Tuesday, August 16, 2011

Some bullish data points

After my recent posts, examples here and here, I have been accused of overly gloomy, bearish and even Apocalyptic.

Today, I would like to present a number of bullish data points as a change of pace. It's always useful to look at the other side of the story, in order to challenge your own viewpoint. We all suffer from confirmation bias, which is the tendency to find data points or news items that confirm our biases.

In brief, I would like to discuss each of the following points:
  • Insiders are buying.
  • Warren Buffett is buying.
  • Sentiment is getting so bearish that it has reached the public consciousness, which is contrarian bullish.

Insider buying
Insiders are known to be smart investors. Even if they are not trading on material non-public information, which is against the law, their investment activity has on average beaten the market. So the market got very excited when TrimTabs reported last week that insiders were buying at the heaviest pace since May 2008.

Others have jumped on the story by reporting that insider buying activity was heaviest in financials, which is bullish for that sector.

Wait a minute - heaviest buying since May 2008? Wasn't May 2008 before the crash in stock prices? While this group has shown outperformance in the past, insider activity is not a perfect timing indicator and they can be early in their calls. Izabella Kaminsky at FT Alphaville highlighted TrimTab's warning about the less than perfect record of insiders:
But TrimTabs cautions that insiders are not infallible. Insiders were also buying heavily in late 2007 and early 2008, right before the financial crisis intensified.

Warren Buffett is buying
The Oracle of Omaha had been speaking bullishly about the economy and the market in early July. More recently, Fortune publish an interview with Buffett entitled Buffett: The lower stocks go, the more I buy. Firstly, Buffett observed that he sees no recession on the horizon from his read of Berkshire Hathaway's businesses:
Up until right now, all of our businesses have been coming back---even Europe isn't doing that badly---except for businesses relating to home construction which is on its rear end. [Importantly Buffett did say that if events continue like the last few weeks it will change things.] Business has been coming back steadily, even more than the mood of the public.
He went on to say that they are buying stocks and issuing Berkshire bonds in the process:
In the meantime, Buffett is looking to buy stocks -- oh, and apparently to sell Berkshire bonds too. Berkshire is reportedly taking advantage of record low rates and issuing bonds to raise dirt-cheap capital. For Buffett right now at least, this is not a time for fear. This is a time for action.

Are stocks really cheap on an absolute basis or are they just cheap relative to bonds? I don't pretend to be as smart an investor as Warren Buffett, but respected value investor Jeremy Grantham of GMO recently wrote that fair value on the S&P 500 is no more than 950.
There is a case to be made that bonds are expensive, especially after the Fed intervened to say that they would keep rates low for another two years (which would encourage a borrow-short-lend-long carry trade). Marc Faber agrees with this assessment:
I personally think the Treasury market (NYSE:TLT), the long-dated, are a bubble and it will be one of the worst investments for the longer term if you buy a 10-year, a 30-year U.S. Treasury so I’m a bit puzzled that Treasuries are now yielding, are essentially near record lows. I would rather sell Treasuries.
In that case, could Berkshire be issue cheap debt to buy stocks in order to arbitrage the difference in expected returns?

Consensus is getting too bearish
The final bullish data point that I have is the contrarian magazine cover indicator. Yesterday, I wrote about the risks in Europe, but look at this Time Magazine cover:
When the story gets to the popular mainstream press such as Time, is it time to buy?
My inner bear doesn`t have a good answer to that question, other to point to this technical analysis study from Goldman Sachs (ht: ZeroHedge) indicating that when the VIX spikes to the high 40`s, as it did last week, it usually either marks an intermediate term bottom or a sideways consolidation pattern in the market. The report, however, does cite the risks to Europe as part of their forecast.

Sentiment analysis seems to be the most compelling from the bullish viewpoint. Given the risks in the system, my best guess is that the market is likely to be choppy but move sideways after this oversold relief rally is complete.


Anonymous said...

"..Sentiment is getting so bearish..."

I'm not sure I agree, Cam Hui! I consider the continuing high readings in the Investor’s Intelligence weekly survey to be horrifyingly bullish, the kind that makes me want to short everything twice!

Here are recent percentages..

Aug 17 Bulls 46.2 Bears 23.7

08/10 47.3 23.7
08/03 46.3 24.7
07/27 49.5 21.5
07/20 46.2 21.5
07/13 44.1 22.6

Please tell me, if not the past six weeks, what will it TAKE to turn these advisors pessimistic?

Cam Hui, CFA said...

Yes I am aware of the survey figures - but can you argue against a magazine cover indicator?

Anonymous said...

"..can you argue against a magazine cover indicator?"

--Yes we can; but only in that such classic indicators of laziness and complacency of assumption--which is what these magazine covers are--will often be found within months of reversal points, rather than days or weeks... and thus can't be used for timing purposes in the same way.

I would rather argue against these I.I. Survey advisory numbers with another Survey, like the current Ticker Sense Blogger Sentiment Index, which you referenced earlier, and which shows an approximately 1/3, 1/3, 1/3 distribution of Bulls, Bears, and Neutral; or with very quick-moving Put/Call ratio data, which has been showing a growing amount of pessimistic put buying the past couple days; or with some objective measure of extreme weakness, like the percentage of SPX or NASDAQ stocks above their 50day MA... which according to one financial writer I follow, is right now still at the third lowest reading since 2002, even with last week's rebound.

Also, I’ve found value in some of the sentiment research done by the Schaeffer Research Institute, which shows that high advisory bullishness is actually NOT bearish... so long as it is rising or steady state.

It's ONLY when it starts to unwind (as it always does, eventually) that it becomes immediately and strongly dangerous.