| TSG - Week Ending August 14, 2009 |
|
|
|
| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 16 August 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
TSG Stock Market LetterWeek Ending August 14, 2009Topics Discussed This Week:
Stocks settle lower but will it last? Earnings show more signs of life Quiet week on the economic front but… Value of a buck in 1970 terms Time to step off the REIT rocket?
Last week
Quote of the week "Back in 2002, before he became chairman of the Federal Reserve, Ben Bernanke claimed that if short-term interest rates fell to zero, a central bank still had the ultimate weapon: printing money by purchasing government bonds. Having now actually tried quantitative easing himself, Mr Bernanke is discovering its limits." ― Economist Magazine August 13, 2009 Stocks settle lower but will it last? After four weeks of across the board gains, stocks moved lower this week in a much needed correction. But while the Dow and SPX slipped marginally, stocks on the Chinese Shanghai Composite have lost more than 12% in the last 8 trading days (see next chart). As the chart also shows, the Shanghai Composite led the rebound a week ahead of US stocks and rallied more than 67% before its correction began. Could be signaling a more significant downturn in other markets?
Figure 1 – Daily chart showing performances for the Shanghai Composite, Indian Nifty, German DAX and S&P500 Index since the March lows. Chart courtesy of GenesisFT.com Market at a Glance Here is this week’s table of commodity, shipping and interest rates indicators that we are tracking. In the last column, the trend is marked in green if positive for the market, red if negative and black if neutral. This week, the VIX moved lower showing increasing complacency among investors, crude jumped nearly $3/bbl while the Baltic Dry Index, a useful measure of global product demand and therefore economic strength, fell 17.3%, for its biggest weekly drop since July 10.
†LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. Corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. About 6 million U.S. mortgages, including the vast majority of subprime home loans as well as 41% of prime ARMs are linked to LIBOR. Earnings tick marginally higher This week, earnings for the 8,013 US stocks of the VectorVest Composite Index (VVC) ticked higher to an average $0.17/share up $0.16 last week and an all-time low of $0.13/share six weeks ago. The combination of falling prices and a rise in earnings cut the VVC average PE to 126.20 from 135.32 last week but it is still up from 118.42 five weeks ago. Earnings growth was 1% again this week, the lowest growth rate in at least 15 years. June 5, 2009 proved the all-time high water market for average PEs at 155.58 for the VVC Index with average earnings of $0.13/share which compares to the previous peak PE of 60.51 in mid-May 2003 during the last recovery. But the difference is that during that period, earnings growth remained much healthier at 8% and earnings had begun improving nearly a year prior after hitting a low of 3%. In March 2000, average PEs were 32 and earnings growth was 11%. Meanwhile average earnings for the 2,978 stocks in the Canadian Toronto Stock Exchange (TSX) tracked by VectorVest Canadian Index (VVC/CA) were again negative at -$0.01, an improvement from -$0.03/share five weeks ago. Earnings growth was steady at 3% down from 4% during the week of July 10. Earnings for the VVC/CA peaked at an average $0.73 per share in September 2005 after which they steadily declined. By the week of March 6, 2009 they had fallen to $0.16/share and on June 12 to -$0.02/share during a period in which the TSX exchange index rose more than 40%. Although prices continue to rally, earnings have yet to respond. We think perennial bear David Tice has a point about stocks being overpriced (see U.S. Stocks Are ‘Dramatically Overpriced,’ Tice Says)
Figure 2 – Chart showing weekly prices, average Price/Earnings ratios (blue), earnings per share (black) and earnings growth (GRT in red) for 8,013 US stocks tracked by VectorVest showing the average PE for the broad range of publicly trading companies. The purple line is the 50-week moving average (MA). Chart courtesy of VectorVest.com Economic Reports Quiet week on the economic front… Not a lot of economic news to report this week. On Wednesday we got the FOMC minutes (yawn). If you missed them, don’t worry. It was pretty much a non-event (see article Fed Signals No Rush to Curtail Stimulus as Slump Ends below). On Thursday we learned that export prices fell 0.3% (drop in agricultural prices) and import prices dropped 0.7% mostly due to the drop in oil prices. On Friday the Bureau of Labor Statistics (BLS) reported that the annual consumer price index (CPI) is now down 2.1% but quite frankly, we don’t give this statistic much stock. Hands up all those who saw their monthly expenses drop this year other than the price of gasoline. According to John Williams of ShadowStats.com, annual CPI-Alt (calculated the way it was before all the statistical smoke and mirror modifications post 1982) was +5.44%. In the next chart, we show a comparison in the official CPI, CPI-Alt and price of gold to determine the buying power of a dollar today compared to 1970. You be the judge on which one you think more accurately reflects true inflation.
