Join Date: Jul 2002
Location: An Investment Bank
The markets aren't really showing what I'd like to see, personally. The rally from March was fueled by companies that were the worst positioned, financially. We ran several matrices and the only correlation between the stocks that ran up from the first of March was that they all had share prices under $5. That, combined with the fact that they were the worst positioned from a balance sheet perspective, means that the March rally was the definition of a junk rally. Q1 earnings were better than expected, for the most part, with the underlying theme being that companies would beat on earnings, but miss on revenues. This is disconcerting, because how sustainable going forward are cost reductions?
Fast forward to Q2 earnings season. There are still a lot of companies beating on earnings but missing on revenues. However, the number of companies reporting revenue matches or beats is much greater than the number from Q1. Interesting fact...as of Wednesday's close, the stocks that had missed earnings this reporting season had outperformed those that had matched or beaten. Again, signs of a "junk" runup, but a little more positive in the fact that we're seeing a significant increase in the percentage of companies that are matching or beating revenue estimates.
Now, we're a value fund. So, we will underperform in "junk" rallies like we've seen. Our two large-cap funds are slightly underperforming the broad market, but our socially repsonsible fund and small-cap fund are blowing the doors off of our index. So, at least the small-cap companies are starting to behave in a more normalized manner.
The earnings "beats" and revenue matches or "beats" are driving the markets higher. In addition, I'm starting to see some real signs come together of a true bottoming of macroeconomic conditions and an upturn. One or two measurements alone might not do the trick (insert "Green Shoots" bullshit from a while back here) but when a lot of them start coming together and working in unison, it drives the markets and sentiment higher.
Given that we're a value firm, we really don't focus on top-down investing. We're definitely more tilted to bottom-up investing. However, my focus this summer has been on the Materials sector with a concentration on hard commodities. If you cover hard commodities, you have to have an opinion from a top-down type of approach. I think things are starting to come together to show a bottom and the very hints of the beginning of a recovery. Now, the recovery will not be some "V-shaped" recovery that was priced in with the junk rally that started the March runup. The two main catalysts driving that are the high and rising unemployment levels and the spike upward in consumer savings rates. We won't have a "V" recovery, not happening. That said, there are still plenty of Industries/Sectors that haven't seen a huge recovery yet, pricing wise, and those are the names we're hitting to position our Fund for the the upswing. The fact that the earnings beats are coming on the back of lower revenue tells me that once revenue does start to turn around and normalize, the profits of companies who have done significant cost reductions will see substantial upside, offsetting somewhat the effects of unemployment and increased consumer savings. Oh well, a portion of my thoughts on the current market...
Last edited by slow99; 07-23-2009 at 11:33 PM.