Some Market Observations

by Wayne Ferbert on April 15th, 2013

  • Earnings season will really start to pick up steam this week and next week. It will be interesting to see how the results shake out. Of the firms that pre-warned on earnings, 80% warned of a lower result on EPS. The historical average is closer to 2/3rds. So, we might expect some weakness. One way or the other, earnings will need to be fairly strong to justify the multiple in the S&P 500 at these levels. It should be interesting.
 
  • Lately, many economists and investors have been pointing out that equities are the only acceptable risk/return trade-off available in the market right now. They point out that fixed income yields are so low – and an interest rate recovery is imminent. This makes purchasing fixed income a difficult pill to swallow. Also, International equities worry many investors as most international economies look fragile in comparison to the slowly recovering US economy.  So, investors think that picking stocks in the US provides the best chance at out-sized returns compared to the risks. In general, I just chalk up this investor approach to further capitulation from the bears that will feed the bull market. It might not be right
 
  • Generally, you can put me in the ‘Skeptic Camp’ when it comes to these current S&P500 market levels. The recovery doesn’t look strong enough to me to justify the current valuations on a forward basis. However, I agree that finding an alternative investment can be a difficult proposition. Where does that leave me? I want to be long the US market – but hedged. I prefer a delta in my hedge that approached -0.50 for every dollar down in the market. I want a concentration in energy and financials. I think they both still have room to run – but I acknowledge that financials might be the most at risk sector if the market corrects violently. Lastly, I want to be over-concentrated in International. These markets are still well off their lows before the crash in 2008-09. I like Emerging markets more than Developed International markets – but want exposure to both.


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