Bespoke Investment Group

Coming Soon: The Bespoke Report 2010

We're currently working on the third annual Bespoke Report that provides investors with a detailed look at where all asset classes stand and what to expect from them in 2010.  The Bespoke Report will also review this unique year and act as a history guide for when, where, why, and how global markets did what they did in 2009.  The Bespoke Report will cover in detail both international and domestic stock markets, economies, currencies, commodities, and fixed income.  It will also provide multiple stock screens that highlight potential investment plays for 2010. 

Quality research has never been more important, and Bespoke's unique products have quickly become must reads for major market participants as well as individual investors.  The Bespoke Report is the epitome of the research provided by Bespoke Investment Group, so sign up for Bespoke Premium today to make sure you receive our 2010 edition when it is released in the last week of the year.  Both monthly and yearly Premium members will have access to the report, so click here to sign up today.

We're currently working on the third annual Bespoke Report that provides investors with a detailed look at where all asset classes stand and what to expect from them in 2010.  The Bespoke Report will also review this unique year and act as a history guide for when, where, why, and how global markets did what they did in 2009.  The Bespoke Report will cover in detail both international and domestic stock markets, economies, currencies, commodities, and fixed income.  It will also provide multiple stock screens that highlight potential investment plays for 2010. 

Quality research has never been more important, and Bespoke's unique products have quickly become must reads for major market participants as well as individual investors.  The Bespoke Report is the epitome of the research provided by Bespoke Investment Group, so sign up for Bespoke Premium today to make sure you receive our 2010 edition when it is released in the last week of the year.  Both monthly and yearly Premium members will have access to the report, so click here to sign up today.

Large Caps Holding Market Back

Since November 9th, the S&P 500 has essentially traded sideways.  We broke the index into deciles (10 groups of 50 stocks) based on market cap and then calculated the average performance of stocks in each decile since 11/9 to see what impact a company's size has had on the market recently.  As shown below, the two deciles (100 stocks) of the biggest stocks in the S&P 500 are up just slightly (about 0.20%), while the rest of the deciles have averaged a gain of more than 2%.  Clearly the blue chip stocks have been holding the markets back during this sideways trading pattern.

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4.22 Citi Shares For Each Person in the World

A comment on Zero Hedge today offered up an interesting stat -- that there are 4 shares of Citigroup for each person on the planet.  Wow. 

We looked at all US stocks and found that Citi has by far the most shares per person on the planet.  With 28,260,770,000 shares outstanding and 6,692,030,277 people in the world in 2008, the Citi shares/person ratio is 4.22.  There are only four other US stocks that have enough shares outstanding to give every person in the world at least one share -- General Electric (1.59 shares/person), Bank of America (1.48), Microsoft (1.33), and Pfizer (1.21).  Bill Gates held 681,395,074 shares of MSFT in his last Form 4 filing.  That's enough to give everyone in the world a tenth of a share of MSFT just from his holdings. 

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Consumer Staples Sector Breaks Down

The S&P 500 Consumer Staples sector has really taken a turn for the worse in recent days.  Yesterday the sector broke below the uptrend channel that it had been trading in for more than six months, and today it broke significantly below its 50-day moving average.  At the least, the technicals point towards sideways trading action for the sector in the near term.

Below we highlight the performance of the stocks that make up the S&P 500 Consumer Staples sector since its recent high on December 14th.  As shown, Avon Products (AVP), Campbell Soup (CPB), SUPERVALU (SVU), Sysco (SYY), and Estee Lauder (EL) are all down more than 5%.

Will The Dollar Continue To Rally?

The US Dollar index has made a nice move higher since the end of November with a gain of about 5%.  The important part about this rally is that the index has broken the long-term downtrend that it had been in since early 2009.  As shown below, the recent action in the Dollar looks a lot like the start of the rally that occurred in the second half of 2008.  In late July/early August of last year, the Dollar gained a quick 5% out of the gate when it broke a multi-year downtrend.  The currency went on to gain 25% over the next 7 months.  Will the recent break of the downtrend be the start of a similar rally?

