When You Exit The Stock Market, Don’t Let The Door Hit You On Your Way Out

You cannot make this stuff up. The median stock in the S&P 500 has never been more overvalued on price-to-earnings growth (PEG) and price-to-sales (P/S). On a forward price-to-earnings (P/E) basis – where profitability expectations already reflect pie-in-the-sky speculation – the median company’s shares trade in the 96th percentile. That’s pretty darn pricey! Credit Goldman Sachs for the assessment. For that matter, give the financial conglomerate kudos for acknowledging the strong possibility that one might be wise to “sell in May” after all. Hedge fund legend Stanley Druckenmiller , who spoke at an investment conference in New York last week, forcibly advised exiting stocks as well. One of his reasons? The stock market in 1982 versus the stock market in 2016. He said, It is hard to avoid the comparison with 1982 when the market sold for 7-times depressed earnings with dozens of rate cuts and productivity rising going forward vs. 18-times inflated earnings, productivity declining and no further ammo on interest rates. Granted, overpriced stocks cannot and will not tell anyone the near-term direction of the market. What’s more, ultra-low borrowing costs a la zero percent interest rate policy largely drove risk assets like stocks to unbelievable extremes. On the other hand, front-loading investment returns over the past seven years has pilfered the potential gains one might have anticipated over the next seven years. The Federal Reserve’s own Richard Fisher confirmed the central bank’s front-loading endeavors back in January. Consider an analysis by Steve Sjuggerud. He analyzed data going back to 1870 with respect to what happened to annualized returns after seven incredible years like the current bull market. The anticipated gains over the next one, three, five and seven years were not particularly promising. In essence, the past’s remarkable returns confiscated the prospects for the future. In contrast, the worst decile rank for seven-year periods served up enhanced annualized gains going forward. Are these results surprising? Not really. It tells investors what they should already know; that is, the rewards for holding stocks at higher elevations are dismal, whereas the rewards for acquiring stocks at lower elevations are admirable. Virtually everyone who has ever looked at the relationship between high valuations and future returns understands that higher prices today imply lower future outcomes (and vice versa). Quantitative easing (QE), zero percent rate policy (ZIRP), negative rate policy (NIRP) did not alter the long-standing relationship; rather, central bank shenanigans pulled the gains from the future into the present, while decimating the hold-n-hope possibilities for the future. If I readily acknowledge that valuations alone do not predict the near-term and that stocks could “grind higher,” why have I been so adamant about maintaining a lower risk equity profile over the last 12 months? Weakness in the global economy, deterioration in market internals (including credit spreads) and the Fed’s directional shift since QE ended (December 18, 2014) have combined to create a toxic brew for “risk on” asset performance. Is it true that riskier stock assets have bounced back from two corrective beatings? In August-September of 2015 and again in January-February of 2016? Yes. Still, the percentages do not lie. Less risky asset types are clearly outperforming riskier ones… and that does not happen in powerful bull market uptrends. We should also be cognizant of the reason(s) for risky asset recovery. Is it because there has been widespread buyer demand from “mom-n-pop” retail investors, institutional advisers, pensions, mutual fund managers and/or hedge funds? On the contrary. Each of these groups have been “net sellers” for 16 consecutive weeks. Corporations are the only net buyers of their own shares and they remain the biggest source of stock demand. However, that dynamic may be changing. Corporations have started to slash spending due to revenue and profit weakness. Not only did the number of firms that cut dividends reach a seven-year high, but according to Bloomberg, corporate buybacks are set to fall below $600 billion for the first time in three years. Get a gander at the table below that shows the possibility of a slowdown based on announced buybacks over the first four months. Click to enlarge In earlier commentary, prior to the available buyback data from Bloomberg, I suggested that corporations would be incapable of perpetually spending 100% of free cash flow after dividends to artificially support share prices. The practice of ignoring capital expenditures has almost certainly hindered business growth for years to come. Take a look at the chart on corporate borrowing below. Corporations spent the majority of borrowed money on buying or maintaining land, buildings, and equipment in the 90s. Today? Most of the debt was spent on non-productive financial engineering. In other words, not only did corporations double their total debt levels since the Great Recession ended, but they barely spent any of that debt on anything other than stock buybacks or acquisitions. Click to enlarge Let’s review. Valuations sit at historic extremes. “Risk-off” has outperformed “risk-on” for an entire year. Buybacks have been remarkably influential in propping up the benchmarks, but may be less likely to do so for the remainder of 2016. Factor in global economic weakness that is showing little signs of turnaround as well as election uncertainty, and it is easy to see why preservation may be more critical than appreciation pursuits. I do not advocate getting out of stock assets completely. A tactical asset allocation shift that lowers one’s risk exposure is typically more beneficial than an “all-in” or “all-out” approach. That said, if you have not reduced your exposure yet, you might want to do so now. Otherwise, there’s a good chance the stock market door will hit you on the backside when you eventually scamper for cover. Click here for Gary’s latest podcast. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

