Performance Update for Week of 6/24 - 6/28

Jun '13 Mfr. ISM & NFP Projections ...

We have our projections for two of the market moving economic data that are being released this week, manufacturing ISM and the BLS employment report.

We estimate manufacturing ISM of 51.6, higher than the 50.5 consensus.  After seeing improvements in most of the regional manufacturing survey results, especially in the Philadelphia Fed survey, combined with last month's very disappointing 49.0, we think we will see a slightly bigger bounce in June than what many economists have estimated.  We note that our so-called more optimistic projection is not an indication of faster economic growth.  The manufacturing ISM index will be released on Monday (7/1).

BLS employment report is scheduled to be published on Friday (7/5).  We estimate NFP change of only +125K, significantly below the 161K consensus.  Increase in non-seasonally adjusted initial jobless claims, along with not-much improvement seen in regional business surveys, we think can be viewed as indications of a disappointing June employment report.  Of course, given the ongoing multi-year trend in more-than-normal economic data revisions, who knows, maybe the May NFP figure will be revised down, making the June NFP change look a bit better.  But again, we expect a miss.

Other economic data to be released in the upcoming week include the ADP employment report, the Challenger Job-Cut report, non-manufacturing ISM, and initial jobless claims. 

Performance Update for Week of 6/17 - 6/21

The equity market would certainly like to forget about last week as S&P 500 declined more than 2%.  

With indications that the Fed may begin tapering in Q4, the 10-yr yield jumped 40bps from last week and ended the week nearly 50bps above where it was last month.  Such a reaction is due to worries that the Fed will begin to end its monetary easing policy.  Higher rates are not due to a much better economy, in our opinion.  Inflation remains very low, which basically shows that overall demand has not increased enough to push prices higher.  As we have said many times before, the improvement in corporate profitability that we have seen the last few years has been driven mostly by cost cutting measures, not by higher demand, which would have led to higher prices and more hiring.  Wage growth has remained stagnant.  

So, overall, the jump in rates was a reaction to what many think will be the removal of the stock market and the economy from their "life support system".  Of course, the higher rates impacted utilities, consumer staples and healthcare sectors a bit more.  But, in our opinion, once the overreaction fades away, and participants understand that higher rates were not driven by expectation of faster economic growth, we could see more money going into those defensive sectors.  As displayed in the last table, staples and healthcare have outperformed the overall market YTD and since March '12.  Simply put, what may be taking place is the realization that while QE has inflated asset prices,  it has not necessarily helped the economy.  And once a strategy is ineffective for a long period of time, the thought of abandoning it has to come to the forefront, which then leads to the equity market slowly trying to discount that ever-present QE premium.  

Regarding some economic numbers, we did not mention last week that the initial jobless claims were disappointing.  They came in at 354K, significantly above the 340K consensus and prior week's 336K (which was revised up from 334K).  The upcoming week will be a busy one as May durable orders, new home sales, and personal income growth will be reported.  In addition, the weekly initial jobless claims, along with Q1 GDP growth, Chicago PMI and the final University of Michigan consumer sentiment will be released.  Reactions to this data will likely create more volatility even though many will also be waiting for the June job numbers due out the day after the 4th of July. 

By the way, on Friday after the close, it was reported Facebook (FB) admitted that a bug (which supposedly has been fixed) exposed email addresses and telephone numbers of possibly 6MM users to other people to whom they may have been directly or indirectly connected.  This news along with what we have learned regarding the NSA and its Prism project, make us think that we are nearing an inflection point where benefits of all of this non-private social media (at times forcibly, and many times unknowingly, non-private) no longer outweigh their various costs.  Like it or not, want it or not, many are getting 'linked' to one another only for the benefit of advertisers.  At least LinkedIn (LNKD) services have the potential of providing very good benefits: jobs! 

Is good news bad news or is it good news?!

Good news remains bad news for the equity market.  The Philadelphia Fed survey and existing home sales came in above expectations, but the market said 'no thanks' and continued to decline.  S&P 500 is down another 1.4%.

What we consider as the most reliable regional manufacturing survey, the Philadelphia Fed survey, came in above expectations.  The index for June was at 12.5, up from -5.2 in May, and higher than the Street's -1.0 estimate.  Some important sub-indexes showed improvement.  They include new orders (16.6 vs -7.9) and shipments (4.1 vs -8.5).  The decline in inventories, to -6.6 from 4.1, might be a good sign in the short term.  It could also be partially responsible for the improvement in new orders.  Employees sub-index still showed continuing decline, although at a slower pace.  It improved to -5.4 from -8.7 in May.  Given the average workweek sub-index's move into positive territory (0.8 from -12.4), we could see more slight improvement in employment next month. 

Existing home sales for May came in at an annual rate of 5.18MM, above the 5.00MM consensus and higher than April's 4.97MM rate.  More than 85% of sales in May were of homes priced at $500K or lower.  However, in terms of the Y/Y sales growth, homes priced above $500K were the strongest.  Months supply was pretty much unchanged at 5.0.  We note that the 30-year fixed mortgage rate has increased to over 4.00% from around 3.75% about a month ago.  For this reason, June existing home sales figures (to be released in July) may not turn out to be this impressive.  

We have stated this on twitter and also in previous posts - as the economy shows improvement (although not at an impressive rate), QE tapering or natural increase in rates will begin to discount the QE premium that has been priced into the equity market for some time; and this could get the market closer to a valuation based on fundamentals.  Bernanke is in a tough spot.  Based on projections released by the FOMC (which we discussed in our previous post), the federal funds rate could move up to between 2% and 3% in 2015.  The current decline in the equity market could be a sign that it is trying to price in expectations of higher rates.  

