They walk the line…
by Blaine Rollins, CIO, 361 Capital
The press continues to write stories of the billionaires’ bearish views on the financial markets. I have no idea if a bond or a stock market crash is close at hand but every time one of them appears in the press or pens a bearish note, I get a few emails asking if now is the time to sell everything. I try to consistently respond with comments noting how the billionaire has valid points, but that it is typically wise to keep a diversified investment portfolio and avoid trying to ‘all or nothing’ time the markets based on what they have seen or read. Even the billionaire market timers themselves will tell you how difficult it is to call the tops (and even the bottoms).
I find it much easier to watch the markets for developing trends and then invest in those ideas that have good fundamentals and a basis for further future buying by other investors. After two to three years of mostly trendless equity markets, 2016 does appear to be providing us with some new and interesting trends in sectors, geographies and asset classes that have been roughed up during the last investment cycle. I don’t mind if the new trends appear because of changes in global economic activity, changes in central bank actions, changes in specific sector demand or just extreme price movements. I just want to find moving investor perceptions and position my investments ahead of those perceived changes. Digging and transporting iron ore in Brazil was a great business that investors tripped over themselves to own back in the mid 2000’s. Today that same chart looks like the Dow Utilities or the U.S. Real Estate ETF. The market will usually move in small, medium and big cycles. Find the time frame that is appropriate for you and add chips to those asset trends that are improving, while funding them with the assets that are expensive, extended and falling out of favor.
Now to the markets, Friday’s job report was strong enough to abate worries over the consumer economy. If only companies would start spending we could really start dialing up GDP growth expectations and give the Fed something to do…
The three-month average job gain is now running at about 190,000, suggesting that payroll growth can easily continue in the range of 120,000 to 150,000 in the months ahead — ample to compensate for natural growth in the labor force and also bring more people back into the labor force…
Adding to the robust job creation, the average hourly wage increased by 0.3 percent in July, a bit faster than expected. Together with a slight extension of the average work week, this puts more money in the pockets of U.S. households. This bodes well for consumer spending, which still comprises the most important component of the economy, suggesting that the U.S. is in relatively good shape to resist the growth slowdown afflicting other countries.
With the bulk of the corporate earnings season now behind us, it looks as if the earnings beats will end up being the highest in five years…
More than 2,000 companies have reported earnings since the Q2 reporting period began on July 11th. Of these 2,000+ reports, 65% posted EPS numbers that were stronger than consensus analyst expectations. That’s a strong reading relative to past earnings seasons over the last five years.
Below is a look at earnings beat rates by sector this season. As shown, the strong overall beat rate of 65% has been driven by Technology, Industrials and Health Care. A whopping 74% of Tech stocks have beaten consensus analyst EPS estimates. Now you know why the sector is on fire lately! The Industrials sector beat rate is at 67%, while it’s 66% for Health Care.
(Bespoke)
I would have titled it… “Look Inside! Positive Yields!”
(Barron’s)
For investors chasing dividend stocks to get yield, Alliance Bernstein has a thought for you…
The hunt for yield and safety stocks continues to captivate investors. Of the nearly 2,700 US equity mutual funds and ETFs, investors have poured money into less than 20%—those with the highest yields. The rest have seen outflows.
But the highest-dividend-paying stocks are trading at valuations that are about 85% higher than their historical average. Investors seem willing to pay a hefty premium for companies offering high current yields, over firms that can grow dividends over time.
High-dividend payers are popular because they are generally seen as stocks that act like bonds. Yet with so many investors and investment flows heading in the same direction, the perception of safety may be an illusion.
(ABglobal)
It was a clear Risk-On week…
Technology & Financials > Utilities & Staples
Emerging Markets > Developed International
Small Caps > Large Caps
Biotech > Healthcare
Junk Bonds > Treasury Bonds
Silver > Gold
Also take notice that all XL Sectors (tagged blue) are in the green for 2016…
(priced 8/5/16)
Apple is waking up…
Some simple 111, 121, 131 resistance levels will be looked at in upcoming months if the stock can continue to move higher.
