HI Market View Commentary 11-20-2023
Let’s go over the two email questions:
- Why are you so “specific” (almost negative) about what you have to do IF someone decides to get registered to trade other peoples’ money?
IF you don’t spend 40 hours a week or more “working” you are doomed to fail. Penalties are 10 year minimum sentences for each infraction=Patriot Act. Yes, you can get lucky but everyone’s luck runs out and then what do you do.
Athletes, Scholarship Students, Caregiver, CEO, CFO
- Are you a technical trader?
Yes but I’m also a Fundamental, Sentimental, Historical, Options protection investor
YOU WILL NOT be right more than you are wrong
Let’s go over this week and end of the month expectations for November
Microsoft = They bought OpenAI
“The Board” Fired CEO Sam Altman
Nadella offer him a new position in a newly created AI team
MSFT up 2.05% or $7.59
Retail traders rule this week as well as the news is OK
THURSDAY – MARKET CLOSED FOR THANKSGIVING, Friday Half day
https://www.briefing.com/the-big-picture
The Big Picture
Last Updated: 17-Nov-23 15:03 ET | Archive
A value hiding in plain sight
What a difference three weeks makes. In late October, the 10-yr note yield was pushing 5.00%, the S&P 500 was on the brink of breaking below 4,100, and the CBOE Volatility Index was north of 20.00.
As we write, the 10-yr note yield sits at 4.45%, the S&P 500 is at 4,500, and the CBOE Volatility Index is under 14.00.
It has been quite a reversal in all respects, so here we are. Holiday spirit is in the air, and, dare we say, maybe even some animal spirits as the term “seasonality” gets tossed around in a positive way like a football on Thanksgiving Day.
The implication is that investor sentiment has taken a marked turn for the better in the past three weeks, largely because interest rates have come down on the assumption that the Fed is done raising rates and is apt to cut rates in the first half of 2024.
Higher stock prices are the manifestation of the improved sentiment, but accompanying those higher stock prices are higher valuations. Three weeks ago, the S&P 500 was trading at a 17.1x forward 12-month earnings, or a slight discount to its 10-year historical average (17.5x), according to FactSet. Today, it trades at 18.7x forward 12-month earnings.
Raising the Valuation Bar
The S&P 500 doesn’t trade at a super-rich valuation, but it’s up there. Just about everyone regularly following the market this year knows why.
- Apple (AAPL) trades at 29.0x forward 12-month earnings (5-yr average is 23.7x)
- Microsoft (MSFT) trades at 33.2x forward 12-month earnings (5-yr average is 28.1x)
- Alphabet (GOOG) trades at 21.5x forward 12-month earnings (5-yr average is 23.5x)
- Amazon.com (AMZN) trades at 43.8x forward 12-month earnings (5-yr average is 63.6x)
- NVIDIA (NVDA) trades at 32.1x forward 12-month earnings (5-yr average is 39.4x)
- Tesla (TSLA) trades at 66.4x forward 12-month earnings (5-yr average is 95.9x)
- Meta Platforms (META) trades at 19.4x forward 12-month earnings (5-yr average is 21.0x)
Source: FactSet
These seven companies in the market-cap weighted S&P 500 have raised the valuation bar. To be fair, that isn’t anything new. They have typically sported premium valuations, but it may surprise some to learn that only Apple and Microsoft are trading at a premium to their five-year average. That doesn’t necessarily make the others “cheap” per se, but there is not as much to the premium valuation as meets the eye at first blush.
If anything, there is concentration risk in these seven names. Investors have flocked to them because they are market leaders with healthy financials. They have flocked to them, because, for the most part, they keep delivering results that validate their must-own status. Fund managers have flocked to them, because everybody else has, and the risk of underperforming “the market” is too great not to own them.
Of course, therein lies the risk for these stocks and “the market.” If their fundamental story changes for the worse, their stock prices will, too, and perhaps in a material way, as Meta Platforms (META) discovered before it got back on fundamental track.
Where there isn’t any concentration risk is in the rest of the market.
Some Q&A
We’ve covered this point before, but it’s worth covering again after the move the market has made in the past three weeks. The market-cap weighted S&P 500 is being driven by a handful of stocks. The S&P 500 Equal-Weighted Index is being driven equally by 500 stocks.
Whereas the market-cap-weighted S&P 500 has looked more like Lightning McQueen this year, the equal-weighted S&P 500 has resembled his best friend, and tow truck, Mater. Granted it hasn’t had the same happy, go-lucky disposition that Mater does, but it has had Mater’s clunky style.
Three weeks ago, it was down 5.5% for the year. As we write, the S&P 500 Equal-Weighted Index is up 2.7% for the year. That won’t win it many plaudits knowing the returns on money-market funds, certificates of deposit, and T-bills are higher, but at least it is something.
It is also something to see that the equal-weighted S&P 500 is trading at just 14.9x forward twelve-month earnings. That is a 9% discount to its 10-year average of 16.4x. That isn’t a super-cheap valuation, but it’s down there.
Why flock to the narrowly concentrated, market-cap weighted S&P 500, which is trading at a premium valuation, when there is ample value to be found in the widely distributed, equal-weighted S&P 500, which is trading at a discounted valuation.
That is the question which begs another question: why aren’t investors taking advantage of this value opportunity?
Here are some possible answers:
- If it ain’t broke, don’t fix it. The mega-cap trade has continued to deliver the goods for investors, so it is hard to walk away from it when it is still working.
- It makes no difference to an investor in a market-cap weighted index fund how the return was achieved. It all counts the same when you need to cash out.
- There isn’t faith in the value proposition — not yet anyway.
What It All Means
That last answer might be the one that matters most both in terms of its meaning and its opportunity.
It means investors think forward earnings estimates are too high, so what looks like a value today isn’t the value it appears to be at first blush if there is going to be a material downward revision to earnings estimates. Accordingly, investors default to the mega-cap stocks, which they expect to be more dependable in a more challenging earnings environment. An economy in recession would be considered a challenging earnings environment.
The opportunity, of course, is in forward earnings estimates holding up because the economy is holding up. That brings us back to interest rates. They have come down sharply in recent weeks for a variety of reasons, but one of the primary drivers is the belief that the Fed is done raising rates because a softening economy will lead to softening inflation.
The extrapolation ends at a softening economy.
There doesn’t seem to be any allowance at the moment for anything other than a soft landing. Interest rates would presumably be chased lower in the event of a hard landing, but the offset in that situation is that earnings estimates would be chased lower, too, which wouldn’t be good for stock prices.
There is a lot riding on the economic outlook. We would argue that the vast outperformance of the market-cap weighted S&P 500 dominated by the mega-cap stocks versus the equal-weighted S&P 500 is not a reflection of the confidence in the outlook so much as it is a reflection of the uncertainty surrounding the outlook.
If the investment community was more certain of the favorable economic view, it would show greater interest in the value-based opportunity that appears to be available in the equal-weighted S&P 500. That opportunity seems to be hiding in plain sight for some opaque reasons.
If the economic future clears in the manner the market is inclined to think it will, the opportunity seen today in the equal-weighted S&P 500 will be worth the, uh, “weight.”
—Patrick J. O’Hare, Briefing.com
(Editor’s Note: The next installment of The Big Picture will be posted the week of December 4)
Earnings dates:
BIDU – 11/21 BMO
COST – 12/14 est
MU- 12/21 est
Where will our markets end this week?
Higher
DJIA – Bullish Overbought
SPX –Bullish overbought
COMP – Bullish Overbought
Where Will the SPX end Nov. 2023?
11-20-2023 +2.5%
11-13-2023 +2.5%
11-06-2023 +2.5%
10-30-2023 +1.0%
Earnings:
Mon: A, ZM
Tues: ANF, BBY, BURL, DKS, KSS, LOW, GES, HPQ, URBN, JACK, JWM, BIDU, NVDA
Wed: DE,
Thur:
Fri:
Econ Reports:
Mon: Leading Indicators,
Tue Existing Home Sales,
Wed: MBA, Initial Claims, Continuing Claims, Durable Goods, Durable ex-trans, Michigan Sentiment
Thur:
Fri:
How am I looking to trade?
www.myhurleyinvestment.com = Blogsite
info@hurleyinvestments.com = Email
Questions???
U.S.-China relations are now more about crisis prevention
PUBLISHED MON, NOV 13 20236:46 PM ESTUPDATED TUE, NOV 14 202312:52 AM EST
KEY POINTS
- After another rocky year of U.S.-China tensions, the two countries’ presidents are set to meet this week for the second time since Joe Biden took office.
- “The focus will be on expanding dialogue in order to low[er] tail risks in the relationship and prevent a crisis that neither leader is looking for,” said Michael Hirson, head of China Research at 22V Research.
- “The current trend in China-U.S. relations is one of easing,” said Shen Yamei, director of the department for American Studies at the China Institute of International Studies. “This easing is a relaxation of the atmosphere.”
BEIJING — After another rocky year of U.S.-China tensions, the two countries’ presidents are set to meet this week in person for the second time since Joe Biden took office.
It will be a rare summit before the U.S. presidential election cycle kicks off in earnest. Taking a tough stance on China, the second-largest economy in the world, has become one of the few areas of bipartisan agreement. Biden plans to run for reelection.
“The focus will be on expanding dialogue in order to low[er] tail risks in the relationship and prevent a crisis that neither leader is looking for,” said Michael Hirson, head of China Research at 22V Research.
“Flashpoints such as Taiwan and the South China Sea need to be managed carefully,” he said. “For that reason the meeting is still important, especially ahead of a politically charged 2024 that will begin with an important presidential election in Taiwan in January and end with the U.S. presidential election.”
U.S.-China tensions have escalated over the last several years, beginning with tariffs under the Trump administration and spilling over into broader tech restrictions under the Biden administration.
Controversy in early February over an alleged Chinese spy balloon flying in U.S. airspace revealed how fragile relations have become — the incident pushed the two countries to suspend already limited high-level talks.
In April, during that period of estrangement, Washington, D.C.-based think tank Center for Strategic and International Studies published a report that described U.S.-China relations as seemingly “caught in a worsening vicious cycle.”
“This translates into a stalemate—and, in fact, spiraling tensions—that go even further than the typical ‘security dilemma,’ in which each side takes steps to defend itself which in turn generate insecurity for the other, who then responds in kind,” the report said.
The immediate aftermath of the [Biden-Xi] meeting is likely to mark a cyclical high point for bilateral relations
Gabriel Wildau
TENEO
Sentiment began to improve over the summer after U.S. Secretary of State Antony Blinken finally made a high-stakes visit to Beijing in June, followed by visits from several other senior officials.
In early October, U.S. Senate Majority Leader Chuck Schumer and five other U.S. senators representing both the Republican and Democratic parties had an 80-minute meeting with Chinese President Xi Jinping.
But both sides are still waiting for more action.
“The current trend in China-U.S. relations is one of easing,” said Shen Yamei, director of the department for American Studies and an associate research fellow at the China Institute of International Studies.
“This easing is a relaxation of the atmosphere,” she said in Mandarin, translated by CNBC. “No actual changes have occurred.”
She pointed out, however, that the establishment of many new communication channels means there is much to look forward to.
Export controls
During this week’s meeting, Shen expects the Chinese side to bring up U.S. export controls and investment restrictions.
The Biden administration has restricted U.S. companies from selling high-end tech, primarily in semiconductors, to Chinese companies and sought to curb U.S. investments in such Chinese tech.
U.S. Commerce Secretary Gina Raimondo in a trip in August had “said no” to China’s requests to reduce the controls and called the them “matters of national security.”
Chinese Vice Premier He Lifeng also raised the issues during preparatory meetings with U.S. Treasury Secretary Janet Yellen in San Francisco on Nov. 10, according to state media.
“Aside from Taiwan, export controls are Beijing’s top concern, but there is no political space in Washington roll back existing controls,” Gabriel Wildau, managing director at consulting firm Teneo, said in a note.
