Thursday, October 16, 2014
How much worse can it get? Is it time to buy Index Funds Again? We are Buyers
The chase by Frances Horodelski:
How much worse can it get? CNN’s fear/greed index (which is a
compilation of such momentum indicators as the VIX, breadth, put/call
index, junk bond demand, safe haven demand, market momentum and stock
price strength) hit zero yesterday afternoon and sits at 1 before the
market opens.
The likes of Warren Buffett and Sir John Templeton have often commented on being fearful when others are greedy and greedy when others are fearful. Wise words that are difficult to live by in the heat of it all. A quick recap of yesterday’s wild action as the elevator went down and up a few times ending well into the red but well off the lows: Volume picked up significantly (to 944 million shares, the largest volume day since the one billion plus day on September 19.
The options pits were ridiculously busy with 7.4 million contracts traded (which represents 740 million shares) of which almost 75% were puts! There might have been some relief yesterday that markets closed off their lows but that relief is giving way to pessimism this morning.
bnn.ca.
The likes of Warren Buffett and Sir John Templeton have often commented on being fearful when others are greedy and greedy when others are fearful. Wise words that are difficult to live by in the heat of it all. A quick recap of yesterday’s wild action as the elevator went down and up a few times ending well into the red but well off the lows: Volume picked up significantly (to 944 million shares, the largest volume day since the one billion plus day on September 19.
The options pits were ridiculously busy with 7.4 million contracts traded (which represents 740 million shares) of which almost 75% were puts! There might have been some relief yesterday that markets closed off their lows but that relief is giving way to pessimism this morning.
Post-close yesterday disappointments from the likes of Netflix, eBay, Wal-Mart’s outlook and the re-focus on the PIGS has traders on their back foot this morning with sagging indices everywhere. The much awaited correction is in full force with 10% or more declines in Japan, Australia, Germany, Paris, the FTSE100, Toronto and Russell 2000. The big cap generals of the Dow and the S&P 500 are playing a safer haven role – but underneath the averages – there is a feeling of collapse. About one hundred of the S&P 500 companies are down 10% or more year to date and 78% of the NYSE Composite is down 10% or more from 52-week highs. Bright light: the Russell 2000 closed UP yesterday and was up the day before too. For perspective, the small cap space was the first of the major indices to peak (March 4). Will it be the first to bottom?
The earnings cycle continues with results from companies like United Health (beat and raise although revenue a slight miss), Mattel (miss), Baker Hughes (miss) while AbbVie comes out against the Shire deal due to the Treasury Department’s adjustments to tax laws which made the acquisition less attractive. Chesapeake Energy announced a Southern Marcellus and Utica Shale asset sale for $5.375B. Goldman Sachs has reported a beat on its earnings with a nickel dividend hike (as expected) – stock is down 2%+ and may reflect among other things sequential decline in many segments – although that feels like an excuse. Apple is having its new iPad launch today and BNN will cover it live on bnn.ca.
The time for complacency has passed and time to pay attention folks. Remember with leveraged hedge funds potentially in serious unwind mode and the margin clerks knocking, selling can be indiscriminate. But, if you’re not leveraged, have cash and see a bargain or two (especially in the face of relatively decent earnings) is it time to be brave? That will be our question today.
bnn.ca.
Wednesday, October 15, 2014
"October is a horrible month" Frances Horodelski
October is a horrible month
The chase by Frances Horodelski:
Top stories on BNN.ca
Canadians paying down mortgages at a much faster rate than expected
Oil producers face price war over slowing global demand
Second Texas healthcare worker tests positive for Ebola
Canadians paying down mortgages at a much faster rate than expected
Oil producers face price war over slowing global demand
Second Texas healthcare worker tests positive for Ebola
On this day, 60 years ago, a storm made its way through Toronto. It wasn’t just any storm – it was a Hurricane named Hazel. By the end of it all that month in 1954, 81 people were dead and more than $1 billion in damages was incurred. October is a horrible month.
