Bespoke Investment Group

What Bull Market?

One of the biggest questions heading into 2008 is whether or not the global equity rally can keep going for a sixth straight year.  Implied in this statement is that 2007 was the fifth year of a global bull market.  However, a look at the returns of major international indices in any currency but the dollar shows that 2007 was not really such a great year.  Below we highlight the 2007 returns of major international equity indices, in terms of Euros.  Of the 12 indices we listed, only five had double digit returns in 2007, and four finished 2007 down for the year, including the US which was the second worst performer behind Italy. 

 

 

The Anti-Rolaids List: 2007

Over the weekend, we highlighted our Rolaids List for 2007.  These are the stocks that caused frequent heartburn for investors as they had the most one-day declines of 5% or more.  Today, we took the opposite approach and screened for the S&P 1500 stocks that had the most single day gains of 5% or more.  This year, Fremont General (FMT) tops the list with thirty-nine 5% up days.  But even with all these big up days, the stock is still down over 75% on the year, as it also had 54 days where it was down 5% or more.  In fact, FMT topped the list of stocks with the most 5% down days and the most 5% up days!  Of the 17 stocks in the list below, nine of them also made our Rolaids List (shaded tickers).

Volatility? What Volatility?

While most would agree that the stock market has certainly been more volatile this year, putting it in perspective with the long term trend shows that by at least one measure, the S&P 500 was less volatile this year than its long term average.

The chart below summarizes the average absolute daily price change in the S&P 500 by year.  In 2007, the average worked out to 72 basis points, which means that, on average, the S&P 500 had a daily move (up or down) of 0.72% versus an average of 0.75% since 1928.  While this year was more volatile than the last three years, prior to those years, the last time the market was this 'placid' was in 1996.

Sector Relative Strength

As the year winds down, now is as good a time as any to review how each of the market's sectors are performing versus the overall S&P 500.  Below we highlight the relative strength of each to the ten S&P 500 sectors over the last year.  In each chart, rising lines indicate periods where the sector is outperforming the S&P 500.  Charts with red shading indicate that the sector has underperformed over the last year.  Finally, in each chart we have also included red dots which indicate the four Fed rate cuts since August.

With the S&P 500 up less than 4%, 2007 is shaping up to be a below average year of market returns, but as the charts illustrate, the weakness has been contained to just two sectors - Consumer Discretionary and Financials.  Without the negative drag from those two sectors, the S&P 500 would have gained about 17% this year.

Looking at each of the ten individual sectors, we found that some notable changes have developed in recent weeks.  While Consumer Discretionary and Financials have seen zero benefit from the Fed rate cuts and remain in sharp downtrends, some of the more defensive sectors, which had continued to outperform, have all shown signs of weakness versus the market over the last two weeks.  While this may merely be profit taking following sharp rallies, it may also be an early signal that investors are beginning to increase their willingness to take risk.

   

The Rolaids List: 2007

Nothing gives an investor more heartburn than when a stock they own in their portfolio has a large down day.  With that in mind, we compiled a list of current S&P 1500 stocks that had the most one-day drops of 5% or more in 2007.  As the list below highlights, 22 stocks had more than 20 5% down days.  FMT topped this year's list with 54 days of 5% declines or more.  That works out to more than one per week!

While most of the stocks in the list were down big on the year, one name on the list, Champion Enterprises (CHB), had 22 'big' down days and still managed to finish the year up.

How the Best and Worst of '06 Fared in '07

As lists of the best and worst performing stocks of 2007 show up everywhere, we decided to see how the winners and losers of 2006 performed this year.  Below we highlight the 25 best and worst performing stocks in the Russell 1,000 in 2006 and provide their year to date performance in 2007 as well.  As shown, the 25 best performers of 2006 are up an average of 7% this year, although 9 of the 25 are actually down more than 25% on the year.

The 25 worst performing stocks of 2006 are down an average of 12% this year.  CHS, BZH, JBL, AMD, NNI, OCR, BSX and KBH are down even more this year than they were last year.  Clearly, anyone who looked for turnaround plays at the start of this year had a tough go at it. 

Below we highlight the 25 best and worst performers in the Russell 1,000 in 2007.  Compared to last year, the gains and losses have been much more magnified.  The biggest winner last year was up 196%, while this year, FSLR is up 791%.  The biggest loser in the index last year was down 52%, while every single stock in the bottom 25 this year is down more than that.  This year has definitely been a stock picker's market, with a large divergence between winners and losers.

