"I would say that (today) the averages are faring better than the average stock -- on average.
If you know what I mean!" -- Kass Diary, Consider this Yogiism!
With opening day yesterday and tonite's NCAA final (I like North Carolina in a high single digit, low double digit win) -- my themes were clearly sports -- related.
Lessons from Jimmy V
And lessons from The Diamond (baseball).
Above all, I was moved by a response to the above from an old friend and former partner.
More clear signs of Peak Autos, and here and here.
Winwood and Clapton play a Tesla tune.
The financial stocks debate.
I will be dining on the "dark side" on Thursday night at Mar-a-Lago. I will send pictures and maybe a new issue of The Palm Beach Chronicles.
CAT is still a DOG.
I got shorter stocks and bonds today, and here.
Who's the sucker? With retail investors committing billions of dollars into equity ETFs and insiders aggressively selling. Let me Tell You Something!
Another strong rally from the market's nadir in the morning -- which I used as an opportunity to expand my short book.
But, as it relates to my quote at the beginning of "Takeaways" -- look at the weakness in the Russell Index! A conspicuous one percent decline.
In other words there was less (in this market) than meets the eye.
* The US Dollar weakened.
* The price of crude oil dropped by 35 cents to $50.26 a barrel.
* Gold rallied by $3.60 an ounce.
* Ag commodities: wheat +1, corn +3, soybeans -7 and oats +1.
* Lumber down an outsized -7.50 today.
* Bond yields declined by 5-6 basis points -- largely a result of the weak auto data (that I have been warning about for months).
* Importantly (for financials), the 2s/10s spread flattened by four basis points and now stands at only 109 basis points.
* Municipals declined (but closed end muni bond funds advanced), as did junk. (The iShares iBoxx $ High Yid Corp Bond (ETF) (HYG) fell 42 cents. Let's watch this ETF closely in the days ahead.)
* Banks, initially quite weak, rallied but ended lower on the day.
* Life insurance stocks were lower, as were brokerages. Hartford Financial Services Group (HIG) performed relatively well.
* Auto stocks stunk up the joint.
* Retail was broadly lower after a few days of stabilization.
* Homebuilders down, but not meaningfully so.
* Big pharma was flatlined.
* Biotech was down by about one percent led by Allergan (AGN) , Valeant Pharmaceuticals (VRX) and Gilead (GILD) (both at new lows) .
* Ag equipment lower, but off the bottom. Caterpillar (CAT) another factory shuttered.
* Mixed media.
* Transports flat.
* Defensive consumer staples fared poorly.
* Little price change in autos.
* (T)FANG strong, led by Tesla (TSLA) Amazon (AMZN) and Alphabet (GOOGL) .
* In indiviudal stocks, Incyte (INCY) CIGNA (CI) and Chipotle Mexican Grill (CMG) were upside standouts. CarMax (KMX) and AutoNation (AN) (Peak Autos!), Robert Half International (RHI) , O'Reilly Automotive (ORLY) and CBRE GroupCBG downside standouts.
Here are some value added contributions from our contributors:
1. Jim "El Capitan" Cramer wants to keep some cash handy.
2. Ben "Goldfinger" Cross on Trump and gold.
3. RevShark ruins my night!
4. Divine makes another great call on the Russell's vulnerability and gives me some promise tonight!
5. Paul Price on value cycles.
6. Bob Lang on being careful who you pay attention to.
Position: LONG HIG large; CPB large; TWTR large AGN large; Short CAT small
Tell Me Something I Don't Know (Insider Selling Edition)
Regular readers of my diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's Hardball With Chris Matthews. So ... "Tell me something I don't know, Dougie." OK, here goes: Insiders have stepped up their selling programs. According to Trim Tabs: "....Corporate insiders have been selling at the fastest pace in six years. Insiders unloaded $9.9 billion ($500 million daily) in February and $9.7 billion ($450 million daily) in March, the highest monthly volumes since February 2011."
To quantify the soft March auto sales, Wards said the SAAR was 16.53mm vs the estimate of 17.3mm and down from 17.5mm in February. That is the slowest pace of sales since February 2015. Edmonds last week estimated that inventories are at the highest level since 2004.
