Market Recap 05.23.2015

Markets were mixed this week as the SPY and the VTI advanced by 0.26% and 0.33% but the VT and the AGG fell by 0.22% and 0.37%. We wrote our last market recap on May 2 and since then the SPY moved up by 1.08% but the AGG fell by 0.50%.

Janet Yellen said on May 6 that “Equity market values at this point generally are quite high…there are potential dangers there.” That comment coincided with the low, at least so far, for the month of May.

According to Bespoke, the Q1 earnings season recorded 60% of companies with an earnings beat and 50% with a revenue beat. The earnings beat was in line with historical numbers but the revenue beat was low. Earnings guidance was -2.9%, about in line with past estimates.

What has gotten the market more concerned is the change in interest rates. The 2/10 spread started the year at 1.50 and is currently 1.57, but the 10/30 spread has opened up from 0.58 to 0.78. The 2/30 spread started the year at 2.08 and is now 2.35, so the curve has steepened on the long end, thus contributing to the year-to-date fall in the AGG.

Ultimately, a price of an asset is a function of future cash flows divided by a discount rate. If rates are headed higher, all other things equal, prices of assets will come down. The market might have already priced in some future increases, but the risk would be that rates increase faster and higher than anticipated. The Fed seems very hesitant to rush any kind of increase.

Higher interest rates have helped floating rate funds. A good gauge in sentiment is the changing discount/premium in closed-end funds. The Apollo Senior Floating Rate (AFT), a fund that we have held in some accounts for a while, now sells at 1.08% discount but started the year at a 9.27% discount to NAV. Meanwhile, closed-end funds that own municipals continue to sell at steep discounts. The MFS Municipal Income (MFM), also a fund that we own in some accounts, is selling at an 11.52% discount from NAV. It started the year at a 9.91% discount.  The current distribution rate is 6.14%, let’s assume an investor has a 28% marginal tax rate, that would be a tax-equivalent yield of 8.53%.

We are thinking about gold. Last week in Barron’s Laurence Fink, head of BlackRock said that “gold has lost its luster” as a historic store of wealth. That seems to be the consensus about the metal. Add in the fact that the VIX hit a 2015 low on Friday and maybe that is a signal.

It’s All Relative

While valuation metrics point to a very highly valued stock market, you can’t look at those metrics in a vacuum. You have to look at alternative investment opportunities including the level of interest rates. Just this week we heard from Warren Buffet and Leon Cooperman with their take on valuation.

Warren Buffet said (, “the market, based on normal interest rates, is on the high side of valuation, not dangerously high but on the high side of valuation. On the other hand, if these interest rates were to continue for ten years, stocks would be extremely cheap now.”

Leon Cooperman ( said “I think the market is in a zone of fair to full valuation…the stock market is at about 16-1/2 times earnings and it seems about right.”

Ira Sohn Conference

Today was the Ira Sohn Conference, where some of the biggest hedge fund managers get together to pitch their best ideas and help raise money to fight pediatric cancer.

Leon Cooperman said “I think the bond market is overvalued, but the stock market is about 16 times earnings and [it] seems about right ” This echoed comments by Warren Buffet who said earlier in the day that he would short the bond market if he could. David Tepper also said there is a chance that treasury’s could fall hard.

David Einhorn went after Pioneer Natural Resources (PXD) laying out a strong argument that PXD simply does not make economic sense.

Jeffrey Gundlach says that the low in bond yields has already happened.

Market Recap 05.02.2015

The market was down 1.5% going into Friday, but a rally on the final day of the week left the SPY off only 0.44%, VTI was off 0.87%, VT minus 0.44% and the AGG declined 0.85%.

The GDP number came in at 0.2% which was worse than the already weak expectations of 1%. Last week we wrote about big price advances by NFLX and AMZN, this week the big moves were to the downside as LNKD fell 21% and TWTR down 26%.

361 companies have reported and according to Zacks, profits are up about 4.7% but revenue is down 4.1%.