Bespoke Investment Group

High Yield Spreads

As the Santa Claus rally continues, spreads in the high yield credit market remain at elevated levels.  Through Friday, the Merrill Lynch High Yield Index was at 568 basis points versus its high of 592 on 11/26.  Since bottoming on 6/1, the index has risen by as much as 145% in less than a six month span.  Below we have updated our chart of prior spikes in high yield credit spreads.

   

While rising high yield spreads are generally associated with increased levels of risk aversion in the markets, we have found that spikes in credit spreads do not necessarily have a negative impact on the stock market.  For example, in 1998, spreads widened by a similar margin, and while the market didn't perform great during the period while spreads spiked, once they stabilized, equities ended up performing very well.

   

NYSE Short Interest Data -- Stocks with the Highest Short Interest

The NYSE recently released its mid-month short interest data, and below we highlight the stocks in the index with the highest short interest as a percentage of equity float.  As shown, 98.95% of NFI's float is short.  The stock is down 96.95% year to date.  The top of the list is mostly made up of homebuilders and mortgage related companies.  Non-credit crunch related companies on the list include LNY, HZO, CMG, BBI, HW, VMW and BIG.

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

S&P 500 On the Last Trading Day Before Christmas

Since 1940, the S&P 500 has averaged a gain of 0.23% on the last trading day before the Christmas holiday, with gains 67% of the time.  This compares to an average one-day gain of 0.032% on all trading days since 1940.  Below we highlight the S&P 500's performance on the last trading day before Christmas since 1980.  As shown, the numbers have been much weaker than average since 2001.

 

Recent ETF Performance

Since today is going to be a slow trading day, we figured we would provide readers with our table of recent ETF performance.  As shown, there is a lot of green on the screen, as equities have generally gone higher over the last week and month.  The gains have been about the same regardless of size (largecap, midcap, smallcap) or style (value/growth).  Even the US Dollar has risen, as highlighted by the declining values of the currency ETFs shown. 

On a sector basis, Energy (XLE) and Materials (XLB) are up the most over the past 30 days, while Consumer Discretionary (XLY) is the only sector that is down. 

On the international front, Hong Kong (EWH), India (INP) and Russia (RSX) are up the most on a monthly basis, and China (FXI) and Russia (RSX) are up the most over the past week.

The two asset classes that have seen declines over the past 30 days are commodities and fixed income.  Commodities did have a strong day on Friday, although fixed income did not.

2008 GDP vs CPI Estimates

The International section of our 2008 outlook, The Bespoke Report, highlights key quantitative statistics of 22 countries that US investors can invest in with ETFs.  Below we provide one piece of the International section as a sample of the research we provide in the 90-page report.

The chart below includes the consensus 2008 GDP and CPI estimates for 22 countries.  China, India, Russia and Singapore are forecast to have the strongest GDP growth, while Singapore, Taiwan and a number of European countries are expected to have the lowest inflation rates.  Italy is expected to have the slowest GDP growth at 1.4%, while Russia is expected to have the highest inflation rate at 8.4% (which is higher than its expected GDP growth).  The scatter chart below compares GDP and CPI so that readers can find high growth/low inflation areas.  China, Singapore, Malaysia and Taiwan look the best based on this criteria.  For those wondering, the US is expected to see GDP growth of 2.3% with an inflation rate of 2.7%.

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.

S&P 500's 50-Day Crosses Below 200-Day

The S&P 500's 50-day moving average crossed below its 200-day moving average today.  Earlier this week, we highlighted that the index has typically performed poorly in the month and quarter following a similar 50/200-day cross.  Click here to view our prior post.

   

Business Week Strategist Forecasts 2008

For some reason, Business Week decided to do away with their Fearless Forecasts outlook piece this year.  Instead, they narrowed down the number of strategists from 80 to less than 15.  Last year's consensus price targets for the major indices did pretty well.  Strategists expected a gain in the S&P 500 of 5.85%, and the current YTD gain stands at 4.13%.  They expected a gain in the Nasdaq of 9.62%, and the current YTD gain stands at 10.71%.

Below we highlight the strategists who made the closest year-end S&P 500 calls as of 12/21.  Two Barry's (Barry Hyman and Barry Ritholtz) and Doug Bermingham are within a mere 7 bps of the actual price level of the S&P 500.  (And we have to give props to Barry Ritholtz for making the best individual stock call in the survey with MOS - up over 300%.) 

Not taking anything away from the forecasters this year, but you would think that Business Week would ask some of the better prognosticators in '07 to make predictions for '08.  Tom McManus is the only analyst in the list above that gave forecasts in this year's publication. 

