Safe Trading Blog

We give a brief reminder of our plan following for the last trade (action) launched on a basket of Stocks on US & French market since last week:

1. We find an indication of a temporary bottom:

Posted on March 17, 2008
Filed Under Stock Code Trading, US Market | Leave a Comment

SPX has bounced above an important level @ 1350 pts! If there is no remorse and this level is consevred, it will be a very positive sign for stocks… On the plot, we also display the 10Y yield note, which follow precisely the S&P500 prices… In fact ther is no mystery. It is the the recent bounce of the 10Y yield (decrease of bonds) which has driven the positive move for stocks (according to standard market mechanics)… The upmove on the TNX itself is a consequence of the economic actions taken recently and largely mentioned in previous posts… Then, it becomes a relevant indicator to check in order to analyse the continuation of the short trend on the SPX. The important level for 10Y yields is 3.75%. If this border can be overcome, I expect a strong short term continuation of the upmove for stocks…

As we have closed our positions, our strategy is now to wait for clear signals from TNX. We are also expecting a stronger behaviour from NASDAQ: the ratio QQQQ/SPY must have a positive slope to indicate that the market is pushing stocks with a good strength… We will follow these signals and others in the next posts…

Remember also that the P/E ratio of the S&P500 is @ 19.9

Yesterday, we have booked profits on our US positions & this morning, we book profits on our French positions : +4% in average per stock baskets (*) & (**)!

(*) http://www.safetradingblog.com/stock-code-trading/good-plan.html

(**) Reminder on our postions closed yesterday afternoon & this morning => 

Posted on March 19, 2008
Filed Under Debrief, French Market, Stock Code Trading, US Market |

…We play it through consumer staples, health care and financial sectors (equally weighted portfolio)… More later. There is some open space on the upside now, even if we may expect some kind of chaotic moves. Do not hesitate to buy stocks when the flows, macro economic news and earning estimate revisions, run in the optimistic direction for stocks… even during a bear market, bounces can be violent and can happen with large amplitudes!

WMT, OMI & JPM on the US market / CA, SAN, & CS on the French market… We overweight WMT in the US basket and SAN in the French basket (*3 with respect to other positions)

What is inflation, how it impacts the global economy and markets, and  what conclusions for investors?

Let’s start by the definition. The standard statement that inflation is a general increase in prices is not correct. Precisely, monetary inflation is an increase in the supply of money. Then, it implies an increase in prices. The increase in prices is a simple consequence of money losing value. But you must not inverse the logic and conclude that an increase in prices will generate inflation. This is not correct! In fact, it is quite obvious to imagine mechanism for price increases with no inflation. Suppose that the money supply remains constant but that the supply of a product X is interrupted or reduced for some reason. Then, prices of X will increase mechanically but no increase in money supply, then no inflation. Deflation, of course, is just the opposite: a decrease in the money supply.

It is not just academic wording with no significance for the world of markets. Inflation is an essential discriminator for Bond prices and Bond prices themselves are directly anti-correlated to Stock prices… Understanding this fundamental variable, that inflation is, will make the complete decision chain on financial markets more transparent and readable.

That said, we still have to determine what money supply means exactly!An interesting word exchange happened a few years ago when US Representative Ron Paul asked Federal Reserve Chairman, Alan Greenspan, what he considered to be the best tool to measure money supply. Greenspan plainly admitted that he was at a loss for picking out what such a measure might be. When US Representative Paul suggested that it must be difficult to manage something you cannot even define, Chairman Greenspan not only agreed with him but also said it was “impossible”.

Hum, interesting! If we don’t know what money supply is, how can we determine whether the money supply is increasing or decreasing? In practice, the monetary authorities can make some basic counts with what they call monetary aggregates, which include various forms of deposits at financial institutions as well as notes and coins in circulation. I do not enter into details, which do not matter so much for the purpose of this post. For example, if interest rates are decreased, it gives more opportunity to write some credits and consequently to increase the money supply… Debt creation is by essence an increase in money supply, and therefore inflationary. However, we should never forget one key point: during the economy slow down, we can see an increase in the amount of defaults and bankruptcies. Therefore, if the lenders do the correct thing, which is to write the bad debt off their books, the money supply will be reduced and that is deflationary. Then, a situation as the one we are living right now, is mixed up by inverse sentiments and forces… My personal balance makes me think that the net result is under control with today levels of economic indicators. An increase of inflation is on the tabs, but it would not be a negative sign in the current stream of US economy… Another technical point which enter into the game but beside the scope of this post: I expect a slight increase in the velocity of money, which will also contain any inflation pressure to sustainable levels…

