Hated: Just about everything!

I took a quick trip over to the StockScouter, which is also a link on my sidebar.

According to the algorithm, there are no stock types liked right now.

Those in the "out of favor" category include VALUE & GROWTH (the only two styles they measure) as well as every stock size, ranging from micro cap to large cap. Virtually every sector is also out of favor, with only Health Care and Consumer Non-Durables managing to make the "Neutral" category.

What's "in favor" in terms of Style, Size or Sector?

Nada, Nil, Nothing, Zero, Zilch ... Yada, yada, yada.

Which, folks, is generally the cue to rummage through the so-called trash, looking for those stock bargains.

Happy hunting!

JW

The Confused Capitalist

A random musing: profit margins

Much of the recent thoughts as to why we are heading towards a bear market - other than the usual phalanx of bears arguing the "edge of recession" - have centred on the extraordinarily high level of profit margins, arguing that this can't go on forever. As put succinctly:

"Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly."

- Renowned Investor Jeremy Grantham

In essence, the bears argue that while the "PE" looks fine, the "E" in "PE" is bogus, and not supported by sustainable metrics. However, most marketplace observers cannot offer a compelling reason why margins have continued to grow (although there is some rationale offered here that makes some sense) at the back end of a long bull market. While I have no doubt that the lengthy margin expansion will reverse at some point, I wonder if corporate conservatism is having some impact.

That is, typically during most other bull markets, fat profits led company managers to buy into so-called "complementary" (not really!) businesses through buyouts and mergers, with poorly focused conglomerates emerging. This, I suspect, led to much poor business practice, including a focus on revenues, instead of contribution to the bottom line - i.e. margins that are accretive to earnings.

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However, the business mantra today is single-minded focus, "the mission" of the business if you will. Not much room for sloppy, drunken, buying binges that are covered up by growing ill-thought-out revenues, even at the expense of declining earnings and/or margins. Today, excess cash is more often deployed through share buybacks and, to a lesser extent, cash dividends.

With that thought in mind, I wonder if the button-down managers of today are primarily responsible for continued profit margins at extraordinarily high levels? And if so, for how long will they be able to keep up the admirable restraint before they, as a managerial collective, feel compelled to sow the seeds of their managerial genuis?


JW

The Confused Capitalist

Emerging Markets hold the line in equity decline

Has the egg finally cracked?

I postulated, last year, that emerging markets were a better value proposition that widely acknowledged, with their strong economic fundamentals, and solid government financing, in sharp contrast to most western nations, and particularly the US.

The WS Journal chart below (via Barry Ritholtz's Big Picture), shows that, globally, the emerging markets were the only major stock group to end the week in an up position.

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Perhaps this is the start of the trend I've envisioned, wherein emerging markets, and the developed nations, re-balance to more appropriate valuation ratios, based on the conditions actually in existence today.

Or perhaps this is just a short term blip ...

JW

The Confused Capitalist

Tall Trees can't grow to the sky ...

It is often said that "Tall trees can't grow to the sky", meaning that things cannot continue past their natural boundaries.

Although current stock market bull commentators often act as if this doesn't apply to today's stock market, the fact is, is that natural "rules" apply. And the two key rules remain impenetrable as always and they relate to PE ratios and interest rates: when PEs are above historical norms, and interest rates are on the way up - then stocks will inevitably fall (exact timing is, as always, the only question).

Nevertheless, as small investors today, we don't simply have to hope for a bull market to make money - we can use quasi-shorting techniques, even in tax-protected accounts. Given that this is one of the longest bull markets in the past fifty years, the direction of interest rates is up, and PEs are above averages, it doesn't take a rocket scientist to prepare for the worst.

That doesn't mean pulling everything from the market - the market often proves people foolish, by adding a few more points than expected. But it does mean doing a balancing act, that might produce a more stable portfolio over the mid-term. For some investors who agree with the thesis that we are in the prelude to a bear plunge, this means retaining solid core positions, and raising some cash, and perhaps using inverse leveraged positions to gain alpha on the downside.

Given that the last major bear market lasted 16 years, and produced numerous plunges (and subsequent near recoveries), a correction (at the minimum) seems in order - fairly soon. So, by investing 5%, 15% or 25% into a levered bear position, such as that available from ProFunds.com, this can allow you to profit while the market is in decline, and then allows you to throw it into the market, when it's hit what you consider to be the bottom.

The risk is that you dampen your return should the bull continue on longer than you thought, but the reward side is the potential to significantly mitigate the downside damage, and be ready to put more funds into the market when it's "on sale".

Just be sure that you aren't risking an excessive amount on the "downside" bet. Remember, it's having a well-reasoned approach - often contrary to popular thinking - that produces the best investment returns. Something to ponder (but not for too long), while this aging bull looks for a face-lift.


JW

The Confused Capitalist