Bespoke Investment Group

Blog Switch

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Default Risk For Financials Shoots Up

During the financial crisis, we created an index that tracks credit default swap prices for the major banks and brokers across the world.  This essentially measures default risk for the financial sector.  After declining significantly for the past 9 months, the index has spiked in recent weeks to its highest level since last September.  As shown below, the downtrend line in the index has also been broken on the run-up as well.  In just a couple weeks, the fear has picked up quite a bit.

 

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What Is Getting Hit Hardest?

We broke the S&P 500 into deciles (10 groups of 50 stocks) based on stock performance in 2009 to see if the big winners from last year are the ones getting hit the hardest on the recent pullback.  As shown below, they definitely are.  The 50 best performing S&P 500 stocks in 2009 have averaged a decline of 9.5% since 1/19.  Each successive decile from best to worst in 2009 gets better in terms of performance since 1/19.  The 50 worst performing S&P 500 stocks in 2009 are only down an average of 2.9% since 1/19.  The winners during the bull run are being sold with authority.

Below are the worst performing S&P 500 stocks since the January 19th top.  US Steel (X) is down a whopping 32%, followed by Cliffs Natural Resources (CLF), Massey Energy (MEE), Freeport-McMoRan (FCX), and QUALCOMM (QCOM).  All of the names listed above are down more than 20%.

Ugly Tape

After trading up nearly 1% in the morning, the major markets have tumbled in afternoon trading.  This type of action, when the market trades sharply down even though economic reports and earnings reports both beat estimates handily, is not good.  There's simply no way to sugercoat it.  Since the start of the pullback, earnings and economic numbers have remained strong, so the market is signalling that the indices got ahead of themselves based on what's in store for earnings and the economy in the future.  The long-term uptrend is also getting very close to breaking down.  If the uptrend breaks, investors will need to reposition their portfolios, which ultimately puts even more pressure on share prices.  At any point, something can spark the market back to the upside, but for now, the short-term trend is down.

 

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Contributions to Real GDP Growth in Q4

Below we highlight the breakdown of contributions to the 5.7% Real GDP Growth in Q4 (YoY).  Consumption and inventories were big contributors to growth, along with exports due to the weak dollar.  One area that didn't contribute to the 5.7% GDP growth was government.  In fact, government's contribution to Q4 GDP actually acted as a drag, as the marginal contribution from the Federal side was more than offset by the drag of state and local governments.  Click here to visite the BEA website.

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Sector Earnings Beat Rate and Stock Performace

The current earnings per share "beat" rate this earnings season is 73% for all US stocks.  Below we highlight the percentage of companies in each sector that have beaten estimates.  As shown, only three sectors have a higher beat rate than the overall market -- Materials (76.7%), Consumer Discretionary (83.7%), and Technology (87%).  Two of the three sectors that are beating estimates at the highest clip are also the two sectors that have gone down the most since earnings season started.  Materials is down the most at -11.37%, while Technology is down 7.72%.  Based on this, either investors aren't paying any attention to the strong earnings, or they think that it can't get much better than this, hence sell the news.  It's probably a little bit of both.  However, guidance has been especially strong as well this earnings season, so the jury is still out on whether the earnings cycle will now turn down.

 

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GDP Rises to Highest Level Since 2003

While the ultimate pace of the economic rebound continues to be debated, GDP in the fourth quarter rose 5.7% (expectations were for growth of 4.6%), which was the fastest pace in six years.  Granted, this growth follows an even bigger decline of 6.4% in the first quarter of 2009, but at least it's a start.  Judging by the performance of equities in the fourth quarter, and the earnings reports we've seen so far, we already knew the fourth quarter was strong, the big question is whether or not this growth will continue in Q1.  Based on what we've seen so far in terms of guidance, companies seem to have a positive outlook.

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Percentage of Stocks Above 50-Day Moving Averages

As shown below, the percentage of stocks above their 50-day moving averages in the S&P 500 has dropped to 35%.  This is the lowest level seen since mid-2009.  Clearly breadth has gotten weak on this pullback.  No sectors have more than 50% of stocks above their 50-days, and Consumer Discretionary has the highest reading at 48%.  Materials is the weakest sector with a reading of 10%.

 
 
 

 

 

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Bespoke on Fox Business Today (1/28) at 2:30

Bespoke's Paul Hickey will appear on Fox Business Network today (1/28) at 2:30 PM ET to discuss our current market outlook. 

10-Day A/D Line For Materials At Most Oversold Level Since October 2008

The 10-Day A/D Line for the S&P 500 Materials sector is currently more oversold than at any other point since October 2008.  It is also currently showing the eleventh most oversold reading since 1990.  In the chart below, we highlight each of those occurrences (all occurred after 2000) with a red dot.  In the week following the prior ten most oversold readings, the Materials sector has averaged a gain of 2.9% with positive returns 70% of the time.