And several large investors have turned the tide in Biotech as a year of selling has now reversed to buying…
As the Olympics get off on the right foot, Brazilian stocks are continuing to put up a great performance…
Makes you wonder if Warren Buffett is buying Brazilian assets along with a Coke at every event intermission he has been spotted attending.
One big reason for the continued move in EM equities has been the massive flows into EM debt…
We know investors are hunting for yield and their hunt has led them to lower the risk free rates and cost of capital in the Emerging Markets.
Another reason for investment flows into Emerging Market equities is that they are still cheap to historical valuations unlike the Developed Markets…
Financial stocks get a green star for going positive last week…
In looking back over the last 20 years, only the year 2000 had a significant sell-off that ended with a positive return…
As a bank analyst, I remember that year well. No one wanted to own financial stocks because they were such laggards. Then during the first quarter of 2000, Tech, Telecom, and Internet stocks broke and the buying of defensive equities, including Financials began. Makes you wonder if a break in Utilities, REITs and Staples will cause a swarm into Financial stocks this time around?
If you need to remind yourself of the XLF Financial ETF weighting and breakdown…
Real Estate will be leaving the XLF in a month as the separate REIT ETF will be spun out. REITs have been the 15-year outperformer. Maybe this spin-off is just the kick in the behind that the Financial sector needs to get its own outperformance going.
Small Cap stocks continue their 2016 outperformance versus Large Caps. No help needed here…
Where could the Risk-On move continue to get fuel as 2016 progresses?
How about active fund manager underperformance. When the pressure is on, and the heat is turned up on a team, the last thing they are thinking is to get defensive. There will be a hard press to find new ideas with more upside and to sell the stocks, sectors and geographies that are not working.
(GoldmanSachs)
Speaking of underperforming assets, look at the sinkhole that is appearing in the middle of the golf industry…
A good thermometer for the health of the golf industry might be this company…
ClubCorp’s debt now exceeds its market cap so concerns have been built. Maybe rising real estate prices will give them a floor value for all of their real estate in the event the clubs become unprofitable. Or, they could also find a way to monetize the Pokemon Go traffic because all the golf courses in my town have become highly prized real estate for rare monsters. Did Nintendo want kids to swarm to golf courses at night once the golfers left? Or do the mapping algorithms just see a golf course as a large park?
Speaking of hard assets, BofA Merrill Lynch has a great chart here…
As for the energy component of real assets, the hot summer caused an unusual event last week in the Nat Gas market…
Natural Gas storage typically fills up during the summer months and then is drawn down during the winter months. But for the first time in 14 years, the summer inventories saw a decline. No doubt the ongoing shift toward nat gas and away from coal has changed the market in the last decade, but still an interesting datapoint to keep an eye on just in case the imbalance persists as football season approaches.
The perfectly hot summer is causing an opposite move in the price of grains…
If you want any job at GE, Jeff Immelt wants you to know how to code…
“Manufacturing is important for the company today. It’ll be important for the company in the future. Those are people making $65,000, $70,000 a year. Those jobs in our world will continue to grow, but they won’t grow as quickly. The new middle-class job is a programmer, a data scientist. A lot of people who work in factories have college degrees, but many of them have associates degrees. I think it’s much harder to find a really great middle-class job that somebody can find with an associate’s degree today. Those are few and far between.
Everybody who joins G.E. is going to learn to code. We hire 4,000 to 5,000 college grads every year, and whether they join in finance or I.T. or marketing, they’re going to code.”
Finally, what great book are you reading this week?
Reading books is tied to a longer life, according to a new report.
Researchers used data on 3,635 people over 50 participating in a larger health study who had answered questions about reading.
The scientists divided the sample into three groups: those who read no books, those who read books up to three and a half hours a week, and those who read books more than three and a half hours.
The study, in Social Science & Medicine, found that book readers tended to be female, college-educated and in higher income groups. So researchers controlled for those factors as well as age, race, self-reported health, depression, employment and marital status.
Compared with those who did not read books, those who read for up to three and a half hours a week were 17 percent less likely to die over 12 years of follow-up, and those who read more than that were 23 percent less likely to die. Book readers lived an average of almost two years longer than those who did not read at all.
(NY Times)
And Lastly…
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