Secular bull or bear?


Author Cam Hui

Posted: 07 May 2013

As US equities have rallied in the last couple of weeks, there has been much discussion about the rotation in sector leadership from defensively oriented sectors to the deep cyclical sectors. Does the rotation mean that this market is truly ready to take off to further new highs? What does it all mean?

I have spent a fair amount of time pondering that question (see my recent post Sell in May?). My conclusion is where you come down on the question of whether this is the start of a new secular bull market where stocks move to new highs or whether we are just seeing the top of a range-bound secular bear.

To explain, consider this long-term chart of the Dow, where the market has seen alternating secular bulls, where stocks rally to multi-decade highs, and secular bears, where the market remains range-bound for years.

Still a secular bear market
My main belief is that we remain in a secular bear for two main reasons: demographics and valuation. I have written about the demographics issue before (see Demographics and stock returns and A stock market bottom at the end of this decade). For stocks to go up, there has to be more buyers than sellers at a given price. The propensity of Baby Boomers, as they move into retirement, is to take money out of stocks. In order for equities to rise, those negative fund flows have to be met by the retirement savings of their children, the Echo Boomers. Two research groups looked into this topic (see papers here and here). Their conclusion – the inflection point at which the fund flows of Echo Boomers moving into stocks start to overwhelm the Baby Boomers taking money out is somewhere between 2017 and 2021.

In addition, long-term valuations don’t appear compelling. I have long considered the market cap to GDP ratio as a proxy for an aggregate Price to Sales ratio for the stock market. The chart below from Bianco Research via Barry Ritholz, shows this metric, whose history goes all they way back to 1925, to be well above its long-term average. In addition, note that instances of falling market cap to GDP ratios correspond with secular range-bound bear markets.

Another reason for the long-term secular bear case comes from John Hussman, an investor for whom I have much respect. His latest 10-year return projections for the SPX is about 3.5% (see My answer to John Hussman). Even with bonds yields at microscope levels, a 3.5% return expectation for US equities is nothing to get overly excited about.

The bull case (and it’s always important for investors to consider opinions contrary to his own) is represented by Ray Dalio’s “beautiful deleveraging” concept (see my post Falling tail risk = new secular bull?). Dalio believes that the United States has undergone a “beautiful deleveraging” process in the wake of the financial crisis of 2008. A “beautiful deleveraging” involves just the right amount of austerity, debt restructuring and money printing. He went on to observe that, by contrast, Europe has gotten it all wrong and that region is likely to be mired in a Lost Decade.

If Dalio is correct, then the rotation that we are observing from defensive to cyclical sectors is another sign of a new upleg in equity prices and therefore the start of a new secular bull.

The intermediate term outlook
While my analysis of the secular bull vs. bear is based on a long-term multi-year investment time frame, what about the intermediate term time frame for the next several weeks to months?

Here’s what’s bothering me about the emergence of the cyclical leadership. First of all, commodities look positively sick. Here is a chart of the industrial metals. Does this look like the basis for a cyclical rebound?

In addition, the Citigroup Surprise Index has been turning down, both in the US and globally. Despite Friday’s NFP upside surprise, the internals of the employment report appeared to be negative and it was before long that there were a cacophony of voices pointing out the weaknesses in the report (for examples, see herehere and here).

I agree with the blogger MicroFundy when he pointed out the divergences between the macro picture and US stocks:

I think we are getting real close to a major inflection point. It seems like every macro-economic data point I come across is saying one thing – the same thing. There is an extremely high correlation between all the varying data points and indicators. Data like the 10yr treasury yields, PMI manufacturing, durable goods orders, copper prices, international (ex Japan) stock markets, inflation expectation, margin levels etc – are all saying that the (global &) US economy is slowing, and that the risks of deflation/contraction/recession are growing.

The only thing diverging from this pattern in all of the charts below is the US equity markets.