I'll repeat again what I said earlier today, "we are past the best days in the auto sector in this cycle and it's now hangover time. Easy money pulled forward a lot of car/truck sales and now there are less sales to pull forward. Add on falling used car prices and pressures will only grow for new ones. Banks also in response to rising delinquencies and falling residual values are likely in turn trimming financing offers."
I added to my iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) short ($121.70) and reestablished ProShares UltraShort Lehman 20+ Yr(ETF) (TBT) long ($38.32).
I added to Twitter (TWTR) long at $14.80 and Campbell Soup (CPB) long at $56.90.
I wouldn't be surprised if we have hit the day's lows. But I wouldn't be surprised if we haven't!
Position: LONG TBT, TWTR large, CPB large; SHORT TLT
This morning Tesla's (TSLA) share price is up nearly $15 after advancing smartly in recent weeks.
Telsa' valuation per auto is $600,000.
Ford's valuation per auto is $7,000.
Tesla is now worth more than Ford.
This is 1999-2000.
From my perch, Elon Musk is our present-day P.T. Barnum.
Tesla's annual earnings estimates keep going down, but its stock keeps going up, manhandled by momentum-based strategies that worship at the altar of price.
If Tesla can't make money selling $100,000 cars to subsidized rich people while it has no competition and advertising costs, how will Tesla make money selling $40,000 cars to middle-income people with massive competition coming and as subsidies disappear?
As suggested in an earlier piece this morning, our markets have lost their innocence and bear little relation to reality.
Tesla possesses a nearly $48 billion equity value with less than 4% upside to the biggest Wall Street bull's fantasized price target.
Tesla, owing to the large short interest, is un-shortable.
It is also un-longable, though I am not sure that is a word, either.
I wanted to share an email I received this morning from a former partner of mine in response to my baseball post.
I thought it was very moving and really impacted me:
Dear Doug,
There is no reason for you to remember (but knowing your prodigious memory, I wouldn't be be surprised if you do), I am now half-way into my 77th year. As we all learn, age and time has a way of changing a great deal. On one hand, every subsequent event can change how we feel about a prior event just as the simple passage of time does as well. Advancing age also changes the relative priority and importance we ascribe to events and shape-shifts the way we look at and feel about the past and so changes the very life we thought we had lived into something different even though every detail of the past remains fixed and unchanged.
In myself, these changes mostly seem to add up to a softening of the edges and colors of the past. Past hurt seems to fade as a soothing amnesia gradually erases the once immediate pain replaced with both understanding and acceptance of what might have been my own ignored complicity in creating hurtful situations. The good things seem to gain brightness and color at the same time and the entire balance has shifted to show me a better life lived than I realized at the time I lived it.
Your morning letter talking about baseball could not have been more timely and appropriate to me. This afternoon, I am going to the METS opener at Citifield. I was, of course, a rabid Brooklyn Dodger fan as a boy until they tore the baseball heart out of me by leaving Brooklyn after the 1957 season. I remember the announcement coming one week after my 17th birthday during my freshman year at the Institute. I lost almost all interest in baseball for the next 50-60 years as a result of that betrayal. But blessed time has softened that and after my retirement 2 years ago, I began to again find myself interested in going out the ballpark to watch a game in the sun, relaxed eating hot dogs and drinking a beer, and watching that beautiful sport. Of course, at current prices, I have gone to only one game per season but it is astonishing how much lasting good a single game can do for the soul. Today, I go for another "baseball fix" to help shift my vision of things back still further to the good side of life.
You spoke of Sandy Koufax, a beloved cousin to you. To me Sandy was not just the greatest but he was a "greatest" to whom I was attached, not by blood, but by common heritage as graduates of Lafayette High School in Brooklyn. So every time, he stepped out on the mound, in some small way, I stepped out there with him and I am pretty sure every graduate of Lafayette from the mid/late 50s felt the same way. When i finish this email, I am going to listen to Vin announce the close of that game and I thank you for including that link. Damn good way to start a day at the ballpark! Who knows, maybe I'll see a perfect game in person myself later today.
