Monday, October 14, 2013

Debt Ceiling...PE From Various Viewpoints

"We…have decided as a Congress that we need to avoid going over the debt limit, and we'll figure it out. And it will probably be a relatively short-term solution," Sen. Rob Portman, R-Ohio said.”  Story at…

I didn’t have time to follow this today, Monday, but unless it has been settled, the previous story is probably as good as any.

“The current 12-month forward P/E ratio is 14.3. This P/E ratio is based on Thursday’s closing price of 1692.56 and forward 12-month EPS estimate of $118.75.”  Excerpt from FactSet Earnings Insight at…

“What goes up, must come down. Figure 2 is noteworthy for highlighting the lofty start of the current secular bear. Now after almost fourteen years, the market P/E is down, but only into the red zone. That level, however, is not overvalued. It was overvalued in 2000 and at many points over the past decade. There were not plausible economic and financial conditions to justify P/E near 30, 40, and more.

Now, finally, the stock market is fairly-valued for conditions of low inflation and low interest rates (assuming average long-term economic growth in the future). But what about the future? If inflation remains low and stable indefinitely, then this secular bear will remain in hibernation until the inflation rate runs away in either direction.” For the full commentary see Crestmont Research via, Advisor Perspectives at…

Note that Crestmont Research says that the market is not currently overvalued based on low inflation and interest rates.  This is the standard approach of many analysts based on estimated forward earnings applied within a context of PE’s versus other economic periods.  This approach also used by Bob Brinker for valuation.  

“…the current Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) of 24.2 is closer to 65% above its pre-bubble median. Despite the 10-year averaging, Shiller earnings – the denominator of the Shiller P/E – are currently 6.4% of S&P 500 revenues, compared to a pre-bubble norm of only about 5.4%. So contrary to the assertion that Shiller earnings are somehow understated due to the brief plunge in earnings during the credit crisis, the opposite is actually true. If anything, Shiller earnings have benefited from recently elevated margins, and the Shiller P/E presently understates the extent of market overvaluation. On historically normal profit margins, the Shiller P/E would be about 29 here. In any event, on the basis of valuation measures that are actually well-correlated with subsequent market returns, current valuations are now at or beyond the most extreme points in a century of market history, save for the final approach to the 2000 peak.

Of course, valuations exert far more effect on long-term returns than on short-term outcomes, where a much larger set of considerations generally apply. Unfortunately, on shorter horizons, the past few years have been unusual. Market conditions that have historically resulted in awful losses over the intermediate-term have instead been associated with positive returns.” – John Hussman, PhD, Hussman Funds Weekly Market Commentary for 14 October 2013.

Well, that’s the big question.  John Hussman, Phd, Economics, says no, they’re pumped up by the Fed and Federal deficits.  Further, we have companies issuing earnings warnings in record numbers as noted below: 

“Heading into the start of the peak weeks of the Q3 2013 earnings season, 110 companies in the index have issued EPS guidance for the third quarter. Of these 110 companies, 91 have issued negative EPS guidance and 19 have issued positive EPS guidance.

If 91 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 88, which was recorded in Q2 2013. If 19 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing positive EPS guidance for a quarter. The current record is 22, which was also recorded in Q2 2013.  The percentage of companies issuing negative EPS guidance is 83% (91 out of 110).   If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006.

With the start of the peak weeks of the Q3 earnings season next week, the markets will likely shift focus from EPS guidance issued for the third quarter to EPS guidance issued for the fourth quarter.”  Excerpt from FactSet Earnings Insight at…

So it really is about earnings and the company earnings guidance in the next several weeks. 

Monday, the S&P finished up 0.4% to 1710 (rounded) at the close.  
VIX rose 2% to 16.07 as options boys worried.

Volume on the NYSE was 15% below the monthly average Friday and 20% below that average on Monday.  It is not unusual to see falling volumes after a low, since many investors aren't convinced.  This time there is alos continued worry over the Debt talks in congress.  The debt compromise isn’t a done deal yet.

Internals were again positive on the day and the 10-day moving average of stocks advancing climbed to 51%. (A number below 50% for the 10-day average is generally bad news for the market.) 

New-highs outpaced new-lows Friday, leaving the spread (new-hi minus new-low) at +161 (it was +157 Friday).  The 10-day moving average of change in the spread is plus 13. That just means that over the last 10-days, the spread has been getting better.

Market Internals are positive on the market for this short term indicator. Short term things look good, so I’m very tempted to get back in the markets, but the longer term NTSM system is still neutral and, as noted below, has some issues.

The overall long-term NTSM analysis remained HOLD at the close. 

SENTIMENT is getting quite high again and the VIX has not come around to signal a buy either.  VOLUME is neutral.  PRICE (that compares sizes of up moves vs. down moves) is the only positive indicator in the bunch and it is the least reliable.  High sentiment can be the right call after a major bottom and everyone goes long, but I’m not buying it here.  The bottom wasn’t much and it just doesn’t feel right.  Charts are OK but have issues too.

The charts have indicated a slowdown of the rate of advance in the S&P 500.

I am beginning to sound like a perma-bear, but I think once the debt ceiling is resolved we will see a bounce followed by losses.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  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.

So far in 2013, the NTSM system has not performed well.  NTSM has earned 10% vs. a buy and hold system that would currently be up 24%.  Why?

I’d say that’s the result of multiple QE by the FED for which there is no precedent.