4 reasons the first quarter was better than it appeared

By Tim Clift

Opinion: High-flying stocks fell to more reasonable levels Half full, not half empty: Equities may not have gained much so far this year, but there were important changes in the market. After the S&P 500 Index ended last year at an all-time high (with a 10.5% gain in the fourth quarter alone), optimism and momentum were strong leading into 2014. But something changed all of a sudden. Instead of extending its advance, the benchmark index eked out an increase of only 1.80% during the first quarter. (The bond market, as measured by the Barclays Capital Aggregate Index, climbed 1.84%.) And the S&P 500 fell as much as 4% in the current quarter. What’s worse, the stock market was driven in the first quarter primarily by “boring” stocks like utilities and “old technology” companies including Microsoft /quotes/zigman/20493/delayed/quotes/nls/msft MSFT -0.47% . Darlings such as Amazon.com /quotes/zigman/63011/delayed/quotes/nls/amzn AMZN -0.53% , Facebook /quotes/zigman/9962609/delayed/quotes/nls/fb FB -0.57%  and Gilead Sciences /quotes/zigman/72849/delayed/quotes/nls/gild GILD +0.46% fell, and the magnitude of the reversal was breathtaking. For example, biotechnology and social-media stocks, the two best-performing groups in 2013, suffered a significant drop after a positive start in 2014. The iShares Nasdaq Biotechnology ETF /quotes/zigman/85342/delayed/quotes/nls/ibb IBB -0.46% ended the first quarter with a 16% drop from its high during the period, as did Facebook, the largest of the social-media stocks. On the macroeconomic front, it didn’t look much better. Largely due to severe weather, first-quarter gross domestic product (GDP) growth is expected to slow to less than 1% when the government releases its results, compared with 2.6% in the fourth quarter. As the great economist Paul Samuelson said: “The stock market has predicted nine of the last five recessions.” One little-changed quarter is hardly the end of the world. In fact, once you look beyond the headline numbers, we believe that you’ll find positive developments that are constructive for a sustained, secular bull market. Here are the top four reasons why the first quarter was, to us, healthy for stocks. And how that could lead to another bull market this year. 1. The correction in momentum stocks removed a lot of “froth” It is important to understand that today’s high price-to-earnings momentum stocks, such as Amazon.com and Facebook , are not the same as many of the dot-com high-fliers of the tech bubble. Today’s tech stars tend to have real businesses, revenues and earnings, and some of them are mega-caps with market capitalizations above $50 billion. A couple of them even exceed $100 billion. These stocks do matter to the stock market. For example, the biotechnology group makes up nearly 25% of the health-care sector, which is the third-largest economic industry in the S&P 500. The decline of these high-fliers, which brought their price-earnings multiples to more “normal” levels, was effective in lowering the valuation of the broader market. But the big drops were generally limited to these stratospherically priced shares, not the market overall. In addition, the money that left these high P/E shares did not appear to leave the stock market — it simply moved to those with more reasonable valuations: the “boring” stocks. That’s why, despite the severe sell-off of high P/E momentum stocks, the overall market barely budged. This market leadership rotation from high-P/E stocks to low-P/E shares is a timely and healthy development, as the primary concern of most investors has shifted from the health of the economy to the fundamental valuation of stocks. 2. Interest rates are falling The only things that are certain in life are death and taxes, and now we can add rising interest rates. Or not. Although the much-dreaded quantitative-easing tapering has begun, interest rates actually trended lower during the first quarter. That’s right — interest rates fell. Ten-year and 30-year Treasury yields, the long-term interest rates most critical to mortgage rates (and thus the housing market), tumbled 31 basis points to 2.7% and 41 basis points to 3.56%, respectively. As for the 5-year and 7-year Treasury yields, the interest rates most critical to consumer loans such as car loans, they too ended the quarter lower than they started. Lower borrowing rates can help stimulate more consumer purchases, feeding economic growth and providing a catalyst for higher stock prices. 3. The euro zone is recovering While Russia and Ukraine dominated the headlines, the euro zone economy continued its recovery. European stock markets actually outperformed the U.S., especially the much-loathed peripheral countries affectionately named “PIIGS” (Portugal, Italy, Ireland, Greece and Spain). The stock markets of the two biggest peripheral countries, Italy and Spain, gained 14% and 5%, respectively. Even Greece, the poster child of the European sovereign debt crisis, registered a double-digit increase. 4. Healthy skepticism “Flash Boys,” Michael Lewis’ new book, asserts that the high-frequency-trading market (HFT) is “rigged.” Although Lewis applied that damning word to a small part of the stock market that affects only a few market participants, such as program traders and penny-stock day traders, it has caused a major kerfuffle across Main Street and Wall Street. The popularity of the book confirms that most investors are not jubilant and blinded by market gains, and in fact retain a healthy level of skepticism. That is healthy, and far from the euphoria that’s a hallmark for stock market tops. As wonderful as big stock market gains may feel, investors need to bear in mind that back-to-back double-digit quarterly gains and 30%-plus annual gains are rare. They may even be unhealthy. Typically, after a period of strong gains, the stock market needs a breather. The rotation from high-fliers to underperformers is necessary for the stability of the overall market. Profit-taking and a fresh look at stock valuations are signs of a robust market taking a rest.

