Saturday, October 31, 2015

Revenues Down Stock Prices Up

The Greatest Disconnects EVER? by Mike Larson, 10/30/15, Money and Markets
 
Nothing ever goes exactly according to plan in the capital markets. I've seen minor divergences, disconnects, and dichotomies from time to time in the almost two decades I've been in the investment and financial education business.
 
But right now? I'm seeing some of the greatest disconnects EVER! Take earnings versus stock prices. Corporate managements have been warning about weakness left and right. Overall S&P 500 earnings are poised to drop as much as 4% this quarter, while revenues are going to drop for the third straight quarter. That hasn't happened since the Great Recession.
 
But the Dow Jones Industrial Average has surged almost 1,700 points from its late September low. The PowerShares QQQ Trust (QQQ) just traded to within a couple bucks of its summer high. Since stock prices are supposed to track earnings results closely, the divergence makes no sense.
 
Buying Opportunity!
 
The last time oil prices sank below $50 a barrel, the best oil and energy stocks handed investors like you TRIPLE-DIGIT profits! Over the past two years, the world's energy markets have been hit with the equivalent of a HYDROGEN BOMB. The price of oil lost HALF its value in the first half of 2015, sinking to levels last seen during the depths of the 2009 recession. I want to share with you what I believe is the greatest  money-making opportunity to appear since the 2008-2009 stock market crash click  here now for more information! –Mike
 
Internal Sponsorship
 
That brings us to the next major disconnect: Mega-cap stocks and broad market averages versus several market sectors and small caps.
 
Sure, the QQQ has been strong and so has the Dow. But the Russell 2000 has barely bounced. It's still roughly 10% below its June high. The Dow Jones Transportation Average is also more than 1,100 points off its highs.
 
Retail stocks trade like death warmed over, as do biotechnology names. Energy joined them in the doghouse this week after crude oil and natural gas plunged.
 
Can a gain in a handful of big cap stocks hold up the averages, even as hundreds of stocks behind them wilt? That seems nuts to me, frankly.
 
Can a gain in a handful of big cap stocks hold up the averages, even as hundreds of stocks behind them wilt? That seems nuts to me.
 
Or how about the disconnect between the performance of Treasury bonds and stocks? When stocks rise, bonds typically fall, and vice versa.
 
But that hasn't happened this time around. Bond prices have risen and bond yields have fallen despite the rise in stocks. That's a glaring non-confirmation of the rally.
 
Then there's the massive disconnect between commodities and stocks. You would expect to see both asset classes rally sharply if the global economy was strong, and demand for commodities and the products they go into was firm. But commodities can't get off the mat despite the rally in stocks.
 
That brings me to yet another major disconnect — the plunge in energy prices and the consumer's lack of a response to it. How many times have we been told that falling gasoline prices would cause retail spending to skyrocket? How many so-called "experts" came on television and said American consumers would be dancing in the streets?
 
But have you been listening to Wal-Mart Stores (WMT)?  Have you seen a chart of the SPDR S&P Retail ETF (XRT)? Did you see how retail sales missed forecasts in September, and flat-lined in August? Or how consumer confidence fell to 97.6 in October versus 102.6 a month earlier, despite further declines in gas prices? These and other data points show the "retail boom" thesis isn't panning out at all.
 
But suffice it to say my research suggests these disconnects are going to be a big problem for investors. I believe they merit a cautious investment approach -- one that focuses on using hedges to protect against downside risk, maintaining elevated cash levels, and owning only the "best of the best" stocks in non-economically  sensitive and higher-yielding sectors of the market. Until next time, Mike Larson
 
Money and Markets

No comments: