Posts filed under ‘Earnings’
Buy in May and Tap Dance Away
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (May 1, 2014). Subscribe on the right side of the page for the complete text.
The proverbial Wall Street adage that urges investors to “Sell in May, and go away” in order to avoid a seasonally volatile period from May to October has driven speculative trading strategies for generations. The basic premise behind the plan revolves around the idea that people have better things to do during the spring and summer months, so they sell stocks. Once the weather cools off, the thought process reverses as investors renew their interest in stocks during November. If investing was as easy as selling stocks on May 1 st and then buying them back on November 1st, then we could all caravan in yachts to our private islands while drinking from umbrella-filled coconut drinks. Regrettably, successful investing is not that simple and following naïve strategies like these generally don’t work over the long-run.
Even if you believe in market timing and seasonal investing (see Getting Off the Market Timing Treadmill ), the prohibitive transaction costs and tax implications often strip away any potential statistical advantage.
Unfortunately for the bears, who often react to this type of voodoo investing, betting against the stock market from May – October during the last two years has been a money-losing strategy. Rather than going away, investors have been better served to “Buy in May, and tap dance away.” More specifically, the S&P 500 index has increased in each of the last two years, including a +10% surge during the May-October period last year.
Nervous? Why Invest Now?
With the weak recent economic GDP figures and stock prices off by less than 1% from their all-time record highs, why in the world would investors consider investing now? Well, for starters, one must ask themselves, “What options do I have for my savings…cash?” Cash has been and will continue to be a poor place to hoard funds, especially when interest rates are near historic lows and inflation is eating away the value of your nest-egg like a hungry sumo wrestler. Anyone who has completed their income taxes last month knows how pathetic bank rates have been, and if you have pumped gas recently, you can appreciate the gnawing impact of escalating gasoline prices.
While there are selective opportunities to garner attractive yields in the bond market, as exploited in Sidoxia Fusion strategies, strategist and economist Dr. Ed Yardeni points out that equities have approximately +50% higher yields than corporate bonds. As you can see from the chart below, stocks (blue line) are yielding profits of about +6.6% vs +4.2% for corporate bonds (red line). In other words, for every $100 invested in stocks, companies are earning $6.60 in profits on average, which are then either paid out to investors as growing dividends and/or reinvested back into their companies for future growth.
Source: Dr. Ed’s Blog
Hefty profit streams have resulted in healthy corporate balance sheets, which have served as ammunition for the improving jobs picture. At best, the economic recovery has moved from a snail’s pace to a tortoise’s pace, but nevertheless, the unemployment rate has returned to a more respectable 6.7% rate. The mended economy has virtually recovered all of the approximately 9 million private jobs lost during the financial crisis (see chart below) and expectations for Friday’s jobs report is for another +220,000 jobs added during the month of April.
Source: Bespoke
Wondrous Wing Woman
Investing can be scary for some individuals, but having an accommodative Fed Chair like Janet Yellen on your side makes the challenge more manageable. As I’ve pointed out in the past (with the help of Scott Grannis), the Fed’s stimulative ‘Quantitative Easing’ program counter intuitively raised interest rates during its implementation. What’s more, Yellen’s spearheading of the unprecedented $40 billion bond buying reduction program (a.k.a., ‘Taper’) has unexpectedly led to declining interest rates in recent months. If all goes well, Yellen will have completed the $85 billion monthly tapering by the end of this year, assuming the economy continues to expand.
In the meantime, investors and the broader financial markets have begun to digest the unwinding of the largest, most unprecedented monetary intervention in financial history. How can we tell this is the case? CEO confidence has improved to the point that $1 trillion of deals have been announced this year, including offers by Pfizer Inc. – PFE ($100 billion), Facebook Inc. – FB ($19 billion), and Comcast Corp. – CMCSA ($45 billion).
Source: Entrepreneur
Banks are feeling more confident too, and this is evident by the acceleration seen in bank loans. After the financial crisis, gun-shy bank CEOs fortified their balance sheets, but with five years of economic expansion under their belts, the banks are beginning to loosen their loan purse strings further (see chart below).
The coast is never completely clear. As always, there are plenty of things to worry about. If it’s not Ukraine, it can be slowing growth in China, mid-term elections in the fall, and/or rising tensions in the Middle East. However, for the vast majority of investors, relying on calendar adages (i.e., selling in May) is a complete waste of time. You will be much better off investing in attractively priced, long-term opportunities, and then tap dance your way to financial prosperity.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE, CMCSA, and certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in FB or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Earnings Coma: Digesting the Gains
Over the last five years, the stock market has been an all-you-can-eat buffet of gains for investors. It has been almost two years since the spring of 2012 when the Arab Spring and potential exit of Greece from the EU caused a -10% correction in the S&P 500 index (see Series of Unfortunate Events). Indigestion of this 10% variety is typically on the menu and ordered at least once per year. With stocks up about +50% over the last two years, performance has tasted sweet. But even binging on your favorite entrée or dessert will eventually lead to a food coma. At that bloated point, a digestion phase is required before another meal of gains can be consumed.
So far investors haven’t been compelled to expel their meals quite yet, but it’s clear to me the rate of appreciation is not sustainable over the long-term. Could the incredible returns continue in the short-run during 2014? Certainly. As I’ve written before, the masses remain skeptical of the recovery/rally and any definitive acceleration in economic growth could spark the powder-keg of skeptics to come join the party (see Here Comes the Dumb Money). If and when that happens, I will be gladly there to systematically ring the register of profits I’ve consumed, by locking in gains and reallocating to less loved areas (i.e., go on a stock diet).
Q4 Appetizers Here, Main Course Not Yet
The 4th quarter earnings appetizers have been served, evidenced by the 50-odd S&P 500 corporations that have reported their financial results, and thus far some Tums may be needed to relieve some heartburn. Although about half of those companies reporting have beat Wall Street estimates, 37% of the group have missed expectations, according to Thomson Reuters. It’s still early in the earnings season, but as of now, the ratio of companies beating Wall Street forecasts is below historical averages.
We can put a little meat on the earnings bone by highlighting the disappointing profit warnings and lackluster results from bellwether companies like United Parcel Service (UPS), Intel Corp (INTC), General Electric (GE), CSX Corp (CSX), and Royal Dutch Shell (RDSA), to name a few. Is it time to panic and run for the restroom (or exits)? Probably not. About 90% of the S&P 500 companies still need to give their Q4 profitability state of the union. What’s more, another reason to not throw in the white towel yet is the global economic environment looks significantly better in areas like Europe, China, and other emerging markets.
Worth remembering, the stock market is a discounting mechanism. The market pays much more attention to the future versus the past. So, even if the early earnings read doesn’t look so great now, the fact that the S&P 500 is down less than -1% off of its all-time, record highs may be an indication of better things ahead.
Recipe for a Pullback?
If earnings continue to drag on in a disappointing fashion, and political brinkmanship materializes surrounding the debt ceiling, it could easily be enough to spark some profit-taking in stocks. While Sidoxia is finding no shortage of opportunities, it has become apparent some speculative pockets of euphoria have developed. Areas like social media and biotech are ripe for corrections.
While the gains over the last few years have been tantalizing, investors must be reminded to not overindulge. Carefully selecting stocks to chew and digest is a better strategy than recklessly binging on everything in the buffet line. There are plenty of healthy areas of the market to choose from, so it’s important to be discriminating…or your portfolio could end up in a coma.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in UPS, INTC, GE, CSX, RDSA, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
