Weekly Market Commentary 5-9-2011


Learning How to See – Part I

Tim Phillips – CEO, Phillips and Company

Last quarter we mentioned that 67.4% of companies beat earnings estimates. We also pointed out that the historical beat rate is 63%. As of this morning, over 80% of the S&P 500 companies have posted earnings for the first quarter and 72.2% of them beat their earnings estimates this quarter.


Alcoa kicked off earnings season after the bell on April 11th. Since then the S&P 500 has returned 1.39%. Now that earnings season is coming to an end, we expect market participants will likely shift their focus towards broader economic trends when making investment decisions.


Looking at the broader economic trends we currently have several cross currents:


On the negative side we have:

  • Fiscal concerns with the debt ceiling
  • Monetary uncertainty surrounding the end of QE2
  • Increased likelihood of default in Greece moving the EU and Euro to a more unstable position


On the positive side we have:

  • Strong jobs numbers
  • Improving consumer credit markets
  • Retail sales are now above the pre-recession peak


We added 244,000 jobs in April, March was revised up from 216,000 to 221,000 and February was revised up from 194,000 jobs to 235,000 jobs. That makes three straight months with 200,000+ new jobs.


This morning the NY Fed released its Quarterly Report on Household Debt and Credit, which continues to show improvements:

  • Continued decline of new foreclosures and new bankruptcies, down 17.7% and 13.3% respectively in the last quarter
  • 15% decline of total delinquent balances, compared to a year ago


So the question for investors is: which trends win, the trends that suggest a stronger economy or the trends that question the economic recovery?


Either way, most institutional money managers are forced to stay fully invested so it’s unlikely we will see a mass exodus from the market or see it move straight up. There will probably still be large swings in both directions in the near future, but overall it still looks constructive for portfolios that have a heavy allocation to equities.


For our retail investors it's always important to point out this heavy equity bias in institutional portfolios. Pension plans, insurance companies, and college and university endowments, tend to keep portfolios in the 80% plus equity exposure. The math is simple:





Some may need up to 9.5% to 10% in annual returns depending upon their specific payout rate and fees.


The only way institutions get this type of return is with a heavy bias to equity. Be comforted but not too much. I continue to see rotation in and out of asset classes and regular portfolio rebalancing including large allocations of cash (20%+) at times. This type of rotation and rebalancing by large institutions can cause some interim pain for all of us as they adjust their allocations


Next week I will give you some insights into what some of the larger institutions are looking at as sectors and segments; this week I am on the road "learning how to see.”


If you have anything specific you would like some insights on or questions to ask some of these larger institutions please email them to me at: tphillips@phillipsandco.com


Tim Phillips, CEO – Phillips and Company