Your email today reminded me of the Doug I loved - still love in fact. Your detailed memories of things - so many of which were also a part of my life - was always a great treat as they added color and texture to the past. I still remember clearly our limo ride to and from Atlantic City as part of the Omega outing, with you remembering and singing every damn lyric of every damn rock and roll song of the 50s and 60s as though you had the song sheets right in front of you. How did you do that?!?
For the record, my good memories of you and good feelings toward you now far outweigh any negative feelings from things that now seem so trivial in time's rear-view mirror. Wouldn't it be great for human beings if every event came with the perspective of time immediately to soften our responses?
Anyway, thanks for the baseball email and for another trip down the Kass memory lane. You added something beautiful to what was already going to be a wonderful day and made it even sweeter.
I could not be more adamant in my writings over the last six months that we are at "Peak Autos."
As stated previously:
"The auto industry has had a robust recovery since The Great Recession in 2007-08. The industry has experienced record sales over the last two years. 2016 was eerily reminiscent of the peak in housing during the mid 2000s.
Expanding new auto sales have translated into record lease penetration abetted by rising residual car values (smaller payments needed).
But, recent hard data (Manheim and NADA used car prices) suggest the movie is now being played in reverse.
The mushrooming in lease activity over the last five years is a meaningful headwind as cars come off lease and returning to the market place (putting a downward pressure on prices). Increases in supply over the next few years are a problem with gains of +10% cars in 2017, +25% in 2018 and +37% in 2019 being forecast.
Unfortunately, this is happening at a time in which auto loan delinquencies are rapidly increasing -- another potential large supply issue.
To me, there is little difference between the bubble in mortgage lending (which overestimated future house values in order to justify Pay Option ARMs and other high-risk, exotic mortgage loans) in the early to mid 2000s to the bubble in auto lending (teaser rates, low or no documentation, no money down, lengthy financing packages, etc.) that has taken place in the last decade.
The only thing holding up SAAR auto sales is the large truck market -- which is highly sensitive to the price of oil.
A foreclosure crisis in the automobile industry may lie ahead. Like housing a decade ago, the automobile industry faces excess supply in 2017-18.
The auto stocks look very cheap on a forward EPS consensus (in both absolute and relative terms) - but those estimates could be quite optimistic -- and I would not even consider longs in the space.
For those that want to take a deeper dive on the emerging risks and potential crisis surrounding the automobile industry (based on an analysis of used car values and residual values analysis) -- let's go to the tapes below. (If you dare!)
Pay special attention to the rising rate of growth in the number of cars coming off lease over the next three years. (Leasing has been responsible for over 30% of yearly auto sales.) As strong (residual) car prices are the lifeblood of future sales, listen to the analysis/projection of lower residual values. Few new buyers will be able to role negative equity into a new car loan and raise their monthly payments (without a large down payment)."
This morning both Ford (F) and General Motors (GM) missed badly on their monthly sales production.
I continue to expect profit guidance for the industry to be lowered in the second half of this year.
Bottom line: Autos are value traps based on Peak Autos -- a steady erosion in used-car prices, a decade high in inventory to sales on dealer lots, deteriorating delinquency rates on auto paper, and a multiyear high in new car sales incentives, among other things.
The "carpet sweepers" who were enamored and recommended the purchase of Deutsche Bank (DB) with your money are now nowhere to be seen as DB shares, at around $16.80 in the premarket, continue to tank to a new multimonth low this morning.
As Peter Bookvar wrote this morning:
While European bourses are mixed, the bank stock index is down by 1.7%, its worst day since late February. These banks need help in the form of eliminating negative interest rates.
Market participants are increasingly bullish on Europe, apparently on a relative value basis, but that optimism could be short-lived. No doubt, if they prove mistaken, as they have been on Deutsche Bank, you will never hear from them that they were wrong here, too.
In "Heading to the Exits," Sir Mark J. Grant boldly dispels the European investor optimism this morning:
Europe has tried a grand experiment for a number of years now. It has worked out well for Germany, who initiated the European Union and prodded it along, and not so well for a number of other countries. In my opinion, the issue is not really Populism but Tribalism. Each European nation is a tribe unto itself. Many European countries, I believe, are just plain tired of having the bureaucrats in Brussels, orchestrated by the bureaucrats in Berlin, telling them how to run their own countries. I think the EU has just about run its course and, as many lead banks suggest investing in Europe now, I am of the opposite opinion.
I think investments in Europe are quite frightening and inadvisable at this point in time and so I take my stand on the other side of this fence.
In my view, I believe the problems in Europe are both political and economic. I point first towards Italy where the deficit, if believed, is running at an admitted 133%. However, that is not all of the story.
The ECB states that the EU has $1.05 trillion in nonperforming loans with $420 billion being resident in Italy which is 40% of the total, according to the New York Times. Italy's unemployment rate has grown from 4.95% to 12.5% in the last year. According to 2017 data from the Heritage Foundation, Italian government spending has amounted to 50.9% of total output (GDP) over the past three years, which is an increase of 22.3%.
If you just took Italy's debt, $2.852 trillion, according to Bloomberg data, and added in the Italian bank's non-performing loans, the debt to GDP ratio would be 157%. This, in my view, is a disaster in process and while the EU's rules mandate that subordinated bondholders and equity holders must take the first losses, this is not simply an economic issue. The vast bulk of these holders are Italian citizens who may get driven into, and already leading in the polls, the Five Star Movement, which wants to exit the European Union and the Euro.
I think this is a time bomb ticking, as Italy will head to elections at some point soon.
Grexit is at the door, once again, as the IMF, to date, has refused to participate in any new bail-out schemes. I do not believe they will participate, with the Trump administration now in charge of the IMF's U.S. contingency, and I find all of the positive comments by the EU politicians, that we are moments away from the next bail-out, to be little more than a children's fairy tale. I am watching these people's noses grow longer and longer and longer.
"A lie keeps growing and growing until it's as plain as the nose on your face."
-Pinocchio
In my opinion, Greece is going to finally exit from the EU, as their July debt payment comes into focus. They may leave, or they may be forced out, as both the EU and the ECB are right up against their spending limits for both the country and the Greek banks. Push is about to come to shove, in my view.
"And now, gentlemen, like your manners, I must leave you."
-Dylan Thomas
Then we have Frexit, and Ms. Le Pen, and while the odds currently favor Mr. Macron, in the final round of voting, this may not be the case as we near the final election. Ms. Le Pen also wants to exit from the EU and return to the Franc and the odds are not so long that they cannot be overcome. This is a work in progress. I would not be so arrogant as to count Frexit out. The balance may yet swing if more terrorist acts are forthcoming or more political surprises, such as what happened to yesterday's favorite, Mr. Fillon.
Then there is a new concern. It has barely been spoken of in the Press and yet the Swedish Democrats may now be the largest political party in Sweden. They too, want out, as Fox news reports that a new YouGov poll shows that 39% of Swedes want to leave the EU and their election is in September. Swexit may arrive this year.
"All the world's a stage, and all the men and women merely players: they have their exits and their entrances."
-William Shakespeare
So, Brexit is underway and Grexit, Frexit, Italgo and Swexit are possible and that all adds up to a considerable amount of risk, in my estimation. This would be Risk with a capital "R." The point here is that there is not enough reward, for investing in Europe, to off-set the considerable Risk that is present. I submit, when the balance hangs in the favor of Risk, and the balance for Reward is minimized by it, then the Risk/Reward equation is not in your favor.
I would also state that fundamental economic analysis can get tossed on its backside by "events" and that there is not one, but a multitude of "events," that could flop the European Union on its backside and flay Brussels to the bone, as it runs the "Exit Gauntlet."
"Take heed," I say. The European construct is at a major tipping point and the flashing lights are blinking red. There are plenty of places to invest money and I just do not see Europe as a stable environment now. If there was enough reward to justify the risk I would have a different opinion but there is not.
Caveat Emptor (Buyer Beware).
For me and my longs -- as expressed in "Let Me Teach You How to Dougie" -- I will continue stay American in my investing.
"Despite calls that European and other non-U.S. markets are cheap (they are for a reason!), a growing U.S. nationalism and political risks abroad could stall European Union growth prospects. Indeed, the EU road has run out of asphalt -- Grexit and Italeave may lie ahead and many peripheral country banks are insolvent. Asia is a potential powder keg politically, militarily and financially (leveraged shadow banking issues). Stick with the transparency brought by listed companies that operate in America."
Speaking of sports, as I did in the opener, yesterday was Opening Day for Major League Baseball's 2017 season.
Which gets to an article I wrote about baseball's investment lessons a few years ago:
Loss of (Our Market) Innocence
SEP 9, 2015 2:34 PM EDT
"We live in a dystopian investment world whose markets -- currencies, commodities, stocks and bonds -- have morphed into an Orwellian backdrop of omnipresent government intervention and manipulation that is increasingly dictated by the quant community. (Who worship at the altar of prices and price momentum and are agnostic on values.)... In recalling this past week's action, it should be clear to most that the market mechanism is broken.
As I wrote in this morning's opening missive, "A Picture of Imperfection," the market's mechanism is broken.
The collateral damage ... that has come out of a broken market dominated by quants makes both trading and fundamental investing difficult in a market that has morphed into one without memory from day to day. Moreover, "artificial" and deep gaps or advances in prices -- another outgrowth of quants' dominance in daily trading activity -- also render technical analysis less useful.
Investment Lessons From Baseball
Over the past 16 years, I have made clear my passion for the game (and purity) of baseball and the investment lessons I have gleaned from the sport.
Two years ago, in "Defense Drill," I pointed out that it's not your batting average that matters in investing and trading, it's your defense that counts. Back in 2012, in "America's Pastime Applies to Markets," I recalled that I have learned over my career that (baseball) history is instructive for investors. And back in the summer of 2007 -- just before all hell was about to break loose -- I penned a column titled "Take Me Out to the Ball Game for a Sense of History":
But, tonight, September the 9th of Nineteen Hundred and Sixty Five, Sandy made the toughest walk of his life I am sure because through eight innings he has pitched a perfect game. He has struck out 11 and he has retired 24 consecutive hitters.
You can almost taste the pressure now... Krug must feel it too.
There are 29,000 people in the ballpark and a million butterflies.
I would think that the mound at Dodger Stadium is now the loneliest place in the world.
A lot of people in the ballpark now are starting to see the pitches with their hearts.
He is one out away from the promised land.
You can't blame a man for pushing so hard.
On the scoreboard in right field it is now 9:46 p.m. in the City of the Angels, Los Angeles, California.
A crowd of 29,139 just sitting in to see the only pitcher in baseball history to hurl four no-hit, no-run games. He has done it four straight years. And now he has capped it with a perfect game.
Sandy Koufax, his name will always remind you of strikeouts. He did it with a flourish. He struck out the last six hitters. And when we write his name in the record books, the "K" will stand out more than "O-U-F-A-X."
-- Vin Scully, calling the last inning of Sandy Koufax's perfect game 50 years ago
In marked contrast to the markets' imperfection, perfection was found on a baseball diamond in Los Angeles as 50 years ago today my cousin Sandy Koufax pitched a perfect game against the Chicago Cubs. The Cubs pitcher, Bob Hendley, threw a one-hitter -- making the game, arguably, the greatest pitching duel in history.
As a teenager, I listened to the game with a small transistor radio. I moved the radio around my bedroom in Long Island to get the best reception possible.
They don't make pitchers like Sandy anymore and they don't make markets the same way they did either ("in the good old days").
Call me old-fashioned, but in Season of the Glitch, I outlined why more volatility will emerge from our broken markets and in the past I have been adamant in my view that we should KILL THE QUANTS BEFORE THEY KILL OUR MARKETS.
There have been a number of factors that have conspired over the last decade to produce the current environment, which resembles less of a stock market than a casino -- providing fertile ground for the disruptive influences of quants, risk parity and other strategies that pay little heed to balance sheets and income statements:
-- Regulation: Volcker Rule, Basel III, Dodd Frank prevented dealers from providing their classical role of ensuring market liquidity and stability -- in part because of lowered allowable leverage and, in part, because of a mandated reduction in proprietary trading activities.
-- The elimination of the uptick rule in 2008: This will go down as one of the dumbest regulatory moves ever.
-- The proliferation and popularity of ETFs: These weapons of financial destruction(which rebalance during the day) have taken a much larger share of trading activity as retail investors have moved away from individual stock picking and toward the use of "these baskets." (As evidence, a disproportionate amount of stock trading activity occurs in the first 30 minutes and last 30 minutes of daily trading, when ETFs "rebalance.")
-- The decline in retail investor involvement
-- The electronization of the NYSE: This has eliminated the stabilizing impact of market makers and specialists. In the past, human beings have used common sense, today emotionless machines rule the day and have recently proven disruptive to our market system.
-- The steady drop in commission rates, which gave brokerages less incentive to take the other side of a trade.
There are some easy near-term solutions to the adverse impact of our Brave New Market -- including the adoption of a tax on financial (stock) transactions and/or the reimposition of the uptick rule.
Unfortunately, the SEC is asleep at the switch and, for now, we have to play the hand we have been dealt.
Bottom Line
So, get used to spending more time in a trading mode and less time in an investing mode -- and given the rise in volatility, keep an eye on your portfolio's value at risk (VAR).
My cousin Sandy Koufax controlled his destiny with his golden left arm.
However, to an important degree, we -- as market participants -- have lost control of our markets and our investment destinies.
It's a sad state of affairs that is not likely to be resolved any time soon.
My pal Peter Boockvar, chief market analyst with The Lindsey Group, locks in on commercial and industrial loans and why they're declining:
Here is an updated chart for C&I loans for the week ended March 22nd and you can see we just about gave back all of the previous week's gains. I've now seen/heard two explanations for the recent decline which puts the outstanding balance at the lowest level since September. One is from a Goldman Sachs analyst recently who believes that its related to the energy sector and the tapping of bank credit lines. We saw a rise in C&I loans in the early part of last year just when the market had its hissy fit and now just as the markets have reached a euphoria phase, we're seeing the opposite. Thus, Goldman is concluding that distressed energy companies were tapping their lines last year and now with the rebound in oil prices are paying them back.
The other reason I've heard but have not confirmed is with the sharp decline in refi's, banks are cutting their warehouse mortgage loan lines to mortgage originators. These warehouse lines show up in C&I loans because they are considered a loan to a company. Maybe.
I'm going to throw out another reason that MAYBE is a factor although I'd rather hear from banks themselves to see whether there is something here or off base. Chime in if you have an opinion. On December 18th 2008, the Federal Reserve initiated the payment of interest paid on excess bank reserves parked at the Fed. At the time the rate was just 25 bps and of course sat there until December 2015. Well, as of two weeks ago banks are now getting 100 bps on those $2.2 Trillion of reserves and that is essentially free money for them, totaling $22b. Let's compare that to different aspects of the current yield curve. The spread between the effective fed funds rate of .91% and the 5 yr US Treasury is 102 bps and 148 bps out 10 years. The spread between 3 month LIBOR and the 5 yr Treasury is 77 bps. It's just 124 bps out 10 years. The 2s/10s spread is just 113 bps and the 5s/30s spread is only 111 bps. Now of course banks are lending out at a spread above LIBOR and/or above Treasury yields but the point is the rising IOER that the Fed is paying banks is providing competition for bank capital and thus could end up being a double form of tightening with a rising cost of capital and less lending.
The Japanese Tankan business confidence indices improved q/o/q but were mostly below expectations. The headline manufacturing index for Q1 rose 2 pts to 12 but expectations were for a print of 14. At the peak of Abenomics enthusiasm it touched 17 in Q1 2014. The outlook was higher by 3 pts to vs the estimate of 13. On the services side the index was up by 2 pts to 20 and that was 1 pt above the forecast but the outlook was unchanged instead of rising by 3 pts as was expected. For small companies we saw improvements in all major categories but were mixed too relative to expectations. Overall capital spending plans were a bit above expectations for Q1 with a .6% gain vs the estimate of down .3% but this compares with an increase of 5.5% in Q4. Bottom line, I'll say again that the Japanese recovery remains in place but is still lumpy with manufacturing and exports doing pretty well while the consumer remains a drag. The market response with the data somewhat below estimates was mixed as the yen is basically unchanged, JGB yields were as well while the Nikkei rallied by .4% but is the only major stock market that is down on the year.