His conclusion is “something’s gotta give”:

There are two extreme scenarios that can “correct” the above divergence, although I believe it will be a combination of the two.

1 – We could see a correction of 15-20% that would put the US equity markets back in line with most of the charts above. It would then be priced closer to fair value based on most of the recent economic data.

2 – The economic data can pop back up. Whether it was because of the payroll tax increase, sequestration, or some other seasonal event(s)… maybe this is/was just a blip on the radar these last few months, and the economic data will “catch up” to the US equity markets.

If these scenarios were mutually exclusive, I would bet the farm on #1. A realistic base case assumption though, is a combination of the two. I am anticipating a good 10% correction combined with a small pickup in some of the macro data.

Either way, something’s gotta give. The level of divergence here is bordering historical, and the relative and absolute over-valuation of some of these high-yield names are frightening.

With Europe mired in recession, commodity markets signaling that Chinese growth is stalling, the US is once again holding up the world. If the American economy is holding up the world, then why is US equity performance faltering against global equities? The chart below shows the relative performance of SPY against ACWI (All-Country World Index). If we are indeed seeing a launch of a new secular bull, shouldn’t the US, which has been the beneficiary of the “beautiful deleveraging”, be leading?

A bearish bias
While I have outlined my bias for the bear case, investing is about probabilities and I honestly don’t know how this market is going to resolve itself. While the bear case is compelling, Street earnings and revenue estimates continue to get revised upwards (as per Ed Yardeni).

Until we see some sort of negative macro surprise that cause estimates to get revised downwards, the stock market is likely to grind higher. As I wrote last week, there is no catalyst yet for a bearish impulse for stocks yet.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. 

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Is this 2011 all over again?


Author Cam Hui

Posted: 07 Mar 2013

I am not a big believer in market analogues, but the current environment bears an eerie resemblance to the summer of 2011. Here are the similarities

Heavy insider selling
I wrote back in early February (see Insider selling, it’s baaack!) that insider selling was surging. Vickers reported that [emphasis added]:

Looking at a longer time frame paints a bearish picture as well. The eight week sell-buy ratio from Vickers stands at 5-to-1, also the most bearish since early 2012. What’s more, the last time this ratio was at these levels was June 2011, just before another correction in the stock market took place.

Apparently, insider selling has gotten worse since that report. According Charles Biderman of TrimTabs (via Zero Hedge), the ratio of insider sales to buys is skyrocketing, though I am unsure of how to compare the Vickers sell-to-buy ratio to the TrimTab’s one as I don’t know the differences in their methodologies:

While retail is being told to buy-buy-buy, Biderman exclaims that “insiders at U.S. companies have bought the least amount of shares in any one month,” and that the ratio of insider selling to buying is now 50-to-1 – a monthly record. “So far the mass delusion is holding.”

By contrast, Bloomberg reports a three-month average insider sales-to-buy ratio of 12 to 1, a two year high:

There were about 12 stock-sale announcements over the past three months for every purchase by insiders at Standard & Poor’s 500 Index (SPX) companies, the highest ratio since January 2011, according to data compiled by Bloomberg and Pavilion Global Markets. Whenever the ratio exceeded 11 in the past, the benchmark index declined 5.9 percent on average in the next six months, according to Pavilion, a Montreal-based trading firm.

Regardless of differences in methodology, the results are an ominous sign for the bull camp.

US political gridlock
Another similarity between today and the summer of 2011 is the rising anxiety over the consequence of political intransigence in Washington. Then, we saw the debt ceiling crisis of 2011, which led to the loss of the AAA credit rating from Standard and Poor’s.

Today, we have $85 billion in overnight sequestration cuts to the federal government and a looming debt ceiling crisis on March 27, about three weeks away. Fed chair Ben Bernanke projected that sequestration will likely slice 0.6% from GDP growth in 2013:

However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

A 0.6% slowdown in GDP growth could very well mean that the economy stalls and keels over into recession. What’s more, another debt ceiling debate with a drop-dead deadline of March 27 will pour gasoline on the fire and could lead to further market anxieties.

