The Morning Call
3/11/15
The Market
Technical
The indices
(DJIA 17662, S&P 2044) fell big again yesterday (who said that there was no
follow through from last Friday’s decline) but still ended within uptrends
across all timeframes: short term (16745-19516, 1951-2932), intermediate term
(16814-21965, 1768-2482) and long term (5369-18860, 797-2112). They both closed below their 50 day moving
averages and their mid-December highs.
Volume
picked up; breadth was lousy with the McClellan oscillator in oversold
territory. The VIX rose 11%, 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 very short
term downtrend.
The
long Treasury moved higher, enough to regain the lower boundary of its newly
reset short term trading range---negating Friday’s break. It also finished below its 50 day moving
average but within its intermediate and long term uptrends.
GLD
(111.4) fell again, remaining within its short and intermediate term trading ranges
(in fact, very close to the lower boundary---109.9), a very short term
downtrend and below its 50 day moving average.
Bottom
line: I guess I should have waited a day
before making my ‘lack of follow through from Friday’s sell off’ comment. Nevertheless, the Averages are still in
uptrends across all time periods.
Indeed, they have been developing very short term uptrends and even
remain above the lower boundaries. Nothing really changes technically until the
short term uptrends are breached and those are still a long way away.
TLT is making another attempt at stabilizing;
but it is too soon to hope that it will be successful. I have little hope for GLD, at least in the
short term.
Fundamental
Headlines
Another
day, another set of poor economic stats.
Yesterday, month to date retail chain store sales were up but less than
last week which was less than the week before, the small business optimism
index was up fractionally but was less than anticipated and while January
wholesale inventories were up, sales plunged (which would explain why
inventories were up). The trend to
slower US economic growth remains intact.
Overseas,
February Chinese PPI plunged while CPI was up 1.4% (remember PPI feeds into CPI)
---reflecting softness in the production sector of the economy.
***overnight,
February Chinese factory production and retail sales came in below estimates.
And
Greece slams Third Reich war crimes and threatens to confiscate German
assets---which will clearly make their bail out talks more amicable:
Weighing
on investors were (1) a rising dollar, (2) [the unmitigated positive of] lower
oil prices and (3) concern over higher US interest rates. Of course, they were concerning investors
last Friday and then were apparently completely forgotten/ignored on
Monday. So who knows what will worry
them tomorrow, or not.
That said, I
have a tough time understanding why the Fed would consider raising interest
rates in the face of the lousy dataflow.
On the hand, I can understand it based on the Fed’s terrible record of
economic forecasting (remember, Bernanke said everything was fine right before
the US economy plunged into a financial crisis back in 2008). And as you know right now, my disaster
monetary policy scenario is that the Fed raises rates as the US sinks into
recession. (medium and must read):
Bottom line:
volatility/schizophrenia seems to have returned to the stock market in the last
three trading days which makes every day an adventure and a potential trap for
traders. That makes it hard to figure
out what the Market perceives as risk.
But I know what I am worried about and that is that the Fed and the
Market may be nearing a ‘no win’ juncture.
On the one hand, if the Fed ultimately recognizes that the economy is
weakening and resists tightening, what happens next? QEIV---which will only
make the problem of an overly expansive monetary policy and its correction worse. Nothing---which will likely bring political
pressure as well as a loss of faith by investors. On the other hand, if the Fed tightens and
exacerbates the economic weakness, there will certainly be no joy in stock
land.
Of course, the
key assumption in the above is that the economy is slowing---and I haven’t even
altered our own forecast yet. But the
steady flow of lousy economic numbers hasn’t ceased and, by definition, has
brought me closer to that point.
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 (short):
Stocks
can rally after peak earnings (short):
EU
QE---already having trouble (short):
Investing for Survival from Kenneth
Anderson
The world is full of stock
traders. They firmly believe that they can trade stocks and create
unlimited wealth for themselves and their families. These traders could
be your neighbor, your co-worker, your physician, your lawyer, and even your
CPA. But traders can also include professionals entrusted to take care of
other people’s money. They are mutual fund managers, managers of pension
plan assets, managers of separate accounts, and hedge fund managers, many of
whom you would think know better.
It is easy to understand why so
many have fallen under the spell of trading. Just pull a chart on any
individual security or index and look at the change in price from low to
high. If you look hard enough you will see a pattern. Once you see the
pattern, it is easy to believe you have found something special that will make
you rich. After all, you are just as smart as everyone else, and to prove
it all you have to do is buy and sell.
There are some problems with
trading your way to riches. There are commissions, taxes and all the work
needed to account for trade after trade. Then there is the fact that so
many people have tried and failed. Although I cannot prove it, I would
opine that very few, if any, individual investors, trading on their own behalf,
have walked away with real profits. Even the great trader Jesse
Livermore, whose fictional biography Reminiscences
of a Stock Operator is one
of the most recommended books by actual traders, died broke.
