Bespoke Investment Group

Bespoke's Sector Snapshot

Along with our commodity snapshot, we start off the week with our sector snapshot that highlights the one-year trading ranges of the S&P 500 and its ten sectors.  The top of the red area is two standard deviations above the sector's 50-day moving average, and the bottom of the green area is two standard deviations below.  All sectors except for Financials and Health Care are currently trading in or above the red zone.  Energy, Materials and Technology are the most overbought sectors at the moment.  Since the March lows, most sectors have developed nice short-term uptrends, but at current overbought levels, sectors could see a pullback to the bottom of their upward sloping channels.

   

Bespoke's Commodity Snapshot

Below we highlight our commodity snapshot using our one-year trading range charts.  The green shading represents two standard deviations above and below the commodity's 50-day moving average.

After breaking to new highs a couple of weeks ago, corn prices pulled back last week and broke below a tight trading range that had been in place since early April.  Corn had been one of the only other commodities to keep up with rising oil and natural gas prices after the correction experienced a couple of months ago. 

Metals rallied again last week for the first time in awhile.  Platinum prices had the best run, and it is now trading into overbought territory.  The double bottom it made earlier this month has proven to be an almost perfect technical setup on the long side.  Fortunately, wheat prices continue to decline, and last week they hit their lowest levels since December 3rd of last year.  Orange juice continues in its downtrend and coffee is trading right in the middle of its trading range.

    

This Week's B.I.G. Tips Reports at Bespoke Premium

Below we provide the titles of the in-depth B.I.G. Tips reports we released this week.  If any spark your interest, they are all available to our Premium subscribers.  These are anticipatory, ahead-of-the-curve research reports that cover markets, economies, stocks, commodities, housing and anything else related to making people money. 

This week's B.I.G. Tips reports: Bespoke's Torture Index (a bad sign for consumer), Earnings Estimate Revisions (stocks and sectors with the most upward and downward earnings revisions), May Options Expiration (typical market performance on May expiration days), Oil and Dollar Rallies (what happens when they both rally), Weekly Investor Sentiment Surveys (what is investor sentiment telling us), Sector ETF Technicals (a technical perspective of the ten S&P 500 sectors), Food Inflation (an in-depth look at food prices), Gold and Oil Splitting Up (what happens when the two commodities diverge), VIX Declines (market performance following large declines in the VIX), Retail Sales (market performance when Retail Sales is weaker or stronger than expected), Triple Play Charts (a look at the best stocks from this earnings season), Monthly Short Interest Report (sector and stock short interest analysis).

Click here to sign up for Bespoke Premium and begin receiving our B.I.G. Tips reports today.

Oil & Gas Equipment & Services ETF

We received a positive response to our post on the stocks that make up the Clean Energy ETF (PBW) yesterday.  Below we highlight the stocks that make up the S&P Oil & Gas Equipment & Services ETF (XES).  As shown in the chart below, XES is currently trading well above its 50-day moving average.  Obviously, its holdings are trading well into overbought territory as well.  Superior Energy (SPN) is the furthest above its 50-day moving average at 24.48%.  SPN is followed by FTI, PTEN and CAM.  TDW, ESV and RDC have the lowest estimated P/E ratios of the stocks that make up XES, while FTI, EXH and SLB have the highest.

 

Donald Trump on Oil

CNBC viewers had the "privilege" to get Donald Trump's thoughts on the economy, oil and OPEC yesterday morning.  Click here to view the video.  One of Trump's proposals was to "tax the oil companies into oblivion" since they're making so much money now.  Joe Kernen eventually went on to ask Trump if he would support the same taxes on real estate if it was as hot as oil was right now.  Trump's response, "Yeah, but the fact is it's not hot like oil.  You know, oil's been hot forever...I tell people to go into the oil business because since I've been growing up, literally, it's never had a down tick.  I mean, it had one year where it was a little bit down, but basically it's never had a down tick."  Kernen went on to ask about the long periods when oil didn't go anywhere, but Trump wasn't having any of it.

Below we highlight the inflation adjusted performance of oil and new home prices from 1970 to 2000.  As shown, oil did nothing but tick down from 1981 to the late 90s, while real estate stayed in a pretty nice uptrend over the 30 year period.  We realize these are residential real estate prices, but the trend was pretty much the same in commercial, which Trump is involved in.  While oil has had its fun this decade, it definitely hasn't "never had a down tick."

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Buffett: "Was It Something I Said?"

