The great rotation, a high VIX and Einhorn's statements

February 4-8, 2012

Market comments:  Continued talk about if, when and where the great rotation will occur. Over the last years, investors have been pushed towards the safety of bonds.  As interest rates on bonds increase and stock markets rally, the idea that money will flow out of bonds and into stocks is becoming widespread. Evidence suggests stock funds have started the year with record inflows.

Despite a sell off on Monday (the largest so far this year), North American markets opened closed up last Friday and gained over the week. Markets have now made gains in the last six weeks, and the S&P 500 sits at a five-year high. The VIX, which lies near 13, is rather high, suggesting complacency in the markets.

Despite several reasons for good cheer, it is important to remember bearish evidence also exists. The Shiller P/E looks at Price to Earnings ratios adjusted over time and inflation. It is often used to gain a macro look at a company over the entire business cycle. Based on the Shiller P/E, many stocks are trading at a premium, which could suggest a market peak is nearing.  Then again, “Europe’s debt crisis is settling, China’s economy is accelerating, the U.S. housing market is on the mend, earnings look good, small investors are moving back into stocks and the S&P 500 is nearing a record high.” Everything looks like the economy is on track to make gains in 2013.

Company News:  Last week, LinkedIn shares surged.  The company’s revenues increased by 81% last year and earnings per share were well over analyst expectations (35 cents rather than 19).

Apple is again facing difficulties as criticism has developed surrounding the company’s use of cash. Apple is well known for stock piling cash – “It grew to a whopping $137.1-billion (U.S.) at the end of 2012, up 13 per cent in the fourth quarter… Apple’s piggybank alone is worth more than 97 per cent of the companies within the S&P 500.” David Einhorn, a noted fund manager with an interest in the company, has said he is “dissatisfied with Apple’s capital allocation strategy” and wants the company to return cash to shareholders.

The Dell deal is the largest in recent history – the largest buyout since the financial crisis began. Silver Lake and Dell Inc’s founder intent to buy the company for approximately US $23 bn. Microsoft is also included in the deal, which will take the company private through a leveraged buyout.

International news: Last week, European markets finished the week strongly, after a new budget was agreed upon in Brussels. Also interesting: a new stock exchange opens in India Monday, February 11.