Bespoke Investment Group

Bernanke Falls Victim to The Magazine Cover Curse

We've all heard about the Sports Illustrated cover curse, where athletes pictured on the cover suddenly hit a slump or develop an injury, but what about the Time Magazine cover curse?  Just one month after being named Time Magazine's Person of the Year, Fed Chairman Ben Bernanke now finds himself wondering exactly what his job is going to be come February.  How's that for a reversal?

Developed Countries and BRICs Take A Hit

Below we highlight the performance of the major equity indices for 82 countries since the close on Tuesday.  As shown, both the G-7 and BRIC countries sit at the top of the list of worst performers.  The countries that have held up better are located mainly in the Middle East, Africa, and Eastern Europe.

Combining the BRICs and the G-7, Russia has done the worst since Tuesday with a decline of 6.33%.  But Brazil and the US are not far behind with declines of more than 5%.  Italy, France, and Germany are all down around 4.75%, followed by Britain at -3.81%.  There has been lots of talk about China partly at fault for the global sell-off, but the country itself is down just 3.64% since 1/19.  Japan has by far done the best of the G-7 and BRIC countries over the last three days with a decline of just 1.62%.

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It's Not the Size

Typically during market pullbacks, the smaller cap stocks get hit harder than the large, blue-chip names.  This hasn't happened during the 3-day pullback we've seen since the close Tuesday.  When breaking up the S&P 500 into deciles (10 groups of 50 stocks) and calculating the average performance of stocks in each decile, the deciles of the biggest stocks have performed about the same as the deciles of the smallest stocks.  At least in this go-around, the sell-off has been of relatively equal magnitude across the board, suggesting that outside motives other than typical market characteristics are contributing to the decline.

What Caused the Drop?

There seem to be opposing views on what has caused the big drop in stocks this week after closing at new bull market highs on Tuesday.  So we've created a poll to see what investors think contributed the most to the declines.  Please take part in the poll below, and we'll report back with the results shortly.  Thanks!

What factor most contributed to the 5%+ decline from bull market highs this week?
	China/Strong Dollar
	Washington/Political Environment
	Valuation
	Overbought Market
	Earnings Season
	Economic Indicators
Free polls from Pollhost.com

S&P 500 Now At Oversold Levels

It took all of three days for the S&P 500 to move from 2 standard deviations above its 50-day moving average to 1 standard deviation below its 50-day moving average.  Will the Massachusetts election day not only mark a major turning point in Washington, but also a major turning point for the market? 

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Bernanke Confirmation Odds

The Intrade odds for Ben Bernanke to be confirmed by the Senate for a second term have dropped from about 95% down to 80% today.  This is a pretty big drop, but the money is still betting that he'll be confirmed.

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% of Stocks Above 50-Day Moving Averages

While the S&P 500 broke below its 50-day moving average today, the percentage of stocks in the index above their 50-days still sits at 56%.  Utilities, Telecom, and Materials are the only three sectors with less than 50% of stocks above their 50-DMAs.  Health Care has the most amount of stocks above their 50-days at 75%, followed closely by Energy at 72%.  To track this breadth indicator on a regular basis, subscribe to Bespoke Premium today.

 

 

Bespoke's Commodity Snapshot

Below we highlight our trading range charts for ten major commodities.  The green zone represents between 2 standard deviations above and below the commodity's 50-day moving average, and moves above or below the green zone are considered overbought or oversold. 

As the dollar has risen in recent days, most commodities have pulled back quite a bit.  As shown, oil has pulled back sharply from the top of its trading range to the middle of its trading range.  Gold and silver have moved down to the bottom of their trading ranges, while corn and wheat are now below the green zone.  Platinum has also pulled back, but it's still closer to the top of its range than the bottom.  Natural gas hasn't gotten hit as hard as other commodities, and it is actually up a bit today.

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Is the Rally Dead or Alive?

Last night, we asked readers whether they thought the S&P 500 would hold support at its 50-day moving average (DMA).  After nearly 500 votes, the majority of readers (55.3%) think the rally is over and aren't looking for the index to find support at its 50-day.

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How to Kill a Rally by Washington DC

On Tuesday the S&P 500 made a new bull market high, which put the index up 70% since the March 9th low.  In just two days, the folks in Washington have done a number of things to stop this rally dead in its tracks and put the recovery in question.  Ever since the Scott Brown Senate victory, politicians on both sides of the aisle have become stressed out about their personal futures, and they are now beginning to change their tunes.  In poker, they call this "playing on tilt," and right now it seems like many down in DC are on tilt.