If you’re wondering, in the U.S., 10% corrections do not always become 20% bear markets. According to the data, there have been 27 corrections of 10% while there have been only been 12 bear markets since WWII. Of course, this is for the S&P 500. On the TSX, on average each of the seven bull markets since 1950 have had three corrections. From where do we mark the beginning of this bull market? Do we use the bottom in March of 2009 or after the 21% decline in the October 2011 lows. Since the latter, there has been one classic correction (down 11% in 2012) and another just under 9% drop. We’re down from 10% from the September 3rd high.
The other major story for Canadians is the drop in the price of oil. Why? Well, the Saudis don’t particularly care to be the disciplined producer right at the moment as they are focused, as some say, on giving pain to Vladimir Putin or getting back at the Americans for perceived injustices. Others suggest that those who play with paper barrels (that is, the non-commercials) have been out of the game with the short position on Brent, for example, the highest in three years and speculative longs collapsed (thank you Sprott’s Eric Nuttall). Right now we are in a shifting season of seasonality, and sentiment on oil has plunged (Bloomberg’s bullish sentiment now only 29%, bears 50%). Demand numbers are actually stronger than most would think from the price and the sentiment. This is a topic of conversation all day for BNN. Energy stocks make up 23.7% of the weight of the TSX and was 27.2% when the sector peaked in June. They are technically in bear territory down 20.13% versus its June 16 peak. Wilbur Ross – where are you?
In the news, Toyota recalling 1.75 million cars, Shire crashing as AbbVie is looking to reconsider its offer at an October 20th board meeting, Bank of America reported its results when adjusted for this, that and the other thing (legal items mostly), the earnings came in at 42 cents versus last year’s 20 cents. The stock is higher by 0.8% in the pre-market. BlackRockreported a big beat ($5.21 versus $4.66). After the close eBay, Netflix, Eli Lilly and American Express will be in focus. So far, the earnings season is calm and better than expectations including last night’s CSX and Intel reports. Hewlett-Packard is back in the market with their buyback program putting an end to speculation on who they might be interesting in buying (remember, the company had halted its program due to the possession of material, non-public information). A new “acting” CEO has been appointed at Sears Canada. The CFOs at BCE and at Pembina Pipelines are retiring.
For those watching the entrails of the markets, here are some data points: high-low, advance-decline and percentage of stocks trading above the 50-day moving average is well into oversold territory; there has been a big spike in the number of stocks trading with 14 day RSI below 30 and according to Bespoke, 63% of the S&P 500 is oversold, the highest in more than one year. For the TSX, 115 of the 251 components have an RSI below 30 while only 15% of the stocks are now above the 50-day moving average. While these conditions can get worse or be ameliorated by a sideways move, we are in the eye of the storm. Technical analysts are looking to 2% on the U.S. 10-year treasury which may have to be reached to see some allocation shifts back to stocks, but geesh, 2% - the same guys were calling for 3.25% at the beginning of the year! Ultimately, low rates do help the valuation support on stocks – especially since so far, earnings aren’t bad. The Q3 earnings growth rate is estimated at 6.5% (excluding Bank of America +7.7%) while European earnings are expected to be up 11-12% (yup, up!).
The futures are accelerating to the downside as traders and investors respond to margin calls, Ebola worries, oil weakness, seasonality, some M&A unwinding, global growth concerns and every worry one can think about (including weak retail sales, a sloppy Empire Manufacturing print, and below estimates producer prices). We’re getting closer but we’re not there yet according to the futures. A 10% correction on the S&P 500 brings us to 1810.
Monday, October 13, 2014
S+P 200 Day Moving Average Critical Signal
"I would love to clear the decks, it's been over three years now since our last 10 percent correction, but I don't think this is going to get us there, depending on earnings," McCarthy said.
"To have an actual correction would make people feel better; it's been a sticking point for so many investors we talk to," said Bruce McCain, chief investment strategist at Key Private Bank.
"It would be healthy to get down to 1,900, plus or minus, or down to the 200-day moving average, it might invite some buyers in, and reignite some enthusiasm for equity prices," said Mark Lushini, chief investment strategist at Janney Montgomery Scott.
Short term, "we seem to be in that anxiety zone that often gives way to decent corrections; we're approaching the 200-day moving average on the S&P, so 1,905 essentially," McCain said.
