Wednesday, December 24, 2014
Intellectual Property Helps Boost 3Q GDP Growth To Highest Level Since 2003
As was widely reported yesterday, 3Q GDP growth was the strongest since 9/30/2003. However, less widely reported was the fact the intellectual property products contributed the most to real GDP in 32 quarters (9/30/2006). Fixed investment overall contributed 121 basis points to real GDP. Residential fixed investment contributed only 10 basis points and continues to hover around 3% of GDP.
Monday, December 22, 2014
CFNAI Makes 94-Month High, Existing Home Sales Disappoint
As has seemingly been the case all year (or maybe even the past four years), we had a mixed bag of economic releases today in the United States. On the positive side, we had the Chicago Fed National Activity Index post the highest monthly number since December 2006. This indicates that the activity level in November was far above trend in the US (i.e. 3%). Perhaps more importantly, the three-month moving average broke out to its highest level since May 2010. If activity levels keep up in December, the 4Q GDP report may surprise to the upside.
On the negative side, we had today's disappointing existing home sales report. After having a run of five months when existing home sales remained about 5 million, November's report came in at 4,93 million. Consensus expectations were for 5.2 million. Existing home sales are just 2% higher year-over-year. The report also showed that the median and average selling price has declined for five straight months. However, both are still higher year-over-year. Lastly, supply remains steady at 5.1 months. Months supply has remained around the 5 month level for most of the past two years.
On the negative side, we had today's disappointing existing home sales report. After having a run of five months when existing home sales remained about 5 million, November's report came in at 4,93 million. Consensus expectations were for 5.2 million. Existing home sales are just 2% higher year-over-year. The report also showed that the median and average selling price has declined for five straight months. However, both are still higher year-over-year. Lastly, supply remains steady at 5.1 months. Months supply has remained around the 5 month level for most of the past two years.
Friday, December 19, 2014
4 Sectors That May Be Worth Avoiding
Success in investing can many times come down to avoiding the major losers rather than always hitting home runs with one's winners. Correct sector allocation plays an important role in sidestepping potential landmines that out there in the market. Sector relative outperformance trends can last for years and finding stocks that outperform the index while being in a underperforming sector is a tough task. Let's take a somewhat extreme example by looking at health care and energy sector performance in 2014. On an equal-weighted, USD basis, the MSCI World Index health care sector is up over 17% year-to-date while the energy sector is down over 22%. The fortunes of these two sectors couldn't have been more different in 2014.
Now as a stock picker, which sector would provide you the most opportunities to outperform? Health care, of course! A remarkable 79% (99 out 125 stocks) of health care stocks have outperformed the MSCI World Index over the past 252-trading days (one year). Meanwhile, only 11% (12 out 113 stocks) have managed to outperform the MSCI World Index over the past 252-trading days. You have been about 9x more likely to pick a winner in health care over the past year than you are picking a winner in energy. Overall, 44% of the stocks in the MSCI World Index have outperformed the MSCI World Index over the past year.
The list of sectors that may be more likely to underperform are probably not too surprising. Below are charts of some of the ten sectors using our proprietary point and figure charting methodology and based on these charts energy, materials, telecommunications and utilities all look like they are in downtrends relative to the MSCI World Index.
To play the energy sector now, it still seems like you are trying to catch a falling knife. The underperformance has been dramatic which could lead to a period of relative outperformance in the short run. However, over the long-run, energy looks to be a serial underperformer in the future.
After a multiyear period of strong out performance, materials has been a major relative underperformer. Support has been breached and there isn't anything from a technical perspective to get excited about.
After looking like it had found support, telecom has since broken down. Telecom was actually the 4th best performing sector year-to-date, however, from a longer term perspective it looks like it is firmly in a downtrend against the benchmark.
Last but not least is the utilities sector. Utilities had underperformed for a few years before this previous year. YTD, utilities are the third best performing sector. In the chart below, you can see this years outperformance in the last column of Xs. It wouldn't be surprising if next year the energy sector played out in a similar fashion to how the utilities sector performed this year. However, over the long-term, the utilities sector continues to look like its a strong relative underperforming downtrend.
Now as a stock picker, which sector would provide you the most opportunities to outperform? Health care, of course! A remarkable 79% (99 out 125 stocks) of health care stocks have outperformed the MSCI World Index over the past 252-trading days (one year). Meanwhile, only 11% (12 out 113 stocks) have managed to outperform the MSCI World Index over the past 252-trading days. You have been about 9x more likely to pick a winner in health care over the past year than you are picking a winner in energy. Overall, 44% of the stocks in the MSCI World Index have outperformed the MSCI World Index over the past year.
The list of sectors that may be more likely to underperform are probably not too surprising. Below are charts of some of the ten sectors using our proprietary point and figure charting methodology and based on these charts energy, materials, telecommunications and utilities all look like they are in downtrends relative to the MSCI World Index.
To play the energy sector now, it still seems like you are trying to catch a falling knife. The underperformance has been dramatic which could lead to a period of relative outperformance in the short run. However, over the long-run, energy looks to be a serial underperformer in the future.
