Bloomberg has a nice post up about the shaky foundation that lies beneath China’s raging bull market. No, this isn’t another post about the millions of undereducated Chinese “investors” who are fueling the bull market or the record level of margin debt that is pushing prices ever higher. Those too might make one hesitate before chasing returns in China, but the shaky ground that China’s stock rally is built upon is more fundamental than that. I’m talking about falling earnings. Earnings are the mother’s milk of stock prices. Without rising earnings continued stock market gains can’t be … [Read more...]
Stunning Wall Street
Amazon reported quarterly results last night that, in the words of one news outlet, stunned Wall Street. What was so stunning about Amazon’s results? The company reported a 15% increase in revenue, but that isn’t so stunning. Wall Street analysts were expecting about $22 billion in revenue and that’s what Amazon reported. Did Amazon finally turn a profit on their billions in sales? Nope, that wasn’t it either. On $22 billion in revenue, Amazon lost $57 million in the first quarter. Hardly stunning. Maybe it was cash flow. Amazon did report a nice jump in free cash flow (cash flow minus … [Read more...]
When Fundamentals Don’t Matter
Barron’s ran an article this weekend on the distortions ETF flows may be creating in individual stocks. This is an issue we have written about at length in our monthly strategy reports. ETF investors along with High Frequency Traders, and corporations (think buybacks) now account for a majority of stock market volume. These investors aren’t focused on underlying company fundamentals and values. HFTs are focused on scalping the next penny increment or two from buyers and sellers, corporations are focused on propping up quarterly EPS via buybacks (IBM is the poster child here), and ETF investors … [Read more...]
Zero Percent Interest Rates Causing Havoc
BlackRock CEO Larry Fink gets it. Stanley Druckenmiller gets it. Yngve Slyngstad, manager of the world's largest sovereign wealth fund, Norges Bank Investment Management, gets it too. The world’s central banks don’t seem to appreciate the risks they have created in the global financial system by holding interest rates at zero for years now. Might it be that the world’s central banks are dominated by far too many academic economists and far too few practitioners of economics, you know the men and women who buy things, start businesses, and make loans and investments? Many practitioners will … [Read more...]
When Asset Booms Go Bust
Voxeu.org has a fitting post up for the economic times on the threat posed to the economy by deflation. Everything you read and hear from the mainstream media, which is of course force-Fed a diet of Keynesian economics, is that deflation is a scourge that must be battled with the full arsenal of the monetary authority. The economic devastation during the Great Depression is always dragged out as the poster child for why deflation is so destructive. But what if the Great Depression was an outlier? Four researchers from the Bank for International Settlements find that historically, … [Read more...]
The Best Performing Portfolio
Pop Quiz! Which of these portfolios had the best performance over the last three years? 3yr Return A) Portfolio 1 +65.8% B) Portfolio 2 +56.5% C) Portfolio 3 +42.5% D) Not enough information Easy, right? The answer is obviously Portfolio 1 because it had the highest return. That’s at least how the vast majority of the investing public and many in the financial press would have answered the question, but it’s incorrect. Investment return is not the same as investment performance. To properly evaluate investment performance you must consider risk as well as return. The correct answer … [Read more...]
Economy on the Verge of Recession?
Is the U.S. Economy on the verge of recession? According to the Federal Reserve Bank of Atlanta’s GDPNow Forecast, first quarter GDP is estimated to rise just 0.10%. The Atlanta Fed’s GDPNow Forecast is constructed by aggregating statistical model forecasts for 13 subcomponents that comprise GDP. The model is updated throughout the month as new data becomes available. You can read more about the Atlanta Fed’s model here: … [Read more...]
Stampede of the Commies
I don’t think China has this capitalism thing down yet. With the Chinese housing market rolling over and the Chinese economy slowing, the Shanghai Composite index is soaring. I don’t mean soaring a little bit. I mean it’s up a ton. Chinese stocks have almost doubled over the last year. There’s a stampede to join in the fun. The hottest sector is technology. Bloomberg reports that Chinese tech stocks are now trading at 220X earnings. In March of 2000 at the height of the greatest stock market bubble in U.S. history, the NASDAQ index was trading at 156X earnings. Why are Chinese … [Read more...]
Transports Send Signal of Caution
Young Research’s Moving the Goods Index is sending a signal of caution on the economy. Our Moving the Goods Index is a modified market-capitalization weighted index of non-airline transportation companies. Transportation stocks are often a leading indicator of economic momentum. The chart below shows that our Moving the Goods Index is rolling over relative to the broader S&P 500. While the relative underperformance of the transports may be an industry specific issue, it could be signaling something more ominous. Savvy investors should take it as a sign of caution. … [Read more...]
Is this the Reason the Stock Market is Falling?
We’ve written about the three big non-profit players in the stock market that are helping to contribute to an overshoot in prices today and will likely force an undershoot during the next major downturn. See the December 2014 issue of Global Investment Strategy (subscription required) for an example. The corporate sector, via share buybacks is one of the non-profit players (High frequency traders and hot money index-based ETF investors are the others). Zerohedge has a nice post up summarizing a Goldman research piece on the impact of corporate buybacks. There is a blackout window for … [Read more...]
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