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July 01, 2009
July 2009 Model Signals: A Shift to Value
For the first time since February, there has been a change on Northlake's Core and Explore ETF models. The Style model has moved to Value after spending 5 months at Growth. The new Value signal is weak, just barley in Value territory on Northlake's 0 to 100 scale. However, five of the nine underlying indicators now favor value and a sixth is rated neutral. The trend toward value has been in place for several months so this move comes as little surprise.
As a result of the new signal, all client positions in the Russell 1000 Growth (IWF) were swapped into the Russell 1000 Value (IWD). The effect on client portfolios is to shift exposure from technology, health care and consumer sectors to financial services, utility, and energy sectors. The shift is anticipating a second half recovery in the economy that favorably impacts the more cyclical parts of the economy.
The Growth signal since the beginning of February was very accurate and contributed favorably to client portfolio performance. While clients owned IWF, it gained almost 19% against an increase of less than 12% for the IWD. This is exactly how the model is supposed to function – capturing incremental performance in a major trend.
There was no change to the signal from Northlake's Market Cap model. It remains firmly in small cap territory although the signal has weakened slightly for two consecutive months. The small cap signal also anticipates better times ahead for the economy and continued improvement in credit market conditions.
Small caps, as represented by client exposure to the Russell 2000 (IWM) outperformed the S&P 500 in June for the second consecutive month. SO far in 2009, the Russell 2000 is up 3.6% vs. a gain of 2.5% for the S&P 500. Thus, the Market Cap model has done its job this year. The small cap signal has been in place since September 2008. During that time, small caps have lagged large caps by a little less than 2%. The small cap signal was early in anticipating an improved economic and stock market environment. Performance especially suffered during the initial portion of the market crash in the final quarter of 2008.
Disclosure: IWD and IWM are widely held by clients of Northlake Capital Management including in Steve Birenberg's personal accounts.
Posted by Steve Birenberg at July 1, 2009 01:18 PM in Models
1 DO YOU THINK THE RALLY IS DEAD FOR NOW IN THE OVERALL MARKET?
2.CETV SOLDD 49% STAKE IN THE UKRAINE.ON PAPER,THIS APPEARS TO BE A BIG DEVELOPMENT AND SHOULD HELP CETV'S BALANCE SHEET.WITH THE BIG DROP IN THE MARKET YESTERDAY,HOWEVER, CETV'S PRICE DID NOT RISE IN REFLECTION OF THIS POSITIVE DEVELOPMENT. WHAT DO YOU THINK OF THIS SALE AND HOW DO MUCH WILL IT AFFECT CETV'S STOCK PRICE [MOST LIKELY] IN THE SHORT AND INTEMEDIATE TERM?
I think it is too early to call the end of the rally but the easy part is done. I do not expect a major decline from here. Sentiment toward the economic recovery has soured due to the jobs picture and the issue of State budgets is a new negative. I still think the downside is contained by 850 and that we are in a choppy market that will range from 850 to 950 for the time being. A big upside move now requires a real piece of positive news.
My initial reaction to the CETV news is very favorable. It is a good solution that provides a greater than expected value for Ukraine and guarantees liquidity. A similar but much smaller deal in Bulgaria seems plausible. CETV's balance sheet should no longer be an issue even if profitability does not return until 2011. FOr stock valuation, cutitng in half the attributable Ukraine losses while establishing a positive value is worth $5-10 per share.
However, the fact that CETV needed to legally separate Ukraine and Bulgaria for purposes of debt covenants storngly suggests that operating cash flow in 2009 is going to fall far short of even the dramatically lowered analyst estimates. Whereas I had previously hoped for $170-190 million, I now think that it could be as low as $100-125 million. For this stock this is a negative of $5-10 per share but much less if 2010 is an up year.
Overall, I see the benefit to a minimum guarantee of $400 million in cash for Ukraine as a net positive vs worse results in 2009 and possibly 2010. This I expect the stock to move higher assuming emerging market stocks and currencies cooperate.
The best part of the deal for the stock is that it takes a huge negative uncertainty off the table at an attractive valuation which means that analysts and investors are going to have fewer reasons to dislike CETV shares. The stock will still hinge on the outlook for economies and Central and Eastern Europe, however.
Posted by: Steve at July 3, 2009 08:05 AM1 the market is on scary correction pattern
2.cetv collapsed down to slighty below $18.
3.do you anticipate any short term bounce in the market in general or in cetv in particular?
4 oil is also collapsing
are we back in thise terrible bear market?
I believe the market is oversold and will bounce. I think yesterday's late rally was the start of the bounce. To get a substantial rally, I think we need a dose of good news on the economy as the sentiment has shifted negatively quickly.
I do not think we are headed for huge losses from here. Oil is reflecting investor sentiment and is still double where it was in March.
Emerging market currencies and stocks have been weak. As noted before, the flip side to the good news in Ukraine is that CETV lowered its outlook again. Until the macro picture is clearly turned, the stock will trade with macro sentiment. Thus it is lower. I am an aggressive buyer at $12-14 and will probably nibble at $15-16.
Posted by: Steve at July 9, 2009 07:46 AM