The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Among the exercises I occasionally undertake is to dig into the history books and see, in retrospect, how things have played out relative to what the punditocracy had proclaimed (works with punditry on politics, markets, economics, sports, etc.) . With Barron’s releasing its semi-annual “big money” survey, there’s really no better opportunity to page back through history. As we went through the worst economic near-collapse in generations, I always find it most instructive to start my analysis in the summer/fall of 2007 and take it from there. (I will never, ever forget attending a very small dinner on the evening of October 2, 2007 (at Casa Lever, then Lever House), at which David Rosenberg was the speaker. He laid out his assessment of what was happening – and what was going to happen – in the economy, and the group of 12 or so (most unfamiliar with his work or world view) looked at him as if he were a Klingon. Total disbelief. The S&P500 peaked one week later to the day – October 9, 2007.)

The current big money poll (Reason To Cheer), brings us this (S&P500 = ~1380):

America’s portfolio managers see more gains for stocks in our latest Big Money poll. They are wary of bonds, hopeful about the economy and predict that President Obama will be re-elected.

On that note, let’s have a look at where the Barron’s big money participants stood in early November 2007 (S&P500 = ~1520):

Although U.S. money managers are less optimistic than in the spring, bulls still outnumber bears by more than 2-to-1. Some even say the Dow will top 16,000 by mid-2008. Insights into bonds, politics, the Fed and more.

Can you see where this is going? We were on the cusp of the worst recession in 70+ years and a market that would lose 50+ percent peak-to-trough. The writing was on the wall in a huge, bold font.

That article contained this graphic:

Suffice to say that following the Barron’s big money poll in November 2007 was a money-loser.

Fast forward to April 2008 (S&P500 = ~1400)

The professional investors surveyed in our latest Big Money Poll are getting set to jump back into stocks. What they like, and why.

That poll contained this graphic:

Moving on to November 2008, the Barron’s big money poll was titled A Sunnier Season, and teased with this (S&P500 = ~970):

Barron’s latest Big Money poll reveals unrelenting bullishness among many money managers, despite their pronostications [sic] for a “contagious” recession and punk profits through 2009.

The article contained this gem: “The managers also cast their votes for BlackBerry maker Research in Motion (RIMM), whose shares have been decimated this year…” RIMM was mid-50s at the time.

In April 2009, when it was, literally, time to margin your account to the hilt and throw it all into equities, the Barron’s big money participants were cautious (S&P500 = ~855):

The pros in our latest Big Money poll say they’re bullish or very bullish about the stock market. But they have good reason not to jump in with both feet yet.

They were, of course, wary at exactly the wrong time:

For one, just 56% of today’s poll participants think the stock market is undervalued, down from 62% last fall. Thirteen percent say stocks are overvalued, up from a prior 7%. And an alarming 58% say the market hasn’t bottomed yet, even though the Dow Jones industrials hit a low of 6469 in March, before recovering to a recent 8100.

The bear market had clearly taken its toll on the psyche of the managers who participated:

In November 2009, Barron’s titled its big money poll Treading Carefully, and teased with this (S&P500 = ~1050):

The bull is still in charge, say America’s money managers in our latest Big Money Poll. But it pays to be cautious, as bargains are getting harder to find. The case for Microsoft.

April 2010 brought Be Very Careful (S&P500 = ~1190):

The bulls in our Big Money poll pulled in their horns a bit and see only tepid gains for stocks between now and year’s end. Stay away from bonds.

The S&P500 closed the year at 1257, up an admittedly “tepid” 5.6% on a price-only basis. The 10-year US Treasury went from about 3.80 to end the year at about 3.31 after hitting about 2.40 in October and then selling off – there was no reason to “stay away” from them.

November 201o brought us Bears, Beware! (S&P500 = ~1190)

America’s money managers say stocks are cheap and the economy will keep growing. Why they’re bullish on tech, bearish on Congress.

The November 2010 poll showed continued caution regarding the bond market, and offered up another majority opinion about a “bond bubble” which has yet to materialize (count me among those who’s not been in the bubble camp):

On we go to April 2011, in which the big money poll was titled Watch Your Step (S&P500 = ~1340):

America’s money managers are bullish in Barron’s latest Big Money poll, but picking their spots with care. The crowd is seeking safety in big, defensive stocks.

Read the rest of this entry »

Dilbert.com Comic Strip by Scott Adams – 16-04-12

Bloomberg puts out an institutional product called “Financial Conditions” that has lots of great charts and commentary.

Whenever I get a big run of charts from someone, I like to see if I can find the one thread weaved throughout the carpet reveals a truth in narrative.

See if you can identify that story below.

Game show participant: “I can name that narrative in three charts.“

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click for larger graphics
Where Are U.S. Long-Term Interest Rates Heading?