While Berkshire Hathaway typically does pretty well following the company's annual meeting in Omaha, the stock has taken a hit since this year's gathering at the start of the month.  After rallying 5.7% in the seven days leading up to the May 3rd meeting, BRK/A has since given it all back and then some, declining 8.87%.  While the company did have a disappointing earnings release right before the meeting, Warren Buffett must be asking himself, "Was it something I said?"  Actually, he's got about 62 billion reasons not to really care.

The Enron Loophole -- Who Cares?

For those that listen to sports talk radio in the NYC area, you have definitely heard the "Close the Enron Loophole" advertisements calling for an end to the "speculation and manipulation of energy prices" in hopes of lower prices for consumers.  The "Close the Enron Loophole" lobbyists finally got their wish yesterday, and oil went down -- for about an hour.  Has all their time and money spent trying to get this through Congress already been washed away with oil back to record highs in no time?

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Homebuilders When Housing Starts Are Stronger Than Expected

Today's Housing Starts report showed the strongest month-over-month gain in more than two years.  Does this mean investors should buy the homebuilders for a trade?  Not necessarily.  In the table below, we highlight the performance of the Homebuilder ETF (XHB) from the open to close on days when Housing Starts are released.  Since it started trading in 2006, the homebuilder ETF has done better from the open to close on days when Housing Starts were weaker than expected.  When the report is stronger than expected, the average return from open to close is 0.1%, but when Housing Starts come in weaker than expected, XHB averages a gain of 0.8%.

To receive more analysis of how economic reports impact the market, sign up for Bespoke Premium today.

A Look At The Respective Rallies in Tech, Housing and Oil

We did a B.I.G. Tips report last Tuesday comparing the tech and housing bubbles to the current rally in crude oil.  Paul Kedrosky asked to publish the chart from the report last week, and then he provided his take on the oil rally the next day.  Today the Wall Street Journal makes the same comparison in a front-page article titled "Bernanke's Bubble Laboratory."  Below is the first paragraph from the story:

"First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities."

Click here to check it out.  It's worth a read.

Below is the chart from our B.I.G. Tips report last week.  Click here to subscribe to Bespoke Premium today.

 

2008 Country Returns

Below we highlight stock market performance for 86 countries (local currency).  So far this year, 30 out of the 86 country indices are up, while 56 are down.  Ghana is up the most at 44.67%, followed by Oman, Qatar, Jordan, Puerto Rico, Kuwait and Costa Rica.  Vietnam, Bulgaria, China and Romania are down the most.  The S&P 500 is down 3.05% on the year, which ranks 37th on the list.

Below we provide a chart of the best and worst performing countries in 2008 -- Ghana and Vietnam.   

 

A Look at Q1 Hedge Fund Holdings

Below we highlight the cumulative sector weights of hedge funds based on their first quarter 13Fs (from Bloomberg).  As shown in the table below, Financials make up the biggest portion of hedge fund portfolios, just as they do in the S&P 500.  Energy ranks second, Technology third, and Industrials fourth. 

In the first chart below, we highlight the changes in holdings in the first quarter versus the fourth quarter of 2007.  Hedge funds increased their weight in Energy the most and decreased their weight in Technology the most.  Tech was one of the worst performing sectors in Q1, but it has been one of the best performers so far this quarter.

Comparing hedge fund weightings to the S&P 500, hedge funds are most overweight in the Materials sector and the most underweight in the Consumer Staples sector.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.   

Farm Bill and Oil Prices

After being up over $2 in the morning, oil has reversed course and is trading sharply lower (over $5 from the high) in early afternoon trading.  This may in part be related to the Farm Bill that was passed earlier by the US Senate by a vote of 85 to 15.  As a result of the strong support for the bill, even if President Bush dusts off his veto pen, the Senate will have the necessary 67 votes to override the veto.

So why is the Farm Bill impacting oil prices?  One of the amendments to the Bill is called the "CFTC Reauthorization Act of 2008," which will put "all significant energy trades on electronic platforms within the regulatory confines of the Commodity Futures Trading Commission, and will impose limits on the size of traders' positions to prevent excessive speculation" (WSJ).  Presently, not all US exchanges are subject to the rules of the CFTC (Intercontinetal Exchange is one of the larger examples), and as a result, there are some who claim that speculators are using these non regulated exchanges to run up the price of oil.  These same people claim that the CFTC Reauthorization Act of 2008 will put a stop to this and cause oil prices to trade down to more realistic levels. 

Clean Energy ETF (PBW) Holdings

PBW is an ETF that holds companies in the "business of the advancement of cleaner energy and conservation."  We've gotten quite a few requests recently about alternative energy plays, so we thought we'd publish a list of the stocks that make up the Clean Energy ETF.  For each stock, we include its sector, price, year-to-date percent change, estimated '08 PEG ratio, relative P/E ratio (to the S&P 500), and weight in PBW. 

