Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: January 2018

THE DAILY EDGE (3 January 2018): Early Q4 Earnings Jump

Did you miss yesterday’s post where I show how inflation impacts valuations and the three risk factors?

  • profit risk: mainly tied to recession risk given current trends and tax reform. Low risk level currently.
  • inflation risk: the Fed is totally focused on 2.0%+ inflation and openly willing to allow some overshooting. Inflation going from 1.8% to 2.5% reduces the Rule of 20 “fair P/E from 18.2 to 17.5, increasing the potential downside to fair value from 13.0% to 16.5%.
  • confidence risk: this risk is now at its maximum given current confidence readings and rising interest rates. A confidence shake up could be nasty given that TINA is no longer in everyone’s mind as 2Y Treasuries flirt with 2.0% yields. Buying the dips may not be as “automatic”.

Yesterday’s post also included the December manufacturing PMIs. Here’s what was said of the trends in manufacturers’ selling prices:

  • U.S.: “factory gate charges rose solidly”
  • Eurozone: “December saw rates of inflation in output prices and input costs remain elevated (…) with average vendor lead times lengthening to one of the greatest extents on record.
  • China: “prices charged increasing at a solid pace.”

Yesterday’s post was also an introduction to this morning’s TEN explaining the new ratings featured in the sidebar.

Pointing up EARNINGS WATCH

Yesterday, Thomson Reuters/IBES published its first tally of Q4 earnings releases and it is very strong:

16 companies have already reported their Q4 results. Eight are consumer companies, 6 technology and 2 industrials. The beat rate is 81% with a +7.0% surprise factor (+2.4% on revenues).

Trailing 12 months EPS have jumped from $128.22 to $131.78 as a result, a 2.3% gain. Full year 2017 EPS will surely exceed the current estimate of $131.47.

The S&P 500 Index jumped 0.8% yesterday but the Rule of 20 P/E dropped as EPS rose (yellow line):

image

  • In 2017 the S&P 500 did not have a single monthly decline and has now risen for 14 months in a row. This has never happened before. How long can this trend continue?

Source: LPL Research (via The Daily Shot)

U.S. Bars Merger of MoneyGram, China’s Ant Financial An American national-security panel refused to approve a deal for China’s Ant Financial Services Group, an affiliate of Jack Ma’s Alibaba, to buy MoneyGram, in the latest sign the U.S. is tightening scrutiny of investment from China at a time of greater tensions between the two countries.

(…) In September, President Donald Trump blocked an attempt by Chinese government-backed Canyon Bridge Capital Partners to buy Portland, Ore.-based Lattice Semiconductor Corp. after CFIUS recommended against the deal.

Chinese conglomerate HNA Group Co. has been trying for some time to get approval from the panel to buy a controlling stake in SkyBridge Capital, the investment firm owned by former White House adviser Anthony Scaramucci. A $2.7 billion deal for China Oceanwide Holdings Group Co. to buy Richmond, Va.-based insurer Genworth Financial Inc. is also being held up by the committee.

The outlook for Chinese investment could get tougher yet if bipartisan bills introduced in November by Senate Majority Whip John Cornyn (R., Texas) and Rep. Robert Pittenger (R., N.C.) pass. The proposed legislation would further ratchet up scrutiny of foreign investment, taking aim in particular at Chinese technology deals. (…)

Left hug Right hug Fingers crossedNorth Korea Calls Hotline to South for the First Time in Two Years

TEN

TENTH YEAR

I started blogging on finance on January 3, 2009 after completely retiring from the corporate world.

  • To try to make sense of the mess the world was in.
  • To distinguish between facts, rumours, alt-facts and fake news.
  • To do thorough and objective analysis.
  • To publish the pertinent facts (new$-to-use.com) and analysis to ensure thoroughness, depth and objectivity.

On March 3, 2009, I concluded that there was essentially no more downside to the S&P 500 Index then at 666 (S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years), re-introducing the Rule of 20 (originally from Jim Moltz in 1986) demonstrating that this was a generational low. Since then, I have written, almost daily, presenting, discussing and analysing pertinent facts, criticized poorly researched and biased articles and opinions, while regularly offering and detailing my own analysis and views so that readers could make up their own mind and act according to their own risk aversion profile.

I make extensive use of the media and blogosphere worlds since their treatment of the info shapes opinions and, therefore, valuations, positively or negatively. My own work and analysis are open and free, totally clear of advertising, for anybody to use and I fully intend to keep it that way. Hopefully, Edge and Odds can help a few people better manage their financial investments.

Several years ago, a reader sent a $5.00 donation, apologizing for the token amount, explaining that he could hardly afford any more having been “wiped out” during the Financial Crisis because he had relied on media and brokers. He wanted to encourage me to keep writing objectively. Thank you Steven, quite an inspiration!

Many readers are kind enough to voluntarily send money to Edge and Odds. This is very welcome given that the Fed’s goal of 2% inflation has been amply exceeded in financial services ten years after the trough. All donations are reinvested in research material for the blog. In 2017, I subscribed to Lowry’s Research which has been doing intelligent and sensible technical analysis since 1938. More recently, I have subscribed to a few more services to complement my own work.

As a result, Edge and Odds has added depth to the ratings of financial markets as you might have noticed in the sidebar.

The Fundamental Rating section breaks down into

  • the Rule of 20 P/E rating (risk/reward ratio based on valuation)
  • the 120 Yield Spread (yield curve trends)
  • the earnings trends, really focused on trailing EPS
  • the inflation trends which not only impact valuations but also central banks behavior

Readers can now see the trends in the 2 important components of the Rule of 20 P/E.

I have added Technical ratings, largely inspired by Lowry’s work but also using other useful indicators and a rating on investor sentiment (from Ned Davis Research) which is a contrarian indicator currently at its most negative.

Hopefully, we will all benefit, especially as this bull, also beginning its tenth year, will surely make us live another historic moment.

TENTH INNING

With just about every sensible valuation parameters having reached near historical levels (I initially wrote “histerical”!), it’s fair to say that this game is now in overtime. It took ten years to get here, ten years during which we witnessed valuations going from generational lows to near historic highs (ex-the dotcom bubble), interest rates reaching 700-year lows (!) and investor sentiment going from extreme pessimism to extreme optimism. Bernanke’s gambit worked!

We are witnessing (and actually playing in) a truly historic game.

This is more akin to baseball than to most other sports. This overtime will likely not end in sudden death like in 1987. This bull seems to be of an enduring specie thanks to its strong sponsorship from central banks around the world. Slow inflation, rising profits and ample liquidity are feeding the beast. I don’t really know in what sequence the final three strikes will occur but I would venture this:

  • strike one: rising inflation and interest rates.
  • strike two: declining liquidity as CBs seek to rapidly normalize.
  • strike three: weaker profits either due to recession or a margin squeeze.

How many innings left?

Dunno. But I know this game will eventually end. I sure hope to be able to play a few more.

Contact: edgeandodds [at] gmail.com