Opinion: Investors just went bonkers,
so you know it’s time to buy stocks
Link back above
Use this handy guide to ‘flake factor’ investing
When investors get downright flakey, it’s always a sign of a market extreme. And the prevalence of nutty ideas making the rounds nowadays confirms the market is scraping the bottom and it’s time to buy.
Smart investors are saying and believing dumb things. This tells me the selling last week hit an irrational tone, confirming that people were trading on pure emotion. It suggests the market strength since then is no head fake, even if it won’t be straight up from here, of course.
After all, lunatic ideas are still lurking out there. You may have your own examples of flakiness. But here are six investor “flake factors” that tell me this market is nuts:
1. If it moves, sell it:
While the S&P 500 SPX, +1.65% was collapsing last week, 83% of stocks in the index were in the red for 2016, even though half of S&P 500 stocks have stable or improving growth.
Does this indiscriminate selling make any sense? Nope. But it confirms the selling pressure was at an extreme. And it offers some great buying opportunities.
To find them, RBC Capital Markets Chief Equity Strategist Jonathan Golub looked for companies with the greatest disparity between their upward earnings revisions and stock declines. Topping the list were Willis Towers Watson WLTW, +0.42% , Netflix NFLX, +6.41% , Broadcom AVGO, +3.52% , Chubb CB, +1.07% and Delta Air Lines DAL, +3.41% .
2. Dump stocks because the U.S. is going into recession:
If the U.S. economy is in trouble, no one told the consumer. Adjusted for inflation, retail sales advanced 6.9% annualized during the three months through January, says Ed Yardeni of Yardeni Research.
Consumers have good reason to be upbeat. Employment growth remains solid. Jobless claims are low even as recently as the first week of February. Wages are rising. The housing market is still strong. Gasoline is cheap. Consumer balance sheets are strong. All of this matters because the U.S. consumer is basically in charge of the economy.
But don’t take the consumer’s word for it. Based on the latest economic indicators, the Atlanta Fed recently raised its first-quarter GDP growth estimate to 2.7% from 2.5%.
One pushback here is that recent jobs numbers don’t matter because declining profits will erode business confidence and hit spending and hiring down the road. The problem with this theory is that if you take out energy companies, profits are actually rising at most companies.
Another irrational worry is that the strong U.S. dollar DXY, +0.12% will lead to layoffs by continuing to hurt exports and thus profits. The problem with this one is that most hiring is done by smaller companies, which don’t have a lot of exposure to trade.
3. Sell bank stocks due to exposure to energy and to bad loans:
There’s a lot of problems with this theory. First, banks have minimal exposure to energy loans. Energy companies raised most of their money in the capital markets. “Their holdings in oil and gas are not that big. I don’t think their vulnerability is so high,” Lew Altfest, chief investment officer of Altfest Personal Wealth Management, says about the banks.
Next, banks are better capitalized than they’ve been in years, points out CLSA analyst Mike Mayo, who has never been one to treat banks with kid gloves. That goes as well for Europe, where banks stocks have been hit hard on fears about bad loans.
“We believe that imminent solvency fears related to European financials are overdone and likely to fade,” notes Barclays analyst Ajay Rajadhyaksha. “Banks have built up substantial liquidity buffers over the past several years. These should provide sufficient cushion to weather any unexpected losses.”
Finally, the U.S. economy is not going into recession, so dud loans are not about to skyrocket. Bankers, who have a great view of the economy, agree with this assessment. “The short story is that the economy is okay and the markets are not,” says Credit Suisse CEO Tidjane Thiam. “A lot of us don’t see...a major recession that the market is pricing.”
“I don’t see any case for gloom and doom,” says BB&T CEO Kelly King. “We don’t see any substantial cracks, any emerging trends that will suggest some big negative outcome on the horizon. I’m not saying there’s not going to be some problems, but I just don’t think there’s any basis for any expectation of a major credit collapse in the banking system. I think that’s completely overstated and inappropriate.”
The upshot in all this is that bank stocks are cheap. Shares of large banks were recently trading at a price-to-tangible-book-value of 1.3. That’s just slightly above the 1.2 times tangible book-value they hit during the financial crisis, Altfest says.
JPMorgan Chase JPM, +0.72% CEO Jamie Dimon clearly agrees. He just invested $26.6 million into his bank’s stock. Another big bank where insiders currently see value is Citigroup C, +2.29% .
4. Commodities are weak, so global growth is finished:
Hold on. The Commodity Research Bureau’s Raw Industrials Spot Price Index is up more than 6% since late November. Because this index consists of stuff commonly used in industry, including copper, lead, steel, tin, zinc, cotton, wool, and rubber, it’s a great real-time indicator of global economic activity, says Yardeni.
