Tower Private Advisors
- Another ugly week for stocks around the globe
- A rant about analysts
- Soggy economics
Capital Markets Recap
Here’s a self-explanatory comment on stocks . . .
- Financials were the top performing group of stocks in action today, as can be seen at right. What’s more, the advance wasn’t limited to just those institutions (99% of stocks in the group were up) that could be expected to most benefit from the financial overhaul package proceeds through Congress; it was approved by members of a House and Senate committee. The best thing to come from it may have been this quote from Rep. Jeb Hensarling: “My guess is there are three unintended consequences on every page of this bill.” Nevertheless, the consensus of views seems to be that the package that emerged was less worse than it could have been. For example, instead of prohibiting the focus seemed to be on limiting activities.
- Dick Bove (bo-vay) is with Rochdale Securities (rock-dale) and is an analyst who has made some bad calls (buy Lehman Bros. three weeks before it collapsed) and some good calls (sell Lehman Bros. four months before it collapsed) on stocks. He sees any costs of the regulation getting–you know what–passed on through higher product prices. According to him, “everybody else will be negatively impacted by this bill, but not the banks.” (Unintended consequence #1). As a result, he thinks the bank stocks should be bought now.
- Markets took off on Monday morning–especially the natural resource companies–on news that China would allow its currency to float more freely, but it would be an orderly process, over time. It would also be based on a basket of currencies; not just the buck. The rally was short lived, however, lasting, as usual, until about 10:00 in the morning. Upon closer inspection and reflection, the market realized the revaluation wasn’t going to take place by Tuesday. A senior investment officer was quoted in a Bloomberg story as saying, “a closer look at the announcement suggests China’s approach is very gradual and it is continuing at its own pace. It’s a less dramatic move when looked at more closely.”
- Australia‘s now-former Prime Minister, Kevin Rudd, was ousted seven weeks after he proposed a widely-hated 40% tax on mining operations and replaced by Julia Gillard*. That’s known as killing Aesop’s gold-egg-laying goose. Call it geocentric, but I don’t understand how these things work. For example, why didn’t he just do like we did in elementary school and take it back, as in “I take it back. I was just kidding.” One would think that with that sort of profit relief, combined with an appreciation of the currency most likely to buy all your stuff, that the mining stocks would have had a good relief. One would have thunk wrong, as the chart at right attests.
- * If you’re like me and you rushed out to Google (the verb) ”Julia Gillard”, you might have noticed that Google offered, helpfully, that you might want to Google “Julia Gillard ears,” and for good reason it turns out. Her ears–more specifically, her ear lobes–are spectacular, as you can see at right.
- Apple‘s iPhone 4 was released this week, and the Company responded to buyer complaints about reception by saying that users should . . . uh . . . hold the phone differently. More formally, “Gripping any mobile phone will result in some attenuation of its antenna performance, with certain places being worse than others depending on the placement of the antennas.” This version of the iPhone includes a high-definition video camera, multitasking, video calling, and other lust-inducing features. The stock didn’t go on sale, however. It hit $279.01 on Monday, and is selling for $267.75 as I type. The problem with the stock is–ask yourself this:
[WARNING: SERIOUS DIGRESSION AHEAD]
- is there a better consumer products company out there? are there any Apple products you wouldn’t love to have? is there a company with a brighter future?
- Now ask yourself this:
- is there anyone else who disagrees with you?
- Now I’ll tell you this: 48 of Wall Street’s best and brightest lemmings stock analysts cover the stock in their research. Amongst the S & P 500 companies, only Intel is covered by more (55) analysts. 45 of the analysts that cover AAPL say it should be bought, while just 3 have a dimmer view, and they just say hold it, which seems reasonable, given the stock’s ascent. What that means is that there aren’t many analysts who can join the fold of AAPL fans, recommending customers of buy it. It’s more likely that they become disenchanted with stock and recommend that customers of said analysts firm hold it–or far worse, and, frankly, far less likely–sell it.
- This is another example of why good companies don’t always equal good investments. In the interest of full disclosure, however, we hold AAPL widely, but the contrarian side of us is leery.
A word on analysts and my disdain for them . . . Generally speaking, a stock analyst’s job is this–and the best get paid seven figures (and that’s not like my seven figures, which includes two decimal places and the dollar sign): bring in more lucrative business for the analyst’s firm forecast company earnings and determine what price the stock will trade at when those earnings are discounted in the stock price. To do that an analyst will use a number to tools, but they boil down to two forms:
- discounted cash flow models
- models that apply valuation multiples to the earnings.
They come up with earnings by any or all of the following means:
- talking to company management
- talking to suppliers
- considering demographics
- looking at the company’s products market size–present and future
- gauging consumers’ uptake of the products and/or services
- using mathematical models to predict using statistical techniques that might incorporate the points above
In the case of AAPL, there are 48 analysts doing this. It’s not likely that they’ve left a stone unturned in their efforts.
