The bulls fumbled the ball just as they got it, giving the bears ample opportunity to rout the market again. There was no real news to support any selling. Instead we actually got some positive news from the weekly jobless claims. It just seemed that bond buyers were active, biotechs continued their decent and took the rest of the equity market lower.
From the Mailbag
I asked readers to send some questions for me to answer. Here are a few:
Q. Are we going to get a 15% correction to get in the markets?
A. There are several questions in one here. First as to the correction. We will likely get a correction, the magnitude of which is uncertain. It is likely in the 5 – 10% range, for which we might already be in the process of as the S&P 500 (SPX) is 3.39% below its intra-day and all time high set last week. It just seems to feel worse than that right now because of the larger decline in the NASDAQ 100 (NDX) of 6.70% from its high in March. A correction of greater than 10% is not likely unless there is an exogenous event (i.e. earthquake, political problem, war, etc.) or the FOMC unexpectedly raises its Fed Funds rate. The second part of the question is saying that you are on the sidelines unless and until we get a 15% or greater correction. That might keep you waiting forever to get into a market that could run away from you. Develop a portfolio of good stocks and stick with them while constantly doing your homework on those very same stocks. Most of all don’t get caught up in short term market fluctuations as investing is for the long run. Just ask Wharton Professor, Jeremy Seigel who even now sees the market in the midst of a healthy rotation. In the interest of full disclosure,, I am a Wharton graduate. Lastly, predicting market tops and market bottoms is a fool’s errand, so I suggest that you don’t attempt to do so.
Q. What is your price target for Apple (AAPL)?
A. The short answer is $640 for the end of this year. The long answer is that this company is still growing and sells for less than the market multiple. In the third year of this quarter Apple will be rolling out new products that will generate another wave of product and stock buying.
Q. What will make you bearish on the market? (this question in one form or another came from several people )
A. I begin my view of the markets from a macro perspective, i.e. the economy. From there I drill down to the micro, individual companies, sectors or asset classes. As for economy, while it is growing in the US, it is growing at a modest pace. I expect that within the next year we could achieve escape velocity and begin to grow at a more normal pace. There are five major macro factors which must come together to indicate that we are headed into a recession or bear market. They are:
- An inversion of the yield curve. We are nowhere near that right now with the 2/10 spread (the difference between the 2-year and 10-year US Treasury is now 2.28%. My good friend and colleague Tony Dwyer looks at the 6 month / 10 year spread which is currently wide by 2.58% and is further from inverting.
- Net job losses for two consecutive months. While job growth is barely above the rate of population growth, nevertheless it is still positive by well over 100,000 non-farm jobs on average every month.
- Declining corporate profits. Profits are now growing at a modest pace but that should accelerate. The stock market is leveraged to small increases in corporate profit growth.
- Decline in credit market demand. While that is related to my first factor in this list, it is not necessarily the same concept. The cleanliness of corporate balance sheets is allowing them to issue debt at historic cheap rates. Pension demand for credit issuance remains unabated.
- Once the market multiple for the SPX exceeds extreme levels of about 20 to 21 where prior bear markets have begun. It now sands at around an average level of 16 to 17, depending on your calculation of earnings.
Thus, unless the above begins to materialize, or a major exogenous event occurs, the bull market in stocks will remain intact and declines will just be normal pullbacks / corrections in a bull market
Banks Report Earnings
As for today, both JP Morgan Chase (JPM) and Wells Fargo (WFC) reported earnings. JPM is trading about 3.5% lower in the pre-market after that bank reported lower than expected results. The causes seems to be lower trading profits, thanks to the Volker Rule and FOMC tapering; a decline in mortgage originations; and, continued payment of fines to the Federal government, the later which uses JPM as its piggy bank. WFC reported a record for quarterly net income bettering Wall Street expectations and is trading fractionally higher in the pre-market. Wells Fargo is the biggest mortgage originator in the nation. The bank reported mortgage loan originations of $36 billon which was down from $50 billion in the prior quarter. Mortgage applications also fell to $60 billion from $65 billion. The company’s mortgage pipeline does look brighter at $27 billion at the end of the most recent quarter compared to $25 billion at the end of 2013. Is it just possible that the winter weather had a role to play in the mortgage figures across both companies? I believe so. Expect to hear the same when other banks like Bank of America (BAC) report next week.
So, with the sell-off yesterday and the slump in JP Morgan Chase shares, pre-market futures are indicated to be off in the range of ½% to ¾%. There is more going on in my opinion. Next week is a big holiday week with Passover taking up Monday evening through Wednesday night and coincides with Holy Week ending in Holy Thursday and Good Friday. It is what I call a B-Team week where many schools are off and the A-Teamers take time off. The A-Team is likely to be front running the slow holiday week trimming positions ahead of the holiday week before leaving the B-Team in charge.
As for me, I will be taking the week off from writing to celebrate Passover but also because my daughter is scheduled for back surgery. I will restart publishing My Gut Feeling on Monday April 21. My best wishes for a Ziessen (sweet) Pesach and Happy Holiday to all.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BAC — although positions can change at any time.
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