“The immediate aftermath of the [Biden-Xi] meeting is likely to mark a cyclical high point for bilateral relations,” he said. “The key question is whether this high point extends into a plateau or whether political pressures trigger a new cycle of deterioration,” he said. “As previously discussed, the period since June has offered a window of opportunity to stabilize relations; following the meeting, this window may close.”
Taiwan is set to hold its presidential election in January, and a more pro-independence winner could stir more of Beijing’s ire.
Beijing considers Taiwan part of its territory, with no right to independently conduct diplomatic relations. The U.S. recognizes Beijing as the sole government of China but maintains unofficial relations with Taiwan, a democratically self-governed island.
While speaker of the U.S. House of Representatives in August 2021, Nancy Pelosi became the highest-ranking U.S. official to visit Taiwan in 25 years. The trip prompted Beijing to suspend talks on climate with the U.S., one of the few areas of potential cooperation.
Areas of cooperation
The Biden administration has said the U.S. is in competition with China, while looking to ensure that it “does not veer into conflict.”
“The Biden-Xi meeting might include a pledge to cooperate or establish a new formal bilateral working group on safe use of artificial intelligence,” Teneo’s Wildau said.
He added that “the two leaders may pledge to cooperate and coordinate on providing humanitarian aid to Gaza, ensure smooth passage of grain through the Black Sea, and support postwar reconstruction in Gaza and Ukraine.”
The U.S. remains China’s largest trading partner on a single-country basis.
However, Shen pointed out that trust between the U.S. and China is still quite low.
“No one believes what [the other] says now,” she said.
Paving the way
Goodwill efforts have increased in the weeks leading up to the planned summit on Wednesday local time between Biden and Xi in San Francisco, alongside the Asia-Pacific Economic Cooperation meeting.
For example, more direct flights between the U.S. and China are resuming from a low base.
Chinese commodity importers in October signed the first agreements since 2017 to buy U.S. agricultural products in bulk, according to a release from the U.S. embassy in Beijing.
China’s Ministry of Commerce last week announced it was gathering information in an effort to address unequal treatment of foreign businesses in China versus domestic ones — a longstanding business complaint.
However, on the cultural front, the three remaining giant pandas in the U.S. on loan from Beijing returned to China last week due to an expiring contract. China has lent pandas to countries around the world as a diplomatic tool.
And in a rather dramatic buildup to this week’s high-level meeting, China only confirmed Xi’s forthcoming travel plans on Friday night — just as the Philadelphia Orchestra was wrapping up a performance in Beijing to commemorate the 50th anniversary of its concert in the country in 1973.
That was a period during which the U.S. started to formalize its relationship with Communist-run Beijing. The two normalized relations in 1979.
Biden and Xi both sent letters for the 50th anniversary concert, which were read ahead of the performance.
“Despite all the ups and downs, the Philadelphia Orchestra continues to come to China,” Matias Tarnopolsky, president and CEO of the Philadelphia Orchestra, told reporters after the concert on Friday.
“Even in the worst of times the Philadelphia Orchestra came and in the best of times the Philadelphia Orchestra came,” Tarnopolsky said. He said the orchestra plans to return to China in 2024, and in the years following.
U.S. gas prices are falling and could hit the cheapest Thanksgiving day price since 2020
PUBLISHED MON, NOV 20 20231:57 PM ESTUPDATED 47 MIN AGO
KEY POINTS
- A gallon of gas could fall to $3.25 on Thursday, which would be the lowest Thanksgiving day price since 2020, according to GasBuddy.
- Gas prices have fallen for nine weeks now on a seasonal weakening of demand and a drop in crude oil prices.
- The OPEC meeting scheduled for Nov. 26 could have an impact on where prices go in the U.S.
U.S. drivers can expect the cheapest gas prices on Thanksgiving day since 2020.
The national average for gallon of regular gas was about $3.31 on Monday, 25 cents cheaper than a month ago and 36 cents lower than the same period in 2022, according to AAA.
The average national price for a gallon of gas could hit $3.25 by Thursday, which would be the cheapest price on Thanksgiving day since 2020 when the Covid-19 pandemic crushed demand and gas fell to $2.11 per gallon, according to GasBuddy.
