IBD MEETUP/NORTHRIDGE SEPTEMBER 21, 2013
Summer Is Over, September Looms • The last 50 years, September has been the worst month of performance for the S&P 500 Index by far. • Over the next few weeks, investors will face a number of issues that are going to drive stock market behavior • The list is long: • The Fed’s quantitative easing program. • Syria. • The debt ceiling debate in Congress. • The German elections, to name a few. • The recent minor pullback in the market • Volatility has picked up last two months and daily swings in the major indices have widened. • Investors are nervous, some are taking a little money off the table while others are slowly putting some sideline funds to work.
INVESTING IS A GAME OF PROBABILITIES. • Opportunity and danger go hand in hand. • The Market offers opportunities to profit on a daily basis but uncertainty lurks around every corner. • Investors can never be 100% sure of any given outcome. • Will the Fed begin to reduce the pace of quantitative easing (QE) in September? • If so by how much? • How close will the U.S. government come to a shutdown due to the inability of lawmakers to reach an agreement on the debt ceiling? • Will the Syrian civil war spread into a regional conflict that will cause the price of oil to soar or will any potential military strike come to a quick conclusion?
US MARKET OUTLOOK FALL 2013 • What's in store for the U.S. stock market this fall? How excited can one be when they read something like this summary in the Financial Times: • "Uncertainty over global growth, renewed U.S. congressional battles over the country's debt limits, the possibility of instability in the Middle East and expectations that the Federal Reserve will begin tapering measures in the coming weeks will weight on the market ..." • And, to add to this: • "Equities appear caught in a Catch-22 whereby strong data stoke Fed tapering fears, while weak data aggravate earnings-per-share jitters, leaving stocks struggling either way."
FALL OUTLOOK • This leads into the comments of Mohamed El-Erian, chief executive and co-chief investment officer at Pimco, • "Which brings us back to this week's data, including high-frequency indicators of economic activity and the monthly employment report. Unfortunately, these numbers are unlikely to point to anything more encouraging than an economy that is moving forward only in second gear - i.e., one that is expanding too tepidly to decisively overcome the combined pressures of inadequate aggregate demand, lukewarm supply responsiveness and remaining pockets of overleverage." • Analysts got all excited when the revised figure for second-quarter real GNP growth was quite a bit higher than the original number. However, when one calculates the year-over-year rate of growth of real GDP, the second quarter number still shows only a 1.6 percent rate of increase … pretty "tepid" by Mr. El-Erian's analysis.
2ND QTR GROWTH RATE • The second quarter growth rate is now higher than that which was achieved in the first quarter, 1.3 percent, but down from the year-over-year rates of growth in the last two quarters of 2012, which were 2.0 percent and 2.1 percent respectively. • This picture seems to be consistent with the scenario for manufacturing in the Fall Business Preview published in the Wall Street journal: • "Momentum at big industrial companies, the face of U. S. manufacturing, is moderating. That means, they will have to put brakes on labor and capital spending to maintain or boost profits. • With little evidence of robust growth in the U. S., continued weakness of the Eurozone and a slower than expected growth in China, industrial companies that make big equipment and machinery-as well as the hundreds of thousands of small parts that go into cars, washing machines and airplanes-are expected to rein in costs.
CAPITAL SPENDING & PROFITS • Capital spending by large U. S. companies will slip 3.4 percent this year from 2012, and fall 8.0 percent in 2014, according to forecasts by Fitch Ratings." • That is, either profits are not going to be strong or the economy is not going to expand much faster ... or both!
Investment Probabilities • Will Germany elect a new Chancellor that will be less prone to provide weaker euro zone members with financial lifelines using taxpayer money? • Properly assess the probabilities and the potential for profit is there. • Underestimate the likelihood of any potential outcome and risk failure. • More uncertainty usually leads to greater volatility. • Greater volatility can be your best friend or your worst enemy.
The Volatility Opportunity Carefully consider the probabilities and underlying economic fundamentals • the recent volatility can be an opportunity to take advantage of pullbacks by adding to positions in sectors more sensitive to the ebb and flow of the economy. • Such Sectors are: • the Consumer Discretionary • Industrials. • Information Technology sectors. • The better the economy, the better these sectors should perform.
