Be Careful Of The Recent Rally

So lets recap real quick....the markets were down by over 10% through the second week of February and now thru the 3rd week of March the markets are right at positive....that is a 20% SWING!  By definition we have seen absolute VOLATILITY!  Forgive me for all the capitalized words (my father does that ALL THE TIME) but I'm trying to emphasize how dramatic the moves up and down have been.

Well to begin I am not a soothsayer nor do I have a crystal ball and I do not pretend to know where and when stocks will go up or down, but that being said I do look at a ton of factors/opinions/data points/historical points/sentiment readers/etc to try to come up with a general "idea" on what direction stocks (or economies) will go in...I also rely upon the incredible research I come across from several of the smartest investment minds in the business that I've been blessed to have come into contact with over the years.  All that being said, I believe the markets are treacherous and the moves up and down are enough to make someone sick when they look at their investments accounts on a continual basis.

I personally believe we have been in the midst of a short term "rally" in stock prices in an otherwise sideways to downwards markets....here are some of the reasons why I do not think the overall backdrop for U.S./Global stocks is very promising at this current time.
- auto loan delinguencies and auto sales are both declining quarter over quarter (economists use auto loans/sales as one of the ways to measure the overall consumers health)
- Growth Domestic Product (GDP) has been topping out over the past 3 months
- Corporate Profits have started to stall and look to start to decline
- U.S. Homebuilder confidence as measured is at a 9 month low (and rates are rising which will continue to put pressure on this sector)
- Retail sales were way below expectation over the past holiday season

Simply put, I think the U.S. economy has slowed, despite the low price of oil, and corporations are seeing their earnings decrease which ultimately will lead to lower U.S. stock prices.  Based on conversations I've had with other money managers and looking at historical stock prices based on current earnings, I am of the belief (altho I am not being dogmatic about anything b/c I am often wrong), that stocks are overvalued by 5-7%...sounds like random numbers but they really aren't.

Long story short, I have been looking to take profits in stock/mutual fund investments that I own as the markets have rebounded and rallied over the past month as I think we will see stocks move down over the coming months.....

More to come on this later (and also where I believe we will be able to see growth/positive returns).

Someone Else's Point Of View (That I Agree With)

I think a recent essay by Howard Marks, co-chair of Oaktree Capital (OAK), bears consideration at this point.

"What's clear to the broad consensus of investors is almost always wrong," he wrote. "First, most people don't understand the process through which something comes to have outstanding money-making potential. And second, the very coalescing of popular opinion behind an investment tends to eliminate its profit potential."

Marks also talked about the difference between what he called "first-level thinking" vs. "second-level thinking":

"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: 'The outlook for the company is favorable, meaning the stock will go up.'

Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account:

• What is the range of likely future outcomes?

• Which outcome do I think will occur?

• What's the probability I'm right?

• What does the consensus think?

• How does my expectation differ from the consensus?

• How does the current price for the asset comport with the consensus view of the future and with mine?

• Is the consensus psychology that's incorporated in the price too bullish or bearish?

• What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?

Some of the talking points from the famed money manager above talks about ways to look at the stock market and investing in general.  I try to approach the randomness of behavior stocks exhibit using "second-level thinking".  If you're looking for someone who's reactive, solely influenced by the current price trend and ignores the emerging and changing risk-vs.-reward ratio, stop reading this missive.

But if you're looking for someone who's anticipatory and fully influenced by the difference between current share prices and an analytical assessment of intrinsic value (i.e., risk vs. reward), then understand that is me.

As I've mentioned, I am uncertain in forcasting the markets movements over the short and near term but I do believe long term the general move in stocks is upwards.  I recognize that we're in a market that's without memory from day to day, as well as one that might not provide positive returns for the year. In fact, I continue to expect the S&P 500 to ring up a low-double-digit decline for 2016 as a whole. This puts a premium on "gaming" any 5% market moves in order to "make hay when the sun is (briefly) shining."

For now, I'd recommend disregarding all of the sentiment surveys. Instead, take note of the apparent self-confidence that exists in a near-universal belief among technicians and fundamentalists that we're in a bear market where investors should underweight stocks or skip them altogether.  