Risk-off, anyone?

News cycle turns down in Europe
In 2011, the ECB’s announcement of its LTRO program stabilized the markets. Mario Draghi’s “whatever it takes” remark in July 2012 and the ECB’s subsequent OMT program contributed to further stabilization. Today, the market consensus has evolved to the view that the ECB has taken tail-risk, or the risk of a European sovereign debt or banking crisis, off the table. The ECB, it seemed, had built a financial castle wall around the eurozone again.

Read the fine print. The OMT program depends on member states submitting to the ECB’s “conditionalities”, namely austerity and structural reform programs. The rise of anti-euro forces in the recent Italian election shows how fragile the ECB’s castle walls really are.

I fear that the news cycle is about to turn down in Europe. Consider these stories that are appearing:

  • The divergence between German and French economies (via Business Insider). This divergence is starting to raise the question of the viability of the French-German partnership in the EU. These are the two principal founding partners in the European Union and brings up the question of wage and productivity differentials between the two countries. If the two economies can’t converge and Germany is unwilling to subsidize France, the euro is cooked. Nothing else matters. It doesn’t matter what happens to Greece, Spain, Ireland, etc.
  • Political turmoil in Spain. The FT reports that Madrid is pushing for a constitutional challenge to Catalonia’s bid for independence, which puts the spotlight on political stability in Spain:

The Spanish government has launched a legal challenge against Catalonia’s recent “declaration of sovereignty”, in the latest move by Madrid to halt the region’s march towards independence.

The government said it would ask Spain’s constitutional court to nullify the Catalan parliament’s January declaration, which stated that the “people of Catalonia have, for reasons of democratic legitimacy, the nature of a sovereign political and legal subject”.

What’s more, Business Insider reports there are rumblings that the Army may not stand idly by and the possibility of a coup d’etat is raising its ugly head. While I believe that these risks will ultimately resolve themselves in a benign fashion, these stories are just further signs that the news cycle is turning negative in Europe.

Recall that in 2011 we had angst over Greece and the implications for the eurozone. We saw endless summits and crisis meetings until the ECB stepped in to stabilize the situation. Today, the fragile peace that the ECB has put together is starting to unravel. Europe is in recession and the tone of the news stories are turning negative.

These kinds of stories have a way of not mattering to the markets until it matters, especially when the market is in risk-on mode. Now that the tone seems to be moving away from a risk-on to risk-off, the market has a way of focusing far more on this kind of negative information.

A positive divergence
In 2011, the SPX cratered about 17% in response to these anxieties. While I am not saying that the downside could be the same, it is nevertheless a warning for the bulls. The key difference between the market weakness in 2011 and today is how the Fed acted then and now. In 2011, the Fed’s QE program was just ending, while we are seeing QE-Infinity today. The actions of the Federal Reserve today may serve to cushion the effects of the speed bumps that the equity markets are likely to experience.

Nevertheless, the current environment is likely to be more friendly to the risk-off crowd than the risk-on crowd.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Just what we need: A stressed consumer


Author Cam Hui

Posted: 02 Mar 2013

Just as the market has to worry about Italy and the prospect of sequestration, I am seeing signs that the consumer is becoming increasingly stressed and consumer spending is slowing.

Signs of consumer balance sheet deterioration
First, CNBC reports that coupon clipping is surging, which is a bad sign for the strength of consumer’s balance sheet:

Consumers are clipping coupons at a rate not seen since before the 2007 recession, and that’s a troubling sign, according to Coupons.com CEO Steven Boal.

The website tracks how often people view and print coupons and their redemption rate. Right now, Coupon.com’s Internet Coupon Index, as it’s called, shows a spike in coupon offers and demand.

