The price to peak earnings multiple rose to 12.4x on Friday, which is the highest level this valuation metric has touched since September of 2008. Positive macroeconomic data such as an unexpected, modest decline in the unemployment rate and increased productivity boosted the S&P 500 for the week . In addition, pending homes sales were better than expected, providing another sign of stabilization in the housing market. However, market gains were modest as November retail sales were slightly weaker than expected, which made some analysts less optimistic about prospects for the holiday shopping season.
Perhaps the most important development of the week was Bank of America’s (BAC) announced plan to repay TARP funding. The bank currently owes the Treasury nearly $45 billion and will use a substantial portion of its recently-rebuilt capital reserves, as well as money raised through a planned secondary offering to repay that debt. This is great news for taxpayers as BAC becomes the first of the “zombie banks” to lay out specific plans for repaying the government’s loans. Bank of America’s decision to pay off TARP was received as bullish news as such a move would be inappropriate if the bank foresaw large future losses, but we think there could be an ulterior motive. It is well known that Bank of America is currently in search of a new CEO, and government-imposed limits to executive pay appears to be complicating the bank’s search for a new Chief Executive.
The percentage of NYSE stocks selling above their 30-week moving average increased to 83% over the last week. Our investor sentiment metric remains extremely bullish and we continue to believe that, over the coming weeks, it will revert to more normal levels. This does not necessarily mean that that stock prices must fall in the coming weeks, but the pace of gains cannot continue unabated indefinitely.
Corporate insiders are clearly not bullish at the present time. Based on the most recent data from finviz, insiders are selling far more than they are buying. According to the last week’s data, insiders bought less than $12 million in stock while selling approximately $957 million, giving bears a whopping 82x edge in terms of dollar volume. Since corporate insiders are generally considered “smart money”, it is instructive when they become
either overly bearish or bullish. The overwhelming bearishness of last week’s insider trades suggests to us that they view the market as over-valued and view this as a good time to take some profits.
Our outlook on the market has been little changed for the last few weeks; we continue to believe that the current risk/return profile is unfavorable for committing additional resources to equities. At this point, we see valuation as unattractive at current price levels, as the market has already priced-in a fairly robust economic recovery. Furthermore, the recent bull market has shown remarkable resilience and sentiment has remained fairly elevated for a number of months. We continue to believe that stocks are vulnerable to a pull-back and any unexpected piece of news could trigger an exaggerated response. Insiders are selling, the dollar is weak and, despite a slight drop in the headline unemployment rate, the moribund labor market remains a real problem. So far, the market has been pretty sanguine regarding the problems which plague this economy. However, if solid evidence of sustainable economic growth does not materialize soon, the stock market is vulnerable. As such, at the present time we recommend that equity investors have a bias toward dividend paying, reasonably valued, defensive stocks.
