The Reformed Broker
The beating Apple took last week is one for the ages. It's not that the 4% it dropped this week is such a huge decline, it's more that the stock is so widely held (I own some for clients) and "in such good shape."
This is the hard part of investing - understanding the psychology shift in a name or a theme which may or may not precede an actual fundamental shift.
In the past week alone, Apple's seen $38 billion lopped off its market cap. With the stock closing at $509 yesterday, it's lost 200 points per share from the September high or $180 billion in total market cap. To put that into perspective, $180 billion is one McDonalds plus one Disney. It's Nike plus Starbucks plus Ford Motor plus Time Warner. This is a demented amount of lost capitalization for such a short period of time and in so healthy a company.
The sell-off has been alternately explained as a tax-gain harvesting thing ahead of the Cliff (when it began selling off it was up 50% on the year and it's gained 8000% over the past decade). This morphed into concern over Samsung's continued market share gains which this week morphed into concern over a chilly reception for the iPhone 5 in China. And without a doubt, there are people who are now selling it for no specific reason; they're just getting out because everyone else is getting out. The stock is the most widely-held position by hedge funds and one of the most widely-held by mutual funds. It is the largest component of the NASDAQ (at a dominant 18%) and also the largest wheel in the S&P 500. ( Continue… )
There seems to be a debate about what's causing the continued market malaise right now, at a time of year when stocks are typically in rally mode.
One camp blames "Fiscal Cliff Fears" while another says this is all about Euro weakness and the latest Greek deal that no one seems to be satisfied with.
The reason people work so hard to ascribe "The Why" to market action is because they can then make a decision once that Why goes away. In other words, if you believe the market is down on Fiscal Cliff stuff, you would then be a buyer when signs appear that an agreement will be made.
To me, The Why is not worth debating. Focusing on market action and fundamentals is probably a better bet right now than seeking explanations. The What is the thing, The Why will only matter to the textbook writers years from now. ( Continue… )
A few things here -
First, today's snapback rally was one of the more predictable of the last few years. We talked about the setup for it yesterday. Everyone was too negative and stocks had dropped too far too fast. Oversold conditions were obvious by mid-week and by Friday they had gotten totally carried away - all ten sectors in the S&P were trading at two standard deviations or more below their 50-day moving averages. That's a collapse and an unjustified one at that.
Second, this can continue so long as the headlines coming out of Washington remain conciliatory and the most vocal opponents of higher taxes start to just get used to it and get on with their lives. Markets will be benign in the absence of shouting.
Third, in the end it won't matter so long as the only strong segment of the economy is housing. In the absence of momentum outside of housing, Q4 estimates probably still have room to come down. This puts a leash on how far equities can go, we've just seen that phenomenon at work after the June-September run. ( Continue… )
"Dear Josh, I've been reading you for years and I still have no idea what your politics truly are. It seems as though you don't believe in anything."
I'll make this really simple - imagine a village. And in this village, the elders are in charge of reminding everyone about their core principles and values - the things that have preserved them for generations. But then imagine that four out of every five villagers were not elders - rather they were everyday people who were constantly changing and pushing progress further, constantly attempting to improve things rather than allow them to remain the same. Using logic and reason and discovery to make life better, one hard-won improvement at a time, dispelling superstition and rewriting the rules because modernism and changing attitudes demanded it.
This would be a successful village or society in my view.
Now every once in a while, the 80% would become too progressive - would overstep their bounds in the name of progress. Or perhaps the village would become susceptible to outside forces or invaders. It is at this point that the 20-percenter villagers, the traditionalists, would be called forward to right the ship or defend the town. Progressives and liberals could never do it, they'd be paralyzed with questions, hamstrung with doubt. It is at this moment when you'd need the wisdom of the ages, the resolve of the experienced to take over to save everyone's lives. ( Continue… )
Let's not make this more complicated than it already is - this is a Fiscal Cliff at the current moment. It is not a Fiscal Slope or anything gradual.I actually wish they'd call it a Fiscal Brick Wall because that's what it will actually act as upon investable assets.
If there is no compromise the US economy absolutely will slam into a wall. The smart money, however, would not be placed on that scenario. It is unlikely that anyone on either side wants a repeat of last year and the more obstinate wing of the GOP that started the whole episode has just been neutered.
But let's get back to the Cliff's impact, should we go over it...
