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Utilities, what's wrong with this picture?
Utilities are the best performers of the year, one of only two sectors in positive territory. The Dow Utilities are up about 7 percent, while telecom is up roughly 5 percent.
The S&P 500, meanwhile is down about 9 percent.
Some electric utilities have seen double-digit gains on the year:
Chesapeake Utilities - 16 percent
Con Ed - 14 percent
Duke - 11 percent
Xcel - 10 percent
For months we have watched energy, materials, and global industrials weaken on concerns about oil oversupply and slower global growth.
The concern is that "new tech" companies may have lower growth rates than the consensus, so multiples are compressing.
But there's something else going on. We are seeing signs that the weakness is spreading out, beyond "new tech," to broader names.
What happened to our rallies? What happened to last Friday, when the Dow rallied almost 400 points?
It's gone, and that's what happens in down markets: bear-market rallies are short and sharp. There's no follow-through.
Where is the bottom? Tracy Knudsen, senior VP of market research for Lowry, visited me Thursday. Lowry is the oldest technical analysis service in the U.S., founded in the 1930s, and I have been reading their stuff for years.
Her message: we are not there yet. Here's the problem: supply (selling pressure) is showing no signs of abating, and demand (buying interest) is showing no signs of picking up.
Simply put, "buy the dip" has turned into "sell the rally," and it hasn't stopped yet.
Knudsen turned bearish in August of last year. She predicted a retest of the highs, which occurred in early September, but the rally was very selective.
By early December, she noted clear signs of increasing supply (more selling) and decreasing demand (less buying interest even though prices were lower), along with declining leadership. That trend continued through the month, and by the end of December, she was saying, "the risk associated with new equity purchases appears to heavily outweigh the potential reward."
She still feels that way.
Aside from the technical issues, the biggest issue facing the market is a lack of earnings visibility.
I'll give you an example. On Jan. 1, energy analysts were expecting the energy sector as a whole to have earnings growth of negative 12 percent for 2016.
One month later, they are expecting energy be down 60 percent for the year, according to S&P Capital IQ.
Huh? From down 12 percent to down 60 percent in one month? Yep. That's because everyone realized oil was not going to go back to $70 by the end of the year. Or even $60. Or, likely, even $50.
"Lower for longer" has won out — with everything.
This was a killer for 2016 earnings. Overall earnings were expected to be up 7.4 percent for the S&P 500 on Jan. 1, now it is up only 3.3 percent.
Back to the main issue: where is the bottom? The problem is, if we are really in a bear market, it's hard to put a time frame on this.
Technically, we are not in a bear market. The S&P is only roughly 12 percent off the May historic highs.
But let's assume we are heading for a down 20 percent market, a true bear market. Knudsen notes that the average bear market lasts 13 months. The S&P 500 peaked in May. If you count it as starting in July, then we have another six months, if we go by historical averages.
My bet is, we will see a bottom before that. Haven't you noticed that everything is speeding up?
ConocoPhillips' announcement that it was cutting its dividend by two-thirds was a bit of a surprise, since it was the first major oil company to make the cut. It's also got investors investing in dividend paying ETFs scrambling to look at what's under the hood of their investments.
Look at dividend ETFs and you will notice a very wide disparity in terms of the energy exposure:
Dividend ETFs with highest Energy exposure:
This is a good example of the fact that ETFs are not all the same, even if they have the same theme.
The banking crisis: is there one?
For the past three days, I've been trying to get my hands around this supposed "banking crisis," particularly in Europe.
I get why there is concern in Europe, but I don't at all get the selloff in U.S. banks.
You didn't know there was a banking crisis? Everyone seems to think there is some kind of crisis because the stocks—particularly the European bank stocks—seem to be telling us something is wrong:
European banks YTD
Deutsche Bank down 34.6%
Societe General down 25.8%
BNP Paribas down 24.3%
Banco Santander down 24.0%
UBS down 20.9%
Yikes! This is after one month. The concerns about Europe fall into several buckets:
1) ongoing restructuring and litigation charges.
2) Flattening yield curve/negative rates.
3) slower European growth.
4) Asset management slowdown. Asset management has suffered because wealthier clients aren't investing.
5) Book value issues: European banks did not take the big writedowns that U.S. banks took; there's concern there may be more asset writedowns that would cause book values to decline.
6) Capital positions. While the U.S. banks were out raising capital and selling new shares in 2008-2009, the European banks didn't. The result: U.S. banks don't need to raise capital, but European banks probably do.
I get this. What I don't get is what's going on with U.S. banks:
U.S. banks YTD
Fifth Third down 24.8%
Bank of America down 24.3%
Zions down 21.9%
Key down 19.7%
JP Morgan down 14.8%
Yikes again! Even the regionals are getting hit.
