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Financial Pacific: Four things you probably do not know (third party) november 29,2010

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Financial Pacific: Four things you probably do not know (third party) november 29,2010 Financial Pacific: Four things you probably do not know (third party) november 29,2010 Document Transcript

  • Four Things You Probably Don’t Know November 17, 2010 Richard Bernstein Four Things You Probably Don’t Know We continue to believe that we are in the earlier phases of a much more normal bull market than most investors realize. By our reckoning, stock markets have four phases: 1. Denial: The bull market can’t happen. Shouldn’t be happening. Won’t continue. 2. Acceptance: Fear of missing out leads investors to increasingly participate. 3. Brainwashing: New investment world. The bull market is never going to end. 4. Bear market: The end of investing as we know it. The current bull market in the US that began in March of 2009 seems to be mired in Phase 1. Most investors can’t believe that it is happening or don’t believe that it can last much longer. Because of this fear and disbelief, there are a number of important facts that investors seem to be ignoring. Here are just four: #1: The US dollar troughed in 2008. Although the consensus seems to be that the US is “debasing” its currency, few seem to have noticed that the US dollar actually troughed in 2008 and has been appreciating for more than two years. As Chart 1 shows, the DXY Index, plotted using weekly data for the last ten years, bottomed on St. Patrick’s Day 2008. Chart 1Richard BernsteinAdvisors LLC520 Madison Avenue28th FloorNew York, NY 10022212-692-4000www.rba-llc.com
  • Four Things You Probably Don’t Know #2: Industrial America is heating up. Many of our proprietary indicators look at changes in economic or financial indicators, because financial markets tend to move not on “good or bad”, but rather on “better or worse”. Accordingly, we regularly examine changes in capacity utilization rates in 55 different US industries. A year ago, only 11 of those 55 industries were experiencing improving capacity utilization; today, that number has risen to 46. This does not mean that those 46 industries are experiencing full-fledged bottlenecks that result in significant pricing power. But it does indicate that production is improving. (One would expect to see production bottlenecks in the latter stages of the economic cycle, and they may yet come, but it would be very unusual to see such bottlenecks in an early- to mid-cycle period such as the current one.) Chart 2, which shows 12-month changes in capacity utilization rates for 55 industries, strongly indicates to us that the US economy is not heading for a double-dip. Capacity utilization continues to increase, not decrease, across a broad range of businesses.Chart 2 Year/Year Difference in Industry Capacity Utilization as of 10/31/10 21 Percentage Point Difference from 1 Year Ago 14 7 0 -7 Nonmetallic mineral prod. Other manufacturing, sa Petroleum and coal prod. Food Apparel Total index, sa Paper Chemical Machinery Primary metal Durable manufacturing (NAICS), sa Manufacturing (NAICS), sa Mining (ex oil and gas) Elect power gen, trans and dist Leather and allied product Mining Manufacturing (SIC), sa Apparel and leather gds Textiles and prod. Textile mills Fab. metal prod. Primary & semifinished proc. (capacity), sa Synthetic rubber Miscellaneous auto and light duty mot. veh. Mot veh and parts Iron and steel prod. Electr equip, appl, and component Bev and tobacco prod. Mfg ex. hi-tech and mot veh & pts. Finished processing (capacity), sa Nondurable mfg (NAICS), sa Oil and gas extraction Support activ for mining Metal ore mining Crude processing (capacity), sa Plastics and rubber prod. Food, bev, and tobacco Coal mining Printing and support activ. Wood product Transp. Equip. Textile product mills Semicond. and related equip Natural gas dist. Computer and electr. Prod. Nonmetallic mineral mining and quarrying Furniture and related prod. Computers, com eq., and semicond. Electric and gas utilities Computer and peripheral equip. Mfg ex. computers, com eq., and semicond. Total ex. computers, com eq., and semicond. Com equip. Aerospace and misc. transp. eq. Source: Richard Bernstein Advisors LLC, FRBRichard BernsteinAdvisors LLC520 Madison Avenue28th FloorNew York, NY 10022212-692-4000 2www.rba-llc.com
  • Four Things You Probably Don’t Know #3: Positive revenue surprises are increasing in the US, but negative EPS surprises are growing in EM. Corporate profits have been much stronger than most analysts forecasted a year ago, and are now near their record high as a proportion of national income. It seems odd to us that investors have not regarded the rebound in corporate profits as a bullish development. In fact, most investors still believe that corporate profits are growing only because of cost cutting. Profit cycles typically begin with a period during which profits growth is driven by improving productivity, and the current cycle was no different. As profit cycles mature, revenues typically begin to grow as well. Again, this cycle seems no different. It is well known that over 70% of S&P 500 companies reported positive earnings