Gavekal Capital: 2013-10-27

Friday, November 1, 2013

GaveKal Capital Surpasses $600M in AUM in GaveKal Knowledge Leaders Strategy

Latest Rally Not Confirmed By Banks

Banks, and financials in general, play an important role in the performance of stock indices. Many bull markets are characterized by the outperformance of banks relative to the overall market. The latest rally in the S&P has not been confirmed by the relative outperformance of the banks. In the chart below we use the KBW Index as a proxy for bank performance. If you are unfamiliar with the KBW Index, it is a float adjusted modified, market-cap index of the 24 largest banks in the US.

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Sony Takes a Nosedive

Yesterday we highlighted that Sony had disappointed investors with weak earnings and lowered guidance. Today the stock is down 11.7% and the chart looks about as ugly as they get. Below we show the absolute price point & figure chart in USD. At least five more zeros will be added to the current column of zeros after today's price action gets registered.

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Homebuilders Extend Downtrend on Taper Concerns

US homebuilders are back under pressure today as fears over Fed tapering are renewed.

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Our relative strength point and figure charts show a group that has rolled over and is in the early stages of a downturn.  It is quite possible the homebuilders retrace the entire move off October 2011 lows.  Charts are below.

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The Deflationary Impact of a Weaker Yen is Now Squarely Being Felt in South Korea

We began opining on the deflationary impacts of Currency Wars back in January and some of those postulations are now coming to fruition - the latest being that the South Korean CPI today hit a level not seen since the aftermath of the Asian financial crisis. We wonder if the BOJ holding off on more QE at its latest meeting was in some part due to pressure Japan has been getting from its neighbors to easy up on the accelerator? Either way, South Korea's CPI at a 15 year low suggest something about global pricing pressure.

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Taper Trade Back In Play

The taper trade appears to be back on this week.  Some of the basic symptoms of this trade are: 1) higher interest rates, 2) higher US dollar, 3) lower gold and 4) weakening stocks.  Charts below showing the last 10 days of activity reveal this sequence.

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Thursday, October 31, 2013

A Brighter Outlook for Inditex?

While Inditex fell below long-term support earlier this year, the stock price has managed to retrace much of that move down:
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Meanwhile, retail sales posted a yearly gain for the first time since 2010:
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Sony Misses Earnings as Downtrend Reasserts Itself

Sony reported lower than expected sales and EPS estimates and lowered its full year profit guidance yesterday, serving as a stark reminder that Abenomincs is hardly a panacea for Japan's struggling consumer electronics industry.

Sony only finished down 1.8% today, but our relative strength point & figure charts show the stock being turned lower by historic resistance after a nice relief rally so far in 2013. Now that it has broken its intermediate uptrend trendline, there isn't much support to stop a larger correction.

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Staples: An Interesting Retail Stock

Per some of our previous posts, it is getting harder and harder to find interesting large-cap consumer discretionary stocks. Many of the well known retail concepts like Target or Nordstrom are breaking down, while some of the luxury names, like Coach or Ralph Lauren are locked in persistent declines.

There is one company where we can make a solid case: Staples.  Below is our relative strength point and figure chart, which shows the stock slowing emerging from a multi-year downtrend.

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Low valuations is another positive for Staples.  One of the techniques we use to measure value is to calculate normalized ratios.  Here, all we do is divide current price by trailing 5-year average metrics.  At 3.4x normalized, intangible-adjusted cash flow, Staples is quite cheap compared to other specialty retailers.

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Mixed signals coming out of the US

There doesn't seem to be a trend in the US economic releases recently. In the past week we have had weaker housing data (Pending Home Sales), an ok production data point (Industrial Production), below consensus employment report (ADP), a weaker regional survey (Dallas Fed), and now today a blow-out regional survey (Chicago PMI). Very confusing! 

