Value Portfolio – Sector Update

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Significant Changes Since Last Week:

We finally made it! The market has reached 100.0% Fair Value (100FV) after flirting with this benchmark for the past several weeks we finally crossed the plateau. Now before everyone runs for the Sell window thinking the market is surely going into overvalued territory we should explain what 100FV means and the normal fair value trading range.

First, 100FV means that at the current prices, as a group, the market is trading at a price that fully reflects the current profitability of the stocks. This is but a single point in the range. It is an important point, but not the absolute trigger that changes the world. And, not all of the sectors, industry groups and stocks are all trading at 100FV, some are over and some are under. But, as a market the combined values and share prices equal 100FV.

There is also something we call a fair value trading range. This is a range where stocks spend most of their time moving up and down. This range is from 80.0% Fair Value (80FV) and 130.0% Fair Value (130FV). Most stocks spend their time within this trading range. It is when they move above 130FV that they become Overvalued and when they trade below 80FV they become Undervalued. When these outlier conditions take place is when we wish to take action. If an investor attempts to take advantage of the minor moves that occur between 130FV and 80FV they will generally chase their tail and end up consuming any gain in transaction costs or experience a nervous breakdown. It is a bit of a random walk between 130FV and 80FV.

We now have three sectors just below 100FV within the Largecap capitalization part of the market.

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Both the Midcap and Smallcap capitalization part of the market moved further above 100FV this week adding almost a full percentage point in Midcap and 1.6 percentage points in the Smallcap capitalization area. It is good to see the three capitalization areas somewhat close to each other on relative value. If one capitalization area started to move out of sync with the other two we would begin to worry about a polarization taking place and start preparing for a significant correction.

One Midcap sector moved back below 100FV this week just slightly to 99.5FV from 100.1FV. This was Consumer Staples. This is a bit out of line with the other capitalization areas in the sector as both the Largecap and Smallcap capitalization areas are well above 100FV. We may need to examine this area in detail if this continues for a few more weeks.

Energy continues to make nice moves toward 100FV in all three capitalization areas with Largecap being the closest at 99.7FV followed by Midcap and Smallcap both at 94.5FV. Telecommunication Services gave up some ground in the Midcap area moving down to 94.3FV while the Smallcap sector moved below 90FV to 88.5FV. This places the Smallcap Telecom sector as the only sector below 90FV in any capitalization area. We do not believe this is a withdrawal from telecommunications but might reflect some withdrawal from an income generating area as some investors might think interest rates will be increasing. This may move some traditional bond investors back into the bond market as they give up high yielding stocks.

We do not believe interest rates will be increasing in the near term and there is a higher probability that they will not increase in the midterm either. Maybe Ben Bernanke is correct in that normal interest rates will not be seen “in his lifetime”. Normal rates for a central banker are near 3.0% and over 10% of the world’s government debt is below 0% currently. We have a long way to go for sure.

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U.S. Allcap Industry Relative Fair Values

There was very little comparative movement within the industry groups this week. There was an ever so slight movement to the upside with 15 of the 21 reported industry groups moving higher on a relative basis. Technology gave up some of the earlier gains from previous weeks and Capital Goods made advances above 100FV to 106.5FV.

Real Estate and Semiconductors were running with each other at the top of the list at above 109FV and both retreated slightly to 108.9FV and 108.4FV which is good to see some slowing in their advancement relative to the other groups. Food and Beverage now has the top spot all alone at 110.0FV advancing from 108.2FV the previous week.

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This is NOT a Specific Recommendation and Should Only Be Viewed as News Based Information for Your Consideration

By | 2016-08-24T08:12:30+00:00 August 24th, 2016|Categories: Money Basics|0 Comments

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