First of all, Happy Holidays.
When we look at investments and the markets they don't truly compare to family and friends. If great holidays can do anything I think they snap us back to that reality.
My note:
I haven't written in a bit - but in many ways the market has been challenging (and annoying).
Perhaps the best way for me summarize my thoughts is to introduce you to a condition that I used to encounter as a swimmer and as a lifeguard: the riptide.
Many of you are from the coast so this idea is probably pretty familiar but basically it is a situation where multiple factors such as
the currents, wave strength and the shape of the ocean floor all coexist and create a potentially dangerous narrow undertow which will pull even the strongest swimmers out to sea.
The key is to not fight a riptide but to swim across it and out of it.
This is what comes to my mind when reviewing the current market.
In this market we also have multiple issues coming together. Here are just a few:
1. We have had our first rate hike in years, but while the employment numbers seem strong, overall demand does not. Will this be the right move?
2. Commodities have been crashing all year. Oil is the most notable and while it would seem to be a good thing to pay less for gas, etc., the question is does this portend a longer term slow down in global demand.
3. What's going on with China? While this seems to be a constant concern, its growth deceleration and recent decision to unpeg from the dollar make this question especially topical.
4. Dollar strength - The weakness of the dollar has hurt the earnings of US multinationals as those earnings in foreign currencies are translated to a dollar value. With the Fed's tightening strategy and Europe's attempt to continue quantitative easing, how will the dollar react?
5. Interest rates - just because a rate hike occurred it doesn't mean that bond rates are heading higher. If we see a continued flight to safety it is possible for yields on 10-year treasuries to actually come down, and the yield curve could actually flatten.
6. Citigroup has thrown out the notion that we are potentially heading for a recession. We will have to see.
7. Earnings on the S & P 500 stock index have come down this year.
While energy stocks have accounted for much of this drop, the question is will this foreshadow a weakening of other sectors
If your head is spinning at just these 7 questions you should understand that I have another 20 or 25 going on relative to checks on specific sectors and their component stocks.
My main point here is that there are a lot of cross currents but, like a riptide, you can't get that picture from just looking at the surface - or in this case, the S & P 500 return for the year. It may look flat but there is a lot going on underneath. Let me give you a quick recap so far.
We started the year at around 2058 on the S & P 500. In May it
moved up 3.5% to 2130. Then it dropped more than 12%
in August. Here we are back up almost 10% to around 2050*.
Some people might look at that action and say, "Hey, we are back where we started".
I look at that and say, "watch out, there is stuff going on, pay attention". Now this doesn't mean that I think the world is coming to an end but I do think there is a bit of a war going on between the bears and the bulls and it will need some time to play out.
Of course it could resolve on the upside - for which I need to be ready. Conversely, it can resolve on the downside - for which I must be ready.
The way that I am handling this right now is that we have raised cash to about 50% of our total. I am staying long the stocks in which I have the most conviction. I really like those companies that are showing great operational strength and leverage - i.e. certain types of technology.
So, if I feel a company has value, why would I sell it just because the market is gyrating?
Like a riptide, if the market starts to pull you out to sea even the strongest stocks are going to have trouble. In these circumstances, the lifeguard mentality kicks in, and my experiences in the early 2000s as well as remembered warnings from old friends on the NYSE urge me to just step aside. There is nothing wrong with avoiding the riptide by going to and/or staying in cash.
My goal for your accounts is not only to perform but also to protect capital.
Right now I am in the protective/lifeguard mode. At some point it will be time to take the fight to the market and get more aggressive but I will only do that when I think I have an edge (and not before).
In January my note will work to analyze the final year-end data and provide some prediction for 2016.
Cheers for a wonderful time with family.
Tim
Notes:
*Source: Worden Brothers TC2000
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