The Morning Call
2/11/15
The Market
Technical
The indices
(DJIA 17868, S&P 2068) bounced yesterday, ending within uptrends across all
timeframes: short term (16571-19347, 1925-2906), intermediate term (16601-21756,
1750-2464) and long term (5369-18860, 783-2083). Both (along with the NASDAQ) finished above
their 50 day moving average and the lower boundary of the former downtrend off
its mid-December high, providing some heft to the current move up. Nonetheless,
the upper boundaries of the mid-December trading highs (17989/2080), still loom
ahead.
Volume
rose, again countering the recent up volume on down price day trend and vice
versa; breadth improved. The VIX fell, closing
within its short term trading range and its intermediate term downtrend but
back below its 50 day moving average. The
lower close did nothing to disturb the developing pennant formation.
I
ran a check on our internal indicator with the following results: in a 141
stock Universe, 47 stocks are either at, near or making new highs (above current
comparable level of the S&P), 61 stocks are in confirmed downtrends and 33
stocks are not in confirmed downtrends but have continued to make successive lower
highs (the difference here is that these stocks have broken above the upper
boundary of the downtrend but have not returned to the level of the prior lower
high).
The
long Treasury dropped again; it remains within short term, intermediate term
and long term uptrends and above its 50 day moving average. But my anxiety grows daily as it can’t find a
stabilizing point.
GLD
continues its disappointing pin action.
It did finish within a short term uptrend, an intermediate term trading
range and its 50 day moving average; but still could not regain the initial Stop
Loss level.
Bottom
line: yesterday’s rally was focused on the
Greek situation, ignoring a lot of other bad news. That seems reasonable, since a resolution (or
not) to Greek finances is the most likely near term event that could significantly
impact EU banks. Certainly, the
technical performance of stocks provided a lift and suggested more upside to
come. On the other hand, the recent volatility
has made one day assessments virtually worthless. In addition, the latest reading from our
internal indicator does not inspire optimism.
I still think that the
boundaries of the mid December trading range are the levels to watch.
The TLT has
joined GLD in the ‘nerve wracking’ column; but our Portfolios are holding those
positions.
Fundamental
Headlines
Yesterday’s
US economic news continued its disappointing trend: weekly retail sales slowed,
the January small business optimism index came in lower than anticipated and
while December wholesale inventories rose slightly, sales were declined. This is just the start of the week; but
another two weeks of poor numbers like we have just experienced, the flashing
yellow light is likely to turn to a flashing red one. In addition, oil was down which has generally
been bad news for stock prices of late.
Must
watch 2 minutes of truth:
The
Gang of Thieves got another punch in the nose, as the NY Department in
Financial Services subpoenaed Goldman, Credit Suisse and Paribas for more information
on their foreign exchange trading.
Overseas,
Chinese CPI and PPI were well below estimates (more deflation?) and UK
manufacturing and industrial production missed forecasts on the downside.
China is the
epicenter of global deflation (short):
None
of this had much impact as rumors/statements flooded the airwaves all day long regarding
the behind the scenes negotiations on the Greek bail out. While in total I thought that news flow was
not all that positive, it happened that the initial headline was a plus,
suggesting that the EU was willing to make some concessions; and that seemed to
set the tone for the day. Of course, if
that occurs then everyone will have dodged a bullet; so I don’t want to downplay
how affirmative that would be. My point
is that I wasn’t quite as jiggy with the headlines as investors in general.
The
latest on Greece (medium):
The
ultimate cost of Grexit (medium):
***overnight,
Putin to meet with France, Germany and Ukraine in attempt at ceasefire (short):
Bottom
line: Greece continues to hold global
investor attention, especially in front of a series meeting among officials
beginning today. I am a little
befuddled by a couple of things: (1) I don’t think that the headlines read
nearly as positively as the Market seemed to indicate and (2) given the magnitude
of the consequences of Greece/EU not working a settlement along with the lofty
valuation of stocks at current levels, I think assuming equity risk ahead of
the upcoming events is a prescription for disaster---not that the worst case
will occur but the losses one could sustain if it does. The
sidelines are the best place for me.
The schedule for
today’s along with other upcoming meetings (short and must read):
And don’t forget
the ‘other’ meeting taking place simultaneously between Russia and Greece
(short and a must read):
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.
The
latest from Alhambra Ptrs (medium):
Investing for Survival from William
Bernstein
William Bernstein
continues to put out thought-provoking, no-nonsense books on investing. Rational Expectations: Asset Allocation
for Investing Adults is
his latest and it didn’t disappoint.
I just love how straightforward Bernstein is with his
approach to investing and portfolio management. No punches are pulled, no silly
theories are spared.
His message always comes across as the old adage that
investing can be extremely simple yet maddeningly difficult at the same time.