This pattern is almost identical to the one that played out right before the last major economic downturn. The higher the index value, the more consumers are under economic pressure, Boal told CNBC.com.

Gallup’s consumer spending survey is falling
In addition, Gallup maintains a daily estimate of consumer spending and it has been trending down for most of February. While this data series is noisy, the downtrend in the 14-day moving average is troubling.

For a contrary opinion…
I had been watching for effects of the payroll tax increase on consumer spending. These data points suggest a consumer that is increasingly under stress. To be fair (and to be aware of the reasoning for the other side of the trade), New Deal Democrat at the Bonddad Blog was sanguine in his weekly analysis of consumer spending data:

Consumer spending

  • ICSC +2.7% w/w +1.8% YoY
  • Johnson Redbook +3.1%YoY
  • Gallup daily consumer spending 14 day average at $82 up $14 YoY !

Gallup has been very positive for 3 months, although a little less so in the last week or two.  The ICSC varied between +1.5% and +4.5% YoY in 2012.  This week was again close to the bottom end of that range for the ICSC. The JR report could just be a one week anomaly, we’ll see.  Even in the worst case, it still looks like consumer spending has not collapsed due to the  tax withholding increase.  It’s worth noting that WalMart is not included in either ICSC or Johnson Redbook.

Risk control is key here
Nevertheless, I remain highly concerned about the ability of the American consumer to significantly contribute to growth in the near term given the data points that I mentioned. Should sequestration hit, the results could be even uglier.

Given these risks and the underperformance of cyclical and consumer discretionary stocks (see my previous post Will the bears get their second wind?), traders who are bullishly positioned should be hyper-sensitive about their risk control discipline.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

The Pavlovian sequester response?


Author Cam Hui

Posted: 02 Mar 2013

Has the equity market been conditioned, like Pavlov’s dogs, to expect a last minute sequestration deal? Why has there been no negative market reaction when it was reported (via NBC) that Obama would meet Congressional leaders on Friday, after the sequester deadline [emphasis added]?

After weeks of argument over the sequester, bipartisan congressional leaders will meet with the president at the White House on Friday — the same day that automatic federal spending cuts are scheduled to go into effect.

President Barack Obama will meet with House Speaker John Boehner, House Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell to discuss the across-the-board budget reductions to federal agencies, aides told NBC News.

Republicans were quick to question why the White House would schedule the meeting only on the final day of the belabored back-and-forth over the cuts.

“If the President is serious about stopping the sequester, why did he schedule a meeting on Tuesday for Friday when the sequester hits at midnight on Thursday?” a Republican aide told NBC. “Either someone needs to buy the White House a calendar, or this is just a – belated – farce. They ought to at least pretend to try.”

I don’t need to go on and on about the deflationary effects of immediate and overnight cuts in government spending. Here is Fed chairman Ben Bernanke on the likely effects of sequestration (via The Bondad Blog):

However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

The market’s reaction
I have been watching Defense and Aerospace stocks, as represented by ITA and PPA, as a barometer of market sentiment about the effects of sequestration. As you can see by the relative performance of ITA against the market, ITA has been in a minor relative uptrend for most of February and has beaten the market in the last couple of days.

The relative performance of PPA also shows a similar pattern of relative outperformance for February and this week.

So let me get this straight. President Obama is meeting with senior Congressional leaders to discuss sequestration on Friday, after the deadline has passed. Meanwhile, the Dow rallies and defense stocks, which are highly sensitive to government spending, are outperforming the market.

Is the market just conditioned to getting a last minute deal, just like what we saw during the 2011 debt ceiling impasse, or endless eurozone summits over Greece in the same year?

What happens to equity prices if the cavalry doesn’t arrive?

