The Morning Call
3/18/15
The Market
Technical
Yesterday the
indices (DJIA 17849, S&P 2074) followed its recent pattern of one day
up/one day down---it was ‘downs’ turn. However,
they ended within uptrends across all timeframes: short term (16783-19554, 1958-2939),
intermediate term (16864-22015, 1775-2924) and long term (5369-18860,
797-2112). They both closed above their
50 day moving averages and the upper boundary of a developing very short term
downtrend---which negates that trend.
Volume
fell; breadth deteriorated. The VIX rose
slightly, closing within its short term trading range and its intermediate term
downtrend, below its 50 day moving average and the upper boundary of a
developing pennant formation.
Options market signaling
problems in the equity market (medium):
The
long Treasury moved higher, finishing within its short term trading range,
above its 50 day moving average but within its intermediate and long term
uptrends.
GLD
fell again, ending very close to the lower boundary of its short and
intermediate term trading ranges, within a very short term downtrend and below
its 50 day moving average.
Bottom
line: while the Averages confirmed the
break of that very short term downtrend, it was with little authority. Still it opens the door for another assault
on the upper boundaries of their long term uptrends. I continue to believe that those boundaries
will offer too much resistance for any meaningful break to the upside. In addition, if the technical internals remain
poor, they should sap any energy for a move to higher levels.
TLT continues to attempt to stabilize; but it
is too soon to hope that it will be successful. I have little hope for GLD, at least in the
short term.
More
on valuation (short):
How
do stocks perform after a six year run? (short):
A
disappointing ‘Fed day’ isn’t all bad (short):
Fundamental
Headlines
US economic news yesterday was sort of mixed:
February housing starts cratered though permits were up modestly; month to date
retail chain store sales rose fractionally.
(1) the latter is a secondary indicator, (2) housing starts are very
important, though (3) permits were something of an offset. Overall, I weigh this to the negative side.
Overseas, the
Bank of Japan restated its intent to pursue QE with vigor and the German index
of investor confidence rose but considerably less than anticipated. I rate the former as by far the more
important; and, as you know, I don’t view QE in any form from any participant
as a plus.
***overnight,
February Japanese exports were stronger than anticipated; UK unemployment was
at the lowest level in six years.
In other
international news, Greece is scheduled to meet with the ECB on Friday which is
likely its last chance at coming up with a bail out agreement before its debts
start coming due.
Greece in its eleventh
hour (medium):
And
it turns to Russia (medium):
Greek
optimist throws in the towel (short):
Greece
isn’t the only one protesting austerity (short):
Of
course, most of investor attention remains on the outcome of today’s FOMC
meeting, in particular, on a single word---‘patient’. That said, when I first heard the lousy
housing starts number yesterday, I assumed that the Market would again
interpret it as a reason to believe that the Fed would remain ‘patient’
(easy). The fact that it didn’t along
with the incredible volatility of late raises a question in my mind as to the
exact Market reaction to the Fed statement---whatever it says.
There
are zero reasons for the Fed to raise rates (medium):
But
they will anyway (medium):
Volatility
and QE and what comes next (medium and today’s must read):
Economic
problems that QE won’t cure (medium):
Bottom line:
volatility/schizophrenia continue to grip the Market probably brought on by its
obsession with a single word and the (sham) significance of a possible miniscule
change in interest rates. Who knows how
long this lack of focus will continue.
But at some point, investors will step back and grasp the big
picture---the Fed has never timed a policy change correctly, this time will be
no different, but the problem is that no one knows how Markets will handle any
change from a policy of historically unprecedented ease.
Meanwhile, valuations are at fantasy levels,
the economy looks more and more like it is rolling over and very little
positive is coming out of the rest of the world whether it be economics or
geopolitics.
The problem as I see it is that there is no ‘win’
scenario. If the Fed recognizes and
confirms that the economy is weak, suddenly earnings estimates start coming
down much more aggressively---and that has never been good for stocks. If the Fed goes on and starts tightening, it
will likely exacerbate the rate of economic deceleration---and that will
ultimately make those earnings estimates decline even more. Some will argue the ‘goldilocks’ scenario:
the economy is just weak enough to prevent a Fed tightening but not so weak as
impair the rate of growth. Good luck
with that.
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.
More
on valuation (medium):
David
Stockman on the economy and the Market (medium):
Investing for Survival from Cullen Roche
With
assets pouring into index funds and ETF’s and away from traditional actively
managed mutual funds it has never been more important to understand the process
of portfolio construction. Although the industry appears to be moving in
the right direction in many ways (primarily away from high fee closet indexing
funds) you still have to be very careful about how you go about constructing a
portfolio because there remains a great deal of misinformation.