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U.S. 10-Year Treasury Note Yields (2006-2012)

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U.S. Equity Prices and U.S. Financial Conditions

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Well? What do you think?

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Source:
FINANCIAL CONDITIONS WATCH
MICHAEL R. ROSENBERG
Bloomberg, APRIL 13, 2012
GLOBAL MACRO TRENDS AND STRATEGIES

The following comes from a Colorado Bond Manager:

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Bob Farrell’s Rules # 7. “Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.”

Most stock market participants can remember back to 2000 if they really try. It was common back then for typically risk-averse investors (like retirees) to be insistent that half of their portfolios consisted of Microsoft, Intel, Cisco and Dell. The price of each of these stocks had gone parabolic and none of them paid dividends, which was a good thing because that left them with all those earnings to plow back into their business. If the investor needed to buy groceries, they could just sell a few shares for cash flow.

My, how things have changed. Today, “dividend paying stocks” are all the rage. McDonalds, Proctor & Gamble and Johnson & Johnson are emblematic. Apple has just begun getting into the act by declaring its first dividend and Intel and Microsoft are now on the list after ramping up dividends soon after the tech stock meltdown in the early 2000s.

What these companies have in common is that they are blue chip names and they have taken on a “one decision” aura. For example, Proctor and Gamble has raised its dividend every year for 55 years. These are growth stocks for the most part so dividend increases are expected to continue. And they are usually “global mega-caps”, meaning that they are very big companies that do business (often the majority of their business) outside the U.S. The highest yielding stocks of a more domestic and defensive nature, like the utilities, fail to inspire. It is my opinion that, largely because of the headwinds to growth here at home compared to the emerging markets like China and India, belief in the process of globalization has become linear. There is also a generally negative view toward the value of the dollar vs. the currencies of our trading partners and so all the benefits that accrue to these companies that relate to a weak dollar are expected to continue. A weak dollar gives a boost to multinational companies’ earnings and a strong dollar does the opposite. A weaker dollar also makes our products cheaper and therefore more competitive (and vice versa).

Read the rest of this entry »

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The Financial Times:

US equity funds see biggest outflows of 2012: US equity funds suffered their worst outflows of the year in the week to Wednesday as investors became decisively risk-averse following a five-day losing streak for US equities. The S&P 500 fell 4.3 per cent in the five trading days to Tuesday, giving back a third of its gains from a stellar first quarter, although it has since regained some of that ground. Investors responded by withdrawing more than $7bn from US exchange-traded and mutual funds that invest in equities, the largest outflow since mid-December, and equivalent to almost 1 per cent of the assets invested in such funds, according to data from Lipper. It was the third successive week of outflows from equity funds and by far the largest.

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Comment:
The story above refers to Lipper data.  The chart above shows Investment Company Institute (ICI) data.  Although they are two different sources, they generally tell the same story.

While domestic outflows (second panel in green) are the largest of 2012, they still pale in comparison to the outflows of last summer.

click for updated futures

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Let’s not mince words: Yesterday’s market action – down 1.75% on heavier volume — was a shellacking:

DJIA 12715.93 -213.66 -1.65%
Nasdaq 2991.22 -55.86 -1.83%
S&P 500 1358.59 -23.61 -1.71%

We are now rather oversold, and are due for a bounce. What I want to look at is the quality of the market internals during this period. It will provide some insight into how far we could bounce back, and where support might be if and when this reaction rally (2-7 days) fails.

I find whenever I discuss these sorts of technical actions, people get confused by the apparently conflicting perspectives (“You sound bearish today and bullish yesterday“). The key to understanding these are your holding periods and timelines. The wiggles in the day-to-day action mean different things to traders, investors, and company insiders.

My holding period is typically measured in quarters and years. But I feel compelled to be aware of what takes place over weeks and months. Shorter time periods than that — hours and days — are so noisy as to be meaningless to me.

Sometimes it appears market participants are disagreeing when they are really just looking at different holding periods.

Investors should never try to “play the squiggles” — using long term valuation measures to trade in and out for a quick profit rarely works. I’ve seen many a good investment turned into a trade — dumped on initial strength shortly after establishing the position for the quick winner, only to watch it run away over the next year. Its usually accompanied by this hackneyed phrase: “No one ever went broke taking a profit.”

Actually, they do. You need big winners to offset a lot of little losers, and small winners don’t help. Its like snatching defeat from the jaws of victory.

Traders who allow a short term position to turn into an investment are usually doing so because they got caught leaning the wrong way and are refusing to admit their error. Rather than take a small hit, they nurture their losing position on the hopes of it recovering. That happens rarely, but far more often the bad trade turns into a giant loss. In some cases, it becomes a blow out disaster that ends the trader’s career.

