Posted by: Ben Steverman on November 10
Stock strategist these days seem obsessed with the concept of quality.
As I wrote as early as June, the March-to-October rally was driven largely by "junk stocks." Leading the way were smaller firms with more debt, less cash, low stock prices and falling sales. These stocks were rebounding from terrible 2008's and their rise reflected investors' relief that worst-case scenarios had not occurred.
But, now, market prognosticators are watching closely to see if the low-quality rally might be over. Or at least waning.
Three different views on this topic:
1. The rally may have further to run, Robert W. Baird strategist William Delwiche noted Nov. 5. But, he says, trends will moderate and not all stocks will participate. He writes of recent activity:
Small-caps have moved into a lagging position relative to large-caps, failing to match gains on the upside and leading the way lower on pullbacks.
Financial stocks look weaker to Delwiche, while energy, consumer staples and utilities are looking stronger.
2. Commentators at Bank of America Merrill Lynch, led by chief U.S. equity strategist David Bianco, focused on the concept of beta, a measure of volatility, in a Nov. 9 note:
We expect higher beta stocks in general to outperform lower beta stocks as the market grinds higher. We expect higher quality stocks to outperform lower quality stocks of equivalent beta.
But beta and quality aren't the same things, and disentangling the two concepts can be difficult, they warn.
3. If you think the market rally has run out of steam, it may be time to move into so-called defensive stocks, firms that will hold value even if the market sinks or moves sideways.
Barclays Capital portfolio strategist Barry Knapp believes it may be too early to make any drastic moves. But, he wrote Nov. 6, "we have reached a turning point in the Fed liquidity-driven, highly-correlated rally across all asset classes." He adds:
While it's probably too early in the cycle to be playing defense, the valuation opportunities present in the space compel us to take a small step in that direction.
He proposes buying more defensive stocks but still favoring more economically sensitive stocks overall. For example, he believes tech, industrials and energy "should continue to outperform."
No matter what happens, many high-quality stocks seem to be trading at prices that could be attractive to long-term investors.
In the meantime, much will depend on corporate profits in the last three months of 2009. After a long recession and financial crisis, two of the weakest sectors are consumer discretionary and financials. Both are predicted to report huge boosts in earnings early next year.
If they do so -- if retailers have a better-than-expected holiday season and banks repair their balance sheets significantly -- the low-quality rally just might continue.
Posted by: Howard Silverblatt on November 06
This was my ninth New York Yankees World Series parade and my sons first. There are no more $5 hats ($35 for the ‘official’ ones and $10 for the ‘others’), most of the windows don’t open, Broadway was closed-off by 11AM (start time), and there is no more tape, just purchased shredded paper. But I’ve waited nine years to pass on the tradition that my mother first taught to me in 1961 (my father had taken me to the last game of the regular season that year, in which Maris hit 61, breaking Ruth’s record). My mother was a Yankee fan, she lived a few blocks from the stadium, and dated her games back to the early 30s. Her parents were both immigrants and there was no better way back then to show your new pride than being a baseball fan, especially if you lived in the Bronx. Her big item was being at the stadium on July 4, 1939, when Lou Gehrig made his final speech; her father brought her a souvenir ball that day with Gehrig’s name on it. Many years ago I stole that ball from my mother, and joked that it would pay for my kids’ first years’ tuition. Two years ago, my son, who attended his first NYY parade today, as well as the first game at the new Yankee Stadium, stole that ball from me. It sits in a case, in his room, on a mantel. However, unknown to him, behind the case there are two notes. The first is from my mother, saying that the ball is now his. The second, I wrote, and is dated July 4, 2039, and addressed to “David’s child”. It says that I stole the ball from my mother, that their father stole it from me, and that today, July 4, 2039, on the 100 year anniversary of Gehrig’s speech, they need to steal it from their farther, my son. I don’t know, or care, if my grandchildren will be Yankee fans, but I sure hope they will understand tradition; it took me a lot of years to get there, thanks mom.
Posted by: Ben Steverman on November 05
Shares of Whole Foods Market (WFMI) took a nosedive on Nov. 5, dropping 15.5% to 27.10.
What scared Whole Foods shareholders should concern all investors, especially those in consumer-focused stocks: The outlook for next year.
Like many other retailers, Whole Foods gets praised for navigating through the recession relatively well. Investors worried about Whole Foods' sales trends and debt load dumped shares in 2008, and shares fell to as low as $7. Since the beginning of 2009, however, Whole Foods' stock is up 187%.
