Random Walk and Un-Random Talk!!!

Before we get to the exciting part of portfolio holdings as of today, let’s talk about couple of not so mundane stuff.

People are bothered, puzzled, surprised and whatnot (is it even a real word?) about the market. Every now and then I am being asked – Why is the market going up? In fact the more ubiquitous question is – Why did the famous (or shall I say the infamous) sequestration  and the forth coming budget talks not stall the markets?

Surprise

My dear fellow investors, I know there has been lot of noise about the unemployment and the sluggish growth  but everyone is forgetting that the housing industry, the pillar that has historically pulled US out of recession, has turned the corner. It has finally started contributing to the economy. There are cities in US like San Francisco, Phoenix and believe it or not – Austin – where the houses are selling faster than the pancakes at IHOP and they are getting pricier (FYI – I meant houses).

Moreover the stock market is a leading indicator of economy’s health in future (4 to 6 months down the line). I guess currently Mr. Market is discounting the shenanigans and gobbledygook of Mr. Washington.

Anyways, I enjoyed the ride and hopefully you did too. Apart from the employment data, there is no significant data coming up in next few weeks that will derail this rally.

Note of caution – Currently the PE(ttm) of $SPX stands at 17.5. Last year it was 15.5 and historical mean value has been 15.5. This doesnt really bar $SPX from reaching 20 but around this number, we have seen strong pullbacks in the past.

SPX_PE

Switching topic.

Over the weekend I read that Mr. Buffett was unhappy with the Berkshire’s returns. Now talk about ‘Subpar’ performance. YTD out of outstanding 27000 mutual funds only 1000 mutual funds have been able the beat the Dow Jones. This would even surprise the Dad of the baby posted earlier.

FundsBeatMkt

But this was not the most interesting thing that I read in the Journal. What really caught my eyes was an article by Jason Zweig – Have Investors Finally Cracked the Stock Picking Code?

Come on Intelligent Investor!!! Is it as simple as Kramer cracking George Costanza’s secret code? (Damn! Posting youtube video used to be free.)

Don’t the numbers speak for itself – 979/26500. Do you really think that using GROSS MARGIN to evaluate a company in addition to the Net Income will make every trader a crystal ball reader like the pretty lady below? I will leave it up to you, the Intelligent Investors, to decide.

CrystalBall

I will talk about my portfolio and it’s YTD performance tomorrow. Till then happy trading! Adios. And don’t forget to get my stock tweets @sumeetvats

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Housing – The Return from the Ashes!!!

One of the pillars of American economy “The Housing Market” is showing the signs of resurgence. The year 2012 was a promising one for housing. With consistent improvements in housing construction and prices, home building is starting again to contribute to the economy.

But before delve deeper into the housing industry let’s paint a picture of the economy.

Jobs

The jobs market continued to recover slowly but surely.

JobReport

Talk about steady: The U.S. created, on average, 153,000 non-farm jobs each month over the course of 2012; the U.S. also averaged 153,000 non-farm jobs a month during 2011. The unemployment rate has slowly improved, falling to 7.8% at the end of the year, but the labor market remains far from booming.

GDP

GDP

GDP in lay mans terms tells you how fast the economy grew. At a high level  GDP primarily comprises of the Consumer Spending, Export vs Import and Inventory. Looking at the above chart it’s easy to conclude that growth has been at best sluggish.

In all, the anemic recovery has done little to bolster the housing market but has been enough to pull it out of the troughs.

Housing Industry

“The housing market is coming back, gaining momentum, and it’s one of the bright spots for the economy as we start 2013,” said Robert Dye, chief economist at Comerica Inc. in Dallas.

PendingVsExistingHomes

Existing and New Home Sales on the Rise

Sales of U.S. homes probably rose in December to the highest level in three years. Combined purchases of new and existing properties climbed to a 5.49 million annual rate last month, the highest level since November 2009. Purchases of previously owned home climbed to a 5.1 million annual rate in December, the strongest since November 2009, economists project National Association of Realtors figures will show Tuesday. New-home sales picked up to a 385,000 annual rate for the month, the best showing since April 2010.