For most of us, there
is a better way that is easy to implement and has a history of growing
wealth. Buy great
companies and just own them for a long time. This is not a new
idea! But because year after year, month after month, and day after day
we are bombarded with the idea that we can trade our way to wealth, it receives
very little attention. So I thought I would send a little reminder that
the other way, buy and hold, has a great record of success.
Warren Buffett and his
partner Charlie Munger are possibly the most well-known champions of buy and
hold. In their 1988 Shareholder Letter they stated, “We
expect to hold these securities for a long time. In fact, when we own
portions of outstanding businesses with outstanding managements, our favorite
holding period is forever.”
Another manager that
deserves recognition is Chuck Akre, who founded Akre Capital Management in
1989. He
managed the FBR Focus Fund for years, earning returns that were some of the
best in the industry. Since 2009 he has managed Akre Focus Fund, where he
once again has performed brilliantly. He is famous for describing the
type of companies he owns as “compounding machines.” These are businesses
that are capable of compounding shareholders’ capital at high rates for long
periods of time with little risk of permanent loss of capital.
Chuck, like myself, was
influenced by Thomas W. Phelps and his book published way back in 1972, 100 to 1 in the Stock Market. I will let
Chuck introduce Tom, whose words we are going to share with you, as Chuck did
with the attendees of the 8th Annual Value Investor Conference held in April
2011:
In 1972, I read a book that was
reviewed in Barron’s and this book was called “100 to 1 in the Stock Market” by
Thomas Phelps. He represented an analysis of investments gaining 100
times one’s starting price. Phelps was a Boston investment manager of no
particular reputation, as far as I know, but he certainly was on to something
which he outlined in this book. Reading the book really helped me focus
on the issue of compounding capital.
Here are the five reasons
to buy and hold great companies according to Thomas Phelps:
1. There is always a market for the
best of anything, because people who appreciate quality always seem to have
money. That is true of stocks and bonds as it is of real estate and antiques.
2. Buying for maximum long-term growth
avoids the pitfall of underestimating other people. When you buy because
you expect the earnings and dividends to increase one hundredfold in the next
twenty, thirty, or forty years you are not planning to unload on someone less
brilliant than yourself.
3. When you buy a stock with a superior
profit margin, an above-average rate of return on invested capital, and sales
that are growing faster than the industry’s or the country as a whole, you have
time on your side. Never bet on a possibility against a certainty.
Time marches on, and will continue to march on. That is a
certainty. If your stock has no visible ceiling on its indicated growth,
time will correct many errors in what you pay for your initial commitment.
4. The old saw about the world beating a
path to the door of the man making better mouse traps may be corn but it is
high protein corn. It is sometimes denigrated on the ground that without
the help of Madison Avenue the better mouse trap maker would blush
unseen. In real life anyone smart enough to make a better mouse trap
would not stop there.
5. “Don’t marry a man to reform him,” a
wise mother counselled her daughter. It is seldom profitable to marry a
stock to reform it either. Sometimes, as with husbands, the hoped for
reform never comes. Even when it does come, it is often sadly
delayed. Hope deferred maketh the heart sick. Your turnaround
candidate may double in price, but if you have to wait ten years for it to happen
your gain is at the compound annual rate of only 7.2%.
And a few other words
from Tom:
Perhaps the greatest advantage
of all in buying top quality stocks without visible ceilings on their growth is
that when we do so we give ourselves the chance to profit by the unforeseeable
and the incalculable. Year after year mankind achieves the impossible but
persists in underrating what it can and will do in the future.
Thomas Phelps’s book 100 to 1 in the Stock Market highlighted 365 companies that
produced a 100 to 1 profit over the 40 years prior to 1971. Some required
the entire 40 years, others took less than five. In each case a $10,000
investment grew to $1,000,000. For those who care, a 100 to 1 payoff over
forty years requires a constant annual growth rate of 12.20%. For those
who really care, the average annual return of the S&P 500 (including
dividends) for the forty years ending December 31, 2013 was 12.62%.
News on Stocks in Our Portfolios
Economics
This Week’s Data
Redbook
Research reported month to date retail chain store sales were up 2.6% on a year
over basis, a decline from last week’s reading.
The
February small business optimism index came in at 98.0 up slightly but below
expectations of 99.0.
January
wholesale inventories rose 0.3% versus estimates of up 0.1%; however, wholesale
sales plunged 3.1%.
Weekly
mortgage applications fell 1.3% but purchase applications rose 2.0%
Other
Update
on student loans (medium):
Politics
Domestic
International
A
thought on Tom Cotton’s letter to Iran (short):
More (short):
Tensions continue to rise
in the US/NATO/Ukraine/Russia standoff (short):
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