There is no "secret sauce" in my playbook and I do not adhere to a constant investment theme; I'm just trying to deliver good investment returns in a market that intermittently provides opportunity.   But let me make clear that while I see current value in stock prices, I'm not positive on stocks right now. Instead, I'm merely trying to be opportunistic. My secular and cyclical concerns remain very much intact, but the stock market's recent dive has widened the gap between current price and intrinsic value for many sectors and individual stocks.  Or, as the investment manager mentioned above Howard Marks put it:

"The bottom line is that first-level thinkers see what's on the surface, react to it simplistically and buy or sell on the basis of their reactions. They don't understand their setting as a marketplace where asset prices reflect and depend on the expectations of the participants. They ignore the part that others play in how pries change. And they fail to understand the implications of all this for the route to success."

Honesty

To be honest, I have not felt confident in forecasting the direction of the stock markets for over a year.  That is not me saying I don't know what's going on and throwing up my hands, but as far as "knowing" if stocks are going to be up a week/month/quarter from now I in fact do not know.  While the markets have been UGLY and Painful as January was one of the worst months EVER in the stock market, and February has continued to be negative, I view lower stocks prices and markets as opportunities rather than something to be feared....I am in complete agreement with ANYONE who says that seeing an account value and the investments therein go down is painful and hurts to see; no one wants to see a decline or negative....what I have to keep telling myself tho is that investing is just that, investing.  We are trying to find value and bargains in company stocks that will be worth more than they are selling for at current prices.  Now the tough part is that sometimes (quite often actually) we see value in a depressed stock price and we think we are getting a great "deal" based on fundamentals and how well the company is doing.  What's annoying and frustrating (along with a bunch of other negative words) is that a lot of times the stocks keep declining in value.  This happens for several reasons.  Sometimes the overall economy is worse than expected or takes a turn for the worse or maybe things that seem distant to us affect/effect stock prices (such as the price of oil, the weather, politics, worldly affairs such as rifts between countries or terroism).  ALL of these things play into the price of stocks/investments but the thing to focus on is will a certain investment, if appropriate research is done, which is bought today will be worth more down the road at some point in the future.

That right there as they say "lies the rub"....the longer time frame you have to invest  your money the more you can put it in things that have a better chance to grow as opposed someone who hasn't saved enough or is drawing on their accumulated savings needs to be slightly less looking to grow their money and more about conserving their money.  My point is writing all this is to empathize with anyone and everyone who is frustrated with the lack of performance and poor action we are seeing in the stock markets.  The only place that investors have been able to hide from the losses in value we have seen has been to not be invested but to sit in cash (which cash is actually a good investment from time to time).

As hard as it is, be patient, remember that over the past 80+ years the stock market has returned ON AVERAGE 7% a year (this includes years when the markets crashed and years when the markets were up big).  It's tough out there, but this too shall pass...

Hands Off

Put simply, the stock market is unplayable at this point.  Volatility is crazy to the up and downside, the market and stocks have no trend or direction and there's no telling what is going to happen from day to day. This is not just my opinion, but also the opinion of several long term successful managers who I listen to and work alongside with.

Several things have come to light however:
- a lot of stocks have gotten crushed and are very cheap (I've been tempted to buy but have not for the most part - although the technology company Twitter is looking EXTREMELY attractive at such a low valuation/price - I expect someone to come in and try to buy the company)
- it is being forecasted that the Federal Reserve and their Board of Governors are not going to raise rates anymore this year b/c the markets and the economy are struggling
- oil is still moving in a random manner being down 3% one day and up 5% the next day
- mutual funds have gotten crushed this year with one of the best known and successful money managers (Bill Miller of Legg Mason) is down 20% YTD
- at some point, new money is going to start coming into the markets and we will see stock prices move up...

Until then, it is best to err on the side of caution and not be too aggressive in buying stocks/mutual funds...at least for now.

