Archive for category: Investing

Near the top of the influence list for the stock market today, and for the rest of the global financial markets today, as well as for the rest of the week, is the slew of big-time corporate earnings on tap. In fact, the market today will get earnings from Dow Jones Industrial

Average component Microsoft Corporation (NASDAQ:MSFT), as well as other tech giants such as Seagate Technology PLC (NASDAQ:STX) and Texas Instruments Incorporated (NASDAQ:TXN).

At the start of the market today, about 20% of the S&P 500 has reported earnings, and the results have been broadly mixed. Approximately 75% of those firms have beaten estimates, which is a pretty good percentage; however, the results haven’t been as good on the revenue front where the results have been much more in-line with estimates.

So, at least so far, we are not seeing the strong revenue numbers like we saw during Q3 earnings season late last year. I think the single biggest takeaway so far from this earnings season is that between the strong US dollar and the reduction in expected energy company earnings, the expected S&P 500 earnings number has come in somewhat materially from $130/share six months ago to under $125/share now, which does have an effect on valuations.

Using $122/share, at 2,070 the market trades at 17X current year earnings—not prohibitively expensive given 0% interest rates. However, given the macro environment it’s definitely on the high side. Point being, valuation is something we need to keep an eye on if results for the remainder of earnings season continue to disappoint, because valuation could become a mild headwind on the S&P 500 towards 2,100 (it’s one of the reasons I’m cautious about buying up here).

The markets today will start to get resolution in several of the macro overhangs that have weighed on stocks early in 2015, but at 2,070 a lot of “non-negative” resolution is already priced in, and I continue to have a hard time seeing a material positive near-term catalyst that will push stocks to 2,100 and beyond.

Last week’s ECB decision on QE was a positive, as the program will be powerful, and global central bank easing is a general tailwind on stocks. And, while likely a problem for another day, the Greek elections have provided at least some certainty over that hitherto unknown.

As for the remainder of the focus on the markets today, we have the Fed meeting on Wednesday. What we’ll look for here is whether the Fed is getting more “dovish” given the global slowdown and central bank easing. “When/How the Fed will raise rates” is a macro headwind on stocks, so this week will be a mover for the stock market today, and for the remainder of the week, month and quarter.

However, keep in mind, even if the Fed is dovish Wednesday, the market would much prefer a surging economy, rising inflation and higher rates, not continued low rates. Finally, the Russia/Ukraine situation is heating back up as outright fighting between Russian backed rebels and Ukrainian government forces started again over the weekend, and the West is already threatening more sanctions.

Bottom line: In our estimation there remain too many headwinds for a material move higher.

The news last week was bullish for the financial markets around the world, including the US, but I am not a buyer at these levels, and would wait to add to select sectors more towards 2,000 in the S&P 500.

 

 

By far the biggest event in the stock market today, not only for the Dow Jones Industrial Average and the S&P 500, but also for the currency, bond and international financial markets today, was the European Central Bank’s (ECB) move to issue even more “QE” than even the most optimistic bulls had anticipated.

In fact, “Super” Mario Draghi lived up to his moniker, juicing financial markets today with a much-bigger-than-expected bond buying program that exceeded estimates both in terms of scope, and size. The result was a near 260-point spike in the Dow Jones Industrial Average, which lead other financial markets today markedly higher in sympathy.

Let’s take a look at the details of the ECB QE, and you’ll see why they caused such a kerfuffle in the markets today.

Size: 60 billion euros per month for 18 months vs. (E) 50 billion for 12 months.

Yes, some are saying the 60 billion per month is a touch misleading because it includes previously announced ABS and CDO purchases, but I think this is missing the bigger point. You see, the ECB QE is really all about the aggregate size of the balance sheet.

The new ECB balance sheet will be over 1.2 trillion euro by September 2015, with room for more. That is far larger than the previously stated 1 trillion euro target—and that, my friends, was the eminent source of the bullishness in the stock market today.

Risk Sharing: The sovereign bond purchases will be “Pari-Passu.”

The ECB said sovereign bond purchases would be pari-passu (meaning all bond purchasers can will be regarded equally, and thus repaid at the same time), which is important because it won’t result in an offset of private market debt purchases. Despite not including total risk sharing across the ECB, and as such putting default risk on the balance sheet of the national central banks, the bottom line is that the chance of default (which is really all that matters here) on much of the QE debt remains very low, and will not be an inhibitor to the success of the program.