    

A Case for Closing the Markets on Monday

The last trading day of the year has not been a good one over the last 25 years.  Since 1982, the Dow has averaged a decline of 25 bps on the final trading day of the year, going up just 36% of the time.  Over the past 10 years, the numbers are even worse.  Since 1987, the Dow has gone up just 30% of the time for an average decline of 33 bps.  Even more of a reason to close the markets on Monday!

Yale University's 2007 Endowment Report

Regular readers of Bespoke know that we are big fans of David Swensen and the Yale Endowment.  Mr. Swensen's book on personal investment is a must read, as it teaches investors about the importance of asset allocation and portfolio rebalancing.  Bespoke even offers an all-ETF money management strategy that practices much of what Mr. Swensen preaches in the book.

Recently, Yale released its Endowment Update for 2007.  The report can be read by clicking here.  We also compared the endowment's current portfolio to that of previous years, and we highlight a chart and table of it below.  As shown, there were no significant changes in the allocation of asset classes from 2006 to 2007.  Private Equity was the only real increase from 16.4% to 18.7%.  When comparing the current portfolio to 2002, however, we see that Domestic Equity has fallen from 15.4% to 11%, Fixed Income has fallen from 10% to 4%, and Private Equity and Real Assets (real estate, timber land, oil and gas) have increased.

 

Bespoke on CNBC

Bespoke's Paul Hickey will appear on CNBC's Street Signs with Erin Burnett at 2:00 PM ET today to discuss the performance of stocks which are the most and least liked by analysts.

Russell 1,000 Stocks Furthest Above and Below 50-Day Moving Averages

Below we highlight the stocks that are the most overbought and oversold going into the new year.  The first table below highlights the 25 stocks in the Russell 1,000 that are the furthest above their 50-day moving averages.  As shown, HES is the most overbought at 36.76% above its 50-day.  HES is followed by FSLR, MOS, RESP, ATVI and ADM.

On the downside, SLM is trading 47% below its 50-day moving average -- further than any other stock in the Russell 1,000.  SLM is followed by the usual losers -- MBI, ETFC, FMD, PAY, IMB and CC.  Hopefully 2008 can turn things around for these struggling companies.

 

Presidential Election Cycle Data

Scott Patterson skeptically highlighted the Presidential election cycle in today's Wall Street Journal.  With year four of President's Bush's final term coming up in 2008, below we provide the average performance of various asset classes in each year of the election cycle.  As shown, since 1948, the S&P 500 has averaged a gain of 8.62% in the fourth year of a President's term, although the average declines to 3.75% in the fourth year of a President's second term.  The US Dollar and Oil have also averaged gains in year four, while the CRB Commodity Index has been relatively flat.  Treasuries have also risen in year four of a President's second term.  Since 1948, the yield on the 10-Year Treasury Note has averaged a decline of 5.35% in years like 2008.

The Bespoke Report: Everything Investors Must Know About the Markets in 2008

Over the years, one of the major faults we have found with Wall Street prognosticators is that they start with their conclusion and then go find the data to support that conclusion.  At Bespoke, we start with the data and then draw our conclusions, which rids our work of any personal sentiment that we might have.

The first annual Bespoke Report from Bespoke Investment Group is an analysis of all asset classes and how each of them are currently interacting with one another.  This analysis forms the backbone of the scenarios that are likely to occur in the financial world in 2008.  Today’s markets and the outlook for next year are being affected by a number of issues, all of which we pore over in detail in this report.  Just some of the topics covered are stock seasonality, the election cycle, Fed easing cycles, recessions, dollar rallies, credit spreads, commodities, housing, hedge funds, valuations and technicals. 

The Bespoke Report includes our outlook on the S&P 500 and which sectors we like and dislike in 2008.

We also provide a number of stock screens that highlight companies that should benefit from our findings.

Upon finishing this report, readers will be well aware of the issues at hand in 2008 and prepared for an environment that has been labeled by many as the toughest of their careers.

You must be a Bespoke Premium subscriber to receive The Bespoke Report 2008, so please subscribe today.