Any trader that wants to let a winning trade can and should do so, but they must establish a new exit rule for that position. I never like to give back more than 25% of a gain in these circumstances. You can alternatively use a shorter moving average as your exit signal.

My rules:

1. Make sure you understand what your holding period is before you establish any position.

2. Traders should NEVER let any losing trade turn into an investment.

3. Strong investments should be given the benefit of the doubt, rather than taking the quick profit.

4. Winning trades should be allowed to run, but require a new exit strategy.

These are fairly basic but oft overlooked ideas. Understand them or create your own, but please don’t just wing it. That’s a real formula for disaster.

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Previously:
Expect to Be Wrong in the Stock Market (The Street.com)

Marketbeat notes a research piece from Savita Subramanian of BofA/Merrill (gee, they seem to be coming up a lot lately; I have to stop hanging around with Rosenberg) that mentioned the outperformance by active managers has been getting passed around institutional desks a lot lately.

Three different hedgies sent me this excerpt:

A good quarter for active funds

57% of managers beat the Russell 1000 during the first quarter-which compares very favorably to just one in five outperforming last year. The margin of out-performance came in at almost a percentage point, with the average fund beating the market by 0.7ppt. Having a style bias seemed to pay off as well: both Growth and Value managers had high hit rates for the quarter, with 77% of Growth managers and 72% of Value managers beating their benchmarks. Core managers had the lowest hit rates this quarter, with just 45% outperforming the benchmark.

Why is this 0.7% quarterly out-performance so significant?

Most equity mutual fund managers are charging investors anywhere between 1.5% and a load as high 5.75% (plus internal expense ratios). Hedge funds typically are charging 2 & 20 (2% fee + 20% performance).

So, while stock picking appears to have made its return from the wilderness, basic mathematics remains lost at sea . . .

Last month, I posted a long discussion on the exodus of asset managers from Merrill. According to several dozen Merrill brokers who emailed me, that post was promptly blocked by Bank of America.

Which is a shame.

Anytime you see a corporate management put its head in the sand, it is a bad sign for the future of that firm. The preference is for transparency, honest responses to criticisms, some degree of self-reflection — not Big Brother censorship. Of course, BofA long ago committed suicide with their Countrywide purchase and other mortgage follies, and exists today only due to the largesse of taxpayers who bailed them out. With that sort of poor decision-making in the DNA of the company, I cannot say I am surprised by yet another example of bad executive judgment.

The investing wealthy have come to a similar conclusion. A new Reuters article this past week is titled Merrill, Morgan Stanley seen losing grip on rich. (I wonder if BofA is going to block Reuters as well?). As it turns out, its much easier to browbeat Congressmen into handing over billions than it is to get the top 1% to do the same.

Here are the key bullet points I picked out of the Reuters column:

• 2008 Financial Crisis: Have led big investors to lose faith with Morgan Stanley, Citigroup and UBS — all 3 were bailed out by taxpayers — and Merrill Lynch — which was rescued by a Bank of America takeover, which itself was eventually bailed out by taxpayers.• Technology: is leveling the playing field between smaller,more nimble frims and the industry giants.

• RIA and family-offices: were the fastest growing firms, increasing assets under management by 18% to $356 billion in 2010 (vs 2% among big four).

• Winners & Losers: There were some winners in the asset shift — Private client units of banks such as Credit Suisse, Deutsche Bank, Bank of New York Mellon and Barclays. The Losers? Big 4 brokerages (Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS)

Here’s an excerpt from Reuters:

“The biggest U.S. brokerages have set their sights set on attracting the wealthiest Americans, but a new study concludes a growing number of multi-millionaire households are taking their money elsewhere.

The share of high net worth customers’ assets held by the top four brokers — Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas — has fallen since the financial crisis and will continue to fall, research firm Cerulli Associates said in a report on Wednesday.

That market share, which peaked at 56 percent in 2007, fell to 45 percent last year and is expected to drop to 42 percent by 2014. The companies together had $2.1 trillion in assets from clients with at least $5 million to invest . . .

Merrill, for example, is discouraging brokers from taking on new clients with less than $250,000 so that they have more time to find and work with million-dollar accounts.Consulting firm McKinsey & Co recently declared the $1 million to $10 million account as the “sweet spot” for private banks, because these clients generate higher margins — two to three times more than investors with tens or hundreds of millions of dollars.

Waves of financial advisers, meanwhile, moved to smaller and more independent wealth managers in search of greater stability or fewer conflicts of interest.”

The rich are different than you and I. Its not just that they have more money — they are much more careful with whom they trust it to . . .

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Hat tip Josh

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Source:
Merrill, Morgan Stanley seen losing grip on rich
Joseph A. Giannone
Reuters, Mar 29, 2012
http://www.reuters.com/article/2012/03/29/us-brokerages-marketshare-idUSBRE82S0T320120329