How does the saying go… if you play with fire, you are liable to get burned? Investors who made the mistake of chasing returns in China’s A-share market this spring just got torched. Over the course of about 10 trading days, two of China’s major stock market indices plunged into bear market territory with the more widely followed Shanghai Composite index only a few ticks away from a bear market. The question speculators now have to answer is whether or not the 20% pounding they just took in the A-share market is the start of a deeper bear market, or simply a correction on the way to higher … [Read more...]
The Monday Melee: Paris Air Show Extravaganza
The Boeing 787-9. The Paris Air Show: So far the Paris Air Show has been a success for the world's aircraft manufacturers. As The Wall Street Journal notes "The world’s two largest aircraft makers booked roughly $42 billion in deals on the first day of the weeklong aerospace extravaganza. Bombardier Inc., Embraer SA and other plane makers also secured new orders." Boeing and Airbus Ready Themselves for the Show: Air Travel Continues to Rise: What We're Reading: Notable & Quotable: Milton Friedman (The Wall Street Journal) Speech inflation: Why Bill Clinton, George W. Bush, … [Read more...]
Auto Sales Soar
Automobile sales are soaring. In May, auto sales hit a new cycle high and an almost 10-year high. Soaring auto sales are a bullish signal for the economy, but auto stocks seem to disagree. The S&P 1500 automobiles index has been trending down since 2013. What is the performance of auto stocks telling us about the economy? Stock prices are forward looking. Investors may be saying that the current run rate of sales in the auto sector is about as good as it gets. If that is true, a cyclical downturn in auto sales may be closer than some expect or alternatively competition in the sector is … [Read more...]
The Monday Melee: Carl Icahn and Apple
Icahn vs. Cook Today Carl Icahn and his Icahn Capital LP wrote a letter urging Apple CEO Tim Cook to buyback more AAPL shares (below). Icahn is an aggressive stakeholder who has transformed many smaller companies. Apple is surely the biggest Icahn has ever attempted to crack. We are pleased that Apple has directionally followed our advice and repurchased $80 billion of its shares (yielding the company’s shareholders an excellent return), but the company’s enormous net cash position continues to grow while the company’s shares are still dramatically undervalued. With Apple’s shares trading … [Read more...]
Raging Bull in China has Shaky Foundation
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...]
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...]
What to Expect from the Stock Market
Have heard this from your broker or advisor? “The stock market is a discounting mechanism.” “That’s factored into the price.” “Investors know about that risk, so it is in the price.” I have been guilty of this myself in the past, but it is a poor use of language. It can misguide and confuse those who aren’t deeply familiar with financial markets. It is of course true that financial markets are a discounting mechanism, but asset prices only discount the risk of future events. They never fully discount the event until it happens. So if your broker tells you some future event is discounted in … [Read more...]
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