If momentum is the strategy du jour, then an end of rally blow-out in the large cap space is likely to come from Materials, IT and Consumer Discretionary. But with those sectors already up 32%, 36% and 20% YTD respectively, there is a chance we won't get much more juice out of them, and it'll be left to some of the laggards to equalize this turn. Prime candidates are Industrials, Telecom, Healthcare, and Energy (2.75%, -5.03%, 3.98%, and 1.9% YTD respectively).
What is interesting is that when you drill down into the small and mid cap space, you get slightly different sectoral leaders and laggers. Leading sectors in the mid cap space have been Energy (43%), Consumer Discretionary (36%), IT (35%), and Materials (31%). Laggards have been Telecom (-5.9%), Financials (-0.11%), and Utilities (3.09%). In the small cap space, leading sectors have been Consumer Discretionary (37%), IT (33%), Energy (28%) and Materials (26%). Lagging sectors have been Utilities (-6.17%), Telecom (-40%), and Financials (-12%).
Defensive strategies have been crushed this year, while being leveraged to cyclicals would have knocked the ball out of the park.
Thursday, August 6, 2009
"Rallying because we're rallying"
Just heard a classic quote from a guy on CNBC.
"We're rallying because we're rallying. People are jumping in because they can't afford to miss this move."
Talk about exuberant irrationality.
I'm sorry to break it to those folks "jumping in," but they have missed the move and there is only more pain for them if they think they can time their entrance and exit to the last leg of this move.
"We're rallying because we're rallying. People are jumping in because they can't afford to miss this move."
Talk about exuberant irrationality.
I'm sorry to break it to those folks "jumping in," but they have missed the move and there is only more pain for them if they think they can time their entrance and exit to the last leg of this move.
Wednesday, August 5, 2009
Attention Shoppers - Standard of Living Adjustment in Progress
It seems reasonable to believe that the US (and a number of other developed countries) will be undergoing a standard of living adjustment over the next 10-20 years. The adjustment will probably be effected through a combination of stagnant real incomes and faster relative growth outside the country. And, the impetus for change comes from the need to get the consumer's economic house in order and the general indebtedness of the economy. The deleveraging of the economy will manifest itself in many ways and in many areas, but there is a good chance that the USD will play a very pivotal role.
Stagnant to falling real incomes will be underpinned by relatively high unemployment and high underemployment, as it relates to productive overcapacity. It will also be interesting to see how quickly the private sector rightsizes itself to these realities. American management is ruthless, so this transition may happen more quickly than thought. The government is going in the opposite direction, and so will serve as a counterweight to the private sector's improvements.
Stagnant to falling real incomes will be underpinned by relatively high unemployment and high underemployment, as it relates to productive overcapacity. It will also be interesting to see how quickly the private sector rightsizes itself to these realities. American management is ruthless, so this transition may happen more quickly than thought. The government is going in the opposite direction, and so will serve as a counterweight to the private sector's improvements.
Controlling The Hydrant
Will the Fed act quickly enough to reduce bank reserves when the velocity of money normalizes? If they are like anyone else in the market, they won't. The problem is not a lack of knowledge or vision related to the risk (they are fully conversant of the risk). The problem will be a failure of timing due to human nature and political pressures. Just as most market participants failed to time their exit from the market with a crisis looming (and their entrance back into the market by the looks of things), the Fed is likely to fail in its attempt to time the withdrawal of reserves from the system.
The Fed is playing a high risk poker game. One that they have demonstrated little aptitude for based on historical precedent. The problem is compounded all the more by the ongoing decline in the duration of government liabilities and the split personality of balancing inflation with employment. The result is, they have a smaller window of opportunity to get things right before the the market dings them, and the costs of failure mount.
The Fed is playing a high risk poker game. One that they have demonstrated little aptitude for based on historical precedent. The problem is compounded all the more by the ongoing decline in the duration of government liabilities and the split personality of balancing inflation with employment. The result is, they have a smaller window of opportunity to get things right before the the market dings them, and the costs of failure mount.
Why The Big Beats?
Company earnings are coming in way above consensus expectations. Why the many, and why the big beats?
Couple of thoughts. (1) When the economy was in freefall nobody had any clue what the future looked like. In the panic that followed, companies erred on the downside and set us up for the current round of big beats [managed expectations]. (2) It appears that companies have a lot less operating leverage than we give them credit for [earnings have fallen less than topline declines would imply]. (3) We are borrowing earnings from the future to win in the present [accounting manipulation]. (4) Companies were pretty quick on the trigger to fire workers [lots of fat in the system].