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Why do Investors Love Large Hedge Funds?

by Attain Capital

It’s the always present question mid-size and start-up funds ask themselves day in and day out. Why do investors keep plowing money into the largest of the large hedge funds when the statistics have shown time and again that those large hedge funds tend to underperform their smaller counterparts. Alternatives research and analysis firm Preqin tackles the question with some hard data in their most recent piece: “What are Investors Looking For?”, showing that the small and mid-size hedge funds outperformed the largest funds by about 1.7% in 2013: (Disclaimer: Past performance is not necessarily indicative of future results) Chart Courtesy: Preqin One answer to the large versus medium/small debate given by some institutional investors we’ve talked to, highlights the deviation in returns, not the returns themselves,  as the reason to choose a ‘brand name’ Billion Dollar+ hedge fund over a smaller upstart which may provide better performance. The logic is that while they may perform a little worse in terms of return – their worst case scenario is a lot less when choosing Goliath over David.  This is the same reason we reach for the Kraft Macaroni and Cheese versus the generic brand, why all else being equal we go with American Airlines instead of Spirit, and so forth. It’s not all about saving money (or making more of it in case of hedge funds), it’s about having a sense of comfort as well. But how much of this type of “comfort” are the biggest hedge funds really delivering?  To dive deeper, we took a look at Preqin’s details on how the hedge fund performance in these different size groups was dispersed. “Fig. 2 shows performance over 2013 according to the 25th percentile, median and 75th percentile values among each of the fund size categories, and the data shows that the top three-quarters of all fund groups achieved positive returns in 2013.” (Disclaimer: Past performance is not necessarily indicative of future results) Chart Courtesy:Preqin The invest with a behemoth logic would have us believe the dispersion of the small and medium size funds would be many times that of the large funds in order to make up for the underperformance of the behemoths, and that the so-called worst case scenario of the small and medium size funds would be much worse than the billion dollar big boys. But the stats show quite a different story (at least in 2013…), with the 25th percentile return for the big boys (the worst case) actually less than the 25th percentile average return for the small and medium-sized funds (the startup funds came in a distant fourth). And what about that comfort level, the dispersion in the large hedge funds returns was indeed less, but not drastically so. Consider medium ($500-999mm) versus large funds ($1b+), where the medium had returns 1.13 times the large, yet a deviation less than that (just 1.06 times as large as the large), and a worst case scenario 1.38 times better. Now, one year doesn’t tell the whole story, and the data for the smallest hedge funds (under $100mm) support the comfort argument with higher deviation and a worse worst case scenario – but don’t throw the proverbial baby out with the bath water by lumping in small and medium-sized hedge funds with the startups. The small and medium-sized provided better returns, with similar comfort in 2013. (Disclaimer: Past performance is not necessarily indicative of future results)

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Do Soybeans Offer More Profit?

