WHEN WILL THE STOCK SNOOZE-FEST END?

Over the weekend, we had 2 major M&A announcements. Are they good or bad for stocks? Yes to one, no to another, in our view. No we are not being coy.  Here is why.

It was nearly 17 years ago today (January 10, 2000 to be exact), when AOL and Time Warner (NYSE—TMX) announced a $156 billion merger. Bulls hailed it as an incredible deal—old school media with new media. Pragmatists viewed as egregious and quizzical. Considering the market hit an all-time high a couple of months later and it is no wonder that some market watchers seem to fear that history is repeating itself with news that AT&T (NYSE—ATT) and Time Warner  are combining in an $80B+ combination.

I see why there is concern here but we do not believe it is the beginning of the end. In fact, it is the end of the beginning the division of service provider and content provider. Now, success is about critical mass, subscriber loyalty, content and time/attention, targeted and higher fee advertising, etc.  We view it as a catalyst for more service industry and content provision players of all sizes to combine.  Outside of the big players, internet ad dollars are just dreams. Asset leverage, along with fees and ad revenue models are keys to survival and success. Look for future M&A in tech and media of all sizes, buoying the space.

The Stock Market Today

It is hard to believe because it seems to have happened both quietly and almost clandestinely, but small caps and microcaps have been clobbered in October. Heading into the last day of the month, Halloween, the Russell 2000 Index is down a scary 5.1%. Even when a company reports solid results, there is little to sustain a higher price. Granted, it doesn’t help that when the NASDAQ bellwethers slip the small caps fall. However, this seems to be a systemic or segment issue and may be best confirmed by the tepid performance of so many recent IPOs. Just like with government officials, there is no conviction out there.

Alas, all is not lost. The RSI on the Russell 2000 is in the 34 range. Anything below 30 is a real buy signal. It is also meaningfully below its 52-week high, has a favorable 12-month forward P/E, and nice earnings growth ahead. In fact, the 17.5x P/E compares with the 19.4x multiple for the NASDAQ 100, and an 18x for the S&P 500.

By the way, since 2001, November endured only 2 down months that were just slaughters. The other 3 down periods were less than 0.5% each. On the plus side, the 10 month gainers averaged 3.4% with 7 of 10 over 2.5%. So, take comfort that the worst may soon be over. Now, if the consumer closes his/her wallet this holiday season, Trump wins, or Russia’s saber-rattling becomes more pronounced, well, that is a horse of another color.

NLS: Good for Your Body and Your Portfolio

It is hard to believe because it seems to have happened both quietly and almost clandestinely, but small caps and microcaps have been clobbered in October. Heading into the last day of the month, Halloween, the Russell 2000 Index is down a scary 5.1%. Even when a company reports solid results, there is little to sustain a higher price. Granted, it doesn’t help that when the NASDAQ bellwethers slip the small caps fall. However, this seems to be a systemic or segment issue and may be best confirmed by the tepid performance of so many recent IPOs. Just like with government officials, there is no conviction out there.

Alas, all is not lost. The RSI on the Russell 2000 is in the 34 range. Anything below 30 is a real buy signal. It is also meaningfully below its 52-week high, has a favorable 12-month forward P/E, and nice earnings growth ahead. In fact, the 17.5x P/E compares with the 19.4x multiple for the NASDAQ 100, and an 18x for the S&P 500.

By the way, since 2001, November endured only 2 down months that were just slaughters. The other 3 down periods were less than 0.5% each. On the plus side, the 10 month gainers averaged 3.4% with 7 of 10 over 2.5%. So, take comfort that the worst may soon be over. Now, if the consumer closes his/her wallet this holiday season, Trump wins, or Russia’s saber-rattling becomes more pronounced, well, that is a horse of another color.

 

Say What?

Great info, insights, and hard-hitting stories make up this week’s Say What? feature...

The New York Times

http://www.nytimes.com/2016/10/26/business/economy/if-immigration-cant-be-stopped-maybe-it-can-be-managed.html?ref=economy

It seems to me that most Americans would be on board with much of this.

The New York Post

http://nypost.com/2016/10/28/man-legally-changes-his-name-to-iphone-7-to-score-gadget/

And I thought “He Hate Me” was ridiculous.

USA Today

http://www.usatoday.com/story/tech/news/2016/10/29/facebook-ireland-test-camera-news-feed-snapchat-video-photos/92959110/

Can Facebook be stopped?

Bloomberg

https://www.bloomberg.com/view/articles/2016-10-28/shift-from-active-to-passive-investing-isn-t-what-it-seems

Brilliant Bill Miller on it again.

ZeroHedge:

http://www.zerohedge.com/news/2016-10-29/anxious-ceos-confirm-gdp-data-weak-us-consumer

Can’t blame them.

Notable Numbers

AAII Sentiment Survey (figures rounded)

  Current Last Week Long Term Avg
Bullish 25% 24% 39%
Neutral 41% 38% 31%
Bearish 34% 38% 30%

Last week we noted that the Lipper Fund Flows data seemed a bit, well, odd. The latest figures are not exactly bullish. In the most recently reported period, equity fund outflows, excluding ETFs, was a whopping $20.2 billion! To put this in perspective, the same category of outflows totaled $22 billion in the previous 4 weeks combined. It may explain the market drops of late and could continue again. On the plus side, considering that in the recent week there such fewer bond inflows, we hope that money is on the sidelines that returns in the coming weeks.