The Morning Call
4/10/15
The Market
Technical
The indices
(DJIA 17958, S&P 2091) rose yesterday.
As a result, both the Dow and S&P closed above the lower boundaries
of their very short term uptrends and 100 day moving averages. The S&P finished above its prior high, while
the Dow did not.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(16933-19710, 1980-2955), intermediate term (17026-22160, 1789-2551 and long
term (5369-18860, 797-2126).
Volume rose;
breadth surprisingly declined (see below).
The VIX fell again, ending within its short term trading range, its
intermediate term downtrend, its long term trading range, below its 100 day
moving average and right on the lower boundary of that developing pennant
formation. The lower its price gets, the
more attractive it becomes as hedge.
And this from
Stock Traders; Almanac (short):
The long
Treasury declined. It ended within its
short term trading range, intermediate and long term uptrends and above its 50
day and 100 moving averages.
GLD’s price fell,
ending within its short and intermediate term trading ranges, its long term
downtrend and below its 100 day moving average.
It also broke a developing very short term uptrend, demonstrating just
how tough a time it is having getting any momentum to the upside.
Bottom line: yesterday’s
pin action was a step toward re-establishing the indices’ upside momentum. That said, they both have two overhead
resistance points to overcome before they can even start an assault on the
upper boundaries of their long term uptrends.
Not that they won’t do it. I am
just pointing out the way higher still has its obstacles.
As you know, I believe
that the upper boundaries of the indices long term uptrends represent
formidable resistance.
Fundamental
Headlines
Yesterday’s
US economic data was mixed but more bad than good: weekly jobless claims
increased but less than expected and February wholesale inventories rose more
than anticipated though wholesale sales declined---not a combo that you want.
Overseas,
German March industrial production rose---an offset to the earlier report of
falling factory orders; plus its February exports were better than estimates. In addition, the Greek parliament voted to
investigate a new alternative to weasel on their debt---clearly not a tactic
that will make an agreement for bailout funds easier.
The only other development worth
mentioning is that Jamie Dimon of all people is now out warning of a crash
(medium):
Bottom line: the
data from Europe continues to improve which remains one of the most promising
economic developments in recent weeks.
On the other hand, the Greeks continue to look for a way out of meeting their
debt obligation. That likely raises the
odds a Grexit and with it the unintended consequences which could stop any lift
in the EU economy on a dime.
I vented my
frustration with QE sufficiently yesterday not to do a repeat. However, the premise and tone of Jamie Dimon’s
comments offers too big a temptation not to take another swipe. But I will allow others to speak for me.
The Fed won’t
normalize rates in our lifetime (medium):
The
failures of the Bernanke Fed (medium):
I
can’t emphasize strongly enough that I believe that the key investment strategy
today is to take advantage of the current high prices to sell any stock that
has been a disappointment or no longer fits your investment criteria and to
trim the holding of any stock that has doubled or more in price.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
Thoughts on Investing from Chris Dudko
My mother-in-law is known to my
kids as Doodles. The name’s origin is a long story, but what’s important here
is that she is extremely smart and a very capable businesswoman (she doesn’t go
by “Doodles” professionally). Despite her business expertise, she is always
asking me questions about the stock market that seem to miss the underlying
philosophy behind long-term value investing.
In an effort to not seem like an evasive jerk, I will attempt to explain once and for all what I actually do.
(For the record, Doodles is just a proxy for every social acquaintance who has ever asked me a question about the stock market. If I am addressing a dumb statement, assume that it was an insane distant relative who inspired my commentary. If the question is nuanced and complicated, assume it was the work of Doodles.)
Well, Doodles, we’ve discussed which types of businesses are appropriate for long-term investment (What 'Buy and Hold' Really Means) and had some high-level discussion about attractive circumstances under which we might want to buy these businesses (Forget What You Know About 'Margin of Safety'). Now we need to discuss the softer side of things. There are some unique psychological pitfalls that often go hand-in-hand with value investing. In short, you will probably feel like an idiot a lot of the time. Personally, I have years of experience in the field of idiocy and I can tell you that while you might get a bit desensitized to feeling dumb, it is still never easy.