Here's the arguments against U.S. banks:
1) international exposure. If you're afraid of the Chinese bogeyman, fine. But regionals who lend to farmers are down too. This might mean something to Citigroup, but your average regional bank does not have international exposure.
2) falling yields. Concerned about lower rates? It's certainly an issue, but consider this: the average U.S. bank has 40 percent or more of its revenues from fees, not rates.
3) we don't believe the book value. Bank stock investors cannot believe that big banks are trading at a significant discount to their tangible book value:
Tangible book value
Goldman Sachs 0.93
Regions Financial 0.89
Bank of America 0.82
Below book value, every one of them. This is pretty rare: outside of 2008, these stocks have not traded below tangible book value.
Don't believe the book value? Here's the problem with that argument: the quality of the book is far better than it was 10 years ago. Bank loans have a 3 to 7 year duration. After 2009, you know what happened if you're a bank: the government moved into your office. The scrutiny is intense. You're lucky if you get a 60 percent loan-to-value ratio.
Bottom line: the Fed knows every loan the banks have, and they check them twice a year.
4) oil loans. This is the big bogeyman, but the stocks are trading like everything is worthless and everyone is going out of business.
Let's take an example. To eliminate international exposure, let's stick with a regional bank. How about Zions? It's a plain-vanilla Utah bank. Straight-ahead commercial and retail banking, along with mortgage loans.
No international exposure. No trading exposure.
They have roughly $40 billion in loans, of which almost $3 billion (7 percent) is in energy. Tangible book value is $5.7 billion. Market cap is $4.3 billion.The difference is $1.4 billion.
If there was some kind of loss, the pre-tax hit would be $2 billion. But the energy portfolio is $3 billion, so the market seems to be assuming that ZION could have a complete loss of almost 70% of the energy portfolio. And bear in mind they already have a 5% loan loss reserve against the energy portfolio, so really the market is assuming 75 percent losses.
You also should know that the recovery rates on failed energy assets are very high. The banks have a lot of protection.
Paul Miller, a bank analyst with FBR, was on our air earlier with the same point: the assumption is that the entire energy portfolio of these banks are worthless, which makes no sense at all.
But no one wants to listen. No one wants anything with energy exposure.
The short answer is, it doesn't make sense, and that's why bank stock traders—and analysts—are puzzled.
And so we have conspiracy theories. "It's the quants." "It's the machines." "It's the momentum guys."
I have no doubt that shorts—in whatever form—are pushing these stocks as far as they can go, into irrational territory. I am quite sure that "the machines" benefit during times of volatility, because pricing is wider and they benefit when that happens.
But let's limit the hysterical rhetoric. What is happening now is that guys who were long these stocks (hedge fund types, generalists) are being forced to sell simply to reduce exposure. It's forced selling. These guys know that the fundamentals are good: the consumer is stronger, the books are stronger—but they can only take so much downside before they have to reduce risk.
Let's hope that some sanity returns soon.
The ETF.com "Inside ETF" conference is in full swing, with a record 2,200 participants jamming the Diplomat Hotel in Hollywood, Florida.
Here are the five questions I am most commonly asked about exchange-traded funds.
1) How big is the ETF business?
It's big and getting bigger. There is $2.1 trillion in ETF assets under management in the U.S. At the end of 2015, $3 trillion worldwide. That is still small in comparison to the roughly $11 trillion in assets under management at mutual funds, but the mutual funds have been steadily losing assets for years.
ETFs are cheaper and more tax efficient than most mutual funds. They are simply a better deal for most investors. There are now north of 1,600 ETFs, and more than 70 ETF providers.
The ETF.com "Inside ETF" conference, the biggest exchange-traded fund conference in the world, kicks off Sunday night with north of 2,000 participants and four days of packed events.
Despite higher volatility and lower returns, 2015 was another record year for ETF flows, with roughly $242 billion in net inflows, an increase of about 10 percent. By comparison, mutual funds had $125 billion in outflows.
That's $2.1 trillion in assets under management, and while it is still small in comparison to the roughly $11 trillion in assets under management at mutual funds, the mutual funds have been steadily losing assets for years.
That was enough money to attract a lot of new providers. Jeff Gundlach of DoubleLine Capital. John Hancock. Goldman Sachs. Eaton Vance. Even Kevin O'Leary of "Shark Tank" got into the ETF act last year.
There are now north of 1,600 ETFs, and more than 70 ETF providers.
I'll be reporting Monday and Tuesday from the conference. Here's an early peak at the hot topics everyone is talking about.
This is one crummy, unenthusiastic rally. We should have done better today.
1) Draghi implies more stimulus coming, and they sell into it. ECB Chief Mario Draghisaid downside risks had increased, and strongly implied more stimulus was coming. This was applauded initially, with both Europe and U.S. futures rallying. It was an echo of Bertrand Russell's famous line: "When the facts change, I change my mind."
