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Author: John Del Vecchio

About John Del Vecchio Author of Rule of 72: How to Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio, John is a forensic accountant at heart. Standing on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, he built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around. John graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.

Do World markets matter?

It’s rare to see such a wide divergence between world and U.S. markets. Many Asian and European banks are hitting 52-week lows, which is suggestive of a deteriorating world- wide environment. While the U.S. may weather the storm better than emerging markets, it does appear that many economies are suffering. Examples of countries with economies in danger of toppling include Brazil, Turkey, India and South Africa.

Intermediate Term Sentiment is Not Outright Bearish

Last week short-term sentiment backed off a bit, and the fear/greed gauge moved down to 55 from the mid 60’s. The NDR short-term composite came in at 70, which is a sell.  I would rate the short term as being mildly negative.

Intermediate-term sentiment is not outright bearish. NDR crowd sentiment is at 70.
Bullish newsletter writers are at 60% and bearish writers are at 18%, creating one of the widest
spreads of the year between the two groups. Having the majority of market participants so aggressively leaning in one direction is a very negative development.

This Trend Practically Guarantees the Federal Reserve will Continue to Raise Rates

By John Del Vecchio

One of the hottest job markets in the U.S. is the trucking industry. Business is booming. A major shortage of drivers has led to a spike in wages as well as other perks such as signing bonuses. While trucking is hot, inflation is heating up too.

The underlying price pressures in transportation and logistics, as well as raw materials persist. The trend is strong and is a factor into why the Federal Reserve will likely continue to raise rates.

The change in pricing for the General Freight Trucking industry has rebounded and now growing by double digits.

Of course, this will start to be reflected in prices elsewhere as companies feel the pinch from higher delivery costs. This past earnings season we saw packaged food companies warn of higher transportation costs. Expect that to show up in your grocery bill in the near future!

Short-term sentiment was mixed this week

Short-term sentiment was mixed this week. NDR short-term sentiment dropped a bit to 50,

A neutral ready. However the CNN Fear & Greed Index moved from 62 to 71, a negative

suggestive of too much bullishness creeping into the market.

The intermediate-term indicators were inline with last weeks gauges, which were a bit too bullish.

NDR crowd sentiment came in at 67.5%, very close to the dangerous

70% plus area. Investor’s intelligence registered at 55% bulls and 18% bears, which remains unfavorable and indicates that

There are currently too many bullish newsletter writers. Sentiment continues to keep us cautious.

Bear Market? Bull Market? Tortoise Market

By John Del Vecchio

Of all Aesop’s Fables, the race between a slow tortoise and a fast hare might be the most classic.

The hare was so sure he’d win that he took a nap part way through the race. Meanwhile, the tortoise just plodded along.

In the end, the tortoise wins the race. It’s as simple as it is effective, with limitless applications.

The stock market is a pretty good one.

Over time, quality outpaces hype. Specifically, earnings quality. Companies reporting truly sustainable earnings outperform glossy growth stories over longer time frames.

It’s a marathon, not a sprint.

With the stock market at all-time highs, valuations stretched to the maximum, and an overly optimistic investing public, you might think that the hype-fueled stories are winning out.

After all, these are the types of stock stories that are easy to get sucked into.

They’re “revolutionary” and creating new markets. It makes for great conversation at summer barbeques – and you can brag about your recent winnings.

However, the exact opposite is happening. Names with quality balance sheets are winning out.

This is even more surprising given that programs like the Federal Reserve’s quantitative easing (QE) encourage excessive risk taking. That means companies might be rewarded by taking on more leverage to try and juice their returns on invested capital.

That quality is winning out – and by a wide margin right now – suggests some sanity in this record-breaking bull market.

This fact, combined with a recent decline in stock buybacks, means the market is setting itself up for one more big run.

Buybacks have been a key driver of stock performance since the lows in 2009. Recently, they’ve slipped, but patterns suggest they may start to tick back up.

If the blue line above were to follow the normal pattern, we should see an increase in buybacks over the next several weeks. Companies in the best position to buy back their stock have strong balance sheets.

The market is anticipating another boost from stock buybacks.

But not all buybacks are equal.

At Hidden Profits, we love getting paid first by the companies in which we’re invested.

Buybacks are one way to do that, but some companies use these repurchases to reduce share count and boost their earnings per share in low-quality ways. Management may finance the buybacks with debt while the business itself is underperforming.

Make no mistake: This is a way to take the shareholders’ eye off the ball.

Thankfully, investors are catching on by rewarding higher-quality companies.

This is our focus at Hidden Profits. My Forensic Accounting Stock Tracker (FAST) system adjusts for the shenanigans management may play with buybacks.

This fall, at the Irrational Economic Summit, I’ll highlight one of those hidden opportunities that has the ability to return billions of dollars to shareholders. It’s an interesting story about an equally disruptive company. I hope you can join me in Austin, TX, from October 25-27!

Good luck out there,

Originally published in The Rich Investor.

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