Collapse in Oil Hurting the I-Fund ?

[VDaGama]

In case there is interest, the following is from Louis Navellier’s Blue Chip Growth March newsletter, which he published 20 February, three days before markets in the US (NOT just the I Fund) started to fall:

I highly recommend that you read this issue carefully, because the time has come to do some "spring cleaning" with the Blue Chip Growth Buy List. I'll discuss this in greater detail later, but the stronger dollar has made it increasingly difficult for many multi-international companies to beat sales and earnings expectations. In fact, 70% of the 50 top stocks in the S&P 500 are expected to disappoint for the first-quarter earnings season.

So there is headline risk brewing in the broader stock market right now, and that means it's time to trim a handful of our Blue Chip Growth companies to reduce our exposure to this risk. In total, we're selling five of our longer-term positions, for an average 37% return. These stocks have become more volatile due to the stronger dollar lately, so now is a good time to take profits and refocus on strong domestic plays….

Because we're making so many changes to the Buy List this month, I want to make sure we're on the same page about why this "spring cleaning" is necessary. The fact is that the stock market is in a fix, and we all need to tread carefully to minimize risk and maximize returns. Allow me to explain in the next section.

Wall Street's Real Conundrum

If you've been paying attention this earnings announcement season, then you know that sales growth has essentially gone "poof" and disappeared. A strong U.S. dollar is squelching the sales of large multi-international companies and squeezing their underlying earnings. And given that about half of the S&P 500's sales are from outside of the U.S., any sales momentum in the S&P 500 has been effectively crushed.

In fact, there are 20 stocks that lead the S&P 500 and account for approximately 30% of its total value. Too many of these leaders have missed estimates, issued cautious guidance below analysts' estimates and/or now have negative forecasted annual sales growth. I'm talking about companies like Chevron (CVX), Coca-Cola (KO), McDonald's (MCD), Pfizer (PFE) and Procter & Gamble (PG).

The chart below lists the top 50 stocks in the S&P 500 and their first-quarter sales and earnings growth. As you can see, the picture isn't pretty for the stocks in the gray section.

Chart.png

With negative sales growth, it is growing increasingly harder for many stocks in the S&P 500 to generate tremendous earnings growth. As a result, many of these companies now have negative forecasted annual earnings growth, too. According to FactSet, the S&P500 average is just 3.1% earnings growth and 1.7% revenue growth. And just 77% of the S&P 500 have posted earnings surprises; a measly 58% have posted sales surprises.

There is clearly a major problem on the sales and earnings front for many large multi-international corporations, and only 15% of the mega-cap stocks are now worth investing in. So there is now a "seismic shock" rumbling through the S&P 500 that will have profound consequences for the overall stock market. A massive flight to more domestic stocks with real sales and earnings growth is now underway.

As you may have noticed, our fundamentally superior Blue Chip Growth stocks clearly make the cut when it comes to large- and mega-cap stocks. Our Blue Chip Growth Buy List rose an average 6.4% this past month, beating the Dow's 3.5% gain by nearly two-to-one.

While the S&P 500 is barely squeaking by with single-digit top- and bottom-line growth, our Blue Chip Growth stocks are characterized by 47% annual earnings growth and 19% average sales growth. And an overwhelming number of our Buy List companies are trouncing sales and earnings estimates. That's why, in the unshaded section of the above chart, you'll notice several familiar names…. As I mentioned in last month's issue, our Buy List is chock full of domestic plays, so we're well positioned to profit from the strong dollar.

[VDaGama]

Please note that Mr. Navellier is referring in his newsletter specifically to the S&P 500.

THAT means C Fund.

Which is why that fund has underperformed since the beginning of the year: +0.8%, vs. +3.8% for the I Fund and +4.0% for the S. (See TSP Charts & Returns at this site.)

“A massive flight to more domestic stocks,” as he wrote, refers also to the S Fund, whose constituents (small- and mid-cap US companies) are much less involved in overseas operations and often BENEFIT from a strong dollar, as the raw materials (e.g., oil) and parts (e.g., semiconductor chips) they may procure overseas become cheaper when translated from foreign currency into dollars.

Even GREATER BENEFIT can accrue to foreign companies (such as those in the I Fund): The raw materials and parts they buy may also become cheaper – AND their products become more competitive (cheaper relative to those produced in dollars) AND when sold overseas translate back to enhanced proceeds in local currency.