Now there is a new meme going around that some of the more prominent bloggers have repeated, wherein we hear about how "the changes don't all take effect at once" and "this whole thing is just like Y2K" and "actually, it will probably have very little effect on the economy at all."
The bloggers who are repeating this are technically correct. But they tend to be either journalists or economists, and not market people necessarily.
And so I think that here's what they miss:
1. What the fiscal cliff's actual impact on the economy will ultimately be is not the point, it is the perception.
2. In the short-term, stocks trade on psychology and sentiment. This happens en masse and things change quickly. Fear over increased taxes, lower government spending and a further contraction of economic growth will not lead to a gradual adjustment of risk asset prices. Rather, it will mean a fear-driven race to the exits all at once. I don't care what your surveys say, deep down everyone who is in the stock market right now is operating under the assumption that a compromise will occur, on time, and one that kicks the can on all of the big issues. Any hint that we're deviating from this script will show up in the tape.
3. Economists and journalists who do fact-based empirical work sometimes forget that most people, including investors, do not behave rationality or react to the data in proportion with its actual meaning. Many people in this world, even some successful ones, can turn from reasonable human beings into hysterical monkeys when their fight-or-flight instinct is triggered. And nothing triggers it like a whiff of panic in the air and the threat of the unknown, in this case the question of how the economy will weather the effects of the Cliff.
So while Fiscal Slope may turn out to be the reality, intelligent people who have figured this out ought not to assume that that's how "the market" will react to it in the short-term. Especially if the calendar turns and we've gone "over it." Expect hysterical monkeys to rule the markets in that scenario rather than human beings at that point, even if their fear turns out to be unfounded.
So it'll be Apple's product launch event versus the earnings reports of America's multinationals in the battle for the next leg of this market. We'll hear from 33 S&P 500 companies today and the statistics say we should not be enthusiastic headed into these reports.
According to Reuters, "Of the 123 S&P 500 S&P companies that have reported earnings through Monday morning, 60.2 percent have topped analysts' expectations, shy of the 62 percent average since 1994 and below the 67 percent average over the past four quarters."
In the last 24 hours we've heard from DuPont, 3M, Texas Instruments, Dow Chemical and UPS. None of them have had much good to say. All them are reporting lower revenues and most are having trouble thanks to the stronger dollar and Euro/China revenue shortfalls.
I'm not sure this type of thing can be contained to just the third quarter. I'm also not sure that Apple's announcement today of their smaller iPad, rumored to be called the iPod DeVito, will be quite enough to lead the charge higher again.
We've chosen to remain overweight US exposure and defensive sectors, underweight global growth-sensitive names and cyclicals. Seemed wrong during much of the summer rally. Seems right given the reality of earnings season.
Know what that number is? The entire pool of financial assets in the United States - a combination of bank accounts, brokerage accounts, mutual fund assets and retirement plan assets.
This number is carved out of the gross $72.2 trillion in US household assets (including real estate). Netting out all household debt, US households have an unencumbered net worth of $58.4 trillion.
And then separating hard assets, we arrive at that $41.8 trillion in financial assets. $28.6 trillion of that is in so-called investable assets and the other $13.2 trillion is in retirement accounts (401ks, pensions, etc). $41.8 trillion is a big number.
Someone asked me yesterday why there was so much financial advertising going on if so few Americans have money put away for retirement. That number is the reason why. Because in our have and have-nots nation, those who have been saving have saved quite a lot. And everyone wants to to clip a fee from that number - the bigger, the better.
That's why there will never be a golf tournament without a financial services sponsor.There's so much money out there it is absolutely staggering.
In the second quarter of this year, share buybacks among S&P 500 companies grew to $112 billion as corporations finished with a record $1.03 trillion in cash sloshing around on their balance sheets. This buyback amount represented a 30% jump over Q1. In contrast, S&P 500 corporations paid out just $70 billion in cash dividends during the same period, an 11% growth rate over the prior quarter.
This preference for financial engineering over hiring, expansion, M&A, or dividend issuance has been in force for a while now.
And quite frankly, nothing could be less productive.
Tom Keene had Fortuna Advisors' Greg Milano on Bloomberg Radio this morning to get some straight answers about the lack of business investment occurring against the backdrop of corporate balance sheets brimming with cash. "Why aren't the advisors to these companies telling them to reinvest all this cash?" Tom asked. Milano explains that you can "grow earnings per share" by simply having less shares to spread the profits among, so why not do that when there's so much uncertainty? No one will fault you.