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Dow Breaks Another Support Level

As shown in the chart below, the Dow has just broken below its support level at the 10,100 mark.  This support was formed by the peak in the index in mid-October.  Some commentators have been blaming the drop on more tax proposals in Obama's State of the Union speech last night.  But even if you think this is the cause of the decline, it shouldn't really scare you too much since the proposals still have to be passed into law.  There have been many tax proposals during the rally that haven't even come close to passing.  In the current political environment, it's going to be hard for Congress to implement anything that will be interpreted as a hit to the economy, especially in an election year.  So if the market is falling because of tax proposals, it's likely to be short lived since the likelihood of actual passage is low. 

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Best Performing Stocks on Earnings

It's been a great earnings season from a numbers standpoint, but it has been a pretty bad earnings season in terms of stock performance.  But some stocks have done well.  Below we highlight the 25 companies that have gone up the most on their report days this earnings season.  As shown, TSCM has had the best earnings-day peformance with a gain of 28.17%  Cramer had a good day!  PLXT is the only other company that has gone up more than 27.32% on its report day.  Other notables on the list of earnings winners include VMW, CREE, ROK, EDU, and STX.

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It's Been a Good Year For Ford

While Ford (F) was typically considered among the most dysfunctional automakers less than three years ago, look who's laughing now.  As major players like GM and Toyota can't get out of their own way, both operationally and in terms of their stock prices, their losses have been Ford's gain.

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Two 200-Day Breaks

Two big asset-classes had major long-term trend reversals today.  When a stock or index is trading above its 200-day moving average, it is considered to be in a long-term uptrend.  When the price is trading below the 200-day, it is considered to be in a long-term downtrend.  Today, the US Dollar index closed above its 200-day for the first time since last May.  China's Shanghai Composite Index closed below its 200-day for the first time since last March.  The dollar has been rallying for a couple of months now, while China has been struggling, but today's moves are confirmations that the trends could be in place for longer than some thought.

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S&P 500 Open Interest Put/Call Ratios

Below we highlight a list of S&P 500 stocks with the highest ratio of open put interest to open call interest.  Companies with high put option open interest compared to call option open interest have more bearish than bullish bets.  It's similar to a company with high short interest, and some investors view this as bullish or bearish.  Investors who view a high ratio as bullish tend to think that the negativity is already priced into the stock, meaning upside potential is greater than downside potential.  Investors who view a high ratio as bearish tend to think that it means the smart money is betting against the stock, indicating that more downside is to come.  Typically during market rallies, stocks with high ratios will outperform, while they will go down faster than the market during declines.

For those interested, we also list the S&P 500 stocks with the lowest open interest put to call ratio.

Ken Heebner: At Least He's Honest

A few minutes ago on CNBC, Erin Burnett asked her panel of guests if they would consider buying Apple's (AAPL) new iPad tablet computer.  The only panelist who raised their hand was Steve Liesman.  One of the panelists on the show who didn't raise his hand, however, was Ken Heebner, who manages the CGM Focus Fund.  As of its most recent filing, Heebner's fund had a 1.06 mln share position in Apple Computer, representing 6% of his fund's holdings.  Yet he still wouldn't buy an iPad, or at least say he was interested in buying one?  At least he's honest.

Bernanke Poll Results

Two days ago we asked Bespoke readers if they thought Bernanke would be confirmed for a second-term by the Senate.  As shown below, 88% responded 'yes' and 12% responded 'no'.  Over at Intrade, the odds are now all the way up to 98%.

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Berkshire Joins List of Ten Largest US Companies

Who said a stock split wasn't good for your stock?  Last week's 50-1 split of shares in Berkshire Hathaways' class B stock (BRK/b) helped set the stage for last night's announcement that S&P would add the stock to the S&P 500.  As a result, the stock is trading up 5% in early trading.  Factoring in today's advance, Berkshire Hathaway now ranks among the ten largest US companies with a market cap of nearly 170 billion dollars. 

Given its size, the addition of Berkshire Hathaway to the S&P 500 is likely to cause some havoc on the index.  With a likely weighting of about 1.1% in the index when it is added in February, index managers will be required to sell about 1.1% of their holdings in each of the index's remaining 498 stocks (BNI will come out of the index with Berkshire's acquisition of the company) in order to make room for Berkshire. As if investors didn't have enough on their plate already!

