writings of a ragamuffin

[humbledragamuffin-blog]

Katie Couric is an Anti-Gun Fraud and Hypocrite

Couric is the same yesterday, today and well, probably tomorrow. A deceptive fraud!

[humbledragamuffin-blog]

Dow Jones Composite Average $DJA Suffers Triple Death Cross

For those who may have taken a hit in the stock market today I apologize for not getting this chart up sooner. I tweeted several times and offered to the staff at StockCharts.com but I don't have any initials behind my name so no one paid attention. But, here is the chart of a Triple Death Cross on the Dow Jones Composite Average $DJA  which, in my opinion, depicts a huge downturn in the markets.

[dougkass]

The 'Big Short' May Be at Hand

Bill Gross, Monthly Investment Outlook, July 30, 2015:

“But perhaps the recent annual report from the BIS – the Bank for International Settlements – says it best. The BIS is after all the central banks’ central banker, and if there be a shift in the ‘feed a fever’ zero interest rate policy of the Fed and other central banks, perhaps it would be logically introduced here first. The BIS emphatically avers that there are substantial medium term costs of 'persistent ultra-low interest rates.’ Such rates they claim, 'sap banks’ interest margins … cause pervasive mispricing in financial markets … threaten the solvency of insurance companies and pension funds … and as a result test technical, economic, legal and even political boundaries.’ Greece is not specifically mentioned, nor the roller coaster ride of Chinese equity markets, nor the rising illiquidity of global high yield bond markets, nor the … well a reader should get the point. Low interest rates may not cure a fever – they may in fact raise a patient’s temperature to life-threatening status. Yellen, Fisher, Dudley and company may not be in total agreement, but they assuredly are listening, as this week’s Fed meeting will likely attest.

There is no statistical reason per se for the Fed to raise interest rates, yet absent a major global catastrophe, we are likely to get one in September. But the reason will not be the risk of rising inflation, nor the continued downward push of unemployment to 5%. The reason will be that the central bankers that are charged with leading the global financial markets – the Fed and the BOE for now – are wising up that the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history. Low interest rates are not the cure – they are part of the problem. Say a little prayer that the BIS, yours truly, and a growing cast of contrarians, such as Jim Bianco and CNBC’s Rick Santelli, can convince the establishment that their world has changed.”  

Much of the market’s attention yesterday focused on the second-quarter GDP report.

The Commerce Department downwardly revised the previous three years of GDP growth to a 2% annual growth rate from an earlier 2.3% estimate. But many market watchers suggested that the first quarter’s upward revision – to 0.6% from an earlier projection of a 0.2% decline – served as a signal that the Federal Reserve will raise the Fed Funds rate in September.

I’m reluctant to come to the same conclusion, believing instead that a December lift-off is more likely.

Here’s my analysis:

Too little attention has been placed on the continued subpar growth that’s been the consistent feature of the U.S. economy since “The Generational Low” in March 2009.

It’s worth noting that recoveries out of severe U.S. recessions like the 2007-2009 one have historically been V-shaped. But this time around, gross domestic product has only expanded at a 2.1% real annual rate from the recession’s bottom – well below the historical trend line of slightly more than 3%.

This fact, coupled with the more-sluggish corporate-profit growth than has emanated from a weaker economy, has formed my cautious market view over the last two years. I also think this slow-growth condition has generated a dependency on aggressive monetary tactics from the Federal Reserve and the world’s other central banks.

The Fed’s 6-year-old policy of injecting massive amounts of liquidity into the system and stabilizing interest rates at near 0% has become a powerful factor in our capital markets and in rate-sensitive sectors (i.e., housing and autos).

But in maintaining monetary indulgence for such a long time, our central bank has now distorted – and screwed up – our economy and markets, perhaps for some time to come. I believe the Fed has:

Borrowing from the future. The “Zero Interest Rate Policy” (ZIRP) has borrowed past and present sales from the future, underscoring the challenge of future economic growth.

Created unknown policy consequences. No one knows the consequence of an extended period of ZIRP “punch bowls,” which could result in aberrant behavior and hangovers.

Made no sense. If there were no consequences to ZIRP, interest rates could have been held at zero forever in the past, as well as in the future.

Importantly, ZIRP is actually losing its effectiveness (at least in America). As I’ve written previously, low rates are hurting groups like the growing savings class – and they’ve been hoarding cash and reducing personal expenditures as a result, weakening growth.

The seeds of malinvestment have also begun to sprout from ZIRP. Low rates increase the supply of “stuff” (e.g., the mushrooming growth of shale oil), sustaining those companies and countries that shouldn’t be sustained and elevating asset prices against limited progress in the real economy.