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Best Performing Stocks Since the Prior Market Peak

The S&P 500 is down 30% from its all-time high reached on October 9th, 2007.  The average stock currently in the S&P 500 is down 23% from its price on 10/9/07.  Just 77 stocks in the S&P 500 are up since 10/9/07, and below we list the ones that are up more than 10%.  These names have not only managed to stay afloat over a very tough period of time for the market, but they've shined.

As shown, priceline.com (PCLN) is up the most of any S&P 500 stock since 10/9/07 with a gain of 135%.  Southwestern Energy (SWN) is the only other stock up 100% or more.  Mastercard (MA), Amazon.com (AMZN), General Mills (GIS), Apple (AAPL), and even The Gap (GPS) are all on the list.  Every name that is up more than 10% since the market's peak back in 2007 is noteworthy, but none is more noteworthy than Ford Motor (F).  After everything that the US auto industry has gone through over the past couple of years, Ford Motor is now up 13% from where it was on the day the S&P 500 hit its record high of 1,565.15 on 10/9/07.  That's hard to believe.

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AAII Sentiment Survey: Fewest Bears Since May 2008

This week's AAII survey of investor sentiment showed that 42.1% of respondents were bullish while only 28.4% were bearish (lowest since May 2008).  The bull to bear ratio of 1.48:1 is the highest since July.  In the chart below, we highlight each week in 2009 where the AAII bull to bear ratio exceeded 1.4.  As shown, the only three weeks where this occurred were in late July and early August.

 

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Goldman Sachs (GS) Earnings Estimates Remain Strong

Up until mid-October, Goldman's stock price was moving hand in hand with its earnings per share estimates.  As shown in the chart below, this relationship between earnings estimates and stock price has diverged significantly since the stock peaked.  Goldman's stock has moved from about $190 down to $165, but its Q4 earnings per share estimate has remained steady and even increased slightly over the past couple of months. 

 

 

Energy Inventories Down More than Expected For the Second Straight Week

While oil was in the midst of a 10-day losing streak over the last two weeks, its price wasn't the only thing declining.  For the second straight week, the DoE announced that crude oil stockpiles declined by over 3.5 million barrels, and in both weeks the draw-down has been greater than expected.  Today's news has helped to boost the price of oil by over $2.  Crude oil inventories remain well above their historical average for this time of year, but they are near their lows of the year.  For bulls on the Energy sector, inventories are moving in the right direction.

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Bullish Sentiment for Newsletter Writers Hits a 2-Year High

According to the weekly survey from Investors Intelligence, bullish sentiment among newsletter writers is currently at its highest level since December 2007.  While this seems to conflict with our earlier post on the Yale Crash Confidence Index, we would note that the discrepancy isn't as wide as it seems at first glance.  As shown in the chart below, while the current level is the highest since 2007, the average bullish sentiment since 2000 has been 48.1%.  Additionally, there have been multiple occasions where bullish sentiment went into the sixties.  So this indicator still has a ways to go before we reach 'peak bullishness'.

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Bespoke on CNBC Wednesday (12/16) at 10:30

Bespoke's Paul Hickey appeared on CNBC's Squawk on the Street today at 10:30 AM ET to discuss the Dogs of the Dow.  For those who missed it, a link to the segment is provided below.

Health Care ETFs Catch Fire

As the Senate continues to strip out provisions that would give the government more control over the health care system, health care ETFs have caught fire and moved to extreme overbought territory.  The Health Care Providers ETF (IHF) has moved up the most and is currently trading more than 10% above its 50-day moving average.

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Breadth Gets A Little Better

The market recently made a new closing high, but it has yet to really break out and attempt to make another big move higher.  The market's comeback in recent days has been accompanied by a nice increase in breadth.  Currently, 71% of companies in the S&P 500 are trading above their 50-day moving averages.  This is a healthy number, and it doesn't yet signal an overbought market that's due for a pullback either.

