Google earning 2/3/2019

Google earning 2/4/2019 Monday Google option distribution says that it's hard to reach 1140 to 1180, and there is no put support. Current price is 1118.62 on 2/1 Friday closing price.

Update: 2/4/19 After ER: 1,107.90 −33.52 (-2.94%)

 GOOGL 1,141.42 USD +22.80 (2.04%) Closed: Feb 4, 7:34 PM EST After hours 1,107.90 −33.52 (-2.94%) 1,107.90 USD ‎7:35 PM

institutional participation and high breadth Impacted by high correlation

8/12/2010

Big Picture Analysis: The equities indexes plowed through many support levels yesterday and overnight, which is probably the death knell for the rally. In retrospect, the signs of institutional participation and high breadth were probably a result of record high correlation in the stock universe. Going forward, I will tend to discount such information until the correlation lowers to normal levels.

http://www.zerohedge.com/article/lack-stock-dispersion-hits-all-time-record-most-stocks-now-trade-one

Consumer Confidence vs Analyst Confidence

DR: Consumer Confidence vs. Analyst Confidence
Published August 2nd, 2010 in Sentiment, Valuation
Tags: anlyst, conference board, consumer confidence, contrarian, earnings expectations, forward estimate, NDR, Ned Davis Research, sentiment, valuation.
Last week we checked in with the respected firm of Ned Davis Research to find them continuing to be bullish on equities.

While their official stance is clearly bullish, I’ve heard that NDR is more accurately reluctantly bullish - especially if you read their daily commentary. Today I wanted to go over two studies from NDR with completely different conclusions that may perhaps shed more light on this.

Consumer Confidence
The first one is based on the Conference Board’s Consumer Conference Index. As you no doubt already know, the US consumer is in dire straits and the various surveys that measure their pulse attest to this, to different degrees. Many are pointing to this fact as an argument for a double dip recession.

The recent Consumer Confidence report for July came in at 50.4, down from 54.3 in June 2010:



But according to a historical study by Ned Davis Research, poor consumer confidence is actually contrarian bullish for the stock market. NDR chopped the Consumer Confidence survey into three categories: low, medium and high. Next, NDR looked at the returns of the Dow Jones Industrial Average over the next 12 months.

They found that when Consumer Confidence is high (above 113) the Dow returns +0.2 per annum. When it is medium (between 66 and 113) +5.9% and most interestingly, when it is low (below 66 - as it is now) the Dow gains an average of +13.1%.

I had noticed the same pattern in the Michigan Consumer Confidence index visually a few years ago but NDR’s crack team of number crunchers transforms it into a quantifiable edge.

Large drops - like the kind we saw in February of this year, when Consumer Confidence dropped 1.1 points - are also significant. According to NDR, when the consumer confidence index drops by at least 9.8 points within a month, the S&P 500 index gains an average of +8.7% in the following 12 month period.

For many people (especially those new to the markets) this upside down view of the world where bad is good and good is bad is simply unnerving. If that is the case for you, think about it this way, when things are at their worst, those who want to sell have sold and the market has in effect, washed out the weak hands.

As an example, the lowest Conference Board Consumer Confidence Index level was 25 in February 2009, just weeks before the stock market made its cycle low.

For more, see this column at Bloomberg: “Buy Signals Flashing With Plunge in Confidence”.

Analyst Confidence
After being surprised by the strength of the earnings performance during this earnings season, Wall Street analysts are rushing to update their spreadsheets so they are not left (even more) flatfooted.

Since the start of the year, they have collectively upped their estimates of earnings by +7% but they are now seriously increasing their future estimates. Currently, the Wall Street consensus is for S&P 500 firms to increase their earnings by +33% this year and by another +16% next year.

And it is this very overconfidence that is troubling to NDR. According to another study by the firm, forward analyst expectations for earnings growth is a contrarian indicator.

When analysts are feeling optimistic and expecting forward earnings expectations to be 15% (or higher), the average annualized returns for the stock market are -12%. When analysts are expecting earnings growth to be just 5% (or less), the stock market jumps higher by an annualized rate of +18%.

This paradoxical relationship is built on the fact that as a group, analysts are more effected by last year’s earnings than actual estimates of future earnings. In behavioral economic terms, there is an “anchoring effect”. For more, see this FT article: “When upbeat analysts’ consensus spells danger”.

For more on using forward operating earnings to value the S&P 500, see John Hussman’s recent commentary here.

Final Thoughts
These two perspectives on the market not only illustrate the binary nature of the financial markets and the US economy, they also underpin how muddled things are (at least to me). Since I’m off for holidays within a few days, I’m comfortable standing aside as I have been for a while now and watching for the market to prove itself to me one way or another.

That reminds me, since I’ll be going away, blogging will be light in the coming days. But if you have a blog or an idea for an article and would like to write as a guest contributor, drop me a note at babak [at] tradersnarrative [dot] com and let me know what you have in mind.