S&P 500 has left the linear regression level far behind.  It is now also below its both downward sloping 50-day and 10-day EMAs.  It has also gone below the 1610 support level we mentioned in our last post and is approaching the next Fibonacci retracement level which still stands at 1595.  If the market closes this low today, we could see a dead-cat bounce on Friday or next week.  After all, a two-day 3% decline in the stock market is considered significant, especially with the QE policies still in effect.

Negative reaction to the FOMC statement

The equity market dipped after the release of the FOMC (Federal Open Market Committee) statement and the Bernanke press conference.  More specifically, S&P 500 closed down 22.88 points, or 1.39%.  

In our opinion, the behavioral and psychological strategy implemented by the Fed is coming back to bite it you-know-where.  It has gotten to a point where every word that is said or printed will move the market.  As an example, just because the word "taper" or "tapering" was not in the statement, the market's reaction to FOMC was positive initially.  

Even so-called journalists with their so-called close ties and connections with the Fed (which is just another part of the psychological plan, similar to the government's very consistent and timely 'leaks') are becoming stars for posting market-moving articles about what might be said by Bernanke.  

Unfortunately for the bulls, even though tapering was not used, the Committee did state that it "sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall."  Simply put, this means that the necessity for further easing is diminishing.  The Fed won't just turn it off tomorrow, but it is trying to tell the market, in a very nice way, that we are getting closer to pushing that 'off' button.  Yes, the quantitative easing will continue, but probability of tapering continues to increase.

However, although the Fed stated that risks to the economy have gone down, we note that many of the latest numbers indicate a slowdown.  For this reason, we think the Fed is stuck between a rock and a hard place.  Returns on such unprecedented easing, in economic terms, are not something to write home about.  Certainly, the stock market has hit new highs and commodity prices are increasing again (not mostly driven by higher demand), but economic figures are giving us a different story.  Of course, the Fed remained consistent in blaming the lawmakers for the slow economic growth by saying "household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth."

FOMC's projections are below.

           Source: Federal Reserve Board and FOMC (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf)

As you can see above, FOMC tightened the range of real GDP growth for 2013 by lowering the high-end of the range.  It did the same for 2015.  However, it upped its 2014 estimate, and did not change its "longer run" estimate.

The table above also shows that unemployment estimates for 2013 - 2015 were brought down slightly, which is good news; but not good for the QE-driven equity market.  

With the slightly more optimistic real GDP and unemployment projections, we were surprised to see that the FOMC actually lowered its 2013 - 2015 inflation estimates.  Just by looking at the 2014 GDP and unemployment revisions (of which, both indicated more optimism), one would think that headline and core inflation would also move up; but again, the FOMC expects inflation rate to actually decline.  

We may be wrong, but in our opinion, such 'discrepancy', could be a sign of the Fed being really stuck in a tough situation.  It appears that while it wanted to let the market know that it thinks the economy is improving, it also wanted to make sure the market understands that just in case it does not, given such low levels of expected inflation, it can continue its QE policies.

From a technical standpoint, S&P 500, closing at 1628.93, remains within striking distance of going below its linear regression level of 1625.  In addition, although it stayed above its 1616 50-day EMA, it did dip below the 1635 10-day EMA level.  It appears that 1610 is the next support level.  Lastly, after Tuesday's nice gain, it looked like the MACD was on its way to reversing its downward trend, but today's decline, put a stop to that, at least for now. 

Equity market bouncing very nicely this morning ...

Let's start with the good news.  First, there's an overall expectation that this week's FOMC will sound more dovish.  Second, the latest Housing Market Index (HMI) of 52 for June was the highest it has been since 2006!  Third, the first two pieces of good news have pushed the S&P 500 up nearly 1%.  

The not-so-good news is the Empire State Manufacturing survey, as although it came in much higher than expected, seven of its nine sub-indexes declined and were either at 0.00 or in negative territory.  The overall index came in at 7.84, a huge improvement from last month's -1.43, and certainly above the expectations of no change.  We find it very difficult to explain such an encouraging figure when new orders, shipments, unfilled orders, inventories, number of employees, and average workweek, all declined significantly.  Number of employees sub-index dropped from 5.68 to 0.00, and all other sub-indexes stated earlier declined further into negative territory.  By the way, the 6-month forward looking index, along with what we consider as important sub-indexes, was also lower.  

We would like to say "don't let the smooth taste fool ya", but then again the equity market is already up 1% this morning.  Regarding the names that we follow, AVID is up 0.5%, BCOR up 1.8% and nearing its 52-week high, FB remains near where we think it should be valued at, but is up 2%, and IACI is approaching $50, up 1%+.

Performance Update for Week of 6/10 - 6/14

PPI, industrial production, and consumer sentiment all miss ...

Overall, today's economic figures were far from being impressive.  

At least based on the headline PPI number, the hope of tapering the taper talk was dimmed a bit.  May PPI increased 0.5% from April, higher than the economists' 0.2% estimate.  Excluding food and energy, the m/m increase was in-line at 0.1%.  Of course, many look at the figure that excludes food and energy due to the volatility of those two groups.  But then again, given the less elastic demand of food (or comparatively speaking, the inelasticity of demand for food), we think changes in food prices will impact everyone and should be taken into account.  Food prices alone went up 0.6%, mostly driven by increase in egg prices.  We wonder if different government organizations will now suddenly launch 'health campaigns' against egg consumption!  Crazier things have happened!