A temporary word of conclusion: there is no worries on fundamentals (concerning monetary management) for decreasing further FED rates in the US or ensuring liquidity… In itself the level of rates is of no significance! Never forget that what matters is the level of rates versus the income increase (GDP). This ratio will lead the economy, the monetary balance and the stock to bond indices…

Dow Jones +2.16% && NASDAQ +2.18%… This is a nice close confirming our short term analysis (see previous posts). The plan is to book profits on our running positions (*) next week! More later…

(*) http://www.safetradingblog.com/stock-code-trading/bounce.html

 PS: short comment on AXA (our french financial “favorite”)

Stock recommendation
Opinion: Buy
AXA’s valuation remains attractive for an annual EPS growth of 10-15%. Despite the decelerating growth in Life New Business, the central target of the Ambition 2012 plan still looks achievable, in particular with the launch of new, high margin products in Europe with attractive features. Equity markets’ fall will penalize 2008 (increase in regulatory reserves?), however AXA keeps a good fundamental potential thanks to targeted acquisitions of additional distribution networks, to margin improvement, to a high quality risk management and to no exposure to either banking, industrial risks or reinsurance.

Price Target : Eur 32 €

Target equal to 1.4 times the 2008e book value. The EPS growth profile and the quality of the franchise justify a valuation premium. Keys points + Structural organic growth in Life & Savings. AXA ranks well among leading global insurers thanks to its wide distribution platform and its innovation capabilities. + Further productivity improvements: economies of scale, industrialisation of best practices, stringent cost control. + Management is highly regarded for the operational improvements implemented since 2000. In particular it enjoys high credit for its track record in external growth and integration of targets. +/- The AXA share has a high Beta, it is penalised by lower equity indices but boosted by interest rate cuts. Management regrets the high index sensitivity and the lack of defensiveness of the share, but it remains somewhat powerless at changing market perception. - Asset Backed Securities exposure is €11bn. US subprime is modest (€1.5bn, 4% of shareholders’ funds). Exposure to US monoline insurers is weak.
- AXA’s past growth was to a large extent external: performance of the shares is often capped by fears of a major acquisition.
- The current dollar weakness is not favourable and the true impact of markto- market valuation of financial assets is still to be felt.

Our bottom line is still the same: we stand in a bear market and the fact that “big” days can happen does not change the fundamentals of our underlying view…

In fact, quantitatively, days with an amplitude above +3% happen about 3 times more often in bear market than in bull market: this is not a good sign for SPX over the long run! However, we have explained our view in a previous post. It makes sense at the levels of yesterday (mid-day) to enter into the stock market to catch some trains: big days can be violent in bear market… This can be a good profitable strategy that risk/reward considerations must select. In case of new plunge, we will immediately close all our postions… Right now, we let them run.

Sell signal on the ultra short QID index => positive for NASDAQ!

SDS is the ultra short SP500 (-2x the performance): we can check a nice double top and a sell signal on the MACD (on SDS) => positive signal on SPX, to be confirmed with the clear break down of SMA50… 

JP Morgan AM : «Pour une bonne année 2008 : Shell, Total, Vodafone et France Telecom»
Capital.fr a sélectionné 26 fonds à suivre en 2008. Tout au long de l’année, les gérants de ces fonds font le point sur leur stratégie d’investissements. Premier rendez-vous avec Louise Bonzano, vice-President et client portfolio manager chez JP Morgan Asset Management. Elle nous explique les choix effectués par Richard Webb et John Baker co-gérants du fonds JP Morgan Europe PEA qui affiche, au 13 mars, un recul de 15,47% depuis sa sélection, le 1er janvier 2008 (voir ce fonds dans notre sélection)

Capital.fr : Les marchés en Europe reculent depuis le début de l’année. Comment pilotez-vous votre fonds au milieu de la tempête ?
Louise Bonzano : Nous continuons de sélectionner des valeurs de croissance ou celles qui sont les moins chères sur les marchés de l’Europe de l’Ouest. Le portefeuille comprend actuellement 112 valeurs afin de répartir les risques. Nous avons, en outre, une certaine souplesse par rapport à notre indice de référence, le MSCI Europe. Nous avons de faibles contraintes sectorielles afin de profiter des anomalies de marché. A l’été 2007, nous étions très présents sur les secteurs de la construction, de l’ingénierie industrielle, de l’électronique et de l’automobile. Leurs perspectives se sont progressivement assombries et nous y sommes désormais moins présents.