Gas has dropped below $3 a gallon in 11 Southern and Midwestern states as of Monday, according to AAA. Those states are Alabama, Arkansas, Georgia, Iowa, Louisiana, Mississippi, Missouri, Oklahoma, South Carolina, Tennessee and Texas.
Prices have fallen for nine weeks now and are on the longest downward streak since the summer of 2022, said Patrick de Haan with GasBuddy.
More than 65,000 gas stations are selling gas at $2.99 per gallon or less right now and another five states could see average prices below $3 per gallon by Thanksgiving, de Haan said.
“Americans collectively going to spend about $1.2 billion less on gasoline from Monday through Sunday from last year,” de Haan said.
OPEC decision ahead
Gas prices could continue to fall for another week or two and potentially dip below last winter’s bottom of $3.05 a gallon, De Haan said. But a lot depends on whether the Organization of Petroleum Exporting Countries implements another oil production cut at their Nov. 26 meeting.
“If OPEC makes a sizable production cut, I think that pretty much ends the potential of us falling below what we saw last year,” de Haan said.
More than 55 million Americans are expected to travel for Thanksgiving, according to AAA. Despite falling gas prices and slowing inflation, about 20% or respondents to GasBuddy’s travel survey said they could not fit holiday travel into their budget due to other areas of inflation.
The drop in gas prices largely reflects a seasonal weakening of demand, though a decline in oil prices over the past several weeks has been the “icing on the cake,” de Haan said.
U.S. gas prices are falling after a recent oil selloff as domestic crude oil inventories rose amid worries that demand is softening.
West Texas Intermediate, the U.S. benchmark, briefly fell into a bear market last week, down 22% from its September closing high. U.S. crude traded higher Monday at $78.02 a barrel, an increase of $2.13 or 2.81% from the previous session on expectations that OPEC might cut production again.
Gasoline demand fell to 8.9 million barrels per day in the week ending Nov. 10, compared to 9.5 million bpd in the week prior, according to the U.S. Energy Information Agency.
At the same time, domestic crude inventories rose by 3.6 million barrels to a total of 439.4 million barrels, outstripping expectations. U.S. crude production continues at a record clip of 13.2 million bpd.
Exchange-traded funds ‘have come a long way,’ advisor says. How to use them in your portfolio
PUBLISHED MON, NOV 20 20233:31 PM ESTUPDATED 2 HOURS AGO
KEY POINTS
- Whether you’re a new or a seasoned investor, exchange-traded funds are one option for your portfolio.
- You can use them for tax efficiency, asset allocation and other investing goals, experts say.
- “ETFs have come a long way over the past 15 to 20 years,” said Barry Glassman, founder and president of Glassman Wealth Services.
Whether you’re a new or a seasoned investor, exchange-traded funds, or ETFs, are one option for your portfolio, depending on your goals and risk tolerance, experts say.
ETFs are a wrapper for individual assets such as stocks and bonds, similar to mutual funds. However, many ETFs have better tax efficiency and lower expense ratios than mutual funds, driving many investors to make the switch.
“ETFs have come a long way over the past 15 to 20 years,” said certified financial planner Barry Glassman, founder and president of Glassman Wealth Services in McLean, Virginia. He is also a member of CNBC’s Financial Advisor Council.
In 2022, investors sold more than $900 billion from mutual funds and poured roughly $600 billion into ETFs, according to Morningstar data. The net difference was the largest on record.
With the continued shift underway, we spoke with experts from CNBC’s FA Council to find out how they’re using ETFs in client portfolios.
Tax efficiency is the ‘most attractive feature’
If you’re investing in a brokerage account, capital gains and dividends trigger taxes yearly, compared to your pretax 401(k) or individual retirement accounts, which defer taxes until you withdraw the funds.
“The most attractive feature of an ETF is that most don’t distribute capital gains at the end of the year,” Glassman said.
The most attractive feature of an ETF is that most don’t distribute capital gains at the end of the year.
