Mid-January, 2014: Earnings Season in Full Swing Favors Lower Guidance
The mid-January reallocation resulted in a move to a more conservative and neutral stance across the majority of PCM indexes that traded mid-month. The PCM Global Tactical Index moved out of technology and consumer cyclicals and into healthcare and the Netherlands equity market, while maintaining exposure to Belgium, US industrials and US materials. The Alpha One Index shed exposure to SPY and committed to the more conservative option of preferred shares in the US equity market. The SPY has since experienced a selloff and the more conservative allocation may be timely in light of the following statistics relating to quarterly earnings releases through 1/17/2014. The following statistics are compliments of Factset.com.
• Of the 53 companies that have reported earnings to date for Q4 2013, 57% have reported earnings above the mean estimate and 58% have reported sales above the mean estimate, well below the four year average.
• The blended earnings growth rate for Q4 2013 is 5.9%. The Financials sector has the highest earnings growth rate for the quarter, while the Energy sector has the lowest earnings growth rate for the quarter.
• On December 31, the earnings growth rate for Q4 2013 was 6.3%. Seven of the ten sectors have recorded decreases in earnings growth rates over this time frame, led by the Energy sector.
• For Q4 2013, 96 companies have issued negative EPS guidance and 15 companies have issued positive EPS guidance.
• The current 12-month forward P/E ratio is 15.4. This P/E ratio is above the 5-year (13.1) and 10-year (13.9) averages.
• In aggregate, companies are reporting earnings that are 2.2% above expectations. This surprise percentage is below the 1-year (3.3%) average and the 4-year (5.8%) average.
• The percentage of companies issuing negative EPS guidance to date for the fourth quarter is 86%. This percentage is well above the 5-year average of 64%.
• A number of companies commented on the negative impact of F/X (currency exchange) rates on revenues and earnings for the third quarter, which is expected to be a continuing trend.
On the bond side, the PCM US Bond Index exited the inverse position on the 20 year US treasuries and is now 50% long in short term treasuries, 25% high yield corporates and 25% investment grade corporate bonds. The PCM Absolute Bond Index also exited its 50% exposure to inverse 20 year US Treasuries, as well as its 50% in emerging market bonds, rotating to a 50% allocation each into short term treasuries and high yield corporates. Due in part to the multi-directional ability of these indexes, the PCM Absolute Bond Index composite was again ranked as achieving "Top Guns" status within the Informa Investment Solutions' manager ranking database; this time for the 3Q 2013 after receiving the award in 2Q 2013 as well. We look forward to seeing if the index achieved the same status for the 4th quarter of 2013. The Absolute Bond Index continues to be a solution to consider for clients who have maturing bonds or high exposure to a bond portfolio with a long duration. The links to our indexes in this article have been updated to take you to a Morningstar Fact sheet for a more comprehensive analysis of the models. To view all of our index models, please visit our website at www.pcminvestment.com.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by Co-CIO's Michael Chapman and Todd Wood.
The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.
About "PCM Quant Coalescence"
Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.
Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective