Sunday, December 14, 2014

‘Tis the Season to Make Buy Lists


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:

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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