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Bond Market Bounces Back as Equities Stumble


Author Larry Berman

Posted: 1 May 2012 re-posted from etfcm

AGG: A few weeks ago many were calling for the end of the treasury bull market. The economy was recovering and yields were heading higher. Since that false start, Bernanke and the FOMC has reiterated the need to keep rates low through 2014 and that more QE is on the backburner if needed. And viola, the bond market has bounced back to near all-time highs as equities start to stumble. Investors can get used to this behaviour as we still see it lasting for years.

Emerging market debt (EMB) is somewhat overvalued given the inflation risks (real returns are extremely low), which suggests currency risks are rising. Peripheral Europe (IGOV) remains a basket case and currency risk is extremely high. High yield (JNK, ZHY) is more correlated to equity market risk and is showing strong evidence that we would want to avoid it for now. The global deleveraging that needs to take place will likely cause stress for the next decade. Significant defaults are likely before it ends and there is flight to safety value in the Treasury markets of Germany and the US. Japan may see some stress in bond yields, but QE will persist.

 

Intensity Builds During Selling Periods In Recent Weeks


Author Larry Berman

Posted: 23 Apr 2012 re-posted from etfcm

Based on the RSI patterns, it is clear there is more intensity during the selling periods over the past few weeks. The market appears to be losing some longer-term sponsorship, but according to McClellan’s oscillator analysis, the odds of one more moves to new highs is still likely in this phase of the business cycle.

As we attended the recent Market Technician’s Annual Conference, an ad hoc sentiment survey showed a pretty significant bearish bias at the moment, largely due to the growing divergences we are seeing and have been writing about for the past month. We still see scope for this market to test the sellers resolve back above 1400 again during earnings period. Earnings have generally been good and that remains a strong positive underlying force in this market.

A close above 1440 would suggest a retest of the 1575 double top from 2000-2007, which would certainly give the technically based bears out there a big gut check. For now we are sellers into strength unless the market proves otherwise.

Europe takes one step back?


Author Cam Hui

Posted: 29 Mar 2012

The story of Europe has been the story of two steps forward and one step back. Here are the two steps forward/

Since the eurozone crisis, the ECB has taken steps with its LTRO programs to stabilize the banking and financial system. Moreover, I wrote that Mario Draghi, on behalf of the eurocrats, outlined the Grand Plan as a way to fix the long-term problems within the eurozone. The Grand Plan consisted of two steps, which sound like pages taken from the Maggie Thatcher playbook:

  • Austerity in the form of “good austerity”, defined as lower taxes and less government spending; and
  • Structural reform, which is the European version of the China taking steps to smash the iron rice bowl, which translates to union busting and going after all of the entrenched interests of the old with their lifetime jobs and gold-plated pensions at the expense of the young jobless.

The one step back happens when Europe dilutes these grandiose object. In the wake of the German and Dutch failure to hit austerity targets, a step backward is inevitable.

Time for Grand Plan 2.0
Most recently, the OECD warned that the eurozone debt crisis is far from over. The organization indicated more work needed to be done, i.e. Grand Plan, and market confidence is fragile. At about the same time, Willem Buiter at Citigroup issued a warning on Spain:

Spain is likely, in our view, to be pushed into a troika (EC, ECB, IMF) programme of some kind during 2012, possibly by losing access to market funding on affordable terms, but more likely by the ECB making a programme for the Spanish sovereign a condition for continued willingness to fund the Spanish banks, which are currently the main buyers of newly issued Spanish sovereign debt. The existing and likely near future EFSF/ESM and IMF financial facilities are unlikely to be sufficient to both fund the Spanish sovereign fully and leave enough financial ammunition in reserve to deal with possible sovereign financial emergencies in Italy or in the ‘soft-core’ of the euro area. The Spanish sovereign would therefore likely continue to fund itself at least partly in the markets even if it comes under a programme. To ensure market access by the Spanish sovereign, the same combination of cheap ECB funding for periphery banks and financial repression of periphery banks by their national authorities that has been effective in lowering sovereign yields since the first LTRO is likely to be required.

