MarketView for September 26

 

 

Summary  

 

The markets rallied sending all three major equity indexes well into positive territory by the closing bell on Monday as positive sentiment with regard to the situation in Europe appeared to once again be on the road to resolution. Specifically, European officials indicated in relatively strong terms that they would find a way to cut Greece's debt and shore up European banks. Of course they forgot to mention exactly how they were going to do this. Nonetheless, the market rallied to session highs during the afternoon on word that a plan to leverage money from the European Financial Stability Facility was in the works.

 

There has been a considerable amount of reluctance on the part of the investment world with regard to making any sort of long-term commitment to equities, primarily because of conflicting reports as to whether or not European officials really were serious with regard to taking the necessary steps to solve the EU’s credit difficulties. Moreover, the markets have become very sensitized the EU’s somewhat unsuccessful efforts to cauterize the euro zone's credit crisis that has Greece teetering near a default.

 

However, talk of plans for a 50 percent write-down in Greek debt and improvements in the euro-zone rescue fund did add some life to the day’s trading activity. Yet, European officials called the talk premature. A CNBC report cited a top European official, who said the plans involved using leverage and the European Investment Bank to buy sovereign debt to save European banks.

 

Financial shares ranked among the session's best performers, with JPMorgan Chase ending the day up 7 percent to close at $31.65, while Citigroup also gained 7 percent to close at $26.72. However, the Nasdaq's gains were limited after a report on Apple suggested the tech company was cutting back on some key orders. Apple’s shares fell 0.3 percent to $403.17 after an analyst said the iPhone maker was cutting orders from suppliers of parts for its iPad tablet.

 

The CBOE Market Volatility index fell 5.4 percent but remains more than 20 percent higher for the month.

 

Boeing’s shares did their part for the Dow Jones industrial average a day after the company delivered its long-awaited Dreamliner to its first customer. Boeing’s shares closed up 4.2 percent at $62.01.

 

Berkshire Hathaway is planning a share-buyback program, an unprecedented move from Buffett that comes after months of investor complaints that the stock was undervalued. Shares of Berkshire Hathaway's more actively traded Class B stock soared 8.6 percent to $72.09.

 

In economic news, sales of new single-family home sales fell in August to a six-month low in another sign the U.S. economy is flagging.

 

About 8.75 billion shares changed hands on the major equity exchanges, a number that was slightly above last year's daily average of 8.47 billion shares.

 

Drop in August New Home Sales

 

According to a report released Monday morning by the Commerce Department, single family new home sales fell in August by 2.3 percent to a seasonally adjusted 295,000-unit annual rate.
That number marked a  6-month low for new home sales and it was also a strong indicator that the key housing market is unlikely to aid in economic growth to any great extent in the immediate future. Unfortunately, the reading was in line with Street estimates and did little to surprise the Street one way or the other.

 

The median price of new homes fell 8.7 percent from July, with weak incomes and a moribund job market keeping sales under duress. The report also continues the pressure on the Federal Reserve and President Barack Obama to try and do more both the economy in general and the housing market in particular. The Fed last week unveiled new measures to try to ease credit further for homebuyers, especially given the fact that last week’s economic reports indicated that new home construction declined in August.

 

Meanwhile, the government raised its estimate for July's sales pace to 302,000 units from the previously reported 298,000 units. In addition, the supply of homes available on the market dropped to a record low.

 

You Are Being Taken Advantage Of?

 

Over and over I have written in both Streetwise and MarketView that you the individual investor is basically cannon fodder for professional traders. Virtually everything you think you know about the stock market is most likely wrong. And the professional traders on Wall Street are deeply appreciative. You are enabling them to earn a very profitable living.

 

It’s a basic premise of behavioral finance, that individual investors of an amateur variety behave irrationally when it comes to their investments. People are panicking like the world is coming to an end? For the professional that is exactly the “Time to buy.”

 

However, if your golf caddie or neighbor is right up there with “It cannot lose” stock tips during a raging bull market, well to the professional that is the time to start thinking about taking some money off the table.

 

Enter the investor sentiment reading.  A few key metrics, such as  the American Association of Individual Investors Bull Bear Index track what individuals are thinking about Wall Street. For true contrarians, the findings are just as telling as some of the more fundamental metrics such as price/earnings or free cash flow. For example, when the average investor is overly bullish or bearish, then that is an indicator to professionals to think about going the other way.

 

And right now, individuals are down on investing on Wall Street. The AAII index is currently at 30.5 percent bulls, virtually unchanged from the week before. Once it’s below 30 percent, it is time to think about adding to your portfolio, not subtracting from it. This is particularly true when you have an event such as last Thursday’s massive selloff with the Dow dropping a few hundred points to below 11,000.

 

Sentiment readings are not some hocus pocus new to the party pieces of data. In fact, they can trace their lineage to the original value investor, Ben Graham, who held that the market is a fickle and irrational beast. He quotes different stock prices virtually every second, based on the whims of the moment, and smart investors can examine company fundamentals to identify seriously mispriced equities. Moreover, the vast majority are clueless when it comes to data such as the AAII bull – bear number.