surprises during the latest reporting period. What is less well known is that, according to Bloomberg, over 50% of S&P 500 companies reported positive revenue surprises for the same period. Investors appear to be caught up in the prevailing emerging-markets euphoria because, evidently, they have not noticed that emerging markets produced the largest proportion of negative earnings surprises during the latest reporting period -- according to Bloomberg, 40% of reporting EM companies, which is roughly twice the proportion found in the US. Table 1 Revenue and EPS Surprises by Global Region (as of 11/15/10) Positive Negative Revenue Positive EPS Revenue Negative EPS Surprises Surprises Surprises Surprises MSCI Japan 37% 49% 50% 29% MSCI EM 53% 46% 34% 40% Russell 2000 53% 56% 33% 33% S&P 500 53% 71% 33% 20% MSCI ACWI 55% 59% 37% 31% MSCI Europe 69% 63% 29% 30% Source: Richard Bernstein Advisors LLC, MSCI, BloombergRichard BernsteinAdvisors LLC520 Madison Avenue28th FloorNew York, NY 10022212-692-4000 3www.rba-llc.com
  • Four Things You Probably Don’t Know #4: The US recovery is relatively “normal”. The current path of US GDP in this recovery is much more normal than most investors realize and is, in fact, largely retracing its paths following both the 1990 and the 2001 recessions. Although both those recoveries were weak by post-WWII standards, the current overall economic recovery is not at all unusual. Note in Chart 3 how closely the current recovery matches those of the past two recessions Chart 3 Economic Growth Emerging from Recessions 150 Dec-49 GDP Indexed from Trough 140 Jun-54 Jun-58 130 Mar-61 Dec-70 120 Mar-75 110 Sep-80 Dec-82 100 Mar-91 90 Dec-01 Jun-09 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters Past Trough Source: Richard Bernstein Advisors LLC, NBER, BEA As Charts 4 and 5 indicate, the stock market tends to follow the path of corporate profits, and that is indeed the case with this recovery. Of the ten post-WWII economic recoveries, seven corporate-profits cycles were stronger than the current one, and three were weaker. In stock market terms, three were stronger and seven were weaker. Chart 4 Chart 5 Corporate Profits* Growth after S&P 500 Performance 16 Months Recession Troughs After Recession Troughs 60% 60% 45% 40% 30% 15% 20% 0% -15% 0% -30% Mar-75 Mar-91 Mar-61 Dec-82 Dec-70 Dec-01 Dec-49 Sep-80 Jun-58 Jun-54 Jun-09 Dec-49 Mar-75 Dec-70 Dec-82 Mar-91 Mar-61 Dec-01 Sep-80 Jun-54 Jun-58 Jun-09Richard Bernstein Recession Trough Recession TroughAdvisors LLC Source: Richard Bernstein Advisors LLC, NBER, BEA Source: Richard Bernstein Advisors LLC, Morningstar520 Madison Avenue *Computed after-tax, with IVA & CCA adjustments four quarters after trough.28th FloorNew York, NY 10022212-692-4000 4www.rba-llc.com
  • Four Things You Probably Don’t Know This cycle’s wall of worry Phase 1 of a market cycle is typically characterized by the proverbial “wall of worry”, when investors tend to overlook or ignore relevant facts (like those presented here) supportive of market performance, and we think that is clearly the case today. Richard Bernstein is chief executive officer of Richard Bernstein Advisors LLC. Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in, any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. Specifically, and without limiting the generality of the foregoing, before acquiring the shares of any mutual fund, it is your responsibility to read the fund’s prospectus. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investors investment horizon, appetite for risk, and ability to withstand a potential lossRichard Bernstein of some or all of an investments value. Investing is an inherently risky activity, andAdvisors LLC investors must always be prepared to potentially lose some or all of an investments value.520 Madison Avenue Past performance is, of course, no guarantee of future results.28th FloorNew York, NY 10022212-692-4000 5www.rba-llc.com
  • Four Things You Probably Don’t Know INDEX DESCRIPTIONS: The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website. Indexes are not available for direct investment. DXY Index: International Currency Exchange (ICE) US Dollar Index. The ICE US Dollar Index, indicating the general international value of the USD, averages the exchange rates between the USD and six major world currencies, using rates supplied by some 500 banks. S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries. MSCI ACWI: MSCI All Country World Index (ACWI). The MSCI ACWI is a free-float- adjusted, market-capitalization-weighted index designed to measure the equity-market performance of global developed and emerging markets. MSCI EM: MSCI Emerging Markets (EM) Index. The MSCI EM Index is a free-float- adjusted, market-capitalization-weighted index designed to measure the equity-market performance of emerging markets. MSCI Europe: MSCI Europe Index. The MSCI Europe Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of developed European markets. MSCI Japan: MSCI Japan Index. The MSCI Japan Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of Japan. Russell 2000: Russell 2000 Index. The Russell 2000 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index.Richard BernsteinAdvisors LLC520 Madison Avenue28th FloorNew York, NY 10022212-692-4000 6www.rba-llc.com