“…don’t speak too soon for the wheel’s still in spin, and there’s no telling who that it’s naming. For the loser now will be later to win, cause the times they are a-changing”

Bob Dylan (Lyrics)

As November 8th approaches, our newly minted Noble Prize winner, Bob Dylan’s song, “The Times They are A-Changin” is right on the money.  At the risk of turning this update into a Dylan fest, here is the very apropos (in my opinion) verse three: “Come senators, congressmen, please heed the call. Don’t stand in the doorway, don’t block up the hall for he that gets hurt will be he who has stalled. There’s the battle outside raging, it’ll soon shake your windows and rattle your walls, for the times they are a-changing”. Standing in the doorways and blocking up the hall has been the norm for some time now in Washington, and for better or worse, in a few days, we will know which political party will wield the (most) power for the next four years. One can only hope that the victor has the skills and the will to bring both parties to the table and enact some intelligent pro-growth legislation – not a joke.

No surprise with all that is happening in the U.S. and abroad, that the month of October is, so far, living up to its stingy reputation (S&P 500 -1.51% as of yesterday). Recently, the Wall Street Journal pointed out that a Merrill Lynch October survey of global fund managers revealed that they are holding, on average, 5.8% in cash reserves. This level is as high as it was back in July during Brexit. According to the WSJ, previous to 2016, “portfolio managers’ cash levels hadn’t reached these heights since November 2001, in the aftermath of the Sept. 11 terrorist attacks.” With the upcoming elections in November and the Fed meeting the following month, it is not too shocking that investors are being conservative and perhaps, keeping some powder dry.

Earnings season kicked off a couple of weeks ago and the large banks, such as Citi, JP Morgan, Bank of America, PNC and even the much beleaguered Wells Fargo were able to scare up (Halloween reference) some earnings surprises. To-date, the aggregate Financial Services economic sector has helped to boost third quarter earnings growth estimates for the S&P 500 by reporting earnings more than 14% above consensus expectations (Thomson Reuters/IBES).  Importantly, the year-over-year earnings growth rate for the financials is the highest of the eleven economic sectors, up 8.1%. Keep in mind, that REITs now have their own category and are anticipated to have grown earnings at a 2% rate this past quarter. In a recent reversal, there has been some softness in the price action of domestic REITS, which is not surprising due to their interest rate sensitivity. U.S. Treasury yields have risen in October and the curve has steepened, adversely affecting some sectors such as Utilities and Consumer Staples. Stocks that were/are richly valued for their safety and generous dividends become less attractive if bond yields come to be more competitive.

We have also seen some good reports from the “old guard” technology names, IBM (or, I Bought Misery, as a stockbroker friend is fond of saying), Intel, and Microsoft. In the newer guard, Apple also beat earnings estimates (by a penny) and matched on revenues; however, earnings declined again, for the third consecutive quarter on a year-over-year basis. Investors were not overly impressed, in fact, in their October 24th report, a day before the announcement, FactSet singled out Apple as “the largest detractor for earnings growth for the S&P 500 Tech sector for Q3 2016”. The stock closed down a little over 2% after the announcement, but has continued to drift lower. It is hard though, to get too upset with a company that has $237 billion in cash – and growing – on its books. The Information Technology sector as a whole, is forecast to have one of the highest reported earnings growth rate (+7.9%) for the quarter.

Although we are still in the thick of earnings season, according to Thomson Reuters/IBES, expectations are currently for a 2.6% increase in earnings from the third quarter of 2015, as follows:

x

As we suggested in the last Earnings Update report, a return (finally) to positive earnings growth is now a probability for the S&P 500 index companies for the third quarter. Corporate guidance, and the corresponding response in analysts’ estimates are again understated as we have seen in the past few years. We are mostly pleased, so far, with the earnings reports of companies that we follow for our investment portfolios. As feared, much of the positivity has been offset in the financial markets by disturbing election rhetoric and the Fed’s forked tongue(s). Hopefully, we will continue to see more treats than tricks for the remainder of the earnings reporting season.

Happy Halloween!

October 28, 2016

 

Margarita V. Fernandez

Vice President – Alhambra Investment Partners, LLC

 “Wealth preservation and accumulation through thoughtful investing.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Margie Fernandez can be reached at:

 305-233-3774

mfernandez@4kb.d43.myftpupload.com