The Morning Call
2/13/15
I have a number of family
obligations that I have to attend to this weekend; so no Closing Bell. But I have made a brief summary of the points
usually covered in that note.
The Market
Technical
The indices
(DJIA 17972, S&P 2088) lifted nicely yesterday, ending within uptrends
across all timeframes: short term (16588-19364, 1929-2910), intermediate term
(16629-21784, 1753-2467) and long term (5369-18860, 797-2093). The S&P and NASDAQ closed at all-time
highs while the Dow fell short of its mid-December peak (19989). Momentum continues to shift to the upside.
Volume
rose; breadth improved. The VIX declined
10%, finishing within its short term trading range, its intermediate term
downtrend and below its 50 day moving average.
The drop broke the lower boundary of the developing pennant
formation---which if confirmed (at the close today) would be a plus for stocks.
The
latest from Stock Traders’ Almanac: the
pin action around President’s Day (short):
The
long Treasury fell again, but not by much.
It remains within short term, intermediate term and long term uptrends
and above its 50 day moving average. I
continue look for price stability; but it is not happening.
GLD’s
chart gets sicker by the day. While it
did finish within a short term uptrend and an intermediate term trading range,
it is back below its 50 day moving average.
My finger is on the trigger.
Bottom
line: investors’ mood seemed to improve
with better geopolitical events out of Ukraine and the EU/Greek
discussions. Momentum and breadth were
better, though our internal indicator continues to suggest that all is not
well. The Averages are now out of sync
with the S&P hitting at an all-time while the Dow trailed. However, it is well within striking distance;
so this discrepancy can be overcome very quickly. If that occurs, then the upper boundaries of
the indices long term uptrends (18860/2093) will again likely prove difficult
resistance.
The TLT fell
once again, dispelling the notion that it had found some stability in
yesterday’s pin action. My anxiety grows daily in its absence. GLD is a short
hair away from history.
Fundamental
Headlines
Wednesday’s
news flow repeated itself yesterday---poor economic data but positive
geopolitical events. US economic data
included higher than expected weekly jobless claims, really poor January retail
sales and a stunning decline in December business sales. Clearly more cognitive dissonance for our
forecast.
Just
how bad is the current data flow (short):
Overseas,
Sweden lowered its central bank lending rate (more ‘beggar thy neighbor’) and
the third largest Austrian bank announced balance sheet problems resulting from
the revaluation of the Swiss franc---neither likely to be a plus for global
economic growth. On the other hand,
December Japanese machinery orders were quite strong. As always, I will take a positive anywhere I
can get it.
***overnight,
a pleasant surprise---in the fourth quarter, EU GDP grew 0.3%, Germany 0.7% and
France 0.1%. Australia spoiled the party
by reporting the highest unemployment rate in 13 years.
The
good news was that:
(1)
Merkel seems to have defused the Ukrainian turmoil, [a]
providing enhanced autonomy for eastern Ukraine {and Russia’s land bridge to
Crimea}, [b] gaining IMF funding for Ukraine to help with its financial
problems and [c] end running the US dangerous drive for more weapons for
Ukraine and more Russian sanctions. If
this agreement materializes and holds, it would remove a big potential negative
from the global economy as well as investor psychology.
The latest from
Ukraine---it is not the terms (vague), it is the will to implement (medium):
And the US
appears to be walking back on Russian sanctions. We need Putin as a special advisor for US foreign policy
(medium):
(2)
contrary to the Wednesday night rumors of an ‘agreement
in principle’ between the EU and Greece over the resolution of Greece’s
financial problems, it was still clear by Thursday morning that there was
none. Though the parties were engaging
in good faith negotiations. To be sure,
that doesn’t mean that all parties to the discussion are being polite or that a
satisfactory solution can be achieved.
But hope springs eternal; and until the fat lady sings, investors seem
intent on accepting the most upbeat interpretation of ongoing events.
The next official meeting date is Monday 2/16 [our
Presidents’ Day holiday] and that should provide some more detail on the
substance and flexibility of the EU/Greek positions. I caution again about getting too jiggy over
a workable solution being achieved before it actually is.
A less optimistic view (medium):
Germany’s tough choices (medium):
But they are apparently getting
closer (short):
The
latest statement from overnight (short):
Bottom
line: both the US and international
economic data flow continue to point to some softening. However, we can’t dismiss this morning’s
upbeat EU GDP news. This reinforces the recent
change in direction of EU stats towards less bad news; and that is good
news. Like the increased sloppiness in
US numbers, the question is, are the improving EU data noise or a sign of a
shift in direction? Too soon to know; but clearly, this just adds more
uncertainty to our outlook. At the
moment, I am making no revisions to our forecast. I remain hopeful that the US is experiencing
just another one of those periodic hiccups that it has in the past; but the
added burden of a currency devaluation arms race and poor international stats are
making (despite the ray of hope in Europe) that position increasingly difficult to
sustain.
On the other
hand, the two potential nuclear explosions that could derail the global (Ukraine
and Greece) economy appear more likely to be resolved satisfactorily. And that could remove major potential
negatives.
Still, a
sluggish US economy that seems to be underachieving with increased vigor,
hampered by misguided central bank monetary policies and a slowing global
economy is not the best prescription for higher stock valuations when those
valuations are already at or near historic highs.
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.
Equity
valuations not cheap (medium):
Great
7 minute video starring Jim Bianco on stock valuations:
Thoughts on Investing from Josh Brown
A lot of
new investors assume that managing money is like golf – where Tiger Woods whips
the amateur who steps out on the course with him 100 times out of 100.
But it’s
not like that at all.
In
investing, unlike golf, the amateur can crush the pro for an appreciable period
of time. That’s one of the most wonderful things about the game and one of
the most frustrating things about the game, all at once.