Buiter did concede that the government is taking steps to implement structural reforms:

It did use this period to pass several important pieces of structural reform legislation. Among these were labour market reforms aimed at reducing severance pay in the long-term contract sector (while introducing or raising it in the flexible contract sector); reforms aimed at reducing the scope and incidence of industry-wide collective bargaining and replacing it with something closer to firm-level or establishment-level contracting; the imposition of an additional €50bn provisioning requirement on the banks; and laws aimed at strengthening central government control over the finances of the lower-tier authorities (autonomous regions and municipalities).

…though he was uncertain as to their implementation:

Passing legislation and implementing it are not the same thing, however, as we know from the Greek experience. In addition, both structural reform and a medium-term programme of fiscal austerity based on a politically acceptable formula for fiscal burden sharing look necessary to restore Spain to fiscal sustainability. The new government’s decision to wait 100 days to introduce its first budget, in the pursuit of electoral gain, did little to boost Spain’s standing in global markets.

Spain is a too-big-to-fail country within the eurozone. Market angst is starting to rise over the willingness of the Spanish government and the Spanish people to bear the pain of austerity.

Will Spain fall and bring down the eurozone in another crisis? I doubt it. This is the back-and-forth of the Theatre of Europe, but some form of Grand Plan 2.0 compromise will likely emerge. I agree with Gayle Allard at the IE Business School in Madrid who says to not count Spain out in a crisis:

[Allard] said Spain’s biggest problem is investors’ lack of faith in the population’s willingness to withstand austerity. “They don’t see the Spanish people in that way, they don’t understand how a country can put up with it,” she said.

“Having watched Spain through previous crisis, they are a pretty surprising country. They get behind things, hard things,” Allard said. “I don’t think this is ever going to look like Greece and that’s something the markets don’t understand.”

Italy does structural reform
Over in Italy, FT recently reported that Mario Monti clashed with the unions over structural reforms “that would give companies more flexibility to fire workers for economic reasons” and he is winning because of weakened opposition:

[W]ith the [labor union] CGIL considerably weaker than a decade ago and with the main political parties in no position to offer a coherent alternative to the present government, political commentators doubt Mr Monti’s technocrats risk being driven from office.

Opinion polls indicate strong public support for Mr Monti in general, although a majority of Italians opposes changing Article 18 which protects workers in the courts from wrongful dismissals for economic reasons. Under the proposed changes, employees would receive compensation but not reintegration back into their workplace.

Monti is also following the Grand Plan script of structural reforms which pit the young unemployed against their elders, who have secure jobs:

With nearly a third of young people unemployed, Mr Monti also wants to end Italy’s two-tier labour market that protects older workers on indefinite contracts but provides little or no security for mostly new hires on short-term contracts.

The politicians are indeed following through with painful structural reforms. In the meantime, there is doubt from the markets that they can implement them even if the legislation is passed. In a typical EU-style compromise, some of the legislation will get watered down, but I believe that the pendulum is swinging back and the momentum toward structural reform is inevitable.

For now, the message for investors is be prepared for some downside volatility out of Europe. But also know that it is likely a temporary hiccup out of which Grand Plan 2.0 will emerge.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

The Market is Exhibiting Selling Pressure and Technical Divergences


Author Larry Berman

Posted: 29 Mar 2012 reposted from etfcm

More than any time in the past few months, the market is exhibiting some selling pressure and many technical divergences—but this does not mean go out and sell everything. VIX is starting to get active, but the premium in the futures curve makes it virtually impossible to determine the delta on using a VXX hedge, so we are still avoiding using this for now.

The bigger break other than an overbought cooling comes if the S&P 500 falls back below the 1370 breakout and the rising trendline, which is tracking just below the rising 50-day average this week in the 1360 area. Do not look for the spot VIX to jump much until these important support levels break.

Seasonality is not bearish for another six to eight weeks, so there is room for all the technical divergence we have noted in recent weeks to fester, rot, and continue to decay the internals.

