The Morning Call
3/20/15
The Market
Technical
Yesterday the
indices (DJIA 17959, S&P 2089) could not manage any follow through from
Wednesday’s fantasy Fed day, maintaining the recent pattern of one day up/one
day down. They ended within uptrends
across all timeframes: short term (16802-19573, 1960-2941), intermediate term
(16883-22034, 1775-2924) and long term (5369-18860, 797-2116) and above their
50 day moving averages.
Volume
fell; breadth was poor. The VIX was up slightly, closing within its short term
trading range and its intermediate term downtrend, below its 50 day moving
average and near the lower boundary of a developing pennant formation.
The
long Treasury gave back some of Wednesday’s gain, but remained well within its short
term trading range, above its 50 day moving average and within its intermediate
and long term uptrends.
GLD
fell, closing within its short and intermediate term trading ranges, a very
short term downtrend and below its 50 day moving average.
Bottom
line: the stocks continued their schizophrenic
behavior---unable to generate any follow through from Wednesday’s Fed surprise. It raises the question as to whether the
theme underlying the stock price advance of the last four years (i.e. Fed
easing) may be wearing a little thin? Asked
perhaps in a different way, is the Fed losing control of the market? That is not a statement, it is a question. But one that we need to pay attention to
until the pin action answers it. An
initial signal could be the advance (or lack thereof) on the upper boundaries
of the Averages long term uptrends and whether or not it achieves success.
Like stocks, much of Wednesday’s gains in the
long bond and gold reversed yesterday. The
difference being that TLT looks like it may have stabilized while the GLD chart
is a piece of crap.
The
‘worst six months’ of a pre-election year can be troublesome (short):
Fundamental
Headlines
Another
day, another batch of lousy economic data: the Philly Fed manufacturing index
was short of expectations as were the leading economic indicators. I keep waiting for one of the key economic measures
to give a sign of life and it is just not happening. I will post revisions to our forecast
tomorrow.
No
economic news from overseas.
***overnight,
the Greeks promised to speed up its economic reform plan (they better because
they are out of money by the end of this month) and the EU voted to maintain
sanctions against Russia.
The
yakking over the more dovish statement from the Fed consumed most of the airtime
and ink yesterday. I have little to add
to my comments in Thursday’s Morning Call except (1) to observe that those guys
thinking that the more dovish Fed tone means that a rate hike is being delayed
from June to September are, in my opinion, whistling passed the grave yard. If I am correct about the economy, there will
be no rate hike anytime soon---unless Yellen has a death wish and (2) to
reiterate the above comment that yesterday’s pin action in the dollar, oil,
stocks, bonds and commodities suggests that the Fed is losing control of the
Markets [investors’ confidence in its strategy]. As you know, I have believed that sooner or
later, investors would have an ‘emperor’s new clothes’ moment with respect to
the efficacy of Fed policy. Whether that
is occurring now, only time will tell.
Where QE has
gotten us (medium and must read):
Japanese
QE continues to pile into stock market (medium):
Bottom line: as I
said yesterday, the Fed made the least bad choice. So in that regard, I have to give it
credit. That said, by its own words, I am
assuming that it has seen the handwriting on the wall, i.e. the economy is not
fine. Unfortunately, the lack of action (not
raising rates) only contributes to the global competitive devaluation race (makes
the dollar weaker) which is unlikely to have a positive outcome. In addition, yesterday’s quick reversal in
most markets may be the first sign that the Markets are going to start paying
more attention to the underlying economic fundamentals and less to the notion
that free money will forever be a miracle drug.
In the meantime,
the fundamentals are getting worse, both here and abroad and equity valuations
are in nose bleed territory. Something will
give sooner or later.
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.
Ten
investment quotes to live by (medium and today’s must read):
Thoughts on Investing from Above the
Market
So what are investors’ biggest
biases? A set of reminders follow.Confirmation bias means that instead of the impartial judges of information that we like to think we are, we’re much more like attorneys looking for any argument we think we can exploit without much regard for whether it’s true. It’s why Fox News and MSNBC viewers tend to see each other as some version of stupid, delusional and evil, no matter the situation or circumstances.
