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Is The Narrative All “Priced In”?

Is The Narrative All "Priced In"?

Tyler Durden

Tue, 12/01/2020 – 09:25

Authored by Lance Roberts via RealInvestmentAdvice.com,

Is the narrative all “priced in?”

As discussed over the past couple of weeks, investors have gone “all.

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3 years ago

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Is The Narrative All "Priced In"? Tyler Durden Tue, 12/01/2020 - 09:25

Authored by Lance Roberts via RealInvestmentAdvice.com,

Is the narrative all “priced in?”

As discussed over the past couple of weeks, investors have gone “all in.” With the markets now extremely extended, what should investors do now?

On Saturday, I discussed the risks as we head into distribution season.

“Given the ongoing extremes of the market, the imbalances suggest a more cautious approach to portfolios currently. As such, we continued reducing our equity exposure, adjusting our bond holdings, and raising our cash levels.

As shown below, with fund managers carrying some of the lowest cash balances on record, we could see selling pressure to make distributions.”

However, while we may undoubtedly experience a pick up in volatility short-term due to distributions, longer-term the markets tend to be “forward-looking.” In theory, the markets are a “discounting mechanism” and start to adjust for expected outcomes.

Overly Optimistic

In this case, the market should be “pricing in” a recovery in economic growth and earnings as a “vaccine” begins to reduce the drag caused by the pandemic. However, with markets at all-time highs, investors have priced in “perfection,” leaving room for “disappointment.” 

For example, in Q4-2019, the S&P 500 finished the year at 3230.78, up 27.6% for the year. The basis of the rally was a trade deal (which never occurred,) tax cuts and massive levels of share buybacks. At that time, analysts estimated that reported earnings for the fiscal year 2020 would be roughly $167/share. Investors justified paying 19.35x earnings due to low-interest rates and expected strong economic growth.

Unfortunately, that didn’t occur. Instead, the economy got hit by a pandemic, a recession, and surging levels of unemployment. Nonetheless, due to massive government interventions, the market recovered to trading near all-time highs, up more than 11% for the year.

However, earnings for 2020 will not come in at $167/share, but rather closer to $93/share. Such is more than $74 lower than estimated, leaving investors holding assets that have doubled in valuation from 19x to 38x earnings.

Investors are currently rushing into already overvalued assets once again based on expectations that 2021 earnings will rise to $143.09/share. The problem is that while investors chased the market higher, 2021 estimates collapsed by roughly $30/share. 

The issue for investors is that historically analysts are roughly 30% too optimistic about the future.

Overly Optimistic

But it’s not just the analysts that are overly optimistic. In the short-term, investors cling to the idea that “fundamentals don’t matter.” Such is not entirely incorrect as “market momentum” is a hard thing to kill. When the “Fear Of Missing Out” overrides logic, the markets can make irrational moves. As noted in this week’s newsletter:

“You have to wonder precisely how much ‘gas is left in the tank’ when even ‘perma-bears’ are now bullish. Therefore, the question we should ask is ‘if everyone is in, who is left to buy?’”

That sentiment has pushed market speculation to more extreme levels, which have historically coincided with short- to intermediate-term corrections. As shown below, over the longer-term, such deviations from long-term means have rarely ended well for investors.

The deviation above the 225-day moving average is now at 15%, which is typically associated with at least short-term market peaks. (Last time was at the September highs)

The 52-week moving average deviation is just slightly below 15%. Such is historically associated with market peaks. (Last time at this level was January 2018, and at 13.5% in February 2020)

On a monthly basis, the deviation is at 17.5% of the 24-month moving average. While we have seen higher levels historically, the market is now in the territory of more meaningful market corrections.

While the markets can certainly go higher from here, the point is that they are unlikely to do so without a correction or consolidation, first.

Bullish Sentiment Abounds

Currently, investor sentiment is about as “bullish” as it can get. We produce a weekly fear/greed index for our RIAPRO subscribers (Free 30-day Trial)

The “Fear/Greed” gauge is how individual and professional investors are “positioning” themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, to more likely the market is closer to a correction than not. (The gauge uses weekly closing data.)

However, even the CNN Fear/Greed gauge is pushing “bullish” levels.

Also, I have rarely seen a period where every sector and market is trading above its relative risk/reward range outside of Utilities. Again, not surprisingly, the deviations from long-term means are also at more historical levels.

None of this means a correction MUST occur. Much like “gasoline” stored in a tank, it requires a “catalyst” to ignite it.

Lots Of Risks To The Bullish Outlook

Many issues could provide such a “spark.”

  1. The market has fully priced in whatever economic recovery we are likely to see near-term. 

  2. There is clear evidence of weakening economic data and slower earnings growth.

  3. Investors are counting on a “vaccine” to restore the economy to its previous strength fully. 

  4. The markets have dismissed the negative impact of the economic shutdown.

  5. Market participants have discounted the need the additional stimulus to sustain economic growth and recovery. 

  6. The Fed is on the sidelines for now. Without additional Treasury issuance, the Fed has less ability to provide additional liquidity to the market. 