Stocks Are Not a Conversation Piece
First, you are going to have to adjust to thinking about investing as something other than a social activity. You’ve probably been to a cocktail party where the conversation eventually turned to the stock market. Somebody probably talked about owning one of the stocks that is forever in the news. Maybe it was Facebook (NASDAQ:FB) and how it might or might not have figured out mobile. Maybe it was JC Penney (NYSE:JCP), which might or might not have ruined itself by dropping and then reinstating its discounting philosophy. Or maybe it was even Herbalife (NYSE:HLF), which may or may not be a complete fraud, depending on which Wall Street titan you want to believe.
In all of these cases, nobody is forcing you to own them. Why would you want to fish where everyone else is fishing? If you have some unique insight into one of these stocks, then by all means go for it. Otherwise, doesn’t it seem easier to find a mispricing in a company that most folks have never heard of?
Instead, try looking at a business like Graco (NYSE:GGG), which makes machines that squirt stuff (paint, adhesives, lubricants, etc.). Of course, you have to wait until the stock has been pummeled a bit to buy it (i.e. not right now). Can you ever imagine a scenario where someone at a party would want to talk about a fluid dispensing machine business (aside from a party at Graco HQ)? Yet the company is dominant in its niche and will be able to continue pressing that advantage for years to come.
Get ready, though, because you are going to be sipping your drink in a corner by yourself when the stock market talk begins.
Good Luck Buying at the Bottom, Selling at the Top
Next, you are going to have to get your head around the fact that you are extremely unlikely to buy at the bottom or sell at the top. Remember that when value investing, by definition you are buying a business that is out of favor. Bad earnings reports, cyclical troughs, or splashy scandals (though all with the competitive advantage still intact… very important) can put you in a position to act.
Unfortunately, there is little chance that your judgment that the investment is attractive will coincide exactly with the rest of the market changing its opinion in the same direction. Instead, you are probably going to appear to be pretty heavily out of step with other investors. Someone looking at your portfolio might even wince at all of the supposed “dogs” tying up your capital.
It may take a year or more for the market to come around to your way of thinking. Then just as the market starts to really agree with you, the stock is going to hit your target for intrinsic value and you are going to sell it. Again, the market isn’t going to change its opinion exactly when you do. Again, you are going to feel like an idiot as you miss the move from “fairly valued” to “overvalued.” But let’s be honest: How are you going to tell when “overvalued” is “too overvalued”?
This happened to me with PetSmart (NASDAQ:PETM). A few years ago, I bought it in the mid $20s, expecting it was worth somewhere in the mid-$40s. The stock lingered for six months or so while the S&P 500 (INDEXSP: INX) went up more than 20% (I was an idiot). Then the stock more than caught up, hitting my mid-$40s target. I sold (I was a genius). The stock is now in the $60s (I am an idiot).
Contrarianism for a Reason, Please
As a fundamental value investor, you will likely be buying businesses that most people don’t care about at a time that, even if they did care about the underlying business a little, they wouldn’t be interested anyway because the near-term looks so hopeless. It can be psychologically hard to feel like you are not part of the club and you will be in danger of becoming a contrarian for contrarianism’s sake. You might dig in your heels and use your portfolio as a means to prove that you are more right than your neighbor. Inappropriate venue, Doodles!
To guard against this, your most important weapon is simply being aware that it might happen. Then you are going to have to practice doing your own homework and following pundits a little less often (at the very least, don’t follow them blindly). You are going to have to come up with intrinsic value targets based on conservative scenarios and try to separate your emotions from your stocks. Realize that just by agreeing to play, you are admitting that you are going to be wrong in some way. Embrace your wrongness!
Most importantly, when the party conversation turns to stocks, tactfully steer your fellow revelers to the subject of your awesome grandkids.
In an effort to not seem like an evasive jerk, I will attempt to explain once and for all what I actually do.
(For the record, Doodles is just a proxy for every social acquaintance who has ever asked me a question about the stock market. If I am addressing a dumb statement, assume that it was an insane distant relative who inspired my commentary. If the question is nuanced and complicated, assume it was the work of Doodles.)
Well, Doodles, we’ve discussed which types of businesses are appropriate for long-term investment (What 'Buy and Hold' Really Means) and had some high-level discussion about attractive circumstances under which we might want to buy these businesses (Forget What You Know About 'Margin of Safety'). Now we need to discuss the softer side of things. There are some unique psychological pitfalls that often go hand-in-hand with value investing. In short, you will probably feel like an idiot a lot of the time. Personally, I have years of experience in the field of idiocy and I can tell you that while you might get a bit desensitized to feeling dumb, it is still never easy.
