| TSG Week of August 28, 2009 |
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| Sunday, 30 August 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Market LetterWeek Ending August 28, 2009Topics Discussed This Week:
Stuck in neutral Big changes to the newsletter coming… Earnings still weak, where’s the growth? Market at a glance An interesting SPX spin and forecast… Elliott Wave take
Last week
Quotes of the week "If there is any lesson to be learned from the movement of stock prices over the past decades, it is that expectations drive stock prices far more than fundamentals. Psychology trumps reality every time." --- Dick Bove Stuck in neutral Last week, our chart showed the Shanghai Index had recovered to a lost of 14.7% after being down more than 20% earlier in the week. This week the Chinese index resumed its drop losing another 3%. However, other indexes and most notably the Indian Nifty Index have re-energized which muddies the waters somewhat. US stocks were stuck in neutral this week in a consolidation. The question is what awaits them next week especially given the reputation September has as being the cruelest one of all for stocks. We are in the process of making some rather monumental changes to our newsletter. Starting in September we will be providing a monthly commodity/resource newsletter to be distributed by InvestorsInsight.com to their list of 700,000 + subscribers. It will also be distributed to our subscribers. Our goal is to ultimately make this a weekly publication. It will be intermarket-friendly which means showing useful and interesting relationships between stocks, and commodities and currencies, an idea which InvestorsInsight support. We are already doing this to some extent in our weekly but the big difference is we will have guest expert contributors each issue. However, as we “re-tool,” we will only be publishing this weekly newsletter as time permits for the next few weeks. We apologize in advance for these interruptions. If you have any suggestions on topics you’d like to see added, please email us at tradesysmailbag [at] gmail [dot] com (Sorry for the email hieroglyphics but it is necessary given the ability of web spiders to scan for ready-made email addresses to spam). If you are an expert and would like to contribute your blend of technical/fundamental market analysis, please email us.
Figure 1 – Daily chart showing performances for the Shanghai Composite (SSE), Indian Nifty (NIFTY), German DAX (GX) and S&P500 (SPX) Index since the March lows in the DAX and SPX and November low in the SSE after which it rallied 103%. 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. If the change from last week is up, the numbers are in green and if down, the numbers are in red. This week, the VIX slipped, crude dropped a dollar/bbl and the Baltic Dry Index, a useful measure of global product demand and trade, dropped another 2%. This index has given back more than 42% since peaking in June which is a negative for trade, Chinese markets and a sustained global recovery. LIBOR fell again but is clearly being impacted by government and central bank stimulus money being pumped around the globe. Although an accurate indicator of credit stress, may not be all that reliable this time around for this reason.
* 52-Week High / Low †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 remain weak, growth is the problem This week, earnings for the 8,013 US stocks of the VectorVest Composite Index (VVC) again held at $0.17/share up from $0.16 three weeks ago and an all-time low of $0.13/share in May through early July. This week the VVC PE was 128.88 up marginally from 128.56 last week. Earnings growth (GRT) remained stuck at 1% again this week, the lowest growth rate on record going back at least 15 years. As the next chart shows, we are at unprecedented low levels of earnings performance compared to any time since VectorVest began keeping records. The VVC Index PE hit an all-time high of 155.58 on June 5, 2009. This 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, the VVC PE was a much healthier 32 and earnings growth was 11%.
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 Here is another perspective on earnings. The next chart shows historic trailing 10-year price-earnings multiples for the S&P500 Index by economist Dr. Robert Shiller.
Figure 3 – Long-term chart of trailing 10-year S&P500 earnings with a linear regression channel (blue lines). From an historic standpoint, earnings have dropped into single digit territory before a sustained recovery began. However, the PE low of 13.32 in March 2009 was nearly double its previous recession low (1981) of 6.95. Also note that the effects of quantitative easing (cheap money) have been diminishing since 2000 and even though rates have been reduced to nominal levels, stocks for the most part have continued to fall in price long-term (brown arrows). The long-term average PE is 16.34 and current the current PE (second week in August) was 17.67. In other words, the PE multiple is certainly no bargain at this stage of the business cycle. Also notice that each time PEs have broken below the orange average PE line, although they have bounced around, PEs have spent the majority of the next few years below the line. Chart courtesy Bob Shiller’s website www.irrationalexuberance.com There is no doubt about it, this time is certainly different but that is not a good thing. Be sure to read an interesting explanation of how this time is also different for stocks thanks to all the liquidity pumping by central banks and governments and what it means for the future (see Presenting the Liquidity Bubble below). More good real estate news… On Tuesday, the Case-Shiller home price index offered confirming evidence that the worst of the housing market may be behind us. For the first time in more than two years, month-over-month home prices across the 20-cities surveyed by the index showed improvement in June of 1.4%.
