Posts tagged ‘Argentina’
Sports & Investing: Why Strong Earnings Can Hurt Stock Prices
With the World Cup in full swing and rabid fans rooting for their home teams, one may notice the many similarities between investing in stocks and handicapping in sports betting. For example, investors (bettors) have opposing views on whether a particular stock (team) will go up or down (win or lose), and determine if the valuation (point spread) is reflective of the proper equilibrium (supply & demand). And just like the stock market, virtually anybody off the street can place a sports bet – assuming one is of legal age and in a legal betting jurisdiction.
Soon investors will be poring over data as part of the critical, quarterly earnings ritual. With some unsteady GDP data as of late, all eyes will be focused on this earnings reporting season to reassure market observers the bull advance can maintain its momentum. However, even positive reports may lead to unexpected investor reactions.
So how and why can market prices go down on good news? There are many reasons that short-term price trends can diverge from short-run fundamentals. One major reason for the price-fundamental gap is this key factor: “expectations”. With such a large run-up in the equity markets (up approx. +195% from March 2009) come loftier expectations for both the economy and individual companies. For instance, just because corporate earnings unveiled from companies like Google (GOOG/GOOGL), J.P. Morgan (JPM), and Intel (INTC) exceed Wall Street analyst forecasts does not mean stock prices automatically go up. In many cases a stock price correction occurs due to a large group of investors who expected even stronger profit results (i.e., “good results, but not good enough”). In sports betting lingo, the sports team may have won the game this week, but they did not win by enough points (“cover the spread”).
Some other reasons stock prices move lower on good news:
- Market Direction: Regardless of the underlying trends, if the market is moving lower, in many instances the market dip can overwhelm any positive, stock- specific factors.
- Profit Taking: Many times investors holding a long position will have price targets or levels, if achieved, that will trigger selling whether positive elements are in place or not.
- Interest Rates: Certain valuation techniques (e.g. Discounted Cash Flow and Dividend Discount Model) integrate interest rates into the value calculation. Therefore, a climb in interest rates has the potential of lowering stock prices – even if the dynamics surrounding a particular security are excellent.
- Quality of Earnings: Sometimes producing winning results is not enough (see also Tricks of the Trade article). On occasion, items such as one-time gains, aggressive revenue recognition, and lower than average tax rates assist a company in getting over a profit hurdle. Investors value quality in addition to quantity.
- Outlook: Even if current period results may be strong, on some occasions a company’s outlook regarding future prospects may be worse than expected. A dark or worsening outlook can pressure security prices.
- Politics & Taxes: These factors may prove especially important to the market this year, since this is a mid-term election year. Political and tax policy changes today may have negative impacts on future profits, thereby impacting stock prices.
- Other Exogenous Items: Natural disasters and security attacks are examples of negative shocks that could damage price values, irrespective of fundamentals.
Certainly these previously mentioned issues do not cover the full gamut of explanations for temporary price-fundamental gaps. Moreover, many of these factors could be used in reverse to explain market price increases in the face of weaker than anticipated results.
If you’re traveling to Las Vegas to place a wager on the World Cup, betting on winning favorites like Germany and Argentina may not be enough. If expectations are not met and the hot team wins by less than the point spread, don’t be surprised to see a decline in the value of your bet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and GOOGL, but at the time of publishing had no direct positions in JPM and INTC. 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.
Goldilocks Meets the Fragile 5 and the 3 Bears
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2014). Subscribe on the right side of the page for the complete text.
The porridge for stock market investors was hot in 2013, with the S&P 500 index skyrocketing +30%, while the porridge for bond investors was too cold, losing -4% last year (AGG). Like Goldilocks, investors are waiting to get more aggressive with their investment portfolios once everything feels “just right.” Dragging one’s feet too long is not the right strategy. Counterintuitively, and as I pointed out in “Here Comes the Dumb Money,” the investing masses have been very bashful in committing large sums of money out of cash/bonds into stocks, despite the Herculean returns experienced in the stock market over the last five years.
Once the party begins to get crowded is the period you should plan your exit. As experienced investors know, when the porridge, chair, and bed feel just right, is usually around the time the unhappy bears arrive. The same principle applies to the investing. In the late 1990s (i.e., technology bubble) and in the mid-2000s (i.e., housing bubble) everyone binged on tech stocks and McMansions with the help of loose credit. Well, we all know how those stories ended…the bears eventually arrived and left a bunch of carnage after tearing apart investors.
