argue the economy in the PIGS has been in real recession, for the average person, since 2001-2002. I witnessed it qualitatively first hand visiting Greece year-after-year, and the systematic decline in activity within a 10-15 year period.)
Five years worth of documented recession. Over 10years worth of meager economic performance. The breaking point appears to have arrived.
Over the past 8 months, the progress in the EU, with respect to structural reforms is nothing short of historic. Governments changed hands, ideologies shifted, drastic change in policies were put in place and all of this was completed within months and without a war. The driver of reform was a couple of trillion dollar paper-losses in the markets. (I truly am fascinated by the course of recent events.)
I do not think the Germans will ignore the progress that was already created. Nor are they immune to heavy pressure. Bonds specific to infrastructure will find buyers via the Chinese. (They have not made their interest in such investments a secret.)
Will there be a EuroBond?
I fucking hope so! This maybe enough for the market to trade at a 15 multiple. Then the SP500 could be on track to close higher then 1500 by the end of the year.
With reforms in place, the only major structural hurdle left within the EU would be to implement a universal EU-wide tax collecting mechanism (like US Federal Tax).
I know the counter intuitive nature of more debt to counter the current debt, but there is validity to the strategy. Its no different than Ford massively leveraging, using the funds to reposition the company and now a few years later, has less debt than cash on its balance sheet, huge cash flow and considered investment grade.
There is light at the end of the tunnel. If EuroBonds become reality, imo, the markets are an outright strong buy. Europe will not collapse. No country will need to exit the Euro (does not mean countries can not default). European concerns will no longer be front page news, at least in the near to mid term. The SP500 will remove its massive discount.
I am beginning to feel giddy. I hope this chatter is real.
Tuesday, May 22, 2012
Google is ready for MMI
If there was ever a 'tell' that Google is ready to merge their awesome software capabilities with hardware its their Google Glasses. And quite frankly, the industry needs Google to step it up. Apple is far-and-way the leader in the post PC transition. Every leader needs a true competitor, if not for the sake of constant improvement.
In late January I highlighted the combined company desperately needed to improve their margins. Since then, Google has seen a systematic increase in overall margins.
This positions the combined company pretty well, especially considering the low-hanging cost-cutting-fruit via MMI. (The most obvious being the elimination of at least 20 of their 27 product offerings.) The combined company is approaching overall margins similar to what Google did in Sept of 2011.
If Google acts on the low hanging fruit by focusing their products on smart-phones and tablet, and removing excess manufacturing capacity from the lower product offerings, the combined company can approach margins toward the mid 30s.
The above became evident after Google reported, and the benefit will become more obvious as the merger develops.
In late January I highlighted the combined company desperately needed to improve their margins. Since then, Google has seen a systematic increase in overall margins.
If Google acts on the low hanging fruit by focusing their products on smart-phones and tablet, and removing excess manufacturing capacity from the lower product offerings, the combined company can approach margins toward the mid 30s.
The above became evident after Google reported, and the benefit will become more obvious as the merger develops.
Saturday, May 19, 2012
Market Thought... re-evaluation
Every now and again, I do a complete re-evaluation of my market thesis. Even though, I consistently monitor and change the thesis as new data develops. Since the SP500 is at a support level I did not think we will see this cycle, I wanted to re-review the macro economic picture.
1. US growth
The markets have told investors US growth will move toward the direction of job growth. The disappointing jobs data two months ago started the collapse in the 10yr, which triggered unease with the big boys. (The 10yr is used to measure US GDP growth. A low 10yr yield means a lower assumed US GDP.)
Since the crappy Jobs number, the jobs data got a bit better. Jobless Claims continue to point to a left-to-right trend, which is good news for the US economy.
Obviously claims need to continue to trend lower. Then the Employment Situation needs to confirm the jobless claims' trend.
2. Europe
The situation in Europe seems just as fucked up today as it was at any point over the last 3 years. However, the situation is fairly different. I have highlighted this before:
1. EFSF + ESF + IMF = +1trillion at the ready.
2. An ECB proven to facilitate, now that cost controls are in place.
3. A mechanism to cutoff a troubled country. (Cut the leg off to save the life.)
4. Banks in troubled countries can be re-capitalized, and supported for far less than the 1T available
5. Spending reforms have already been implemented
6. The Euro is declining, a needed by-product of the EU mess to promote economic growth. A correlation of Euro to PMI is obvious, a declining Euro will provide some economic growth.
