ETFs: A Triumph of the Slothful and A Guaranteed Disaster

ETFs are a poor excuse for real investing, they are a manifestation of a surrender to laziness and a bonus to wealth managers who don't do anything. but sponge off 1-2% of your NAV perpetually. They also guarantee their investors a 100% participation in the next market crash.

 

ETFs create large capital market misallocations, equally rewarding the strong and the weak. When you go to buy a suit,do you buy every suit on the rack? Nope, you look for that perfect suit that has the best quality, best value.and best look. Why do that when investing?

 

Soon investors will realize the wastefulness of ETFs and get fed up with just average returns as the market averages revert back to a 4% annual return. They will realize that they are allocating over 95% of their capital to suits they would never wear and never want to wear and would never actively buy. Active management and deep research are worth the time spent and will be rewarded - as it always has been and should be. (particularly when applied to small-caps where information inefficiencies and a higher relative cost for research prevails).

 

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Dispersion is typically higher for small-cap stocks than large caps. Value added opportunities for skillful stock selection among small caps are therefore much larger than in the large-cap universe.

 

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Financial Gurus Warren Buffett, John Bogel, and Larry Fink have reaped massive fortunes by propagating the false proposition that the average investor should never expect better than average returns.and should therefore surrender to passive indexing.

 

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*The dispersion of the S&P 500 as of Nov. 30, 2017 was 18.3%, moderately low by historical standards.

 

The mass migration out of active managed funds into passive ETFs has accelerated greatly since the great crash of 2008. This represents the mass collective evasion by wealth managers to be held accountable for underperformance and their allegiance to the Wall Street profit machine of maximizing fees to the detriment of their clients best interests. It is an act of oligarchic collusion to collect egregious management fees to match only the return of the market indices. Isn't that what a prudent fiduciary should do? How can anyone be held liable or culpable for the crime of being average?

 

ETF growth has been very consistent and shows no signs of slowing down. ETFs had an organic growth rate of 16.5% on average over the last 10 years, which is much higher than the 2% growth of mutual funds. Organic growth strips out the effect of market returns to highlight where investors are putting their new investment dollars.

 

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(A SELF-FULFILLING PROPHECY)

 

Corporate managers seem to have bought into this contempt full form of greed. They deplore individual shareholders,preferring the silent, supporting passivity of ETFs.WItness the lack of stock splits. They manipulate their stock prices and manage earnings by wave after wave of share buy backs while consistently selling shares into financially engineered, artificial price levels inflated by low cost borrowed funds. Buybacks lower a stock's beta and provides a consistent flow of demand, regardless of management's performance.

 

Since this bull market began, there have been at most 16 stock splits in a year, which happened in 2011. In each of the last three years, the number of splits has shrunken. The average number of stock splits per year since 2008, when the bull market began, is just 10.

 

But in the bull market from 1998 to 2000, there were an average of 91 stock splits per year. And in the bull market from 1987 to 1990, there were 57 on average per year.

 

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What will be the catalyst of change? What will create a prevailing aura of disdain and disgust for ETFs.? WIll it be a globally synchronized crash where correlation approaches unity? Or will it be a dull aching period of underperformance? Have we as the investing masses exchanged "a walk on part in a war for a lead role in a cage" Will we take a guaranteed universal income stipend, weekly home deliveries from Amazon prime, accept a passive 4% over a volatile 9% and spend our remaining days tweeting, googling, facebooking and Netflixing B movies ad infinitum?

 

*Roger Waters - Wish you were here 1975

 

Robert Maltbie CFA
This email address is being protected from spambots. You need JavaScript enabled to view it.
President, Singular Research
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Three Buy Ideas from our Chart room

MMI March 2019

Singular research MMI mildly bullish

3/15/19

Slightly Bullish

MMI Report

mmi

(Below 50 is bearish, above 50 is bullish)

Is this a bull rally in a bear market? Until markets indices make new highs and breadth improves, we are still technically in a bear market. Less than 50% of all stocks are still below their 200 day moving averages, reaching a high of 46% recently. The S&P 500, having experienced a failure to penetrate 2820 several times since last September is attempting to break this level again. At a 51 score, there is not much conviction that a breakout will occur this time. Save a surprise trade deal with China, near term catalysts are not clear cut.