For this, called “currency effect,” see:

http://people.opposingviews.com/currenc ... -5672.html

Sure, the resulting rise in foreign-company stock prices is dampened when converted into dollars, but the link provided in an above post CLEARLY shows the OPPOSITE of what that poster claimed:

The MSCI EAFE (on which the I Fund is based) STILL beat the pants off the C Fund – EVEN in Dollar terms: +2.3% vs +0.8%. That is, 2.9-fold!

http://www.msci.com/products/indexes/co ... mance.html

QE, improving economies, and POSITIVE currency effects vastly overwhelmed the negative currency effects – to the tune of 2.9 FOLD!

Meanwhile, the index SLAUGHTERED the hapless C Fund in Euro terms: 17.7% to 0.8%. 22.1-FOLD!

And since the beginning of March the index most certainly did NOT “tank,” as alleged in the aforementioned post, it ROSE 2.6% -- in Euro terms. Meanwhile, the C Fund slumped 1.2%, and during the last week the I tied the C – even in dollar terms, outperforming it yesterday, when markets generally fell (reputedly due to currency and oil price effects!).

It’s the C Fund that’s getting hit by the currency issue – NOT the I!

And the I Fund did NOT fall – but ROSE -- because of the rising dollar.

As well as QE and improving economies throughout Europe, Astralasia, and the Far East (EAFE).

NOT just the Eurozone!

(The MSCI EAFE is comprised of about 34.9% non-European companies; 34.5% non-Eurozone European companies; and ONLY 30.1% Eurozone companies.)

All of which factors – INCLUDING currency – contributed to the outperformance of the MSCI EAFE vs the C Fund -- 2.9-fold, even in dollar terms.

And for a somewhat less pessimistic response to currency effect on C Fund constituents, see:

http://fundamentalis.com/?p=4617

Can anyone see the utter confusion (disinformation?) occurring in much of this thread?

[skiehawk11]

I disagree with your analysis. You are using end results to justify the workings of the I Fund and are also comparing the paltry returns of the C Fund (I Fund is x2.9 more than the C Fund) to incorrectly argue for investing in the I Fund. Both analyses are flawed as numbers don't tell the whole story.

Since the dollar has appreciated, the EFA has been largely negative. Since the beginning of this year it had performed extremely well based on the fact that the dollar didn't appreciate all that much and thus the affect of QE in Japan and Europe was more than the dampening affect of the USD appreciation.

So end results, the I Fund is up greater than the C Fund, but you can't derive your absolutes as you are by using only the end result. Rather the journey is more representative of what's going on.

Also, the S&P 500 article proves my point in one aspect. An appreciating dollar hurts the C Fund if of course its influence is greater than other mechanisms at play (e,g, - QE). Additionally, the USD appreciating has also had a hand at dampening oil prices along with the oversupply. You can buy more of something (oil in this case) with one dollar than you could x amount of time ago.

Also, the currency article you linked to describes how a company is influenced by currencies and how playing currencies can either increase or decrease a companies profits. I'm not sure how you are deriving this as a reason of the I Fund outperforming.

[crondanet5]

A while back I posited that some measure of success in the Fantasy Game was being out of a Fund that was going down. That preservation of capital meant you could get back in that Fund when it had bottomed out and ride it up however far you wanted. And then get out of it and get into the next bottomed Fund to ride that up. Oftentimes the Fund you are in is not the favored one. As for the I Fund I believe people are influenced to get in it-- or stay in it-- because of headlines stating big inverstors are buying up Europe. Hey, if that's where the chocolate cake is why not get in line? Well, I'm not going to get in line. you see the chocolate cake they're consuming is shorting the Euro, not buying the stock of good manufacturing companies. The I Fund does not invest in that aspect of the European economy. What are these investors expecting will happen in Europe? They expect the GDP will go down, the Euro drops in value, they rake in their cash and look for the next opportunity. Now one Gamer on this site I've come to appreciate is Tractor, Tractor recently revealed he did one of the most amazing things a good TSP Participant could do. In fact it is the only time I ever heard of any Participant doing it, and it was brilliant. PM him if you like and ask what he did. That was not the reason I pointed him out. Long time Players have followed Tractor's involvement with the I Fund. He made some earnest money, but then it stopped. And he's out. For that reason alone we should drop the I Fund as a potential investment for now. There are better places to be right now that are making money rather than losing it. Need a Fund? PM RGEN. Hope this helps everyone make more money in a tough investment year.

[rlinehan]

“rlinehan you could be right. I may have made a mistake moving into the S Fund. Are you in the G?”

Sorry, crondanet, I missed that post, as I wasn’t around Friday, when a lot of stuff evidently went up on this subject.

No. I’m not in the G (except new contributions, which go there until I decide what to do with them); I’m currently about evenly split between the C, S, and I, and that is for diversification purposes, as diversification helps mitigate the volatility of stock markets, in which I’m fully invested (in TSP, that is).

That split may well soon change, though – depending on how things shake out over the next days, weeks, and months.