Copper Gold Ratio vs S&P500

Copper Gold Ratio Predicts Higher Stock Prices

Since we’ve had movement in both the price of copper (up) and gold (down) I thought we’d check into the copper/gold ratio. The reason I’m interested in the price of copper in gold is that it has been an uncanny predictor of the S&P 500 recently:

The copper gold ratio was predicting lower prices for the S&P 500 index back in June.

Back then, the ratio fell below the lows it made in October 2009, November 2009 and February 2010. Soon stock prices followed.

Now, the ratio has made a bottom (in early June) and surpassed its previous lows (blue line). That would suggest that the early July lows in the S&P 500 will hold - assuming that this relationship between the commodities ratio and stock prices continues, of course.

As well, the firm prices in Dr. Copper are suggesting that a “double dip” is a receding scenario. This confirms other data that I’ve looked at and shared over the past little while:

Questioning the Double Dip Shibboleth
Yield Curve Model: Zero Probability of New Recession
Anxious Index: No “Double Dip”, Economy Improving

7/13/2010 5th higher close in a row -> IT bull

TUESDAY, JULY 13, 2010

Short-term Persistence a Positive For the Intermediate-term

Monday marked the 5th higher close in a row. This kind of persistence coming off a low has almost always led to further upside over the intermediate-term. This can be seen in the study below.

Short-term returns were very choppy. Looking out a month or so the results strongly favor the bulls. In last night's Subscriber Letter I listed all the instances. What was interesting is that there was positive representation from every decade.

A Case for Undervalued Equities: Earnings & Interest Rates

A Case for Undervalued Equities: Earnings & Interest Rates

Published June 28th, 2010 in Economy

Tags: bonds, dividends, earnings, earnings yield, guest post, interest rates, P/E, Price earnings ratio, secular bear market, valuation, Wayne Whaley.
The following is a guest post by Charles H. Dow Award winner, Wayne Whaley (CTA) of Witter & Lester. If you would like to be privy to his daily market comments and model ratings via daily email, free of charge, email him at wayne@witterlester.com with the subject title “ADD ME TO DAILY EMAIL”.

Valuation models, particularly those that rely solely on trailing earnings, are suspect as market timing tools, as the market has historically shown the ability to stay over or undervalued before returning to historic norms. With that said, there are some relevant observations we can glean from the relationship between the ‘earning’ of bonds and equities.

Converting P/E’s to Earnings Yields
The earnings yield is a theoretical construct if we imagine that all earnings are paid to shareholders in the form of dividends. It is a valuable tool because it has measurable correlation to the prevailing interest rate at any point in time. The earning yield is calculated by dividing the earnings by the S&P or if you already have the P/E ratio, you can simply invert the P/E to get E/P.

Comparing Earnings Yield to Interest Rates
I have seen the earnings yield compared to T-bills, T-notes and T-bonds. Since the spread on these three securities has varied tremendously throughout history, I will avoid getting into yield curve analysis for this study and simply compare it to what I call an average interest rate (AIR), which is the average yield for T-bills, T-notes and T-bonds. A large positive difference would intuitively suggest equities are cheap and a negative gap the reverse:

Click to see larger chart in a new tab:


Observations
The current spread is 2.74. It will go to some number between 3.0 and 3.25 as soon as we plug in a new number for second quarter earnings. That will be the largest spread since mid-1980.

The highest spread between earnings and AIR occurred on September 1974 with a spread of 6.95 and the S&P 500 index at 63.54. One year later the S&P was 50% higher (83.87). The lowest spread (-3.63) was at the end of the third quarter in 1987. We then proceeded to have the infamous 1987 crash with the S&P 500 index lower by 23% over the next quarter.

The current price-earnings ratio is 17.63 and headed to about 16.3 in a couple of weeks when we get a good handle on second quarter earnings. Some proponents of the secular bear market case argue that based on historical precedent, the bear market will end when the ratio is at single digits. If that is the case, it will have to be several years from now when rates are much higher than today.

This research has relevance not so much because it argues that stocks are cheap, but because it reestablishes the fact there is a relationship between the general level of interest rates and earnings.

Final Thoughts
Some would say that the above research is based on trailing earnings and the current earnings will never hold water down the road. As well, if you go back far enough in time (the 1950’s and the 1920’s), the interest rate to earnings relationship falls apart.

These points are well taken and I put very little weighting on valuation in my trading, because as I mentioned, the market can be overvalued for a long time. Valuation was negative for much of the 1990’s, yet the market tripled in that decade. In 1974, this valuation relationship peaked at 6.95 before having a 50% rally, however, the indicator was over 1 for the three previous quarters prior to that while the market dropped an additional 34%.

The valuation model that I use in my personal work takes a similar approach to the above but smooths the data a bit more and then attempts to extrapolate the past earnings into the next four quarters taking into consideration some economic variables. Valuation can give you a sign that your pitcher is in the late innings, but you should wait until the market starts having trouble finding the strike zone before you yank him. Conversely, the current market’s relative attractiveness doesn’t mean we have to go up this month, but it suggests that eventually the odds favor a resolution to the upside.