ExistingHomeSales

HousingStarts2

Builder Sentiment is Running High

Nonetheless, the economic improvements witnessed in 2012 – at least compared to the terrible years that preceded it – manifested themselves in ongoing good news for housing. The December increase in starts is consistent with the upward path of builder confidence over the last few months, as measured by the NAHB/Wells Fargo Housing Market Index (HMI). You can see below that there has been a surge in builder confidence specially since the later half of 2011.

BuilderSentiment

Construction Spending Gets a Boost

Per Census data, solid gains in both single-family and multifamily production resulted in nationwide housing starts rising 12.1% to a seasonally adjusted annual rate of 954,000 units: the highest level of new home production since June 2008. Single-family starts rose 8.1% to a seasonally adjusted annual rate of 616,000 units in December, while multifamily production jumped 23.1%, to 338,000 units. The improvement in home building in 2012 has boosted construction spending. Following graph corroborates this fact.

ConstructionSpending

Dwindling Inventory

As a result of the pickup in demand, the inventory of homes for sale has dwindled, driving up real-estate values and encouraging more construction. There were 2.03 million existing homes on the market in November, the fewest since December 2001, and 151,000 new houses for sale, close to the 142,000 reached in July that was the lowest since records began in 1963.

NewHomeInventory
Prices have Bottomed
The most recent S&P/Case-Shiller index of homes in 20 cities showed prices increased 4.3 percent in October from a year earlier, the biggest gain since May 2010. The gauge is up almost 9 percent since reaching a 10-year low in March. The median sales price rose 14.9% and average prices rose 20% that are likely a combined effect of higher priced homes sold and a reflection in the cost of building materials and lot price increases.
CaseShillerIndex
The Final Numbers – Actual Sales Vs Inventory
NewHomeData
 ExistingHomeData
What will Continue to Drive this Turnaround
All the economy pundits are betting that this resurgence will not fizzle out. Progress will probably build in 2013. Sales of existing homes will rise about 7.2 percent to 4.98 million this year, the highest since 2007, according to the median estimate of economists and housing analysts surveyed by Bloomberg. Prices will gain 3.3 percent after an estimated 4.5 percent jump in 2012, according to the forecasters.

“After seven years of navigating an unprecedented market downturn, we finally saw stabilization and recovery in 2012,” Stuart Miller, chief executive officer of Lennar Corp., the largest U.S. homebuilder by market value, said during a Jan. 15 earnings call. “While there have been and still are economic and political uncertainties ahead, we feel that this housing recovery is fundamentally based and driven by a long-term demographic need for housing. 2012, therefore, we believe is just the beginning of the recovery.”

But Why?
Extremely low mortgage rates, recovering house prices in most markets and pent up demand are few of the reasons that will provide forward movement in home building and home buying in 2013.
Sustained Low Interest Rates
InterestRates
Rising Rent
RentChart
Declining Foreclosures
ForeclosureStats2ForeclosureStats1
But there is a Weak-link: New Home Sales

Here’s TD Securities with some commentary:

The new homes market has been a laggard in the overall housing market recovery, and while new home building and existing home sales activity have risen significantly from their lows, new home sales have yet to enjoy a similar turnaround in fortune. In December, we expect sales activity to improve only modestly, with the pace of sales boasting a respectable 6.1% m/m gain to 400K. The increase in sales will add to the positive momentum in November, when sales rose an equally impressive 4.4% m/m, justifying the surge in optimism among home builders (as seen in the NAHB home builders’ sentiment report) about sales prospects in recent months. In the coming months, we expect the positive momentum in new home sales activity to be sustained, though it is likely to continue to lag the buoyancy in the existing homes market.

Here’s TD’s chart. Hopefully, the increasing home buyer traffic will eventually lead to a pick up in sales.

NewHomeSalesVsTraffic
Now How do we PROFIT from all this. Next in the series we look at Lennar and some other builders.
Disclaimer: All the above data have been collected from –

We are in midst of baton transfer..

This might seem to be a writing on the wall now but we are not there yet. We are gradually approaching the correction phase. If the market craters through 1358, the bulls will officially sign off.

We have seen all the phases of transition –

  1. Broken almost 5 month old trend line.
  2. Market tries to capture it but fails.
  3. Market breaches 50 DMA.
  4. It tries to recapture the moving average but fails
  5. And finally we are staring at a lower low after lower high.