Many alternative energy plays are still very speculative and have either very high valuations or no earnings at all.  Clearly not every company in this list is going to make it, and that's what makes holding the ETF and not trying to pick individual names so appealing to investors.  With oil up so much this year already, it's surprising to see that only 24% of the stocks that make up the ETF are up on the year.  FSYS, GU, ENER and MXWL are all up more than 50% this year, but three of the four don't even have earnings.

Percentage of Stocks Above 50-Day Moving Averages

Currently, 77% of stocks in the S&P 500 are trading above their 50-day moving averages.  As shown in the one-year chart of this indicator below, 77% is an overbought level and it usually doesn't last long without seeing a pullback. 

On a sector basis, Energy and Telecom top the list with 89% of stocks trading above their 50-days.  Technology is at 87% and just broke to a new one-year high.  Health Care and Consumer Staples currently have the lowest percentage of stocks above their 50-days, as investors have shunned defensive sectors over the last month or so.

      

1990 All Over Again?

In the aftermath of the crisis in the credit markets, many economists have said that the US economy is facing the worst recession in the post WWII area.  While the ultimate outcome of the current period is anyone's guess (many are now doubting we will even end up with a recession), we wondered whether investors and economists tend to think every recession (or even period of economic weakness) is the worst ever as they are going through it, and then once it's over say, "Oh that wasn't so bad after all." 

For example, the 1990 recession is considered by most to have been pretty mild.  But at the time, people thought it was a lot worse.  For example, in February 1992 - almost a year after the recession ended - US News and World Report said that, "The current downturn is different. Many cash-strapped homeowners whose houses have fallen in value won't be able to take advantage of the refinancing bonanza promised by the Fed's rate cut. So far, unemployment remains lower than it was a decade ago, but this recession isn't over yet, and the economy's glaring structural problems will stifle growth and new jobs."  US News went on to say that the recession would be "unlike any the country has experienced in the post-World War II era, the result of years of profligacy and irresponsible government policies."  Sound familiar?  For those interested, we highly recommend reading the entire article to see just how negative sentiment was leading up to one of the greatest decades of growth in American history.

In fact, if we were to compare the 1990 period to today, there are many similarities.  As just an example, in each period, the dollar was weak, inflation was on the high side, oil spiked, and credit markets were under stress.  In both periods there was even a George Bush in the White House! With these similarities, it comes as little surprise that the performance of the stock market has been similar during both periods.  In the chart below, we overlaid the S&P 500 in the current period (since October 2007) with the period from June 1990 through June 1991.  As the patterns show, for the last six months, the two periods have tracked each other closely.  While this is not meant to imply that the S&P 500 is poised for a monster rally, the correlation between both periods is certainly worth noting.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke. 

S&P 500 Historical Trailing 12-Month P/E Ratio

The trailing 12-month P/E ratio recently reached its highest level since February 18th, 2004.  As shown in the first chart below, since bottoming at 16.42 on August 15th, 2007, the P/E ratio has risen 43.3% to 23.53.  P/Es typically expand when the market rallies and contract when the market declines.  In recent years, however, the trend has reversed.  From 2004 to 2007, earnings expanded at a faster pace than price, even as the market rallied.  Since the market peaked in late 2007, however, earnings have slowed and P/Es have risen sharply.

A chart of P/E ratios going back to 1960 highlights the massive expansion in valuations from 1980 through 2000, which culminated in an extremely high ratio caused by the tech bubble.  The historical average since 1960 is 17.87.

 

Q1 S&P 500 Group EPS Growth

With 92% of the S&P 500 having reported first quarter earnings, below we highlight year-over-year growth numbers for the major groups of the index.  Groups highlighted in green saw earnings growth, while those highlighted in red saw earnings declines.  The index as a whole has seen earnings decline by 16.9% versus the first quarter of 2007.  Only 6 of the 24 groups saw earnings declines, however.  These declines came in banks, diversified financials, insurance, real estate, consumer durables & apparel and retailing.  No surprises there.  The biggest gains in earnings came in automobiles & components (which had a low starting point), energy, software, tech hardware, materials and media.

   

Overbought and Oversold ETFs

In our daily ETF Trends report at Bespoke Premium, we provide proprietary trend and timing scores on more than 200 ETFs across all asset classes (international and domestic stocks, commodities, currencies, fixed income, etc.).  Below we highlight the ETFs from our database that are currently trading the furthest above and below their 50-day moving averages.  As shown in the first table below, oil and oil stock ETFs like DBE, XES, USO, DBO and OIL top the overbought list.  These are followed by steel stocks (SLX), Brazil (EWZ), and other energy and materials names.