Revisions to the C-S HPI meant that month-over-month prices also improved in May up 0.5% from April. Prices are still falling year-over-year (-15.13%) but that is the smallest annualized decline rate since January 2008.
We then learned Wednesday that new home sales had also risen faster than expected in July with a 9.6% month-over-month gain compared to a revised gain of 9.1% in June as sales jumped to an annualized rate of 433,000 from 395,000. Unsold inventories slipped to 271,000 (from 280,000) which is a 7.5 month supply at the current (accelerated) rate of sales. However, according to the University of Michigan consumer sentiment survey, sentiment remained more or less flat in August at 65.7 versus 66 in July for what its worth. Another case of Pollyanna paradox in the media? I saw an interesting analysis this week that I thought I’d share. This next Bloomberg chart comes to us courtesy of Zerohedge.com showing similarities between the Japanese Nikkei225 Index from the 1980 and the S&P500 Index from the 1990s. It draws the conclusion that given the correlation between the Nikkei225 in 1999 and the S&P500 in 2009, we should expect another 40% price appreciation in the latter. (See two links for the article The Meltup Cometh? below.) The only problem is that if you look at these charts in nominal terms, they bear no resemblance to the chart below. Bloomberg explains that the chart was adjusted for currency differences. Is the Bloomberg chart valid? There are two problems with the chart that I see. First, to make an apples-to-apples comparison, both charts should be adjusted to the same measure. Gold is one standard of which all are familiar. Second, comparing the period used for the Nikkei of the late 1990s with the current period for the S&P500 is a huge stretch to say the least Figure 5 shows each index priced in gold. As you can see, these charts also bear very little resemblance to Figure 4. The S&P500 just recently put in its low and remains in a long-term downtrend compared to the low in the Nikkei in the middle of the chart with a volatile uptrend afterwards.
Figure 4 – Bloomberg chart showing an interesting correlation between the Nikkei225 and S&P500 with a 10-year lag and asks the question, will the SPX rally another 40%?
Figure 5 – Here are the same charts divided by the price of gold for a valid comparison. It is also interesting to note that the S&P500 is now down more than 70% from its 1999 high when priced in gold compared to roughly 30% for the Nikkei from its all-time high priced in gold. Charts courtesy of www.genesisFT.com The moral? Its amazing what you can do when looking for ways to justify your views but it important to insure that any comparisons (and periods in question) are realistic otherwise you run the risk of self-delusion – a prohibitively expensive habit when dealing with markets. Elliott Wave Take Last week, the highest probability pattern in play was a target on the SPX of 1120-1150 in large Double Zigzag off the March 6. That pattern remains in play although we were unable to get the chart to accurately label the waves this week due to a limitation in the duration of eSignal intraday data. An analysis on daily data made very little sense in our opinion so here is the chart from last week.
Figure 6 – Hourly chart of the S&P500 showing highest probability pattern. Courtesy of Elliottician.com It is important to point out that we are in risky territory at present. An alternate count puts us in range of the top of counter-trend rally Wave 2 so a reversal into a powerful impulse Wave 3 could come at any time. September also has the well-deserved reputation of being the worst month of the year to be invested in stocks according to a number of sources including the Stock Trader’s Almanac. So if we are going to get a melt before year end, it should occur this month if historical probability is any guide. The second most probable pattern shows a potential shorter-term retracement first into a range of 920-975 before the index powers higher. On the lighter side… More Murphy’s Laws… Arnold's First Law of Documentation If it should exist, it doesn't. Arnold's Second Law of Documentation If it does exist, it's out of date. Arnold's Third Law of Documentation Only useless documentation transcends the first two laws.
Stories of the week… Presenting the Liquidity Bubble http://www.zerohedge.com/article/presenting-liquidity-bubble Monetization of US Treasurys In Isolation http://www.financialsense.com/fsu/editorials/willie/2009/0820.html The Meltup Cometh http://www.zerohedge.com/article/meltup-cometh S&P 500 May Surge 40% in Duplication of Japan http://www.bloomberg.com/apps/news?pid=20601109&sid=aKzgH4hvhh.g The risk of a double-dip recession is rising http://www.ft.com/cms/s/0/90227fdc-900d-11de-bc59-00144feabdc0.html Stages of secular bear markets http://www.investmentpostcards.com/2009/08/28/stages-of-secular-bear-markets/ National Credit Maps http://data.newyorkfed.org/creditconditions/ Fed Paper - Panic of 1907 http://www.scribd.com/doc/19022709/Panic-of-1
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