The 1000-point thresholds are falling rapidly And Other News

With President Trump taking vacation at the same time as Congress and a light data calendar, what will the pundits feast upon? Corporate earnings results and new stock market records mean that the price targets at the start of the year are now obsolete. For many, the question will be:

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Also see

Is it time to raise price targets?

Last week featured earnings news and generally positive economic data.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market price moves.

The key feature is the lack of volatility. Prices moved only about 0.6% from top to bottom.

 

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. Last week’s deserving winner was Ben Carlson (his second award). We also posted the list of all past winners. I have a great candidate for the coming week as well. I hope that readers and past winners will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news last week was generally positive.

The Good

  • Tracking the year-over-year growth in the forward estimate;

    8/4/17: +9.75%

    7/7/17: +9.58%

    6/9/17: +9.35%

    5/5/17: +9.80%

    4/7/17: +8.30%

    The “forward 4-quarter EPS” has still not cracked 10% y/y growth, and it may not, since the earnings compare’s get tougher with the 3rd and 4th quarters since crude oil prices were less of a drag in the back half of 2016, but you also have Financial’s possibly to starting to enter a period where revenue and EPS growth could accelerate.

    The forward estimate trends remain positive. For SP 500, it’s one of the best leading indicators we have.

 

  • Pending home sales increased 1.5%
  • GDP estimates are higher. The Atlanta Fed’s GDP now forecast is showing strength. Will it hold up this quarter?

 

The Bad

  • Construction spending declined 1.3% versus expectations of a gain of 0.5%.
  • Rail Traffic was slightly lower (Calculated Risk). Contrary interpretation of the data from GEI.
  • ISM non-manufacturing declined to 53.9 missing expectations of 56.9. By my rules, this change in the diffusion index, showing growth at a slower pace than the month before, is “bad.”
  • Personal income showed no growth versus an expected gain of 0.3%. Jill Mislinski and Doug Short make the adjustments for inflation and transfer payments. The result is a bit less distressing.

  • Auto sales missed expectations for nearly all companies. The aggregate pace is now below 17 million vehicles per year. Bloomberg explains that cars are lasting longer. Fair enough, but still not good for the economy.

The Ugly

I am disturbed by the Pew survey report (Via Statista and GEI) that most Republicans (58%) see colleges and universities has having a negative effect on “the way things are going in the country.” I confess my bias from many years of experience, but that experience also confers knowledge.

It was also an ugly month for CNBC, where ratings continue to decline. It was their worst month in 22 years, with Fox Business taking the lead.

 

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a light economic calendar. Inflation data are still not very interesting. JOLTS provides information about labor market structure, but few use it for that purpose. There is not much FedSpeak.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

With President Trump joining Congress on vacation, one source of news (and volatility) might be absent. The light calendar leaves plenty of news time to fill. Expect the punditry to fill it, whether there is news or not!

Into the vacuum, I expect plenty of talk about stocks and markets setting new records. Analysts were raising their price targets on Apple (AAPL) for example, after the positive earnings news and outlook. Or was it just because old targets were hit? I expect that scenario to be repeated, both for individual stocks and the market overall. Pundits will be asking:

Is it time to raise our price targets?

Here are some viewpoints:

  • Everything is over-priced. My price targets will eventually be proven right.

  • I want to stay on the company’s good side. Access is essential. I’ll keep my “buy” rating and raise the target.

  • The market might be OK for a bit longer, but the twelve-year outlook is poor.

  • Everything looks really good – just like we see before a big decline.

  • The rally is based upon dumb money, the Fed, Trump, blind ETF investing.

  • Stocks are due for a big correction.

  • Targets should change with the fundamentals – especially earnings expectations.

 

We monitor the stocks in our portfolio as well as those on our watch lists. We review price targets frequently. We sell when a stock reaches or approaches our target. Apple is a good example. We sold it after holding it for many profitable years, including times when many analysts hated the company and said the low multiple was deserved. What has changed? Adding debt, much higher enterprise value multiples, and the analyst lovefest are factors. You must choose companies and hold on when others

Leave a Reply

Your email address will not be published. Required fields are marked *

*

13 − ten =