Stocks Are Not a Conversation Piece
First, you are going to have to adjust to thinking about investing as something other than a social activity. You’ve probably been to a cocktail party where the conversation eventually turned to the stock market. Somebody probably talked about owning one of the stocks that is forever in the news. Maybe it was Facebook (NASDAQ:FB) and how it might or might not have figured out mobile. Maybe it was JC Penney (NYSE:JCP), which might or might not have ruined itself by dropping and then reinstating its discounting philosophy. Or maybe it was even Herbalife (NYSE:HLF), which may or may not be a complete fraud, depending on which Wall Street titan you want to believe.
In all of these cases, nobody is forcing you to own them. Why would you want to fish where everyone else is fishing? If you have some unique insight into one of these stocks, then by all means go for it. Otherwise, doesn’t it seem easier to find a mispricing in a company that most folks have never heard of?
Instead, try looking at a business like Graco (NYSE:GGG), which makes machines that squirt stuff (paint, adhesives, lubricants, etc.). Of course, you have to wait until the stock has been pummeled a bit to buy it (i.e. not right now). Can you ever imagine a scenario where someone at a party would want to talk about a fluid dispensing machine business (aside from a party at Graco HQ)? Yet the company is dominant in its niche and will be able to continue pressing that advantage for years to come.
Get ready, though, because you are going to be sipping your drink in a corner by yourself when the stock market talk begins.
Good Luck Buying at the Bottom, Selling at the Top
Next, you are going to have to get your head around the fact that you are extremely unlikely to buy at the bottom or sell at the top. Remember that when value investing, by definition you are buying a business that is out of favor. Bad earnings reports, cyclical troughs, or splashy scandals (though all with the competitive advantage still intact… very important) can put you in a position to act.
Unfortunately, there is little chance that your judgment that the investment is attractive will coincide exactly with the rest of the market changing its opinion in the same direction. Instead, you are probably going to appear to be pretty heavily out of step with other investors. Someone looking at your portfolio might even wince at all of the supposed “dogs” tying up your capital.
It may take a year or more for the market to come around to your way of thinking. Then just as the market starts to really agree with you, the stock is going to hit your target for intrinsic value and you are going to sell it. Again, the market isn’t going to change its opinion exactly when you do. Again, you are going to feel like an idiot as you miss the move from “fairly valued” to “overvalued.” But let’s be honest: How are you going to tell when “overvalued” is “too overvalued”?
This happened to me with PetSmart (NASDAQ:PETM). A few years ago, I bought it in the mid $20s, expecting it was worth somewhere in the mid-$40s. The stock lingered for six months or so while the S&P 500 (INDEXSP: INX) went up more than 20% (I was an idiot). Then the stock more than caught up, hitting my mid-$40s target. I sold (I was a genius). The stock is now in the $60s (I am an idiot).
Contrarianism for a Reason, Please
As a fundamental value investor, you will likely be buying businesses that most people don’t care about at a time that, even if they did care about the underlying business a little, they wouldn’t be interested anyway because the near-term looks so hopeless. It can be psychologically hard to feel like you are not part of the club and you will be in danger of becoming a contrarian for contrarianism’s sake. You might dig in your heels and use your portfolio as a means to prove that you are more right than your neighbor. Inappropriate venue, Doodles!
To guard against this, your most important weapon is simply being aware that it might happen. Then you are going to have to practice doing your own homework and following pundits a little less often (at the very least, don’t follow them blindly). You are going to have to come up with intrinsic value targets based on conservative scenarios and try to separate your emotions from your stocks. Realize that just by agreeing to play, you are admitting that you are going to be wrong in some way. Embrace your wrongness!
Most importantly, when the party conversation turns to stocks, tactfully steer your fellow revelers to the subject of your awesome grandkids.
News on Stocks in Our Portfolios
Economics
This Week’s Data
February
wholesale inventories rose 0.3% versus expectations of 0.2% increase;
unfortunately wholesale sales declined 0.2%.
The
Fed’s inflation targeting just got another lift as March export prices fell
0.4% and import prices declined 0.2%.
Maybe if the Fed doubles down on QE they can create the greatest
deflation in history.
Other
Politics
Domestic
International War Against Radical Islam
The
latest on the military/diplomatic nightmare in Yemen (medium):
Chaos in Damascus (medium):
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