And, no; I see no reason to leave the S. If I were to be in one stock fund, that would be my choice – for the reasons I (and others, including you) wrote above.

But when I think about being in just one fund, I can’t help recalling what waynekaryn wrote above: “at the end of the day, we're just gambling with the information we have. Sometimes it works for us, sometimes it works against us. Just like Poker.”

Now comes your "gamer."

That isn’t how I approach my retirement savings. Because of my diversification (and getting out of markets, stock and bond, when they verge on collapse), I have never lost money in the TSP in any year for 21 years.

And I don’t see market collapse looming now, despite current volatility. (What’s new? Having we seen versions of this before?)

I just encountered a website that may be of interest to you, as it seems directly to address your query as to what to do right now:

http://fat-pitch.blogspot.com/2015/03/w ... .html#more

(Note that the writer is positive on the Russell 2000, whose constituents form part of the S Fund, not on the C.)

Sites like that are good to watch so as to know when to exit the stock market.

There are others, some of which have been mentioned and/or linked to here at TSPCenter (like TSP Talk, EBB Charts, and Ira Epstein’s Youtube videos).

Do you see any of them warning us to bail out of the stock market?

I don’t.

As for "big investors" "shorting the Euro, not buying the stock of good manufacturing companies," what is your proof?

The previous point you raised re Russia and sanctions is far more valid, as it's clear fact and, indeed, is one major reason holding European (as well as world) stocks down.

[skiehawk11]

rlinehan, I should be taking lessons from you. I only have maybe 10 years of investing.

[crondanet5]

rline that is a great site. My kind of charts. Embedded in there is a good reason for you to go 100% S Fund Tuesday. Did you see it?

[rlinehan]

Yeah, I sure did!

And glad you liked the site.

Sure, I’ll be watching how things play out this week, including what Schaeffer’s Research’s Monday Morning Outlook, which comes out tomorrow, has to say, especially about the RUT and MID (S&P MID CAP 400 INDEX, the other component of the S Fund). To me, the MID looks OK but not as good as the RUT, but I always defer to those more expert than I on such matters.

http://www.schaeffersresearch.com/comme ... ?id=124643

Then there’s the FOMC’s decision on interest rates on Wednesday. Hopefully that will calm markets that have been roiled since the February Jobs Report was released 6 March.

If not, I’ll just have to wait some more to make a move.

Thanks Skiehawk for the kind words!

I’m sure, though, that ten years is more than enough, especially for you.

It is rather the laggards in the Fantasy TSP Leader Board who concern me: There should be ALL positive annual returns there, when there’re not.

NOT good!

[crondanet5]

I'm not sure what to do Wednesday. Stay in the S or go G?

[rlinehan]

I'd stay.

I'm not expecting to sell any of my shares.

Indeed, I hope to add to them.

Things look better so far this morning.

[crondanet5]

I am remiss in answering your question about shorting the Euro as opposed to buying European ETFs and company shares. My source is CNBC. I religiously watch Fast Money and Options Action. The Fund managers they have there are very sharp and very aware of what is happening in the markets. I do not have a web site posting to give you. But just this Monday morning CNBC reported an article in the Wall Street Journal about hedge funds making a ton of money shorting the Euro. And if you follow the premarket data on cnbc.com you've seen the Euro drop compared to the US dollar. So that's my source.

[dcramer29]

rline - since you're so worried about our returns, you need to open up your account stats for everyone to see. You talk a big game, and talk big about your performance. Well lets see it.

[waynekaryn]

I wouldn't take any of this seriously dcramer.

I guess for calling the stock market a game of chance, where sometimes you make money and sometimes you lose money has somehow relegated me to the status of "gamer" according to rhinelan.

Since this "game" plays out this way I'd say, oh, 100% of the time, I guess that title's acceptable.


rlinehan is either a sad attempt at trolling or a sad attempt at selling something. Either way, it's sad

[pcallah]

Big talk from both rhinelan and waynekaryn. Care to back it up by making your fantasy TSP public? That proves real quick who should be taken seriously!

[waynekaryn]

pcallah, how is calling out something that is true big talk?!?

Answer this question. Do you disagree with the fact that, somedays you go green playing the market, and some days you go red playing the market?

If YES, be quiet (because you agree with me)
If NO, be quiet (because if you think you can beat the market all the time, I don't want to hear delusional talk)

I've never said I was any kind of financial wizard or guru. All I'm conveying is that I'm playing this (and my TSP) for what it is, a game. A socially acceptable form of gambling. Sorry if you don't like the title, but that's what we all are doing, "Betting" our money to make more money.

And yes, I've unprivatized my stuff (just for you pcallah)