In
addition, the professional golfer gets to keep his trophies and wins regardless
of the subsequent decline in his skills. In contrast, the professional
investor’s average or below-average years will dilute the benefit of his
“winning” years as mean reversion knocks his lifetime track record back down to
earth. Peter Lynch must have known this when he retired in 1990 at the top of
his game – he left the magic intact before reality and probability could strip
him of it.
Randomness
and Time team up to take almost all of us down, one way or the other.
Here are
three charts from a recent presentation from Towers Watson on equity investing
that show this phenomenon graphically (emphasis mine):
Past performance in particular can sound a plausible basis
upon which to form an opinion. This is because we are programmed to recognize
patterns in nature and to extrapolate what we believe we have observed.
However, studies
have shown that there is a high degree of randomness in relative investment
returns and that to be statistically significant, a performance record should
be intact for nearly 15 years. Few investors meet this criterion.
Fewer still meet this requirement and have not experienced other changes which
have a direct impact on future performance, such as staff turnover or growth in
assets under management which can affect portfolio construction. Consequently, we strongly believe that –
considered in isolation – past performance is a poor basis for assessing
investment skill.
Josh here
– in other words…
Excess
returns can show up anywhere, in any portfolio, and are randomly achieved in
aggregate:
Any
schmuck can hang with the pros, for a long time, and beat a skilled investor
for years before his information disadvantage becomes apparent. And the skilled
managers are very capable of underperformance as well, Towers Watson notes that
even Warren Buffett recorded two three-year rolling periods of negative
relative-performance, despite his 45-year marathon track record of outperformance:
And
finally, we are all, in the end, victims of our own success. Identifying a
manager with durable skill and a sustainable investing process only assures one
thing – that others will discover that manager as well and pour their dollars
in. And then, like hearing your favorite indie band on Top 40 Radio, you’re
totally grossed out and uncomfortable. And with good reason – your alpha is now
dust in the wind. Nothing ruins an outperforming investor or an indie rock band
like mass appeal:
After seeing these charts and this evidence of futility,
you might be asking yourself the following: If anyone can win and anyone can
lose at any time in the markets, why
bother trying at all?
Fair question. But I submit to you that successful
investing is a lifetime
pursuit, and in the end, it’s the pursuit itself that offers the rewards
along the way. The destination was never the thing – most of us aren’t meant to
end up as Peter Lynch or Warren Buffett. No, it was what you learned on the way
there that made all the difference. As the poet C.P. Cavafy reminds us:
Ithaka gave you the marvelous journey.
Without her you would not have set out.
Without her you would not have set out.
A lifetime
of outperforming the markets is unattainable for most. But a lifetime of
self-improvement and the acquisition of skill and knowledge – that’s available
for anyone who’s willing to go for it.
News on Stocks in Our Portfolios
o
V.F. (NYSE:VFC):
Q4 EPS of $0.98 in-line.
o
Revenue of $3.58B (+8.8% Y/Y) misses
by $10M.
Economics
This Week’s Data
December
business inventories rose 0.1% versus expectations of up 0.2%; business sales
plunged 0.9%.
Other
The
burden of US government finances (medium and a must read):
Fed
or fundamentals (short):
Politics
Domestic
GOP backtracks
on immigration (medium):
International War Against Radical Islam
Closing Bell Notes
1. The
trend in US economic numbers continues to be disappointing.
2. International
economic numbers were mixed this week with some good numbers out of Europe. The question is, is this noise or a change in
trend?
3. Earnings
season: what started off with potential
negative implications fizzled somewhat in the end. To be sure, fourth quarter final profits will
be less than anticipated but they will be much better than I thought two weeks
ago. The question is still guidance and
we won’t know that for another three months.
For the moment, this is a byline.
4. Oil:
it is still bouncing around in price and there is still no consensus on whether
that is good or bad for the economy/stocks.
5. Vulnerable
banking system: the banksters are back in the headline with a spate of stories
on investigations and subpoenas over misdeeds. In addition, Austria’s third
largest bank is having balance sheet problems resulting from the Swiss franc
revaluation. However, a resolution of the Greek dilemma will ease potential
pressure on balance sheets.
6. Central
bank money printing: Sweden climbed on the money for nothing bandwagon this
week; however, the main news flow focused on the extent of economic weakness in
China and what that might mean for monetary/currency policies. A weakening yuan will not be great for trade
or deflation pressures.
International ramifications of EU QE
(medium):
7. Geopolitical
risks: At the moment, the Ukrainian conflict seems to have been defused but at
the cost of an implicit Russian success.
That is still a plus. Greece is
still talking.
Bottom line:
the trend in the current data flow suggests the risk of slower than expected
growth in the US is mounting, though I am not yet making changes in our
forecast. Better reported profits
prevented this development from becoming worse; and the improved stats out of
Europe raised hope that our ‘muddle through’ scenario is alive and well. Nonetheless, problems exist outside of Europe
leaving the global economy as the biggest negative to our outlook. The impact of lower oil prices still aren’t
apparent except in the oil patch.
The
banksters continue to do their part to weaken investors’ confidence in their
financial viability as the central bankers step up their game of ‘beggar thy
neighbor’.
Resolution
in Ukraine removes a geopolitical risk; we still know nothing on Greece except
that both sides are still talking. This
is not over but the tone has improved.
The
Market technicals improved this week.
The Averages appear to be preparing for another assault on the upper
boundaries of their long term uptrends.
While
the resolution of potentially traumatic geopolitical events reduces the risk of
an air pocket in equity prices, stocks are still way overvalued by virtually
every measure. But history suggests that
any correction will come as a result of some unforeseen event which by
definition is unforeseen.
Take
profits where appropriate, get rid of anything that resembles a loser and learn
to love cash.
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