 

Equity markets are betting on the consumer


Author Cam Hui

Posted: 26 Mar 2012

Last week, I wrote that the character of the stock market had changed. The market had gone from a central bank liquidity driven rally, which favors hard assets and asset inflation plays, to a focus on the American consumer as a source of growth (see This bull depends on the US consumer).

To review, leadership had gone to Consumer Discretionary stocks, which was in a relative uptrend against the broad market:

…and Financials, which had broken its relative downtrend line and has now staged a relative breakout through resistance:

Europe mirrors the US
I reviewed the chart patterns of the European sectors on the weekend and (to my surprise) found a similar pattern. European Financials had broken out of a relative downtrend, but they weren’t as strong as American Financials as they have not yet staged a relative breakout, but appear to be undergoing a sideways relative consolidation:

European consumer stocks are broken down as Consumer Goods and Consumer Services, which is not quite the same categorization that we find in the United States. Nevertheless, I was surprised to see that the European Consumer Goods sector has been in a long relative uptrend against the market and had staged a relative breakout and pullback after spending several months undergoing a sideways consolidation period:

The European Consumer Services sector was not as strong, but had nevertheless provided leadership in the latest rally.

Market bullish on US and Europe consumer, but worried about China
When I look around the world and listen to the market, the stock markets are telling me that first stage booster of central bank liquidity has dropped and and it’s up to the second stage rocket, namely the American and European consumer, is on course to lift us past escape velocity. There is one drag to our rocket, however, and that’s the prospect of a slowdown in China, as the weakness in commodity prices and commodity sensitive currencies are signaling those concerns.

Expect a rally, but define your risk tolerance
A bullish bet is therefore a bet on the health of the American and European consumer – and that is indeed a fragile foundation for a rally. Nevertheless, unless I am convinced otherwise the stock market remains in an uptrend. The chart below shows the weekly NYSE Summation Index, which is a breadth indicator, which I have overlaid a slow stochastic, an overbought/oversold indicator. If past history is any guide, stocks are tactically oversold and likely to rally in the next couple of weeks.

If you believe that we are in an uptrend, then the current period is likely to resemble the circled December 2010 correction and consolidation period in the middle of the QE2 rally. If you believe that the market is likely to correct further, another analog (circled) might correspond to the weakness seen in June 2010.

In both cases, the oversold readings of the stochastic point to a tactical rally in stocks for the next couple of weeks. In all cases, it would be wise to stay long, but carefully define your risk tolerance with the appropriate stop loss orders. In the meantime, watch the news flow and in particular closely watch how the market reacts to news coming out of China.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Hold your nose and “rent” the junk


Author Cam Hui

Posted: 13 Feb 2011

The stock rally in 2012 has been characterized by a low-quality rally, or “dash for trash”. I wrote here that investors were under-invested in equities and have been rushing for the entrance. They have been chasing the low-quality high-beta names as a way to quickly increase their equity exposure.

If I am right in my thesis that we are in the midst of a buying panic, then the low-quality theme makes sense as a trade. The way to participate is through the use of the Phoenix strategy.

The Phoenix rises again?
I gave a buy list of Phoenix stocks on February 24, 2009, shortly before the ultimate bottom in the stock market in March 2009. The idea behind the strategy is to find beaten down stocks that barely survived the bear market and have the financial or operational leverage to benefit from the coming upturn.

The February 24, 2009 list produced many winners. Notable among them were household names such as the Bank of America (BAC):

Liz Claiborne (LIZ):

…and Saks (SKS):

Different macro backdrop, but still dashing for trash
This time, the macro backdrop is different. We were not in a recession, though arguably it has been a period of anemic economic growth, so the situation for many companies isn’t as dire as it was in late 2008 and early 2009. Nevertheless, Phoenix does make sense as a way to participate in the “dash for trash” theme.

