Diary of a Financier

Bull v. Bear: Checklist edition

In Capital Markets on Thu 21 Nov 2013 at 11:07

In this exercise today, I wanted to leverage a great checklist Barry Ritholtz (The Big Picture) offered some months ago.  Mr. Ritholtz concisely advised that investors should really only focus on five inputs–the only things that really matter: Valuation, trend, inflation, earnings, and credit.  (Explanations below.) To wit, I thought I’d quickly evaluate each item to give myself a quick appraisal of the stock market…

~~~~

  1. Valuation ()- How are stocks valued? Are they cheap or are they expensive? (Keeping in mind that cheap stocks can get MUCH cheaper, and expensive stocks can get MUCH dearer)
    • Fundamentals are pretty fairly priced, but I’ve done the multiple analysis to make the case that there’s little upside and a razor-thin margin of safety for SPX in 2014–a poor risk/reward ratio
    • The secular trend in PEs is negative, with lower highs & lower lows
      • $SPX fundamentals– PE 17.82x (ttm), 16.02x (FY13e), PE 14.5 (FY14e); PEG 1.33; PB 2.49; PCF 9.16
  2. Trend (+) What is the economy doing in sum? Is it expanding or contracting? What is the market doing—rising, falling or range-bound?
    • GDP growth should expand in 2014 at the fastest rate since the Clinton-era, as the fiscal drag wanes, state & local governments arise from austerity, and US export markets come back on-line
    • SPY weekly (1998-2013)SPX is in [at least] a cyclical bull trend, most recently taking a parabolic path higher, likely entering the earliest stages of Euphoria
  3. Inflation (+)- What is the overall trend in inflation? Are prices rising or falling or stable—and how rapidly?US Inflation measures- CPIs (2013.10)
    • Inflation (PCE) is stable, but very low
    • The Fed’s communications indicate that they’re likely to target higher than optimal inflation over the coming years in order to achieve full employment
      • October CPIs (y/y annualized)- Core @ +1.0%; Headline @ +1.5%
  4. Earnings (Push)- Are companies able to grow their top and bottom lines?
    • There’s a probability that sales & net incomes grow, but I have to call this a pushSPX fundamentals- source of EPS growth (2013q3):
      • Rising rates threaten the margin gains that have been largely responsible for increasing EPS
      • At the same time, a resurgence of both US export markets & domestic CapEx* can generate revenue growth
  5. Credit ()- What is the cost and availability of credit?
    • Credit is widely available and silly cheap, so it’s hard to imagine the trend materially improving
    • Regulators are clamping-down on excesses by explicitly asking banks to tighten lending standards (I & II)
    • A QE taper combine with the extension of ZIRP will steepen the yield curve, encouraging investment*

~~~~

I count 1 push, 2 negatives, and 2 positives.  Quantitatively, that’s an aggregate push.

If I had to make a qualitative conclusion from this isolated exercise, I think it reinforces the intermediate term bear case and the long term bull case I’ve been touting–but I’m not here to make subjective guesses that reinforce my preexisting biases.

More holistically, considering embedded market expectations, I’d have to say the risks on the horizon are to the downside for investors.  2014 GDP growth is expected to be strong; earnings growth is expected to be massive (even controlling for downward revisions); credit is expected to remain readily available; stock trends are expected to continue trending (according to a low $VIX @12.7–admittedly a coincident indicator).

That’s a bit fuzzy, I know, but I assure you it’s rather data driven–as on display in all the analyses I’ve done in this Diary’s entries and the curating in its Top Newsstuffs (#Bullish and #Bearish sums).  Thus, the “Bearish” tag on this post pertains to the intermediate term, in which perceptions should recouple with realities–probably to open the new year 2014 at this point…

–Romeo

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