“It’s too soon to tell whether this is significant, or just a short term bounce. But it is one encouraging sign that maybe things are not falling apart, as widely thought,” Yardeni adds. The commodity index strength is confirmed as a signal by the JP Morgan global purchasing managers index, a good gauge of global economic strength. It edged up to 50.9 in January. Anything above 50 is considered a sign of economic growth.
5. Low oil prices are due to weak demand in China, which means the Chinese economy is terrible:
Really? So how does it make sense that China’s crude imports surged by 9.3% in December compared to the year before, following an 8.7% year-over-year increase during the other 11 months of 2015?
“I don’t think China is falling apart. That’s how it makes sense,” Yardeni says. This view was backed by a recent Nielsen consumer confidence survey which found that retail sales and consumer confidence in China remain strong.
6. The market has sold off, but nothing is cheap enough to buy:
I hear this one a lot. One reason may be that investors who missed the bottom in early 2009 are still pining for a retrace to get the great deals on stocks. Sorry, that’s not going to happen.
But the current selloff really isn’t so shabby. It had recently knocked the S&P 500 trailing price earnings multiple down to about 16.5 from 19. These are levels not seen since October 2013 — ahead of a 23% rally.
Dividend-paying stocks that look particularly cheap now include Gilead Sciences GILD, -1.96% , General Motors GM, +0.44% , Kohl’s KSS, +3.00% , Seagate Technology STX, +2.04% and Wells Fargo WFC, -0.23% , says John Buckingham of The Prudent Speculator, a value-oriented stock investment letter that receives high-rankings for long-term performance from Hulbert Financial Digest.
But won’t the recent lunacy-induced market selloff spook the consumer, turning investor flakiness into self-fulfilling prophesy? That’s a risk. But I’m guessing it won’t happen. Most people have limited exposure to stocks.
And Americans’ personal financial picture is brighter. U.S. household debt as a share of disposable income is at the lowest level since 2002, and the household debt-service ratio is at a multi-decade low. “After a long period of deleveraging, the U.S. household sector is in solid financial health, so it is difficult to see consumer spending turning over due to market volatility alone,” says Goldman Sachs economist Zach Pandl.
so you know it’s time to buy stocks
Link back above
Use this handy guide to ‘flake factor’ investing
When investors get downright flakey, it’s always a sign of a market extreme. And the prevalence of nutty ideas making the rounds nowadays confirms the market is scraping the bottom and it’s time to buy.
Smart investors are saying and believing dumb things. This tells me the selling last week hit an irrational tone, confirming that people were trading on pure emotion. It suggests the market strength since then is no head fake, even if it won’t be straight up from here, of course.
After all, lunatic ideas are still lurking out there. You may have your own examples of flakiness. But here are six investor “flake factors” that tell me this market is nuts:
1. If it moves, sell it:
While the S&P 500 SPX, +1.65% was collapsing last week, 83% of stocks in the index were in the red for 2016, even though half of S&P 500 stocks have stable or improving growth.
Does this indiscriminate selling make any sense? Nope. But it confirms the selling pressure was at an extreme. And it offers some great buying opportunities.
To find them, RBC Capital Markets Chief Equity Strategist Jonathan Golub looked for companies with the greatest disparity between their upward earnings revisions and stock declines. Topping the list were Willis Towers Watson WLTW, +0.42% , Netflix NFLX, +6.41% , Broadcom AVGO, +3.52% , Chubb CB, +1.07% and Delta Air Lines DAL, +3.41% .
2. Dump stocks because the U.S. is going into recession:
If the U.S. economy is in trouble, no one told the consumer. Adjusted for inflation, retail sales advanced 6.9% annualized during the three months through January, says Ed Yardeni of Yardeni Research.
Consumers have good reason to be upbeat. Employment growth remains solid. Jobless claims are low even as recently as the first week of February. Wages are rising. The housing market is still strong. Gasoline is cheap. Consumer balance sheets are strong. All of this matters because the U.S. consumer is basically in charge of the economy.
But don’t take the consumer’s word for it. Based on the latest economic indicators, the Atlanta Fed recently raised its first-quarter GDP growth estimate to 2.7% from 2.5%.
One pushback here is that recent jobs numbers don’t matter because declining profits will erode business confidence and hit spending and hiring down the road. The problem with this theory is that if you take out energy companies, profits are actually rising at most companies.
