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Weekend Reading: November 16-17

11/15/2013

Technical Update

The S&P 500® Index (SPX) established another new all-time of 1791.53 on Thursday, November 14. Beginning Monday, November 18, there are only 30 trading days remaining in 2013. I encourage investors to remain focused first and foremost on “managing the risk” during the upcoming period. Along those lines, Figure 1 refreshes our SPX technical formation, which remains as pristinely bullish as has been traced out since the mid-1990.  Investors seeking a nearer price point of reference than the previously defined 1729.86 support level may incorporate the November 7 low of 1746.20 (red circle) into their risk management strategy.

Figure 1 S&P 500 Index (SPX), prior 365 days

Source: Bloomberg

February 7, 2014

While only 30 trading days remain in 2013, there are just 84 calendar days until the opening of the Sochi 2014 XXII Winter Olympics on February 7. Oh, yes…February 7 is also the perceived deadline for policymakers in D.C. to extend the U.S. debt ceiling. I expect the media attention that day can rightly focus on the opening of the Sochi games, and not the debt ceiling, as the recent resolution quietly allows the Treasury department to use “extraordinary measures” for funding. That allowance provides at least $200 billion dollars to be utilized that could easily push the debt-ceiling deadline into mid March. Factor in early 2014 tax revenue receipts ahead of April 15 and further dividend contributions from Freddie Mac, and the real deadline might just be a Q2 2014 event.

Despite The Emerging Markets

Rather impressively the SPX has shaken off the weakness emanating from the emerging markets this month. The MSCI Emerging Markets Index (MSCI) (Figure 2) has fallen 4.12% during the month of November, while the SPX has gained 1.94%. This past August the MSCI experienced a similar bout of weakness that did impact global markets and sent the SPX into a modest correction. I suspect the difference in performance for the SPX between August and November is the positive contribution from current domestic economic news and recent earnings. The weakness is emanating from the usual suspects list such as Indonesia (-6.7%), India (-5.47%), Brazil (-5.02%), and Russia (-2.59%). Investors should continue to seek opportunities in emerging market economies with exposure to the United States. The month-to-date performance of two such economies support that strategy: Mexico (-1.35%) and South Korea (-1.05%).

Figure 2 MSCI Emerging Markets Index (MXEF), prior 365 days
 
Source: Bloomberg

Earnings Update

The calendar Q3 earnings season is approaching its close. Within my Q4 playbook I emphasized the favorable tailwind from profit margin growth during 2013. This quarter’s earnings results provided evidence that the profit margin tailwind had strengthened. This quarter’s acceleration places current profit margins (Figure 3) at 8.92%, nearly 50 basis points higher than the year-ago quarter’s 8.40%.  Additionally, overall SPX sales growth stands at +2.77% and EPS growth at +4.39%. SPX sales growth ex-financials is currently +3.12% and EPS growth ex-financials is +3.70%. Figure 4 takes a detailed look at the SPX sector breakdown for this quarter’s earnings.

Figure 3 SPX Profit Margins, prior five quarters

Source: Bloomberg

Figure 4 SPX Calendar Q3 2013 Earnings Results


Sector

Reported

Sales Growth

EPS Growth

Quarter to Date

Year to Date

Overall SPX

463/499

2.77%

4.39%

6.49%

25.55%

Overall Ex-Financials

383/419

3.12%

3.70%

-

-

Consumer Discretionary

65/84

7.23%

12.44%

6.76%

36.45%

Materials

31/31

2.32%

9.10%

6.26%

18.91%

Utilities

31/31

3.23%

3.07%

4.74%

12.08%

Technology

61/66

4.27%

7.76%

6.82%

18.63%

Industrials

58/63

1.67%

7.65%

7.40%

31.50%

Consumer Staples

35/40

2.04%

3.53%

8.74%

24.01%

Health Care

52/54

5.73%

0.70%

6.75%

35.42%

Financials

80/80

0.55%

7.22%

5.65%

28.31%

Energy

44/44

0.06%

-8.91%

5.15%

22.07%

Source: Bloomberg

Japan

While major equity indices for developed nations such as the United States and Germany have been able to advance to new yearly highs, the Nikkei 225 (Figure 5) still remains below its May 25, 2013 yearly high. I expect recent price action for the Nikkei and Japanese yen (Figure 6) suggests an attempt to challenge that previous yearly high in the remaining weeks of 2013. 

This week Janet Yellen dismissed the premise of a bubble for risk assets. Whether you agree with her or not, the impact clearly is supportive of risk assets. Across the pond, the European Central Bank took action to defend against the reemergence of deflationary pressures with an interest rate cut. Both those actions suggest that the runway for further monetary easing from the Bank of Japan (BOJ) has been lengthened.

Japanese Prime Minister Shinzo Abe and BOJ Governor Kuroda face the implementation of an April 2014 consumption tax. Concurrent with the tax implementation, investors should expect the next round of monetary easing as an offset to the tax.  

This week’s Japanese Q3 GDP print of 1.9% was disappointing following 3.8% Q2 GDP and 4.3% Q1 GDP. That weakening should also motivate policy makers to ready the next round of monetary and fiscal stimulus. For the balance of 2013, investors should maintain a focus toward opportunities in Japan; this month’s Nikkei performance and the yen’s weakening provide evidence for that.

Figure 5 Japanese Nikkei 225, prior 365 days

Source: Bloomberg

Figure 6 Japanese Yen, prior 365 days

Source: Bloomberg

The Week Ahead: November 18-22

  • Investors may want to keep an eye on the performance of U.S. banks in the wake of the Moody’s ratings review released on November 14. Financials rank in the lower end of the nine major sectors for the current quarter. I view the Moody’s results as having the potential to accelerate the financial sector’s performance. There were no big surprises in the review, and the ultimate arbitrator, the credit market, responded positively, with yields on both Morgan Stanley and JP Morgan subordinated paper actually falling.
  • U.S. economic news will include results for October retail sales, October housing data, November Philadelphia Fed and FOMC minutes from the October 29 meeting
  • November 20 Bank of Japan meeting
  • 26 SPX companies release earnings results, largely from the consumer discretionary sector with 15 companies reporting

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.