Energy prices increased 1.3%, driven mainly by gasoline prices.  This goes along with our assumption about the retail sales numbers that we mentioned earlier this week; however, those retail sales numbers did not verify the assumption.  We were probably one month too early.  We could see higher gasoline prices impact CPI in June, therefore also having an impact on June retail sales.  If next week's May CPI comes in a bit high though, then hopes of tapering the taper talk, especially within the FOMC statement, could be dimmed even further.

Industrial production remained pretty much unchanged, which is what we had anticipated.  However, that was slightly below the 0.2% consensus.  We note that the April m/m change was revised to -0.4% from -0.5%, which makes the 'adjusted' consensus for May 0.1%.  But again, the expectation was a bit high.  We also expected a miss on capacity utilization, which did take place, but the miss was around 20bps more than we had projected.  Capacity utilization came in at 77.6%, below our 77.8% and the Street's 77.9%.  The no-change in production, accompanied by nice decline in capacity utilization, is not good news when it comes to the state of employment, in our opinion.  

The University of Michigan consumer sentiment figure also missed expectations; 82.7 vs 84.5.  

With disappointing economic numbers, the market is barely down, especially given the fact that it spiked nearly 1.5% yesterday.  Again, the Hilsenrath impact cannot be ignored.  We will see if Mr. Hilsenrath has written an even more dovish version to be published just in case next week's CPI numbers come in too high.  We wouldn't be surprised, as these days (or the past 3+ years), Bernanke and Hilsenrath have done a very good job implementing behavioral and psychological strategies to 'force' most to take more risk without much fundamental or economic justification. 

Herr Hilsenrath demonstrates heroism once again ...

Well, as we assumed on Tuesday night (http://mogharabi.blogspot.com/2013/06/update.html), Mr. Hilsenrath went to work and published another great dovish article to help everyone relax a bit.  The result is today's huge turnaround with the S&P 500 jumping nearly 1.5% and closing at 1636.4.  

Hilsenrath's article heading says it all: Analysis: Fed Likely to Push Back on Market Expectations of Rate Increase. (http://blogs.wsj.com/economics/2013/06/13/fed-likely-to-push-back-on-market-expectations-of-rate-increase/?mod=WSJ_hpp_LEFTTopStories)

Although such a move was very easy to anticipate, as we did, we must ask who (or what group) knew exactly when Hilsenrath was going to publish this?  The market jumped before the article came out, and one cannot say it was driven by the 'good enough' economic news.  Whether it is economic data or the publishing of an article by an 'influential' 'journalist', the ones that get the info first always win.  

From a technical standpoint, MACD turned up a bit today, so the upwards trend, which has been in the market since mid-Nov. '12, has not changed yet.  Slope of the regression line increased slightly, moving the latest linear regression level to 1619.9, from 1617.  

In addition to Hilsenrath's article, a miss in tomorrow's PPI, industrial production, or University of Michigan consumer sentiment could further taper the talk of tapering, which could push the equity market a bit higher.  No one wants good economic data!  So it is not too difficult to realize that the market remains very dependent on the Fed. 

Update on Economic Data ...

Initial jobless claims came in better than expected with no revisions for the prior week; 334K (down 12K from prior week) vs 350K. Of course, the seasonal factor did its job as the non-seasonally adjusted figure was up more than 37K from the prior week. But as they say, these seasonal adjustments get cancelled out over the year; at least we hope so. 

Headline retail sales m/m change of 0.6% was higher than the 0.5% consensus. However, excluding auto and gas, the 0.3% increase was inline with expectations. 

The equity market is responding as well as it can with the S&P 500 being up 0.12%. 

BCOR: H&R Block Misses Q4 Expectations

H&R Block (HRB) disappointed on the top and bottom-line with EPS of $2.54 and revenues of $2.2bil, missing the $2.60 and $2.3bil estimates, respectively.  While this, along with profit taking, may explain Blucora's (BCOR) decline lately, it will likely push the stock down a bit further.  Of course, BCOR is up 18.2% since we suggested it, compared with S&P 500's 6.9% gain. And BCOR did hit its 52-week high of $18.92 in late May. 

When it comes to BCOR, we believe the HRB miss will be forgotten about soon.  As a reminder, BCOR's fiscal calendar is the same as the regular calendar.  For this reason, most of BCOR's tax services revenues were already reported in its Q1 report, and were impressive.  In addition, the very narrow-range guidance that the Company provided for Q2 tax service revenues, $23.0MM - $23.5MM, shows that management had a pretty good idea about revenues coming in during Q2.  For this reason, the risk of BCOR missing on the top-line in Q2 is minimal.

May '13 Industrial Production Estimate ...

S&P 500 had another bad day, closing down 0.84% at 1612.5.  It also closed below the 1617 regression line that we touched on yesterday.  Of course, today's decline cut the MACD nearly in half to 2.44.  It is closing in on the zero line with the average still above it at 8.04.  The upward trend has not only stopped, but it is set to turn into an effective downward trend unless helped by some economic data and/or the Fed.  Retail sales and initial jobless claims data will be released tomorrow, followed by May PPI and industrial production on Friday.  

Again, we think May retail sales may have been helped with slight uptick in gasoline prices during the second half of May.  Auto sales will likely be flat after the nice 1% pop last month.  So, while the headline figure might come in-line or better than the 0.5% m/m change consensus, we think retail sales, excluding autos and gasoline, could come in slightly below the 0.3% consensus.  

Initial jobless claims are pretty difficult to project, especially given the seasonal factors applied and BLS' consistency with its revisions.  The consensus is 350K. 

Regarding Friday's industrial production number, given the continuing disappointment in ISM-manufacturing, we think it will come in pretty much unchanged at 98.76 (a mere 0.02% change) compared with April's 98.74.  The consensus is for a 0.2% change or 98.94.  Although most of the regional surveys' work week figures declined in May, we think given lower production, capacity utilization remained at 77.8% compared with economists' estimate of 77.9%.