Barry Glassman
FOUNDER AND PRESIDENT OF GLASSMAN WEALTH SERVICES
By comparison, certain mutual funds have year-end capital gains distributions, particularly those with large outflows, which require managers to sell off holdings.
For Cathy Curtis, a CFP and founder of Curtis Financial Planning in Oakland, California, ETFs provide “more control over the tax impact” for investments in a brokerage account.
“Being in California, a very high tax state, this is an important part of my practice — helping clients to minimize taxable income,” she said.
How ETFs help diversify portfolios
ETFs can also be used to balance risk with reward in your asset allocation strategies.
You can think about ETFs as part of either a core portfolio or a satellite portfolio, according to Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
ETFs with exposure to broad-based indices, such as the S&P 500, can be a part of your core portfolio, providing stability because the fund follows the general movement of the index. Kamila Elliott, an Atlanta-based CFP and co-founder and CEO of Collective Wealth Partners, said her firm uses ETFs primarily for core positions in its portfolios.
By comparison, ETFs in satellite portfolios provide opportunities for diversification, which lessens exposure to any singular asset or risk. For example, Cheng pointed to a client interested in opportunities in the video game industry who was able to identify a video game ETF that suited their interests.
Since you can’t guarantee the next big industry winner — including in the video game industry — ETFs in this role can be less of a risky bet than individual stocks, but they still have the potential for large losses and gains.
ETFs are ‘a little bit more intentional’
″[ETFs] just can be really powerful because clients can be a little bit more intentional,” Cheng said.
Compared to mutual funds, ETFs allow you to decide where to invest your money with a greater focus on matching personal interests and needs, Cheng said. Noncore ETFs are often specific to certain sectors, stocks or niche focuses, such as food system sustainability during climate change.
To complement core ETFs, Elliott said she typically uses mutual funds “in the developed markets, emerging markets and ESG space.”
https://www.cnbc.com/2023/11/15/etf-experts-see-rare-circumstance-for-growth-vs-value-trade.html
‘Unusual environment’: ETF experts see rare circumstance for growth vs. value trade
PUBLISHED WED, NOV 15 202311:53 AM EST
Value exchange-traded funds have lagged growth in 2023 due to an unusual circumstance unfolding in the market, according to two experts.
Tom Hancock, head of focused equity at GMO, said Monday that the leadership of mega-cap, artificial intelligence-driven tech stocks has helped the growth trade to outperform.
“This is an unusual environment where there are so many opportunities for large-cap equities,” he told Bob Pisani on CNBC’s “ETF Edge.” “You don’t normally see that.”
As of Tuesday’s close, the iShares S&P 500 Growth ETF (IVW) has gained 22.84% this year. The iShares S&P 500 Value ETF (IVE) is up 11.27% in the same period.
Still, Nathan Geraci, president of The ETF Store, said just a handful of stocks are behind the outperformance of growth.
“A lot of growth performance this year has been driven by the so-called Magnificent Seven, because if you look at many of the growth indices, they’re pretty top-heavy,” he said in the same segment. “The largest growth companies have been enough to really drive that performance differential versus value.”
Growth’s move higher is a marked change from 2022. The IVE value ETF fell 7.38% last year, while the IVW growth ETF dropped 30.08%. Geraci said the reversal in value’s performance this year caught investors by surprise.
“If you think about this, that’s a really tough pill to swallow for value investors after it appeared value was turning the corner in 2022 following years of underperformance,” he added.
Hancock, who manages the GMO U.S. Quality ETF (QLTY), said although Big Tech’s rapid rise has led some stocks to become overvalued, it also has created quality opportunities for value investors.
“From the point of view of a value investor, while some of the most well-known stocks may be at kind of frothy valuations, there’s a pretty big supply chain, pretty big ecosystem there. So there’s a lot of growth at a reasonable price, high-quality opportunities to invest in,” he said.
Hancock suggested investors could still take advantage of companies growing at a high return on capital for a fair price.
“That kind of company has been doing very well, and I think that kind of trend can continue as long as there’s innovation and growth opportunities going forward.”
HI Financial Services Mid-Week 06-24-2014