Birinyi on stock run-up: Time for spooked investors to give up the ghost

Birinyi on stock run-up: Time for spooked investors to give up the ghost
S&P 500 closing in on alll-time high; 'join the party'
APR 09, 2013
By  John Goff
The $1.9 trillion restored to U.S. equity prices in 2012 has pushed the Standard & Poor's 500 Index within 10 percent of a record, more than 7 percentage points closer than any country among the world's biggest stock markets. The benchmark gauge for American equities climbed 2 percent to 1,432.12 yesterday as the European Central Bank detailed its bond-buying plan and data boosted optimism in the labor market. More gains are likely as bearish investors give up and start buying, according to Laszlo Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut. “They realize it isn't working,” Birinyi, an equity trader for Salomon Brothers Inc. in the 1980s, said in a telephone interview. “The excuses of no volume and earnings aren't going to be good -- that's not happening, and maybe it's time to join the party.” U.S. equities are climbing as Federal Reserve Chairman Ben S. Bernanke's policy of holding rates near zero helps profits and economic growth rebound from the first global recession since World War II. Gross domestic product in the U.S. is forecast to increase 2.2 percent this year while earnings in the S&P 500 may reach $103.48 a share, the most ever, according to the average of analyst estimates compiled by Bloomberg. Global Markets Yesterday's advance left the S&P 500 9.3 percent from its all-time high of 1,565.15 (SPX), reached Oct. 9, 2007. Among gauges in the 10 largest equity markets, the U.K.'s FTSE 100 Index is 17 percent away from its peak, while Canada's S&P/TSX Composite has 24 percent to climb, according to data compiled by Bloomberg. Futures on the S&P 500 expiring this month gained 0.3 percent to 1,435 as of 8:54 a.m. in New York. U.S. payrolls rose less than projected in August and the unemployment rate declined as more Americans left the labor force, indicating the U.S. labor market is stagnating. Including dividends, the S&P 500 reached a record yesterday, while the Nasdaq Composite Index closed yesterday at the highest point since 2000, the data show. Financial firms, companies that benefit from discretionary spending by consumers, and technology suppliers have rallied more than 35 percent since last year's low of 1,099.23 on Oct. 3. Mining and chemical companies led yesterday's advance, jumping 2.6 percent, followed by banks and technology producers, which added 2.4 percent. None of the 10 S&P 500 industries increased less than 1 percent. Stronger Rally “I'm a little bit surprised by its strength,” said Birinyi, who advised clients to buy stocks before the S&P 500 hit a 12-year low in March 2009. “This is a little bit of a stronger rally, not just in price but the fact that it's affecting all areas. So it's not just the usual excuses of a short-term rally or hedge funds buying.” American companies are doing better than the rest of the world in part because of Europe's debt crisis. The S&P 500's advance of 112 percent since its 12-year low in March 2009 compares with 72 percent from the Stoxx Europe 600 (SXXP) Index and 64 percent in the MSCI Asia Pacific Index, the data show. Bearish bets against the S&P 500 have increased. The proportion of S&P 500 shares available for trading, or float, that was sold short on Aug. 15 increased to 4.02 percent, up from 3.72 percent at the end of March, according to bi-monthly data compiled by U.S. exchanges and Bloomberg. 'Many Problems' “Everybody knows that stocks should go higher, but they say this time is different and there are so many problems,” said Byron Wien, vice chairman of the advisory services unit of Blackstone Group LP, the world's biggest private-equity firm. He spoke in a Sept. 6 telephone interview from New York. “At a certain point, it looks like the negatives aren't as fierce as you feared.” Since the end of 2009, the S&P 500's median quarterly earnings growth has been 25 percent, data compiled by Bloomberg show. While profits may decline 1.7 percent this quarter, they will rebound 11 percent in the final three months of 2012 and rise 11 percent next year and 12 percent in 2014, according to analyst estimates compiled by Bloomberg. Stocks in the S&P 500 closed yesterday at the highest level since Jan. 3, 2008, when the index was mired in its worst start to a year in a quarter century. Share prices are also at the same level as in April 2007, five months before they began a 57 percent plunge spurred by the souring of subprime mortgages and the collapse of Lehman Brothers Holdings Inc. 2007 Levels “Could we approach levels of what we saw back in 2007 and could that be argued as a bubble?” said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion. “It would be a bit of a bubble if we got there today or tomorrow with no change in data flow or prospects. Could it happen over the next 12 to 18 months, predicated upon a stabilizing situation in Europe and China, improving fundamentals? Yes.” A total of 68 stocks have been removed and replaced from the S&P 500 since 2009 as companies were dropped following takeovers, declines in market value, corporate restructurings and bankruptcies. General Motors Co., bailed out by the U.S. government in 2009, and Black & Decker Corp., which was acquired by Stanley Works in 2010, are among companies that were pulled. The S&P 500 is trading 13 percent below its average valuation since the 1950s and its price-to-earnings ratio has fallen throughout the rally since 2009, according to data compiled by Bloomberg. The benchmark gauge for American equities trades at 14.51 times reported profits, down from the 24.26 reached in December 2009, the data showed. Fund Withdrawals Even as the S&P 500 doubled, investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute, a Washington-based trade group. Withdrawals were $135 billion last year, the second-highest total after 2008, and about $75 billion has been pulled in 2012. The flight from mutual funds helped lower daily volume for U.S. exchange-listed stocks to 6.5 billion shares in 2012, down 44 percent from its peak in October 2008, according to data compiled by Barclays Plc and Bloomberg. Volume hasn't been this light at the same time that valuations were below their historic average since at least 2003, when the data began. U.S. equity volume reached the lowest levels since at least 2008 excluding holidays in August as vacationing traders awaited clues from the Federal Reserve on stimulus measures. The S&P 500 gained 2 percent in the month, its third straight advance. ECB Firefighting “The market continues to think that the Fed will support economic growth and the ECB will do whatever it needs to do in terms of its firefighting,” said Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a phone interview on Sept. 6. His firm oversees $636 billion. “It's running ahead of itself a little bit.” Investors have bought American equities since Alcoa Inc. (AA) kicked off the second-quarter earnings season in July as more than 70 percent of S&P 500 companies that reported results beat analysts' estimates, according to data compiled by Bloomberg. That compares with about half of the constituents in the MSCI World Index from developed and emerging markets. Apple Inc., Whole Foods Market Inc. and Fifth Third Bancorp (FITB) posted some of the biggest advances among S&P 500 stocks since the market bottom in 2009, rising more than 700 percent. Wyndham Worldwide Corp., the franchiser of Days Inn hotels and Super 8 motels, increased 17-fold to lead gains in the index. Leading Industries Companies that rely on consumer discretionary spending, computer and software makers, and banks had the best performance out of 10 groups in the benchmark gauge for American equity since the bull market began, more than doubling as investors bought companies that are most tied to economic growth. Defensive stocks including utilities and energy producers posted the smallest gains. Energy stocks, which trail the S&P 500 by 38 percentage points since March 2009, have fueled a 12 percent rally in the stock gauge from its June 1 low. The 15 percent increase in oil and gas producers includes gains of more than 50 percent in Valero Energy Corp. and NRG Energy Inc. “The U.S. has recovered better than the other markets because our financial system and companies have restructured and responded first,” James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, wrote in an e-mail Sept. 6. His firm manages $704.3 billion. “We still like the U.S. market the best.” --Bloomberg News--

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