What’s more, the vast majority of these analysts are steeped in fundamental analysis–the majority, I’m sure, have CFA, for Chartered Financial Analyst, after their names–which means they believe that prices are determined by fundamental factors only, rather than that prices are determined as if at auction, which is to say, by the forces of supply and demand.
So what is one to do? Why, hire a professional, of course (click here if you need a suggestion of one.) Really, though, analysts do serve a useful purpose–and I should add that not all of my colleagues share my disdain for analysts–and that is as reporters of what’s going on at companies, but you should take ignore ratings and price targets with a bucket of salt.
The intent of this blog isn’t to make investment recommendations, especially on individual securities. Rather, it’s intended to showcase how we think about things and what we think about things, but bigger things, like the economy and broad asset classes, not individual stocks and bonds, so don’t construe what follows as a recommendation. If you must, use a predetermined stop-loss to protect your capital, because if it doesn’t work out, you’re not going to hear about it again from me; it’s going under the internet rug. Only if it soars will I mention it again.
Our friends at the Williams Inference Center (WIC) began, a while ago, to bring up PayPal as a way that consumers and others were doing an end-run around banks and other financial intermediaries, but especially the credit card banks and processors. PayPal makes its money by working the float, or the funds it has its mitts on before its users download the funds into traditional accounts (e.g. savings and checking accounts.) PayPal is owned by ebay, naturally, and so we began to watch the stock. WIC is exceedingly good at spotting nascent trends. It’s our jobs to determine what securities might benefit/suffer from such trends. One group of securities we’re going to avoid for a while is the credit card companies (Visa, Mastercard) and the banks the rely heavily on credit card processing revenues.
We do like ebay’s prospects, especially as they relate to PayPal vis-a-vis the WIC observation and, more importantly, as they relate to stock performance. The stock has triggered several technical indicators we like to watch, but which are not being given away here, and the analysts are fairly skeptical about the stock. There are 31 analysts that cover the stock, which is a lot (in the top 10% of the S & P 500), but just 16 of them say to buy the stock, the balance say hold (14) and sell (1).
Funny that economists are called the dismal scientists when they’re so consistently optimistic.
Housing data was lousy this week on three of four counts. Existing Home Sales fell by 2.2%, which was far worse than the dismal scientists’ hoped-for 6.0% increase. Similar optimism about New Homes Sales was also disappointed, as those sales rose by 300,000 in May, whereas economists had looked for a rise of 410,000. Mortgage Applications fell by (-)5.9%, which was driven by a 38.9% drop in Purchase Applications and a 3.8% drop in Refinance Applications. The positive datapoint came from the Home Price Index, the broadest measure of home prices across the nation, which rose by 0.8%, which was better than what economists had hoped for and March’s figure (both 0.3%).
Two consumer confidence figures were released this week: ABC Consumer Confidence, which is released weekly, and University of Michigan Consumer Confidence, which is released twice per month. Both improved modestly, as can be seen below. U of M Confidence is at the highest levels since 2008, while ABC is sitting below serious–what one would refer to when looking at a security’s price–serious resistance at -41, the peak seen several times in 2008, 2009, and 2010. In the same way, a breakout through the resistance will provide the most rudimentary indication of a trend change, a higher high.
Initial Jobless Claims fell to 457,000, which was better than economists expected (463,000) and lower than the week prior’s upwardly-revised 476,000. Still, the series made no progress with respect to providing any clarity to the current sideways motion. Finally, Q1 GDP was revised down, from 3.0% to 2.7%, on weaker Consumer Spending data.
There’s a lot being released next week, but everthing is dwarfed by the release of nonfarm payrolls.
Key indicators to watch
- Nonfarm Payrolls – Friday – while there are other important indicators, this one is the most critical. Economists expect a decline of (-)110,000 jobs, and the range of estimates is firmly in that neighborhood. There are 50 estimates, and they range from -200,000 to zero. There isn’t one economist amongst the group who expects a positive number, and that appears to be a result of layoffs of census workers. One source of ours said that half of the workers hired in May were let go in June. Manufacturing Payrolls, however, are expected to have risen by 20,000. The Unemployment Rate is expected to have increased by 0.1% to 9.8%.
- CaseShiller Home Price Index (April) – Tuesday
- Pending Home Sales (May) – Thursday
- Chicago Federal Reserve National Activity Index (May) – Monday
- Personal Income, Spending, and Saving (May) – Monday
- Dallas Federal Reserve Manufacturing Activity (June) – Monday
- Chicago Purchasing Managers index (June) – Wednesday
- Initial Jobless Claims – Thursday
Graig Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors