Posts filed under “Think Tank”

What Do You Catch When You Chase Your Tail?

Good Evening: U.S. stocks went virtually nowhere today, allowing both the bears and the bulls to claim victory. Those predicting an imminent decline in U.S. share prices took note that a slight majority of stocks went down on a day when the economic data came in stronger than expected. For their part, those forecasting a continuation of the rally since March can rightly say that the major averages have held in well and refuse to sell off in spite of a laundry list of worries. Perhaps we are all straining our eyes too much in looking for directional clues. To me it seems as if everyone wants to chase what’s “working now” in favor of what is well priced to work in the future.

Stock index futures weren’t doing much prior to this morning’s data releases, and market participants were nonplussed by both a rise in mortgage applications and a surge in durable goods orders (see below). This usually volatile statistic jumped 4.9% in July, thanks mostly to orders in the transportation sector (think: cash for clunkers). The 0.8% rise in the ex-transportation component actually just fell shy of consensus estimates of 0.9%, so there wasn’t much news in this release.

Equities opened 0.5% this morning before swinging higher by the same amount after new home sales figures were announced. Market participants double-checked their screens when they saw sales rise almost 10%. Double digit sales gains and housing have not shared the same sentence for many moons, but percentages can play tricks on the mind when the base is low enough. Plus, new home sales are but 15% of total sales (existing home sales account for the other 85%). It was thus easy to understand why the averages rolled over and went back below unchanged in the wake of this report.

The trading was then very dull for the rest of the day. The averages bobbed over and under the unchanged mark all the way into the bell. By day’s end, only the Dow Transports (-1.3%) were more than a fraction away from Tuesday’s closing levels. Treasurys, too, saw a pretty slow session. A 5 year note auction was fairly well received, and it helped support bond prices after an early decline. Yields finished 1 to 3 bps lower. The U.S. dollar index (+0.4%) caught a minor bid, while commodities went the other way by a similar amount. A 1% retreat in crude oil and other energy products paced the CRB index to a loss of 0.5%.

It’s been 3 years since traders, salespeople, and investors have been able to take a vacation in August without too much angst about the next twitch in stock prices. I guess we’re all a bit out of practice when it comes to relaxing during the two weeks preceding Labor Day, and it shows. You can’t open up a newspaper, go to a financial website, or turn on Bubblevision (a term for CNBC that Bill Fleckenstein coined more than a decade ago) without being assaulted by the latest speculative opinion about which direction the stock market is headed during the next 5 minutes — give or take a commercial break.

The bull/bear debate I described in the opening paragraph is symptomatic of our instant gratification, gotta-know-now society. Like waiting for the latest polls during election season, equity investors have fallen prey to waiting for the latest bit of information to seize upon before deciding what to do next. And earnings season has almost become a joke, since the only thing that seems to matter is whether or not a company “beat the Street” last quarter. Investors only want to see a win, and they don’t seem to care what has actually been “won” or how victory has been achieved.

Take Williams-Sonoma — please! Down on this struggling, mid to high-end retailer going into today’s earnings report, analysts were expecting the company to lose 9 cents a share (see below). When the company revealed that it actually MADE 5 cents, the buy orders flew in well ahead of the serious questions about how WSM did it (the stock rose 11.25% to finish the day at $15.47 — I have never owned or shorted a single share). The company turned punk revenues into a profit by closing stores, slashing their advertising budget, and delaying planned capital expenditures — hardly the strategy one hopes to see in a growth stock. But is WSM a value stock at these levels? Let’s say the company’s thriftiness persists and it continues to earn a nickel every quarter. Let’s also be generous and say the company triples this amount during the quarter encompassing the holiday season. After a year, WSM would post a profit of .30 versus a stock price north of $15 per share. Paying 50 times earnings for a company that is trying to shrink its way to prosperity is hardly the stuff that would make Ben Graham or Warren Buffett reach for a buy ticket. True, “normalized” earnings might well be more than $1.00 per share, but this is the “new normal” for consumers, not the old normal.

I hope more people get to experience the strange feeling I had today when I tried to establish a small long position in a tiny company that I think has a strong balance sheet and a bright future. The Charles Schwab order system wouldn’t allow me to place the order, however, offering me a phone number to call instead. When I actually reached a live person, I soon discovered the problem. I couldn’t buy the name because Schwab doesn’t log a stock into its database until someone wants to buy (or sell) it. That’s right; I’m the first investor in Schwab history to try to buy shares in this thinly traded name. “Wow”, said the order taker on the other end of the line, “I’ve never seen this happen before. And you know what? There’s no listing of any analyst coverage, either!” I may or may not make a dime owning this company, but it sure felt nice to be far away from the pulsating throng that felt the need to compete over shares of Williams-Sonoma today

What’s been lost in the modern approach to investing is a true sense of value. It’s been replaced by a deification of momentum. Thus conditioned, the investor class is starting to become a herd of momentum seekers, chasing the latest information or movements in price. Judging from the email traffic I’ve received from readers, even smart people are trying to game what the less cranially endowed crowd is doing so they can try to profit from zigging after the next zag. No matter where the market goes in the next month or two, let us hope all the short term focus, this zany worshipping of momentum, starts to fade in favor of a return to the basic principles of value. If chasing momentum was such a fruitful endeavor, then why do we laugh at dogs that chase their tails?

– Jack McHugh

Most U.S. Stocks Drop After Report on Orders for Durable Goods
U.S. Economy: July Home Sales and Goods Orders Jump
Williams-Sonoma Rises After Profit Beats Estimates

Category: Markets, Think Tank

“Toto, I’ve a feeling we’re not in Kansas anymore”

“Toto, I’ve a feeling we’re not in Kansas anymore.” The USA, the bastion of global capitalism, entrepreneurship, with the goal of achieving the American dream is now home to people who would rather work for the government. According to Rasmussen Reports, a government job remains “the top employment choice in today’s economic environment.” While below…Read More

Category: MacroNotes

New Home Sales

July New Home Sales, about 15% of the market, totaled 433k annualized, 43k above estimates and up from a revised 395k in June. It is now at the highest level since Sept ’08. Months supply fell to 7.5 from 8.5 and to the lowest level since April ’07 and is an obvious big improvement as…Read More

Category: MacroNotes

Durable Goods

July Durable Goods rose a much better than expected 4.9% vs the estimated gain of 3% but ex transports, new orders rose .8%, .1% less than expected. The June data for both headline and ex transports were revised higher. Non defense capital goods ex aircraft, the core capital spending component, fell .3% after healthy gains…Read More

Category: MacroNotes

Bulls get more giddy and bears go into further hibernation

Stock market bullishness has reached a new high in this run from the March lows as measured by the weekly II survey of newsletter writers. Bulls rose to 51.6 from 48.3 last week and that is the highest since Dec ’07 while Bears fell to 19.8 from 23.1, the lowest since Oct ’07. This contrarian…Read More

Category: MacroNotes

Stocks Shout “Recovery!”; What Do Other Markets Say?

Good Evening: U.S. stocks rose once again on Tuesday, halting its latest losing streak at one. What was interesting about today’s rather modest closing gains is that, given the news flow, they could have been quite a bit better. Ben Bernanke was reappointed to his position as Fed Chairman, home prices actually rose a tad…Read More

Category: Markets, Think Tank

Seasonality of Home Prices

To highlight the seasonality of housing and its impact on pricing where the spring is the busiest of the year, the S&P/Case Shiller Index, which does not seasonally adjust its m/o/m pricing, has shown its best performance in Q2 in every year except one going back to ’01. ’09 is of course not complete but…Read More

Category: MacroNotes

Bloomberg Lawsuit

Bloomberg Lawsuit Judgment

Category: Legal, Think Tank

Consumer Confidence

August Consumer Confidence from the Conference Board was a better than expected 54.1 vs the consensus of 47.9 and up from 47.4 in July. It’s the highest since May which at the time was the most since Aug ’08. Almost all of the improvement was in the Expectations component which rose about 10 points while…Read More

Category: MacroNotes

S&P/Case Shiller Home Price Index

The June S&P/CaseShiller 20 city Home Price Index fell 15.44% y/o/y, better than the expected fall of 16.4%. The index rose 1.4% m/o/m, the 2nd month in a row of m/o/m gains. From the record high, prices are down by 31.3%, off the high to low drop of 32.6% at the low in April. Every…Read More

Category: MacroNotes