US ECONOMIC OUTLOOK • Economic growth in the U.S. should improve modestly in 2014. • Expect better economic performance in Europe as well as the emerging economies over the coming 12 to 18 months.
MATERIALS SECTOR • Although it has been one of the worst-performing sectors of the year, it appears to have woken up and staged a breakout. • The NYSE Advance/Decline has broken its downtrend from the July-August highs, which is a positive sign. It indicates that the worst of the selling is now likely over. But, still, investors should be prepared for some downdrafts and choppy action as the month continues. • Some of the biggest leaders were emerging markets as the ETFs tracking Indonesia, Thailand, Turkey, and India all had gains of over 5% for the day. • The material stocks also did well with the Select Sector SPDR Materials (XLB) gaining 1.4%. It has broken out to the upside and three stocks in this sector are leading the S&P and show positive volume patterns.
Fooled Again -- But Not by the Fed • The broad market ripped to new all-time highs immediately after the taper died a public death at the hands of the Fed's press release. Gold exploded toward $1,375. Rates plummeted. The Dow launched through 15,700. Transports hit new highs, adding a Dow Theory bull market signal to the mix.
Rude Trends: When to Buy... When to Sell • Everyone's been skeptical of the housing market lately, including Greg Guenthner, Agora Financial:"If you're in any housing related stocks, now would be a good time to take some profits.“Many believed the first phase of the homebuilding rally was over following the stellar gains in the homebuilders off their 2011 bottoms. Many new investors were jumping onboard the "housing is back!" bandwagon. And concerns over rising interest rates were taking their toll on the charts.
So it was time to walk away and watch from a safe distance. That's when the weak data started chipping away at investor confidence. In fact, the squishy numbers continue to roll in as housing starts and permits missed estimates yesterday: "Housing Starts and Building Permits for the month of August came in weaker than expected," reports Bespoke Investment Group. "With respect to starts, economists were expecting the actual level to come in at a seasonally adjusted annual rate of 917K, while the actual reading was just 891K. Permits missed by a modestly larger margin as the actual reading came in at a level of 918K versus economists' estimates of 950K."However, yesterday's taper news may have been the break housing stocks desperately needed. With rates taking a punch to the gut, a lot of the fear about the housing market slowing down has abated…A lot of homebuilder names ripped higher yesterday. Now might be the time to get back in...
EMERGING MARKETS • Under its first new government in ten years, China is set to lead the emerging market charge in 2013. • Collectively, the BRIC economies - Brazil, Russia, India and China - are expected to grow over the next 12 months, with the east Asian superpower leading the way. • Bank of America Merrill Lynch Global Research Today’s report, gross domestic product (GDP) growth in emerging markets is anticipated to recover to 5.2 per cent led by the BRICs nations while the US and Europe's outlook remains shrouded in fiscal uncertainty. • Markets were thrown into chaos Wednesday when the Federal Reserve announced it would not be reducing its controversial quantitative easing program in the immediate future. After trading flat ahead of the Fed's statement the Dow Jones Industrial Average (^DJI) closed up 147 points at a record 15,677. The S&P500 (^GSPC) also closed at a record high at 1,725.5.
PROBABILITIES • The stock market has a long history of providing the best performances during periods of slow economic growth. Valuations are stretched as one might suspect following four years of a bull market run. As a result, we rate stock values as potential negative force. Investor psychology, which many believe is the principal driver of the stock market, shows investor optimism increasing but not to the levels seen at important peaks in prices. Seasonal patterns are constructive but become somewhat problematic late in the third quarter when stocks could be vulnerable to a correction. The Tape remains favorable with nearly all industry groups in harmony with the primary trend. Bottom line: The weight of the evidence is bullish suggesting the path of least resistance for stocks remains to the upside. Investors underweighted in equities should focus their attention on the strongest sectors including Consumer Discretionary, Industrials, Health Care and Financials.
GAME CHANGERS • Quantitative Easing has been put to bed for the remainder of the year, but what about a new Fed Chairman’s policies? • The Debt Ceiling raises its Quarterly head, will the US default? • Obamacare has become a bargaining chip, would there ever be an agreement on defunding? • Will the Federal Government be shut down now that the Republicans have drawn a line in the sand? • In light of the above what is prudent investment policy?
FORTUNATELY THERE IS HELP OUT THERE WE ARE NOT ALONE