 

 

S&P 500 stalling at 2820

Singular research MMI mildly bullish1

 

Market sentiment :negative this indicator is slightly bearish, the bull/bear ratio below 1x, is our only positive sentiment indicator while Citibank’s Greed / fear indicator is mild but still slightly too zealous. The VIX and VXN in at mid-teens, not at last summer’s complacency levels but reflecting a bullish attitude. Bond spreads are normalized again and TRIN/ARMS index are mildly overbought. MACD shows upside momentum is waning.

AAII Index

Bullish 33.5%

Bearish 36.3

Neutral 30.2

 

 

Technicals: Positive

As S&P 500, QQQ and DJA averages are above 200 day moving averages, confirmed by unweighted S&P 500. Meanwhile, the Russell 2000 small cap index was just turned back below its 200 day moving average.

 

QQQ above its 200 day Moving average

Singular research MMI mildly bullish2

 

 

Liquidity: Negative

The mystery of what sources of funds has powered to rally off the Christmas Eve bottom remains to be wholly solved, but it looks like a combination of share buybacks, inflows from money markets funds and some short covering were the catalysts. This indicator shows only $4-5 billion of net inflows over the last four weeks. This is below our minimum threshold of $20 billion to generate a bullish reading. Contributing positive factors are 1) a high level of money market assets, currently over $3.3 trillion, representing over 12% of total US equity market cap and 2) closure of IPO & SPO markets due to the recent government shutdown which prevented SEC review of these offerings.

 

Valuations : Positive

Based on 2019 S&P 500 eps estimates, the market is +/- 5% of fair value at 16x. The ftm eps yield is 6.09% vs BAA corp. Bond yield of 4.95% protecting the argument that growth is undervalued.

The market is slightly above fair value vs GDP at 1.42 x and replacement value is not cheap at approximately 1.2x. Assuming a PE at parity of bond yields, discounted by 10% multiplied by eps of $169 for 2019, which assumes a modest + 3.5% eps increase, we derive 3070 as fair value, this represents +12% total return potential.

 

Earnings momentum: Negative

We are uncomfortable with the assumption that the “market” has priced this in at press time. Most revisions are trending steadily down. Q1 2019 eps has been cut by 6.6% to a -3.4% estimate for Q 1 2019. Negative guidance on individual company estimates is -74% vs. a historical -71% average. It is the largest y/y decline since q2 2016. Similarly, the market bottomed ahead of this in Feb 2016. Q2 2019 eps estimates is +0.2%, with revenues +4.6%, Q3 2019 eps estimate is +1.7% with revenues +4.5%, Q4 2019 eps estimate is +8.1% with revenues +4.8%. CY 2019 e is + 3.9% with revenues + 5.0%. CY 2020 eps is forecast at a robust + 11.5%. Meanwhile, net profit margins continue to rise, from 10.7% of revenue in q4 2017 to 11.4% in q4 2018. The largest sector declines in eps in q1 2019 are expected in energy, materials, technology and info tech. The source of the slowdown is Europe and Asia, while domestic US companies are expected to be positive +6%. Fully 38% of S&P 500 revenues are derived from abroad.

 

Monetary Indicators: Positive

Our proprietary excess liquidity indicator is now bullish, showing a Fed that is again stimulating the economy. Our excess liquidity indicator, which compares monetary growth adjusted for velocity vs GDP weighs in at +115 bps. The yield curve spread ratio, comparing the 2 year treasury to the 10 year treasury is .95 which is still positive, below 1 but very flat at only +12 bps. High yield is just a hair below attractive at +396 bps to the 10 year treasury. +400 bps is considered attractive. Finally, as mentioned, the level of liquidity representing potential buying power in money market is over $3.3 trillion or nearly 12% of total domestic equity value. Over 10% is generally bullish.

 

 

Singular research MMI mildly bullish3

 

Addendum to the 1%

Underscoring a call for higher taxes and wealth redistribution are these data points: Median Household income in 2000 = $61,279 vs $ 60,714, in 2018 adjusted for inflation. And a lower proportion of public equity as % of total net worth at 29% vs 40-45% in the 70-& 80’s, reflecting the effects of more wealth being owned privately.