Lending standards have also dropped (e.g., the proliferation of covenant-lite debt offerings), while fear is obliterated and complacency proliferates. Malinvestment is also vividly appearing in China’s economy and capital markets.

Meanwhile the fundamentals and technicals are flailing:

As Capital IQ’s Lindsey Bell (my friend and former associate) reported yesterday on CNBC, second-quarter S&P revenues are coming in at -3.8%. while (financially engineered) EPS have risen by only 1%.

On the technical front, I’ve consistently observed the narrowing market leadership, which shows no signs of improving.                      

For now, the markets are disregarding signs of slow structural-growth signals and investors are paying up for stocks as valuations continue to expand. But with the Fed at an inflection point of policy, 0% interest rates will no longer likely buoy or even expand P/E ratios further.

Instead, the Wizard of Oz’s curtain will be soon opened and investors will finally begin to see whether the flight path of economic growth is steady enough to support stocks at current levels. Personally, I remain skeptical.

Thus far in 2015, I’ve envisioned a sawtooth pattern lower in the belief that a major market top is forming. Tactically, I’ve adopted a “short the rips and cover the dips” strategy that’s paid off so far.

But at some point – probably in the relatively near future – it will be more appropriate to “short the rips and stay short.” After all, the “Big Short” might be soon at hand.

[humbledragamuffin-blog]

Gross might be correct this time or possibly incorrect but, he could be correct. Hey, I could be interviewed on TV

[humbledragamuffin-blog]

Helping folks with the Critical Periods in their lives...we all have them, you know!

[quantifiedalpha]

Intel's Earnings History Indicates Upside

Summary

Intel has beaten EPS 7 of the last 10 quarters, including 5 consecutive surprises.

The analyst consensus EPS estimate represents a negative year-over-year earnings growth of >5%. Considering, Intel hasn’t experienced negative YoY earnings growth since FQ1 2014 we feel that that’s overly bearish.

While the stock price’s recent performance is not indicative of an earnings surprise, it is an attractive entry price for investors.

We are bullish on INTC at current prices and have a 12-month target price set at $35.02.

Our quantitative earnings model predicts that Intel (NASDAQ:INTC) will beat the Wall St. consensus EPS and revenue estimates when they release next Wednesday after market close.

We’ll start by providing our projections, proceed to an explanation of the rationale behind the projections, and finish with some additional analysis and supplementary charts. Our track record of past quarterly earnings predictions made by the model can be found here.

EPS PROJECTIONS

On average, sell-side analysts on Wall Street expect Intel to report $0.52 in EPS for this quarter. Our model projects a 65-75% probability that Intel will beat these projections. It expects a large beat on estimates, ranging from 5-10% higher than consensus (EPS between $0.55 to $0.57).

REVENUE PROJECTIONS

On average, sell-side analysts on Wall Street expect Intel to report revenues of $13.14 billion for this quarter. Our model projects a 55-65% probability that Intel will beat these projections. It expects a small beat on estimates, ranging from 0-5% higher than consensus (revenue between $13.15B to $13.80B).

RATIONALE

Analyst estimates are consistently too conservative as companies beat earnings estimates over 60% of the time. Analysts may do this to stimulate trading (e.g., Hayes 1998), to obtain access to management (e.g., Lim 2001) or to confirm a prior sentiment on a stock (e.g. Hwang 1996). In any case, analysts are incentivized to “play nice” with the companies that they cover, and this manifests itself in earnings estimates that are consistently lower than they should be.

This pattern of earnings estimate manipulation can be taken to the extreme in certain companies. Thus, the most important factor to consider when predicting whether a company will beat earnings estimates ahead of time is its past track record of estimate beats. While Intel may not be an extreme example of earnings estimate manipulation, it does have quite a consistent track record of outperforming analyst estimates. Below is INTC’s earnings history:

Last quarter, INTC beat the consensus EPS estimate of $0.40 by 1¢ for a 2.5% surprise. This was the 5th consecutive earnings surprise for Intel, and the 7th in the last 10 quarters. The reported EPS of $0.41 represented a 7.89% Y0Y earnings growth over FQ1 2014’s reported EPS of $0.38. The Wall St. consensus EPS estimate of $0.52 is 3¢ lower than the FQ2 2014 reported EPS of $0.55, representing an expected YoY earnings growth rate of -5.45%. As seen on Table 1.1 in the appendix, if INTC were to experience negative YoY earnings growth it would be the first time since FQ1 2014.

