PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
These are strange times. Despite concerns about the enormous debts crippling the developed world, markets have rallied just about everywhere – and a key technical measure says there's still plenty of upside. Meanwhile, there are new reasons not to listen to analysts, or money managers in their 30s. Find out why second-hand iPhones are so valuable to telcos, and what's spooking gold bulls. Also, meet the billionaire dwarf-throwing prince and, on video, learn from Wall Street's oldest investor.
Stocks have further to run '¦ “The Ratio Adjusted Summation Index (RASI) is back up above 500, and that is a bullish piece of news '¦ The RASI is much like the classic Summation Index, with one difference. We factor out the changing number of issues on the NYSE in order to make long-term historical comparisons more meaningful '¦ Like the classic Summation Index, the RASI moves up and down with the trend of the market, and it gives important information about the state of the trend when it gets to very high or very low levels. But the factor I like the most about the RASI is what it tells us based on how it behaves around the 500 level '¦ If you see a nice deep selloff that takes the RASI down below zero, then on the subsequent advance it is important for the RASI to be able to get back up above 500. Failing to surpass that level is a sign that the uptrend cannot achieve 'escape velocity', and prices are likely to roll over and head back down to the prior low, or lower '¦ So all of this leads us to the current RASI reading, which at 618.2 is above the 500 level but still below the peak of 763 seen on November 15, 2011. So it is a divergent lower high, but it is still high enough to say that the uptrend which started in October is not over. There can be ordinary pullbacks along the way, but the message of the RASI is that the final highs of this current new uptrend have not yet been seen.” (Tom McLellan, McLellan Market Report, January 15)
And valuations are where you want them '¦ “One can look at all kinds of history over the past 70 years and show via the P/E Bulls-Eye data that stock valuation is at a level that typically has provided for upside potential. Thus, we find the dislike for current market valuation as being more indicative of negative investor sentiment than a statistically based objective perspective. Admittedly, valuation alone cannot move share prices higher. Catalysts may need to involve some credible path towards fiscal resolution in Europe, improved political clarity in the US particularly with respect to the Presidential elections, Chinese hard-landing fears subsiding and a greater belief that the US economy can decouple from Europe’s recession, to name a few possibilities. Nonetheless, we suspect that the faux valuation resistance will fade.”
(Tobias Levkovich of Citigroup, January 9)
Still, it's no market for young men '¦ “If you think the typical image of a stockmarket sensation is a man in his mid-thirties who invests nearly everything into his shares, then you might be in for a shock. In fact, statistically speaking, the investor who is least likely to succeed is a 35-year-old man who is entirely invested in stocks, according to a new report from the Swedish Institute for Financial Research '¦ The results also show that the investor who enjoys the greatest financial success on the markets is typically a man aged 43, with investment capital totalling 2.6 million kronor ($375,723). Other indicators associated with investment success include the possession of a university education and portfolios with higher diversification. In addition, women appeared more regularly in the groups of most successful investors than in those that suffered investment losses.” (The Local, January 17)
Second-hand iPhones are great for carriers '¦ “Consumer Intelligence Research Partners (CIRP) recently surveyed the secondary iPhone market in the US and found it to be thriving. Since the October debut of the iPhone 4S, 53% of new iPhone buyers have introduced their old phone into the secondary market [by selling them second-hand] '¦ Among consumers who gave their old iPhone to someone else, 87% expected the recipient to activate it on a wireless carrier. Extrapolating from that, CIRP estimates that 11% of iPhone activations since the launch of the iPhone 4S have been used iPhones '¦ The research firm believes that, for every used iPhone that carriers activate, they save about $US400. In the fourth quarter of 2011 alone, CIRP figures that secondary-market activations saved AT&T and Verizon between $US400 million and $US800 million in subsidy costs.” (Huffington Post, January 17)
This gold trend '¦ “Even for a chart sceptic like me, it’s obvious that the 200-day moving average is exerting a powerful influence on the gold market. First, when gold prices collapsed in September, their apparently unstoppable decline was halted by a wave of buying starting in the mid-$US1500s. At the time, the 200-day moving average stood just above $US1500. And then [last] week, the 200-day moving average acted as a gravitational pull downwards on the gold price. After a few flirtatious glances at it '¦ the yellow metal finally broke below the marker [last] Wednesday for the first time in almost three years. I’m not the only person to find myself increasingly engrossed by colourfully illustrated charts. In fact it becomes a self-fulfilling prophecy: the more traders fixate on the 200-day moving average, the more significance it has attained for the market. After it was breached on Wednesday, the gold price promptly dumped another $US60. Indeed, I know a manager of a very large macro hedge fund portfolio who holds a bullish view on gold based on the parlous state of the financial system and believes prices are heading to $US2500 and beyond. And yet, he won’t dream of buying gold now that it has fallen through the 200-day moving average: at least, not after prices have been flushed out a good deal more.” (Jack Farchy, Financial Times, January 15)
The new 'consensus estimate' '¦ “Analysts are more clustered than ever in their profits estimates, says Savita Subramanian of Bank of America-Merrill Lynch. According to her calculations, estimate dispersion for S&P 500 company earnings are now down below 10% ' the lowest that figure has been since at least February 1986 (check the chart). In other words, it’s been at least 25 years since analysts were in such close agreement about where earnings are likely to land. This unusual state of affairs suggests one of two possibilities: (a) Wall Street analysts are so certain, and prescient, about where earnings are going to be that they’ve all naturally clustered around the correct figures; or (b) Wall Street analysts have no idea what’s going to happen, given the magnitude of macroeconomic uncertainties, that they’re all cribbing each other’s notes and/or going with the safest, most middle-of-the-pack estimates they can muster.”