Announced the evening of Nov. 4, last quarter's results didn't contradict the thesis that the food retailer's business has stabilized. In fact, fourth-quarter earnings of 23 cents per share beat Wall Street expectations by 2 cents.
Sales trends weren't bad. Chairman and chief executive John Mackey told analysts: "We believe our sales have stabilized and officially turned the corner."
After five quarters of declines, comparable store sales figures rose 1.6%. Total sales for the quarter rose 2.3% to $1.8 billion.
With results that good, why are investors bailing on the stock? One problem, which I noted back in August, is the high expectations built into Whole Foods' stock price. Because it is a growing firm, investors are willing to pay far more for Whole Foods than other grocery chains. Before earnings were released, on Oct. 30, J.P. Morgan (JPM) analyst Charles Grom noted that Whole Foods traded at 27.6 times his 2010 earnings prediction. Rival supermarket chain Kroger (KR), meanwhile, trades at a price-to-earnings ratio of 11.2. That "seems a bit excessive," he wrote.
But even if you believe Whole Foods deserves a premium stock valuation, you should be worried that 2010 sales and profits will disappoint. And that's the warning investors received from Mackey.
Mackey said he sees "no anticipated positive change in the economy over the short-term." Whole Foods, like many other retailers, has already slashed its expenses, and further cuts will be harder to find. "We will have difficult expense comparisons due to the cost savings realized in 2009," Mackey said.
Credit Suisse (CS) analyst Edward J. Kelly noted:
The company is making progress in addressing some of its issues (slowing growth, downsizing its stores, exiting bad leases in development, and cutting its bloated expense structure), [but] this catalyst seems to be more than price in [its stock.]
The recession forced Whole Foods -- and many other companies -- to become more efficient and make tough choices. However, investors already have reaped most of the benefit of these changes.
In 2010, investors will need robust consumer spending to drive results. And, with the job market weak, that might be too much to hope for.
Posted by: Ben Levisohn on November 05
When the S&P 500 opened at 1047.30 on Nov. 5 and quickly rallied 1.65% to 1063, investors could be pardoned for feeling a sense of déjà. Just yesterday, the S&P 500 opened at 1047.14 and barreled its way up to 1061. But stocks gave back most of their gains after the FOMC meeting, and closed at 1046.50. Will today's trading end on a happier note?
Technical analysts see some indications that it could. For starters, the market is pushing strongly against its near-term resistance, which is around the 1060 to 1066 level. Yesterday, it hit those levels and fell back. But short term sentiment, as measured by the percentage of stocks trading at 10-day lows, is bearish, says technical analysts at institutional brokerage Concept Capital. That indicates an oversold condition and could point the way higher for stocks.
Still, there are signs that the market is poised to roll over. On Nov. 4, more stocks moved down than up, a bad sign after the S&P 500 spent so much of the day in the green. And despite the oversold conditions, the market hasn't been able to put together any positive momentum, Concept Capital says.
More worrisome is the 60-day average correlation of individual stocks to the S&P 500. Right now, that number is 62% -- it would have to trade above 70% to be problematic. But if it keeps rising, it could be a sign of long-term weakness to come. Says Concept Capital: "A prolonged rise in correlation could indicate that a more significant period of market weakness is starting to develop."
Posted by: Ben Levisohn on November 03
Equities are expensive, says High Frequency Economics chief economist Carl B. Weinberg. But before you start dumping all the stocks in your portfolio, pay heed – it’s Europe, Japan and England – not the U.S. – you need to worry about.
During the past two quarters, U.S. investors have become accustomed to companies beating earnings estimates. Sure, much of that has been done with cost cutting, but a beat is a beat. In Europe and Japan, however, third quarter corporate earnings have been coming in below expectations. That's impacted valuations across the board. The Japanese Nikkei 225 has a trailing p-e of 37.58, the Xetra DAX 100 has a p-e of 43.95 and England's FTSE 100 has a p-e of 21.15. The S&P 500, in contrast, has a p-e of just 21.15.
The difference, Weinberg says, stems from labor market differences. In the U.S., job cuts have been deep and painful, but they've also been quick. Costs have quickly been realigned and that's helped keep price-to-earnings ratios near "historical norms," Weinberg says. European and Japanese lack the flexibility to cut wages or lay workers off to match falling demand. That’s good for workers but bad for valuations. Says Weinberg: “This will be a bad season for [Japanese, Euroland and London] stocks.”