Below we highlight Business Week's strategist predictions for 2008.  As shown, Elaine Garzarelli, Laszlo Birinyi, Bernie Schaeffer and David Bianco are looking for the biggest gains in the S&P 500.  Only two strategists are expecting declines in '08 -- Ben Inker and Robert Arnott.  Tom McManus, who made the best prediction last year of this year's strategists, is looking for the S&P 500 to close '08 at 1,625.  The consensus forecast from all 13 strategists is for a 2008 gain of about 9%.

We also provide each strategist's 2007 S&P 500 calls where applicable.  As far as individual stocks go, AIG, ORCL, FCSX, PEP and SBUX were mentioned as favorites.

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.

Michigan Confidence Slightly Better Than Expected

Today's Michigan Confidence report for December came in a little better than expected (75.5 actual vs. 74.5 forecast), but it is still at relatively low levels.  As we did yesterday with the initial jobless claims report and the Philly Fed, below we highlight the historical trend of the Michigan Confidence report with recessions highlighted in red.  As the chart illustrates, at the start of the four recessions since 1978, Michigan Confidence was higher than the current levels in two periods and lower in the other two.  Bottom line?  Using the Michigan Confidence as a barometer of recession risks is not very useful.

S&P 500 Snapshot

Below we highlight some key charts for the S&P 500.  The first one is our trading range chart that highlights if the index is overbought, oversold or neutral.  As shown, the S&P 500 is right at the bottom of its normal range, which means it is currently one standard deviation below its 50-day moving average.  While this isn't a flashing buy signal, it does mean that the risk/reward tradeoff favors the reward side much more than it does when the index is well into overbought territory.

The S&P 500 10-day advance/decline line measures the average daily number of advancers minus decliners over the last 10 days.  The A/D line is a breadth measure that shows underlying strength or weakness in the movement of the market.  Readers will notice that the A/D line recently moved to its highest levels of the year, even as the index just barely moved above its 50-day.  While the extreme overbought reading is negative in the very short term, the underlying strength it shows is a positive when looking at a longer time horizon.  Since the A/D line peaked a couple of weeks ago, it has moved back below zero and is close to oversold territory.

Currently, 34% of stocks in the S&P 500 are above their 50-day moving averages.  While the 34% number is not telling us much at the moment, the fact that it failed to match its August lows after the most recent declines is a positive sign.

Finally, the current trailing 12-month P/E ratio of the S&P 500 is at 18.32.  Unfortunately, this number is just as high now as it was when the market was making new highs a couple of months ago.  This highlights that earnings have definitely slowed. 

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.

S&P 500 From Christmas to Year End

Since 1940, the average change of the S&P 500 from the last close before the Christmas holiday to the last day of the year has been a very positive 0.79%.  Over the last ten years, the index has averaged a gain of 57 bps with gains 80% of the time.  Since the current bull market began in 2002, however, the index has actually averaged a decline of 14 bps from Christmas to year end, with gains 3 out of 5 times.

 

Philly Fed Turns Negative

Today's Philly Fed report for December was weaker than expected at -5.7 vs. forecasts of +6.0.  It was also the first negative reading since June 2005 and was the lowest reading since April 2003.  Like this morning's initial jobless claims report, the weak Philly Fed number is likely to ratchet up the recession talk.  Below we highlight the Philly Fed since 1968 with recessions highlighted in green.  While negative readings coincide with recessions, there were also four separate periods during the nineties when the indicator turned negative and no recession occurred.

 

Bespoke on CNBC at 2PM

Bespoke's Paul Hickey will appear on CNBC's Street Signs with Erin Burnett at 2:00 PM ET today to discuss our 2008 Outlook.

Best Performing Stocks Year To Date; FSLR, ONXX, CF, MOS, TBSI, GMO, SPWR

With five trading days left to 2007, below we highlight the best performing stocks in the Russell 3,000 year to date.  As shown, First Solar (FSLR) is up 729% this year, which is nearly twice as much as the second best performer, ONXX (429%).  ONXX is followed by CF, MOS, TBSI, GMO, SPWR and RCCC.  For those that subscribe to the window dressing theory, these names could do well through the 31st.

Initial Jobless Claims

Initial jobless claims showed a 12K increase this week to 346K, bringing the four-week moving average up to 343K.  Many economists watch the four week average as a leading indicator for economic weakness, and today's rise has some saying that a recession is becoming increasingly more likely.

Below we highlight the four-week moving average of initial jobless claims since 1967, with periods when the economy was in recession highlighted in red.  We also note where the indicator was when the recession started.  As shown in the chart, the current level of initial jobless claims remains below the levels it was at when the last four recessions began.  While things could certainly get worse over the next several weeks, current levels of initial jobless claims are still not quite in 'recession' territory.