After a multiyear period of strong out performance, materials has been a major relative underperformer. Support has been breached and there isn't anything from a technical perspective to get excited about.
After looking like it had found support, telecom has since broken down. Telecom was actually the 4th best performing sector year-to-date, however, from a longer term perspective it looks like it is firmly in a downtrend against the benchmark.
Last but not least is the utilities sector. Utilities had underperformed for a few years before this previous year. YTD, utilities are the third best performing sector. In the chart below, you can see this years outperformance in the last column of Xs. It wouldn't be surprising if next year the energy sector played out in a similar fashion to how the utilities sector performed this year. However, over the long-term, the utilities sector continues to look like its a strong relative underperforming downtrend.
How Our Indexes of Innovators Stack Up
GaveKal Capital’s Jennifer Thomson checks in on how
our own investment in innovation is performing, comparing the new GaveKal
Knowledge Leaders Indexes to the leading mutual funds in their categories. A
head-to-head comparison over four years ranks the indexes 7th and 2nd
among the leading actively managed mutual funds in the world stock and
diversified market equity categories. Watch the video to find out why.
Thursday, December 18, 2014
An Unconventional Way Of Looking At Valuations
An unconventional way of looking at valuations is to place companies into different "buckets" based on their absolutely valuation level. This gives you a simple way of understanding where the majority of stocks lie in terms of valuations levels
In the charts below, we take a look at price to earnings, price to book, price to cash flow and price to sales ratios. We want to see whether or not a majority of companies lie above or below certain absolute levels.
For example, we break out two groups based on price to earnings ratio. We are looking at the percentage of stocks in the MSCI World Index with a P/E ratio over 10x and the percentage of stocks with a P/E ratio under 5x. 86% of all stocks in the MSCI World Index have a P/E ratio over 10x and only 8% of stocks have a P/E ratio less than 5x. In early 2009. less than half of all stocks at a P/E ratio over 10x.
In early 2009, 46% of all stocks had a P/B ratio of less than one. Conversely, 54% of stocks had a P/B ratio greater than one. Currently, only 16% of stocks have a P/B ratio of less than one and 84% of stocks have a P/B ratio greater than one.
The percent of stocks with a P/CF ratio over 10x is at its highest level since July 2007. 59% of all stocks in the MSCI World Index have a P/CF ratio over 10x. In early 2009, only 19% of stocks had a P/CF ratio greater than 10x. On the flip side, only 11% of stocks have a P/CF ratio less than 5x. In early 2009, this percentage stood at 47%.
Last but not least, we have the price to sales ratio. 71% of all stocks in the MSCI World have a P/S ratio over 1x. This is a higher percentage than it was in July 2013. In fact (not shown), 44% of all stocks have a P/S ratio greater than 2x! In early 2009, only 16% of stocks had a P/S ratio greater than 2x. Currently, only 29% of stock have a P/B ratio less than 1x.
In the charts below, we take a look at price to earnings, price to book, price to cash flow and price to sales ratios. We want to see whether or not a majority of companies lie above or below certain absolute levels.
For example, we break out two groups based on price to earnings ratio. We are looking at the percentage of stocks in the MSCI World Index with a P/E ratio over 10x and the percentage of stocks with a P/E ratio under 5x. 86% of all stocks in the MSCI World Index have a P/E ratio over 10x and only 8% of stocks have a P/E ratio less than 5x. In early 2009. less than half of all stocks at a P/E ratio over 10x.
In early 2009, 46% of all stocks had a P/B ratio of less than one. Conversely, 54% of stocks had a P/B ratio greater than one. Currently, only 16% of stocks have a P/B ratio of less than one and 84% of stocks have a P/B ratio greater than one.
The percent of stocks with a P/CF ratio over 10x is at its highest level since July 2007. 59% of all stocks in the MSCI World Index have a P/CF ratio over 10x. In early 2009, only 19% of stocks had a P/CF ratio greater than 10x. On the flip side, only 11% of stocks have a P/CF ratio less than 5x. In early 2009, this percentage stood at 47%.
Last but not least, we have the price to sales ratio. 71% of all stocks in the MSCI World have a P/S ratio over 1x. This is a higher percentage than it was in July 2013. In fact (not shown), 44% of all stocks have a P/S ratio greater than 2x! In early 2009, only 16% of stocks had a P/S ratio greater than 2x. Currently, only 29% of stock have a P/B ratio less than 1x.
Stock Volatility Has Picked Up...A Little
We have had a small pickup in volatility in the equity markets since October. After a five month span from May-September that saw the daily change in the MSCI World Index vacillate between -0.5% to 0.5% with an average daily change of 3 basis points, we have had an increase in the number days that have ended either up 1% or down 1% and the average daily change has declined slightly to 0 basis points. .
The six-month moving sum of days where the MSCI World Index finished down by at least 1% has increased to 10 days. This is the most 1% down days in a six-month span in 14 months. Back in February, the six-month sum was just two.