Update ...

S&P 500 dipped around 1% on Tuesday as, very surprisingly, Japan paused central planning for a bit.  As we mentioned on 5/11, we believe the equity market is overvalued, partially due to the ever-present QE premium.  Of course, as is the case with any centrally managed/controlled economy and equity market, once those central planners see signs of economic weakness or not as much growth as desired, they begin to taper the talks of tapering.  Do not be surprised if this takes place sometime this week.  Who knows, Mr. Hilsenrath and Bernanke may be discussing variety of strategies each with behavioral impact on some institutional investors but certainly on 100% retail investors; or so they hope.  We still value the S&P 500 at around 1475.  We are not saying it will get there tomorrow or next month, but at some point, we think within the next 12 - 18 months, the reality of fundamentals will take over, no matter how many 'green shoots' or 'sugar highs' Bernanke throws at the market.

From a technical standpoint, at 1626.13, S&P 500 is not far away from going below its linear regression level of 1617.  Before getting there, it will have to break through and stay below the 'semi-support' level of 1625.  By the way, since we last discussed the MACD level being too high (5/22), it has dropped from 24.05 to 4.67 (as has S&P 500, from 1687 to 1626), but it remains below its average.  For this to reverse, we think MACD would have to start up-trending and cross above its average, which currently stands at 9.45.  One more thing on the technical side, the next level of the Fibonacci Retracement is around 1595, which if the market goes below, it can dip all the way to the 1540 - 1550 range.  But as is with technical analysis, everything can change very quickly.

Some potential market moving economic indicators being released later this week include the May retail sales, weekly initial jobless claims, May PPI and May industrial production.  

We think May retail sales may have been helped with slight uptick in gasoline prices during the second half of May.  Auto sales will likely be flat after the nice 1% pop last month.  So, while the headline figure might come in-line or better than the 0.5% m/m change consensus, we think retail sales, excluding autos and gasoline, could come in slightly below the 0.3% consensus.  

Initial jobless claims are pretty difficult to project, especially given the seasonal factors applied and BLS' consistency with its revisions.  Economists have projected a seasonally adjusted figure of 350K.  As usual, most of them are likely being 'uber conservative' with their estimates. 

We will post our industrial production and capacity utilization estimates by Thursday.

Performance Update for Week of 6/3 - 6/7

May '13 NFP Pretty Much In-line with Expectations ...

Our NFP projection track record certainly is not improving.  With all the news about NSA/PRISM and basically the 'Big Brother' watching over everyone (http://www.washingtonpost.com/wp-srv/special/politics/prism-collection-documents/), who knows which numbers released by BLS are legitimate or accurate.  But the market continues to move based on these figures, so we have to pay attention.  May change in NFP was 175K, which included a net -12K adjustment in NFPs for March and April.  For this reason, that 175K change should be looked at as 163K which is pretty much in-line with the consensus, and significantly higher than our 95K guesstimate.  

The winners were jobs in retail trade and temp help services with net changes of +27.7K and 25.6K, respectively.  Jobs in healthcare, and leisure and hospitality also grew.  Weakness was evident in manufacturing, as jobs in that sector declined for the third consecutive month.  Government jobs also declined, but the rate of decline has been decelarating the last couple of months.

With all of those good numbers, average weekly hours remained flat, and hourly earnings went up by only a penny.  Wages continue to lack growth.

On the household survey, the number of people unemployed for more than 27 weeks increased in May, unlike in March and April.  Decline in unemployment duration of 5 - 14 weeks and 15 - 26 weeks was more than offset by increase in  the ones unemployed for less than 5 weeks.  

The U-6 unemployment rate went down 10bps to 13.8%, matching the March level and below last year's 14.8%.

S&P 500 futures up 0.65%.  Of course, such initial positive reaction is not a surprise.  We must note that the talk of QE exit strategy will resurface which could put the QE premium that is everpresent in the equity market at risk.  Lastly, watch what you do and say as the 'Big Brother' is watching you!

More Disappointing Economic Data ...

We got more bad economic news this morning as the ADP employment report along with April factory orders were disappointing, while non-manufacturing ISM barely beat the consensus.

ADP private payroll number for May was 135K, significantly below the 171K consensus.  The April figure was also revised down by 6K.  This is not good news regarding Friday's BLS employment report.  It appears that the Street's NFP change expectation of 167K might be a bit too optimistic.  Then again, our 95K projection is certainly out of the Street's 147K - 210K range of estimates.  

April factory orders improved 1% sequentially, but such improvement was still below the 1.4% expectation. In addition, the March figure was revised from -4% to -4.7%.  Monday's manufacturing ISM report certainly goes along with the factory orders.  

ISM non-manufacturing index of 53.7 was slightly higher than the 53.5 consensus.  New orders and business activity sub-indexes improved, while employment, exports, imports, and inventories did not.  Slowdown in inventory growth, combined with a too-high of an inventory sentiment (62.5) certainly indicates the uncertainty out there among many different types of businesses.  We think the dip in inventories may also explain increase in new orders, as backlog of orders remained flat.  

At least for the time being, bad economic news is impacting the equity market negatively.  We will see if the Beige Book, to be released later today, will provide any psychological healing.  S&P 500 is down 0.90%, while VIX is up nearly 7%.  AVID is getting worked, down 1% at $6.50.  BCOR is down 0.8% at $17.80, while FB continues to take a dump, down 1.4% at $23.19.  We note FB is now below the $23.50 valuation we gave it a long time ago.  We'll see if management can come up with some new gadgets and gimmicks to keep the stock above $20.  Lastly, IACI is up 0.5% at $48.50.

