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Monthly Archives

April 2014

EWM Number of the Day: 4/21/2014

By Uncategorized

$100 million

Square’s approximate loss recorded in 2013, which was broader than its loss in 2012, according to people familiar with the matter. With losses widening and cash shrinking, representatives of the mobile-payments startup have discussed a possible sale to several deeper-pocketed rivals.

(Source: Wall Street Journal)

U.S. Equity Markets: Bull or Bear?

By General

We believe that it is hard to determine precisely whether you are at the end of a Bull run or at the beginning of a Bear cycle. However, one can look at a panoply of macro factors that might help in making a decision one way or the other. It is also possible that the two scenarious balance out and put you in a Neutral Zone. 

Factors that favor a continuing of the current Bull Market:

  • Continuing of current accomodative global monetary policy
  • U.S labor market continues to improve
  • U.S. auto sector continues to grow
  • U.S. housing affordability still attractive in most markets
  • Muted inflation
  • U.S. Current Account and Federal Budget deficits continue to shrink
  • Renaissance in U.S. energy production and manufacturing
  • U.S. corporations sitting on over $2 Trillion in cash
  • M&A and IPO activity picking up
  • Equity market valuations are reasonable particularly on a relative basis to bonds
  • Europe starting to grow its economy
  • China growth stabilizing alongwith other emerging markets like India and Brazil

Factors that Bears are making in support of a coming Bear Market:

  • Slow job improvement compared to past economic recoveries
  • Political and regulatory uncertainty continues hindering global capital investment and employment growth
  • End of QE in the U.S. prompting discussion of how equities might crash in a rapidly rising interest rate environment
  • High corporate profit margins might not be sustainable
  • Momentum investors have driven the valuations for many internet oriented and biotech stocks to very steep levels that might not be sustainable
  • U.S. IPOs might be showing signs of excessive speculation
  • U.S. equity markets have not had a 10% plus correction in over 30 months vs. a historical average of 18 months
  • 2nd quarters are usually the worst on both a price change and frequency of decline basis since WWII for the S&P 500

We are in a neutral zone with a bias towards Equities and Risk Managed asset classes on a relative and absolute return basis.

$2.1 Trillion in Untaxed Profits held Abroad by U.S. Corporations

By General

More than $2 trillion in foreign profits were held by U.S. corporations abroad in 2013, says Reuters.

U.S. corporations do not pay income tax on their overseas profits (something known as income tax deferral) unless they bring those profits back into the United States.

  • Between 2008 and 2013, the amount of profits held overseas by American corporations almost doubled.
  • General Electric alone had $110 billion overseas, followed by Microsoft (at $76.4 billion), Pfizer (at $69 billion) and Merck (at $57.1 billion).

This corporate tax issue has been at the center of congressional debate on tax reform. Some lawmakers have advocated getting rid of offshore deferral, and others have pushed for a “tax holiday” that would allow these corporations to bring foreign profits back into the United States at a low tax rate. Democratic Senator Max Baucus, former finance committee chairman, had made a number of tax reform proposals before leaving to become ambassador to China. Senator Ron Wyden has taken over Baucus’ post.

Analysts do not anticipate any real reform action until after the mid-term elections in November, but Americans can expect to see a push for a tax code overhaul in 2015.

Source: Kevin Drawbaugh and Patrick Temple-West, “Untaxed U.S. Corporate Profits Held Overseas Top $2.1 Trillion: Study,” Reuters, April 8, 2014.

Are the U.S. Equity Markets Over Valued?

By General

Every time the equity markets hit a new high, doubts begin to arise if the markets are getting too toppy/frothy. It is usually a good time to take a step back and put things in perspective. A good comparison is usually done by going back in time to when the markets peaked in March 2000. In that light, David Kostin, chief U.S. equity strategist at Goldman Sachs, looked at some data going back to March 2000 when the technology bubble peaked and subsequenty burst. I was really close to this time period, having moved to Silicon Valley to join a team doing late stage, pre-IPO, tech venture investing.

“Veteran investors will recall the S&P  500 and the tech-heavy Nasdaq peaked in March 2000.  The indices eventually fell by 50% and 75%, respectively. It took the S&P 500 seven years to recover and establish a new high, but the  Nasdaq still remains 25% below its all-time peak reached 14 years ago.”

However, according to Kostin, there are six ways in which the two episodes differ:

Recent returns are less dramatic. Although the trailing 12-month returns are similar (22% today versus 18% in 2000), the trailing 3-year and 5-year returns are much lower (51% vs. 107% and 161% vs. 227%, respectively).

Valuation is not nearly as stretched. S&P 500 currently trades at a forward P/E of 16x compared with 25x at the peak in 2000. The price/book ratio is 2.7x versus 6.Xx. The EV/sales is currently 1.8x compared with 2.7x in 2000.

More balanced market. The reason it is called the “Tech Bubble” is that 14% of the earnings of the S&P 500 came from Tech in 2000 but it accounted for 33% of the equity cap of the index. Today Tech contributes 19% of both earnings and market cap. Top five stocks in 2000 were 18% vs. 11% today.

Earnings growth expectations are far less aggressive. Bottom-up 2014 consensus EPS growth currently equals 9%, close to our top-down forecast of 8%. In 2000, consensus expected EPS growth equaled 17%.

Interest rates are dramatically lower. 3-month Treasury yields were 5.9% in 2000 vs. 0.05% today while ten-year yields were 6.0% vs. 2.7% today. The yield curve was inverted by 47 bp. Today the slope equals +229 bp.

Less new issuance. During 1Q 2000, 115 IPOs were completed for proceeds of $18 billion. In 1Q 2014, 63 completed deals raised $11 billion.

Kostin says based on historical patterns, momentum stocks are unlikely to rebound, but the broader market should still be set for modest returns going forward.

(Sources: Goldman Sachs, Business Insider)