With the market hitting all-time highs, many investors are wondering how investor sentiment can be so positive when job creation is still not as strong as it should be. This divergence between the financial markets and the real economy cannot last forever.
Investor sentiment has been propped up by the Federal Reserve, which is trying to prime and ignite the U.S. economy. While job creation is certainly better now than it was a few years ago, there is still much more work that needs to be accomplished.
One very visible sign that the economy is not running at 100% capacity was the recently released retail sales data. For March, retail sales decreased by 0.4%, although this did follow a very strong February that showed a one-percent gain. A survey of 85 economists by Bloomberg had a median forecast of zero (unchanged) from March. (Source: Kowalski, A., “Retail Sales in U.S. Declined by Most in Nine Months,” Bloomberg, April 12, 2013.)
Job creation obviously plays a very important role when it comes to retail sales. And remember that like most developed nations, a vast majority of the U.S. economy is based on consumer spending.
In this case, investor sentiment might have become too bullish on retail-oriented stocks. If job creation does not accelerate, we could see a further impact on discretionary spending, which would break down investor sentiment throughout this year.
However, this recent retail sales data might have been a blip, as the trend is still fairly strong. Remember that one data point does not make a trend. Following stronger-than-expected data earlier in the year, a pullback was expected due … Read More
The equities market continues to hover near its multi-year highs. There are still many Wall Street analysts who suggest that the bulls are in full control and will drive stocks higher.
Investor sentiment had been extremely bullish in each session since the start of the year, but a neutral rating was reported on February 21–22.
We are still seeing optimism on Wall Street from the bulls, with some market watchers calling for the Dow to crack 15,000, and move upward toward 20,000. Even the small-cap Russell 2000, which recently traded at a record high, is up nearly 10% this year. Based on an annualized rate, the Russell 2000 would advance over 60% this year, considering what has happened so far. I actually think some of the euphoria in the equities market is overblown.
While Wall Street and the media may still feel the equities market will continue to move higher, I believe there’s some real risk in the equities market that you should be aware of as shown in the chart below.
Chart courtesy of www.StockCharts.com
While I’m not calling for a stock market correction, I do see red flags out there that suggest some selling pressure may be on the horizon for the equities market.
Take a look at the Dow. The blue-chip index has failed on two occasions to hold above 14,000, so there appears to be some topping action, based on my technical analysis. The reality is that selling in blue chips would be a red flag in the equities market.
In the broader market, while the S&P 500 initially held at 1,500, the index did see … Read More
One of the most important factors to consider and one of the most difficult to comprehend when it comes to the market is investor sentiment. Investor sentiment is usually far ahead of both the general public and the economic data.
A perfect example is how investor sentiment in the housing sector was clearly far ahead of the recent data showing strength for the homebuilder stocks and new home construction.
One stock that has performed quite well lately is Ford Motor Company (NYSE/F). Many times last year, when much of the public was negative on the economy and housing, Ford came out with extremely strong results. Of course, this is partially due to their pickup truck division, which is directly correlated with the boom in new home construction.
For the fourth quarter of 2012, Ford reported the highest pretax profit in over a decade, with $1.7 billion, a huge jump of $577 million from the fourth quarter of 2011. For the full year, Ford reported a pretax profit of $8.0 billion, and the firm ended 2012 with a gross cash level of $24.3 billion. (Source: “Ford Posts Highest Fourth Quarter Pre-Tax Profit in More Than a Decade,” Ford Motor Company web site, January 29, 2013, last accessed February 4, 2013.)
However, a big problem for Ford, along with many other automotive stocks, has been the eurozone. Ford’s revenues in the eurozone dropped from $33.8 billion for the full year 2011 to $26.6 billion in 2012. The company is making strategic revisions to its eurozone division.
We all know the eurozone has been in trouble for quite a long time. Recent data … Read More
There are various measures to determine investor sentiment regarding the general market. The most obvious is to take a look at a broad index, such as the S&P 500, and see where it’s currently trading. Because price is truth, the market does not lie. If people are bullish or bearish, their actions in buying and selling shares within the S&P 500 will be translated into corresponding price moves.