This link redirects to a previous post with a good video highlighting the EU situation.
The above alone should mitigate fallout from Europe, but there is also the current willingness from global Central Banks to ensure contagion does not spread.
3. China
Since the beginning of May, China has been in a straight line down.
Everyone knows China's GDP is going to decline as they transition to a more consumer based economy. Right now, the negative chatter will continue as the negativity is corroborated with declines in Chinese share prices and the commodity complex.
Investors are looking for data points that show an increase in Chinese consumer demand or stimulus that will facilitate the transition.
But there should be no over-stating the obvious. Chinese middle class is growing, their savings rate is large and their buying power is sizable. Companies selling into the Chinese middle, upper-middle and upper class in China will see no impact on their earnings.
4. Fucked-up coincidences
I don't know how else to describe the course of events over the past couple of days that had a definite impact on market performance.
a. JPM's stupid trades. Any positive sentiment on the banks, due to improvements in housing, was thrown out because of JPM. Regardless of the bank's balance sheet and actions, the bank-bear's negativity became re-enforced, and contributed to the overall negative market sentiment.
b. Facebook's IPO. Talk about a fuck up. Nasdaq fucked it up. What ever the reason, around 12:30pm every stock basically declined on Friday, imo, due to the botched execution of the IPO.
Technicals
The fear of Europe, along with global economic slowdown fears caused the markets to decline, to levels I generally was expecting, near 1340. But the "Fucked-up coincidences" gave us enough negativity for the market to touch its longer-term support, the 360 SMA.
I was not expecting the market sentiment to be so negative to allow for a retest of the 360SMA, especially after consolidating at the SMA for 5 months prior to the market's leg-up.
The markets are very oversold, and are now sitting on an important support level. From a technical stand point, now is a really good time to start 'loving' (not liking) the market.
But a dilemma persists: Are equity shares cheap enough in relation to the above concerns?
Valuations
Regardless of what anyone says, a stock, the piece of virtual paper, has value. To ignore this is to ignore the truth. Despite the axiom "cheap can get cheaper". Barring a systemic event, "cheaper" has to be justified.
Value is always a relative term. But if anyone had the ability to buy into a company that has an earnings yield far higher than the vast majority of other investments, that is involved in a secular growth curve, would anyone say no? (That is what is currently being said with respect to GOOG, AAPL, QCOM and many others.)
Currently, the SP500 has a trailing multiple of about 13.3, which is an earnings yield of 7.5%. (Earnings yield being the inverse of the trailing PE, 1/13.3). The 10yr is at 1.7%. But this relative basis valuation has been the case for a few years now.
In Oct 2011, when Europe was facing a true Lehman x1000 event (because the stop-gaps mentioned above were not in place), the SP500 fell to around 1070. Looking back, the SP500 had an EPS of around 94.6, which means the SP500 saw a multiple of around 11.3. If the market was to see a similar multiple with current EPS, then the SP500 would achieve around 1100.
Historically, a trailing multiple around or below 12 is really really low, if not rare. Real fear surrounding EU wide bank runs, not just Greek or Spanish banks, but all of Europe's banks. The mechanisms mentioned above, while financially unhealthy if sustained for a long period of time, prevent systemic bank runs. If a systemic event is prevented, then a trailing multiple of 13.3 is far too low!!
This does not mean countries can not default. They can, and maybe will (and in Greece's case, default again). But for those who think government can not maneuver out very difficult situations, should familiarize themselves with the history of NYC. For a city's who's GDP was larger than many other countries in the world and expected decline declared irreversible, NYC never defaulted, and still thrives.
Conclusion
The situation can look shitty, if you want it to look shitty, but Apple stores are still packed. Chip demand for mobile is so high manufacturers can not keep up with demand. Google is still growing Revenue by 20-25%. SP500 earnings grew by 5-6% when they were projected to be flat to down. Global GDP is still humming along.
IMO, the biggest (most realistic) risk to multi-national earnings is if they are not properly hedged against the coming Euro decline. But these guys actively hedge, and the currency risk should be minimal.
1. US growth
The markets have told investors US growth will move toward the direction of job growth. The disappointing jobs data two months ago started the collapse in the 10yr, which triggered unease with the big boys. (The 10yr is used to measure US GDP growth. A low 10yr yield means a lower assumed US GDP.)
Since the crappy Jobs number, the jobs data got a bit better. Jobless Claims continue to point to a left-to-right trend, which is good news for the US economy.