April Construction Spending up 0.4%

As a follow-up, we forgot to mention the other disappointing economic indicator released this morning, construction spending for April.  It increased 0.4% from March, but this so-called rebound was below the consensus of 1.0%.  We note that the decline in March was revised a bit lower, from -1.7% to -0.8%.  private non-residential outlays led the way with a 2.2% increase.  Growth in non-new housing, new housing, and MDUs (multi-dimensional units) slowed down a bit.  In fact, while new housing and MDU construction spending grew more than 1%, non-new housing plummeted by more than 3%.  Public outlays continued to dip, down another 1.2%, after declining nearly 3% in March.

Disappointing May '13 Manufacturing-ISM

Manufacturing ISM for the month of May came in below expectations.  The index value of 49.0 was bad news, bad economic news and not necessarily bad equity market news.  First, that figure was not only below the Street's 51.0, but also below our 50.4 projection.  Second, anything below 50.0 indicates lack of growth.  We are not saying slower growth; we are saying no growth, actual contraction.  The only sub-indexes above 50.0 were employment, exports and imports.  We must say that all of those sub-indexes did decline from the prior month.  

Let's look at it this way: new orders, backlog of orders, production, and deliveries all plummeted to below 49.0; while employment remained above 50.0 (at 50.1 and lower than April's 50.2), inventories went up to 49.0, exports declined to 51.0 (from 54.0), and imports, although 0.5 below last month's, remained high at 54.5 (comparatively speaking, of course).  We think this is bad news as it indicates lower current and future demand, higher costs (especially on the HR front), and a good chance of inventory build-up the next couple of months.  

Of course such bad economic news is good news for the equity market as long as the Fed keeps the market 'high'.  Many hope that bad economic news will push a Fed exit strategy further out, meaning that its QE strategies will continue going into maybe the next decade, or generation, or century.  

S&P 500 responded kindly to such bad economic news by closing up nearly 0.6%.  As long as such policies force many to 'invest' in riskier assets, such as equities, and as long as the value of those assets continue to get inflated (ignoring lack of income or wage growth), then everyone and everything is fine.  Well, of course that is not true, but maybe we can say: as long everyone thinks everything is fine, then everything is fine.  

Again, non-manufacturing ISM and ADP will come out on Wednesday (6/5), initial jobless claims on Thursday (6/6), and May's employment report on Friday (6/7).  On the employment front, our estimate is not even close to the Street's 167K.  We are expecting only a 95K increase in NFP for May.  Wednesday's ADP report will indicate if our NFP projection is a wacko one or not.  Let's hope the employment report will not disappoint, because the market could behave as it did last Friday (or even worse) after even just a slight miss.

ISM & NFP Projections; Performance Update for Week of 5/28 - 5/31

Although last week ended with S&P 500 down more than 1%, the month of May was a good one, up more than 2%.  But after hitting all-time high of 1687.18 on 5/22, the index gave back more than 3%.  Many are now discussing the gap between the fundamental-based valuation and where the market is currently trading at ... finally!  In addition, various Fed strategies are now being discussed more openly, with QE-exit being the main topic.  

As our weekly data indicate, consumer staples was a disappointment.  The 4% pull-back was mainly due to Procter & Gamble's (PG) and Coke's (KO) 6% and 5% declines, respectively.  PG went down as it released disappointing earnings; and KO, besides having to give back a bit after having gone up more than 17% since beginning of the year, the Company now has some doubters given increasing focus on obesity and somewhat slower pace of growth in China.  Then again, KO does have some 'healthy' products.  In addition, it is summer time and we believe the demand for KO products will remain strong.  Some favorable macro data have come in for the staples sector, at least for the short to medium term.  They include increasing CPI for food items combined with declining PPI for food items.  

This week will certainly be a busy one.  ISM manufacturing data for May will be released on Monday, followed by non-manufacturing ISM and ADP employment report on Wednesday (6/5), initial jobless claims on Thursday (6/6), and May's employment report on Friday (6/7).

We think tomorrow's ISM manufacturing will slightly disappoint.  We are expecting 50.4, a bit below last month's 50.7 and the Street's 51.0 estimate.  Data released by some of the regional Reserve Banks do point to a no-change to decline in manufacturing.  

On the employment front, our estimate is not even close to the Street's 167K.  We are expecting only a 95K increase in NFP for May.  If the market doesn't change much going into Friday's May employment report, let's hope the report will not disappoint, because the market could behave the way it did last Friday (or even worse) after even just a slight miss. 

Performance Update for Week of 5/20 - 5/24

It's early, but FYI, equity futures down approx. 1% ...

It appears that the market needs either better economic data or further confirmation or assurance that it will remain centrally managed and controlled by Bernanke and the Fed.  Mr. Bernanke's testimony on Wednesday was not as effective as many had expected.  We find it interesting that while the Fed is trying to be as transparent as possible regarding how it is managing this supposed free market and economy, it is also trying not to be too transparent to make sure everyone still believes that this is a free market and economy!  All of this has gotten the market more and more addicted to the Fed's QE.  At times it appears that the market, lawmakers, entertainment/business TV networks, and everyone else are saying what Cypress Hill used to sing in the early 1990's: "I want to get high, so high ...". (http://www.youtube.com/watch?v=cXQ0CyZpmZo)

We note that the equity market no longer reacts as significantly to positive or negative macro news as it did the last few years, which means there are some companies that remain undervalued and/or under-followed.  However, in the meantime, as the market has kept hitting new highs, a pullback, basically of any significance, has become more likely.

