Stock Mkt Movements Id'ing Key Data & Inflection Points

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Full Title: Stock Market Movements - Id'ing and Interpreting Key Data and Inflection Points
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"They" say Buy and Hold is dead and to some degree I agree, however those who bought at or near the bottom of this latest bear market plunge in early March 2009 and held on and did not trade out are miles ahead of the flippers who could not see the Armageddon trade was done and a recovery was being priced into the market.

As a personal note, I was a buyer of the market at the lows picking up ultra etf's such as SSO in the low 14 price area. What helped me id the bottom was a valuation metric I use along with other markers such as Policy. It took a lot of nerve to buy in the week ending 3/6/09 and the day of the actual bottom 3/9/09.

Identification of key inflection points at tops and bottoms of markets is crucial to the success of all investors.

The question is what data points are key to determining market turning points? There is no magical answer which fits all market occasions, but it is important IMO to be vigilant in the following Major areas

Major Data impact areas:

- Earnings Growth
- Business Cycle and macro economic growth
- Yield Curve
- Fed monetary policy
- Money Flow
- Policy changes - whether Financial, Accounting or Political. note: The broader scope for Political is the assessment of competence and its impact.
- Exogenous Events - similar to what Taleb refers to in a broader sense as Black Swans
- Valuation
- Bubble Watch - "the Next one" in the boom/bust cycle

ancillary considerations: herd mentality (momentum players) and TA (Technical Analysis)

The idea of this thread is the discovery, assessment, and sharing of market moving data. By no means is this an attempt to blow smoke up anyone's hind quarters to say all the answers are here. Going forward, I will be offering my ideas re: the above Major Data impact areas. Others are encouraged to do the same and to add to the Major Data impact area watch list and commentary where appropriate. No one person can sniff out all the opportunities, collectively however the odds begin to stack in our favor.

If value added, the discovery and look ahead parts of the above are the most intriguing and exciting.

Stay tuned.

[rffrydr]

Immigration is there for one reason and one reason only, save Harry Reid's azz. He's the Administration's point-man as Senate leader and it's a nice old Bush plank that stands to split republicans.
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Today is the Tomorrow you worried about Yesterday!

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The Greece fire on Tuesday (causing oversees mkts to tumble and our own mkt to swoon over 200 pts) obscured the positive news of the day IMO, where Obama announced the Bipartisan Deficit Commission to be co-chaired by Erskine Bowles (former White House Chief of Staff) & Alan Simpson (former Republican Senate Whip). During the announcement Obama chided those out there ( as I posted here re: CNBC?s Harwood analysis ) trying to make political hay or news re: Obama's concept of everything being on the table regarding deficit reduction, stating he is not going to play the game of ruling things in or out and will let the commission have free reign to explore and develop their approach and final report. Obama's intro. covered the base issue, before he started on the job he was handed a 1.3 Trillion deficit from the prior Bush administration with a projection of an over 8 trillion add to the debt.

The theme again competence at the top (President Obama) rules and is a positive for the market.

Obama is supposed to sign today an executive order establishing the bipartisan National Commission on Fiscal Responsibility and Reform (previously known as the deficit commission).

Fiscal responsibility is a big deal.

We do not want to follow Greece's path. BTW if nothing else the Euro zone should know the problem of contagion from the '98 Asian contagion but also from what happened here with Lehman Bros. the thread which unraveled.

Fin. Reg and Energy are important themes left to be accomplished this year by this administration. I still say they need to back off immigration reform till next year although I think I have a solution which may fly - more later on this on the political thread.

Go Bulls 1230 or bust

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verbiage from S&P analyst @ 4/7/10 update to 2010 S&P GICS earnings:

Better, but still not a market for normal comparisons; need to look for trends in the recovery cycle and less Y/Y

Q1,'10 sales up 8.3% over same issues for Q1,'09 and up 73.2% for Operating; Indexed values are 7.1% and 69.6%

Forward growth (sales) dependant on spending ->dependant on the economy (jobs)

Q1,'10 Oper margin estimated at 7.17% vs. 7.27% for Q4,'09 and 4.56% for Q1,'09

Q1,'10 As Rpt margin estimated at 6.62% vs. 6.43% for Q4,'09 and 3.39% for Q1,'09