Bespoke's 2008 Reader Questionnaire

Please fill out the Bespoke 2008 Reader Questionnaire if you have yet to do so!  We'll be publishing the results along with a list of everyone's stock picks before the new year begins.  A big thanks to everyone who has taken part so far.

Will the S&P 500 be higher or lower by the end of 2008? Higher Lower Will the price of oil be higher or lower by the end of 2008? Higher Lower Will the US Dollar index be higher or lower by the end of 2008? Higher Lower Will the US economy go into a recession in 2008? Yes No Will the US housing market bottom in 2008? Yes No Will a Democrat or Republican win the 2008 Presidential election? Democrat Republican Which sector will go up the most in 2008? What is your #1 stock pick for 2008? E-mail Address: * * Required

Bespoke's Commodity Snapshot

Below we highlight our trading range charts of 9 major commodities.  Oil prices are up today after the assassination of former Pakistani Prime Minister Benazir Bhutto.  As shown, Oil has now moved back to the top of its trading range and is in overbought territory at $97.25.  The ever important $100 level is back in play for the time being, and it seems to be putting pressure on equity markets.  While Oil is rising, Natural Gas is falling.  The commodity is currently trading at the bottom of its trading range (green shading) after declining from highs reached at the start of November.  Gold is also up today due to political unrest overseas.  Much like Oil, Gold is trading right at the top of its historical trading range.  Platinum is even more overbought than Gold, while Silver is trading in the middle of its trading range.  Coffee recently nudged against overbought territory before pulling back slightly, and Corn has skyrocketed in recent weeks.

   

Where Is The Predicted Recession?

We recently gathered the forward quarterly US GDP estimates from 63 economists polled by Bloomberg.  Below we have plotted these 63 estimates using a line graph.  The average estimates project a bottom in GDP growth of 1.1% in Q4 '07 and a steady rise to 2.6% by Q4 '08.  It seems that the mainstream opinion is that the odds of a recession in 2008 are 50/50.  But of the 63 economists surveyed by Bloomberg, only 2 are actually predicting a recession (2 consecutive quarters of negative GDP growth).  While economists are not exactly known for their prescience, you would think that there would be more than 3% predicting a recession, making them more inline with the general consensus.

Want to know how to invest in 2008?  Receive our in-depth, 90-page outlook piece, The Bespoke Report 2008, when you become a Bespoke Premium member.

Bespoke's Sector Snapshot

Below we provide trading range charts of the ten S&P 500 sectors.  These charts are part of our weekly Sector Snapshot available to Bespoke Premium members.  The red shading represents overbought levels while the green shading represents oversold levels.  When the price moves above or below the red or green zones, extreme readings are reached.  There are no sectors currently at extreme oversold levels, but the Energy sector is very close to extreme overbought levels.  Energy is trading in a nice uptrend, but it is currently right at the top of its upward channel.  Most sectors are trading in the neutral zone (light blue shading), with Financials and Consumer Discretionary closer to the bottom and Tech, Materials and Utilities closer to the top.

    

The Odds Are in Tech's Favor

The Nasdaq and the S&P 500 Technology sector have gone up each of the last six days.  Interestingly, over the last five years, when the Nasdaq has been up six days in a row, it has gone up on the seventh day 72.7% of the time.  The Technology sector has gone up on day seven even more often at 91.7%.  On the other hand, the S&P 500 and the Dow 30 have gone up four days in a row, and the odds of them going up on day five are much smaller.

Updated Case-Shiller Median Home Price Data

October was an ugly month for home prices across the country, as all 20 of the cities that S&P/Case-Shiller tracks were down on a month over month basis.  The Composite 10-city index was down 1.4% month over month and 6.7% year over year.  The 6.7% year over year decline was the biggest fall in the index's history. As shown, San Diego was down the most month over month, followed by Detroit, Las Vegas and Phoenix.  Chicago, New York and Portland were down the least from September to October, but they were still down.  Only three cities (Seattle, Charlotte and Portland) remain up on a year over year basis, but these gains are falling rapidly.  Below we highlight historical year over year monthly percent changes in the Case-Shiller median home price indices.  The charts provide a great picture of the abrupt stop and subsequent fall in nationwide real estate prices.

