Equities vs. Government bonds

Today's comment I look at the long-term and recent performance of equities vs. government bonds (ie US Treasuries). Courtesy of BASML, these charts below, which are based on a rolling 10-year annualized return, illustrate that in the last decade, government bonds have outperformed equities. With that being said, with the Federal Reserve supporting the market by keeping rates low for an extended period, I would currently allocate more to equities. Although government bonds did outperform equities last year, I believe equities will outperform US Treasuries this year. As I have previously noted, equity valuations are attractive, macroeconomic factors are trending positively, government policy is supportive and S&P dividend is yielding more than 10-year US Treasuries. I would still favor allocating some of your portfolio with corporate bonds, but would not be a buyer of US Treasuries.

The reason to be bullish for US Treasuries is if you believe there will be a major banking and debt crisis that spills over into US and China. And, as we have seen so far this year, that has not been the case. Earlier today, Greece's government approved austerity measures necessary to receive its next round of bailout package. The market has digested this positive news, and the S&P 500 is trading in the black to begin the day (up about 0.5% right now)

Fri 2.10.12

Today, the market is looking to pull back. The market has been on a nice run lately, and I would look for some profit taking today. If you remember last year, I harped on the fact that the market was becoming used to huge, wild swings of 2-3% or more a day. Well, lately volatility has declined and we have enjoyed a nice, steady rise. In fact, so far in 2012, there's only been one day of a decline of 0.5% or more and we haven't had a decline of 1% or more since late December. However, the news out of Europe and Greece is gloom and doom, as the European finance minister is basically saying there should be no Greek bailout, and it appears that other Euro countries are looking to push Greece out of the Euro.

The other point I would like to make about this rally we have enjoyed, is that too many investors have become bullish. Stocks, like McDonald's, are hitting their multi-year highs, even though we are in a sub 3% GDP environment. Furthermore, this is all happening while volume has been significantly lower than historical norms.
But, to leave on a positive note, courtesy of Sam Stovall, from S&P, when stocks are in the "black" in January (note the S&P was up 4.4%), then 86% of the time since 1945, the market has been in the black for that year.

Tues 2.7.12

To keep expounding on the notion that 4th quarter's earnings season has been less stellar than previous quarters, I note that WSJ has picked up on this and has a graph which states that this earnings season is shaping up to the be the worst since the financial crisis for profit margins and firms beating expectations. Of the 204 companies in the S&P 500 that reported results in January, 60% have beaten estimates, which is well below the 70% that beat expectations in the first 3 quarters of 2011. However, I again must throw some "warm water" on this "cold water" statistic, as companies are continuing to provide solid earnings guidance for 2012, and 4th quarter has historically been a "clean-up" quarter, so as an investor I would look at the whole picture, which says that the economy is starting to rise (albeit slower than we would like) and employment data is moving in the right direction. Lastly, companies balance sheets are as solid as they have ever been, with a substantial amount of cash on their books, so although it will be bumpy, look for the trends to continue to be favorable.

Fri 2.3.12

Not much more that I can say, that hasn't already been said about today's HUGE jobs number. The Consensus was around 100k, and the highest estimate was 225k, so today's 243k number really was a welcome surprise to the markets and to the rally we are enjoying. Furthermore, the market has priced in more of a recession for Europe (and in particular, Western Europe) then what is currently playing out. And, all the big global companies, such as UPS/Fed Ex and Caterpillar, are all coming in with higher, revised guidance on 2012, and ramping up their investments. So, I would look for continued strength in the equity market, and not pay too much attention to the "As the World Turns" (also known as the PIIGS countries), and enjoy this rally.


To me, this is a similar feeling to how I felt after watching Alabama beat Clemson in the Georgia dome in Saban's 2nd year. For years, beginning with Dubose and ending with Shula, it became second nature to be pessimistic, and to believe that our glory days would never resurface. But, after watching Alabama come out and just completely pummel a soft ACC Clemson team, I started to realize that give it some time, and Alabama would be back on top.....having that same feeling from now with the US economy

Mon 1.30.12

First on the macro front, Portuguese credit-default swaps rose to a record 39.5%, signaling a 71% chance of default over the next five years, as investors continue to remain concerned about debt talks and the upcoming E.U. summit. Investors are focusing on Greek bond talks, which could offer the best idea of what haircut debt holders are willing to take. Also with respect to Greece, Germany has proposed that Greece hand control over its finances to a Eurozone budget commissioner before the newest terms of its bailout are agreed upon. As one can imagine, Greece is not happy about this new wrinkle, at all.


Lastly, to update my note from last week on S&P earnings and the number that are missing Consensus. See below from a table that Credit Suisse prepared. As I noted in a previous note, 70% of companies had beaten expectations in 1Q11, 2Q11, and 3Q11 results, and 62% of the long-term historical average. So, although earnings are trending toward the historical average, this is still way down from the last 3 quarters of results.  The S&P 500 was up 1.9% last week, with Information Technology sector leading the way, up 8.5% (almost entirely due to Apple's earnings), while Telecom Services were the lowest performing sector (primarily due to AT&T's loss as a result of its break-up fee it paid for the T-Mobile deal that was denied by the DOJ).

Mon 1.23.12

My note today focuses on how S&P earnings so far have disappointed investors. Of the 77 S&P components that have reported 4Q11 results, 43 have beaten estimates, 26 have missed and 9 have met Consensus. To put this into some kind of historical perspective, this means that although 56% of the companies have beaten expectations, this is way below the 70% rate that we experienced in the first 3 quarters of 2011 and is below the 62% historical average.


Well, one might counter this and say investors are not as focused on near term earnings, but more so of future earnings (i.e. guidance). Of the 108 companies that provided earnings guidance last quarter, 68 have missed and 13 have matched their estimates. What this tells me is that investors are going to scrutinize their earnings estimates for 2012, as investors weigh in earnings vs. macroeconomic factors that are trending favorably. Ultimately, I look for this to result in more volatility in the coming months once earnings season ends.

Thurs 1.5.12

For my comment today, following up on the bullishness of Wall Street strategists for the big brokerage houses. In early December, I illustrated a couple of their 2012 estimates, but today, courtesy of the WSJ, I have a graphic which shows how well they performed last year and what their forecast is for this year. Enjoy