Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
Mulling things over. Investors seem to be taking a break today. The tape wandered around both up and down over the day and no one camp took over. News for the day was uninteresting. Maybe the positive Chinese Q4 GDP data is worth mentioning (6.8% vs 6.7% est & 6.8% prior). It’s a tiny surprise and it reinforces the narrative that the global economy is improving.
That being said, futures didn’t react to the data release. Maybe (big maybe) the optimism of current valuations already accounts for these developments? Probably just wishful thinking on my part. Anyway, markets were active again with capital flow printing 114%.
For all my complaining about the market e.g. valuations, I welcome the increased capital markets activity. It felt like flow was always below average from May to Dec last year. Activity has picked up substantially in January. This data can be spun bullishly or bearishly and I don’t want to try doing either. I just want to say that *generally* growing flows is a positive. It *should* result in better price discovery and *should* improve the allocation of capital for society.
Let’s talk about earnings season. The season just began and so far so good. The beats are coming as usual, little better than usual actually. Here’s the plot of the surprise percentage.
Here’s a 15-year plot.
Qualitatively speaking, it doesn’t seem like results thusfar are eye-poppingly good but they’re good enough to keep investor attitudes positive.
2017 Q4 Earnings season:
6% of the S&P 500 reporting (1/18 data)
Surprise vs Estimates
- Sales: +0.5% (1/18 data)
- Earnings: +1.6% (1/18 data)
Growth vs Prior (Y/Y)
- Sales: +5.3% (1/18 data)
- Earnings: +5.6% (1/18 data)
Like I said before, so far so good. My concern remains whether current prices are fair for these results. We’re trading at 17-20 P/Es depending on the earnings estimate you choose. Is 5% earnings and revenue growth worth that multiple? You could argue both ways. I don’t want to argue. I worry that even if you think valuations are fair, the room for error is zero. If earnings and sales growth continue for 5-10 years at 5-10% rates, everything is hunky dory. But the global growth rate is only about 3%… so how will the largest companies consistently outgrow the globe? What if there’s a bump in the road?
Maybe I’m being pessimistic. I might be calling the glass half-empty. I just worry that the bullish bet going forward is a bad risk-reward.
I’ve been thinking this way for a while though so maybe I’m a broken clock. When will I be right?
See you tomorrow,