2007 Country Returns

With just two trading days left in 2007, 81.6% of the 87 countries highlighted below have equity indices that are up on the year.  Aside from Zimbabwe, which is dealing with hyperinflation, the Ukraine, China and Bangladesh are up the most on the year, while Ireland, Venezuela and Puerto Rico are down the most.  The US ranks 59th out of 87 as far as returns for 2007 go, with a single-digit gain of 5.48%.  Other notables on the list are India (+46%), Brazil (+44%), Germany (+21%) and Japan (-9%).

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Top Global Stocks of 2007

Below we highlight the 25 best performing stocks of the Bloomberg World index in 2007.  The Bloomberg World index contains 5,175 global stocks from 85 countries.  As shown, Romanian company CMCM is up the most this year at 8,965%.  CMCM is followed by Mongolia Energy and Nority International.  One US company was able to crack the top 25.  First Solar (FSLR) is up 811% on the year.

Want to know how to invest in 2008?  Receive our in-depth, 90-page outlook piece, The Bespoke Report 2008, when you become a Bespoke Premium member.

Q4 S&P 500 Earnings Growth Now at -6.3%

Below we highlight estimates for quarterly S&P 500 earnings growth for Q4 '07, Q1 '08 and Q2 '08.  The estimates are weekly since early August, and as shown by the chart, Q4 '07 earnings estimates have fallen off a cliff.  Back in August, Q4 growth was expected to be 12.3%.  It is currently expected to decline by 6.3%.  This decline is primarily due to the collapse of earnings in the Financial sector.  Q4 '08 estimates for Financials are now expected to decline 57%.  All other sectors are actually expected to be flat or show significant gains.

Want to know how to invest in 2008?  Receive our in-depth, 90-page outlook piece, The Bespoke Report 2008, when you become a Bespoke Premium member.

Final '08 Strategist Forecasts of the Year

Credit Suisse included their 2008 S&P 500 forecast in this week's strategist survey done by Bloomberg.  The company is looking for a year-end S&P 500 price level of 1,650.  This is the last survey of the year, and all 12 strategists are looking for gains from current levels in 2008.  Bear Stearns and HSBC are looking for the biggest gains, each with price targets of 1,700.  Morgan Stanley is looking for the smallest gains, with a price target of 1,525.  Morgan Stanley currently has the best call of all the 2007 estimates made at the end of '06.

2008 Bespoke Reader Questionnaire

Be sure to check out our Bespoke in the News page to see recent articles mentioning Bespoke.  Today, we were mentioned in the WSJ, USA Today, and Barron's.

As 2007 comes to an end and 2008 approaches, we want to get a consensus on a number of topics from Bespoke readers.  If you have some time over the next couple of days, please respond to the questions below, and we'll provide the results by the end of the year.  If you don't wish to provide your email address, simply enter [email protected] in the email address question below.  Thank you for your continued support of this site as well as Bespoke Premium.  Happy Holidays!

Will the S&P 500 be higher or lower by the end of 2008? Higher Lower Will the price of oil be higher or lower by the end of 2008? Higher Lower Will the US Dollar index be higher or lower by the end of 2008? Higher Lower Will the US economy go into a recession in 2008? Yes No Will the US housing market bottom in 2008? Yes No Will a Democrat or Republican win the 2008 Presidential election? Democrat Republican Which sector will go up the most in 2008? What is your #1 stock pick for 2008? E-mail Address: * * Required

Nasdaq Up Five Days in a Row

The Nasdaq closed up today for the fifth straight day for the first time since October 10th and the twelfth time since the start of 2006.  Following prior streaks, the Nasdaq's average return has been a decline of 0.21%, with positive returns in only five out of twelve days.

Merrill Lynch: We're Practically Giving It Away

If you lived in the Northeast in the early 1980s, you may remember the commercials for electronics retailer Crazy Eddie, where the actor would say their prices are so insane that 'they're giving it away.'  After reading the terms of Merrill Lynch's (MER) deal with Singapore's Sovereign Wealth Fund, Temasek, some investors think someone at MER is doing their own Crazy Eddie impersonation.

As news surfaced this morning that MER had closed on the $4.4 bln cash infusion, shares traded up over $2 to more than $58 per share.  However, in the initial press release, MER never mentioned the terms of the deal, and now we know why.  Under the disclosed terms, MER is selling the shares at a price of $48 per share, a full 17% below where the stock was trading earlier this morning.