Another irrational worry is that the strong U.S. dollar DXY, +0.12% will lead to layoffs by continuing to hurt exports and thus profits. The problem with this one is that most hiring is done by smaller companies, which don’t have a lot of exposure to trade.
3. Sell bank stocks due to exposure to energy and to bad loans:
There’s a lot of problems with this theory. First, banks have minimal exposure to energy loans. Energy companies raised most of their money in the capital markets. “Their holdings in oil and gas are not that big. I don’t think their vulnerability is so high,” Lew Altfest, chief investment officer of Altfest Personal Wealth Management, says about the banks.
Next, banks are better capitalized than they’ve been in years, points out CLSA analyst Mike Mayo, who has never been one to treat banks with kid gloves. That goes as well for Europe, where banks stocks have been hit hard on fears about bad loans.
“We believe that imminent solvency fears related to European financials are overdone and likely to fade,” notes Barclays analyst Ajay Rajadhyaksha. “Banks have built up substantial liquidity buffers over the past several years. These should provide sufficient cushion to weather any unexpected losses.”
Finally, the U.S. economy is not going into recession, so dud loans are not about to skyrocket. Bankers, who have a great view of the economy, agree with this assessment. “The short story is that the economy is okay and the markets are not,” says Credit Suisse CEO Tidjane Thiam. “A lot of us don’t see...a major recession that the market is pricing.”
“I don’t see any case for gloom and doom,” says BB&T CEO Kelly King. “We don’t see any substantial cracks, any emerging trends that will suggest some big negative outcome on the horizon. I’m not saying there’s not going to be some problems, but I just don’t think there’s any basis for any expectation of a major credit collapse in the banking system. I think that’s completely overstated and inappropriate.”
The upshot in all this is that bank stocks are cheap. Shares of large banks were recently trading at a price-to-tangible-book-value of 1.3. That’s just slightly above the 1.2 times tangible book-value they hit during the financial crisis, Altfest says.
JPMorgan Chase JPM, +0.72% CEO Jamie Dimon clearly agrees. He just invested $26.6 million into his bank’s stock. Another big bank where insiders currently see value is Citigroup C, +2.29% .
4. Commodities are weak, so global growth is finished:
Hold on. The Commodity Research Bureau’s Raw Industrials Spot Price Index is up more than 6% since late November. Because this index consists of stuff commonly used in industry, including copper, lead, steel, tin, zinc, cotton, wool, and rubber, it’s a great real-time indicator of global economic activity, says Yardeni.
“It’s too soon to tell whether this is significant, or just a short term bounce. But it is one encouraging sign that maybe things are not falling apart, as widely thought,” Yardeni adds. The commodity index strength is confirmed as a signal by the JP Morgan global purchasing managers index, a good gauge of global economic strength. It edged up to 50.9 in January. Anything above 50 is considered a sign of economic growth.
5. Low oil prices are due to weak demand in China, which means the Chinese economy is terrible:
Really? So how does it make sense that China’s crude imports surged by 9.3% in December compared to the year before, following an 8.7% year-over-year increase during the other 11 months of 2015?
“I don’t think China is falling apart. That’s how it makes sense,” Yardeni says. This view was backed by a recent Nielsen consumer confidence survey which found that retail sales and consumer confidence in China remain strong.
6. The market has sold off, but nothing is cheap enough to buy:
I hear this one a lot. One reason may be that investors who missed the bottom in early 2009 are still pining for a retrace to get the great deals on stocks. Sorry, that’s not going to happen.
But the current selloff really isn’t so shabby. It had recently knocked the S&P 500 trailing price earnings multiple down to about 16.5 from 19. These are levels not seen since October 2013 — ahead of a 23% rally.
Dividend-paying stocks that look particularly cheap now include Gilead Sciences GILD, -1.96% , General Motors GM, +0.44% , Kohl’s KSS, +3.00% , Seagate Technology STX, +2.04% and Wells Fargo WFC, -0.23% , says John Buckingham of The Prudent Speculator, a value-oriented stock investment letter that receives high-rankings for long-term performance from Hulbert Financial Digest.
But won’t the recent lunacy-induced market selloff spook the consumer, turning investor flakiness into self-fulfilling prophesy? That’s a risk. But I’m guessing it won’t happen. Most people have limited exposure to stocks.
And Americans’ personal financial picture is brighter. U.S. household debt as a share of disposable income is at the lowest level since 2002, and the household debt-service ratio is at a multi-decade low. “After a long period of deleveraging, the U.S. household sector is in solid financial health, so it is difficult to see consumer spending turning over due to market volatility alone,” says Goldman Sachs economist Zach Pandl.
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