  7. While the economy is indeed recovering, along with employment, it will still likely fall well short of pre-pandemic levels stifling future earnings growth and revenues.

  8. Investors pay exceedingly high valuations based on a full earnings recovery, which is unlikely to be the case.

These are just some broad thoughts. However, when everyone is long equities and leveraged, it is an unexpected, exogenous event, which begins the rush for the exit.

What exactly will that catalyst be? No one knows, just as no one expected the “pandemic” in March.

Whatever the catalyst eventually is, the common refrain will be that “no one could have seen it coming.”

It’s Still A “Sellable Rally.” 

The reason we have and continue to suggest selling this rally is that, until the pattern changes, the market  exhibiting all traits of a “topping process.” 

  • Weak participation

  • Failure at long-term resistance

  • Extreme bullish speculation

  • Negative divergences in relative strength

We can show this in a long-term monthly chart.

Since 2009, whenever the monthly MACD “buy signal” was this elevated, it typically correlated to a short- to intermediate-term market peak. At each point, the “bullish story” was the same.

  • Earnings are still strong.

  • Economic data suggests the economy is growing strongly.

  • It’s a “Goldilocks Economy” 

  • The Fed is remaining “accommodative.” 

However, the primary warning signs to investors were also the same:

  • A failure of the economy to live up to market expectations

  • The rise in volatility

  • A decline in bond yields.

  • A shortfall in corporate profits and earnings

Calculating The Madness

Sir Isaac Newton once said:

“I can calculate the motions of the heavenly bodies, but not the madness of the people..” 

As we head into year-end, we will be navigating the risk of overly extended and bullish markets against the seasonally strong end of year period. As discussed in our “3-Minutes” on Monday, we expect a short-term correction over the next couple of weeks as “distribution season” ensues.

However, following that, the annual “Santa Claus” rally into year-end is likely. We will act accordingly and increase equity risk in portfolios as needed.

Such is just how we manage money. We believe that over the long-term, capital preservation and risk management leads to better outcomes.

If you disagree, that is okay.

When the opportunity presents itself, and the “madness has subsided,” these are the questions we will ask ourselves before we add exposure to portfolios:

  1. What is the expected return from current valuation levels?  (___%)

  2. If I am wrong, given my current risk exposure, what is my potential downside?  (___%)

  3. If #2 is greater than #1, then what actions should I be taking now?  (#2 – #1 = ___%)

How you answer those questions is entirely up to you.

What you do with the answers is also up to you.

You have to ask yourself how much of the “narrative” has already gotten priced into the market?

By looking at the data, it would be easy to assume the answer is “much.”

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Shipping company files surprise Chapter 7 bankruptcy, liquidation

While demand for trucking has increased, so have costs and competition, which have forced a number of players to close.

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March 8, 2024

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The U.S. economy is built on trucks.

As a nation we have relatively limited train assets, and while in recent years planes have played an expanded role in moving goods, trucks still represent the backbone of how everything — food, gasoline, commodities, and pretty much anything else — moves around the country.

Related: Fast-food chain closes more stores after Chapter 11 bankruptcy

"Trucks moved 61.1% of the tonnage and 64.9% of the value of these shipments. The average shipment by truck was 63 miles compared to an average of 640 miles by rail," according to the U.S. Bureau of Transportation Statistics 2023 numbers.

But running a trucking company has been tricky because the largest players have economies of scale that smaller operators don't. That puts any trucking company that's not a massive player very sensitive to increases in gas prices or drops in freight rates.

And that in turn has led a number of trucking companies, including Yellow Freight, the third-largest less-than-truckload operator; J.J. & Sons Logistics, Meadow Lark, and Boateng Logistics, to close while freight brokerage Convoy shut down in October.

Aside from Convoy, none of these brands are household names. but with the demand for trucking increasing, every company that goes out of business puts more pressure on those that remain, which contributes to increased prices.

Demand for trucking has continued to increase.

Image source: Shutterstock

Another freight company closes and plans to liquidate

Not every bankruptcy filing explains why a company has gone out of business. In the trucking industry, multiple recent Chapter 7 bankruptcies have been tied to lawsuits that pushed otherwise successful companies into insolvency.

In the case of TBL Logistics, a Virginia-based national freight company, its Feb. 29 bankruptcy filing in U.S. Bankruptcy Court for the Western District of Virginia appears to be death by too much debt.

"In its filing, TBL Logistics listed its assets and liabilities as between $1 million and $10 million. The company stated that it has up to 49 creditors and maintains that no funds will be available for unsecured creditors once it pays administrative fees," Freightwaves reported.

The company's owners, Christopher and Melinda Bradner, did not respond to the website's request for comment.

Before it closed, TBL Logistics specialized in refrigerated and oversized loads. The company described its business on its website.