This is an old school failure. The shorts will show up every where. Unfortunately if we review last two summers this market might end up going sideways. So be careful while shorting.

I already have 15% of my portfolio invested in TLT, BLV and RWM. I will add some more once the down side is confirmed. As of now I don’t see too many obvious shorts. All the good stocks are either in consolidation phase or approaching 50 DMA.

Portfolio is already 50% cash – will try to create more cash.

Let’s browse some charts. One thing is clear – all the recent breakouts have failed. This is a strong indicator of weak market. Leaders are either consolidating or trying to hang on to 50 DMA. Remember in a correction, leading stocks decline by average 2-2.5 times the general market correction. The ones that end up correcting the least and have strong fundamentals are prospective leaders of next bull market.

Deja Vu!

Before we move forward let’s review the market

If you look at the half-hourly chart of S & P 500 for last few weeks you will observe a lot of indecision. This can stem from a market that is awaiting a jobs report or the one that has rallied almost 25% since October bottom but bumping into some bad data or a market that is just waiting for earnings to come out. This is a typical sideways movement that needs just one or two catalysts to either jump up or break down.

Till Friday morning, we were all hunky dory – raising toast to the best quarter since 1998.

But by now, you guys must have heard, read and pondered about the jobs report that came out on Friday morning. Entire market was expecting creation of 205000 jobs with lowest estimate being 193K but to everyone’s disappointment the number came in at 120000. This is exactly the catalyst that I mentioned above. Following is the S & P 500 futures –

Going Forward –

The question is where are we heading from here. Let’s look at the slightly bigger picture –

We will definitely get temporary support at 1375-1370. But that floor might not last long if Alcoa comes out with bad numbers on Tuesday after close. I personally expect the floor to crack on Monday itself. This market might turn into a sideways market or 5-7% correction if this is just one-off jobs miss and not a trend.

The real correction will start if –

  1. We get more of such job reports.
  2. The companies fail to meet Q1 numbers.
  3. Manufacturing margins start contracting.
  4. The inventories start piling up.
  5. Europe’s problem resurfaces.
  6. Israel goes after Iran.

All these events individually have the capability of turning a flat market in to an intermediate/full blown correction. A correction that can go beyond 12-15% – That’s spooky.

In terms of technicals if we fail to hold on to 1336, we are looking at lower lows and lower highs. This means that we are in correction. The breakouts will fail, the industrial sector & commodities will sink and we will stare at repeat of 2011.

Deja Vu!

There is a stark resemblance between job numbers & rally at the beginning of 2011 and the similar macro economic data points in 2012. All of them  fizzled out, making 2011 one of the worst trading year in last 20 years. In case 2012 tries to follow the suit of 2011, I suggest that please sit on the sidelines unless you are nimble (like really really nimble) or you are willing to take 15-20% loss or you want to buy stocks such as QCOM,APA, EMC, etc for long-term. The top traders have always said that it’s good to sit out when market goes sideways and hop in when the direction is confirmed.

This is the kind of summer where I would use the old adage -“Sell in Summer and go away”.

Question is why side ways and why not a full fledged correction?

Never underestimate the Printing Press. One off job report might not bring back QE3 from dead but few of such reports will definitely get Feds going.

 

 

 

 

 

 

Lastly what do we do with current portfolio?

Just as not all fingers are alike similarly different kinds of stock in a portfolio deserve different treatment.

  1. Reduce all the momo stocks such as LULU, ALLT, SCSS, TPX, HLF, ULTA, CLR, ALXN, etc to 1/3 of original position. A risk averse investor might sell all. The reason is the panic grips the owners of such stocks with higher multiples faster than does the rest of the market. Just a reminder, small cap stocks corrects more than larger cap stocks during a correction.
  2. Stick with oldies such as HAL, APA, STX, WDC, PG, COV,etc unless the fundamentals show a major shift such as margins contraction trend,etc. Some of them have already seen fair share of correction.
  3. To defend your portfolio you can buy long term US treasury bonds such as BLV, TLT, etc. They tend to be haven during such corrections.
  4. A very active trader might try putting in shorts such as SH, HDGE, RWM, etc.
  5. Keep an eye on the leaders of this bull and see how they perform during the correction. By leaders I mean – AAPL, ISRG, CMG, SCSS, ULTA, LULU, TSCO, FFIV, etc.
  6. Start running scans to look for stocks with excellent fundamentals that are holding up well. They might be the future leaders.
  7. Lastly add to your existing value positions or buy new ones (after fishing for course) after market has gone corrected by 10%. But remember an oversold market can become more oversold!
  8. Again, In case 2012 tries to follow the suit of 2011, I would suggest that please sit on the sidelines unless you are nimble (like really really nimble) or you are willing to take 15-20% loss or you want to buy stocks such as QCOM,APA, EMC, etc for long-term.

