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Stock Market Review - The Most Profitable Letter In 2009
2009 reacquainted the investment profession with the alphabet, as it was the year of the V, U, L, and W. Every economist tried to get recognition for predicting the most appropriate letter to describe the US economy’s expected path. Sadly, very few of those letters made investors any significant amount of money during the year, and now the debate about the economy rages on as to whether it will double-dip, or continue to climb. However, there was one letter that was very profitable to investors for most of 2009 – Beta. Lost in all the hand wringing over the economy, Beta was an investor’s best friend in 2009 – so much so that outperformance more or less required having significant exposure to high Beta stocks in any portfolio. Looking back on 2009, the returns for the top 20% (highest) and bottom 20% (lowest) beta stocks in the Russell 1000 universe is shocking:
A classic stock in the high Beta portfolio was Las Vegas Sands. LVS started 2009 at a price of approximately $6 a share. By mid-March it had fallen to $1.42 a share on credit crunch concerns, which resulted in a work stoppage on its Cotai Strip Project. However, as credit markets thawed and its default no longer loomed imminent, it began a truly “generational” move to close the year above $16 a share. While some investors buying at the low secured the elusive “10” bagger over a few months, LVS still returned over 200% for the entire year, consistent with the results for high Beta stocks in 2009. This stock summarized the difficulty of the 2009 investment environment. Moreover, owning classically prudent stocks did not pay handsomely in such a volatile environment. We were very grateful that the AFG 50 portfolio closed 2009 outperforming the S&P 500 by approximately 450 bps. While every year one beats the market is an accomplishment, last year was particularly rewarding considering the challenging market conditions.
So looking ahead to 2010, is the Beta trade likely to persist? We think not. The following chart looks at the returns of high versus low Beta portfolios over the last 10 years. The interesting thing to take note of is how the Beta effect tends to reverse itself following a particularly robust cycle such as 1999 and 2004.
Notice that in general, high Beta stocks have not tended to outperform their less volatile siblings. However, when they do, the return differential is very dramatic. The other interesting thing from this chart is that following those dramatic “Beta Effect” years in 1999 and 2004, the Beta effect tended to reverse itself significantly. Clearly 2009 is a strong “Beta Effect” year, and assuming nothing changes as the year unfolds, we expect that lower Beta stocks should enjoy relative outperformance in the months ahead, as the riskier stocks take a breather from their dramatic ’09 run.
The economic environment for 2010 should provide many interesting discussions for us as the year unfolds. While economic activity has certainly picked up over the past few months, it is hard to have a positive intermediate-term view of the economy given the ongoing uncertainty created by Washington. Ultimately, the economy needs consumers, but with reported unemployment at 10%, and “all-in” unemployment closer to 17%, it seems unlikely that consumers will provide an ongoing boost to economic activity without job creation and growth. That last bit – job creation - is the tricky part of the whole equation. From a macro perspective, it seems that until things clear up regarding new regulations and taxes, businesses will be very timid about adding new workers. After all, it is virtually impossible to hire without understanding the total compensation one must pay to a new worker or the after tax profit such a worker can generate. With health care reform still undefined, it is difficult to see employers adding workers in significant numbers in the short-term. Additionally, the possibility of new taxes for energy, probable higher interest rates later this year, and higher income and capital gains taxes for 2011, will likely make employers take additional pause until these issues become more transparent. So for now, we will act like a responsible economist and say that “on one hand”, low interest rates provide a very attractive economic environment, “but on the other hand”, interest rates are only low because the underlying structure of the economy is fairly lousy. Bottom line, we are not likely to make a major bet on the economy at this point in time.
Regarding the overall market, things are just about as confusing as the underlying economy. While in 2009, we consistently hammered on the theme that the market was silly-cheap based on the profit and growth expectations priced into it, we cannot make such a claim today. The chart below updates our analysis of the expectations built into the S&P 500 stocks.
While the sales expectations are not obscene, they by no means are flashing an “all systems go” signal given the uncertainty still floating around the economy. While we would say we are cautiously optimistic about the market, we are more cautious than optimistic at this point.
We conclude this month with a quick review of our notable forecasts from last year. In general, we did very well with our predictions. Here they are:
1. The return of valuation as an important stock selection factor: Valuation will regain popularity although investors will remain guarded about risks. Stocks with attractive valuations and manageable leverage, large and small, will outperform the overall market. Investors have fled to safety by purchasing stocks with high dividend yields, low leverage, and positive trading momentum. As investors shift their focus towards the long-term, stocks currently trading at deep discounts to their future expected cash flows should outpace the overall universe, as we experienced in December(2008).