With that in mind, I screen the members of the Russell 3000 for the following characteristics:

  • Stock price below $8 (lower quality, high beta names)
  • One year return of -50% or less (beaten down stocks)
  • Market capitalization of $100 million or more (must be “real” companies)
  • Net positive insider buying (number insider buys – number of insider sells > 0, which should provide some downside support should our thesis turn out to be wrong)

I came up with the following 39 names:

American Superconductor Corp (AMSC), ATP Oil & Gas Corp/United States (ATPG), Aviat Networks Inc (AVNW), Broadwind Energy Inc (BWEN), Central European Distribution Corp (CEDC), Clearwire Corp (CLWR), Cleveland Biolabs Inc (CBLI), Coldwater Creek Inc (CWTR), Demand Media Inc (DMD), EXCO Resources Inc (XCO), Fairpoint Communications Inc (FRP), Frontier Communications Corp (FTR), Gentiva Health Services Inc (GTIV), Geron Corp (GERN), Globalstar Inc (GSAT), Hampton Roads Bankshares Inc (HMPR), IntraLinks Holdings Inc (IL), Kratos Defense & Security Solutions Inc (KTOS), K-Swiss Inc (KSWS), MEMC Electronic Materials Inc (WFR), Meritor Inc (MTOR), MGIC Investment Corp (MTG), Monster Worldwide Inc (MWW), Office Depot Inc (ODP), OfficeMax Inc (OMX), Opnext Inc (OPXT), Overstock.com Inc (OSTK), Pacific Biosciences of California Inc (PACB), Popular Inc (BPOP), Quepasa Corp (QPSA), Radian Group Inc (RDN), RAIT Financial Trust (RAS), Savient Pharmaceuticals Inc (SVNT), SIGA Technologies Inc (SIGA), Sigma Designs Inc (SIGM), Skilled Healthcare Group Inc (SKH), Sun Healthcare Group Inc (SUNH), TriQuint Semiconductor Inc (TQNT) and Willbros Group Inc (WG).

Important caveats and disclaimers
I know nothing about your investment objectives and risk tolerance so don’t construe this as investment advice as this may not be a suitable strategy for you.

This is obviously a high risk approach and I would take the following steps to control risk. First of all, determine how much of your portfolio you want to put into this strategy as 100% commitment is not suitable for pretty much everyone. Second, diversification is critical. I have received feedback when I last issued the call to buy into the Phoenix strategy about this stock or that stock not working out. If you do employ this strategy, you should buy a basket of these stocks and not focus on just one or two names.

Do your own due diligence on the stocks on the list. For some investors, this list could serve as a starting point to do some investigation of their own. As well, define your risk tolerance carefully, either on an individual stock basis and/or on a portfolio basis.

Lastly, this is a momentum dependent strategy that should be rented and not owned. As soon as momentum wanes, that will be the exit signal.

You’re on your own.

A shorter list
If 39 names is too much for you to think about, then I winnowed the list down to eight names by requiring that there are no insider sells (instead of just positive net insider buying) and heavy insider buying, defined as more than five insider buys within the last six months:

ATP Oil & Gas Corp/United States (ATPG), Coldwater Creek Inc (CWTR), Gentiva Health Services Inc (GTIV), MEMC Electronic Materials Inc (WFR), Savient Pharmaceuticals Inc (SVNT), SIGA Technologies Inc (SIGA), Sun Healthcare Group Inc (SUNH) and Willbros Group Inc (WG).

Since the market rally has been going on for several months, buying into a Phoenix strategy now is being late in the game. However, as equity underweight investors rush to get into the stocks, this strategy should yield some decent returns if my investment thesis is correct. One important component of this approach is to watch momentum indicators carefully. When they start to turn down, then it’s time to get out.

Be bold. This is the time to hold your nose and “rent” the junk.

Full disclosure: I am personally long ATPG and SVNT and may seek to get long the other names mentioned in the days to come.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

 

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