S&P 500 futures are down around 1% right now.  And on the global front, the Asian markets are taking a hit mainly due to the disappointing Bernanke testimony and decline in China's preliminary manufacturing index for the month of May.  Japan's NIKKEI 225 index is down 7%.  Then again, it had skyrocketed 45%+ from the beginning of the year. 

Things don't look that great from a technical standpoint.  After spiking up nearly 6% in less than a month and hitting the all-time high of 1687.18, S&P 500 has a huge gap to fill.  Its next support level, we think, is around 1595, which is also its next Fibonacci Retracement level and where the linear regression line is currently hitting.  If it goes below that, which the Fed and lawmakers will do their best to prevent from happening, then 1540 would be the next support level.  In terms of MACD (moving average convergence/divergence), it went as high as 25.1 and ended Wednesday at 24.1.  Last time the MACD value hit that level was in late Oct. '11, after which the market experienced a near 10% pullback.    

Of course, potential losses within the US equity market could be pared or avoided if Thursday's initial jobless claims and new home sales numbers come in much better than expected.  The consensus for initial claims is 345K, while economists expect April's new home sales to have edged up slightly to 425K, from March's 417K.

AVID: Received a second letter from NASDAQ

Avid (AVID) received a second letter from NASDAQ basically warning the Company again that it has not filed its quarterly and annual reports on time.  This is certainly bad news, but based on lack of updates from AVID the last couple of weeks, it was somewhat expected.  The glass is not empty; in fact, based on the information in the Company's press release, it appears that while things are not good, they may be better than many had expected.

• AVID submitted its plan to NASDAQ regarding how it will try to regain compliance.  While such plan requires approval from NASDAQ, if approved, the Company will have until mid-September to file the CY '12 10-K.  If it can do that, we think the quarterly filings will follow shortly after.  
• AVID provided an update, although a vague one, on what it has discovered during its evaluation of the accounting treatment of maintenance revenues, or as the Company stated, the "Software Updates".  It found that it needs to restate not only Q1 - Q3 for CY '11 and CY '12, but also the 10-Ks for CY '09 - CY '11.  However, according to the Company, while it appears that the main issue is the timing of revenue recognition, "the restatement adjustments are not expected to affect the amount of total revenue ultimately to be earned, or the amount or timing of cash received or to be received, from the sales transactions or the Company's liquidity or cash flow for any prior period."
• The Company also said that it may have overstated its restructuring expenses by around $3.5MM for Q3 '12.  

We are not saying that this is a safe bet now.  In fact, as this 'discovery process' is ongoing, AVID could find additional issues.  However, if (a big if), AVID successfully regains compliance by mid-Sept., one could again primarily look at the Company's valuation and take out the compliance and accounting risks that have dragged this stock down.  And appears that it will drag it down further for the time being as AVID took a 12% dump in AH on Tuesday. 

Performance Update for Week of 5/13 - 5/17

Move along, nothing to see here!

With disappointing initial jobless claims and Philadelphia manufacturing survey results, the market is pretty much saying 'no problem', as the S&P 500 is now green.  It appears that Hilsenrath's article about the Fed's 'maybe, maybe not' QE exit strategy has done its job - the market reacts positively to good economic news, and it reacts positively to bad economic news.  Interesting that while there was so much debate going on around whether or not insurance companies must be forced not to automatically reject people with pre-existing health conditions, everyone keeps pushing and begging the Fed to keep 'insuring' the equity market.  As we have said before, we are going along for the ride, but at these levels, for safety reasons, we're holding on to something as it might get bumpy. 

Regarding AVID, the stock spiked up 2% at around 11:15AM (ET), on pretty good volume.  The deadline for the Company to submit a plan to NASDAQ on how it will regain compliance is Monday, 5/20.  With the resignation of former CEO, Gary Greenfield, from his latest so-called consulting position, some are thinking that AVID will provide an update sooner than later.  And it appears that some (or someone) bet about 30 minutes ago that the update will be good news. The stock is up only 1.5% now for the day.

IACI: More good news ...

Unlike most news coming from Congress these days, we are happy to say that the latest regarding IACI's Aereo is good news.  According to an article published by The Hill, Sen. Mark Warner (D-Va.) said to TV broadcasters yesterday that "threatening to withdraw content because of these other challenges, that really raises for me the question of whether you ought to be able to keep that spectrum for free, which is a public good and maybe could be utilized for better public purposes." 

http://thehill.com/blogs/hillicon-valley/technology/299679-sen-warner-fires-warning-shot-at-broadcasters-over-aereo

Aereo continues to expand in different markets around the country, with Atlanta being the latest one.  Aereo has come out ahead in courts and it appears that even the lawmakers are on its side.

You can be the judge ...

Could this be the start of one last push by professionals to get more retail investors in the game and drive the market higher one last time before the Fed begins to wind down QE?  You can be the judge ... Fed QE Tapering Now Needed To Avoid Bubbly 'Hyper Drive

(http://www.forbes.com/sites/afontevecchia/2013/05/14/david-tepper-caused-a-break-in-market-sentiment-fed-qe-tapering-now-needed-to-avoid-bubbly-hyper-drive/)

On another note, IACI continues to perform well.  It is up 3% at $51.74/sh on ok volume.  It appears that a few funds increased their holdings in IACI during Q1.  Even though we upped our valuation of the Company just recently on 5/1 (to $54/sh from $52/sh), the stock is now around 4% from reaching it.  BCOR is up more than 1%, at $17.85.  As a reminder, we increased our valuation to $21.25/sh (from $19.00/sh) last week.  We did see some profit taking earlier this week.  While the overall equity market keeps disappointing the pessimists, although again we believe it is overvalued, some immunization to FB due to its disappointing performance appears to be at work.  The stock is down nearly 1%, even though the market turned positive approx. 30 minutes ago.  And AVID is pretty much flat right now. 