Fragile 5 Bed Too Hard
After enjoying some nice porridge at a perfect temperature in 2013, Goldilocks and investors are now searching for a comfortable bed. The recent volatility in the emerging markets has caused some lost sleep for investors. At the center of this sleeplessness are the financially stressed countries of Argentina and the so-called “Fragile Five” (Brazil, India, Indonesia, Turkey and South Africa) – still not sure why they don’t combine to call the “Sick Six” (see chart below).
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| Source: Financial Times |
Why are these countries faced with the dilemma of watching their currencies plummet in value? One cannot overly generalize for each country, but these dysfunctional countries share a combination of factors, including excessive external debt (loans denominated in U.S. dollars), large current account deficits (trade deficits), and small or shrinking foreign currency reserves. This explanation may sound like a bunch of economic mumbo-jumbo, but at a basic level, all this means is these deadbeat countries are having difficulty paying their lenders and trading partners back with weaker currencies and depleted foreign currency reserves.
Many pundits, TV commentators, and bloggers like to paint a simplistic picture of the current situation by solely blaming the Federal Reserve’s tapering (reduction) of monetary stimulus as the main reason for the recent emerging markets sell-off. It’s true that yield chasing investors hunted for higher returns in in emerging market bonds, since U.S. interest rates have bounced around near record lows. But the fact of the matter is that many of these debt-laden countries were already financially irresponsible basket cases. What’s more, these emerging market currencies were dropping in value even before the Federal Reserve implemented their stimulative zero interest rate and quantitative easing policies. Slowing growth in China and other developed countries has made the situation more abysmal because weaker commodity prices negatively impact the core economic engines of these countries.
Argentina’s Adversity
In reviewing the struggles of some emerging markets, let’s take a closer look at Argentina, which has seen its currency (peso) decline for years due to imprudent and inflationary actions taken by their government and central bank. More specifically, Argentina tried to maintain a synchronized peg of their peso with the U.S. dollar by manipulating its foreign currency rate (i.e., Argentina propped up their currency by selling U.S. dollars and buying Argentinean pesos). That worked for a little while, but now that their foreign currency reserves are down -45% from their 2011 peak (Source: Scott Grannis), Argentina can no longer realistically and sustainably purchase pesos. Investors and hedge funds have figured this out and as a result put a bulls-eye on the South American country’s currency by selling aggressively.
Furthermore, Argentina’s central bank has made a bad situation worse by launching the money printing presses. Artificially printing additional money may help in paying off excessive debts, but the consequence of this policy is a rampant case of inflation, which now appears to be running at a crippling 25-30% annual pace. Since the beginning of last year, pesos in the black market are worth about -50% less relative to the U.S. dollar. This is a scary developing trend, but Argentina is no stranger to currency problems. In fact, during 2002 the value of the Argentina peso declined by -75% almost overnight compared to the dollar.
Each country has unique nuances regarding their specific financial currency pickles, but at the core, each of these countries share a mixture of these debt, deficit, and currency reserve problems. As I have stated numerous times in the past, money ultimately moves to the place(s) it is treated best, and right now that includes the United States. In the short-run, this state of affairs has strengthened the value of the U.S. dollar and increased the appetite for U.S. Treasury bonds, thereby pushing up our bond prices and lowering our longer-term interest rates.
Their Cold is Our Warm
Overall, besides the benefits of lower U.S. interest rates, weaker foreign currencies lead to a stronger dollar, and a stronger U.S. currency means greater purchasing power for Americans. A stronger dollar may not support our exports of goods and services (i.e., exports become more expensive) to our trading partners, however a healthy dollar also means individuals can buy imported goods at cheaper prices. In other words, a strong dollar should help control inflation on imported goods like oil, gasoline, food, cars, technology, etc.
While emerging markets have cooled off fairly quickly, the temperature of our economic porridge in the U.S. has been quite nice. Most recently, the broadest barometer of economic growth (Real GDP) showed a healthy +3.2% acceleration in the 4th quarter to a record of approximately $16 trillion (see chart below).