Price-to-sales estimated to be 1.26 vs. Q1,'09 low of 0.80

Howard Silverblatt
S&P Senior Index Analyst

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Op. earnings est. still at 78.12
Top down Op. earn est. still at 67.61
As reported earnings est. still at 62.09

remember the Hester article excerpted here

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Byron Wein, in my prior post referenced videos, is expecting 5+% GDP growth, while I am expecting about 3.25% for the year. I already discussed the relationship between GDP and earnings so no need to beat that dead horse. Wein is expecting a run to 1300 level on the S&P with a finish to the year about where we started whereas I think we are stretched to the top of the range now based on my GDP and earnings expectations calculations, which is to say I expect a correction along the way of 5 to 10% followed by base building and a modest rise as we work our way thru the year. Earnings, rising interest rates, end to quant easing, mid-term election uncertainty are all factors along the way.

What can we learn from a past recent boom bust cycle with an Armageddon trade included (911) say the period from the 2000 tech. bubble to about 2004.

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The following analogy if it holds up may be a guide to what we can expect this year although there are vast differences in the cures for the respective trade the analogy still may hold true.

The trade is an Armageddon trade the first of which started back in 2000 as a normal bear market correction but was accelerated to the Armageddon trade by the attack by Al Queda on the US @ 9/11/01. As we look at the rally off the bottom of this one @ 10/09/02 spx776.76 which led to spring of 3/11/03 spx800.73 about 9 days before the US went into Iraq, which was the 2nd chance last train out, we started to hit some head-winds in the 1200 area and at 12/31/04 we were at spx1211.92 (up 51.35% from 3/11/03 and up 56.02% from the low @ 10/9/02. The next year 12/31/05 spx 1248.29 we only advanced about 3%.

So what...

well maybe if you look at where we are today recovering from the Credit Collapse Armageddon trade of 2008 & 9 vs. where we were at the bottom on 3/9/09 & $SPX at 676.53 and we see that same huge run a year out at 3/9/10 $SPX at 1140.44 or up 68.57% from the bottom and as of today 1194.37 or up 76.54% we seem to be at that same place nearing the 1200's on the spx.

Although a lot depends on earnings, the point is after the huge run, a year out from that huge gain we only advanced 3%. The Bove video on bank earnings seems to bolster my argument for high expectations built into current prices which are disappointed which generally leads to a correction of sorts.

The low hanging fruit has already been picked.

Upcoming earnings will give us a clue. Is the consumer back and spending or holding the purse strings a little tighter this time?

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Major Data impact area: Earnings Growth & Valuation

The question of valuation can be answered by assessing S&P earnings expectations and economic growth. There are two ways I use to get a handle on S&P earnings estimates which are:

1) backing into S&P earnings growth from a macro (top down) basis using the broad measure of the country's output or GDP

and/or

2) utilizing adjusted S&P Operating earnings estimates data (bottoms up).

I believe the current answer is in the view of the macro economy as measured by GDP and earnings growth (top down). A rational market would be unwise to use the standard measure of bottoms up Operating earnings estimates as a gauge until the employment stats come back to the normal range since this is an important component from the expense side but also from the demand or top line side. Possibly a more rational number to use would either be an adjusted op earnings figure or a top down Op earnings view.

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1) S&P Index projection using GDP:

A while ago I caught a stat thrown out by Michael Pinto
http://www.cnbc.com/id/15840232?video=1293423532&play=1 and the part I reference if the link still works starts at 3min45sec into the 10 min. clip where Michael Pinto of Global Investment Advisors said earnings growth rate is usually about 6 x GDP. I tested this out on data going back to 1988 and got an average of 4.55 so the 6 number is not out of line depending on the time frame of data used by Pinto.

My estimate of 2010 GDP is in the range of upper 2's to lower 3's with the front end of the year being hotter (higher in GDP growth) than the back end as fiscal and monetary stimulus run out or is withdrawn.

So let's say we project a 3.25% 2010 GDP, using the 4.55 to 6 multiple to get an earnings growth range we get 14.7875% to 19.5% which translates to S&P earnings range of 65.27 to 67.95. Throwing on a 17.5 multiple we get an S&P range of 1142.19 to 1189.09 which is about where we are now.

As a check to the above we can compare to the 2010 S&P top down Operating Earnings estimate which @ 3/31/10 stands at 67.61 which is spot on close to the top end earnings range @ 67.95 which I projected from GDP.

So what's the problem??? Well nothing unless you consider the market has in front of it a much higher number for S&P Operating Earnings as we are hearing from some of the analysts trotted out on CNBC and as seen below.

