Should I stay or should I go?
If you say that you are mine
I'll be here till the end of time
So you got to let me know
Should I stay or should I go?
- Clash
The song above rang a bell as the S&P 500 closed today up at 1352. Not a new high, but relatively close to the 2011 high of 1363. The American Association of Individual Investors reports in its most recent Sentiment Survey that 52% of it's polled members are bullish, 28% are neutral, and 20% are bearish. I also discovered that well known market bears Nouriel Roubini and David Rosenberg turned bullish recently.
And there are reports like this one by David Kotok from Cumberland Advisors. Initially when I read it, I looked at it as a bullish report - meaning I should have my money invested in the stock market. (Please note that all emphasis is mine.)
On to my next speculation - when will central banks pull back? I haven't read much detail about the Great Depression. However I have read that many armchair quarterbacks think it didn't have to last as long as it did, and they blame the Federal Reserve. These individuals argue that the US economy started recovering in 1932/1933. However in 1937, the Federal Reserve tightened monetary its policy, which led to a "second depression" as measured by unemployment as seen below.
As Ben Bernanke is known as an expert on the Great Depression, he does not want to be known/blamed for the same mistake. Hence, it's likely that much like Alan Greenspan left interest rates too low before the housing crisis, Ben Bernanke will also leave monetary policy too easy. Hopefully it will end better this time than the last (though I wouldn't bet on that). Certainly price increases (e.g. inflation) will result. David Kotok surmises as much:
Still my favorite paragraph from David is this:
I've been reading David Kotok sporadically for the last few years. Like his previous works, this is a well thought out report. If you can afford to spend more than 1% of your day, I encourage you to read it in full.
Is The Hockey Puck Slowing Down
Much like Wayne Gretzky's hockey play, stock markets don't trade on today's news. They trade on perceptions of the future - skating to where the puck is going. In the case of stock markets, the puck is earnings growth. Lately, earnings growth is not looking good. As FactSet reports, Estimated Q1 2012 earnings growth rate for S&P 500 falls to 0%. (emphasis mine)
Note the contradiction between investor bullishness and estimated earnings growth. If estimates do not turn around, the current rally will not last.
Parting Thoughts
The long-term average of bullish, neutral, and bearish investors in the AAII Sentiment Survey is 39%, 31%, and 30% respectively. With the current reading of 52%, 28%, and 20% respectively, we can see that a lot of people are jumping into stocks thinking a new bull market is beginning. Out of curiosity, I downloaded the survey from the S&P 500 all time high in October 2007 - Bullish 55%, Neutral 20%, Bearish 25%.
Truth be told, the fact that these numbers are close doesn't mean much. Scanning through the years, there are a number of occurrences where the survey deviates from its long-term average. And while the market may have fallen, it doesn't mean a major event is on the horizon. Still don't blindly chase rewards, manage your risk.
Disclaimer: Please remember that I’m just a guy sharing information on a blog, and this is NOT official investment advice. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please consult your investment adviser before making any investment decisions. During your conversation with said investment adviser, ask why they believe in their recommendation. If you are not convinced by their explanation, any action that you take or forego is also your responsibility. Just in case you missed that, you are responsible for your investments.
With that said, don’t let your investments keep you up at night. If they do keep you awake, you may be taking more risks than you are comfortable with. Talk to a professional about reallocating to less risky investments so that you can sleep. During your conversation with said professional, ask why they believe that their recommendation is less risky. If you are not convinced by their explanation, don’t invest. Remember:
So far, the Cassandras’ predictions of global collapse and failure have been proven false. Some of the most notorious bears are now turning bullish and revising their forecasts to the positive. Other “gloom and doom” holdouts are feeling the heat. We think that heat will intensify.
The key to watch is in the credit markets. Credit spreads tell a story of overwhelming liquidity being applied to the financial-system open wounds like a steroidal salve.
...
Credit spreads are reflecting transition from worldwide recession and double-dip forecasts to gradual and improving economic outlooks around the globe. Data supports this shift in the United States, as well as in other places in the world. It will happen in portions of Europe, but not in Greece.
...
At the present time, our US stock market ETF portfolios remain fully invested. We are concerned about a market correction, which appears underway. It is necessary, since we have moved dramatically higher from the October selling-climax low. The upward move has been at a sustained pace. We expect this to be a correction, not a market peak. We believe the financial sector is still attractive. As it repairs, it will become even more attractive.Truth be told, this market report ended bullish. However the more times I read this report, the more I realized that this is a on-the-one-hand and on-the-other-hand report. In other words, it also lists market limitations. Going back to the report, let's look at that second paragraph again:
The key to watch is in the credit markets. Credit spreads tell a story of overwhelming liquidity being applied to the financial-system open wounds like a steroidal salve. Such treatment can alleviate interim pain. It is treatment for the symptom; it works for a while. It does not provide a permanent cure.Liquidity is a treatment for the symptom. Also consider:
Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow.Ergo, central bank liquidity has improved the credit markets. As the credit markets determine lending to everything from companies to countries, the global economic ecosystem is dependent on them functioning. As long as credit markets are happy, global financial markets can overlook the debt crisis. Here's a summary of global central banks actions to ensure this outcome:
The G4 central banks (http://www.cumber.com/content/misc/G4_Charts.pdf) have taken the size of their collective balance sheet from $3.5 trillion to $9 trillion. That number is likely to rise. The G4 have extended duration so that the focus of their policy is not just in the overnight lending rate or in the very short term. Massive liquidity has blunted liquidity squeezes everywhere in the world.Yet this type of intervention into the economy cannot go overlooked. No one can tell me the market is free when $5.5 trillion has been added to system simply to keep it going. After all, what happens when this liquidity goes away? I don't think anyone knows for sure, but it's reasonable to speculate there could be an equal and opposite reaction to when the liquidity is added.