3 Strong Buy All-Cap Value Mutual Funds

Value mutual funds provide excellent choices for investors looking for bargains, i.e., stocks at a discount. Value mutual funds are those that invest in stocks trading at discounts to book value, and have low price-to-earnings ratio and high dividend yields. Value investing is always a popular strategy, and for a good reason. After all, who doesn’t want to find stocks that have low P/Es, solid outlooks and decent dividends? However, not all value funds solely comprise companies that primarily use their earnings to pay dividends. Investors interested in choosing value funds for yield should be sure to check the mutual fund yield. The mutual fund yield is the dividend payment divided by the value of the mutual fund’s shares. Below we share with you three top-rated all-cap value mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of all-cap value funds, their Zacks Rank and past performance. DFA Tax Managed U.S. Marketwide Value II (MUTF: DFMVX ) seeks long-term growth of capital. DFMVX invests 100% of its assets in its Master Fund, The Tax-Managed U.S. Marketwide Value Series. The Master fund is expected to invest the lion’s share of its assets in companies located in the U.S. DFA Tax-Managed US Marketwide Value II has a three-year annualized return of almost 9.1%. DFMVX has an expense ratio of 0.22% as compared to the category average of 1.10%. Pioneer Core Equity Fund A (MUTF: PIOTX ) invests the majority of its assets in equity securities of U.S. companies. PIOTX may invest a maximum of 10% of its assets in securities of non-U.S. issuers, which include up to 5% of its assets in securities of emerging economies. The fund may also invest in initial public offerings of equity securities. Pioneer Value A has a three-year annualized return of almost 6.3%. Craig Sterling is one of the fund managers of PIOTX since last year. Homestead Funds Value (MUTF: HOVLX ) seeks capital appreciation over the long run. HOVLX primarily focuses on acquiring common stocks of undervalued companies with market capitalization higher than or equal to $2 billion. The fund considers factors including earnings valuations and debt ratios to identify undervalued companies. Homestead Value has a three-year annualized return of almost 9.9%. As of December 2015, HOVLX held 48 issues, with 5.47% of its assets invested in Bristol-Myers Squibb Company (NYSE: BMY ). Original Post

Car ETF In Focus Post Mixed Auto Earnings

After strong U.S. light-vehicle sales in March, April witnessed a record. As a result, sales on a seasonally-adjusted annualized rate basis improved significantly. The automobile sector has been seeing certain favorable elements such as low fuel prices and a low interest rate environment. However, these factors failed to translate into impressive growth numbers during the first quarter as a stronger yen stood in the way of realizing the sector’s full potential. As per our Earnings Trend report, Tech and Auto sectors suffered the most negative price reaction of all the 16 sectors during this earnings season. Below we have highlighted in detail quarterly results of some of the major auto companies that have reported recently. Auto Earnings in Detail The largest U.S. automaker’s, General Motors Co. (NYSE: GM ), adjusted earnings of $1.26 per share for the quarter beat the Zacks Consensus Estimate of $1.01 by a wide margin. Earnings increased 46.5% year over year. Revenues in the reported quarter were $37.3 billion, up 4.5% year over year, beating the Zacks Consensus Estimate of $35.7 billion. The stock has shed 5.2% since reporting earnings (as of May 13, 2016). The second-largest carmaker by sales, Ford Motor Co. (NYSE: F ) , posted adjusted earnings per share of 68 cents in the first quarter, up 39 cents from the prior-year quarter and ahead of the Zacks Consensus Estimate of 43 cents. Revenues increased 11% to $37.7 billion and surpassed the Zacks Consensus Estimate of $36.1 billion. For 2016, the company expects pre-tax profit, earnings per share, revenue and automotive operating margin to be equal to or higher than 2015 levels. The stock has lost 3.2% since releasing earnings. Japanese automaker, Honda Motor Co., Ltd. (NYSE: HMC ), reported a loss per share of ¥51.85 (46 cents) in the fourth quarter of fiscal 2016 (ended March 31, 2016) as against earnings of ¥45.45 (40 cents) in the year-ago quarter. The Zacks Consensus Estimate was for earnings of 49 cents per share. However, consolidated net sales and other operating revenues escalated 4.8% year over year to ¥3.66 trillion ($32.46 billion). The figure also surpassed the Zacks Consensus Estimate of $31.88 billion. The year-over-year increase can be attributed to higher revenues from automobile and financial services business operations. For fiscal 2017, Honda expects revenues to decline 5.8% to ¥13.75 trillion ($7.64 trillion). The stock lost 4.8% since it reported earnings. Another Japanese automaker, Toyota Motor Corporation (NYSE: TM ), posted earnings of $2.40 per ADR in its fiscal 2016 fourth quarter, beating the Zacks Consensus Estimate of $2.07. However, the company’s consolidated revenues fell 2.1% year over year to ¥6.97 trillion ($60.6 billion) and were short of the Zacks Consensus Estimate of $63.1 billion. Toyota’s consolidated revenue guidance of ¥26.5 trillion ($252.4 billion) for fiscal 2017 reflects a 6.7% decline from fiscal 2016. The stock is down 4.4% (as of May 13, 2016). While Ford and General Motors reported better-than-expected earnings and revenues for the first quarter, Honda’s quarterly earnings and revenues for the quarter fell short of estimates and Toyota reported mixed results. This puts the spotlight on the exclusive auto ETF, the First Trust NASDAQ Global Auto Index Fund (NASDAQ: CARZ ), which has a sizable exposure to the above-mentioned stocks. CARZ lost more than 2.7% (as of May 13, 2016) in the last 10 days. Let us take a look at this ETF in detail. CARZ in Focus This ETF tracks the NASDAQ OMX Global Auto Index, having exposure to the automobile manufacturers across the globe. The product holds 37 stocks in the basket with Honda, Ford, General Motors and Toyota placed among the top five holdings with a combined allocation of nearly 31.5% of fund assets. Other firms hold less than 5% of assets. In terms of country exposure, Japan takes the top spot at 35.4% while the U.S. takes the second spot having a 23.6% allocation, followed by Germany and South Korea with 19.5% and 8% allocations, respectively. The ETF is neglected with $39.6 million in AUM and sees light trading volume of around 9,500 shares. The product is a bit expensive with 70 bps in annual fees and currently has a Zacks ETF Rank #3 or “Hold” rating with a High risk outlook. Original post