 

Robert Maltbie Jr. CFA

President

Singular research

This email address is being protected from spambots. You need JavaScript enabled to view it.-6915

ROKU Q4 update: Increasing our price target

 

Singular Research Director's Letter: November 2018

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November 2018 Director’s Letter

 

The Correction Deepens  

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The market continued its sell off despite a couple strong rebound attempts. The China trade war fears and fed tightening continued to loom ominously over the market as investors de-risked and reduced exposure to equities.  
            Major market indices such as the S&P 500 in the DJIA struggled to stay in positive territory as the yield curve continue to flatten, triggering a recession fear sell-off as the three-year bond inverted above the five-year bond. Save a slightly tepid employment reports most economic series continued to display strength. But, as we know, the market is a forward-looking indicator, portending trouble ahead for 2019. 

Top performers for November

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Bottom performers for November

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We initiated coverage with a buy on Olympic Steel, (ZEUS), an operator of U.S based metals service centers with a growing focus on higher value- added, engineered products. We are very constructive on long term prospects for this beneficiary of Trump’s steel tariffs.
We wish our clients and friends and their families a joyous holiday season and thank all our subscribers for their continued support.Singular Research Staff

Singular Research Director's Letter: October 2018

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October 2018 Director’s Letter

 Lowlights:  a triumvirate. of negatives overcomes bull market

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Nowhere to hide from the claw of the bear, or the wrath of the Fed. The new Fed chief  Powell indicated that the Fed plans on more hikes this year and next, a hawkish tone that spooked investors in October. The sell -off was deep and swift knocking most major indices approximately 10%, and individually issues 20-30%. The FAANG was hit hard for a 20% drop  

Investors are concerned about trade wars and declining earnings momentum as S&P500eps growth is expected to taper from 15% to 5% over the next two quarters. Meanwhile, GDP continues to steam ahead  at 3.5% GDP growth in Q3. 

 

OUR INTERNAL MARKET INDICATORS ARE MILDLY BULLISH 

Screenshot 2018 11 30 00.01.41

 

Singular best & worst in Oct.

Underscoring the bearish environment in October the best/worst list dominated by negative returns.

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Thank you for support.of our quest to discover forgotten,forlorned and mispriced, undercovered small and micro cap equities. We look forward to finding much more attractively valued coverage candidates in the months ahead. Happy holidays !

Singular Research Staff…

  

 

Singular Research Director's Letter: September 2018

September S& P 500 defying gravity

In September, U.S. equity markets bucked the  historical trends and another rate hike by the Fed while edging slightly higher. However, the Russell 2000 index and the Singular Research coverage list were both slightly lower in September.


Perhaps distracted by the battle regarding the Kavanaugh appointment, it seems many market participants didn't read the fine print in the FED minutes showing a shift to a more hawkish stance toward raising rates very soon.The Fed hinted at up to five more hikes between now and the end of 2019, actions that may appear to be too aggressive. And a tone that likely as of this writing in mid-October has initiated a sharp correction in US Equity markets.

 

Our top performers for September were an Eclectic group of stocks.

The list was led by Seabridge Gold (SA), up 14.6% benefiting from a recovery and a possible bottoming of gold related equities in September. Our second top performer was Olympic Financial (OLY .TO) up 14.3%. Olympic was bolstered by a better-than-expected earnings report spurring our analyst to his raise his price Target.
Are third best  top performer was Emerging Biosolutions ( EBS),  up 6.2%. Emergent benefited from the announcement of a significant acquisition marking their entrance in the opioid treatment business acquiring a top private company with a remedy for overdoses called Narcan.

Screenshot 2018 11 13 22.24.34

Singular three bottom performers were led by Huttig Building Products, (HBP), off 18.5% Huttig was hurt by the recent hike in interest rates which slows down demand for housing. Our second worst performer was Harvard Bioscinces, (HBIO), down 11.8%. Harvard appeared to be impacted by uncertainties caused by the departure of its CFO and light profit-taking. Are Third worst performer was Salem Media Group (SALM) down 11-75.  Salem has been struggling most of the year adjusting is portfolio of stations ridding itself of lower-performing stations while focusing on top performers.

Screenshot 2018 11 13 22.27.39

We hosted our Midwestern values conference in Dallas on September 20th featuring ten exciting growth and value ideas. In attendance were top local and regional fund managers, the conference was viewed as an outstanding success.
We thank our clients for their support and input as we move forward in the fourth quarter and  toward what we believe will be a strong finish to 2018.

Singular Research 

Market Indicators & Strategy Report Feb. 1, 2015

MMI 20150201a

MMI 20150201b