Ironically, while energy ETFs are the most overbought, gold and silver ETFs are the most oversold.  We did a B.I.G. Tips report on the recent divergence between the price of oil and gold and found that it doesn't happen often.  Since both are inflation hedges and are typically correlated, it will be interesting to see which way the two trade going forward. 

Most of the other ETFs on the oversold list are fixed income names, but currency ETFs that don't include the US dollar also show up on the list for the first time in awhile.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke. 

S&P 500 Holding Uptrend

Even after a little back and forth action over the past couple of days, the S&P 500 has managed to hold its uptrend and remains above key support at the 1,400 level.  The index is currently down 4.45% year to date.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Apple (AAPL) Rally Redux

Since bottoming in March at $119.15, Apple (AAPL) has rallied 60% over the last 55 trading days to $190.  This rally looks almost exactly like the gains Apple saw over a 58 trading day period from August 16th to November 6th, when it went up 64% from $117 to $192.  On a closing basis, Apple peaked at $199.83 on December 28th, 2007.  We put the stock in our Model Portfolio at $131 on March 19th and exited the position at $185 on May 6th.  Apple definitely has some wind at its back these days, but as the stock approaches $200, it should be met with some selling pressure.

Retail Sales For April

While the headline number for today's retail sales report was inline with expectations (-0.2%), the ex-autos number came in stronger than forecast (+0.5% vs +0.2%).  In order to see where the strength and weakness came from, we broke out today's report by category to see which groups have seen the biggest increases and decreases in their share of the total retail sales pie.  As shown, over the last year the categories that have seen the largest increase in their share of retail sales are Gas Stations, Food and Beverage Stores, and General Merchandise.  These groups are all purveyors of non-discretionary items, indicating that rising inflation is causing consumers to spend a larger share of their disposable income on necessities. 

Groups that have seen the largest decrease in their share of total retail sales include Motor Vehicle and Parts, Building Materials, and Furniture.

While retail sales rose 2% on a year/year basis, after adjusting for inflation, sales actually declined by 1.9%.  In fact, this month's decline marks the fifth straight monthly year/year decline.  This is the longest streak of monthly declines in the last fifteen years.

Subscribe to Bespoke Premium today.

Where's the Volume?

Below we highlight a price and 1-month average volume chart for the S&P 500.  Many market participants have been questioning the rally due to a lack of volume.  While it is noteworthy that volume has declined, we'd note that volume is typically lighter when the market is going higher and heavier when it's going lower.  Current volume levels seem much lower than normal because of the spike seen during the credit crisis from July '07 to March.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Consensus Economist Estimates

As a follow-up to yesterday's post on Bloomberg's monthly survey of economists, below we highlight their consensus GDP, CPI and Fed Funds Rate estimates.  In the first chart and table below, we highlight the median GDP growth forecasts from 65 economists surveyed.  We also provide their median estimates monthly going back to the start of the year.  As shown, estimates have ticked lower each month, with the exception of a 10 basis point increase in Q2 '08 GDP estimates this month.

Consensus CPI estimates for the second quarter remained the same this month at 3.7%.  They ticked slightly higher for Q3 '08, lower for Q4 '08, and higher for Q1 '09.  Economists also increased their expectations for the Fed Funds Rate by 25 bps for the next 3 quarters after a month of market stability and signs that inflation is now a bigger concern than it was.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke. 

Best Performing Stocks on Earnings

The unofficial earnings season comes to an end tomorrow with Wal-Mart's (WMT) earnings report.  Below we provide a list of companies that have had the biggest one-day gains on their earnings report days this season.  These companies all had one-day gains of 20% or more in response to their earnings reports.  For companies that report in the morning, we use that day's change, while we use the following day's change for companies that report after the close.  As shown, IAR was up the most on its report day this quarter with a 45% gain.  IAR was followed by ENER, ALGT, ANAD, AMSC and YRCW.  Google just barely missed the list with a gain of 19.99% following its earnings report.

If you're looking for a more in-depth look at the best companies from this earnings season, subscribe to Bespoke Premium today.

Lock Up the Gas Tank!

First it was highway guard rails, then manhole covers, and now gas tanks.  While attending a family wedding in New Jersey this weekend, many of the out of town guests came out to their cars Sunday morning to find that the hotel's parking lot had been hit by gas siphoners.  Apparently, like everything else from the Seventies has done at some point or another, siphoning gas is back in style.  And if this is happening in New Jersey, where gas prices are among the lowest in the nation, you can bet it's a nationwide trend.  Time to buy a gas cap lock.