2. Sector preference reshuffling: Investors will look for and be able to find more bargains in cyclical sectors, such as consumer discretionary, technology, and basic material. Consumer staples will remain a safe haven but become less appealing as investors get ready to embrace higher returns at appropriate risks.
3. Inflation concern resurfaces: By the end of the year, the Fed will be more concerned with inflation than deflation, due to the stimulus efforts and the tremendous amount of cash injected into the economy in 2008 and over the coming months.
4. Stronger household balance sheet: US households’ total debt outstanding will continue to shrink as American people continue to pay down their debts. This voluntary de-leverage act will make the overall economy’s GDP growth recovery longer to materialize, but good for the long-term financial well being of average families.
While Beta was clearly the driving factor behind profitable portfolios in 2009, valuation performed admirably. The return spreads between the top and bottom value score quintiles for the Russell 1000 was 22.37%. If only every forecasting exercise could be as reasonable as last year’s. For this year, we are not making direct forecasts ourselves, but rather will share the various predictions of our recent Market Forecast Project Survey.
Here is a summary of the predictions for 2010 from the Market Forecast Project Survey:
We asked our survey participants:
“What is your prediction for the U.S. Economy for 2010?”
Responses were:
• Fair
• Muddle through
• GDP up 3.5%
• Unemployment remains elevated, and in the second half of the year, rises again.
• I can't imagine it will be great once the stimulus dries up but this year proved me wrong so many times, who knows.
• GDP +3.1%
• Plus 3%
• Strong first half with multiple challenges in the second half
• GDP +6%
• Continue to grind it out, under 3% GDP growth.
• GDP less than 3%
• Continued improvement at a crawl pace
• Positive GDP Growth as money multiplier rebounds
• GDP will grow by 2.5% by the end of 2010.
• Strong 1H weak 2H tax increases and higher interest rates etc. become headwinds
• Sluggish growth of 2.5%
• GDP positive 3.5%, but unemployment staying above 9% until 4Q
• GDP expansion q1, currency crisis q2, deteriorating q3/4
• Strong first half growth, slowing substantially as the Fed withdraws monetary measures.
• GDP = +4.2%.
• 3% growth
• Decent growth for the first half of 2010. As the year closes, headwinds may start to take their toll. Overall, near 3% GDP
• Growth for the year.
• 1.5% growth
• Growth in the first half... contraction in the second
• 2.5% growth
• Modest growth 2.5%
• 2010 GDP 3.5%
• Unemployment 8.5%
• Considerable growth in 1H10 (5% GDP) and then Moderate Growth (2.5% GDP) for 2H10
• Slow steady increase, but historically weak
• 3% GDP growth
• 1.5% to 3% with low confidence. Too dependent on global economy to have high level of confidence.
• Weak growth 1-2%
• I think the rebound will lose steam until the 4th quarter.
• Continued recovery with unemployment figures worsening. Growth of 3-4%.
• +3.0% GDP
• The U.S. will be in a serious recession until January 20, 2013
• Recovery by 3Q.
• Solid +3.8% real GDP growth
• +3.5%
• Moderate recovery GDP growth of 3%
• Stronger than expected.
• +1-2%
• Flat
• Double dip
• Growth of 2%
• Strong GDP in 1st quarter with flat GDP over the 3 following quarters.
• Good growth. Better than the market. 4% growth
• Inventory rebound broadens out to the economy with employment starting to pick up sooner and to a greater magnitude than expected given very lean workforces. GDP to smash consensus and top 3.5%
• GDP +2-3%
• +4%
• Statistically positive growth of 2.8%
• Should see some improvement but it will be a long way from be a growing economy.
• Better than expected but overshadowed by higher interest rates.
• +2.5% for the year - stronger in first half
• 3.5% GDP
• +4.5% GDP
• Strong 1H then flat line in 2H
• A muted recovery that comes in fits and starts (and some disappointments), with GDP gaining an overall 2.5% (stronger in the first half and weaker in the second half).
• GDP +2.5%
• Continuous improvement in all areas: GDP growth of 3.2%, unemployment numbering 8.6% - inflation 1.8%
• GDP +3.5% AVG
• GDP will be positive at 2.5%.
• Bleak. Go global.
• Slow recovery continues. Unemployment remains stubbornly high.
• GDP will rise 1.5%
• Grinds out lower un-employment and with ever downward-tick, it means an upward tick in oil prices at the pump.
• Things will be slightly better - relative to 2009, things will feel great
• GDP rises to 3.5% annual growth
• GDP growth of 2.5%
• Unemployment 10%
• CPI 1.5%
• Higher foreclosures in the housing market with home prices holding steady. Unemployment still above 10% and the economy unchanged.