Bespoke's Commodity Snapshot

Below we highlight our trading range charts of 8 key commodities.  When the price moves above or below the green shading, the commodity becomes overbought or oversold.  As shown in the charts, most sectors are currently within their normal trading ranges.  Platinum is the only commodity trading above its trading range, while Coffee has moved to the very top.  Copper is the closest to oversold territory, while Oil and Natural Gas are just about in the middle.

   

Bespoke Bears at Record High

   

As of mid week, the percentage of respondents that marked "Bearish" as their current view on the S&P 500 is at its highest level since the poll started in July.  Let us know what you think about the markets by taking part in the Bespoke Market Poll below.

My current view on the S&P 500 is:
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The Bespoke Report 2008 - Now Available!

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.  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.

S&P 500's 50-Day Approaching 200-Day

The S&P 500's 50-day moving average is getting mighty close to crossing below its 200-day moving average, which is a big no-no for technicians.  While the market did okay after the last time it happened in July 2006, the average returns following this 50/200-day negative cross aren't pretty.

A 50-day cross below the S&P 500's 200-day has happened 36 times since 1940.  The average change of the S&P 500 in the month following this cross has been -0.76%, while the average change over the next 3 months has been -0.01%.  These numbers are very negative when taking into account that the average 1-month change during any period since 1940 has been 0.66% and the average 3-month change during any period has been +2%.

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S&P 500: 1997-Present

We've been reading a lot lately that market technicals have turned negative, but when we look at a long term chart of the S&P 500, the picture still looks positive.  We've heard numerous times about the double top that has formed from the highs made in 2000, but it's important to point out that we actually took out those highs.  A double top is really only confirmed when the price tests prior highs but fails to go through them. 

And the index is still trading in the long term uptrend that was formed at the very start of the current bull market.  The most recent lows tested and held the bottom of the upward channel.

The Bespoke Report 2008

For those readers wondering why we've been a tad slow in posting this week, we just want to let you know that we've been putting the finishing touches on our outlook piece -- The Bespoke Report: Everything Investors Must Know About the Markets in 2008.  As of now, we're all set to release the first annual report during the day tomorrow.  The report will only be available to Bespoke Premium members, so be sure to subscribe if you're not already a part of the Bespoke community.

US Index ETFs Move Into Oversold Territory

After large declines since the Fed stole the Christmas rally, the majority of US index-tracking ETFs have moved back into oversold territory (more than 1 standard deviation below its 50-day moving average).  NYC, ISI, QQQQ, MDY, IJR, IWM and IWC are currently the most oversold.  The only two that are not oversold are the mega-cap DIA (tracks the Dow 30) and OEF (tracks the S&P 100) ETFs.

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Goldman Sachs' Declining Share Count

This quarter, most banks and brokers have been busy suspending their buyback programs and cutting their dividends as their earnings outlook deteriorates.  Goldman Sachs (GS), on the other hand,  not only continues to buy back stock but they also authorized an additional $12.5 bln for future buybacks.  With a market capitalization of roughly $88 bln, today's announcement represents approximately 14% of the company's market cap.

Update -- 2008 S&P 500 Forecasts

Below we highlight the most recent strategist forecasts for the price of the S&P 500 at the end of 2008.  AG Edwards and Morgan Stanley were added since our last post on '08 projections.  Based on the current price of the S&P 500, Wall Street strategists are looking for a gain of 13% by the end of next year.  Bear Stearns and HSBC are the most bullish, with price targets of 1,700, followed by Strategas (1,680) and Goldman and Citi (1,675).  Morgan Stanley is the least bullish with a price target of 1,525, but this is still 5.47% above the current level of the S&P 500.  Over the past few weeks, we've seen numerous downgrades of individual stocks across the board, but more heavily concentrated in the Financial sector.  It is somewhat curious that amidst the plethora of downgrades, all strategists are looking for gains in the S&P 500 in 2008, even with the Financial sector making up nearly 18% of the index.

22 Country Trading Range Charts

We recently created trading range charts for 22 countries that have trackable ETFs, just as we do with US Sectors.  When the price of the index moves into or above the red zone, it is considered overbought.  When the price moves into or below the green zone, it is considered oversold.  Currently, Australia, Brazil, Hong Kong, South Africa and Taiwan are trading at or below the bottom of the green zone, indicating extreme oversold conditions.  The only countries that have held up relatively well over the last week are India, Russia and Malaysia.

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The Grinch That Stole The Christmas Rally