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Clear Thoughts
Highlights from the Clear Conference Call on 11/22/05
| Quants don't make predictions, but we do share observations. Read the notes of our 11/23/05 conference call |
The purpose of our call was to shed additional light on the increased amount of trading in our Clear portfolios during this earnings season. Earnings season is a 3-4 week period where the bulk of public companies report their quarterly financials with the highlight being revenue and earnings. The following is a summary of the call.
Activity in the past four weeks:
Performance:
- October was a down month for the market with the S&P 500 losing 1.77%. Equity long/short funds haven taken a beating with the average fund reporting 3%-4% losses and some reporting declines as high as 8% to 10% for the month in extreme cases as reported by CNN.Money. As difficult as October was for us, this month we are ahead as a composite.
- Clear Portfolios and benchmarks YTD (as of 11/21/2005)
- Clear Composite*: 12.51% (after fees)
- S&P 500: 3.54%
- S&P 1500: 4.32%
- DJIA: 0.35%
* The Clear composite is an equal weighting of all six portfolios after all management and trading fees; 1/1/05 through 11/21/05.
Increased turnover:
- We manage for performance
- As a flat wrap fee asset manager, we do not have an incentive to trade or not to trade.
- As Companies reported during the earnings season, the market appeared to be extremely sensitive requiring companies to beat expectations and raise forecasts for both revenues and earnings in order to have positively affected stock prices in the short-term.
- We believe that this is not a rule and only a short term trend we are seeing but one worth sharing; we like new names for the portfolio (stocks) that meet expectations, confirm their outlook and see their stock fall based on that good news. This indicates strong fundamentals and as Wall Street beats up the share price it can create a buy indicator in our algorithms.
- With all of this market volatility; stocks are moving quickly in general; the technical part of our equation such as real-time monitoring of price to earnings (P/E) and price to earnings to growth (PEG) ratios cause companies to fall out of our top ranks.
- Stop-Loss discipline - how we actively manage our portfolios: a one day drop, one week drop, drops compared to peers/sectors all can trigger a sell. This protects us in a down market. Remember that only the top ranked stocks can be in a Clear portfolio.
- Such active management at times can be challenging for subscribers to follow and make it easier for new subscribers to get in.
- What does this all mean? Equity markets require even more patience than previous years. We calculate the market to be more volatile month to month causing short-term increased turn-over.
Portfolios and sectors:
We have limits to how heavily weighted any one portfolio can be to specific sectors and sub-sectors. Additionally our trading rules in a case of rapid growth or decline guide us in and out of sector exposure.
We would like to share some additional observations that may be a source of questions.
For the Value Portfolios:
Homebuilding & Steel
- We continue to have exposure to homebuilding and steel and we are closely monitoring it.
- Our computers still like these stocks for its value and growth.
- We are not investing based on sector but based upon the financial performance of each individual company compared to other value opportunities.
- We believe if P/E ratios get too low there will be consolidation or a move for high cash flow producing firms going private with the private equity firms flush with cash and seeking deals.
- Look to consumer confidence numbers, weather, Fed interest rates and the holiday shopping season as early indicators. There are also enormous amounts of rebuilding along the gulf coast stretching from Florida to Texas. Homes, offices and municipal buildings all require new structures.
For the Growth Portfolios:
There is much media chatter about a big tech rally.
- Google broke $400 (out of any of our screen ranges and not in our portfolios)
- Yahoo hitting 5 yr high
- EBAY hitting 3 month high
- Apple hitting all time high
- We calculate that the fundamentals support our continuing to own the stocks and indicate more room for gains in these stocks
The Clear Outlook for year end.
Our computers do not have opinions, emotions, nor can they predict the future. As money managers, we can draw reasonable conclusions from the data as follows:
- We are still finding a large pool of stocks that represent good value or are reasonably priced.
- Our initial screens are yielding robust lists, we have a large pool of initial results in which to rank and weight a top ranked list/portfolio
- Median P/E for S&P 500 is about 18.45.
- As companies report their quarterly earnings and their stock prices move, some are fighting to come back into the portfolio, this is the reasonable price/growth or price to valuation component of our algorithms.
- A large pool of stocks passing our initial screening process we believe is a good indicator for the overall economy.
- In the fourth quarter, analysts polled by Reuters estimate expected earnings for companies on the S&P 500 index to grow by 12.4% over the fourth quarter of last year.
- Corporate earnings and balance sheets of companies appear strong in the last reported quarter.
- We see record cash positions.
- Even with strong earnings, companies have been conservative about spending since the dot com crash.
- For large multi-nationals, the job creation act has billions of dollars of earnings being repatriated.
- More companies are paying dividends at record high levels.
- More companies are repurchasing their own shares. In fact, companies in the S&P 500 returned approximately $245 billion on share repurchases in the first three quarters of this year topping the record $197 billion spent in all of 2004.
- Energy prices are still a wildcard for the economy and energy related share prices. Prime factors to watch are the weather, geopolitical forces and how fast companies can get back online in the gulf. (We have already seen a down/up cycle of crude oil as well as gas prices.)
- Other commodities are still doing extremely well (gold 18 yr high; copper all time high)
- Do not discount the U.S. consumer. Every time in the last four yearsss the media predicts a slow down they are proved wrong.
- Fed released minutes this week and it looks like they might be nearing its end of rate hikes.
If anyone has any questions please feel free to email customerservice@clearam.com and we will do our best to answer your questions promptly.
Happy Holidays!!
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