Forecasts, Magic Numbers, Dreams Come True…
By Frederic Marsanne
Published on January 5, 2017
Every once in a while, the market does something so stupid it takes your breath away.
Indecision and delays are the parents of failure.
Nothing is worth more than this day.
Only those who have patience to do simple things perfectly ever acquire the skill to do difficult things easily.
Eighty percent of success is showing up.
I don’t want to achieve immortality through my work. I want to achieve it through not dying.
Image courtesy of Stuart Miles
(Cambridge, MA) — Always amazing! No really, you’ve got to enjoy the show. Pundits proclaiming the S&P 500 will go up 10% in 2017, or collapse 50%, or take another 30%, or whatever. When really, we know all these are shots in the dark. Nobody can consistently predict the market’s outlook. Stop it, please, it hurts!
Check out the latest issue of Barron’s (January 2, 2017), where Jack Hough, whose prose I enjoy reading I shall mention, hazards his own guess. He expects a 7% earnings gain in 2017, along with a 5% advance for the S&P 500, for a total return of 7%, including dividends. There is a rationale behind these numbers, of course, and at least Jack is smart enough to argue his case. As he puts it, “Tail winds from rising consumer confidence, reinflation, plump house prices, falling regulation, and the start of an infrastructure push will be offset by head winds from a strong dollar, rising labor costs, and limited room for further corporate cost-cutting.”
He adds, “That shares prices will rise a bit slower than profits assumes that price/earnings ratios will revert just a whisker toward their lower, long-term averages.” He cautiously continues, “Beneath the surface, there will be more action than those numbers suggest, as investors continue an overdue shift to value from growth that began in 2016.”
Still, 5% is 5%, and while it is possible after all that he’ll be right, it is also quite possible that we’ll finish with a very different market performance profile at the end of the year. I surely would not want to be Jack’s shoes. If thirty years in the market have taught me anything, well, I am afraid it’s humility. I’ve been wrong so many times. And then, even when I’m right, I feel I was wrong anyhow because other events occurred that just…blew my mind. Say the market ends up 3 to 7%, not far from Jack’s estimate, but gold mines double or the indexes in Brazil go ballistic, end up 40% or 60% or more, or… You get the picture.
Of course, in any market, an average is just that an average. Two years ago, energy shares reached what felt like an all-time low so harsh was the sectoral bear yet other market gauges never sat very far from their all-time high. There could be a punishing debacle in one vertical yet hardly any reason for worry in other market compartments.
Just remember this, though. The S&P 500 now sports a P/E of 25.76, more than 60% above the mean of 15.63 that the market has experienced since 1870 – not cheap by any stretch. There surely is room for pain if the market wanted to inflict it. Another way of putting this: if the market goes up another 10% to 20%, then the index will be double its mean. It will start to get nutty, another work for bubbly. Bubbles never end well.
A final thought. I like to track what insiders do. Over the past month and a half, the weekly insider transactions ratio, i.e., the proportion of insider sales to buys, has mostly been neutral. But when an officer, director or owner of 10% or more of a class of a company’s securities (usually, smart people, also deemed the mart money) purchase (or sell) large equity blocks, what you get is precious, company-specific clues. While a secondary indicator (earnings, earnings, where are you?), insider transactions signal that people in the know at these companies believe now is not a bad time to accumulate or liquidate shares. Maybe they see something coming…
Recent insider purchases at Six Flags Entertainment (SIX), Occidental Petroleum (OXY), Wynn Resorts (WYNN), Abbott Labs (ABT), Viacom (VIAB), Vera Bradley (VRA), Virtu Financial (VIRT), Akamai Technologies (AKAM), Inovalon Holdings (INOV), and Foresight Energy (FELP) are notable. Healthcare is a promising area of investigation. Biogen (BIIB) seems to present investors with real long-term appreciation potential at current prices. (An insider bought a massive amount of BIIB on 10/22 and 10/23/2015; more than a year later, the shares trade at about the same price.) The same Jack Hough mentions Hanesbrands Inc. (HBI) as a possible value play. CEO Richard Noll bought for about $500k worth of shares back in August 2016; the stock is nearly 20% cheaper now… It’s tough not to agree anyhow.
Beware, Happy New Year, and may all your dreams come true!
- The author of this article owns shares of some of the equities mentioned above. But remember: you can never trust a madman.
- FUNanc!al provides no advice of any kind.
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Check out the following two videos; they capture some of the spirit…
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