• Up
We asked our survey participants:
“What is your Stock Market prediction for 2010?”
Responses were:
• Mid-year dip to end at 0%
• S&P 500 down 10%
• up10%
• Dollar Appreciation initiates significant stock market correction.
• DJIA 11,388
• Plus 9%
• Strong first half with multiple challenges in the second half
• S&P500 +6.35%
• Emerging Markets +12.7%
• Strong 1st qtr, weak 2nd & 3rd, strong 4th qtr ending the year around 1250.
• S&P500 950
• Flat to up 10%
• Higher by 5 to 15%
• Global equity markets will move higher in 2010.
• 1250 on S&P 500
• U.S. stock market between -5% to +5%.
• Up 10%, with a short but nasty 15% correction in early 2Q.
• Down 20%
• Choppy market that ends up 10% on the year
• S&P 500 = 1350
• Up 12%
• Looking for a solid year ahead - targeting S&P at 1300 by year end. Look for a major adjustment (-10% or more) in the 2Q.
• Lower by 10%
• Pain.... revisiting the lows of March 2009
• 1-2% for all major indices. Essentially flat price performance with returns being generated from dividends
• At some point during the year, the S&P 500 will be up 12% from the closing price on 12/31/09.
• S&P 500 - 1250
• NASDAQ - 2050
• 15-20% Gains.
• 11000 on the Dow - but first a pullback
• Up 15%
• Flat with increasing volatility
• Unchanged for full year
• Down
• The market will trend upwards in the early part of the year, decline into the early fall, and then begin to rebound. I see the market ending the year up about 4%.
• U.S. and European stocks up by 10-15%, L/t Bonds down slightly, Emerging market equities and debt up significantly, REITS even to slightly higher, gold even to lower, oil lower.
• +10% return.
• S & P will decline 15%
• Twenty percent dip but flat by year end.
• + 17%
• S&P 13471
• S&P 500 up <8.0% in 2010
• Down 10%
• +0-10%
• Up 5%
• Up 5%
• Flat
• S & P 500 down 5%
• Flat.
• S&P 500 to finish between 1300-1350 driven by ongoing earnings upgrades and better than expected economic growth.
• Risk to that forecast more to the upside than the downside and possible returns exceed those of 2009.
• SPX 1100
• DOW 10500
• +15%
• S&P 500 at 925
• The major indices (DJIA/S+P 500/NASDAQ) will finish the year about 10% each.
• Volatility within a trading range.
• +6%
• SP 1350, peaking mid-2010.
• 1400 S&P500
• Up 10% in 1H then back down in 2H for up 5% for year
• Early excitement as stronger earnings reports come in the first part of the year followed by a reality check correction in the warmer months as what is really going on in the economy is valued. As investors start to look further into 2011/12 for direction, the market will start to move up. The long & short of it will be a choppy move to be within 5% of where we are right now.
• The biggest risk is the government's heavy hand in the economy (withdrawal of artificially keeping mortgage rates low, huge leverage in its balance sheet, or congress attempting wonderful and noble concepts-but in reality creating huge expenditures/costs that won't meet any targets and will cost much more than stated), which history shows turns into a drag on the economy at best.
• S&P 1050
• An increase of 14% in the S&P 500 index from its opening value at the beginning of this year
• S%P 500 1222
• Domestic markets will be up about 6% for the year. Int'l markets up about 8% for the year. Bonds will be essentially flat.
• Down. Dow 10082, or a pessimistic view of Dow 8140.
• S&P 1295
• S&P 500 will hit 1,300 level
• From here: up 10 % then down 10% then up 5%
• Modest gains across all benchmark's with annual gains averaging 12%
• SPY closes up 5%
• Up
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For December of 2009 (from Nov 30 to Dec 31), the returns are the following:
AFG's Portfolio Performance
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I will follow the Stalin multi book model on 2010..
The government will report 3.2% growth.
The Feds internal secret books will record 2.1% growth.
The actual will be 1.0475% growth.
(Yes, the Fed will lie to itself internally, it just can't help itself. The political games run deep.)
Interesting high beta website.
At least two alpha newsletters
outperformed:
TopTen with CDE up 6.9 times last year
and
Big4, with CO2 up 76 times.
Of course past performance is no guarantee
of future results, maybe better...
http://www.jubileeprosperity.com/
UPDATES:
http://www.zerohedge.com/forum/market-outlook-0
In early 2007 I warned of an impending stockmarket crash.
I confirmed a bottom by April 2009.
In mid 2009 I warned of an impending USD rally.
The uptrend since March 2009 has been a bear market rally contained within a much larger bear cycle that started in 2000.