Chart 1 – Graphic showing different values of the dollar today compared to 1970 using the official CPI (CPI-U) ($0.18), John Williams alternate CPI (CPI-Alt) which shows the metric the way it was calculated before all the statistical computation changes post 1982 ($0.06) and last, the dollar priced in gold today ($0.04). And for what its worth, the mid-month consumer sentiment from the University of Michigan was 63.2 in August which is down from the July number of 66. Time to bail off the REIT rocket? We got more news this week about the heartburn that commercial mortgages are giving the banks. We learned a couple of weeks ago that commercial mortgage failures hit a 20-year high. The bad news continued this week. On that note be sure to read the Bloomberg article below Toxic Loans Topping 5% May Push 150 Banks to Point of No Return. The delinquency rate on commercial property loans pooled together into investments, estimated at around $750 billion, hit nearly 3% in Q2-09 which is about triple from where it was at year-end 208 according to real estate group Reis Inc. In all, there are about $3.5 trillion worth of commercial real estate loans held by banks, or tied up in commercial mortgage-backed securities or held by other institutions. More than $2 trillion in commercial mortgages are expected to come due between now and 2013 (see article below Recession and debt drag on commercial real estate). As a group, REITs (both equity and mortgage) are up 68% since March 6 according to the VectorVest composite. Per share earnings for the VectorVest REIT Sector Index comprised of 133 equity REITs and 41 mortgage REITs came in at negative $1.08/share according to the latest data which is an improvement from the March 18 low of -$1.35 but a sizable per share loss none-the-less. More importantly, the earnings growth rate is negative 4%. Compare these numbers with an earnings growth rate of 20%, average EPS of +$2.11/share and a PE (that many considered a reason to buy them at the time) of 14.53 two years ago this week (Aug 17, 2007). So are REIT’s overpriced right now? We certainly think so.
Figure 3 – Weekly REIT Sector chart courtesy of VectorVest.com On the lighter side… More Murphy’s Laws… Law of Blissful Ignorance What you don't know will always hurt you. Stories of interest this week… Toxic Loans Topping 5% May Push 150 Banks to Point of No Return http://www.bloomberg.com/apps/news?pid=20601109&sid=aTTT9jivRIWE Recession and debt drag on commercial real estate http://news.yahoo.com/s/ap/20090812/ap_on_bi_ge/us_commercial_real_estate_2 Commercial mortgage failure at 20-year high in U.S.: report http://www.reuters.com/article/ousiv/idUSTRE56J1A120090720 Commercial real estate deals off, prices up http://www.bizjournals.com/denver/stories/2009/08/10/daily88.html?ana=from_rss U.S. Economy: Sales Unexpectedly Decrease as Job Losses Mount http://www.bloomberg.com/apps/news?pid=20601087&sid=a03T3Kgw7klc U.S. Stocks Are ‘Dramatically Overpriced,’ Tice Says http://www.bloomberg.com/apps/news?pid=20603037&sid=avmwu6UfHB4o Fed Signals No Rush to Curtail Stimulus as Slump Ends http://www.bloomberg.com/apps/news?pid=20601110&sid=anfnMbBTNbw0 Economic Bottom Calls: Willful Ignorance http://market-ticker.denninger.net/archives/1313-Economic-Bottom-Calls-Willful-Ignorance.html Treasurer Fear of Credit Freeze Seen in Cash Hoarding http://www.bloomberg.com/apps/news?pid=20601109&sid=aKArtbx5GFHw Underwater Mortgages May Reach 30% by Mid-2010, Zillow Says http://www.bloomberg.com/apps/news?pid=20601110&sid=aL3gWFhKRt_w
Disclaimer TradeSystemGuru.com obtains information from sources deemed to be reliable; however, TradeSystemGuru.com does not guarantee the accuracy of any of the information provided. TradeSystemGuru.com makes no warranties, expressed or implied, as to the fitness of the information for any purpose, or to results obtained by individuals using the information. We may or may not be invested in any investments cited above. In no event shall TradeSystemGuru.com be held liable for direct, indirect, or incidental damages resulting from the use of the information found on or distributed through this website. TradeSystemGuru.com shall be indemnified and held harmless from any actions, claims, proceedings, or liabilities with respect to the information and its use. TradeSystemGuru.com does not make specific trading recommendations or provide individualized market advice. All information provided is to be construed as opinions and is intended to be used as an educational information service only. We encourage investors to contact a registered securities representative prior to making any investment or related decisions. Any and all forecasts and opinions expressed herein are for discussion purposes only and are not intended to constitute investment or trading advice. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Last Updated ( Saturday, 22 August 2009 ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| < Prev | Next > |
|---|