Optimism bias means that one’s subjective confidence in his judgment is reliably greater than his objective accuracy – we think we’re right far more often than we are. It’s why (together with confirmation bias) Little League bleachers all over America are full of parents just sure that Johnny-boy is a future Major Leaguer (or a least a prospective college scholarship winner — all evidence to the contrary) and why venture capitalists are wildly overconfident in their estimations of how likely their potential ventures are to succeed.
Our self-serving bias pushes us to see the world such that the good stuff that happens is my doing (like the coach who says “We had a great week of practice, worked hard and executed today”) while the bad stuff is always someone else’s fault (“It just wasn’t our night” or “We would have won if the refereeing hadn’t been so awful” or “We couldn’t have foreseen that 100-year flood market crisis”).
Our loss aversion means that we feel losses between two and two-and-a-half times as strongly as gains. It favors inaction over action and the status quo over any alternative. It’s one reason why football coaches are so frustratingly cautious and “go for it” far less often than the data says they should.
The planning fallacy is our tendency to underestimate the time, costs, and risks of future actions and at the same time to overestimate the benefits thereof. It’s why we overrate our own capacities and exaggerate our abilities to shape the future. It’s one reason why every building project tends to have cost overruns and why my week-end chores take at least twice as long as I expect and require three trips to Home Depot.
Intuitively, we think the more choices we have the better. However, the sad truth is that too many choices can lead to decision paralysis due to information overload. It’s why participation in 401(k) plans among employees decreases as the number of investable funds offered increases and why New Jersey diner menus (this one, for example) can be so frustrating. It’s also why we so readily rely upon heuristics (rules of thumb) rather than getting down and dirty with the data.
We routinely run in herds — large or small, bullish or bearish. Investment institutions herd even more than individuals in that investments chosen by one institution predict the investment choices of other institutions by a remarkable degree. It’s why market bubbles occur – in tulips, baseball cards, internet stocks and real estate. It’s why the NFL is a copycat league.
We inherently prefer narrative to data — often to the detriment of our understanding – even though stories are crucial to how we make sense of reality. That’s why ridiculous conspiracy theories abound, even among otherwise smart and intelligent people, without a bit of good evidence. It’s also why we will tend to distrust data unless and until a good story is attached to it.
We are all prone to recency bias, meaning that we tend to extrapolate recent events into the future indefinitely. That’s why most NFL pre-season play-off predictions look like the previous year’s play-off pool even though there is typically a 50 percent change-over in play-off teams year-to-year. And as reported by Bespoke, Bloomberg surveys market strategists on a weekly basis and asks for their recommended portfolio weightings of stocks, bonds and cash. Even though they are the supposed “experts,” their collective views are a great contra-indicator. The peak recommended stock weighting came just after the peak of the internet bubble in early 2001 while the lowest recommended weighting came just after the lows of the financial crisis. That’s recency bias.
Again, the existence of these behavioral and cognitive deficiencies is difficult enough. That we tend to think they’re other people’s problems and not our own – the bias blind spot – is the icing on the cake. As I have tried to point out repeatedly, risk is risky. Because of our behavioral biases and our tendency to think they don’t apply to us, the odds are overwhelming that we’re going to miss or ignore many of the risks that plague us. The greatest risk of all is staring us in the face when we look into the mirror. At least, the greatest risk of all is staring you in the face when you look into the mirror.
News on Stocks in Our Portfolios
·
Revenue of $1.28B (-1.5%
Y/Y) misses by $30M.
·
Revenue of $7.46B (+7.0%
Y/Y) misses by $160M.
Economics
This Week’s Data
The
March Philadelphia Fed manufacturing index came in at 5.0 versus expectations
of 7.0.
Some more ‘in the weeds’
analysis (short):
The
February leading economic indicators rose 0.2% versus estimates of up 0.3%.
Other
More
countries join China’s regional bank (medium):
Politics
Domestic
International War Against Radical Islam
Terms
of the nuke deal with Iran have been leaked (short):
More from Syria (medium):
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