Friday, October 10, 2014
Thursday, October 9, 2014
Markets Pullback...It's going back to the old normal,
"It's going back to the old normal," said Quincy Krosby, chief market strategist at Prudential Annuities. "Markets have volatility and markets used to have pullbacks," she added. It's been more than two years since the S&P 500 has gone without at least a 10 percent correction.
Those looking to stay in the financial markets may want to keep a steady supply of antacids nearby.
The stomach-churning volatility the market has seen in recent days likely isn't going anywhere—not with the Federal Reserve trying to prepare a graceful exit from monetary easing while a panoply of other concerns haunt investors.
Forget the "new normal," which bond giant Pimco defined as a long-term period of low growth. This looks like something different.
"It's going back to the old normal," said Quincy Krosby, chief market strategist at Prudential Annuities. "Markets have volatility and markets used to have pullbacks," she added. It's been more than two years since the S&P 500 has gone without at least a 10 percent correction.
"As we get closer to normalization by the Fed, which means the rising of rates, the market is going to demonstrate characteristics it always had, which included pullbacks and basically trying to decide what valuations should be," she added.
Old-fashioned price discovery indeed has become a relic in the time of unprecedented Fed easing. The central bank has expanded its balance sheet past the $4.5 trillion mark as it has injected liquidity into the markets and given new meaning to the old "don't fight the Fed" adage.
The S&P 500 has surged nearly 200 percent since the financial crisis on the back of the Fed's quantitative easing, but gains ahead could be harder to come by, or at least require more work on the part of investors.
The Fed is set to end QE later this month but probably will keep interest rates anchored near zero until well into 2015.
Markets Crash - Volatility VIX @19- Do You Buy The Indexes On 200 Day Moving Average?
Thats the plan...
Triple Bottom Breakouts on P&F charts are bearish patterns that mark a downside support break.
The Fear Index = Vix
Triple Bottom Breakouts on P&F charts are bearish patterns that mark a downside support break.
The Fear Index = Vix
Thursday, October 2, 2014
Four pillars of tax-smart investing
These are to: (1) control the timing of income, (2) control the type of income, (3) control the location of income, and (4) control the offsets to income. Today, I want to talk about the second pillar: Controlling the type of income you earn on your portfolio. Here are six ideas to consider:
1. Understand your marginal tax rate
Your marginal tax rate is the amount of tax you’ll pay on one additional dollar of income. That rate will vary, depending on the type of income. Interest income is the most highly taxed. Then there are capital gains and eligible dividends. When it comes to these, capital gains are generally taxed at more favourable rates if you have a higher level of income (typically over about $80,000; but it varies by province), and eligible dividends are generally taxed at lower rates when your income is lower. If you structure your portfolio to earn capital gains or dividends, you’ll face less tax overall than if you earn interest. Keep in mind, the level of risk you take on will also be different and should be factored into your decision about the type of investments to hold. For a good summary of marginal tax rates, I like to visit this facts and figures page.
2. Returns of capital are tax-efficient
Some investments are designed to return your original capital to you over time. You won’t face tax on a return of capital, and so this type of cash flow is very tax-efficient. Keep in mind that this is really a deferral of tax since you’ll pay tax later, when you ultimately sell the investment, but the money is better in your pocket for the time being than the taxman’s. If you happen to own private company shares, you can extract your “paid-up capital” (a cousin to your adjusted cost base) tax-free from your company, which can be better than dividends.
3. Manage clawbacks of OAS benefits
If you receive Old Age Security (OAS) benefits and your income in 2014 is over $71,592, then you’ll have to repay part of your benefits. You’ll repay 15 cents for every dollar of income over $71,592 this year. If you earn eligible dividends, those dividends will be grossed-up for tax purposes, so that you’ll report $1.38 of taxable dividends federally for every $1 of actual cash dividends, and this will make a potential OAS clawback problem even worse. Again, don’t let the tax tail wag the investment dog: If dividend-paying stocks are right from a risk perspective, they may be best for you. But understand the tax implications.
4. Share buybacks can be better than dividends
If a company has excess cash and chooses to buy back shares, you’ll face tax on a capital gain rather than dividends, which could be better for you than dividends if you’re in a higher tax bracket, and provided you don’t need the income.