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Can't Blame Earnings Season

The earnings picture continues to look impressive.  Heading into the close yesterday, the earnings beat rate (% of companies beating EPS estimates) stood at 71%, which is high in its own right.  Last night and this morning, another 64 companies reported earnings, taking the total number of US companies that have reported since earnings season began up to 223.  As shown below, the earnings beat rate now stands at 73.5%, which would mark the highest reading for any quarter since at least 1999 if the reporting period ended today.  And even though the S&P 500 finished the day down, the companies that reported earnings last night and this morning collectively had a stellar day.  The S&P 500 closed the day down 0.42%, but the stocks that reported earnings averaged a gain of 2.40%!  The average 1-day % change for all companies reporting earnings this season stood at -0.24% coming into today, but the 64 additional companies added to the total today have bumped the overall number up to 0.52%.

Over at Bespoke Premium, we're constantly providing up-to-date analysis on earnings season above and beyond the information shown above.  Click here to subscribe today.

Lots on Deck Tomorrow

As shown below, 42% of stocks in the S&P 500 are currently trading below their 50-day moving averages.  This is just below the 43% reading seen at the bottom back in October, so things don't currently look great from a breadth perspective.

Tomorrow is one of those days that we see maybe 4 or 5 times a year where the market just gets pounded with information overflow.  Not only does the market have to digest more than 50 earnings reports, but it has to digest the Geithner/Paulson testimony, New Home Sales, the FOMC decision, the Apple Tablet, and last but not least, President Obama's first State of the Union address.  Get ready, because it's going to be a very active day! 

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1,091 Proves Strong Once Again

On a closing basis, the S&P 500 stopped going down right at the 1,091 level, which has acted as key support four times now since last November.  Now that the index has found support in the short-term, traders will focus on the 50-day moving average as the next level of resistance, which is about 13 points above the index's current level.

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Guidance Is Also Strong

Just like the earnings beat rate this quarter, the percentage of companies raising guidance versus lowering guidance is also strong.  As shown below, 12.6% of companies that have reported earnings this season have raised guidance, while just 2% have lowered guidance.  In the prior two quarters, we saw positive guidance outnumber negative guidance, but the current spread this quarter would beat them handily.  This number is likely to come in some as earnings season progresses, but for now, guidance looks good.

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Will He or Won't He Be Confirmed

Worries over the confirmation of Ben Bernanke eased somewhat today as the administration reiterated its support for the current Fed Chairman and polling of Senators showed that he's at least on track to get the 60 votes needed.  Traders at Intrade currently have the odds of confirmation for a second term at 90%.  We are wondering if Bespoke readers, whom we think as a whole represent a good picture of 'the market', are putting the odds above, the same, or below the 90% mark.  Please take part in the poll below and tell us whether or not you think Ben Bernanke will get the 60 'yes' votes needed to win confirmation for a second term by the Senate.  Thanks for participating!

Will Bernanke Be Confirmed By The Senate?
	Yes
	No
Free polls from Pollhost.com

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Apple Back Above 50-DMA After Hours

Apple (AAPL) had a nice day today, closing up $5.32 to $203.08.  The stock had a strong earnings report after the close, and it closed the after-hours session up another $1.52 to $204.60.  While this is a small gain for Apple compared to what it does sometimes after earnings reports, it is a significant gain because it has put the stock back above its 50-day moving average.  With the speculated release of its tablet coming on Wednesday along with lots of other non-stock related events going on in the market right now, Apple can use as many positive technical forces as it can get.

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When a War on the Banks Turns into Bigger Bonuses

Right or wrong, there's no denying the fact that many Americans think that people who work on Wall Street are paid too much.  While this view was certainly present before the bailouts, it has bubbled up to the forefront of popular opinion since then.  Those of the view that bonuses should be capped or restricted argue that even banks who have paid back the government benefited from the government's actions.  This is certainly true, but a lot of companies outside of the financial sector also took government assistance or regularly benefit from government programs.  In these cases, there is little outrage towards pay.  Professional athletes make salaries on par or greater than the top bankers, and they play in stadiums that are largely financed by higher sales taxes or through the issuance of tax-free municipal bonds.  And just last week, NBC paid Conan O'Brien over $30 million to walk away and take the Summer off, even though NBC's parent company took advantage of the government's TLGP (Temporary Liquidity Guarantee Program) and issued over $60 billion in government guaranteed commercial paper.

As we all learned during the Financial crisis, however, it is important to remember the law of unintended consequences.  Actions or words that look good at face value could end up with results that run counter to your original intent.  While Wall Street bonuses have been labeled "obscene," all the rhetoric against the banks actually has the potential to benefit some bankers, making their potential paydays even more "obscene."  For example, a Bloomberg story this morning reported that the stock-based portion of bonuses for employees at Goldman Sachs (GS) was priced on Friday when the stock closed at a six-month low and had its worst two-day decline since the March lows.  As a result of the decline in Goldman's stock, though, an employee getting a bonus of $1 million in stock received 6,488 shares, which was 436 more shares than they would have received one week earlier.

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