 

Of course, investor sentiment isn’t exactly a slam-dunk metric. If it were, then everyone would be filthy rich already. Tread especially carefully if speculating in embattled individual stocks. Sentiment readings won’t be of much help if – as with BNP Paribas, say – you’re stepping in front of a speeding train. That said, a few pointers for leveraging investor sentiment to your best advantage:

 

Look for longer-term trends - A one-week blip, of an unusually high bullish or bearish numbers, shouldn’t be enough to start moving money. Once you’re hitting three or four weeks of persistent numbers, that’s the real tipoff that investors are feeling overly doomed or elated.

 

Realize their limitations - The AAII reading isn’t a truly scientific result, in that it’s a voluntary member survey. “While the organization has 150,000 members, we understand that only several hundred regularly participate,” stock-market research firm Birinyi Associates wrote in a recent research note. As the product of a self-selecting process (like political exit polls), the data is useful for understanding broad-strokes trends but should not be taken as absolute gospel.

 

Weigh readings from multiple sources - Since survey samples can be relatively small, it’s possible a particular metric could get a one-week reading that’s out of line with popular sentiment. For a better bird’s-eye view, always look at a variety of polls.  What you are looking for  are extreme values from multiple indicators, because after that sentiment usually changes and the market along with it.

 

Don’t expect immediate results - If you buy after a period of extreme bearishness, and don’t realize quick profits, don’t despair. This is a longer-term tool, not something for the day-trading set.

 

Can Amazon Ruin Apple’s Day?

 

Amazon.com, which revolutionized reading with its Kindle e-reader, is expected to unveil a tablet computer this week that could potentially challenge Apple's market dominating iPad. Amazon on Friday invited media to a press conference to be held in New York on Wednesday, declining to provide further details.

 

However, many of those being invited indicate a degree of confidence that the world's largest Internet retailer will introduce its long-awaited tablet computer this year to expand in mobile commerce and sell more digital goods and services.

 

The tablet has been awaited as a strong competitor to Apple's iPad. Apple has sold about 29 million of the devices since its launch in April 2010.

 

In much the same way Amazon's Kindle e-reader was priced low to quickly get traction among readers the company is likely to keep the price of its tablet low to attract users and sell other content and services.

 

While Amazon has not ever admitted the device's existence, the TechCrunch blog earlier this month wrote that the Amazon tablet also will be called Kindle. It is expected to be a 7 inch device with a full color, touch screen, run on Google's Android software and cost $250, the blog said, well below the price of the least expensive iPad.

 

The tablet could pose a major threat to Apple because of the Kindle's popularity and the movie and music services Amazon sells. The device also takes aim at Barnes & Noble's NookColor device, which hit the market last year and features tablet functionalities.

 

Several technology companies like Research In Motion and Samsung have introduced tablets that sold poorly. Hewlett Packard Co announced recently it would abandon its tablet.

 

Amazon shares finished the day up 0.2 percent at $223.61 on Friday on Nasdaq. The stock had traded as low as $219.06, but rallied as invitations to the media event began arriving.

 

Berkshire Hathaway Implements Share Buyback

 

Berkshire Hathaway, the company run by Warren Buffett,  said it will launch a share buyback program, an unprecedented move from Buffett that comes after months of investor complaints that the stock was undervalued.

 

Many believe that Berkshire’s shares are at their cheapest in a generation and even analysts who are cautious on the stock have acknowledged that it appears to be attractively priced. Yet Buffett has held his ground, preferring deals that grow margins and provide a return.

 

In his letter to shareholders last February, Buffett bragged that "not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years." But Berkshire said on Monday it was now willing to pay up to 10 percent more than book value for the stock.

 

"In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise," Berkshire said in a statement.

 

Buffett is effectively buying two things cheaply -- Berkshire as an operating company for a broad set of industrial and consumer businesses, and Berkshire as a portfolio of stocks that have been heavily sold of late.

 

Berkshire Hathaway Class A shares rose 5.3 percent to $105,600 in late-morning trading, while the more actively traded Class B stock rose 5.8 percent to $70.17. Last week, both classes fell to their lowest point since early 2010.

 

The company said it would use cash on hand to fund the buybacks, but would not buy any shares if doing so took the company's cash position below $20 billion.

 

As of June 30 Berkshire's book value was $98,716 per Class A share, which would suggest the company would be willing to pay up to $108,588 per share in the buyback program.

 

Berkshire had $47.89 billion cash at June 30 but has spent at least $15 billion this quarter on acquisitions and investments, most notably the chemical company Lubrizol and a preferred stake in Bank of America. Assuming Berkshire spent $10 billion buying back stock at the top of its stated range, it could end up repurchasing nearly 10 percent of its Class A shares.

 

Berkshire recently made a take-it-or-leave-it offer for re-insurance company Transatlantic Holdings that was rebuffed, an indication it is still in the market when the deal is right and companies are cheap, as is the case with Transatlantic. The buyback is just the latest sea change at Berkshire, which is slowly transforming itself as Buffett ages and begins to look toward the future of the conglomerate.

 

That future has been at the forefront of investor thinking since early this year, when Buffett's presumed heir apparent David Sokol left the company amid a scandal around his own personal investments in Lubrizol.

 

Berkshire has now brought on two investment managers who will help run its portfolio after Buffett retires, and the board is believed to have a short-list of candidates who would replace the "Oracle of Omaha" as chief executive.