However, it is interesting to look at corollary indications to determine how strong the underlying trend really is. Investor sentiment is extremely difficult to predict, as is anything in life. While the future is unknown, by understanding the strength of current investor sentiment, we can help form a picture about what the future holds for the S&P 500.
State Street has an Investor Confidence Index, developed by Kenneth Froot, a Harvard University professor, and Paul O’Connell of State Street Associates. According to State Street, “The State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.” (Source: State Street, last accessed January 14, 2013.)
Let’s take a look at this metric of investor sentiment in relation to the S&P 500.
For the month of December, the Investor Confidence Index moved upward, just slightly higher than November, which was the low of 2012. Professor Froot commented, “As has been true for some months now, global institutional investor confidence remains weak as institutions continue to shy away from equities.” (Source: “Investor Confidence Index rises slightly in December by 0.4 to reach 80.9,” State Street, December 26, 2012, last accessed January 14, 2013.)… Read More
Last week the Chinese stock market, represented by the Shanghai Composite Index, jumped a massive 4.3% in one day on heavy volume, as investor sentiment soared on the belief that the Chinese economy is beginning to recover. (Source: “China Stocks Jump Most Since 2009 on Support Speculation,” Bloomberg, December 14, 2012.)
There were also indications that the government is going to allow more institutions to purchase equities outright. This followed a better-than-expected Purchasing Managers’ Index (PMI), developed by Markit Group Limited, of 50.9, compared to November’s reading of 50.5. (Source: “China Stocks Jump Most Since 2009 on Support Speculation,” Bloomberg, December 14, 2012.)
Investor sentiment is trying hard to pick up signs that perhaps the Chinese economy is entering a recovery stage. While it is possible that the Chinese stock market has become oversold, there are still large structural issues for the Chinese economy to address.
I think one of the most serious problems for the Chinese economy that perhaps investor sentiment is not fully realizing is the shocking extent of debt levels within that nation.
According to estimates by a Chinese economic consultancy GK Dragonomics, corporate debt in China has risen from 108% of the entire economy in 2011 to 122% in 2012. (Source: “Corporate China’s Black Hole of Debt,” Bloomberg BusinessWeek, November 19, 2012, last accessed December 15, 2012.)
The problem is greater than just a few companies within the Chinese economy having large debt. GK Dragonomics calculates that when combining public, household, and corporate debt, the total amount is approximately 206% of gross domestic product (GDP). (Source: “Corporate China’s Black Hole of Debt,” Bloomberg BusinessWeek, November 19, … Read More
In what will most likely be a landmark ruling, Australia’s federal court has ruled that one of the world’s leading credit ratings agencies Standard & Poor’s (S&P) misled investors by issuing a AAA rating, its safest rating, to securities that were extremely complex and risky, and that ultimately lost most of their value.
One of the biggest problems following the crash is that investor sentiment has soured on the financial industry. Many people have the market view that the game has been rigged against the retail investor. During the bubble prior to the crash, rating agencies like S&P continually slapped AAA on risky investments. The entire system was built on generating revenue and commissions by packaging products that could be sold to people who should not have been buying them in the first place. By creating a false market view, investors who normally wouldn’t buy risky assets were tricked into believing that they were safe. This blatant misrepresentation has led to a lack of positive investor sentiment across many facets of the financial system.
Investor sentiment can be extremely fragile. Rulings such as this finally capture the anger that many have felt over the past few years. While investors have lost untold amounts of money, the rating agencies that people and institutions have relied upon have gotten off without any liability. The market view was that rating agencies could do whatever they wanted without repercussions. This appears to be changing.
Justice Jayne Jagot of Australia’s federal court stated that S&P was “misleading and deceptive” when it came to rating structured debt instruments during 2006. The debt instruments themselves were grotesquely … Read More
The recent developments in Asia are a good lesson in showing investors that the task of making investment decisions is not an easy one. The cross-current of multiple variables can result in shifts in investor sentiment that are not obvious, at least initially. Let’s take a look at several events that have just occurred in both Japan and China.
