MORNING BID – Of bubbles and evaporating weather troubles

Apr 1, 2014 12:55 UTC

There seems to be a battle in the market between those who believe stocks are in, or are nearly in, a bubble (that should remind investors of 2007, 2000, or another time when the market was significantly overvalued), and those who believe all is well, things may be a bit frothy but hang in there – that kind of thing.

This could be the result of who is driving news flow.

People with boring diversified portfolios (and good on ya for that) probably see this as less of a big deal, given steady appreciation in stocks. Those with big positions in the momentum names that were hammered in the last week – one of the worst in terms of performance for hedge funds relative to the S&P since 2001, according to Goldman – might see it differently.

Really, what’s happened is that the more speculative areas of the market have been the focal point for some serious gains, and now, a good deal of selling. Sure, the biotechnology stocks aren’t at the point experienced by homebuilders and financial stocks in 2007, but who would want that anyway?

Citigroup is still down about 90 percent from its peak all those years ago. And financials are the only sector since October 2007 that still boast a negative total return (it’s not a close call, either – it’s still like negative 30 percent).

Bank of America/Merrill Lynch said in a note that the average biotech stock trades at 24 times sales, the highest since the tech bubble. Still, BofA/ML is sticking to its premise: “While we continue to recommend that investors fade secular growth stocks (and bond proxies) in favor of inexpensive cyclicals, overall market fundamentals remain favorable, and the frothy spots appear well contained. Equity bubbles rarely happen when everybody is talking about bubbles, and equity sentiment remains subdued, unlike the bullish levels of 2000.”

Whole load of assumptions in that sentence – equity bubbles rarely happen when everybody is talking about them? Sure didn’t feel that way in 2000 and 2007. And frothy spots are pretty contained when the baseline is still that it hasn’t engulfed the majority of the market the way it did in 2000.

This isn’t to say BofA is wrong on this front. The market doesn’t, as a whole, feel as overwhelmingly overpriced as it did in the 2007 period or in 2000. Indeed, even the IPO market, which has been chock-a-block with unprofitable companies, including a lot of biotech names, has not extended its gains to levels comparable to the 2000 tech bubble.

So, a bit more of a correction is certainly possible, and those who believed the market would churn its way through the year are pretty much on target for now. The S&P gained 1.3 percent in the first quarter, and a repeat of that for three more quarters for a 5.5 percent or so price change in the year wouldn’t seem out of line with expectations.

Investors should get a reasonable clue of the path of consumer spending as the nation’s automakers release data on their sales in March. GM, Ford and Toyota are expected to see smaller sales gains than Chrysler, but the hope is for slightly better sales as payback for recent weather-linked sogginess, right when the market is hoping to see such encouraging news.

Morgan Stanley sees this as the case, noting that one of its proprietary indicators of consumer activity is seeing a rebound in housing, auto sales and other consumer areas, while Goldman Sachs last week wrote that “we believe that dealer traffic experienced an inflection point mid-month,” anticipating a seasonally adjusted annual rate of car sales to come in at 16 million.

MORNING BID – Bubble, bubble

Mar 5, 2014 14:35 UTC

Opinions vary right now as to whether we’re seeing the return of bubble-like qualities across a broad swath of the market or just in select names (which really isn’t a bubble, then, bubeleh, just overvalued stocks).

With the Ukraine issue subsiding a bit, investors had a chance to sink their teeth back into the market, including a number of areas that seemed ripe for buying, like small-cap names, which saw a very strong 2.6 percent increase on Tuesday that outdid the larger-cap stocks.

Fund flows have remained strong to smaller stocks, and the overall valuation picture is still somewhat complicated here, as lower interest rates have tempered concerns about reduced liquidity (it’s a strange thing to see the safe-haven play into bonds not quite recede, while stocks shoot to the moon. The best of both worlds, until it ends.)

Naturally there are skeptics. Mike O’Rourke of JonesTrading has been a consistent one for some time, and he went all-out in a late note, pointing out that the double-levered long Russell ETF had 17 times its average daily volume.

That, he said, is “either some short being covered or a major reach for risk,” also noting the ongoing moves overnight seem correlated with dollar/yen and the bond market. Again, this is more a signal of a risk-on/risk-off environment than one operating on expectations of economic and earnings growth.

With the S&P 500 once again at an all-time high, it’s hard to argue that point, but let’s give it a shot anyway. The bull case would be that the weather will recede as a true problem and that growth and overall cash flow is good enough – and that low yields still make it complicated to invest in other asset classes.