While he uses plenty of
data to back up his claims, Bernstein also focuses on the important behavioral
issues that are the real problem for most investors. In Rational Expectations,
he broadly defines three groups of investors by their behavior:
Group 1: The average small
investor, who does not have a coherent asset-allocation strategy and who owns a chaotic mix of mutual funds and/or individual securities,
often recommended to him or her by a broker or advisor. He or she tends to buy
near bull market peaks and sell near bear market troughs.
Group 2: The more sophisticated
investor, who
does have a reasonable-seeming asset-allocation strategy and who will buy when
prices fall a bit (“buying the dips”), but who falls victim to the aircraft
simulator/actual crash paradigm, loses his or her nerve, and bails when real
trouble roils the markets. You may not think you belong in this group, but
unless you’ve tested yourself and passed during the 2008–2009 bear market, you
really can’t tell.
Group 3: Those who do have a
coherent strategy and can stick to it. Three things separate this group from Group 2: first, a realistic
appraisal of their true, under-fire risk tolerance; second, an allocation to
risky assets low enough, or a savings rate high enough, to allow them to
financially and emotionally weather a severe downturn; and third, an
appreciation of market history, particularly the carnage inflicted by the
1929–1932 bear market. In other words, this elite group possesses not only
patience, cash, and courage, but also the historical knowledge informing them that
at several points in their investing career, all three will prove necessary.
Finally, they have the foresight to plan for those eventualities.
Group 1 usually finds out the hard way that financial
markets can be unforgiving. These are most likely the people that have
completely given up on investing at his point after blow-ups from the tech bust
or the great financial crisis. They assume the markets are rigged or function
like a casino. Most people in this group try to make money through lottery ticket-style
speculation. It never ends well and the psychological scars can endure for a
very long time.
For the more sophisticated investors, Group 2 probably
dwarfs Group 3 by a wide margin even though many would have a hard time
admitting this fact. It’s easy to estimate your tolerance for risk and assume
you will be able to rebalance and buy when everyone else is selling.
Unfortunately, a crash is much different than a
correction and investors in this category tend to find out the hard way. This
group capitulates by selling out of stocks after they have dropped by a
substantial amount or ramping up their equity exposure after a large run-up in
prices.
It’s easy to be a long-term investor during a bull
market. Everyone’s making money and it feels like you can do no wrong.
It’s when things don’t go as planned that this group loses control.
Bernstein says as much in the book when he observes, “If
you began your investing journey after 2009 or haven’t yet started, then you’re
an investment virgin.”
Your willingness to take risk will change much more often
with the movements of the markets than your actual ability or need to take
risk. Therefore a sensible long-term asset allocation is paramount to
your success as an investor. Typically your broader asset allocation shouldn’t
change all that much until your circumstances change (or when you need to
rebalance).
It will feel like you should change your allocation
weights between stocks, bonds and cash based on the most recent market
performance, but most of the time it’s just performance chasing.
You can tilt your portfolio to certain sub-strategies
within asset classes, but figuring out the mix between risky and safer
investments is one of the keys to sticking with your investment plan.
That means you need an asset allocation that either
includes investments such as high quality bonds to be able to rebalance when
stocks fall or enough human capital in the form of savings that can be used to
deploy at lower prices.
This is an important,
often overlooked point, which Bernstein brings up in his Group 3 description
that can play a huge role in determining your risk tolerance – having a high enough savings rate.
It’s not enough to say you will buy when fear is high and
stock prices are low. You also have to have the necessary funds available to
make purchases during times of maximum pessimism.
How you feel right now about the markets and your own
portfolio probably has a lot to do with your investment stance over the past
five years. If you have a healthy allocation to stocks, you feel like a genius.
If you’ve been sitting in cash after selling out a few years ago you don’t
feel so great.
It’s important to remember both your feelings during the
crash and those in the subsequent recovery to new all-time highs. To be
included in Group 3 you have to find a way to balance the emotional highs and
lows to find your happy place in the middle.
News on Stocks in Our Portfolios
·
Revenue of $19.95B (-0.8%
Y/Y) beats by $290M.
·
Lorillard (NYSE:LO): Q4 EPS of $0.93 in-line.
·
Revenue of $1.28B (+2.4%
Y/Y) misses by $10M.
Economics
This Week’s Data
Redbook
Research reported weekly retail chain store sales rose 2.1% year over year but
down from last week’s number of +3.8%.
January
small business optimism index came in at 97.9 versus expectations of 101.0.
December
wholesale inventories increased 0.1%; but wholesale sales fell 0.3%.
Weekly
mortgage applications fell 0.9%, while purchase applications were down 0.7%.
Other
The
NY Fed consumer survey (short and a must read):
An
accidental currency war---Mohamed El Erian (medium):
Bank
of America stumped: why lower gas prices haven’t led to increased discretionary
spending (medium):
Politics
Domestic
Latest on the
IRS stalled criminal investigation (short):
International War against Radical Islam
US
Yemen embassy closing completely (short):
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