First, there is now a worry that the Senate will have a tough time raising the debt limit.  There is likely no shot that this won't happen because its implications would be dire for the U.S., but nevertheless, it is a very unpopular topic right now and even a hint of a failure to pass this can get investors nervous.  Second, questions are surfacing over whether or not the Senate will be able to confirm Bernanke.  It is also likely that the Fed Chairman will eventually be reconfirmed, but investors are comfortable with Bernanke, and any doubts regarding his status are worrisome (after comments from both sides of the aisle today, maybe it isn't likely anymore).  Finally, the administration launches an all-out attack on Wall Street, seemingly acting tougher towards bankers than terrorists.  Many large-cap Financials took it on the chin yesterday (as shown below), and an attack on Wall Street is essentially an attack on the stock market since those working in the Financial sector are the ones making the majority of investment decisions.  (On a side note, we find it quite amusing that the government made sure it exited most of its positions in financial firms before announcing its new proposals.)  And given the fact that more than half of Americans own equities in some form or another, an attack on the stock market is an attack on Main Street.  Something needs to be done about "too big to fail," but rather than work together, the administration seems to have unilaterally decided on what needs to be done without consulting any of the parties involved.  Based on Barney Frank's comments yesterday, it also appears that members of Congress in the President's party were also left in the dark.  Add these three things up and you get a two-day decline of 3% for the S&P 500 and a break below the 50-day moving average this morning.  While there are some other things at work contributing to the declines (China worries, dollar rising), we believe the majority of it is due to what's going on in DC.

It is likely that none of the three things mentioned above will even play out, so we're treating the sell-off as a short-term correction that will offer buying opportunities.  However, it's never good to get investors riled up and leave them in a state of uncertainty, and that's exactly what Washington has done this week. 

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Will the 50-Day Moving Average Hold?

The S&P 500's sell-off over the last two trading days has brought the index within points of its 50-day moving average (DMA).  The last time the index traded below its 50-DMA was on November 5th.  Will this level provide support in this go around? What do you think? Cast your vote below.

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S&P 500 Back to Back Declines of 1%

The current market sell off marks only the fifth time since the March 9th low that the S&P 500 has had back to back declines of 1%.  In the chart below of the S&P 500, we show each of those prior occurrences as well as the additional decline the S&P 500 saw before making a low.  As shown, in two periods (3/20 and 3/30) the low was put in with the second day's decline.  In the other two periods, the S&P 500 saw additional declines of 3.6% (6/16) and 2.9% (10/26).

Earlier today, we put out a note for clients and looked at the market's historical performance following back to back 1% declines.  To view the report, subscribe to Bespoke Premium today.

 

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Initial Jobless Claims Break Downtrend

The weekly initial jobless claims number came in much higher than expected today at 482,000 versus estimates of 440,000.  As shown in the chart below, this jump up to 482,000 has broken the downtrend that was in place since mid-2009.

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Buffett Reconsidering His Views Towards Stock Splits?

In an interview on CNBC yesterday, Warren Buffett said that even though he was splitting the B shares of Berkshire Hathaway (BRK.b) on a 50-1 basis, this should not be interpreted as a sign that he now has a positive view towards stock splits.  However, based on the performance of Berkshire Hathaway that we pointed out yesterday and its follow-up performance today, maybe Buffet is reconsidering his views.  Over the last two trading days, shares of Berkshire have now rallied by 10%, even as the S&P 500 has seen its worst two-day stretch since November.

 
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The Split Heard Round the World

lnvestors have been clamoring for years and years for Berkshire to split its shares, whether it be the $100,000 A shares or the $3500 B shares.  After voting confirmed the split today, BRK/B shares will be divided into 50 smaller shares tomorrow.  This 50 for 1 split will convert shares to roughly $70.  Berkshire B shares were up $85 yesterday and are up another $130 today.  The bulls are clearly favoring the split and eagerly awaiting its arrival.

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Presidential First Years: Stock Market Returns

While his detractors will argue otherwise, based on his first year in office, Barack Obama has been a good friend to the stock market.  Since 1897, the 33% return in the DJIA during his first year in office has been better than every other President except FDR, who saw a first year rally of 96%.  While conventional wisdom generally says the market likes Republicans better than Democrats, history suggests otherwise - at least during a President's first year.  Since 1897, the median return of the DJIA during the first year of a Democratic President's term has been 22.6%.  Under Republican Presidents, however, the median return of the DJIA has been a much more modest 0.4%.

 
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Crazy Market

The major indices are approaching the -2% level on the day, which would be the worst day for the market in some time.  While some people thought a Scott Brown win would be good for the market, it appears to be doing the opposite.  The dollar is strong today on the Brown win, which is hitting stocks (especially commodity-related stocks) hard.  As shown below, the Materials sector is down 2.39% on the day.  The Health Care sector is down the least of the ten major sectors at -0.96%.  So while the Health Care sector has benefitted for the time being, the rest of the market is taking it on the chin.

After another leg higher to the 1,150 mark, the S&P 500 has been bouncing around that level for a couple of weeks now.  While the uptrend remains, could we be in store for another sideways trading range like we saw in November as the index struggled to get through 1,110?