"TBL Logistics is a non-asset-based third-party logistics freight broker company providing reliable and efficient transportation solutions, management, and storage for businesses of all sizes. With our extensive network of carriers and industry expertise, we streamline the shipping process, ensuring your goods reach their destination safely and on time."

The world has a truck-driver shortage

The covid pandemic forced companies to consider their supply chain in ways they never had to before. Increased demand showed the weakness in the trucking industry and drew attention to how difficult life for truck drivers can be.

That was an issue HBO's John Oliver highlighted on his "Last Week Tonight" show in October 2022. In the episode, the host suggested that the U.S. would basically start to starve if the trucking industry shut down for three days.

"Sorry, three days, every produce department in America would go from a fully stocked market to an all-you-can-eat raccoon buffet," he said. "So it’s no wonder trucking’s a huge industry, with more than 3.5 million people in America working as drivers, from port truckers who bring goods off ships to railyards and warehouses, to long-haul truckers who move them across the country, to 'last-mile' drivers, who take care of local delivery." 

The show highlighted how many truck drivers face low pay, difficult working conditions and, in many cases, crushing debt.

"Hundreds of thousands of people become truck drivers every year. But hundreds of thousands also quit. Job turnover for truckers averages over 100%, and at some companies it’s as high as 300%, meaning they’re hiring three people for a single job over the course of a year. And when a field this important has a level of job satisfaction that low, it sure seems like there’s a huge problem," Oliver shared.

The truck-driver shortage is not just a U.S. problem; it's a global issue, according to IRU.org.

"IRU’s 2023 driver shortage report has found that over three million truck driver jobs are unfilled, or 7% of total positions, in 36 countries studied," the global transportation trade association reported. 

"With the huge gap between young and old drivers growing, it will get much worse over the next five years without significant action."

Related: Veteran fund manager picks favorite stocks for 2024

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Wendy’s has a new deal for daylight savings time haters

The Daylight Savings Time promotion slashes prices on breakfast.

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March 8, 2024

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Daylight Savings Time, or the practice of advancing clocks an hour in the spring to maximize natural daylight, is a controversial practice because of the way it leaves many feeling off-sync and tired on the second Sunday in March when the change is made and one has one less hour to sleep in.

Despite annual "Abolish Daylight Savings Time" think pieces and online arguments that crop up with unwavering regularity, Daylight Savings in North America begins on March 10 this year.

Related: Coca-Cola has a new soda for Diet Coke fans

Tapping into some people's very vocal dislike of Daylight Savings Time, fast-food chain Wendy's  (WEN)  is launching a daylight savings promotion that is jokingly designed to make losing an hour of sleep less painful and encourage fans to order breakfast anyway.

Wendy's has recently made a big push to expand its breakfast menu.

Image source: Wendy's.

Promotion wants you to compensate for lost sleep with cheaper breakfast

As it is also meant to drive traffic to the Wendy's app, the promotion allows anyone who makes a purchase of $3 or more through the platform to get a free hot coffee, cold coffee or Frosty Cream Cold Brew.

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Available during the Wendy's breakfast hours of 6 a.m. and 10:30 a.m. (which, naturally, will feel even earlier due to Daylight Savings), the deal also allows customers to buy any of its breakfast sandwiches for $3. Items like the Sausage, Egg and Cheese Biscuit, Breakfast Baconator and Maple Bacon Chicken Croissant normally range in price between $4.50 and $7.

The choice of the latter is quite wide since, in the years following the pandemic, Wendy's has made a concerted effort to expand its breakfast menu with a range of new sandwiches with egg in them and sweet items such as the French Toast Sticks. The goal was both to stand out from competitors with a wider breakfast menu and increase traffic to its stores during early-morning hours.

Wendy's deal comes after controversy over 'dynamic pricing'

But last month, the chain known for the square shape of its burger patties ignited controversy after saying that it wanted to introduce "dynamic pricing" in which the cost of many of the items on its menu will vary depending on the time of day. In an earnings call, chief executive Kirk Tanner said that electronic billboards would allow restaurants to display various deals and promotions during slower times in the early morning and late at night.

Outcry was swift and Wendy's ended up walking back its plans with words that they were "misconstrued" as an intent to surge prices during its most popular periods.

While the company issued a statement saying that any changes were meant as "discounts and value offers" during quiet periods rather than raised prices during busy ones, the reputational damage was already done since many saw the clarification as another way to obfuscate its pricing model.

"We said these menuboards would give us more flexibility to change the display of featured items," Wendy's said in its statement. "This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants."

The Daylight Savings Time promotion, in turn, is also a way to demonstrate the kinds of deals Wendy's wants to promote in its stores without putting up full-sized advertising or posters for what is only relevant for a few days.

Related: Veteran fund manager picks favorite stocks for 2024

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International

United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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2 hours ago

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March 8, 2024

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

Shutterstock

United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

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"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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