(Wall Street Journal, January 9)
The unlikely odds of a eurozone breakup '¦ “Citi chief economist Willem Buiter and his colleague Ebrahim Rahbari say a breakup is not their base case but, if the ECB is not just playing chicken as most people would like to think, here are the odds: 'Even if the ECB acts, the German parliament and population may decide that such an increase in ECB support is a price not worth paying for EA membership and walk out, probably together with other core countries. In light of the very high costs that these decisions would entail, we would give both scenarios a very low (sub 5%) probability of happening.' The odds of a peripheral country leaving, however, are substantially higher, they write – given the partial loss of sovereignty and of course the austerity: 'Such politically intrusive oversight, coupled with growing consolidation fatigue after years of austerity and recession, may lead to one or more countries storming out of the euro area. Such a breakup scenario would be somewhat less damaging, in our view, because it would result in less risk of 'exit fear contagion’ than a forced exit. We also still consider an exit by a fiscally weak country very unlikely, except in the case of Greece, but the risks of such irrational actions may clearly rise over time. In view of the continuing high degree of political uncertainty in Greece, it cannot be ruled out that the country will leave the euro (around 25% probability, in our view), either by storming out, or by being pushed out because of a refusal by the Troika to continue funding the sovereign and the banks following non-compliance with the Greek program, possibly around the time of the next round of private sector/official sector involvement’.” (FT Alphaville, January 10)
Austerity doesn't work '¦ “Jaime Guajardo, Daniel Leigh, and Andrea Pescatori of the International Monetary Fund recently studied austerity plans implemented by governments in 17 countries in the past 30 years. But their approach differed from that of previous researchers. They focused on the government’s intent, and looked at what officials actually said, not just at the pattern of public debt. They read budget speeches, reviewed stability programs, and even watched news interviews with government figures. They identified as austerity plans only those cases in which governments imposed tax hikes or spending cuts because they viewed it as a prudent policy with potential long-term benefits, not because they were responding to the short-term economic outlook and sought to reduce the risk of overheating. Their analysis found a clear tendency for austerity programs to reduce consumption expenditure and weaken the economy. That conclusion, if valid, stands as a stern warning to policymakers today '¦ [Because] there is no abstract theory that can predict how people will react to an austerity program, we have no alternative but to look at the historical evidence. And the evidence of Guajardo and his co-authors does show '¦ austerity programs in Europe and elsewhere appear likely to yield disappointing results.” (Robert Shiller, Professor of Economics at Yale University, January 18)
Billionaire Saudi Prince Alwaleed has a little secret '¦ "Alwaleed keeps in his entourage a group of dancing, laughing, joking dwarfs. One source called them 'jesters’. Alwaleed owns a fleet of aircraft, including a 747 and an Airbus A380. One time '¦ when the Prince was trying to decide what to buy next, he decided to give the choice to his dwarfs – teaching one the word 'Boeing’ and the other the word 'Airbus’. He called a big meeting with all his aviation advisers and had the dwarfs speak. One said 'Boeing’ in a funny, jesterly way. The other said 'Airbus’ in the same manner. The source says Alwaleed laughed and went with the Airbus '¦ One source, who left Alwaleed's employ with a letter of recommendation from the Prince, says that at least once, Alwaleed set up a 'midget-tossing’ contest, promising money to whomever could throw the little people the farthest. There were pillows. Another time, says this source, at one of the parties Alwaleed would throw in the desert, he tossed $US100 bills into a bonfire, encouraging the dwarfs to run into the 'raging fire’ and pull the money out, 'scorching themselves’ in the process. One former employee of Alwaleed's – who left under good circumstances, and had very little bad to say – says that Westerners might not understand but that the Prince's behaviour toward dwarfs is actually a charitable act." (Business Insider, January 12)
Video of the week: Lessons from the world's oldest investor '¦ At 106, Irving Kahn has been in the market since the Great Depression.
(CNN Money, December 28)