With so much focus over the past few months on global macro issues I thought it would be a good idea to point out some of the positive stories playing out at the “micro” level. While major macro-economic headwinds are present and likely will remain present, corporate earnings and relative valuations tell another more positive story. While the macro rift may well continue to drag down our markets, the hurdle seems to be set low enough that we may well be able to clear it quite easily.
Flight to Bonds
This year investors have been moving assets from equities to bonds on a large scale. While this may seem rational with the uncertain economic situation we are in, it seems investors are not accounting for any potential rise in interest rates. If they do increase at some point in the future bond market volatility could easily swing asset prices down as much as 40-50%. While the bonds eventually would return to par, the 15-30 years it would take to do so are years that the demographic investing in bonds does not have. This may very well be a time in which investors are fleeing the asset they should be flocking to.
Source: Investment Company Institute, Ascendant Advisors, LLC. As of November 16, 2011
|Sector||% Beating||% Missing|
Source: Bloomberg, Ascendant Advisors, LLC. As of November 27, 2011 and only covering companies in the S&P 500 with 3rd quarter earnings on September 30, 2011
Despite all the negative investor sentiment and cash flows out of equities, corporations continue to achieve solid earnings results. The majority of companies in most sectors have been beating consensus analyst estimates with Telecom being the only exception. It should be noted that several drivers of this are massive cutbacks, spending reductions and productivity increases from layoffs. Even still, companies have cleaned house and are making money hand over fist.
Source: Standard & Poor's Financial Services LLC, Ascendant Advisors, LLC
Of course being cheap is not reason enough to buy stocks, but consider the following:
As we at Ascendant have discussed and warned about often, the fiscal drama being played out in Washington will have its consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the return on bonds and bond funds will turn sharply negative.
The sad irony is this: to escape the risk of the stock market, millions have sought safety in bonds which sounds to me a little like jumping from the frying pan into the fire.
As 2011 draws to a close, I encourage you to take the opportunity to learn more about our Value-Momentum investment process and how our disciplined approach can help you navigate these difficult markets. If you are interested in having one of our professional staff contact you to schedule a meeting to review your portfolio please let me know.
James H. Lee, MBA
Ascendant Advisors, LLC