Introduction
The shopping malls’ parking locations are increasingly crowded as
shoppers are busy executing their Christmas and Chanukah gift lists being
spurred on by the new discount levels of more than 50%. The shoppers look to be
pleased with their purchases.
Perhaps my coincidence in the investment world which regularly rotates
to being ahead or behind the world of retail sentiment, recognizes this past week should call all
serious investors to begin their research lists to examine the discounts from the
peak stock price levels being offered to them. Please note I said research
lists not an axiomatic buy list. There can be some long-term concerns that make
current discounts not yet attractive.
This is an old exercise for me. As an analyst whenever there was a
meaningful decline in the market I would make lists of stocks with future
attractive price levels. The problem with these lists was that largely the
stocks did not fall to really cheap prices, the equivalent to 60%+ discounts at
the mall. Thus for all of my analytical skills, usually I did not execute as
many buy orders as I should have. What I learned and now recommend is that
instead of single price activators, one should develop a set of steps of declining
prices combined with increasing levels of purchases. Buying more at cheaper
prices is good as long as the declines are not in response to long-term changes
in outlooks. The late and great Sir John Templeton and his chief investment
officer Tom Hansberger made considerable fortunes for their clients always
looking for better bargains than what was generally “on offer” in the market.
Some large and small examples:
Energy
The current apparent concern of the general stock and bond market is
that the willingness to maintain supply levels of petroleum in the face of
cyclical economic declines in Europe, Japan, and China is leading to lower trading
prices for petroleum. I see little in the way of evidence of the relationship
between the use of energy and a change in long-term economic growth. As a matter
of fact, to the extent that energy prices remain low, the conservation efforts
are likely to be reversed and we will probably become inefficient in our use of
“low cost” energy.
I am addicted to being a long-term investor; I do not have the trading
skills that others seem to possess. With that thought in mind, for an account with
more than ample cash reserves held by an investment group of present and
recently retired investment professionals, I recommended that the energy
component be raised from 7% to 10%. In our energy basket we include various up,
mid, and down stream petroleum and alternative fuel sources, rail tank car
producers, railroads and various energy services suppliers. I am reasonably
confident if the group averages down and holds for a long-term, the results
will be pleasing. One of the smarter, large, (actually very large) investors
today is Steve Schwarzman of Blackstone. He is now launching a multi-Billion
dollar Energy Fund. He remembers when it was cheaper to find oil on the floor
of the New York Stock Exchange than to drill for it. We are probably not there
yet, but we are already seeing foreign buyers nosing around Canadian and US
companies.
Mutual funds
Turning to an arena that I spend most of my waking time on, I believe
there is a great trade opportunity presently. The year-to-date average performance of 24 commodity
energy funds through last Thursday was down -25.99%. On the other hand the average for 88 Health/Biotech Funds
for the same period was up +27.96%. (Friday was a bad day.) While we have
benefited nicely from over-sized positions of Health/Biotech stocks in general
diversified funds, I suspect that an energy-oriented portfolio will have better
performance over the next two years than one heavily invested in Health/Biotech
stocks.
In terms of my Time Span Fund Portfolios, this decision was for the
operational time span portfolio (1-2 year duration) and the replenishment
portfolio (up to five year duration), but not for the endowment portfolio (ten
or more years) and certainly not for the legacy portfolio (for the benefit of
future generations). For the longer term portfolios I recommended that at least
one of the members of their investment steering committee have a background in
commodities. I am not so bold as to suggest that commodity-oriented investments
should be included today. I would want the committee to be aware of future
commodity price moves. Rising commodity prices will affect food,
transportation, manufacturing, energy, and financial services thus can be very
important to most stock and bond portfolios.
Financial services
One of my lenses through which I examine the stock market is the holdings in the private financial services fund that I manage. Some of
these stocks have been falling since the beginning of the current year after a
generally good 2013. Others may have temporarily peaked in early December. In
December through Friday, Moody’s* broke down from its $100 handle
and now is down -7.46%. I perceive no change in the incredible need for income
that is driving the issuance of more bonds and other financial instruments.
However, the gain in the share price for the calendar year through the end of
November was well over 20%.
A possible explanation
All stocks, particularly those with outsized gains, are subject to the
practice of wealthy investors giving significantly appreciated shares to charitable organizations who immediately convert
the gift to cash. This could be a possible explanation. Let me give a
particular example of the stock price of T Rowe Price*. On Monday of last week on slightly under 900,000 shares being traded, the stock hit a
high price of $85.45 closing at $84.80. At the end of the week on a pressured
Friday the daily volume doubled to 2 million shares with a closing price of $82
near its low for the week of $81.97.
*Shares held
personally or in the private financial services fund I manage.
Longer term outlook
I was hoping to begin this week’s post with a headline “The Bad News
is the Stock Market is Rising.” The reason for this contradictory thought was
based on my often-expressed fear that growing enthusiasm was leading to a
speculative, parabolic stock price rise; one of the remaining missing
elements to be able to declare a major top. Luckily for all of us that this
week’s decline activated a pressure release valve in the beginning to boil
market. I should not have worried according to David Kotok the leader of
Cumberland Advisors. In his December 12th commentary he noted the reactions
to his talks with the analyst societies in Providence and Boston. He asked
whether 18000 on the Dow Jones Industrial Average would be the break point and
whether they thought that the closing one year from the day of his talk would
be higher or lower. Almost half thought lower. That view was pleasing to him as
he is fully invested in ETFs. I am also relieved because without the
“professionals” leading or trying to get caught up with the charge, my feared
final stage won’t happen. However, I am keeping my eye on the difference
between redemptions of equity mutual funds and the purchases of stock Exchange
Traded Funds. What I don’t know now is how much of the ETF purchases are from
sharp investors like Cumberland or how much of the purchases are from approved
participants that are buying shares of ETFs to facilitate their customers
shorting these ETFs (either as a hedge versus their other holdings or
expressing a view on future prices). Bottom line: many are confused about the
outlook for the market. As a “registered contrarian” I am reasonably assured
and only become deeply concerned when all of the market passengers move to one
side of the boat.
Please share with me any evidence that you now have for materially
changing your long-term views on stock and bond prices.
__________
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Copyright © 2008 - 2014
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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