What if we used all out brains (and please, be nice with jokes about your friendly neighborhood blogger not using any of his)? Luc Besson takes the myth that humans only use 10% of our brains, and adds Scarlett Johansson and comes up with Lucy, a $40 million film that could top the box office this week. In the movie, an evil gangster sews a new designer drug into Johannson’s belly, making he a drug mule. But when the drug leaks, it causes her to start using her brain–all of it Mayhem ensues. Reviews range from lukewarm– Slate’s Dana Stevens doesn’t recommend the move but notes it’s a choice “you might not regret if you dial your expectations down (or your drug intake up)”–to why not–The New York Times’ Manohla Dargis calls Lucy “an entertaining workout” that lays “waste to both men and any semblance of story sense”–to heck yeah–Vulture.com’s David Edelstein calls it “an outlandishly entertaining mixture of high silliness and high style.” Imagine what Besson could have done if he’d just used more of his brain.
Universal Pictures If only we had that kind of brain power Lucy does, we’ obviously have been able to make sense of this week’s market moves. But alas: The S&P 500 finished the week little change at 1,978.34, while the Dow Jones Industrial Average fell 0.8% to 16,960.57. The Nasdaq Composite gained 0.4% 4,449.56, while the small-company Russell 2000 fell 0.6% to 1,144.34. Stranger still: The market received some fairly solid news–including the fewest jobless since 2006–and couldn’t capitalize on it. Part of the problem was some high-profile earnings disappointments from the likes of Caterpillar (CAT) and Boeing (BA), which would weigh more heavily on the price-weighted Dow. What a mess.
Despite some of those big misses, Marketfield’s Michael Shaoul likes what he sees from earnings and large-cap stocks:
As the Q2 2014 earnings season has progressed to the point that a third of the companies in the S&P 500 index have reported, it has produced corporate data that is broadly supportive of the current equity market, with 77% of companies reporting bottom line surprises and 66% top line wins. It is too early to state how earnings are breaking across sectors but we are encouraged by the general tone of releases and interested to see that input costs, including that of labor, are clearly becoming more of a factor than they have been in recent quarters. Given the help from earnings we have not been surprised to see the S&P 500 index edge close to the 2000 level and at Wednesday's record close of 1987.01 we are within 1% of this target. Whether we will have the momentum to break through and extend gains over the rest of summer still remains to be seen but overall the action within the large cap index can only be described as constructive.
Strategas Research Partners’ Nicholas Bohnsack and Ryan Grabinski explain that the S&P 500 isn’t as fair valued as it looks:
A sluggish top-line has produced an elevated price-to-sales ratio for the S&P 500 and nearly all of its component sectors. Down the cap spectrum, the valuation optics is far more extended. Concerns on elevated P/Sales ratios have likely been held in check by the current P/E framework we highlight…the Index trades 17.7x TTM and 15.7x NTM earnings. Consider, however, the material impact so-called financial engineering has had on bulking up the denominator of the P/E equation, resulting in a lower, seemingly "fair" quotient. To the extent to which the c-suite has largely exhausted their ability to pad the bottom-line, top-line growth remains below trend (running ~3.1% Y/Y through 1H vs. 1H '13 vs. a full-year consensus range of +4.5-5.0%), and the Street begins to soften the implied growth rate of forward estimates, the fuel tank for cyclical multiple expansion may be half empty.
Russell Investment’s Andrew Pease wonders if “a lack-of-fear index” is needed:
Franklin Roosevelt famously said "the only thing we have to fear is fear itself." Right now, the thing to fear is, actually, the lack of fear…
…volatility at current levels has historically been a pre-condition for higher volatility. So it's reasonable to expect volatility to increase at some stage. The challenge is to identify catalysts. Geopolitics is always a risk, but the signal we are on alert for is a hawkish shift in Fed language. This could happen if the rise in U.S. core inflation over the first half of the year continues. We're not forecasting this—our models predict core inflation will stay close to 2% through 2015—but an inflation surprise could shake markets out of their current complacency.
Something has to, right?
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