Here is a quick snapshot of all the manufacturing PMI's from Asia. South Korea's fell to 48.4 from 49.2, Japan's final read was 52.4 vs 53.3 and down from 52.6 initially, Indonesia's rose to 50.5 from 49.3, Thailand's fell .4 pts to 50.2 while Malaysia's was little changed at 49.5 and Vietnam's was higher by .4 pts to 54.6. Bottom line, most of the major countries have manufacturing PMI's still hovering around the flat line of 50. As India gets out from underneath its bungled cash swap plan, its manufacturing PMI rose to 52.5 from 50.7 in February. It bottomed at 49.6 in December. The best news out of India recently was the passage of the new tax system which is hugely positive and I remain bullish on Modi and their markets.
In Europe, the final look at March manufacturing PMI was no different than the first one at 56.2 which is what was expected and is at multi year highs. The unemployment rate for the euro area ticked down by one tenth to 9.5% also as expected and puts it at the lowest level since April 2009 as it continues its slow crawl lower. Pre recession it got as low as 7.3% and peaked at 12.1% in April 2013. The European economy is definitely seeing a cyclical upturn and with the beginning of the ECB taper beginning today, I expect another taper to be announced sometime by September. While European bourses are mixed, the bank stock index is down by 1.7%, its worst day since late February. These banks need help in the form of eliminating negative interest rates.
The manufacturing PMI in the UK in March fell to 54.2 from 54.5 last month. The estimate was for a rise to 55. This is the 3rd month in a row of declines and is basically no different than it was 6 months ago which implies the benefit to exporters from a weaker pound may already have run its course. In fact, Markit said "the domestic market remained the primary source of new business wins for manufacturers." Markit also said the survey "shows that high costs and weak wage growth are sapping the strength of consumers, with rates of expansion in output and new orders for these products slowing further." Price pressures were mixed m/o/m with input prices down while output prices were up but overall with price gains, "it remained among the steepest recorded in the 25 yr survey history." The pound is lower with the data miss. The figure captures the dilemma that the BoE has in that its facing serious inflation pressures at the same time they are panicked over what Brexit will do to the UK economy. I say, deal with the inflation aspect as its in their purview which can help REAL wages for consumers and have faith that UK industry will manage its side just fine.
Lessons Learned From Jimmy V and Beating the Big C
Apply some of Coach Jim Valvano's life principles to your investing.
"If you laugh, you think and you cry, that's a full day. That's a heck of a day. You do that seven days a week, you're going to have something special."
-- Jim Valvano, coach of the national champion 1983 North Carolina State basketball team
March Madness is my favorite sporting event of the year. I have the most precious memories traveling with my youngest son to semifinal weekends and to Monday's finals. Our trips to the NCAA tournament have, in part, defined my relationship with him.
But this morning, my thoughts are on another game and that speech. Both can provide us with important life and investing lessons.
"We were such underdogs that even my mother took the Houston Cougars and gave the points."
--Jim Valvano
That game took place 34 years ago in 1983. In that game (the NCAA finals), a seemingly outmanned N.C. State Wolfpack (Sir Denny Gartman's team and alma mater) faced the Houston Cougars, who were led by two future NBA Hall of Famers in Hakeem "The Dream" Olajuwon and Clyde "The Glide" Drexler. Houston finished the regular season as the top team in the country and collectively was known as "Phi Slama Jama," so named for the fast-paced showmanship of their game. Going into the championship game, Olajuwon boldly predicted "the team with the most dunks will win."
Though only a No. 6 seed in their regional bracket, the N.C. State Wolfpack was hardly a team of nobodies at No. 16 in the nation. It took an impressive late-season streak just to get them to that ranking, however, and nobody thought they had a chance against Houston, which had won 26 games going into the game against N.C. State. So it was quite a shock to see Lorenzo Charles dunk the winning two points in the last second of the game, and I will never forget Wolfpack coach Jim Valvano running around like a chicken with its head cut off.