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| Source: Crossing Wall Street |
Moreover, corporate profits continue to come in at decent, record-setting levels and employment trends remain healthy as well. Although job numbers have been volatile in recent weeks and discouraged workers have shrunk the overall labor pool, nevertheless the unemployment rate hit a respectable 6.7% level last month and the positive initial jobless claims trend remains at a healthy level (see chart below).
Skeptics of the economy and stock market assert the Fed’s continued retrenchment from quantitative easing will only exacerbate the recent volatility experienced in emerging market currencies and ultimately lead to a crash. If history is any guide, the growl from this emerging market bear may be worse than the bite. The last broad-based, major currency crisis occurred in Asia during 1997-1998, yet the S&P 500 was up +31% in 1997 and +27% in 1998. If history serves as a guide, the past may prove to be a profitable prologue. So rather than running and screaming in panic from the three bears, investors still have some time to enjoy the nice warm porridge and take a nap. The Goldilocks economy and stock market won’t last forever though, so once the masses are dying to jump in the comfy investment bed, then that will be the time to run for the hills and leave the latecomers to deal with the bears.
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 AGG, 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.
Aaaaaaaah: Turbulence or Nosedive?
We’ve all been there on that rocky plane ride…clammy hands, heart beating rapidly, teeth clenched, body frozen, while firmly bracing the armrests with both appendages. The sky outside is dark and the interior fuselage rattles incessantly until….whhhhhssssshhh. Another quick jerking moment of turbulence has once again sucked the air out of your lungs and the blood from your heart. The rational part of your brain tries to assure you that this is normal choppy weather and will shortly transition to calm blue skies. The irrational and emotional, part of our brains (see Lizard Brain) tells us the treacherous plane ride is on the cusp of plummeting into a nosedive with passengers’ last gasps saved for blood curdling screams before the inevitable fireball crash.
Well, we’re now beginning to experience some small turbulence in the financial markets, and at the center of the storm is a collapsing Argentinean peso and a perceived slowing in China. In the case of Argentina, there has been a century-long history of financial defaults and mismanagement (see great Scott Grannis overview). Currently, the Argentinean government has been painted into a corner due to the depletion of its foreign currency reserves and financial mismanagement, as evidenced by an inflation rate hitting a whopping 25% rate.
On the other hand, China has created its own set of worries in investors’ minds. The flash Markit/HSBC Purchasing Managers’ Index (PMI) dropped to a level of 49.6 in January from 50.50 in December, which has investors concerned of a market crash. Adding fuel to the fear fire, Chinese government officials and banks have been trying to reverse excesses encountered in the country’s risky shadow banking system. While the size of Argentina’s economy may not be a drop in the bucket, the ultimate direction of the Chinese economy, which is almost 20x’s the size of Argentina’s, should be much more important to global investors.
At the end of the day, most of these mini-panics or crises (turbulence) are healthy for the overall financial system, as they create discipline and will eventually change irresponsible government behaviors. While Argentinean and Chinese issues dominate today’s headlines, these matters are not a whole lot different than what we have read about Greece, Ireland, Italy, Spain, Portugal, Cyprus, Turkey, and other negligent countries. As I’ve stated before, money goes where it’s treated best, and the stock, bond, and currency vigilantes ensure that this is the case by selling the assets associated with deadbeat countries. Price declines eventually catch the attention of politicians (remember the TARP vote failure of 2008?).
Is This the Beginning of the Crash?!
What goes up, must come down…right? That is the pervading sentiment I continually bump into when I speak to people on the street. Strategist Ed Yardeni did a great job of visually capturing the last six years of the stock market (below), which highlights the most recent bear market and subsequent major corrections. Noticeably absent in 2013 is any major decline. So, while many investors have been bracing for a major crash over the last five years, that scenario hasn’t happened yet. The S&P chart shows we appear to be due for a more painful blue (or red) period of decline in the not-too-distant future, but that is not necessarily the case. One would need only to thumb through the history books from 1990-1997 to see that investors lived through massive gains while avoiding any -10% correction – stocks skyrocketed +233% in 2,553 days. I’m not calling for that scenario, but I am just pointing out we don’t necessarily always live through -10% corrections annually.
Source: Dr. Ed’s Blog
Even though we’ve begun to experience some turbulence after flying high in 2013, one should not panic. You may be better off watching the end of the airline movie before putting your head in between your legs in preparation for a nosedive.
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 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.
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