The market view regarding Japan has been consistent for many years—the country has basically economically flat-lined. The decrease in the population is severely hampering the economy’s ability to grow. On top of that structural problem, the crisis in Europe is actually causing a flight into the Japanese Yen, causing it to be seen favorably in terms of investor sentiment as a “safe” currency (which is ridiculous when one considers their sky-high debt/gross domestic product, or GDP), and this rise in the yen has hurt the country’s export sector. All of these factors and many more, including their need for energy use, has put pressure on the Bank of Japan to help the economy.
Last week, the Bank of Japan expanded its monetary stimulus program to 10 trillion yen ($124 billion), bringing the total to 80 trillion yen. The initial market view in terms of investor sentiment was a decrease in the value of the yen, which makes sense. However, shortly following this initial move, the yen began to strengthen, contrary to what the common market view would be in this case.
In my opinion, this is resulting from rising tensions between Japan and China. For many of us in North America, we’re unaware of how long and deep the complicated relationship … Read More
Best Buy Co., Inc. (NYSE/BBY), one of the largest electronic retailers in the world, is at a crossroads. The latest quarterly corporate earnings results were shockingly bad, showing that the company’s current direction is not working. The company reported corporate earnings of $12.0 million, a drop of 91.0% from $128 million in the prior year period. The company also suspended any guidance for future corporate earnings estimates, which is usually met with an extremely negative investor sentiment.
The future is looking bleak, even as the founder has proposed a takeover of the company at $24.00–$26.00 per share. With the stock price trading below $18.00, it is obvious that investor sentiment is extremely negative on this stock, showing signs that investors don’t believe any such deal will occur.
With sales down 2.8% and gross margin continuing to decrease to 24.3% as compared to 25.4% in the prior year period, it is apparent that corporate earnings will continue to be under pressure. The business model of having smaller stores to compete is either not working or not being enacted fast enough. Investor sentiment will continue to weigh on the stock until there are signs that the massive decline in corporate earnings will soon come to an end. So far, I don’t see any improvement in the near future for corporate earnings growth and, as such, I continue to see investor sentiment keeping the stock price at depressed levels.
Large format retailers have had a difficult time in generating corporate earnings against online retailers. Consumers prefer to touch the product in the store and purchase the goods at home. Best Buy has been … Read More
With economic data coming out of Europe continuing to show that the financial crisis is not ending anytime soon, why are stocks in Europe moving up? There are several reasons that you should be aware, as investor sentiment can change quite quickly.
If we look at the yields for bonds in troubled nations, such as Spain, Portugal, and, of course, Greece, the market-based evidence shows us that the financial crisis is still as present as ever. No new initiatives or solutions have been formed and implemented, but the investor sentiment for the equities market has changed since the end of June, partially because of anticipation of additional stimulus by the financial authorities in Europe to try and prevent the spread of the financial crisis.
As spring moved into summer, investor sentiment turned negative, as institutions betting on a downfall of European equities increased, as seen by the number of funds that went short. Selling short occurs when investor sentiment is negative, and an investor then borrows shares and sells them first, hoping that the price will decline, at which point, they can then buy the shares back and profit from the decreased price. If the share price increases, then short sellers would incur a loss.
According to research firm Markit, the number of shares loaned out from the STOXX Europe 600 Index decreased from 3.4% in May to 2.9% at last count. This reduction in short sellers can be seen by the higher price, as investor sentiment has shifted away from being completely bearish. In the middle of the current financial crisis, millions of shares sold short were bought back … Read More
The latest corporate earnings report from Zynga Inc. (NASDAQ/ZNGA) was a complete and utter disappointment. Frankly, I’m surprised that people thought little games like “FarmVille” would last forever. After all, how many virtual pigs does one really need?
Investor sentiment has clearly been waning the last few months since the initial public offering (IPO). From a high this year of $15.91, the stock has recently hit lows below $3.00. Obviously investors are not happy about the company’s corporate earnings release and guidance going forward.
Investor sentiment in a company like Zynga is going to be volatile since the business is based on fads. The company needs to be constantly creating hit games all of the time. Any slowdown in users and spending will crush corporate earnings and the stock, as we see now. The firm has reduced corporate earnings guidance from an earlier estimate of $0.23–$0.29 per share down to only $0.04–$0.09 per share.