Capital.fr : Quelle est votre position sur les banques ? Les perspectives continuent de se dégrader…
Louise Bonzano : Début 2007, nous étions également surpondérés sur le secteur bancaire avant de réduire nos positions jusqu’en novembre. Depuis, nous nous sommes renforcés car les valorisations des banques sont redevenues plus attractives, tout en restant sous-pondérées dans le fonds. Certains établissements sont peu exposés aux crédits à risque et à l’immobilier, tout en bénéficiant de la croissance de leur marché domestique et des pays émergents. Ainsi, la banque espagnole Banco Santander est l’une de nos principales positions. Nous détenons également des titres de National Bank of Greece et des participations dans des banques scandinaves, comme DNB Nor.

Capital.fr : Quels sont les secteurs qui pourraient vous permettre de traverser les turbulences actuelles ?
Louise Bonzano : Principalement, les télécoms, l’énergie et les services publics. Dans les télécoms et les services collectifs la concurrence s’amenuise et les tarifs sont orientés à la hausse. Dans les télécoms, les marges étaient sous pression depuis 4 ou 5 ans. Mais, maintenant, les opérateurs qui proposaient des tarifs peu chers ont soit cessé leur activité, soit été rachetés. Il y a eu beaucoup de fusions. En conséquence, les marges se stabilisent et les résultats sont en moyenne supérieurs de 1 à 2% aux attentes. Ce qui tranche dans l’environnement économique actuel.

Capital.fr : Quelles sont vos valeurs préférées dans les télécoms et les services publics ?
Louise Bonzano : Dans les télécoms, nous sommes présents chez France Télécom (FTE), Vodafone, Deutsche Telekom (DTEL), le néerlandais KPN et Portugal Telecom. Dans les services publics nous possédons des titres E.on et RWE car la croissance des résultats est intéressante. Les opérateurs de services publics ont la capacité d’augmenter leurs tarifs pour répercuter la hausse des prix de l’énergie, tout en contrôlant leurs coûts.

Capital.fr : En sélectionnant l’énergie, vous voulez profiter de la hausse du pétrole ?
Louise Bonzano : D’abord, les valorisations de Shell, Total ou de l’italien ENI sont très intéressantes car les opérateurs ont été handicapés en 2007 par des problèmes de fonctionnement dans leurs raffineries. Ces problèmes sont moindre actuellement et les compagnies pétrolières devraient bénéficier à plein d’un baril d’or noir au dessus des 100 dollars. D’autant que les analystes financiers ont intégrés dans leurs modèles de valorisation un baril de pétrole entre 70 et 85 dollars. Il vaut plus de 105 dollars. De bonnes surprises sont donc à attendre en matière de bénéfice.

Capital.fr : En janvier dernier vous aviez recommandé de suivre Man AG et Nokia (NOK). Leur êtes-vous toujours aussi favorable ?
Louise Bonzano : Le titre Man AG, le fabricant de poids-lourds, bénéficie d’une forte croissance dans les pays émergents, surtout en Amérique du Sud et en Europe de l’Est. Dans la téléphonie mobile, nous préférons toujours Nokia (NOK) à Ericson.

Finally it occurs! As anticipated on the sentiment indicators, it was more likely that stock market could find a kind of peace with the recent FED actions and “not so terrible” LEH, GS results…

We play it throught consumer staples, health care and financial sectors (weighted portfolio)… More later. There is some open space on the upside now, even if we may expect some kind of chaotic moves. Do not hesitate to buy stocks when the flows, macro economic news and earning estimate revisions, run in the optimistic direction for stocks… even during a bear market, bounces can be violent and can happen with large amplitudes!

WMT, OMI & JPM on the US market / CA, SAN, & CS on the French market… We overweight WMT in the US basket and SAN in the French basket (*3 with respect to other positions)