It’s clear from the size of the EPS surprises (big beats and small misses), that Intel appears to be a company that analysts have a tendency to “play nice” with. This is possibly due its immense size, which increases the importance of the relationship for analysts. Although the correlation is not as strong on the revenue side, the same story holds, with Intel’s revenue beats proving greater than their misses. Below is Intel’s revenue history:

While last quarter’s reported revenue of $12.78 billion marked a $44 million (0.35%) miss on the Wall St. consensus of $12.82 billion, it was only the 5th time in the last 10 quarters that Intel had missed revenue projections. It also represented positive YoY revenue growth to the tune of 0.13%. Hopefully Intel can repeat the 2% revenue beat that they recorded 12 months ago, and not the 0.67% miss that they recorded 24 months ago. This quarter’s consensus revenue estimate of $13.14B would represent -5% YoY revenue growth compared to FQ2 2014’s reported revenue of $13.83B. Considering that Intel hasn’t recorded negative YoY revenue growth since FQ2 2013, we feel that the -5% revenue growth cushion that analysts are expecting is overly bearish, and that Intel will beat the Wall St. consensus revenue estimate.

Another factor that plays a big role in our predictive model is the recent performance of Intel’s stock price. We’ve found through extensive historical back testing that the market tends to anticipate strong earnings ahead of time, and thus stocks are bid up in price ahead of earnings. This proves to be a warning sign for Intel’s upcoming earnings, considering how poorly Intel has performed, especially after AMD issued negative guidance today.

The chart below shows Intel’s price performance over the last six months, and compares it to the average six-month performance of stocks in the semiconductors industry group, the information technology sector, and the overall market. It also includes the top five semiconductor stocks ranked by six-month price performance for comparison:

Over the last six months, Intel’s stock price has dropped dramatically to the tune of 15.17%. This is compared to the industry group average of +4.78%, the sector average of +4.67%, and the overall market average of +3.82%. Intel has been a laggard recently, which is not a good sign as it heads into earnings. At the very least, the market is not excited for Intel’s earnings release. This does potentially mean that if Intel ends up beating expectations by a wide margin, then the market could react favorably and reward Intel shareholders.

CONCLUSIONS

While we’re confident that Intel will beat analyst estimates when they release, that does not necessarily mean that we advise buying the stock before the release. On average, stocks that beat analyst estimates will rise in stock price by around 1-2%. However, there is a huge amount of variation around this average, and many stocks will actually decrease in price even after strong earnings releases.

Valuation is the best factor available when determining post-earnings announcement price changes. Cheap value stocks increase in price by a larger margin than expensive stocks after beating earnings estimates (e.g., Zhao 2009). The chart below shows where Intel ranks within the market on five crucial valuation metrics:

Intel’s weak 6-month price performance has left it with an attractive value profile. While its sales yield of 39.93% is relatively weak compared to the market median of 55.17%, it’s right inline with the semiconductors group median of 39.93%. INTC is especially attractive from an earnings and free cash flow yield perspective, with both yields more than doubling the respective market medians and tripling the respective group medians. Historically, stocks in the 80-89th percentile of the market in earnings yield generate an excess return of 4.06% - a great sign for the stock going forward. Intel also rewards shareholders with an attractive 3.25% dividend yield. Based on a ranking of their overall relative value profile, we rank INTC in the 78th percentile of all stocks in the market (i.e. slightly above average).

We feel confidently that Intel will beat analyst estimates tomorrow and that the stock is currently at an attractive buying opportunity. It’s weak 6-month price performance is a bad sign from a momentum perspective, but also leave the company with a very attractive valuation. The company has very strong returns on both assets and equity, and has a very attractive buyback and dividend program in place to reward shareholders. Intel also invests a lot into research & development, which depresses its earnings in the short-term but provides numerous long-term benefits. Intel has closed higher on the day following earnings 4 of the last 6 quarters, and has had a positive 7-day price change after each of the last 5 earnings releases.

The appendix below includes Intel’s YoY growth history, as well as a history of its earnings and revenue releases compared to estimates, and finally a snapshot of our 12-month expectations for the stock.

APPENDIX

Table 1.1 - INTC’s EPS and Revenue YoY Growth Rates

Table 1.2 - INTC’s history of Wall St. EPS Estimates vs. EPS Actuals

Table 1.3 - INTC’s history of Wall St. Revenue Estimates vs. Revenue Actuals

Table 1.4 - INTC 12-Month Overview

[humbledragamuffin-blog]

Why not begin my account & 1st post with Tumblr by giving a shout out to the staff at Quantified Alpha! Well done & I'm looking forward to a long & profitable relationship!