5. Sell shares on the right side of the ex-dividend date
You have some control over whether you’ll face tax on capital gains or dividends by choosing the time of your sale. If you sell a security before the ex-dividend date you’ll realize capital gains only, which could be best if you’re in a higher tax bracket. If you sell on or after the ex-dividend date you’ll receive dividends, which could be best in a lower tax bracket.
6. Consider a back-to-back prescribed annuity
Here’s how: Consider taking some of your capital invested in interest-bearing investments and buy a prescribed annuity. A portion of each annuity payment will be taxable interest, but a portion will be a tax-free return of capital. You’ll face less tax and put more in your pocket. Then, take some of the additional cash flow from the annuity to purchase a life insurance policy (back-to-back with the annuity) that will pay out on your death, replacing all or some of the capital invested in the annuity.
Next time, I’ll continue this discussion on the pillars of tax-smart investing
Markets start to the fourth quarter isn’t the worst in history, but definitely up there
We're not in the panic zone yet
The chase by Frances Horodelski:
There are lots of news items to focus on this morning, the first is the market. Yesterday’s weak start to the fourth quarter isn’t the worst in history, but definitely up there. According to Bespoke, yesterday’s 1.32% decline in the S&P 500 was the 10th worst back to 1928. This morning, we’re not seeing much follow through, although Europe is mixed. U.S. futures are higher. This could change when the ECB announces its rates decision (no change) and as well any additional colour on its balance sheet expansion intentions at the press conference.
What I’m watching: The percentage of stocks above the 50-day (20.5%) and the 200-day (43%) are both at levels last seen in November 2012. Sentiment which has deteriorated recently but isn’t in panic zone, although CNN’s fear/greed indicator is 8 – at levels worse than during the financial crisis. Many of the RSI indicators aren’t as oversold as one would like to see – but they are getting there. Yesterday’s decline, while painful, felt orderly with everything marked down, although volume has picked up. It is when it isn’t orderly that we get concerned and accidents happen.
The news calendar is filling up. First, Sears Holding is doing a rights offering to distribute 40 million of its 51.957M shares of Sears Canada. Eddie Lambert controlling shareholder in Sears Holdings will be exercising his rights and Fairholme Capital will also be doing so. The rights and shares of Sears Canada will be listed on the Nasdaq. A bit of shuffling deck chairs but in the end, SHLD is looking to raise an additional $380 million dollars from SHLD shareholders (or those own are looking to exercise the rights) to reduce its position in SCC from 51% to just under 12%.
Second, Agrium is out with a statement this morning highlighting its Q3 outlook which is substantially below the street estimate (45-55 cents vs. 68 cents expected) and a Q4 which is expected to be flat with last year’s adjusted 84 cents versus the street at $1.03. The stock is down 6%+ in the pre-market.
Third, the street is reacting to CP’s outlook. “Surprisingly strong” says CanaccordGenuity (rates the stock Hold); “Guidance in line with expectatons; revenue growth targets in focus today” from RBC note (rates the stock sector peform); “Four-year financial targets supportive of significant share price upside”, BMO with an outperform rating. The investor day continues today.
Fourth, an interesting item from yesterday that Adidas is taking advantage of ridiculously low interest rates and doing a major share buyback to appease shareholders. Who is next to do this in Europe?
Fifth, oil is a focus as it drops below $90 after Saudi Arabia cuts prices more than expected. JPMorgan wonders whether they may be setting up for a market share battle.
Finally, we’re waiting for tomorrow’s jobs numbers, Brazilian elections on the weekend, next week’s earnings kick-off and hopefully a reduction in the tensions and worries related to Hong Kong, Ebola and even Ukraine/Russia. With the Fed nearing the end of its bond buying purchases, the key will be if the U.S. economy can stand on its own two feet. We’ll see.
The NYSE Composite is down 4.5% from its September high knocking just less than $1 trillion off the total market cap of $21.6 trillion. The margin man might be calling today which can oftentimes put in a bottom.
The NYSE Composite is down 4.5% from its September high knocking just less than $1 trillion off the total market cap of $21.6 trillion. The margin man might be calling today which can oftentimes put in a bottom.
On a different note, there are only 84 days until Christmas.