Tag Archives: stocks

Market Lab Report – Premarket Pulse 11/10/15

Major averages fell yesterday but on lower, below average volume on renewed concerns about an impending rate hike when the Federal Reserve next meets in December. Given the huge move the averages have made in less than 6 weeks, they were well above their respective 50dmas, thus a pullback would be expected. Clues will be seen in the days ahead in how leading stocks behave as to whether the pullback will be short-lived or something more serious. In terms of interest rates, a proper wind down of QE would be a step in the right direction though central banks abroad have no intention to tighten at this juncture. Meanwhile, the US economy, according to what the Fed follows, is on the mend giving them more room to tighten when they meet in December. If the US economy is truly on the mend, a first hike on this basis could be bullish as history has shown. On the other hand, jobs data is suspect thus the economy could still be weaker than reflected in the report. This could still prompt the Fed to hike but as a one-time hike of 25 basis points, then keep rates at that level for a prolonged period while the economies of the world heal. That said, QE seems to have failed to stimulate any sort of meaningful growth at home or abroad since it began in late 2008 in the US then later in other countries. Central banks have the mistaken notion that printing money will lower interest rates which will stimulate growth. And while this might normally work, these are not normal times. The issue is that first world governments are seeking higher and higher taxes to plug the gaping holes in their massive trillion dollar deficits. But this only serves to increase asset/currency inflation as well as goods inflation because fewer goods are being produced at higher production costs (which explains why basics such as milk, eggs, and electricity cost as much as they do). Meanwhile, demand inflation, a true measure of real demand in healthy economies, remains dormant. Thus, central banks remain trapped in this QE vortex as they continue to print. Any soft landing seems further and further off, if it is even possible. As always, keep a close eye on your stocks since market pullbacks in this environment can result in stocks getting clocked. Wine and spirits distributor Constellation Brands (STZ) had a pocket pivot yesterday off of its 50dma. Earnings and sales are accelerating, pretax margin 21%, group rank 27.

Tilts – Searching For (Relative) Value

By Douglas R Terry, CFA The investing environment remains challenging. Equity valuations are high after a 6-year extraordinary bull market. Bonds have been in a bull market for 35 years, and yields, though off their 2012 lows, remain at historic extremes. After a 7-year, 700% bull in oil from 2001 to 2008, it gave back 90% of gains in 6 months. Oil followed this up with a 5-year bull, and again gave back 90% of gains in 6 months. Sometimes, as investors, it’s necessary to just invest in the best place possible, given a lot of historically poor choices. In these times of poor valuations, we want to stay underinvested, as embedded risk is higher than normal. We want to be nimble and try to avoid getting steam-rolled in markets that can drop 80% or more in less than 6 months. Here are some places I think we can find relative value. Equities: US equities have seen the best regional equity performance performance, but also have the highest valuations. US valuations relative to non-US stocks are at extremely high levels relative to the past 25 years. The US is performing better today than the rest of the world. Perhaps US strength can help the rest of the globe. A tilt toward Global Ex-US stocks has a good relative chance of providing portfolio value. Fixed Income: With rates at historic lows and the Fed contemplating a rise off the zero bound, one would want to be very careful in bonds. If you do venture out the yield curve, consider inflation-protected bonds. Oil has plunged over 60%, and much of the headline inflation weakness is tied to this major commodity. Perhaps, more importantly, much of the embedded future inflation expectations have dropped coincident with oil markets. If this recent soft patch is just a lull, which I believe it is, then interest rates may rise and bond portfolios would not perform well. But if the economy does prove resilient, oil may have found a bottom. Higher oil means higher inflation expectations. Stable oil means headline inflation creeps up toward core inflation. Both scenarios would be relatively good for inflation-protected bonds. In bond portfolios, consider upping the allocation to TIPs versus nominal bonds to use rising inflation expectations as a hedge against the potential of good growth and rising rates.