Thoughts On The Markets, Economy, And Politics

I continue to believe that 2016 will be a year of surprises and drama -- politically, economically and market-wise:

• Politics. This year began with one of the most "probable improbables" -- controversial, outspoken Republican Donald Trump leading the pack of GOP presidential contenders. (Sarah Palin even reappeared to endorse him.) And last night, we saw a shocking development in the Democratic presidential contest as non-Democrat Bernie Sanders wound up in a dead heat at the Iowa caucuses with leading contender Hillary Clinton. On the Republican side, one-time GOP heir apparent Jeb Bush spent $4,000 for each vote he got in Iowa. You can't make this stuff up.

• Economics. The inability of zero interest rates, $30-a-barrel oil and injections of liquidity to catalyze global economic growth has led to negative interest rates in some regions and countries. After the Bank of Japan cut its benchmark rate below zero last week, yields on more than $7.1 trillion of government debt have turned negative. Meanwhile, yields on U.S. investment-grade and junk bonds are rising to their highest levels in four years.

• Markets. Short-term moves are often exaggerated in our current backdrop of machine-dominated markets. They're full of sound and fury, but provide an uncertain setting for the buy-and-hold crowd and arguably diminish some of charting's value. But they provide a wonderful opening for opportunistic traders willing to buy or short the market's extremes. Importantly, the "contrary" -- an up move in the last 10 days within the context of a down market -- recently prevailed as the market put what the benefit of hindsight shows was probably a massive short term bottom in the markets; I do believe however we will see extreme volatility over the short term so it's difficult to forecast intermediate term market moves (I'm just trying to wait for the best opportunity to buy mutual funds when the markets are down big or buy individual stocks when they offer substantial value and a risk/reward that is favorable for a longer term investment horizon).

"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."

-- Winston Churchill

The markets are so wild we have gone from being down over 10% through the first 3 weeks of January (the 20th), to seeing the markets move back up over 6% since then...(they are down 1.5% so far today)..

Most Importantly

I wanted to mentioned something that I believe is of the utmost importance as we are in the one of the most difficult and confusing investment periods imaginable.  Investment time frames should not be looked at over a matter of days or weeks but rather longer term....it is ridiculous to know for certain how stocks will act over the short term the best thing to do is to stay conservative and look for good investing "entry points" and try to buy when stocks are down and find good "value"...it's just too crazy out there!

So Now Where Are We At?

Not much has changed in the markets since my last post; U.S. stocks are still volatile and markets around the world are not to be trusty as they have no memory from day to day (as in there is no "trend").  Stocks are being held captive to three things:
- The Federal Reserve (and actually other monetary bodies around the world such as the European Central Bank)
- Oil (stocks have been moving in tandem with oil over the past several weeks; when oil goes up stocks usually go up, and the same goes for when oil goes down)
- China (their economy is slowing, and their stock market has been getting crushed)

Today the Federal Reserve released their 1st quarter meeting notes (after having raised rates at their last one) and here's what my takeaway from them was:
- The Fed repeats that the economy is expected to warrant only gradual rate rises.- The Fed is assessing global developments for its balance-of-risk view.- The Fed fund futures price the next rate hike in the second half of the year. - The Fed's comments conform generally to my expectations expressed earlier today and appear to be market-friendly, as they are tilting dovish:

The markets have begun to selloff again the release of the minutes as many see that the FED is actually slightly concerned about the economy and stock market (which they absolutely should be - no big surprise there).  I for one am thinking about adding to my international and large cap U.S. mutual funds slightly.  I'm also eyeing some individual stocks in the banking and technology sectors.  This is still a very ugly investing environment with the average mutual fund being down close to double digits already....

Looking out over the next several weeks and month, I believe (tho I am no way sure - don't believe anyone who is headstrong in their market observations - I personally  follow/listen to/ and often communicate with some of the most successful investors in the business so I take what they say with high regard) that retail spending will pick up, the stock market will probably rebound a bit and then trade sideways, and it will be a long frustrating next month or so.  I do think some money can be made over the short to intermediate term by buying stocks and adding money to mutual fund holdings while everyone is so negative and things are so ugly.  Buy when things are ugly and look to sell when things are wonderful and happy (buy low sell high)...