By: Chris Barron

For some time now, market analysts have been assuming that we might see a fairly large acreage shift from corn on corn back to more soybeans. This could be the case in general; however, be sure to stay focused on your individual numbers. The idea that producers will switch from corn to soybeans assumes there must be more profit potential in soybeans compared with corn, or that the cost of growing soybeans is significantly less and could reduce overall cash flow requirements. Don’t be so sure without running a number of different scena­rios. Planting more soybeans doesn’t neces­sarily equate to more profitability or less risk. Unless you have a compelling agronomic reason for planting more soybeans, it’s critical that you run the numbers, even up to the last minute. Consider the following factors as you analyze your final or last-minute rotation and planting decisions: What are the realistic yield prospects between corn and soybeans; gross income differences; and current risk management/marketing tools? Yield prospects for corn versus soybeans on an individual farm-by-farm basis can greatly vary. Assuming market prices stay at current levels, maximizing yield is the most effective way to improve profit potential. Look at your yield history and see which crop has been more consistent or provided the highest yields. Has continuous corn or your previous crop rotation been effective in the past? If so, ask yourself the reason for changing a success­ful pattern. I’m not advoca­ting planting more corn neces­sarily, but I am encour­aging every producer to analyze every acre for maximum profitability. Gross income is another consid­eration that affects produ­cers who rent land. High cash rents can make it virtually impossible to profitably grow soybeans without achieving maximum yield potential. For example, assuming a cash rent price of $350 per acre, it would take $6.36 per bushel at 55 bu. soybeans, or the first 31 bu. of production, just to cover land cost. Higher rent prices can easily account for 50% of production costs. Equipment should be another focal point. Analyze your current equipment costs on corn versus soybeans. If planting more soybeans requires additional equipment investment, be sure to correctly evaluate the cost. Adding more soybean acres doesn’t necessarily guarantee a reduction in equipment cost. Lack of Revenue Guarantee. Risk-management decisions go hand in hand as we evaluate profit opportunities between corn and soybeans. The primary challenge for many producers considering more soybean acres is the lack of revenue guarantee compared with corn. For example, many producers can purchase as much as $350 per acre more revenue coverage on corn than with soybeans. For most producers, the revenue coverage for private insurance and the agricultural risk coverage (ARC) through the farm program provide a substantially higher coverage level by planting corn. Actual production history (APH), county yield averages and the level of crop insurance coverage all have a direct impact on the best rotation for your farm. Marketing opportunities between corn and soybeans could be anyone’s guess during the growing season. Regardless of your acreage mix, be sure to continuously monitor your cost of production in order to have a clear understanding of exactly where your profits begin and end. Profit oppor­tu­nities will likely be short-lived on rallies this year. If you’d like a side-by-side comparison tool for corn versus soybeans, please let me know and I will email you a copy.

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Three Variables to Consider Before Investing in Gold