It’s not a stellar argument, particularly when many of the more bullish strategists still also don’t see the S&P gaining much more than a few percentage points in the rest of 2014.

One outlying argument came from Morgan Stanley’s Adam Parker, who points out that even though about 40 percent of tech stocks have a price-to-sales ratio that exceeds 5 times, that’s still not close to the tech-bubble peak, when it was about 80 percent. Admittedly, this figure is at a five-year high at a time when people continue to fear markets rolling over somehow.

Still, the big gains in the S&P and Russell suggest a possible “blow off” move, according to Jason Goepfert of SentimenTrader. He says moves like this, in the past, have been at the apex of a rally – especially as the small-caps and biotechs moved up sharply, and they’re the kind of high-beta outperformers that go nuts just before the deluge. So there’s that.

Longer-term strength can follow moves like this, often after some short-term weakness, however.

MORNING BID – Janet Yellen’s rain (snow) check

Feb 27, 2014 14:16 UTC

This is the thing about delaying the new Fed chair’s follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that’s potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That’s mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There’s also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the “Fed put” option has become in the discussion of Fed activities, so we’ve really lowered expectations here.

Meanwhile, Boston Fed head Eric Rosengren said the Fed is looking very closely at activities in emerging markets, which is sort of obvious in a sense but contradicts, if only modestly, Yellen’s thoughts two weeks ago. And really, the Fed’s ability to influence economic activities overseas in some of the world’s developing markets or troubled spots is even weaker than what it can exert over U.S. demand. So maybe it’s just one to grow on.
Either way, Yellen would probably want to comment on the situation, if, again, a smart senator would think to … well, never mind.

Overnight, the situation in the Ukraine has worsened, with armed gunmen taking control of regional government headquarters in Crimea, vowing to be ruled from Russia. The Ukrainian hryvnia continues to sink while the Russian ruble plumbs new five-year lows, surpassing the previous day’s losses, and a bit of risk-off action can be seen in the zloty and a bit of better buying in Treasuries, where the 10-year yield was lately at 2.66 percent. Fund flow figures will be key to watch here to see if overseas flows increase to the U.S. or at least to the developed areas of Western Europe and Japan.

MORNING BID – Netflix, and a bear’s lament

Jan 22, 2014 17:27 UTC

The week opened with the earnings of a number of high-profile corporate names that disappointed investors. Most notable of these was International Business Machines, which really ought to be called International Buyback Machines, given Big Blue’s penchant for driving earnings through financial engineering rather than, y’know, the real kind of engineering.

IBM fell short on revenue estimates, saw shrinking demand in part because of reduced government spending (China’s government, not the US), yet exceeded net income estimates because of – what else – a lower tax rate, now at 11 percent vs 14 pct a year ago.

Margins continue to shrink – the pre-tax margin for the fourth quarter dipped to 25.1 percent from 26.7 percent a year ago. So, in some ways, it’s a microcosm of the recent earnings trend – cost-cutting, relying on government largesse, moving money around, and making per-share earnings look better by just changing the whole “per share” thing.

IBM’s not the only company that mirrors the S&P 500 writ small. Another is Netflix, the streaming media company that was the S&P 500′s best performer in 2013 and reports earnings after Wednesday’s close.

The bear case is pretty much handled by pointing at a chart of the stock rocketing into the stratosphere, looking into the TV cameras, and saying “Seriously?” Which is pretty much how some of the bearish types on Wall Street think of the entire market right now, believing they’re the only sane ones on earth while everyone else is crazy.

But we know how that goes when it goes wrong, and with Netflix, all those bets against it went wrong all year – causing short interest on the name to dip from the mid-20 percent area to a miniscule 0.93 percent of the float, according to Markit, which puts it in ExxonMobil territory.

Analysts expect a gain of about 2 million U.S. subscribers, and Wall Street forecasts net income of $41 million, five times the $8 million it recorded a year earlier.

The expectations at least remain positive, so that’s something. But there’s an irony here – the stock more than tripled in 2013, and from an intrinsic value basis, ranks as one of the worst in Starmine’s greater universe: The $330 price in the market should be closer to $61 a share, according to Starmine, as its forward price-earnings ratio currently stands at about 83, when it warrants somewhere around a 19 P/E.

The idea that the overall market is just as overvalued as Netflix doesn’t quite pass the smell test. You can hear the bear’s lament in the discussion of the broad market just as can be heard in the NFLX discussion – one that waned as the stock kept rising.