In the last few
weeks I have emphasized the myth of passive investing. That is, even
if you use low fee index funds you still have to actively pick assets.
This “asset picking” will be the key factor in your portfolio’s performance. In essence, we are all active asset pickers.
And that means we are all relying on some implicit forecast and our ability
to decipher how certain assets will perform in the future.
I
should emphasize that I am not an advocate of traditional “active” management.
In fact, I am an advocate of low fee indexing. But that doesn’t
mean I think the distinction between “passive” and “active” is very useful.
In fact, I think it’s rather dangerous. Here are two main reasons
why I think this is so important:
1) Beware of advisors charging a high fee for “passive indexing”. Over the last 5 years I have noticed a growing trend
in asset “management”. I see more and more advisors charging a high fee
(usually between 0.5-1.5%) for “passive indexing” approaches. But what most of
these advisors are actually doing is picking an asset allocation for you and
then claiming that you need them to “manage” it for you over the long-term.
And they will charge you the high fee for this service. This is
nothing more than a form of active management sold to you under a different
name. The fact that they are using low fee index funds does not mean they
are not actively picking the asset allocation. This, in my opinion, is a
worrisome trend that investors need to be keenly aware of. While paying a
high fee for a closet indexing mutual fund is silly, it’s only marginally less
silly to pay a high fee for someone marketing themselves as a “passive indexer”
when the reality is that they are doing something that is simply a less active
version of an alternative.
2) “Passive indexing” is better than closet indexing, but that
doesn’t mean it’s necessarily smart. Portfolio construction is all about process. There
is, by necessity, a certain degree of forecasting that goes into any form of
portfolio construction. Some people just use historical data.
Others try to gauge the business cycle. Others try to forecast
returns using value metrics. There are lots of ways to make forecasts
about the future and gauge how certain assets can help us meet our financial
goals. But we should be aware of how most “passive indexers” go about
doing this. In my experience, most of them are using historical data
based on “factor” tilting. That is, they are basically expecting the
future to look something like the past and they are actively tilting the
portfolio in a specific way based on this view using a value, small cap or
other “factor” emphasis. This is not necessarily bad, but I wouldn’t say
it’s necessarily good either. As any Wall Street disclaimer will note, past performance is not
indicative of future returns.
This is as applicable to indexing as it is to stock
picking….
Worse, what many of these “passive
indexers” have done is constructed a straw man around “active” management.
In an attempt to differentiate themselves from all things active they
have overlooked the reality that they too are active asset pickers. As I showed here, many of these “passive indexers” are guilty of the same
thing they accuse active managers of doing. What’s dangerous here is that
they’ve pegged closet indexing mutual funds as the entire scope of “active”
management in an attempt to claim that the indexing approach is
necessarily different and superior. But the reality is that they’re just
picking assets inside an aggregate just like stock pickers are. Yes,
buying an index is certainly better than buying a high fee closet indexing
mutual fund, but that doesn’t necessarily mean the underlying portfolio process
and allocation is smart. It just means it’s smarter than something really
bad (the high fee closet indexing mutual funds).
I
think it’s important to go into the process of portfolio construction with your
eyes wide open. We can all implement low fee and tax efficient portfolios
while also remaining diversified through the use of index funds and ETFs.
But I think we should also embrace the reality that all of this is part
of an active endeavor. Marketing gimmicks are the cornerstone of Wall
Street’s ability to sell you something. And when something sounds too
good to be true on Wall Street that’s almost certainly the case. While
the concept of “passive indexing” has grown in popularity it’s also become
increasingly susceptible to misinformation. Hopefully my articles on this
topic have helped to enlighten someone so they can avoid some of the pitfalls
out there….
News on Stocks in Our Portfolios
·
Revenue of $4.35B (-0.7%
Y/Y) in-line.
·
Oracle (NYSE:ORCL): FQ3 EPS of $0.68 in-line.
·
Revenue of $9.32B (flat
Y/Y) misses by $140M.
Economics
This Week’s Data
Month
to date retail chain store sales growth rose from 2.6% to 2.7%.
Weekly
mortgage applications fell 3.9%, while purchase applications dropped 2.0%.
Other
Fannie
and Freddie may need additional bail out money (short):
More
trouble in the oil patch (medium):
US
European allies joining China regional bank (medium):
Politics
Domestic
International War Against Radical Islam
23
beheadings for practicing Christianity by……Saudi Arabia (medium):
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