I just returned from the Financial Planning Association’s Retreat Conference where I was an invited speaker on the topic of “Investing Outside the Box: Modern Insights Into Portfolio Management.” Now that I’m back in the office, it’s time to catch up on my reading. Here is a review of today’s homework.
First up is The King Report, a daily piece by Bill King of M. Ramsey King Securities, Inc. King is well known in institutional investment circles for his knowledge of Wall Street trading, and for his outspoken and somewhat cynical view of policy makers and Wall Street “elites.” King’s letter is often a compendium of headlines from major financial papers and blogs, and today’s piece has a variety of headline topics including, “Spain swoops to rescue major bank,” from Yahoo.com, “Germany says renegotiating EU pact ‘not possible,’” also from Yahoo.com, “Saving the Euro Will Require Banking Sector Reform,” from Der Spiegel, “Merkel urges Athens to stick to reforms” from FinancialTimes.com, and more. King opines:
Last week we noted that the U.S. stock market had become very, very dangerous because the economy was rolling over but hype and hope for QE 3.0 was propping up stocks. The situation in Europe is even worse; so its markets are more dangerous, especially with banks on the brink.
King ends today’s letter with the warning: “Let’s be careful out there!”
Next up is another daily research letter from Ed Yardeni, President and CIS of Yardeni Research. Yardeni is known for being as bullish as King is bearish, and is credited for coining the phrase “bond vigilantes” to describe the bond market. Today Dr. Ed’s headlines come under the title, “What’s Driving the Bull?”, and include “1) The bull gets no respect. 2) It’s still a V-shaped earnings rebound, especially for Small and MidCaps. 3) S&P forward earnings at record high of $110. 4) Q1 beat leads to slight Q2-Q4 retreat. 5) Rising labor costs overseas bad for margins, good for revenues. 6) Germany losing customers in euro area, but finding others elsewhere. 7) Will Consumer Discretionary continue to lead the bull? and 8 ) The message in consumer credit.”
On the prospects for profit margins, he writes:
I don’t see much more upside for profit margins, especially for the S&P 500 companies that have large payrolls in places where labor costs are rising like China and India. However, the flip side of this development is that standards of living are rising around the world thanks to globalization. So the prospects for revenues remain bright.
After Yardeni’s letter, I’ll move to Bianco Research’s Newsclips/Daily Commentary. As you might imagine, this is a compendium of financial headlines interspersed with comments from Jim Bianco, a well-known market analyst with a wide following in institutional investment circles. Today’s headline article is “Consumer Credit – Worse Than You Think.” The article begins with a quote from a Bloomberg.com article highlighting the fact that consumer borrowing in March surged by the most in more than a decade on growing demand for educational financing and autos. The advance was paced by a $16.2 billion jump in non-revolving debt, including student and car loans. However, in Bianco’s comments and charts, he points out that government-owned consumer credit and student loans are one in the same since all student loans are bought by the government and the government currently owns virtually no other type of consumer credit. Student loans have gone parabolic thanks to a 2009 government mandated cut in student loan interest rates that expires July 1. If you take out the government owned student loans, there has been virtually no rebound in consumer credit since the Great Recession ended. Bianco finishes this section of the letter with a quote from the Bloomberg article:
The rate on student loans is set to double on July 1 without action by Congress. The rate increase would affect about 7.4 million students, according to the White House, adding an average of $1,000 a year in payments on college loans.
Today’s piece prints to 20 pages, and also covers gas prices, Europe, corporate bonds, retail investors staying out of the market, the Citi Surprise Index turning negative, and includes a series of charts providing an updated look at the election. (Intrade.com betting currently gives President Obama a 59.5% chance of winning a second term, and gives Republicans a 70.9% of controlling the House and a 62.1% chance of controlling the Senate.)
Next on my homework list is a selection from Advisor Perspectives, a compendium of sell-side research and other material available from analysts who allow free access to their work through the Internet. There are typically six or more in-depth articles presented in each Advisor Perspectives, and today I printed out a research piece from Jerry Webman, Chief Economist, and Art Steinmetz, Chief Investment Officer, of OppenheimerFunds, titled “Q2 Outlook: ‘Sell in May’ May Not Work This Year.” The article prints to 11 pages and gives the bull and bear case for the market for the remainder of the year. Webman covers the bearish risks, including the U.S. fiscal cliff and replay of the debt ceiling debate, unchecked inflation, the unsolved European sovereign debt crisis, and the China growth slowdown. He ends with, “Remember, when everyone has stopped worrying, it’s time to sell.” Steinmetz handles the bullish case, including the injections of global bank liquidity, the continuing signs of economic improvement, and good valuations and low interest rates. He also mentions that he loves high yield bonds, (the actual quote is, “High yield fixed income – Love it, love it, love it.”), dividend paying stocks, emerging market stocks, and international bonds.
[Authors note: As I write, Josh Hamilton of the Texas Rangers just hit his fourth home run of the evening against my beloved and hapless Baltimore Orioles, and has gone 5 for 5 with his fifth hit being a double. This shellacking is making it easier to sit in my office and do homework this evening.]
Last on tonight’s list is a valued piece from Ned Davis Research called Daily Bullet Points. I don’t get around to reading these every day, but twice a week I print out whatever I’ve missed. Tonight’s pieces include “Secular Trends and Commentary,” by Ned Davis, “Oil-Our take,” by John LaForge, “Our Thoughts on the European Elections,” by Alejandra Grindal, and “Consumer Credit Supporting the Economy,” by Joe Kalish. Considering that Bianco offered a very negative view of consumer credit today, it’s interesting to read Joe Kalish, Chief Global Macro Strategist, taking a slightly different view. Kalish opines that:
1) Over the past 12 months, consumer credit excluding student loans has increased 0.7%, 2) The consumer credit report is consistent with the latest Senior Loan Officer Survey, which showed banks more willing to make loans, easier standards, and increased demand for all types of consumer loans compared with three months ago, and 3) Easier credit will help provide much needed support to retail sales and the economy.
The good news is that I am now officially done with my homework. The bad news is that tomorrow I will have to do it all over again. Pinnacle analysts read even more research on a daily basis and together, we strive to incorporate all of this information into our view of the markets. Of course, Sauro Locatelli, our quantitative analysts, has no such worries. He simply pumps the latest data into his complex equations and allows the model to tell us what to do. We think the combination of analysts who use their subjective judgment, experience, and intuition to reach conclusions about financial markets, in combination with quantitative models based on rules-based decision making, is the best way to invest our client portfolios. Unfortunately, there is only one way to become an expert on the financial markets, and that is to do the homework.