On to my next speculation - when will central banks pull back? I haven't read much detail about the Great Depression. However I have read that many armchair quarterbacks think it didn't have to last as long as it did, and they blame the Federal Reserve. These individuals argue that the US economy started recovering in 1932/1933. However in 1937, the Federal Reserve tightened monetary its policy, which led to a "second depression" as measured by unemployment as seen below.
 |
| Source: http://silverloc.edublogs.org/category/depressions/the-great-depression/ |
By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future.So on-the-one-hand we have central banks providing liquidity to the global economy via the credit markets. This makes for bullish equity markets. On-the-other-hand, doesn't this mean we have a financial system based on air and promises versus something real/substantive? Occasionally I read about the hollowing out of the US manufacturing sector, looks like it's spread to the financial sector as well.
Still my favorite paragraph from David is this:
The biggest threat to financial-market pricing comes from periods of uncertainty, the sequence of ambiguous and conflicting views that alter investor perceptions. Uncertainty is the enemy of market pricing. Once you achieve clarity, markets adjust quickly to the new reality and move on. This will hold true in every city, county, and country. And it will apply to every banking system in the world.One day the biggest uncertainty will be the central banks themselves as investors prophesy when they will reverse their policies. Think about that...
I've been reading David Kotok sporadically for the last few years. Like his previous works, this is a well thought out report. If you can afford to spend more than 1% of your day, I encourage you to read it in full.
Is The Hockey Puck Slowing Down
Much like Wayne Gretzky's hockey play, stock markets don't trade on today's news. They trade on perceptions of the future - skating to where the puck is going. In the case of stock markets, the puck is earnings growth. Lately, earnings growth is not looking good. As FactSet reports, Estimated Q1 2012 earnings growth rate for S&P 500 falls to 0%. (emphasis mine)
The blended earnings growth rate for Q4 2011 stands at 5.5%. However, two companies account for most of the earnings growth in the S&P 500 for the quarter: Apple and AIG. If these two companies are excluded from the index, the Q4 2011 earnings growth rate for the S&P 500 drops from 5.5% to 0.8%. Comparisons to weak year-ago earnings are driving the unusually high dollar-level growth for AIG, while strong results in Q4 2011 are driving the high dollar-level growth for Apple.
If 5.5% is the final earnings growth rate for the Q4 2011 quarter, it will mark the end of the streak of consecutive quarters of double-digit earnings growth at eight. But, it will mark the ninth straight quarter of overall earnings growth for the index. This streak might be in jeopardy in Q1 2012, however, as the estimated earnings growth for that quarter fell to 0.0% this week.
 |
| Source: FactSet |
Parting Thoughts
The long-term average of bullish, neutral, and bearish investors in the AAII Sentiment Survey is 39%, 31%, and 30% respectively. With the current reading of 52%, 28%, and 20% respectively, we can see that a lot of people are jumping into stocks thinking a new bull market is beginning. Out of curiosity, I downloaded the survey from the S&P 500 all time high in October 2007 - Bullish 55%, Neutral 20%, Bearish 25%.
Truth be told, the fact that these numbers are close doesn't mean much. Scanning through the years, there are a number of occurrences where the survey deviates from its long-term average. And while the market may have fallen, it doesn't mean a major event is on the horizon. Still don't blindly chase rewards, manage your risk.
Disclaimer: Please remember that I’m just a guy sharing information on a blog, and this is NOT official investment advice. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please consult your investment adviser before making any investment decisions. During your conversation with said investment adviser, ask why they believe in their recommendation. If you are not convinced by their explanation, any action that you take or forego is also your responsibility. Just in case you missed that, you are responsible for your investments.
With that said, don’t let your investments keep you up at night. If they do keep you awake, you may be taking more risks than you are comfortable with. Talk to a professional about reallocating to less risky investments so that you can sleep. During your conversation with said professional, ask why they believe that their recommendation is less risky. If you are not convinced by their explanation, don’t invest. Remember:
- It’s your nest egg.
- Opportunities are easier to make up than losses.
will the foxconn investigation cause apple shares to drop? how much of china's economy is based on suspect manufacturing practices for american companies. could both china and the u.s. economy could take a hit as a result to this? a trigger?
ReplyDeleteCould Foxconn investigation cause Apple (AAPL) to drop? It could be the trigger, yes.
DeleteYet take a look at this article. It's from a trader who I've followed for years and who I think does a really good job seeing the two sides of any argument (bullish vs bearish). His point is regardless what you think of ay particular company, sometimes you need to treat the stock as a separate entity (for lack of a better word). AAPL could continue higher, but eventually it will turn because expectations/perceptions (and stock price) get ahead of reality.
http://www.minyanville.com/businessmarkets/articles/todd-harrison-todd-harrison-minyanville-todd/2/14/2012/id/39389
By the way, green line is Nasdaq, yellow line is China's stock market, white line is crude oil price, and orange is AAPL.
As for the US economy, I think of Apple as a benchmark company in that iPod, iPhone, iPad sales give us a reading on consumer's enthusiasm to spend on the hottest technology products. Falling sales would tell me one or two things: AAPL is letting their products grow stale and/or consumers are pulling back spending.
Getting back to your question though, Nasdaq would likely decline if AAPL declines. China is far more than AAPL. The proof is in the graph - the yellow line would track the rise of orange line.