The Energy and Financial sectors are the only ones where less than 50% of stocks are trading above their 50-day moving averages.  If these sectors can rebound, the overall market will likely make a really nice move higher.  The bears, however, are interpreting the weakness in these two sectors as a sign that the overall market will soon follow suit.  Industrials, Health Care, Utilities, and Telecom currently have the highest percentage of stocks trading above their 50-days.

 

Yale's Crash Confidence Index

The Yale School of Management conducts a number of sentiment surveys each month on individual and institutional investors.  One of the surveys asks, "How confident are you that there will be NO stock market crash in the next six months?"  Based on the results of the survey, the Crash Confidence Index is the percentage of respondents who think that the probability of a crash is less than 10%.  As shown below, the Crash Confidence Index peaked at about the same level for institutional investors in April 2006 and February 2007.  The Index peaked for individual investors in April 2006.  As the market got worse and worse in 2008, less and less investors thought that a crash was unlikely.  At the bottom of the market in early 2009 (after the market essentially did crash), the Crash Confidence Index hit its lowest levels for both institutional and individual investors, meaning that hardly anyone thought the likelihood of a crash was less than 10%.

The Crash Confidence Index is currently around 30% for both individual and institutional investors.  As shown in the chart, this is not indicative of complacency at all, as it is well below the peak readings seen during the last bull market.  While some sentiment indicators show a lot more bulls than bears right now, this one shows that a lot of investors are still worried about an imminent market decline, which in our view means the market is still climbing a wall of worry.

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2009 Changes in Market Caps

Below we highlight the percent of world stock market cap that various countries make up and how the numbers have changed this year.  As shown, the US remains the biggest country with its stocks making up 29.61% of world market cap.  This is more than three times Japan's representation in second place at 7.68%.  At the start of the year, the US had 32.75% of world market cap, so its representation is down 9% in 2009 even though US equity markets are up.  At 7.27%, China overtook the UK in third place in 2009 and is closing in on Japan.

Brazil's percent of world market cap increased the most in 2009 at 58.2%.  Its weighting has gone from 1.84% to 2.92%.  Indonesia, India, Australia, Turkey, China, Russia, and Taiwan have all seen their weightings increase by 25% or more this year.  On the flip side, Japan has lost the most market share of the developed countries, declining from 10.28% to 7.68%.

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Comparing Financials and the Nasdaq

Many people have compared the decline in Financials during the most recent bear market to the decline in the Nasdaq when the Internet bubble burst in 2000.  Below we highlight a chart showing the decline from their peaks for the Nasdaq and the S&P 500 Financial sector.  The x-axis shows the number of trading days following their peaks.  The Nasdaq peaked on March 10th, 2000, while the Financial sector peaked on February 20th, 2007.

The Nasdaq bottomed 647 trading days after it peaked for a total decline of 77.93%.  The Financial sector bottomed 515 trading days after its peak and declined 83.96%.  As shown in the chart, the Financial sector has bounced back more quickly than the Nasdaq did immediately following its bottom.  After the Nasdaq bottomed, it traded in a solid uptrend for the next five years before it entered another bear market when the crisis hit in late 2007.  If the Financials take the same track as the Nasdaq did, there will be a lot of happy investors out there.

 

The Obama Bull

What a difference a few months makes.  As most investors were painfully aware, President Obama's first term in office certainly got off to a poor start.  On his inauguration day, the DJIA declined 4%.  This was the worst performance on the day of a Presidential inauguration since at least 1900.  Things didn't get much better soon thereafter.  Forty-one days into his presidency, the DJIA's performance was also the worst for any US President since 1900.  To many, this was a sign that the market was not comfortable with his policies and their ultimate impact on business.  Others argued that the declines were the result of the problems that Obama inherited.  As we noted back in April, "Both the critics and supporters of the President have valid arguments.  With the passage of time, however, President Obama's ownership of how the market unfolds (good or bad) becomes less debatable, and as it stands now, he is not off to a good start."