By: DailyGainsLetter

George Leong writes: While there continue to be many gold bugs out there, I’m not one of them—but I do see gold as a trading opportunity. Given what we have seen so far and looking ahead, I just don’t see gold as a buy-and-hold strategy at this time. Yes, there’s money to be made, but it’s going to be for traders only. The recent break below $1,300 an ounce and the subsequent rally to the current $1,325 level is an example of such a trade, not a new trend that’s developing on the charts, based on my technical analysis. The chart below shows the potential declines in the metal towards $1,200 and $1,100 an ounce. Chart courtesy of www.StockCharts.com Many gold supporters will counter that China is hoarding gold and India will soon pick up its buying. While I don’t argue against this, I just don’t see the yellow metal retaining its luster at this point unless a war breaks out in Ukraine and Russia intensifies its threat. If this should happen, it would drive Russia’s gross domestic product (GDP) growth lower and could result in the fragile eurozone and European economies retrenching back into a recession that just ended. I wrote about gold several weeks back as a trading opportunity on dips below $1,300. I continue to hold on to that belief, but longer-term, the yellow metal could fade and fall back towards $1,200 or less. My thinking is that inflation is nowhere to be seen in the United States, China, or Europe. (In fact, deflation may be more of a concern here.) And unless inflation picks up, the yellow metal isn’t going higher on a sustained move. That’s one of my top reasons why gold may head lower. A second reason is that the Federal Reserve is continuing to cut its quantitative easing via its monthly bond purchases. The move is meant to force yields, interest rates, and the U.S. dollar higher. If it succeeds, the stronger value of the greenback will negatively affect demand for the yellow metal, which is priced in U.S. dollars. My third reason is that, unless economic growth falters in this country, we will likely see capital move into the stock market and equities versus gold. After the strong returns in 2013 coupled with the poor start to 2014, traders are likely to be more inclined to funnel money into stocks than gold at this time. Now, if the economy does weaken and a conflict escalates in Europe, gold would then move higher under these circumstances, but its sustainability would be an issue. So the way I view it is that gold is only for traders and not for buy-and-hold investors at this time. If the three variables I talked about hold true, then investors can expect the yellow metal to inevitably trend lower. But, of course, there will be quick shorter-term trading opportunities that will still surface.

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GOLD Elliott Wave Down D Wave

By: Gregor_Horvat

On Gold we presented  a triangle idea few weeks back, with wave C rally up to 1380/1400 resistance area. Market sold of sharply from that levels  in March and it seems that price is ready to continue lower in April as current decline looks impulsive, labeled as wave (a). With that said, we suspect that wave D will fall down to around 1240/1270 zone after a completed sub-wave (b) that may look for a top formation in the next week or two in 1320/1360 area. GOLD Daily Elliott Wave Analysis GOLD Four Hour Gold has recovered up to 1320-1342 resistance area that we highlighted it several times in our past updates. We also noted that bearish reversal could be near if we consider a double zigzag from the low. Well, market fell very sharply yesterday and finished the day around 1300 area which suggests a completed recovery in wave (b). So we anticipate further weakness now, ideally market will move beneath 1277 by the end of the week. 1331 is now new short-term critical resistance. GOLD 4h Elliott Wave Analysis GOLD One Hour Yesterday some commodities fell sharply, and gold was no expectation. We have seen a very powerful bearish move away from 1330 that has unfolded in five legs so we think that this market will go even lower, but after a three wave bounce. We see nice resistance zone for wave c at 1310-1315. GOLD 1h Elliott Wave Analysis

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Enter the Pound

by Greg Harmon

The focus in the equity world has been on the Dollar, Euro and Japanese Yen. Will the Dollar weaken? Will the ECB cut rates to weaken the Euro? Will Japan finally be able to create some inflation by weakening the Yen? What gets lost in this is that the winner of the currency wars has been the British Pound. A quick look at the chart of the currency measured in Dollars below shows a clear trend higher since July, nine months. It has leveled a bit recently but the most recent action shows that there may be an opportunity to put on a tending trade in Sterling. In technical terms it is testing resistance from a higher low and building an ascending triangle. A break of the triangle higher would target a move to 173.50. That is a big move for a currency. This level has some additional significance. Looking on a wider view at the monthly chart shows that this is near the 50% retracement of the move lower in 2008 at 173.66. So with a move finally getting some space from the 38.2% retracement at 164.81 and the 200 month SMA at 166.38 as a natural stop level it is ready for a trade. For an equity player this move can be played with the ETF $FXB. Due to the fee structure a direct play should look for a move over 165.75 on the ETF as a trigger.

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