2. Europe
The situation in Europe seems just as fucked up today as it was at any point over the last 3 years. However, the situation is fairly different. I have highlighted this before:
1. EFSF + ESF + IMF = +1trillion at the ready.
2. An ECB proven to facilitate, now that cost controls are in place.
3. A mechanism to cutoff a troubled country. (Cut the leg off to save the life.)
4. Banks in troubled countries can be re-capitalized, and supported for far less than the 1T available
5. Spending reforms have already been implemented
6. The Euro is declining, a needed by-product of the EU mess to promote economic growth. A correlation of Euro to PMI is obvious, a declining Euro will provide some economic growth.
This link redirects to a previous post with a good video highlighting the EU situation.
The above alone should mitigate fallout from Europe, but there is also the current willingness from global Central Banks to ensure contagion does not spread.
3. China
Since the beginning of May, China has been in a straight line down.
Investors are looking for data points that show an increase in Chinese consumer demand or stimulus that will facilitate the transition.
But there should be no over-stating the obvious. Chinese middle class is growing, their savings rate is large and their buying power is sizable. Companies selling into the Chinese middle, upper-middle and upper class in China will see no impact on their earnings.
4. Fucked-up coincidences
I don't know how else to describe the course of events over the past couple of days that had a definite impact on market performance.
a. JPM's stupid trades. Any positive sentiment on the banks, due to improvements in housing, was thrown out because of JPM. Regardless of the bank's balance sheet and actions, the bank-bear's negativity became re-enforced, and contributed to the overall negative market sentiment.
b. Facebook's IPO. Talk about a fuck up. Nasdaq fucked it up. What ever the reason, around 12:30pm every stock basically declined on Friday, imo, due to the botched execution of the IPO.
Technicals
The fear of Europe, along with global economic slowdown fears caused the markets to decline, to levels I generally was expecting, near 1340. But the "Fucked-up coincidences" gave us enough negativity for the market to touch its longer-term support, the 360 SMA.
The markets are very oversold, and are now sitting on an important support level. From a technical stand point, now is a really good time to start 'loving' (not liking) the market.
But a dilemma persists: Are equity shares cheap enough in relation to the above concerns?
Valuations
Regardless of what anyone says, a stock, the piece of virtual paper, has value. To ignore this is to ignore the truth. Despite the axiom "cheap can get cheaper". Barring a systemic event, "cheaper" has to be justified.
Value is always a relative term. But if anyone had the ability to buy into a company that has an earnings yield far higher than the vast majority of other investments, that is involved in a secular growth curve, would anyone say no? (That is what is currently being said with respect to GOOG, AAPL, QCOM and many others.)
Currently, the SP500 has a trailing multiple of about 13.3, which is an earnings yield of 7.5%. (Earnings yield being the inverse of the trailing PE, 1/13.3). The 10yr is at 1.7%. But this relative basis valuation has been the case for a few years now.
In Oct 2011, when Europe was facing a true Lehman x1000 event (because the stop-gaps mentioned above were not in place), the SP500 fell to around 1070. Looking back, the SP500 had an EPS of around 94.6, which means the SP500 saw a multiple of around 11.3. If the market was to see a similar multiple with current EPS, then the SP500 would achieve around 1100.
Historically, a trailing multiple around or below 12 is really really low, if not rare. Real fear surrounding EU wide bank runs, not just Greek or Spanish banks, but all of Europe's banks. The mechanisms mentioned above, while financially unhealthy if sustained for a long period of time, prevent systemic bank runs. If a systemic event is prevented, then a trailing multiple of 13.3 is far too low!!
This does not mean countries can not default. They can, and maybe will (and in Greece's case, default again). But for those who think government can not maneuver out very difficult situations, should familiarize themselves with the history of NYC. For a city's who's GDP was larger than many other countries in the world and expected decline declared irreversible, NYC never defaulted, and still thrives.
Conclusion
The situation can look shitty, if you want it to look shitty, but Apple stores are still packed. Chip demand for mobile is so high manufacturers can not keep up with demand. Google is still growing Revenue by 20-25%. SP500 earnings grew by 5-6% when they were projected to be flat to down. Global GDP is still humming along.
IMO, the biggest (most realistic) risk to multi-national earnings is if they are not properly hedged against the coming Euro decline. But these guys actively hedge, and the currency risk should be minimal.
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