Equity Market Flying High!

S&P 500 is up nearly 1% even though there's been talk of the Fed slowly exiting QE. Could this be the last 'umpf' for the market before a small correction?  As we noted last week, the equity market is overvalued, in our opinion. Pretty soon we could see that QE premium, currently priced in, get discounted. In fact, today's uplift includes not only the cyclical sectors, but also the utilities sector, up nearly 1%, along with other defensive a such as healthcare and consumer staples. By the way, VIX is up 5%+; still below $15, but looks like the VIX and equity market divergence is beginning to converge, at least early on today. 

IACI: Aereo Expanding faster than many expected

Aereo announced that it'll be in the Atlanta market in June (https://aereo.com/pr/atl). 

IACI is up 2%+ approaching $50/sh on heavy volume. 

Fed Maps Exit From Stimulus (WSJ)

Well, soon after we posted our thoughts about the overall equity market (S&P 500), Mr. Hilsenrath, 'the market savior' journalist of The Wall Street Journal, published an article discussing the Fed's QE potential exit strategy.  Hilsenrath has been a savior for the equity market the last couple of years, as pretty much every time there was bad economic news, he would get 'hints' from the Fed that further QE would be pushed to up the stock market, hopefully increasing everyone's wealth via the good 'ol 'trickle down' economics.  Well, this time, his article is about the exit strategy, and surprisingly, he published it on a Saturday!  Remember that we did touch on the Fed approaching an exit strategy and how that might take out the 'QE premium' that is currently priced in the equity market.  Enjoy the article (link included).

"Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations. ... " - Fed Maps Exit From Stimulus (WSJ)

http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html

Performance Update for Week of 5/6 - 5/10

 

Is S&P 500 Overvalued?

As more than 90% of the S&P 500 companies have reported Q1 results, combined with continuation of modest economic recovery, and state of employment being in a slightly better shape than we have been projecting, we thought to take a look at the S&P 500 to see whether it is undervalued or not.  In our opinion, it is overvalued.  

Let's start with 2013 projections.  According to S&P, 2013 S&P 500 EPS (operating income estimates from bottom up) are expected to grow 13% Y/Y.  This growth is partially driven by the overall economic recovery; however most of it is from margin expansion, which is due to company cost-cutting measures and not necessarily top-line growth.  But let's say, demand increases and companies will be generating higher revenues.  Unfortunately, given the significant cost cutting measures implemented the last 5 years, increase in demand will demand higher costs such as increased headcount.  What will keep cost increases somewhat in check will be continuing stagnation in wage growth.  We note that although commodities have taken a hit recently, any further confirmation of continuing economic growth will push them up again, increasing costs for companies.  In addition, many geopolitical factors are still in play.  While capex and other investments may increase, which is good news, again, we think it will be limited.  It will be tough for public companies to show shareholders that the bottom-line can continue to grow.  Of course, many could change their accounting methods and make those non-GAAP EPS look good, but that's another topic for another time.  

So we could basically see modest increase in demand, higher headcount, lower margins, and not much of an increase in consumers' disposable income.  Simply put, at least in the short to medium term, higher demand might be costly for many companies.  All of this will make the continuation of strong EPS growth less likely. 

Based on where the S&P closed at on 5/10, it has a forward P/E of 14.9, based on 2013 EPS projections.  We think this indicates that the index is overvalued.  Based on the 5-year CAGR consensus of 10.7% and a 2.1% annual dividend yield, we think S&P 500 should be valued at approx. 13x 2013 EPS, or at around 1429.  This represents a PEG of 1.0.  At 1633.70, the index is 14% above what could be its fair value based on 2013 numbers.  Obviously, there is a QE premium built into this.

Now, given that we are almost half-way through 2013, let's look at 2014.  Based on the $123.13 EPS estimate, it appears that only 12% Y/Y EPS growth is expected in 2014, lower than this year's 13%.  This goes along with what we mentioned earlier regarding lack of further significant margin expansion going forward.  Given declining bottom-line growth, we think the P/E (along with the dividend yield) should represent a PEG of slightly below 1.0.  We applied a mere 5% discount to our 2013 13 EPS multiple, which resulted in a 12.35 P/E.  Applying this to 2014 EPS estimate, gave us a valuation of approx. 1521 for the S&P 500, representing a 7% downside from where the index closed on Friday. 
 

We still have half of 2013 ahead of us, so we took the midpoint of our estimates, 1475, as our projected fair value of the S&P 500 for the next 12 - 18 months, representing a 10% downside. 

There are certainly other factors that can push the S&P 500 much higher or lower.  They include continuation (or not) of the Fed's QE policy, improvement (or not) of the state of the economy in the EZ, potential stability (or not) in the Middle East, and many other factors.  However, we think the Fed should be thanked for such a huge premium that we are seeing when it comes to the value of the equity market.  Unfortunately, its time will come, and we and the market will have to adjust.  As the economy keeps improving and as Bernanke will be trying his best to avoid the creation of another bubble, we think we are getting closer to that time.  From a fundamental standpoint, the S&P 500 should be valued at around 1475 during the next 12 - 18 months, in our opinion.

BCOR: Upping Our Valuation to $21.25/sh (from $19.00/sh)

Given that Blucora (BCOR) has increased 24%+ since we mentioned it in late Jan. (nearly 3x that of the S&P 500), is now within only 1% of our valuation, and that we are nearly half-way through 2013, we are introducing our 2014 estimates, along with the new price target of $21.25/sh.  Our new valuation represents a sum-of-parts: 6x search adj. EBITDA, 8x tax services EBITDA, and $148.7MM in net cash.