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Rod
Jun 29th, 2010 at 8:47 am
Sorry Waine, I tend to agree with you but this time I cannot disagree more. What you are proposing is not too different from a metric known as the “Fed Model”. It is a monumental failure. It signaled stocks were expensive in 1981 (right at the start of a 20 year bull market) and cheap in the middle of 2007 (6 months before a -57% bear market). This has been documented elsewhere, both by bloggers and academic research.

The valid point you make is that, in general, valuation is not a good timing device. But I believe there are some studies that can help to identify a generational buy point. I think there is value in statistics like “Tobin’s Q” and Shiller CAPE (Cyclically Adjusted Price-Earnings).

Rod
Jun 29th, 2010 at 8:53 am
I forgot to mention that according to Shiller CAPE the market is definitely NOT undervalued. We are moving towards undervaluation, but it will still take a few years. Same conclusion looking at the Dow priced in Gold.

Wayne
Jun 29th, 2010 at 9:23 am
Rod,
Yes, The work in this post is a very close proximity to the Fed Model, it makes for interesting conversation but is not practical as trading model. In fact, you would do well to flip it upside down and trade it. Much as Shiller does, In my actual model, I attempt to smooth the earnings, albeit not over 10 years. The observations that can come out of the study are that.

1) there is a relationship between interest rates and equities. It is not 100% correlated, but the relationship would make it difficult to justify single digit P/Es with interest rates at current levels and

2) The spread between rates and earnings is largest since 1980. It that bullish or bearish is debatable

A really astute Quant would also point out that a lot of the research is based on ratios and when either the denominator or numerator approaches zero, strange things can happen to the relationship, such as is the case here since interest rates are bounded by zero and earnings can go negative.

As I said, the post is hopefully simply some research to converse on.

Mike C
Jun 29th, 2010 at 7:43 pm
Firstly, I do APPRECIATE the work. That said:

Valuation models, particularly those that rely solely on trailing earnings, are suspect as market timing tools, as the market has historically shown the ability to stay over or undervalued before returning to historic norms.

I ABSOLUTELY AGREE especially when by “market timing” you are referring to periods of say 6-12 months. Which means the analysis above is more or less academic with not much practical utility.

I think valuation is helpful for the investor, not trader, who isn’t looking to “time the market” but instead put money to work with the objective of seeing a decent return over say 7-10 years which is about the time frame it takes for valuation to mean revert. One could have made good money buying the market in 1999 and selling it in 2000 when the trend broke down, but a buy and holder for 10-years hasn’t made diddly squat. They need to buy stocks at 1979 valuation levels, not 1999 valuation levels.

Here is a different take on valuation that I think is more relevant for a buy and hold time frame

If you want to buy and hold at a good valuation and expect a decent 10-year return wait for 800-850.

I think one has to match the tool to the timeframe. I don’t see a point in forcing the valuation issue to try and make 1-year ahead decisions.

GreedsGood
Jun 29th, 2010 at 11:21 pm
I use a similar model to gauge the comparative valuation of major asset classes versus equities. The most important piece of this puzzle is what the fair “spread” or equity risk premium (ERP) should be.

For the base yield, I use a hybrid 10-year treasury, 10-year AA and AAA/BAA spread to arrive at this number.

I adjust the historical ERP (~4%) by the projected growth rate and earnings consistency as well as the current market volatility level. Based on current metrics, I could make a case for a significantly higher ERP and thus a lower P/E multiple (or conversely equity earnings yield)

Praveen
Jul 1st, 2010 at 7:32 pm
Here is an interesting take on the market valuation based spreads between 10 year treasury bonds and earnings yields.

Mike C
Jul 1st, 2010 at 8:30 pm
Interesting link.

The model says stocks were the MOST OVERVALUED in 60-years from 1980-1982. How did stocks do in the subsequent 5-10 years from those starting dates? What does that say about that model?

Earning Yield vs 10-year Treasury yield

What Does Earnings Yield Mean?

The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations.

Investopedia explains Earnings Yield
Money managers often compare the earnings yield of a broad market index (such as the S&P 500) to prevailing interest rates, such as the current 10-year Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks as a whole may be considered overvalued. If the earnings yield is higher, stocks may considered undervalued relative to bonds.

Economic theory suggests that investors in equities should demand an extra risk premium of several percentage points above prevailing risk-free rates (such as T-bills) in their earnings yield to compensate them for the higher risk of owning stocks over bonds and other asset classes.

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7/3/2010 from Barron
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Oppenheimer strategist Brian Belski recently noted that the gap between the earnings yield on the S&P 500—earnings divided by the index’s value—of 8% is five percentage points above the 3% yield on the 10-year Treasury note. Belski’s research shows that, historically, when the gap has been this wide, the average one-year return on the S&P has been 26.7%. The last time the gap was so wide was in the late 1970s.