And, oh, that speech at the 1993 ESPY Awards that Jim Valvano gave just eight weeks before he died of cancer. I still cry every time it is repeated on ESPN, as it is being broadcast now, on Sunday morning, as I write this missive.
James Thomas Anthony Valvano was the mischievous middle son born to Rocco and Angela. When he was 17 years old he wrote down on an index card his professional aspirations. He would play basketball in high school (he did at Seaford High School in Long Island) and college (he did at Rutgers), become an assistant basketball coach (he did at Connecticut), then a head coach (his first head coach position was at Johns Hopkins, then at Bucknell and Iona), achieve victory in Madison Square Garden (he did while at Rutgers) and finally cut down the nets after winning a National Championship (he did with N.C. State).
Some elements of Valvano's life lessons can be adopted into our investing strategy.
"No matter what business you're in, you can't run in place, or someone will pass you by. It doesn't matter how many games you've won.... How do you go from where you are to where you want to be? I think you have to have an enthusiasm for life. You have to have a dream, a goal, and you have to be willing to work for it."
--Jim Valvano
The investment mosaic is a complicated one, and no one rule always works. How-to books may sell copies and make money for the authors, but they usually don't make the readers much money. There is no substitute for hard work in delivering superior investment returns. There are 86,400 seconds in a day; it's up to you to decide what to do with them. As I have written repeatedly, no secret sauce, magical elixir or special stock chart provides clarity to our investment decisions. Rather, successful investing is a byproduct of hard-hitting research.
"Be a dreamer. If you don't know how to dream, you're dead."
In investing you must find an edge (or, as Michael Steinhardt calls it, a variant or differentiated view) by often thinking of factors/ideas that others haven't thought. Importantly, you must also avoid being too early -- especially if your investor base has a different time frame than yours.
Second-level thinking trumps first-level thinking in delivering returns. As Howard puts it, first-level thinking says, "It's a good company: let's buy the stock." Second-level thinking says, "It's a good company, but everyone thinks it's a great company and it's not. So the stock's overrated and overpriced: let's sell." First-level thinking says, "The outlook calls for low growth and rising inflation. Let's dump our stocks." Second-level thinking says, "The outlook stinks, but everyone else is selling in panic. Buy!"
"I asked a ref if he could give me a technical foul for thinking bad things about him. He said, 'Of course not.' I said, 'Well, I think you stink.' And he gave me a technical. You can't trust 'em."
--Jim Valvano
I am often asked by investors and others why I usually don't listen to company executives or the guidance of their investor relations departments. To me, it is preferable to speak to people in the supply chain or to company competitors because, to paraphrase Warren Buffett, managements often lie like Ministers of Finance on the eve of devaluation.
"My father gave me the greatest gift anyone could give another person. He believed in me. "
You gotta know yourself, too. Wall Street is not a great place to "find yourself." (There is a reason why there is a cemetery on one side and a church on the other side of the New York Stock Exchange building.) Psychology can be important; it often trumps cause-and-effect relationships that have been in place historically. Above all, have confidence in your own analysis (as long as it is thorough), even if your view is at variance with the consensus.
And of course, Coach Valvano's most recognized quote: "Don't give up, don't ever give up."
Learn to survive under adverse market conditions by avoiding large losses, and learn how to prosper during good times. Generally speaking, by maintaining discipline and stopping out your losses, you can live another day in your investing life. It is not batting averages or on-base percentages that count in this game; it is how you control the risk in your portfolio. As an example, short positions can be hedged by owning cheap out-of-the-money calls, and long positions can be hedged by owning cheap out-of-the-money puts -- especially in a low-volatility setting.
Laugh, think and cry -- I always do this time of the year, as I will tonight watching the NCAA tournament finals. But it's especially true over the last few years after overcoming my own confrontation with cancer -- it's been a shining moment for me.
You, too, can have many shining investment moments, by applying some of Coach Valvano's life principles to your investing.
The V Foundation for Cancer Research, created in 1993 by Jim Valvano, has contributed over $170 million to cancer research. If you would like to contribute, here is the website.