As time has passed and Obama's ownership of the economy has become less debatable, the market's performance has seen a major reversal.  There is still a little more than a month left in his first year, but as of today, the DJIA's 32% gain is on pace to be the second best first year return for a US President since 1900.  The only President with a better first year return was FDR who oversaw a gain for the DJIA of 96.1%.  While there are many who argue that Obama's policies will hurt business and the economy, so far the market is saying that his critics are wrong.

Click chart for larger view.

 

One Year at Zero Percent

Tomorrow marks the one-year anniversary of the historical decision by the Fed to cut its target rate to 0%-0.25%.  As shown in the first chart below, this is the lowest the rate has been going all the way back to 1934 (prior to 1971 the Discount Rate is used). 

The Fed has kept rates unchanged now for 364 days.  This is a very lengthy time period, but it's not without precedent.  Prior to 1970, the Discount Rate remained unchanged for years at a time.  The longest period where the Fed Funds Rate was left unchanged was 552 days in 1997 and 1998.  For the current period to break the 552-day record, the Fed would have to leave rates unchanged at 0% through at least June 22nd, 2010.  The Fed has signaled that they don't plan on hiking rates before then, but with inflation numbers coming in hot this morning, the market may force the Fed's hand sooner than that.

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International Long Term Interest Rates

While long-term interest rates in the US are on the verge of breaking out to multi-month highs, a look at long term rates in other countries/regions shows that the rest of the world isn't following suit.  As shown below, 10-year government bond rates in the US (3.60%) are currently well above the Euro region (3.25%) and Canada (3.42%) but still below UK rates (3.88%).

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Junk Bond ETF Makes New 2009 Highs

Along with the S&P 500, the junk bond market made new bull market highs as well today.  As shown below, the high yield bond ETF (HYG) had been trading in a very tight range over the past few weeks.  Last week it began to pick up, however, and today it broke out of its range to close at a new 2009 high.  With both stocks and junk bonds making new highs today, the bull market uptrend has been confirmed once again, paving the way for another leg higher.

For those looking for stocks to buy, today we put out a report highlighting a number of long opportunities -- available to Bespoke Premium members only. Sign up now!

 

S&P 500 Hits New Closing High For 2009

With little fanfare or hoopla, the S&P 500 put in a closing high for 2009 today after trading and remaining above 1,110.  As shown at right, this level has acted as resistance over the last several weeks.  Longer term, however, 1,113 is a level that the S&P 500 has spent plenty of time above or below over the last ten years.  The next test for the S&P 500 stands at 1,120, which represents the exact mid point between the prior bull market's high and the most recent bear's low.

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Default Risk Continues To Fall

Below is a chart of an investment grade CDS (credit default swap) index coupled with the S&P 500 Financial sector.  During the financial crisis, default risk spiked across the board as investors worried that the entire system could collapse.  As shown in the chart, CDS prices have declined significantly since the March 9th market low, however, and we're currently at levels not seen since early 2008.  While default risk just made a new low, the Financial sector has not made new 2009 highs.  The bulls are hoping this drop in CDS prices is a leading indicator that means financial stocks are on the verge of a resurgence.

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2010 Country GDP Growth Estimates

Below we highlight consensus 2010 GDP growth estimates for 28 countries (+Europe) based on Bloomberg's survey of economists.  As shown, all but one country is expected to see GDP growth in 2010.  Spain is the lone country expected to see a decline in GDP at -0.40%.  China is expected to see the most growth by a wide margin at 9.40%.  Indonesia and Singapore rank second and third as 5.55% and 5.50% respectively.  The US is tied with Canada for the best GDP growth estimate (+2.6%) of the G-7 countries.  European G-7 countries and Japan are expected to see growth in the 1%-1.5% range.

Our research shows that in the four quarters coming out of a recession, the US has averaged GDP growth of 5.4%.  With a consensus estimate of +2.6%, economists are clearly expecting a weak recovery in the US.  However, does anyone remember a time when economists weren't expecting a weak recovery?

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