Also, for the first time since November 2012, we have had 2 instances in past the six months that the MSCI World Index declined by at least 1% on consecutive days. To put that in perspective, we had a 14 month span from Feb 2013 to April 2014 where there wasn't one instance of a back-to-back 1% decline in the MSCI World Index.
Finally, the one-quarter moving sum of the cumulative number of stocks that have had at least a 5% decline in a day is at a 15-month high. However, just as is the case with the two charts above, it currently stands at a far lower level than we have true distress in the market such has in 2011 and 2008/2009.
The six-month moving sum of days where the MSCI World Index finished down by at least 1% has increased to 10 days. This is the most 1% down days in a six-month span in 14 months. Back in February, the six-month sum was just two.
Also, for the first time since November 2012, we have had 2 instances in past the six months that the MSCI World Index declined by at least 1% on consecutive days. To put that in perspective, we had a 14 month span from Feb 2013 to April 2014 where there wasn't one instance of a back-to-back 1% decline in the MSCI World Index.
Finally, the one-quarter moving sum of the cumulative number of stocks that have had at least a 5% decline in a day is at a 15-month high. However, just as is the case with the two charts above, it currently stands at a far lower level than we have true distress in the market such has in 2011 and 2008/2009.
Wednesday, December 17, 2014
Junk Bond Spreads Widest Since August 2012
About a month ago, we noted that the spread between high yield bonds and treasuries was not confirming the all-time high in the S&P 500. Since that time, we have had a slight turnover in the equity market but an even larger move in junk bonds. The spread between junk bonds and 10-year treasuries is currently at 520 basis points. This is the widest the spread has been since August 2012. A small part of this move can be attributed to the 10-year treasury yield declining by 17 basis points during the past month.
However, junk spreads are widening against investment grade bonds as well. The spread between high yield bonds and AAA bonds is back at the level seen at the end of October and any further widening from here would send spreads to the widest levels in over a year.
However, junk spreads are widening against investment grade bonds as well. The spread between high yield bonds and AAA bonds is back at the level seen at the end of October and any further widening from here would send spreads to the widest levels in over a year.
Tuesday, December 16, 2014
The Median Stock Is Once Again Negative YTD
The median year-to-date performance in the MSCI World Index with two weeks of trading left is -1%. The median stock was up 20% at this point last year and was up 13% at this point in 2012.
The developed country with the worst median performance YTD is MSCI Portugal. The median stock is down 35%. The developed country with the best median performance YTD is MSCI New Zealand. The median stock in MSCI New Zealand is up 14% in USD terms.
The major country indices in Europe are all unsurprisingly negative year-to-date. The median stock in MSCI Germany is down 10%, in MSCI France is down 10%, in MSCI Italy is down 12% and in MSCI Spain is 8%
The median performance year-to-date in the MSCI USA is 9%. The only other developed country indices with positive median performance YTD are MSCI Hong Kong (6%) and MSCI Ireland (6%).
The developed country with the worst median performance YTD is MSCI Portugal. The median stock is down 35%. The developed country with the best median performance YTD is MSCI New Zealand. The median stock in MSCI New Zealand is up 14% in USD terms.
The major country indices in Europe are all unsurprisingly negative year-to-date. The median stock in MSCI Germany is down 10%, in MSCI France is down 10%, in MSCI Italy is down 12% and in MSCI Spain is 8%
The median performance year-to-date in the MSCI USA is 9%. The only other developed country indices with positive median performance YTD are MSCI Hong Kong (6%) and MSCI Ireland (6%).
9 Out Of 10 Energy Stocks In The Developed World Are In A Bear Market
The MSCI World Index is only about 6% of it's 200-day high as of the close yesterday. However, 55% of the stocks in the index are down at least 10% and 30% of the stocks in the index are currently in a bear market (down at least 20%).
By region, Europe unsurprisingly has the most stocks in a bear market with just under half (46%) of the stocks in the MSCI Europe Index down over 20%. 30% of the stocks in MSCI Pacific and 21% of the stocks in the MSCI North America Index are in a bear market.
By region, once again unsurprisingly, the energy sector has the highest percentage of stocks in a bear market. Over 91% of all energy stocks in the developed world are in a bear market. The last time this many energy stocks were down at least 20% was on October 4th, 2011. Materials has the second largest percent of stocks down at least 20% at 50%. Health care has the fewest at 14%. The remaining sectors all have between 20%-34% of its stocks in a bear market. Charts of the sectors below.
By region, Europe unsurprisingly has the most stocks in a bear market with just under half (46%) of the stocks in the MSCI Europe Index down over 20%. 30% of the stocks in MSCI Pacific and 21% of the stocks in the MSCI North America Index are in a bear market.
By region, once again unsurprisingly, the energy sector has the highest percentage of stocks in a bear market. Over 91% of all energy stocks in the developed world are in a bear market. The last time this many energy stocks were down at least 20% was on October 4th, 2011. Materials has the second largest percent of stocks down at least 20% at 50%. Health care has the fewest at 14%. The remaining sectors all have between 20%-34% of its stocks in a bear market. Charts of the sectors below.