Unanimity of the Decision: All Parties Thus Concur

Whether the Germans were on board with the ECB QE was a topic of concern for the markets today. While there was no actual vote (so we can’t see who was for it or against it), Draghi said in the press conference that there was unanimity in using QE as a legal monetary policy tool. This strongly implies the Germans, while likely reluctant, will not try to derail the program.

I believe the stock market today reflects the bullish response to the ECB QE, not just here at home but particularly with respect to European equities. In fact, if you are looking to buy the ECB QE then I think the best way to do so is with an exchange-traded fund (ETF) such as the Wisdom Tree Europe Hedged Equity ETF (HEDJ).

This fund already is significantly outperforming the S&P 500 year to date (7% vs. 1%), and I suspect this can continue over the coming weeks and months.

Interestingly, I was surprised yesterday while watching the analysis/reaction to the ECB QE announcement, as some of it seemed to focus on the economic implications of the details of QE.
We don’t actually know if QE helps an economy, even after six years of it here in the United States. However, we are interested in stock market returns, and we do know pretty well that QE makes nominal stock prices go up (see UK stocks, Japan stocks and US stocks).

My initial bullish thesis on Europe was based on the proposition of an expanded balance sheet, and seeing as the ECB is committed to an even larger and open-ended balance sheet expansion than most had previously anticipated, I view this as even more European equities bullish.

From an investment standpoint, I continue to like HEDJ as the single best way to play “Europe” broadly, as it also protects you from a decline in the currency. And despite the falling currency, I still like country-specific and sector-specific ETFs such as the iShares MSCI Italy Capped (EWI), Global X FTSE Portugal 20 ETF (PGAL), and the iShares MSCI Europe Financials (EUFN).

While these respective ETFs are not protected from the drop in the euro (and it will weigh on returns for US investors) I believe the potential upside in these ETFs is more than enough to warrant taking on the currency risk. To use a crude analogy, HEDJ is like the S&P 500, while the remaining ETFs are like cyclicals sectors—and thus they will be more volatile than HEDJ in both a rising and falling tide.

Bottom line: For anyone other than those with a very short-term outlook, I think you can begin to leg in to HEDJ or the other positions. And, if you already own them, I think adding to them gradually on a schedule over the next week or two will prove prescient.

Although nearly every week is replete with news, economic events and all manner of market-moving headlines, not all weeks are created equal.

This week is, in fact, the first really important macro-economic week of 2015, and while there aren’t a huge number of economic events, what we do have on tap is extremely important.

Obviously, the clear highlight this week is the European Central Bank (ECB) meeting on Thursday. We’ll be previewing the particulars of the meeting in the coming days, but given the Swiss National Bank (SNB) decision last week to de-peg the franc from the euro, it seems that expectations are high for something big from the ECB QE plan.

At this point, 500 billion euros remains a key level to watch. I suspect that anything below this level will be considering underwhelming.

Now, in addition to the ECB we also get the global January flash PMIs Wednesday night/Thursday morning. Given the concerns about global growth and global deflation, these metrics are very important, as the market needs a confidence boost about the pace of growth globally.

Specifically, China and Europe remain in focus, especially following the downbeat Chinese growth data Monday night and the ECB decision looming Thursday morning. And, for the first time in a few months, even the US data will be watched closely. On an absolute level it should be fine, but right now the key is just how much momentum the US manufacturing sector is losing.

If we see a sharp deceleration in US manufacturing data, it may weigh further on sentiment. Now, staying in the US, we also get the latest round of housing data via housing starts on Wednesday, and existing home sales on Friday. Keep in mind that housing has quietly lost a bit of positive momentum over the past two months, and some stabilization in that data will help provide a boost to market confidence.

For 2015, the global economy is estimated to expand by 3%, which is down from a projected 3.4% growth rate in June. In 2016, the World Bank thinks growth will come in at 3.3%, which is down from the prior estimate for 3.5% growth.

Bottom line: This week is key, because it is an opportunity for the ECB and economic data to help partially vanquish the growing concerns about the pace of global growth and disinflation. If the PMIs are decent (meaning China and Europe stay above 50), and the ECB does something powerful (i.e. QE greater than 500 billion), the outlook for the global economy could be a lot better as we head into Greek elections Sunday.