2) S&P Index projection using adjusted S&P Operating earnings

Here is what we know:

@ 3/31/10, 2010 S&P GICS Operating earnings estimate = 78.12 <= this could be a big problem for the market if it turns out this is too optimistic and the market attempts to run to the implied index level.

For example if we put a multiple of 16.5 to 17.5 the implied range of the S&P would be between 1288.98 and 1367.10

Note that 2009 GICS Operating earnings = 56.86

The potential problem => The implication re: growth of 2010 over 2009 earnings is, earnings would have to grow by 37.39% to meet this optimistic 2010 estimate (78.12-56.86)/56.86 unlikely for 2010 IMO.

As discussed above, if Pinto's relationship holds, a 37.39% growth rate would imply a GDP of roughly 6.23% annual which is a huge number to get to considering the macro environment (granted we got to the 5.6% level at 4th Qtr 2009 but with some help from less than anticipated draw downs of inventory - adjust for this hocus pocus and we get a mid 2 GDP).

My own personal view is the 78.12 is a bit on the optimistic side considering the macro economic issues facing the US economy. The macro stats are out there for anyone to see from GDP projections, to headline Unemployment stuck in the upper 9% range (upper teens if you look at the shadow unemployment figures), to Boomers retiring and will naturally spend less going forward as a function of age.

Anyone who tracks S&P earnings has seen their projections generally start out very optimistic and as the year progresses they begin to ratchet back. A 10 to 15 and sometimes 20% ratchet back on earnings projections is not unusual. Who knows S&P may be spot on for 2010 however if they are wrong by the anecdotal historical ratchet down based on observation, the result would be 70.31 (with a 10% adjustment) to 66.40 (with a 15% adjustment). This would put the growth of earnings over 2009 at between 16.78% and 23.65% which translates to an S&P index range of 1162 to 1230 if we throw a high end 17.5 multiple on it. Note from a recent historical perspective coming off the 2nd chance bottom in 2003, the market saw a 23.75% rise in earnings to 2004 which is a nice coincidence since the top end 2010 earnings growth projection I just calculated using the anecdotal ratchet back adjustment technique was at 23.65%

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The bottom line is both of the above methods I use seem to indicate we are at or near the upper end of the range on valuation and that caution is in order if the market attempts to blow out on the top end considering the head-winds and look aheads.

Accumulating stocks on pull backs would make sense considering my prior post regarding what time it is - and the economic clock http://www.marketthoughts.com/forum/viewtopic,p,37736.html#37736 and the boom/bust cycle.

Besides having fiscal and monetary policy on our side going forward, we have a competent administration. The last competent administration was under Clinton, and before that Reagan (although the Laffler curve I think has pretty much been discredited but we got a big end of cold war dividend, tax cuts not paid for by corresponding spending worked until they didn't).

[nodoodahs]

Dueling definitions:
http://en.wikipedia.org/wiki/Inflection_point
http://mathworld.wolfram.com/InflectionPoint.html

The mathematical definition predates the current vernacular usage by several centuries ...

If you search "inflection point" on Google you'll find that the top two, and three of the top four, definitions are mathematical and not the poorly-thought-out slang usage so common today.

That's all I have to say on that subject ...
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

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One of the most important segments of S&P earnings is Financials.

For 2010, S&P estimates a 199.94% increase in this component of the S&P in its current $78.12 bottoms up Operating earnings estimate.

For those interested, xxx Bove on Bank earnings:

http://www.cnbc.com/id/15840232?video=1462403603&play=1

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[nodoodahs]

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I caught a little bit of Wien this am.

For those interested who missed you can view the discussion re: Wien's 2010 surprises here: http://www.cnbc.com/id/15840232?video=1462405837&play=1

more market insights here: http://www.cnbc.com/id/15840232?video=1462391248&play=1

What caught my ear was Byron feels the market has a little more room to run but feels the market will finish the year where it began. He cited some important head-winds.

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[rffrydr]

That natural cycle is getting screwed up inasmuch as the stocks that are supposed to reflect it are concerned. When finance, the extreme example for example, is nationalized then unnationalized; marked to a market that doesn't exist at both its highs and lows....or, autos, where production is just shut off, you get rallies when you shouldn't get rallies and cyclically-adjusted PEs turned every which way.

Every one (but the chinese) is a bond bear. That then begs the question of the cycle itself....and who's cycle is it really anymore, anyway
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Today is the Tomorrow you worried about Yesterday!