It was widely believed that some of these comments were directed at the Federal Reserve, a veiled request for them to back off on the perception that they are on an aggressive path to hike rates.
What happened? Our markets open up, and they immediately sell into it.
2) a huge oil rally, and they sell into that. The only thing that saved us from a humiliating plunge was oil, which staged a dramatic turnaround shortly after the U.S. open and took the whole market up with it.
But — and here's the worrisome part — the second oil stopped rallying at noon the market stopped going up and began gently rolling over.
And for the rest of the afternoon, it's meandered around in a very narrow range.
Volume is heavy but much lighter than yesterday. There were only two stocks advancing for every one declining.
That's it? After yesterday, when we had 30 stocks DECLINING for every one advancing?
After 40 percent of the stocks listed on the NYSE were at 52-week lows, and after one of the worst Januarys EVER, this is all we can do?
This is one tough, nasty, skeptical market.
Is this capitulation? Do you believe we are in a bear market, or not?
One thing's for sure: for a brief moment in the middle of the day, we were in Twilight Zone territory. Rod Sterling should have been the stocks reporter. Consider the following:
The CBOE Put/Call ratio, the ratio of put contracts to call contracts being purchased, was 1.75 just prior to the open. That means there were 175 put contracts being purchased for every 100 call contracts. That is extremely high and indicative of a panic.
At 12:30 p.m., ET, there were:
1) 1,347 new lows at the NYSE, roughly 40 percent of the NYSE and the highest levels since November 2008.
2) 30 declining stocks for every one advancing stock at the NYSE — again, levels that not seen since 2008.
3) twice normal volume.
All of this is suggestive of at least a short-term selling climax. And that's exactly what happened. Stocks rallied, and rallied hard. The Dow transports rallied almost 300 points from top to bottom (about 5 percent).
Here's the problem: this only suggests that the selling has halted for the moment. In bear markets, you always get rallies. Some of the last for a day; some for a few days. But then the markets drop again.
So, to answer the question, "Is this the bottom?," you have to have a conviction on the markets. If you believe this is just a garden variety sell-off (and so far this is a garden-variety sell-off, since the S&P 500 is roughly 13 percent off its May historic high), then there is a good chance we are near the bottom.
But if you think we are headed for a steeper drop — and many feel we could drop another 10 percent or more — then today's action, and the likely modest bounce we will get tomorrow, is just a brief respite.
Ladies and gentlemen, place your bets.
One of the most frustrating—and unsuccessful—quests in 2016 has been the Search for a Successful Strategy.
Sorry about the large caps, but it has assumed an almost mythical status among traders who cannot abide simply going to cash.
The first thing investors noticed—this started at the end of December—is that traders are taking down exposure across the board. For the most part, investing by regions has produced the same losses:
Major indexes 2016
S&P 500 down 8.0%
EAFE down 8.0%
All-World down 8.5%
All-World ex-U.S down 9.1%
See? Everything is down 8 to 9 percent. Good luck there looking for something that outperforms.
Value versus growth was another big debate at the end of 2015. For the most part, growth stocks (largely tech, internet, healthcare) have outperformed value (largely energy, autos, industrials, financials) for the past several years.
Many predicted that would change in 2016. So far, they have been wrong as well:
Value vs. Growth 2016
Value down 7.8%
Growth down 7.9%
value: energy, autos, industrials, financials
growth: tech, internet, healthcare,
One of the only strategies I have seen that works (or at least produces less losses) is sell high volatility, buy low volatility.
High vs. low volatility
High Volatility down 16.8%
Low Volatility down 4.7%
High volatility are stocks that have a high sensitivity to market movements (typically energy, tech, solar, biotech); low volatility (typically consumer staples and utilities) do not.
You can see this in the performance of several high volatility names:
High Volatility 2016
Freeport-McMoran: down 42%
Wynn Resorts: down 14%
Cameron Int'l: down 7%
First Solar: down 6.8%
And the better performance of stocks that are low volatility:
Low volatility 2016
Campbell Soup: up 3.3%
Clorox: up 0.6%
Kellogg: down 1.4%
Coke: down 2.4%
P&G: down 4.2%
There's an old saw on Wall Street, that there's two types of selling: intellectual and non-intellectual. Intellectual selling is where you don't like a stock because you don't like the earnings prospects, or the economic prospects. Non-intellectual selling is when you are being forced to sell when you don't want to.
We seem to have entered the non-intellectual part of the selloff.
The "doom loop" is shaking up stock markets as worries of negative interest rates in the US may come.
The rivalry between Bill Gross and his former company Pimco looks set to hinge on the U.S. economy this year. FT reports.
Tender issued for euro-denominated unsecured bonds worth 3 billion euros and dollar-denominated bonds worth $2 billion.