Green Book September 2013
We're Still Bullish As The Major Trend Stays Positive
Leadership isn’t warning of impending weakness but market breadth is highlighting risks not evident when inspecting leadership alone. We use Implied Equity Duration to measure the sensitivity of stocks to interest rate changes. Is The Dividend Mania Ending? Not all of the high yielders have been trashed. The Small Cap P/E premium of 15% could go higher. Today’s record profit margins are due primarily to declines in “below the line” items. Are there Emerging Market opportunities given the momentum reversals and currency vulnerabilities? Aerospace & Defense has compelling stories of future profitability and growth. We still believe the upside for the U.S. 10-year is limited.
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Featured Articles
Market Internals: The Good And The Bad
Leadership isn’t warning of impending weakness in either the U.S. economy or the stock market. Market breadth, on the other hand, is highlighting risks that aren’t evident when inspecting leadership alone.
Duration: It’s Not Just For Bonds Anymore
We measure the sensitivity of common stocks to changes in interest rates using Implied Equity Duration. Growth-oriented sectors tend to have higher duration than Value-oriented sectors, while regional differences are largely explained by interest rate and risk premium differentials.
Is The Dividend Mania Ending?
The list of new lows is dominated by yesterday’s darlings, “bond-like” stocks. In particular, Utilities and REITs have been hammered. However, not all of the stock market’s high yielders have been trashed.
Small Cap Cycle Extension?
Small Caps have an historically high P/E premium of 15% vs. Large Caps. This premium could go higher, but we’d be reckless to call for a long-term extension of Small Cap leadership given this premium.
Decomposing Today’s Record Profit Margins
The celebrated gains in corporate profitability over the past decade and a half are attributable primarily to proportional declines in “below the line” items like interest expense and corporate taxes.
Navigating Reversals In The Emerging Markets
Identifying opportunities given this summer’s momentum reversals and currency vulnerabilities.
Industry Groups: No Need To Bottom-Fish
Buying global groups with strong price momentum has been a winning strategy. Will it continue?
Aerospace & Defense Purchased
With a wide range of market cap choices, an excellent technical profile, and less dependence on federal spending than you might think, this group has compelling stories of future profitability and growth.
Data Dependency—September Taper Still Likely
More upside surprises are still likely and, despite the disappointing jobs report, the overall economic picture still supports a September taper. The improving economic picture is not just happening within the U.S., but in other major countries. We still believe the upside for the U.S. 10-year is limited.
Table of Contents
Stock Market
- The MTI, And More Market Maxims...
- Market Internals: The Good And The Bad
- Is The Dividend Mania Ending?
- Small Cap Cycle Extension?
- Industry Groups: No Need To Bottom-Fish
- Decomposing Today’s Record Profit Margins
- Sector Margins: Just Thank The Consumer
- Navigating Reversals In The Emerging Markets
Of Special Interest
Macro Monitor
- Data Dependency—September Taper Still Likely
- RAI Falls, But Stays On “Higher Risk” Signal—Remain Cautious
- U.S. Investment Grade Corporate Bonds: Maintain Favorable
- U.S. High Yield Corporate Bonds: Maintain Neutral
- U.S. Municipal Bonds: Maintain Neutral
Equity Strategies
- Select Industries: Adding Aerospace & Defense Group
- Group Models: Info Tech Tops Domestic, Financials Tops Global
- Select Attractive Domestic Groups
- Aerospace & Defense Purchased
- The Short Side - AdvantHedge Lags YTD
Quant
Market Internals
- Up/Down Earnings Ratio: Q2 Reports Below Average But Ahead Of Q1
- Q2 Median Revenue Comparisons: Higher Growth Across All Segments
- Q2 Median Company Earnings Growth Rates Vary Drastically Across Cap Size
- Small Cap Premium Remains 15%
- Small Caps Lead Year-To-Date
- Growth Continues Leading In Mid And Small Caps YTD But Lags In Large Caps
- S&P 500: Equal Weighted Outperforms In August & YTD
- Minimal Sector Weight Changes Across The Capital Tier Indices
Portfolios
Major Trend
Estimating the Downside
Market Internals: The Good And The Bad
Leadership isn’t warning of impending weakness in either the U.S. economy or the stock market. Market breadth, on the other hand, is highlighting risks that aren’t evident when inspecting leadership alone.
Duration: It’s Not Just For Bonds Anymore
We measure the sensitivity of common stocks to changes in interest rates using Implied Equity Duration. Growth-oriented sectors tend to have higher duration than Value-oriented sectors, while regional differences are largely explained by interest rate and risk premium differentials.
Is The Dividend Mania Ending?
The list of new lows is dominated by yesterday’s darlings, “bond-like” stocks. In particular, Utilities and REITs have been hammered. However, not all of the stock market’s high yielders have been trashed.
Small Cap Cycle Extension?
Small Caps have an historically high P/E premium of 15% vs. Large Caps. This premium could go higher, but we’d be reckless to call for a long-term extension of Small Cap leadership given this premium.
Decomposing Today’s Record Profit Margins
The celebrated gains in corporate profitability over the past decade and a half are attributable primarily to proportional declines in “below the line” items like interest expense and corporate taxes.
Navigating Reversals In The Emerging Markets
Identifying opportunities given this summer’s momentum reversals and currency vulnerabilities.
Industry Groups: No Need To Bottom-Fish
Buying global groups with strong price momentum has been a winning strategy. Will it continue?
Aerospace & Defense Purchased
With a wide range of market cap choices, an excellent technical profile, and less dependence on federal spending than you might think, this group has compelling stories of future profitability and growth.
Data Dependency—September Taper Still Likely
More upside surprises are still likely and, despite the disappointing jobs report, the overall economic picture still supports a September taper. The improving economic picture is not just happening within the U.S., but in other major countries. We still believe the upside for the U.S. 10-year is limited.
Stock Market
- The MTI, And More Market Maxims...
- Market Internals: The Good And The Bad
- Is The Dividend Mania Ending?
- Small Cap Cycle Extension?
- Industry Groups: No Need To Bottom-Fish
- Decomposing Today’s Record Profit Margins
- Sector Margins: Just Thank The Consumer
- Navigating Reversals In The Emerging Markets
Of Special Interest
Macro Monitor
- Data Dependency—September Taper Still Likely
- RAI Falls, But Stays On “Higher Risk” Signal—Remain Cautious
- U.S. Investment Grade Corporate Bonds: Maintain Favorable
- U.S. High Yield Corporate Bonds: Maintain Neutral
- U.S. Municipal Bonds: Maintain Neutral
Equity Strategies
- Select Industries: Adding Aerospace & Defense Group
- Group Models: Info Tech Tops Domestic, Financials Tops Global
- Select Attractive Domestic Groups
- Aerospace & Defense Purchased
- The Short Side - AdvantHedge Lags YTD
Quant
Market Internals
- Up/Down Earnings Ratio: Q2 Reports Below Average But Ahead Of Q1
- Q2 Median Revenue Comparisons: Higher Growth Across All Segments
- Q2 Median Company Earnings Growth Rates Vary Drastically Across Cap Size
- Small Cap Premium Remains 15%
- Small Caps Lead Year-To-Date
- Growth Continues Leading In Mid And Small Caps YTD But Lags In Large Caps
- S&P 500: Equal Weighted Outperforms In August & YTD
- Minimal Sector Weight Changes Across The Capital Tier Indices