Market Commentary – January 18, 2010

General Market Comment:    January 18, 2010

 The market is closed in the U.S. on Monday for Martin Luther King Day.  The special election in Massachusetts for the senate seat formerly held by Ted Kennedy is shaping up to be a pivotal statement on the public’s support for the Obama administration’s policies.  A win by Republicans would be considered bullish. 

 The week will also include a heavy calendar of earnings announcements.  So far, the few earnings that were reported last week didn’t please the pundits.  The chart on the leading economic indicators as reported by the ECRI (Economic Cycle Research Institute) and updated through Jan. 8 shows that the economy is in fact undergoing a very robust symmetrical recovery.  This condition in the past has translated into equally robust earnings growth.  The ECRI data suggests the pundits will find the upcoming earnings reports to have more of the kind of growth they are looking for. 

ScreenHunter_08 Jan. 18 11.17 

As you consider the above chart note how the indicators tended to recover by as much or more in percentage terms as they fell going into recessionary periods.  The current recovery is exhibiting the quickest and the steepest recovery since the data series started in 1967.

 I also want to present an updated chart on the amount of money held in assets of zero maturity in the U.S. compared to the market value of the S&P 500.  MZM is now 97% of the market cap of the S&P 500.  There is $9.5 trillion sitting in cash and cash equivalents.  While this is not as extreme a percentage as last year when the market bottomed it remains far above the median level.  Despite the run up in the equity market and the recovering economy there remains about the same level of cash on the sidelines as at the peak in fear and uncertainty last year. 

ScreenHunter_09 Jan. 18 11.17 

The point of highlighting the MZM level is to say that there is ample upside to the stock market and the economy once that cash begins to be more productively invested in the real economy.

 I believe we may be beginning to see some evidence of that reinvestment of cash into the markets in the following chart on cumulative breadth in the S&P 500 as prepared by Bespoke Investment Group. 

 ScreenHunter_10 Jan. 18 11.18

A bear case against the market would need to see the breadth (i.e. the cumulative number of advancing vs. declining stocks) breaking down.  One can plainly see that is not occurring at this time. 

 So . . . we have a sufficient number of energetic and vocal skeptics to prop up the proverbial “wall of worry” needed to sustain a bull market, a looming pile of catalytic data in the form of Q4 earnings reports, plenty of cash still poorly invested and persistent internal market strength suggestive of more buyers than sellers . . . that all seems to suggest we have more risk to the upside in stock market values in the near term.



Market Commentary – January 11, 2010

General Market Comment:    January 11, 2010

 The market had a solid opening week for 2010.  Market lore since 1950 is that the market goes on to rise for the year in over 86% of the cases if the first week is a gain.  Keep in mind that the first week was a loss in 2009 and in 2008 so this indicator is not entirely reliable.

 January is usually the best month of the year for the NASDAQ although it was down in both 2008 and 2009.  Strong earnings reports this month should allow the rally to continue in the near term.

 Earnings reports get kicked off this week however the largest number of reports will occur starting Jan. 18.  There are at least 8 broker sponsored investor conferences this week headlined by the JPMorgan Healthcare conference.  Needham also holds their popular growth stock conference this week.  We will see a flood of analyst reports over the next 30 days.

 We will keep our commentary short this week.  I will add color as we get further into the earnings season.  There has not been any material change to earnings estimates in recent days either in the broad market sense or in our names.


Market Commentary – January 4, 2010

General Market Comment:    January 4, 2010

The fear du jour is appropriately that the recent run up in the stock market is due for a sharp correction.  There are some so bearish as to call for a retest of the deep lows of last March.  To be sure the surge in equities has been record breaking.  The NASDAQ rose 44% in 2009.  While that is impressive keep in mind that in 2003, the NASDAQ rose 52.5% in the twelve months ended September 2003.  It rose 56.8% in the twelve months ending December 1991 and it rose 86% in the twelve months ended June 1983.

What was common to all of the time frames?  The economy was recovering from a recession. 

So what happened afterwards?  That’s a loaded question obviously.  The market certainly corrected ultimately but I believe that we are still in front of the peak in the market compared to those prior periods.  I believe the case can be made we remain in the very early days of the economic recovery and should have prolonged period of equity value growth well into the second half of 2010.

 I say that for several reasons.

a)      we have not seen the peak in earnings growth.

b)      we have not seen a flattening in the yield curve.

c)      we have not seen the retail investors throw caution to the wind and pile into equities.

It is my intention to expand on each of those points in the coming days however suffice to say that the data at our doorstep this week and this month will serve to solidify the case for earnings and economic recovery.

One data point to keep in mind as the data piles up is the total disregard retail investors have shown to equities in the last 12 months.  Retail and institutional investors have poured an unprecedented $349 billion into bond mutual funds through the 11 months ended November.  At the same time they withdrew $4.7 billion from equity mutual funds.  They withdrew $30.2 billion from U.S. focused equity mutual funds.  This is beyond – silly – its insane. 

Keeping in mind the incredible bias for fixed income described above notice that when the NASDAQ appreciated 52.5% in the 2003 economic recovery there were INFLOWS of $151 billion into equity mutual funds.  Accordingly, the rise in the equity market in 2009 is even more remarkable in light of the absence of material capital inflows – that may change in 2010.  When and if the investing public begins to re-enter the equity market we will be able to expect a market value gearing of as much as 10X the amount of capital invested in stocks . . . “sweet”.

Here is a quote from a recent newsletter – ChangeWave Investing by Tobin Smith – that I felt does a good job framing the exquisitely contrarian circumstance we now have in the market.

It’s official — equities are dead. Bah! Humbug!  That proclamation was more or less issued in an article from Institutional Investor magazine. In it, the reporter argued that investors are “questioning the conventional wisdom that stocks outperform bonds. They’re systematically pulling back from equities, and Wall Street will never be the same. The equity party is over.”

Indeed, investors rattled by tumultuous stock market volatility have sought safer and more-consistent returns in fixed income — as well as in other alternatives, such as real estate and commodities . . . .

. . . Our take on equities is simple: If the financial media is ready to declare stocks dead — we want to own them. This is one of the most bullish signs we’ve seen in a long time and though it’s very unscientific, it’s nevertheless encouraging.

Who can ever forget BusinessWeek’s cover in 1979 when the magazine declared, “Death of Equities”? With Bloomberg now its owner, however, the publication isn’t likely to make the same mistake.

Equities may be down from their illustrious heights of the 1990s, but investors in the United States and around the globe will continue to want to own a piece of the action in what is still the world’s biggest and best economy.

That should do for now.

I suspect there will be some selling pressure in the coming days as gains from 2009 were pushed into a new tax year.  The selling will heralded with relief from the market technicians.  Earnings and improving macro data including potentially improved labor metrics as soon as this Friday should provide the foundation for the next leg up.

2010 will be a remarkable year.  Don’t allow your fears to overcome your logic.  Rational exposure to innovative growth companies such those followed by Aberdeen has a role in everyone’s portfolio.