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"Stand in the place where you live
Now face North
Think about direction
Wonder why you haven't before" - REM "Stand"
From the moment you make your first trade, one thing is certain: you're going to make wrong decisions. Relax - partial credit will be awarded. Failure, in fact, rarely comes from simple wrong decisions. Rather, it falls on those holding a flawed premise, those that realize too late that the market has moved on from their portfolio thesis.
How to avoid failure, then? Reassess, reassess, and constantly question your position in the market. That's why I write this newsletter, actually -
through relentless effort to realign our understanding of the market with its actual workings, we can get a clear view of the path ahead.
So, where do we stand?
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Timothy C Withers
Firm Principal, CLU, ChFC, MBA
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Macro Picture
For those of you well-scheduled folk quick to point out that this newsletter arrived a bit late, you're not wrong. Forgive me - I couldn't help but wait for the Fed's tricky decision on interest rates. After months of "hawkish" language (i.e., watch out, a rate hike is on the way), they sat on their hands and did nothing. Naturally, they went on to threaten us with a December rate hike, but I'm not holding my breath.
The market certainly gave its applause at this willingness to keep rates low through a rally over the past few days, but I'm looking beyond stock market bumps for some other telling details.
Let's take the strength of our dollar:
despite having some of the strongest Treasury yields in the world, dollar strength is still "range bound" (hasn't spiked up or down) and the anticipated rush towards dollars has yet to happen. There's still time for a stampede, but I see nothing on this horizon yet.
Gold and silver haven't sold off either, which is the expected outcome as the dollar gets stronger. Generally, folks like to gather up these metals when they see the economy or dollar strength weakening. Interesting.
Our old friend oil deserves a nod as well: with barrel prices dropping recently, and considering the stagnant strength of the dollar, I'm forced to attribute this dip to the industry simply having more supply than anticipated. While this has some far-reaching implications, the direct effect is straightforward:
I've reduced my positions in oil stocks.
And finally, the good stuff. If you're one of the few that keeps up with these notes (hi, mom), you'll recall that over the past months I've pointed out the steadily dropping Treasury interest rates. Since we last spoke, not quite so:
the 30-year yield has actually
risen more than the five and 10-year yields. Steepening yield curves aren't just a pretty picture; they're normal for economic growth. (A flattening curve, on the other hand, indicates a higher chance of recession.) Don't break out the party hats just yet, but I see this as a good sign.
All in all, this year's macro environment has been a squirrely one to read. Going forward, though, I'm seeing a slow growth, low interest environment. That's not a bad sandbox to play in for stock positions, actually. With relative assurance that the bottom isn't going to drop out of the market, I'm optimistically looking for more opportunities.
Now, if we do see enough positive data over the next three months - pushing ever closer to that rate hike - I'll heavily consider even more allocation to financial stocks and the like.
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Fundamentals
I've spoken before about the
business model transition that many companies are happily embracing, but let's touch on it again. Remember the old days (the 2000's) when we bought shrink-wrapped software off the rack like groceries? Now, developers - from video games to Microsoft Office - have moved to a subscription model.
At first blush, this seems like a raw deal for these companies. I used to shell out $400 for a version of Microsoft Office, but now can simply subscribe to their most updated software for hardly $100 per year. So why aren't these companies struggling to stay afloat?
First, there's the nitty-gritty of logistics: the packaging and delivery that goes into retail distribution will take a chunk out of anyone's bottom line. Subscription software bypasses all of this.
Next,
think of the cyclical headache that comes with selling packaged games and software. A shiny new product may rake in a big cash bump, but it's as unpredictable as they come. For a company counting on cash flow, this is dangerous territory. Subscription models, on the other hand, couldn't be steadier.
As companies announce their earnings,
we're seeing this improved predictability in both budgeting and forecasting show up. Adobe (ADBE), for example, just had a solid quarter building renewable income via subscription services and their skyward shift to the cloud. I think it's only a matter of time until Apple and a pack of other companies start pushing their service offerings in this direction.
Frankly, I see this as a win-win for both companies and their customers. A win-win-win, if you include us:
I think subscription models are a hidden gem in the market economy and stock prices will continue to sustainably rise for some time to come.
Technical
Over the past several days, the Nasdaq 100 composite hit a new historic high. Yes, we've surpassed the previous record from - drumroll please - the year 2000.
Sure, many investment managers hate the unchartered territory of these new highs, but I'm in love. As an ex-competitive swimmer, it feels like breaking through glassy water, far ahead of the pack.
Now, it's true that not all indexes have followed suit. But as the Nasdaq 100 holds many tech companies, I'm optimistic that my above stated view of the technical picture could be a close match with what we're about to see.
With this in mind, I'm sifting through all the tech companies - software, chip companies, biotech, etc. - for the telltale signals of strengthening fundamentals and good technical pictures.
So what am I doing?
In our large cap portfolio, I'm pulling my hands out of the oil barrels and instead shifting my focus to tech and other companies showing accelerating growth characteristics. I've stood with the defensive stocks and oil companies for the better part of this year, but as I hum REM to myself and observe a changing landscape, I must change my direction with it. This outlook is especially important for our large cap model where the macro economic view is such a force.
When it comes to our all cap model, we're always laser-focused on the companies with the strongest projected future growth. The changes I've made here have been few and far between as our fundamental analysis has proven spot-on and the macro economic factors impact these stocks less than their individual financials.
There's no room for close-mindedness in these markets.
To stay competitive, you must be constantly looking around and adjusting. I thought oil would be a great position (and it still may be) but a read on the shifting market had me cut my holdings and move on. If you get stubborn with the stock market it has a way of running over you, and quickly.
Fall is here, and I hope this came as a helpful start. Best of luck in your new directions, and I'll be back to you in October.
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Disclosures:
S&P 500 An index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and it meant to reflect the risk/return characteristics of the large cap universe.
The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies.
Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets. This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate.
"Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk."
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
Dow - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.
FactSet Earnings Insight February 6, 2016 edition was used for information contained in the Micro Section of this newsletter.
Rebalancing assets can have tax consequences. If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale. Please consult your tax tax advisor.
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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. MSW Financial Group is a member firm of PartnersFinancial. Kestra IS and Kestra AS is not affiliated with MSW Financial Group or PartnersFinancial.
The above links are provided for your information only. As they are provided by third parties, Kestra Investment Services, LLC (Kestra IS) does not endorse, nor accept any responsibility for the content. Kestra IS does not independently verify this information, nor do we guarantee its accuracy or completeness.
The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is not guaranteed by Kestra Investment Services, LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.
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Copyright © 2016 Timothy C Withers. All rights reserved.
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