It’s been 547 trading days—since August 2011—since U.S. stocks have suffered a 10% correction.
That’s a good thing if you’re all in but not so good if you’ve got money on the sidelines or cash flowing into your portfolio (from say your retirement contributions) that you’d like to invest on the dip.
No wonder that with the Standard & Poor’s 500 stock index down a whopping 1.1% from November 27 to noon (New York time) on December 5, I’m thinking about a buy on the dip opportunity of say a 3% decline or maybe a little more
A 10% drop is, I think pretty unlikely in the near term—say in December or January—because there is still money on the sidelines ready to buy the dip. And that, of course, limits the size of any dip.
3% though? Maybe a little more?
That seems possible given the market’s obvious nerves over the will they/won’t they meeting of the Federal Reserve’s Open Market Committee on December 18. That day could, although I think the odds are against it (even after today’s GDP number), bring a decision from the Fed to begin to taper off the central bank’s monthly $85 billion in asset purchases. That worry—witness the weakness in the market yesterday on a report of stronger than expected job growth from the ADP survey—was enough to take the market down from the open until about 1:30 p.m. New York time.
The market’s rally from 1:30 p.m. almost until the closing bell on December 4 is also an indication of the strength of buy on the dip sentiment.
I wouldn’t go hog wild with joy at a 3% drip, but there are a few stocks that I’ve been waiting to buy if they would just pull back a bit.
Some individual stocks are already close to or slightly over that 3% dip benchmark. Cummins (CMI), for example, is down 2.9% from December 2 through the December 4 close. Flowserve (FLS) is down 3.4% from November 25 through December 4.
And a few attractive names are down even more. Read more
U.S. GDP growth pops to 3.6% in today’s second estimate, but that’s not as meaningful for a Fed taper as it seems
I’m starting to long for some conclusive economic news—even if it is bad economic news.
Today’s release of revised third quarter GDP growth is frustratingly inconclusive—if you’re looking for, as the market is, a strong trend that might indicate which way the Fed will jump on the taper/no taper decision at its December 18 meeting.
The headline number shows a very strong economy. The revised numbers say that third quarter GDP growth came in at 3.6%. That’s a big jump from the 2.8% in the first estimate of third quarter GDP growth and a significant increase from the 2.5% growth rate in the second quarter
If we could take these numbers at face value—and, more importantly, if we were convinced that the Federal Reserve would take these numbers at face value—then I think we’d be looking at a strong argument for believing that the Fed would start to reduce its $85 billion in monthly asset purchases with the December 18 meeting.
But we can’t take these numbers at face value—and I’m certain that the Fed won’t. The big increase in revised third quarter growth doesn’t show an acceleration in the economy’s growth rate. Instead the jump from first to second estimate is due to a big increase in inventories. Growth in inventories, I’d point out, is only a good thing if those inventories get sold. If they don’t, if goods sit on warehouse shelves, inventories become a big negative for economic growth in the next quarter.
Real final sales, a number that excludes inventories, actually got revised down in today’s estimates to 1.9%. That’s a drop from 2% growth in the first estimate for third quarter GDP and is down from a 2.1% growth rate in the second quarter.
Personal consumption spending also got revised downward to 1.4% from 1.5% today, supporting the slight downward trend in real final sales. Personal consumption spending, what you and I call consumer spending, increased by 1.8% in the second quarter so today’s downward revision shows an even bigger slowing in consumer spending than the first estimate did.
Given the inconclusive nature of today’s GDP numbers, I think we’re set up to have the financial markets react relatively strongly to tomorrow’s jobs numbers for November. The consensus of economists surveyed by Briefing.com calls for the economy to have added 185,000 jobs in the month. That would be below the 204,000 added in October.
Rising corporate bond yields in China are good for insurers: Adding China Life as a stock pick in the PIcks portfolio
Yields on AAA-rated five-year Chinese corporate bonds have climbed to 6.25%. That’s up 1.75 percentage points in the last six months.
That’s not terrible news—or at least not as terrible as it would be for U.S. companies. Bonds play a still small (but growing) role in financing companies in China. Most financing comes in the form of bank loans.