I believe that capital preserved is the capital created for future investment opportunities.

If you are really, really lost, I will talk more about correction, handling of stocks during corrections and going short later on in the week.

By the what do you think?

Thanks For participating!

Where do we go from here?

So ladies and gentlemen, after a scintillating 2012 Q1, where are we headed?

The stock market continues to be in a bull market. Every analyst from every bank is changing his/her year end target of S&P500. Some claim improving job market, some site housing market is turning around and some are just catching up. According to me don’t pay any heed to these people.  Just follow the market and it seems to be doing good -forecasting doesn’t help. In fact any kind of anticipation will bring ego and emotion in your trade.

 

But there are few things that concern me – lack of participation by public, oversold energy sector and the laggard Russel 2000.

The things that can impact the markets this week

Apr 02
ISM Index – Mar
Apr 02
Construction Spending – Feb
Apr 03
Auto Sales – Mar
Apr 03
Factory Orders – Feb
Apr 04
ADP Employment Change – Mar
Apr 06
Unemployment Rate – Mar

 

 

FaceOff – China data vs US data

And the winner is China PMI. The Dow ended lower for a third consecutive session dropping 78 points as concerns mount over China’s manufacturing index being down for the 5th month in a row.  The S&P 500 lost 10 points today and the NASDAQ lost 12 points. This was despite the fact that new jobless claims fell more than expected last week, while an index of leading economic indicators for February rose more than forecast.

China’s manufacturing activity shrank in March for the fifth straight month, while manufacturing in the 17-member euro zone contracted more than expected, led by declines in France and Germany. This took toll on sectors such as energy, materials and industrial.

But despite all this we are still in bull as long as we hang onto 1370 in S&P 500. This current mild weakness in the averages is not unexpected given the magnitude of the market move from October of last year.  It would not surprise me to see continued short term sideways action over the near term or even a drop of 2% points.

So if you look at charts above 1370 will act as pivot point. The reasons are – you have previous high support, 50 DMA and the trend line support. Moreover the breakouts did not disappoint today – look at LNKD, WDC, ALLT and GNC. Surprisingly LULU reversed even after not so weak guidance. LULU might have lost it’s momo status.

Good Reads. Tons of them today –

China & Eurozone factories shrink (REU)

Another day of Copper beating (BL)

Keystone XL – Again! (BL)

US Economy and Sentiment (BL)

Hunger Games (MW)

Oil lower amid talk of tapping reserves (FIN)

Gold in tandem with China as well! (REU)

Market Synopsis for the day

Stocks continued to grind higher. The Nasdaq rose 0.8%, the S&P 500 0.4% and the Dow Jones industrial average 0.1%, backing off earlier gains. The U.S. home builders’ confidence in the housing market held steady in March after five consecutive monthly gains, keeping sentiment at the highest level in nearly five years as the industry slowly regains its footing after a devastating bust.

But the day belonged to AAPL. Before open AAPL announced that it will reward it’s investors with 1.8% dividend yield, i.e 2.65$ quarterly. This is its first dividend since 1995 and plans for a three-year, $10 billion share buyback. As a result, the elated investors pushed the stock price to above 600$ for the first time. Goldman came out and raised it’s price target to 700$. Kudos to the most valued compnay. But this was not it. AAPL’s latest HD tablets that went on sale on Friday have already topped 3 million units in sales. No respite for AAPL owners!

Some good reads –

Apple opens its $98 billion cash pile (REU)

UPS to buy TNT for $6.85 billion (REU)

Least Volatile Market in two Decades (BL)

New Ipad Sales Tosp 3 Million (MW)

Home Builders are becoming bullish (MW)

Chinese Home Prices Drop (BL)

China Raises Gas Price by 7% (MW)

And Finally The Day Ahead