Of course, this is perfectly true and a tragic squandering of resources and opportunity. Because in climates ofcertainty, buybacks are a terrible waste of shareholders' capital - in the feel-good atmosphere of certainty during 2007, US corporations spent half a trillion dollars buying their own shares back at all-time highs. We know how that looked a year later...
As to why the advisors are recommending buybacks over dividends, he explains that they get paid by their corporate clients to execute ongoing buybacks (presumably the shares are bought by the brokerage side of the advisor's firm - long live the bulge bracket). An increased dividend pays the advisor's firm zero dollars, hence the bias.
Share buybacks also reaccelerated in the 2nd quarter, coinciding with the first sense that business growth was starting to slow down. This should not be surprising - executives get paid and bonused based on many factors, profitability measures being chief among them. And so when organic profit becomes harder to come by, you see buybacks stepped up to take the pressure off. Eighty companies in the S&P 500 have reduced their outstanding shares by 4% or more through buybacks so far this year, according to S&P.
One other thing - executives use buybacks to offset compensation, they issue themselves shares or options, and then get the board to approve a stock buyback to counter the effect of dilution. If you're asking yourself "wait, so buybacks can be used as a tool to transfer shareholder money to the executives?" then you've got it figured out, that's exactly what they can be used for. And they often are.
No one should be surprised that cash-rich corporations (and their executives) are being risk-averse or thinking about short-term profit-boosting and self-gratification. Corporations are people, too, remember?
It was also pointed that out that, ironically, the selection committee is out of Norway, a nation that would fit perfectly into the EU - except that it had chosen not to join. A wise choice, especially considering both the absolute and relative strength of the Norwegian economy (lots of oil, it's like a snowy Saudi Arabia, also they made a conscious decision to use the oil wealth for the good of their entire society, not just for whichever Viking stumbled upon it first in the North Sea).
Anyway, my other thought was that there are good years and stupid years for the Nobel Peace Prize, I'm not sure which this will turn out to be. Remember that Yasser Arafat once won, shortly before becoming the father of modern day terrorism. Also, one-termer Jimmy Carter for some unenduring reason no one can remember. They also gave Henry Kissinger the award for signing the Vietnam Accords, in the meantime he had been secretly bombing Laos.
There's a truism as old as time (or at least as old as the business of Other Peoples Money) and it concerns the benevolent effect produced by up-markets: Financial advisors love them more than anyone else.
This is the case for the following three reasons:
1. Billing off a higher base: Most advisors and money managers are paid based on their assets under management or AUM. When the market rallies, so too do most of the account values under their wing. This means they are charging their customary fee percentage but the base is a larger number. There are two ways for an advisor to raise AUM, the first is the hard way - getting new clients, convincing existing clients to dump other relationships, networking, prospecting etc. The second way is the easy way - merely staying put through a bull market. The increase from either pays the same.
2. A rising tide hides all mistakes: In a rally, a broad-based one at least, even the loser investments can start to look and feel like winners. They get dragged up thanks to the environment and the advisor who chose them gets a second chance to rethink that purchase decision. Easier to sell ugly merchandise into an up tape than book losses into a malaise or a correction.
3. Customer confidence improves: Advisors tend to be looked at in a more favorable light when the investment markets are acting well and things seem to be ticking along without a problem. Portfolios flourish on auto-drive, dividends are paid, gains are taken and conversations can turn from the stressful to the friendly - "Playing any golf this weekend? How's Jayden doing at Cal State this semester?"
As evidence of this last point, I point you towards a Marist Research survey published this week of 175 individuals with investable assets of $1 million or more, excluding primary residence.
Here's Julie Steinberg writing at the Wall Street Journal:
Millionaires appear to be more satisfied with their treatment at the hands of their wealth advisers. Just over 85% said they’re satisfied with their investment firm, up from 67% in 2010. The advisers themselves are also commanding more respect. Nearly three-quarters of respondents are pleased with how their advisers have managed their portfolios through difficult economic times. That figure jumped from 59% in 2010.
This amidst a backdrop of only 28% believing that the economy is healthy. In other words, they're not confident overall but they're extremely confident about their finance guy or gal.
Good vibrations in the market, especially those emanating from the third quarter of this year, go a long way toward solving lots of outstanding issues in a very benign and gentle way. Seasoned advisors fight through the tougher times (Fall 2011, Winter 2008, etc) knowing that times like these are never far away.