August 5th, 2014
Sungarden Investment Research Article of the Week
by Rob Isbitts, Sungarden Investment Research
Editor's Note: This article was originally posted on 18 July 2014
A while back, we published a list that we continually update at Sungarden. We call them Red Shoots. They are essentially the opposite of a set of conditions which gave investors hope that not all was lost, in the throes of the financial crisis of 2008. Those reasons for optimism were called “Green Shoots”, like a patch of short green grass about to show up on the dirt area you will one day call your lawn. Red Shoots are the opposite: they are the reasons for extreme caution when the market and many investors seem to be forgetting that security prices are not a one-way proposition. They can go down as well as up. Here is the current list, with sources in parentheses, where appropriate. As always, we welcome your additional ideas here. You can be alerted to changes in this list by contacting us at www.hedgedinvesting.com.
- About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months (Bloomberg and the Investment Company Institute). That’s also a reversal from the five years through 2012, when $300 billion was withdrawn. Retail investors are notorious for buying high and selling low.
- The Options Volatility Index (VIX) recently bounced off a seven-year low.
- Smallcap stocks, as indicated by the Russell 2000 Index, are separating from the overall market and heading down from all-time highs). That index recently traded at 80x earnings, an astronomical valuation level. This could portend a lower appetite for pursuit of return going forward.
- Job data produces an apparent smokescreen. In June, 523,000 full-time jobs were eliminated, leaving full-time employment 3.4mm below its precrisis level (Macro Mavens).
- Credit-card borrowings up $19 billion — even as growth in spending (excluding automobiles and gasoline) is slowing (Federal Reserve). Fed money-pumping that fails to spur the economy on is often a prelude to a recession.
- Non-revolving credit (often in the form of car loans to “sub-prime” borrowers) grew at over 9% in the last year. Shades of the credit crisis?
- Weaker companies are getting easier access to loans with minimal “covenants” or conditions attached to them. The shift recalls a boom era for loan deals leading up to the financial crisis (Wall Street Journal).
- Retired General and ex-NATO commander Wesley Clark registered $33 million worth of “The Grilled Cheese Truck” stock with the SEC. The company paid him $472,000 last year despite losses that are more than 2x its revenue. Investment stories like these tend to accompany market tops.
- The S&P is trading at 19.6x earnings vs a long-term average of about 15.6x.
- Total Market Cap to GDP is 122% as of 07/14. A rating in the range of 75%-90% indicates a fairly valued market.
- Fidelity wants to offer more initial placements of IPOs directly to its online brokerage customers
- Foreign investors hold a record $5.96 trillion of U.S. Treasury debt, more than double their stake of six years ago. In a recent Treasury Bond auction, Indirect bidders — a class of investors that includes foreign central banks and institutions – purchased 53.2 percent of the debt, the most since February 2006, according to Treasury data.
Bottom-line: With stock indexes just below all-time highs, bond rates at generational lows and Global Central monetary policy akin to irresponsible parenting, keep your eyes open.