And it’s really great news for China’s insurance giants such as China Life Insurance (LFC as an ADR in New York) and Ping An Insurance Group (2318.HK in Hong Kong and a reasonably liquid PNGAY in New York.) That’s because China’s insurance companies, required to invest a big share of their portfolios in fixed-income products, are finally seeing rising yields on those investments. A 1.75 percentage point increase in yield is a big deal for these companies—especially if there’s more where that came from. Proposals from the recently concluded Third Plenum of the Communist Party’s Central Committee that point to further efforts to increase the role of the market in setting interest rates certainly point in that direction.
Of the two big insurers, Ping An is at this point the better company and the better long term bet. The company has what analysts judge the most productive life insurance sales force in the industry and a first-mover edge in direct marketing automobile insurance by phone. (The company uses an agency model for its life insurance sales, which gives it an advantage over peers that rely to a greater degree on selling through banks.) The first half of 2013 saw Ping An report a mid-teens growth rate for new business in its life insurance unit—the second six-month period in a row where the company has hit that growth rate. Margins in the personal and casualty unit rose even against increased competition in the segment. The one drawback to Ping An is a weakly capitalized banking unit. A long-drawn out battle with regulators has hindered Ping An’s efforts to inject capital into the bank. The weakness of the bank’s capital position is the major reason that Ping An trades at a 10% discount to China Life even though the company has shown significantly greater growth momentum.
It’s a lack of that growth momentum that has resulted in a paltry 13.5% 12-month gain for China Life’s New York traded ADRs versus the 30.8% gain for New York traded PNGAY. And all of that gain has come in the last month as the ADRs climbed 24% to $49.12 on December 4 from $39.66 on November 13.
In the first half of 2013 China Life saw the value of new business climb just 0.8%, and new sales through agencies drop 2% despite a 1% increase in the number of agents.
What’s attractive to me about China Life—and leads me to give it a nod over Ping An in the near term (although there’s no reason you can’t own both with China Life representing more of a trading play thanks to the ample liquidity in the New York ADRs)—is the leverage that China Life’s huge investment portfolio gives the company on any increase in yields (and in stock prices.) Read more
The yen is taking a bit of a breather today after hitting a six-month low against the U.S. dollar yesterday. Today’s slight rise in the yen—0.57%–takes the yen to 102.37 to the dollar. Japan’s currency is down 14% for 2013 against the U.S. dollar.
And since Tokyo stocks climb as the yen falls—on expectations that a cheap yen will create more sales overseas for Japanese companies and add to revenue and earnings as strong currencies are converted into yen for hometown balance sheets—Japanese stocks moved up to just short of a six year high for the Nikkei 225 Stock Index at a December 3 close of 15,749.70. That’s the highest level for the index since December 12, 2007.
The pause for the yen—and most likely for Japanese stocks too—comes as investors and traders wait to see what the European Central Bank will do on rates at its Thursday, December 5 meeting. The central bank is most likely to stand pat rather than cut interest rates at the meeting.
Investors and traders are also waiting on U.S. jobs data due on Friday, December 6. In October the U.S. economy added 204,000 jobs and a number significantly above that report would add to fears that the Federal Reserve will move to begin tapering off its $85 billion a month in asset purchases with its December 18 meeting. Economists surveyed by Bloomberg are projecting that the U.S. economy added 181,000 jobs in November.
Right now it looks like investors and traders in Japan—and in Europe and the United States—are in a wait and see/protect the profits mode in front of the Thursday and Friday news.
‘Tis the season to upgrade Apple (AAPL) fa la la la la, la la la la.
Today UBS upgraded Apple to buy from neutral and raised it target price to $650 from $540.
Yesterday, December 2, Deutsche Bank raised its target for Apple to $625 from $575.
Ostensibly, the higher target prices are based on news/rumors that China Mobile (CHL) has finally struck a deal to sell iPhones, that gross margins on iPads are stabilizing at higher than expected levels, and that next year should bring new products that will erase worries that Apple can’t innovate any more.
I continue to like Apple for the long-term—it sells at a very low multiple on any reasonable projection for growth—but I have to wonder if these upgrades are based on new long term information or are a reaction to Black Friday weekend numbers that suggest very strong Apple sales for the holiday retail season. Read more