Monday, May 13, 2013

Decline in revenues…Another Sell Recommendation…High Valuations

“At least one notable investor thinks we may be in bubble trouble again.
Sam Zell on Thursday at the SALT hedge fund conference in Las Vegas said stocks are due for a fall. The legendary real estate investor thinks the market is out of touch with what is really going on in the economy…"Right now you are buying at an all-time high," says Zell. "And there are times when stocks hit a high, and then go higher, but that's when you have a good economy."  Story at…

FACTSET EARNINGS (excerpts from Factset Earnings Insight, Friday, 10 Apr 2013)
“With about 90% of the companies in the S&P 500 reporting actual results, the number of companies reporting earnings above estimates is in-line with the recent average, while the percentage of companies reporting revenues above estimates is below the recent average…
…In aggregate, companies are reporting earnings that are 4.9% above expectations. Over the last four quarters on average, actual earnings have surpassed estimates by 4.1%...
…The blended revenue growth rate for Q1 2013 is -0.2%, down from an estimate of 0.4% at the end of the quarter (March 31). However, only two of the ten sectors are reporting a decline in revenues: Energy and Materials.”  Excerpts from FACTSET at…

“Regional purchasing managers surveys and Federal Reserve surveys have turned uniformly lower in recent reports. Importantly, while non-farm payroll growth was surprisingly robust in April, the gain belied a significant decline in the average hourly workweek. It is the combination of workers and hours worked that determines production and income. If labor hours were held constant, total non-farm payrolls would have declined between 550,000 and 623,000 jobs in April (depending on whether one uses non-farm payrolls x average weekly hours or instead uses the index of aggregate weekly hours). The U.S. may or may not avoid recession, but there is no evidence of a material or durable acceleration in economic growth here.”  - John Hussman, PhD, Weekly Market Commentary for May 13, 2013 from Hussman Funds at…

The Shiller P/E is based on the current price divided by inflation-adjusted, 10-year average earnings.   (See my blog “Stock Market Advice From Darth Vader” at for a detailed discussion of the Shiller P/E.)  Here’s the current info:

“…the Shiller P/E reached 24 last week (S&P 500 divided by the 10-year average of inflation-adjusted earnings). Secular bear market lows have typically taken the Shiller P/E below 8 before durable secular bull market advances have taken hold…Though the discipline to “sit by quietly while the mob has its day” can be nearly excruciating in the excitement of late-stage bull markets, as the market registers multi-year highs amid rich valuations and heavily optimistic sentiment, it’s worth remembering that the 2000-2002 bear market wiped out the entire total return of the S&P 500 in excess of Treasury bills all the way back to May 1996…Moderate losses are frustrating, but deep, major losses from rich valuations are the ones that matter, because it is difficult to recover from them in a durable way. The recent advance is a gift in that regard. Consider that carefully now, not later.” - John Hussman, PhD, Weekly Market Commentary for May 13, 2013 from Hussman Funds at…

Yes, it has been hard to sit on the sidelines for the past month.  My consolation is: some have been on the sidelines since last year!

Monday, the S&P 500 was virtually unchanged at 1,634 (rounded).
VIX fell 0.3% to 12.55.        

The Morgan Stanley Cyclical index fell 0.7% while the S&P 500 was unchanged Monday.  The cyclical stocks will be an important item to watch since they tend to be recession sensitive.  If this downward trend continues it will show investor concerns over the economy.

Market internals seem neutral at this point without giving clues on market direction.

Monday, the overall NTSM analysis was again HOLD at the close. 

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  My reasoning may be found at…(although that probably looks pretty lame by now.)
The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)

I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.