Tower Private Advisors
- Very abbreviated post
- What is it about sharks?
- The taper begins
I forgot to include this Friday…
This is a great cover story. Remember, cover stories can be useful as contrary indicators. Companies that show up on covers as company of the year tend to see their stocks perform pretty poorly afterward. The Death of Equities almost rang the bell near thebeginning of the ’80s bull market.
The thought process behind the cover-story-as-contrary-indicator is that once the publication’s editor approves the issue for a cover story, the story has pretty much run its course. Think about it: is it news to you that the European economy’s in trouble? This cover story would have been helpful were it published one or two years ago.
Finally, I heard this quote today regarding the Greek elections:
“Greece survives to fail another day.”
Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors
I’m a big fan of using cover stories as contrary indicators. (You can see previous examples I’ve cited by clicking here.) The idea is that by the time an issue makes it to the cover of a publication it’s already widely discounted in prices and markets. Barry Ritholz provides some rules for using magazine covers at his blog’s post here. I’m not sure mine, below, qualifies, but this is my sandbox. Here are his rules, verbatim:
I’m not sure the last one is a requirement; first, asset price losses ought to suffice; second, if a cover captures the general zeitgeist among the populace, and that’s factored into asset prices, than a reversal or lifting of the subject–as the contrary nature of the cover story argues–ought to provide the contrary catalyst.
Anyway, here is this week’s cover from The Economist.
I happen to agree with the cover story’s angle, although I think I know the answer. Not that it’s relevant to this particular posting, but it has to do with the fact that the recent recession was accompanied by a financial crisis. In the past, that combination has lead to very subdued recoveries.Taken at its face value, the contrary angle would be that the economy’s weakness is priced into assets and any positive surprise would push risk assets quickly higher.
Looked at only from the angle of Jane Consumer, I’d say this pretty well sums it up: this is just a lousy economy. Any surprise in the economic statistics–like a big increase in non-farm payrolls or, better yet, anecdotal stories about one’s neighbors (the closer to home the better)–could spur buying of stocks.
I think, however, that the tenor of professional investors has been much more upbeat, such that they might poo-poo this cover story by spinning things bullishly as they’re wont to do.
In conclusion I’ll put it this way. Individual investors have not rushed to stocks. Thus, this cover story probably captures their mood pretty well, and if it’s the contrary indicator it appears to be, we might see individual investors return to stocks. But the professional investment class is far more important, and they’re already in, already bullish.
I like magazine covers for their use as contrary indicators. You can find some dandies by perusing the Cover Stories category on the blog. This one, though, is great for its creativity. It’s intended to highlight the problems facing the U.S., what with its divided government. Check out those names:
Below the image you can see a couple of paragraphs from the actual article. Click on the picture to see a huge version of it, and click on the link with the paragraphs to jump to the full story.
To the Republicans who now control the House of Representatives, the main problem is the deficit and the cumulative burden of debt it brings with it. The deficit will of course narrow as the economy recovers, but because of the insatiable demands for health care of America’s now-creaky and retiring baby-boomers, unless taxes are hiked it will not dip below 4% of GDP, and it will start to rise again after 2015. That is not sustainable. Not only will borrowing on this scale tend to crowd out more productive investment: the interest on it is already eating up 10% of government revenue, a figure that will rise as interest rates go up. Hence the Republican demand for swift and deep cuts. Get spending down, shift government off the backs of the people, and jobs will return, as the invisible hand works its magic.
Mr Obama sees things the opposite way round. His state-of-the-union speech was an attempt to place jobs—which, according to pollsters, most Americans say are their priority—at the forefront of the debate, and he put the deficit at the end of a long list of concerns. After two years in which he concentrated more than was wise on getting health reform passed, refocusing on jobs makes some sense. It is obviously true that America’s infrastructure, both human and physical, is sub-par (its children’s maths skills were recently placed 25th out of 34 in a ranking of OECD countries). And it is hard to reduce the deficit while the country has a large group of persistently un- or underemployed people. Full article here.
Google (GOOG) is a stock we’ve liked for a while. It’s part of a theme that our Williams Inference service highlightedseveral quarters ago: cloud computing. That’s the idea that more and more of our computing applications will be housed, not on your desktop’s hard drive, but on the internet, the so-called Cloud.
But since late 2007, when it hit its peak of $747, it has struggled, falling as low as $247.30 in the depths of the financial crisis. It has since recovered 50% of that loss, but its peers have far-outperformed it.
There may be a glimmer of hope for the stock in that Fortune magazine is just now recognizing the company’s situation, featuring it on the cover of its most-recent issue, shown below.
As I’ve mentioned here before, by the time a company or an issue moves from deep in a publication to the front cover or page, it’s often a sign that the worst is over.
One piece that’s missing to complete this picture of pessimism is gloom amongst the analysts. There are 37 who follow the stock, with 86% of them rating it a “buy,” while five say “hold” it. That’s considerably above the average for all U.S. stocks. The analysts’ price targets have come down, however. At the end of 2009, the average price target was $662, while the stock was at $619. Now, with the stock at $503, the average price target is $625.