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The Citi Economic Suprise Index recently moved into slightly negative territory for the first time since July. This may be an early signal that the recent rally in the 10-year may soon be over.
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Wednesday, October 30, 2013

US Budget Deficit quietly making substantial gains

The Treasury Department reported that in September the government had a surplus of approximately $75 billion. The budget deficit as a percent of GDP has basically halved since the end of 2011.
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2 Out Of Fashion US Luxury Companies

Coach and Ralph Lauren are two US luxury retail stocks that are currently out of fashion with investors. 

Coach has been in a persistent downtrend since the beginning of 2012, and it has accelerated on the downside so far in 2013.

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Ralph Lauren looks like it is following the same pattern, having recently broken down from an area of support.

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Has LinkedIn's stock finally hit a wall (or ceiling)?

LinkedIn sold off hard today (-9.3%) as management guided slightly lower than analyst's were expecting for the final three months of the year. LinkedIn has been on a tear this year. Before the sell off today, LNKD was up 136% and had outperformed the MSCI World Index by 90% over the past year. It had been the 17th best performing stock out of nearly 1600 in the MSCI World over the past year. The stock looks to be in an uptrend but has it gone too far, too fast? A correction, either through time or price, would seem likely as current overhead resistance has proven too be stubborn.

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Leading indicators suggest housing component of CPI will rise and gasoline component will fall

Two of the largest expenses for consumers are housing and gasoline. The gain in house prices suggest that the owner's equivalent rent portion of CPI will rise in the coming months. Meanwhile, retail gasoline prices suggests that the gasoline component of CPI will fall.
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Tuesday, October 29, 2013

German Health Care Stocks: Market Leaders?

As we mentioned a couple of weeks ago, most European equity indices are in positive territory this year (lead by the peripherals). And, as the DAX continues to make new highs, we decided to take a quick look at what might be driving performance in MSCI Germany...
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The Heath Care sector (followed closely by Consumer Staples) has been a significant source of strength in recent history:
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However, if we look more closely, the reality is that this sector has been largely supported by just one stock:
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Which helps explain why, when we look at the rest of our relative strength point-and-figure charts in the German Health Care sector, most fail to confirm any overwhelming leadership:
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The information listed above is for example purposes only and should not be construed as the Investment Advisor’s opinion or investment outlook.
As of the most recent quarter end, Qiagen was held by the Investment Advisor. Past performance is no guarantee of future results.

Consumer confidence spread between richest and poorest Americans reaches all-time high

The overall consumer confidence index fell from 80.2 to 71.2 in October due mainly to the government shutdown this past month. The consumer confidence survey also takes the temperature of consumers in different income brackets. What caught our eye was the difference in confidence between the richest and poorest Americans. The spread between the two reached an all-time high in October. Perhaps an unintended consequence of QE?

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Denver leads housing recovery according to Case-Shiller Home Price Index

Getting timely data on house prices is tricky. The Case-Shiller Home Price Index tracks 20 cities but with a two month time lag. The latest data (August) shows a couple of interesting points emerging about the national housing market. First, Denver and Dallas are the only two cities where prices are now higher than they were at the peak of the housing boom. Second, New York City has had the weakest rebound off the lows of any city. Third, every city has posted a year-over-year gain for every month this year. Tables and charts below:

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Weak North American Retailers & Retail Sales

Retail sales were reported in the US today +3.23% over the last year, the weakest year over year reading since the recovery began.  Weakening retail performance is weighing on several US retail giants like Target, Nordtsrom and Family Dollar (charts below).

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Construction & Farm Machinery Today's Weakest Link

Cummins is leading the construction and farm machinery stocks down this morning after reporting revenues roughly $100 million under estimates.  In addition, the company lowered revenue estimates for fiscal year 2013, citing, "Revenues were below our expectations as we continue to face an environment of weak demand for capital goods in most of our major markets. Our focus on lowering costs in all parts of our business positions us well to deliver strong earnings growth as market conditions improve."

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We find many unattractive looking stocks in this group, most either locked in persistent downtrends or beginning to break down after prolonged tops.  The worst looking charts are below.

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