Weekly Recap & Outlook – 04.13.12

Tower Private Advisors


  • New indexes
  • First bit of useful information published on this blog
  • JPMorgan entering the anti-Christ league along with Goldman Sachs

Capital Markets Recap

Just one lone patch of green up there, the globe’s largest issuer of debt, the country with almost the world’s worst demographics. Whatever. Please note the addition of two indexes I stumbled across today, the Fisher-Gartman Risk On/Risk Off indexes. At a glance one can see what the market’s mood was for the week. When the Risk On index is up then the switch was set to risk on; if it was down–or, conversely, the Risk Off index was up–then investors dialed down their risk appetite. We’ll be able to look for divergences between those two and the Volatility Index. (They should mimic each other. If they don’t, something might be afoot.)

Top Stories

How would you like to deal with a 35% pay cut? I thought so. Well, you ought to have loads of sympathy for the Blankfein household. Lloyd Blankfein, Chairman and CEO of Goldman Sachs, saw his 2011 pay package decline by a whopping 35% to…well…a whopping $12.4 million (having declined from $19.1 million.) But, hey, it’s all relative; surely you can imagine the terse moments over dinner in the Blankfein home… “well, dear, we’re just going to have to hold off on the new place in the Hamptons–I know, I know, I promised…”

There’s a big slowdown underway in China–at least in relative terms, but which of the G10 countries wouldn’t kill for the problem China has? Data, from the country whose data most people view skeptically, showed that its growth in the first quarter was at an 8.1% run rate, down from 8.9% in the fourth quarter. (The timeliness, alone, of the data makes it suspect. In the U.S., we don’t get the first iteration of quarterly GDP growth until a full month after its end. China’s was available just 13 days after.) Anyway, here you can that the run rate was in the lower half of the last 20 years of data.

That left some economists in a Bloomberg article guessing that the Chinese authorities might yank on the fiscal policy lever to boost the country’s growth. It had previously put on the brakes to slow down inflation there.

Quick–name a stock! Apple. Right. The stock has 59 analysts covering it, and the first sentence of a Bloomberg story sums it up pretty well:

It’s the most intriguing investment question of our time: How high can Apple Inc.’s stock go?

The story goes on to talk about an analyst from [Minneapolis-based brokerage] Piper Jaffray who has been mostly right about the stock. He thinks the stock hits $1,000 in 2014, making it the “first U.S. company worth $1 trillion.” He claims that investors will eventually recognize that Apple is where “tech is headed,” and they’ll move their technology exposure to the stock. Another analyst–obviously a clueless fool–downgraded the stock on April 9 because he thinks that wireless carriers will wise up, realizing they’re losing money with their contract subsidies, and cut the same, hurting sales of iPhones.

Despite the lemming analysts on the stock mostly saying buy, buy, buy, the stock–other than its parabolic rise–doesn’t have the hallmarks of a bubblicious stock. That’s not to say that a parabolic rise isn’t cause for concern. After all, if a rising 200-day moving average defines a company’s secular trend, then Apple could fall to $432, a 29% drop, and still be considered to be in a bullish trend. On the other hand, the stock’s valuation is far from lofty. It’s trading at 17.38x trailing 12 months earnings and just 13.85x the [same lemming] analysts’ earnings estimates. Here’s the first free bit of information on this blog that will actually be valuable to you:

You do not want to pass on your Apple shares to your grandchildren. The obsolescence risk inherent in technology, alone, virtually assures the stock’s relative demise. Some kid in a garage somewhere in California is working on the technology that will do an end-run around Apple. After all, this winsome lass is sporting glasses from Google’s Project Glass, which glasses purport to display the internet an inch in front of one’s eyeball.

Speaking of Google, the company saw its stock pummelled today on news that it would be issuing a stock dividend of non-voting shares. Of course, it also had other news, like sales growth slowed, but that’s aside from the point I want to make here, which has nothing to do with company fundamentals or the stock dividend, but rather that Google is run by two nerdy guys who are unconventional–the company didn’t have an IPO; it had a dutch auction for its shares–because that’s what nerdy guys do: unconventional things. And that’s how Apple will get knocked off its lofty perch. When, is anyone’s guess, however.

Messrs Dodd and Frank must have their undies in a bunch (e-mail Mike Cahill, Tower’s CEO, if that was objectionable to you) over news that JPMorgan has, “transformed the bank’s chief investment office [sic?] in the past five years [hmm...see chart below - GPS], increasing the size and risk of its speculative bets…” The Company hired a new Chief Investment Officer back in 2006 with the doomed-to-failure name of Achilles Macris (I am not kidding.) The same Bloomberg story goes on to say that, “some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets.” That refers to the positions of the so-called London Whale, a London-based derivatives trader who was given the moniker, presumably because he can upset the whole financial world with a flip of his metaphorical tail, which might give new meaning to the phrase, tail risk.

In the “past five years…bets are now so large…London Whale” Surely, this is just coincidence, then.

Okay, now before reading further, put all sharp objects out of reach. There. Gary Shilling is an old guy who writes an investment newsletter, and he’s been hugely correct about one investment call he made back in the ’80s. He told his readers to buy a zero-coupon Treasury bond back in the ’80s. He has continued to pound the table on owning the long bond–and he still likes it. Had you taken his advice back then you would have handily beaten the return of stocks. Had you begun subscribing to his newsletter in late 2010 and only had the courage to buy a 30-year zero-coupon Treasury on New Year’s Eve 2010, you would have made a cool 61.6% return in 2011. I am not kidding. Anyway, this silly old man thinks it’s reasonable that stocks could lose 43% in 2011, as the U.S. enters recession and corporate earnings come in at $80 per “share” of the S&P 500. A “likely” P/E ratio of 10 multiplied by the $80 produces an S&P 500 at 800, about 43% below where we are now. On the other hand, this is the same guy who characterizes Apple as being in a speculative bubble, but has no problem recommending a 30-year United States Treasury obligation that pays no interest until 2042. Still…61.6%.

This Week

Reflecting the current soft spot int the economic data, the NFIB’s Small Business Optimism index’s March reading came in below February’s reading (92.5 v 94.3) and well below what economists had expected (95.0). Inflation data was released this week in the forms of the Consumer Price Index (CPI) and the Producer Price Index (PPI). The former showed that prices for all goods and services measured rose at a 12-month pace of 2.7% in March versus the 2.9% pace recorded in February. At the Core level (excluding food and energy prices), prices rose at a 2.3% pace (2.2% in February.) The PPI recorded a 2.8% pace (3.3% in February); exluding food and energy prices, 2.9% (3.0% in February.) Initial Jobless Claims showed an unexpected jump this week (+25,000 versus economists’ expectations of a (-)2,000 drop). Finally, University of Michigan Consumer Confidence fell from 76.2 to 75.7.

Next Week

Key indicators to watch

  • Industrial Production
  •  Capacity Utilization
  • Initial Jobless Claims
  • Leading Economic Indicators

Regional surveys

  • Empire Manufacturing
  • Philadelphia Federal Reserve

Housing indicators

  • NAHB Housing Market Index
  • Housing Starts
  • Building Permits
  • Existing Home Sales

Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors


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