That is a massive drop in corporate earnings in a very short period of time. This is a company that just went public a few months ago, and its corporate earnings are decreasing at a shocking rate. Another worrisome note is that insiders have been massive sellers of stock. It’s understandable that some insiders want to take some profits, but the level of selling was huge. This means insiders are far less concerned by what happens now. Zynga went public as its hit game FarmVille was at its peak, and people bought the hype, especially the retail public, as investor sentiment was at its peak.
There’s no denying that fads can be profitable. Remember “Cabbage Patch … Read More
As we’re in the heart of corporate earnings season, the most striking thing to note is that many companies are posting weak revenue numbers. While they might be showing corporate earnings growth, this is coming on the back of cost cutting. While investor sentiment might be temporarily swayed by the appearance of strength through positive corporate earnings growth, one should look at the underlying situation to better extrapolate what is possible for future quarters.
Of the 119 S&P 500 companies that have reported corporate earnings, sales rose an average of 2.9% for the quarter. This is the weakest quarter since the third quarter of 2009. While 73.0% of reported companies have beaten corporate earnings estimates, only 42.0% have exceeded revenue guidance. Investor sentiment might pay attention to the corporate earnings, but I would suggest that at some point, this trend will end unless revenue also begins to increase. There are only so many ways to increase productivity before the options become exhausted.
This lack of revenue growth will feed into the economy with less spending on hiring and capital expenditures. Investor sentiment might be held off for a little while, but people would be foolish if they didn’t realize that, eventually, revenue needs to start growing again.
In addition to the global economic slowdown, part of the frustration is the lack of confidence in regards to the fiscal cliff. If companies knew that massive program cuts weren’t coming down the pipeline, they might be willing to start investing and spending again. This fear is also growing in investor sentiment, as we’re seeing firms that are sensitive to government contracts have … Read More
Recent news that the Chinese Investment Corporation has announced that it will be moving some of its invested funds out of the U.S. and into emerging markets is a decision that sends an important signal about investor sentiment. This is an interesting move by China regarding its view for the future of the U.S. economy. The U.S. economy has obviously encountered significant setbacks over the last few years, but these are only the beginning of our problems if investor sentiment such as this takes hold. Once nations like China decide that the future is less bright when looking at the U.S. economy compared to other nations, that’s when we’ll have serious issues.
The sustainability of the U.S. economy is built on positive investor sentiment built with foreign investments, fresh money coming into the nation and continuing its growth path. Once we lose foreign investor sentiment to other nations, the U.S. economy will lose its edge. Attracting capital and people to join the U.S. economy in creating wealth is the foundation of American success. The U.S. economy has become the largest in the world because foreign capital and people have developed new technologies and innovations. Once investor sentiment shifts, the country that gets this new attention will also get the result, which is a much stronger economy.
The China Investment Corporation stated that part of the reason was increased scrutiny from regulators, as many are worried that the organization is backed by the Chinese government. While everyone should be aware of keeping our best companies within the U.S. economy, shutting the door to foreign investment is not the answer.
The sovereign … Read More
While the U.S. government can continue to tell us that there is no real inflation in the market, there are many signs that can show us what the investor sentiment is really like. Real inflation means that paper money is becoming worth less every day. How can you tell the investor sentiment? Talk is cheap; look at what people are really doing with their paper money. Let’s take a look at some recent news regarding the art market. In this current economic situation that the world is in, with Europe falling apart, unemployment still very high in the U.S.—why would people be throwing money into art? Because they would rather have a painting than paper money.
We just recently saw the sale of Edvard Munch’s “The Scream;” it sold for a record of almost $120 million. In the current economic environment, you would think that selling a painting would be difficult. Not only is the investor sentiment strong for arts, but also buyers were falling over themselves to break records in prices for many different works. This is sign of real inflation; the super-rich are extremely intelligent and know that their paper money is becoming worth less every day. They are looking for ways to trade their paper money for something that’s concrete, whether it’s gold, jewelry or art. This investor sentiment is something we should all pay attention to, even if we can’t afford the high-end art market.
The next night, more art went on sale and more records were broken. Looking at the total sales for the evening to gauge investor sentiment, $380 million in art was sold, … Read More