About once a month, market watching gets the best of me. It's important to find a mental happy place, sort of like how Happy Gilmore mused, so that the investing brain can recharge.
Tracking (and trading) the market on a granular level has its pros and cons. There is the development of this uncanny feel for the market, as if you would bet the ranch on ABC happening to a stock price if DEF news is released. Unfortunately, that pro also becomes a con as too much love is shown to words emanating from a second-tier EU politician who -- at the time of ramping negativity on risk assets -- appears to carry the weight of a first-tier politician. News tends to consume the recesses of the brain until it becomes an inhibitor to sound investment decisions.
After shaking my head in response to Best Buy's (BBY) quarter (tax rate funny games, the continuation of an absurdly large share repurchase plan to basically make an earnings number so year-end bonuses could be paid), going "yup" as Polo Ralph Lauren (RL) issued a subpar initial fiscal year sales outlook owing to Europe and trying to play political analyst on the probability of a Eurobond, I opted to enter a happy place from noon until 6 p.m.
No news consumption, just old-school reading on investing with the promise on the white board to return to analyzing the markets later in the evening. The goal of this badly-needed exercise was to see if I was giving a disproportionate amount of respect to well-worn themes in the market (Grexit, etc.) and not seeing reasons to be more optimistic on stocks near/medium-term. But nothing changed thought-wise, especially after digging around in the e-mail box.
Credit Suisse says in a client survey:
- 59% of its clients thought stocks would be the best-performing asset class in the next year.
- 64% of its clients thought high profit margins were here to stay in the next three years.
Those hopping aboard the AAII survey as a contrarian indicator on the market, welcome. I will jump off this train for a moment and zero in on the above numbers, which to me scream undying optimism on the part of investors on stocks because they believe in a land of perpetually rising profit margins. Forget Europe's periphery falling into the water and China data points indicating a RRR slashing will take time in reversing slowing growth, the U.S. undoubtedly is going to shoulder the profitmargin expansion load. Well, I hate to be the plague virus in the water trough of the bulls, but if we lose 3% to 4% in GDP growth in 2013 from fiscal cliff lunacy, profit margins are going down in a hurry, making 2014 a year of profit margin recovery. That would be a shame as not every single company in the S&P 500 has retained its 2006 peak EBIT margin rate.
An always-fun numbers read from Bespoke says:
- S&P 500 has a dividend yield of 2.1%, below the long-term average of 3.93% dating back to 1924.
Many companies have been unwilling to pay more of their higher-than-expected post-recession earnings out in the form of dividends, which suppresses the S&P 500 dividend yield. I also think the low yield relative to the historical norm is a function of investors clinging to losing positions instead of cutting bait to free up capital for stronger opportunities. Either way, investors are not being properly compensated for the risk of owning, or buying more of, a stock. Earnings risk is increasing and earnings are not getting plowed back into robust dividend increases (kudos to Polo Ralph for doing the right thing with its dividend).
For those that have inquired, I continue to think Best Buy will do away with its dividend in order to support its turnaround efforts and there is risk of credit rating downgrades.
Overall, I sense we are setting up for a gun-slinging environment heading into the massive amounts of data set for release next week, most notably on Friday.