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Health Care Stocks and Tuesday's Election

As Tuesday's sector performance highlighted, the prospects of a Scott Brown victory in the Massachusetts US Senate race put the passage of Health Care reform in serious doubt.  On the day, Health Care was the top performing sector with a gain of over 2%.  However, long before Scott Brown pulled ahead in the polls, the Health Care sector had already bottomed in terms of relative strength vs. the S&P 500.  As shown in the chart below, Health Care's relative strength bottomed back in mid-October when it became clear that any legislation that actually passed would be severely watered down.  For investors who were long the Health Care sector, the recent reversal in the polls just made an already good situation even better.

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Intrade Contracts For Health Care and House Ownership

After Scott Brown's unlikely win last night for the open MA Senate seat, we checked Intrade to see which way the odds have moved for various political scenarios.  After the special election, Intrade started up a new contract for whether "Obamacare" health care reform will pass before 6/30/10.  The specifics of the contract are that either the House bill, Senate bill, or any combination of the two bills would have to pass for the contract to pay out.  As shown in the first image below, the initial bid/offer stands at 25/30, so the odds are currently about 25% that a bill will pass by mid-2010.

The more stunning contract is whether or not the Democratic party will retain a majority in the House.  After the election last night, the odds have moved down to 54% that the Dems will maintain House ownership, even with a 40-member lead.   

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Key ETF Performance

2010 has gotten off to a great start across the board.  Below we provide the recent performance of key ETFs across all asset classes.  As you can see, there is lots of green and little red, indicating that almost everything is up over the last day, week and month.  The only ETF listed below that is down over all three time periods is Natural Gas (UNG).

Country "PEG" Ratios

Many investors use the PEG ratio as a valuation tool these days because it puts a company's growth prospects into perspective along with the widely followed price to earnings ratio.  The PEG ratio is the P/E ratio over the growth rate, and a PEG of less than one is generally considered good. 

In this regard, we have created "PEG" ratios for a number of countries using the P/E ratio of each country's main equity market index along with 2010 estimated GDP growth rates.  Just as with stocks, the lower the country PEG, the more attractive.  As shown, India has the best PEG out of the countries we analyzed.  It has a P/E ratio of 26.19 and estimated 2010 GDP growth of 8%.  While its P/E isn't as low as a lot of countries, its growth rate is very high.  China ranks second with a PEG of 3.66.  The US ranks in the middle of the pack with a P/E of 24.53 and estimated GDP growth of 2.6%.  At the bottom of the list sits Switzerland, Italy, and the UK, while Australia, Japan, and Spain have negative PEGs due to either a negative P/E ratio or negative estimated GDP growth.

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Bespoke's Sector Snapshot

Below we provide our 6-month trading range charts of the S&P 500 and its ten sectors.  Moves into or above the red zone are considered overbought, while moves into or below the green zone are considered oversold.  As shown below, the S&P 500 has been trading in an uptrend within the red zone for some time now.  It typically bounces back and forth from the bottom of the red zone to the top, and it is currently at the bottom and trending higher. 

The Health Care sector has taken off over the last week and is currently trading well into extreme overbought territory.  In this regard, it's hard to ignore what a Scott Brown victory in Massachusetts might mean for health care reform.  Aside from Health Care, most other sectors have pulled back slightly lately but still remain in uptrends.

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PKX: Another Buffett Bluff?

Following today's announced merger between Cadbury (CBY) and Kraft (KFT), some could argue that Kraft's largest shareholder, Warren Buffett, helped to get the deal done when he publicly voiced his concerns about not liking the deal.  Buffett's announcement that he wouldn't vote in favor of issuing more stock to get the deal done served two purposes.  First, it sent the message to CBY that they shouldn't be too greedy and hold out for a much higher bid from KFT.  Second, it helped to boost KFT's stock by close to 10% as investors became less concerned about KFT going out and spending too much to buy CBY.  With KFT shares 10% higher than they were on January 5th, the company could now use 10% less stock in the stock portion of its acquisition.

Today, Buffett is in the headlines regarding POSCO (PKX), another company in which he is a large shareholder (4.5%).  This morning Reuters quoted PKX's CEO as saying that Buffett was looking to buy more shares in the company "after missing the opportunity to buy them on dips last year when the global financial crisis depressed equity asset values."  In reaction to the news, the stock is trading 3.5% higher, partially erasing a one-week slide in the company's shares.  The only question for investors is, why would Buffett, or for that matter any other investor, be telegraphing his moves before acually making them.  Does anyone seriously believe that Buffett is going to go out and buy more shares in the company after publicly saying he liked the company?

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Bespoke's Morning Earnings Report

Our Morning Earnings Report starts up today for Bespoke Premium Plus subscribers.  Along with a summary of key statistics throughout earnings season, each morning the report will provide all of the US earnings reports that were released after the prior trading day's close and so far that morning.  Based on information from our databases here at Bespoke, this report highlights a number of potential trade ideas as well.

Please click the thumbnail below to view an example of our Morning Earnings Report from the Q3 '09 reporting period.  For investors looking to stay on top of earnings season, there simply isn't a better report out there.  Subscribe to Premium Plus to receive our Morning Earnings Report on a daily basis.