We have not adjusted our 2013 estimates: search revenues of $387.9MM; search adj. EBITDA of $58.2MM; tax services revenues and adj. EBITDA of $97.6MM and $48.8MM, respectively. 

For 2014, we expect continuing double-digit top-line growth within the search segment; 15.1%, compared with our conservative 2013 projection of 12.5%.  Although overall online search revenue growth is expected to slow down a bit in 2014, we expect BCOR's adjustments to Google's (GOOG) latest pricing policies to be completed by Q3 of 2013, from which the benefits will be seen in 2014 revenue growth.  While such transition will be successful, we see BCOR also focusing on pushing the O&O share of search revenues a bit higher.  With all this said, we expect EBITDA margin to remain flat at 15% compared with our 2013 projection, which, again, we believe to be conservative.  We look for 2014 search revenues and adj. EBITDA of $446.5MM and $67.0MM, respectively.

Regarding BCOR's tax services segment, we expect nearly an 8% revenue growth in 2014, driven mainly by a higher NFP estimate for 2013, which means likely more tax payers in 2014 tax season.  We estimate an average of 200K change in NFP per month in 2013.  In addition, we think 2014 TaxAct's total units, as a percentage of 2013 NFP will go up a few bps to approx. 4%.  This translates into approx. 5.5MM total units during 2014 tax season, generating around $94.6MM in revenues.  For Q3 and Q4 '14, we expect additional $3.0MM in revenues, bringing 2014 total tax services revenues to $97.6MM.  In addition, we think BCOR's marketing, development, and partnership strategies will pay off more next year, possibly increasing this segment's EBITDA margin to 50%, which equates to $48.8MM in EBITDA, 11% growth from the prior year.

Again, our sum-of-parts valuation based on 2014 numbers, results in $21.25/sh; 13% upside from where BCOR closed at on Friday (5/10).  Lastly, BCOR management will be presenting at JMP Securities Research conference in San Francisco on Monday (5/13).

Performance Update for Week of 4/29 - 5/3

We did not have a chance to post our weekly updates (or any other post) for a couple of weeks.  We are certainly trying our best to remain consistent.

• AVID has actually hung in there better than we thought.  The Company has not yet updated the Street regarding its review of how it recognizes some services revenues.  It also has not provided any color about if or when it will release FY '12 and Q1 '13 results.  If this issue is resolved, and we currently have no idea whether it will be or not, then based on our $9/sh valuation, there is a 31% upside.  However, such upside is associated with a lot of risk.
• Some good Q1 results and positive guidance brought some attention back to BCOR.  It is only 7% away from reaching our valuation of $19/sh.  For this reason, our 'undervalued' label is pretty close to becoming an exaggeration.  We could see some profit taking this week, especially given the big jump in the name late last week.
• FB went up a bit after its Q1 results, and we continue to view it as overvalued.  Others have similar opinions on FB as we posted a bit earlier today.
• IACI has been moving up steadily.  Its near 2% dividend yield is a plus.  It came within 8% of our initial $52/sh valuation.  However, we upped it to $54/sh, and with that, there is still a 12% upside, even after the near 20% gain since late Jan.  We note that similar to BCOR, our 'undervalued' label on this name is pretty close to becoming an exaggeration. 

FB: Facebook's Results Fail to Impress (Barron's)

This is part of what Barron's said about Facebook (FB) on Sat., 5/4; similar to what we have been saying for a long time and our latest post on 5/2, after the Company's earnings release.  Link to the story is also provided below.

"Facebook racked up big gains in mobile advertising, but at the expense of its core desktop business. With a market value of $71 billion and annualized mobile revenue of just $1.5 billion, that's hardly something to celebrate ... " - Facebook's Results Fail to Impress (Barron's)

BCOR Up 19%+; NFP Beat Expectations; "Bull on bull ..." ...

It appears the 'macro worry' that we had yesterday, thinking it may limit BCOR's increase after good Q1 numbers, was actually a non-worry.  BLS reported NFP change for April higher than our estimate and the Street's.  We note that after the disappointing ADP report on Wednesday, many economists lowered their NFP guesstimates, which brought the consensus down to 145K. BCOR was upgraded to a 'buy' by Craig Hallum research, and the stock is up more than 19% on heavy volume.  IACI is up 2.6%; AVID just hit the $7 mark for the first time since late Feb., and FB is down 0.3% or 9c.

Non-farm paryolls increased by 165K in April, higher than our 150K and the Street's 145K estimates.  The data (which we hope is not 'fiddled' with) provided by BLS shows slight weakness in goods-producing jobs, more specifically in construction.  Strength was apparent on the private-service side, with leisure & hospitality, temp, retail, and healthcare leading the way. 

In terms of hours and earnings, although average pay increased by 4c, average weekly hours worked declined to 34.4 from 34.6 in March. 

In addition, while the headline unemployment rate declined by 10bps to 7.5%, what we consider as the real unemployment rate (U-6 in the BLS report) increased for the first time this year, up 10bps to 13.9%. 

BLS also revised the last two months' NFPs much higher, which is good news. However, lately, including the monthly revisions, something a bit unusual has happened - monthly net changes in ADP and BLS (NFP) reports have been diverging a bit.  Who knows what data by which org is being 'fiddled' with or if everything is legitimate, but that's something to keep an eye on. 

Lastly, the way the equity market is moving, as someone tweeted earlier this morning, "You are witnessing bull porn here ... Bull on bull action"!