Several implications. Analysts are playing catch-up by raising forward estimates, but they'll soon be getting closer to reality, and that means the lowered expectations game will be tougher to play ["we're onto you"]. If it was too much fat in the system, then we are likely stuck with high level structural unemployment [dead weight costs to economy and one-off gains for company earnings]. If it was simply management hitting the panic button, then we are on the mend [operating leverage will propel future earnings but be counterbalanced by rehiring costs...highlights the short sightedness of some managements]. As far as I am concerned, management is always suspect with regard to their accounting policies, assumptions and treatments, and their attempt to manage and massage earnings [that is a gross generalization, but probably not far from the truth]. This time is no different, and it will be interesting to see how and where they try to manage earnings going forward [lots of moving parts on this one].
Couple of thoughts. (1) When the economy was in freefall nobody had any clue what the future looked like. In the panic that followed, companies erred on the downside and set us up for the current round of big beats [managed expectations]. (2) It appears that companies have a lot less operating leverage than we give them credit for [earnings have fallen less than topline declines would imply]. (3) We are borrowing earnings from the future to win in the present [accounting manipulation]. (4) Companies were pretty quick on the trigger to fire workers [lots of fat in the system].
Several implications. Analysts are playing catch-up by raising forward estimates, but they'll soon be getting closer to reality, and that means the lowered expectations game will be tougher to play ["we're onto you"]. If it was too much fat in the system, then we are likely stuck with high level structural unemployment [dead weight costs to economy and one-off gains for company earnings]. If it was simply management hitting the panic button, then we are on the mend [operating leverage will propel future earnings but be counterbalanced by rehiring costs...highlights the short sightedness of some managements]. As far as I am concerned, management is always suspect with regard to their accounting policies, assumptions and treatments, and their attempt to manage and massage earnings [that is a gross generalization, but probably not far from the truth]. This time is no different, and it will be interesting to see how and where they try to manage earnings going forward [lots of moving parts on this one].
Two Things You've Got To Get Right*
As an asset manager there are two things you've got to get right.
(1) Where is the money coming from?
(2) Where is the money going?
If you have your finger on (1) and (2) then you have a good chance of getting the trend right. And if you get the trend right, then you can make a whole lot of mistakes, and still be a genius.
At a big picture level, the money seems to be coming from Asian Central banks, sovereign wealth funds, and big bank prop desks (with perhaps the prop desks being the most important player).
In the current environment, there are two subtexts. The first is the USD as the engine of the carry trade. And the second is the use of ETFs and commodities as the preferred vehicle and store of value.
* You've actually got to get a lot of things right. But one of the other things you've got to get right is having the acuity of mind to change position should you be wrong. The trick, like most things in life, is having balance.
(1) Where is the money coming from?
(2) Where is the money going?
If you have your finger on (1) and (2) then you have a good chance of getting the trend right. And if you get the trend right, then you can make a whole lot of mistakes, and still be a genius.
At a big picture level, the money seems to be coming from Asian Central banks, sovereign wealth funds, and big bank prop desks (with perhaps the prop desks being the most important player).
In the current environment, there are two subtexts. The first is the USD as the engine of the carry trade. And the second is the use of ETFs and commodities as the preferred vehicle and store of value.
* You've actually got to get a lot of things right. But one of the other things you've got to get right is having the acuity of mind to change position should you be wrong. The trick, like most things in life, is having balance.
Tuesday, August 4, 2009
Looking For The Panic
I'm looking for the panic buying of the "I've missed the boat brigade" diving into the market on the back of the new consensus sounding the "all clear" to keep pushing this market up.
There may be good reasons for this market to go up over the long term, but we are fast getting to a point where the reasons for the market to continue its meteoric rise are getting thin. I don't know where that point will be - it could be 1050, it could be 1100, it could be 1150, or even 1200 - but as this market continues to march higher, I think it would be wise to sell into it.
It wouldn't surprise me if the peak of this move marks the top of a longer term trading range, from which the market consolidates its gains and periodically tests the range over the next couple of years. If I had to put a floor on the market it would probably be around 800 or so.
There may be good reasons for this market to go up over the long term, but we are fast getting to a point where the reasons for the market to continue its meteoric rise are getting thin. I don't know where that point will be - it could be 1050, it could be 1100, it could be 1150, or even 1200 - but as this market continues to march higher, I think it would be wise to sell into it.
It wouldn't surprise me if the peak of this move marks the top of a longer term trading range, from which the market consolidates its gains and periodically tests the range over the next couple of years. If I had to put a floor on the market it would probably be around 800 or so.
Subscribe to:
Posts (Atom)