So Much Noise...

August 19, 2014 10:12 AM

Weekly Research Briefing
August 18, 2014

(AlexeyKn/500px)

Great for traders, algorithms and long term buyers, but difficult for emotional investors. Do you think Warren Buffett spent more time on Friday thinking about Vladimir Putin or Monster Beverage? As some were selling stocks and running to buy even more Treasuries because of news in the Ukraine, Mr. Buffett was more likely to be taste testing all the Monster flavors against a fresh box of Sees Peanut Brittle.

The financial markets are split right now. The Treasury Bond market, European equities and Industrial & Energy stocks are betting on a global slowdown and ongoing uncertainty in the geopolitical landscape. In the opposite camp are Biotech, High-Tech and Emerging Market stocks are signaling that all will be fine and growth is returning. Junk Bonds and Small Caps put in a small recovery last week, but more is needed to instill confidence in the broader audience.

The markets seemed to be setting up for an upside break last week from their August oversold condition and it looked like Friday would be a very positive end to the week. But once the rumors of an attack on a Russian convoy in the Ukraine hit, buyers pulled their tickets and sellers took control. We still do not know if an attack occurred or not. But it doesn’t matter as it was just more noise to either digest or ignore as investors consider the longer term.

Visually, here is what Friday’s Ukraine Noise looked like in both the VIX and the S&P 500…

Even with all the Noise in 2014, the market’s return is exactly on its historical mean for the month of August…


(RyanDetrick)

Richard Bernstein reports that the average investor has a very difficult time ignoring Noise…
“The performance of the typical investor over this time period is shockingly poor,” wrote Bernstein. “The average investor has underperformed every category except Asian emerging market and Japanese equities. The average investor even underperformed cash (listed here as 3-month T-bills)! The average investor underperformed nearly every asset class. They could have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities. Thus, their underperformance suggests investors’ timing of asset allocation decisions must have been particularly poor, i.e., investors consistently bought assets that were overvalued and sold assets that were undervalued.”
(BusinessInsider)

One certain way to make yourself a better investor is to answer this question: “If I were starting today from scratch, would I buy the portfolio I currently own?” I can tell you that this question is applicable to both Professional as well as Novice active investors.
It could be that your portfolio isn’t quite what you want because you’re constrained by unrealized capital gains. Perhaps you bought a stock in your taxable account that had great returns, but its performance has since fallen off. Still, you might be reluctant to sell until you’re in a lower tax bracket or perhaps you hope to bequeath the shares. At that point, your heirs would be free to sell because of the step-up in cost basis that occurs upon death.
But often, it isn’t taxes that stop us from fixing our portfolio, but rather some mental mistake. Maybe we’re loath to sell some holdings because they’re underwater, and we want to get even before we get out. Maybe we inherited the investments from our parents and we’re reluctant to sell because we think they’d disapprove. Maybe we persist in trying to beat the market because we remember our winners while conveniently forgetting our losers. Maybe it simply feels safer to sit tight, because change feels risky.
(WSJ)

Back to the Ukrainian Noise, while much of the world thinks of Putin like this…



(TheEconomist)

Barron’s prints some contrarian insight from George Friedman of Stratfor…
Friedman has a different view of Vladimir Putin’s performance there than does much of the Western press. Whereas Putin is commonly viewed as the consummate power politician, a chess player many moves ahead of the competition, Friedman claims that he has so badly bungled the Ukraine situation that he might be deposed as president of Russia in the not- too-distant future. “Forget his sky-high voter approval ratings in Russia,” Friedman asserts. “There are rumblings of discontent inside the Kremlin over his apparent loss of Ukraine to the West, in conjunction with a poorly performing economy being driven into recession in part by U.S. and EU economic sanctions arising from confrontation in Ukraine. One shouldn’t forget that Khrushchev was dumped by close Kremlin associates in 1964 as a result of the diplomatic humiliation the USSR suffered in the 1962 Cuban missile crisis and economic woes over the next year and a half.”
(Barron’s)

The one market most in love with the Geopolitical Noise is U.S. Treasuries…

(StockCharts)

German Bund yields also are enjoying the ride…

@SoberLook: German 10-yr yield below 1%, almost exactly half of what it was going into 2014

Japanese yields also riding the coattails…

@SoberLook: Chart: 10-yr JGB yield pushing 50bp

As Ukraine drags on, the Economic sanctions against Russia are now starting to bite German business sentiment and heavily weigh on German stocks…
@MarkitEconomics: ZEW current conditions at 7-month low (44.3), economic sentiment at 20-month low (8.6).



For the week, U.S. equities ground out gains across most sectors. Health Care was helped by the big move in Biotechs while Energy was held back by the falling price of the commodity…


More broadly, the Emerging Markets and Asia joined the gainers while Europe showed little bounce as it was hit hard by Friday’s Noise…

Barron’s is putting a high quality, mega cap stock on your watch list in this week’s cover story on Schlumberger. Read the story and look at the stock price reception to the June analyst meeting. The pullback in energy and the markets could set this one up for a nice entry into your portfolio. If oil prices stabilize, expect Large Cap portfolio managers to be all over this long term growth story…
By improving the technology and durability of its products, and becoming more efficient and integrated, they said Schlumberger could achieve a tenfold increase in operational reliability, reduce inventory levels by 25%, boost asset utilization by 100%, raise productivity by 20%, and lower unit support costs by 10%. By 2017, the company expects to boost earnings per share to $9 to $10, from an expected $5.70 this year and more than double the record $4.75 posted in 2013. No doubt, achieving these targets would help the stock price. Based on Schlumberger’s robust forecasts of future growth, Morgan Stanley’s Ole Slorer raised his price target for the shares to $168, more than 50% above last week’s $106; the stock price could conceivably reach $200 if the company hits its revised earnings targets sooner than expected, he says.
(Barron’s)

John Deere reported last week. Attached to their earnings was an updated outlook on the Ag markets. Favorable conditions in the U.S. looks like it will lead to mostly lower prices next season…


(JohnDeere)

Larry Robbins is a good investor. Here is a quote from him that while specific to one of his holdings is broadly applicable to many companies with solid balance sheets and business models…
“A company we own, Monsanto, just went out and issued $4.5bn of debt in a seven-part debt deal, including 10, 20, 30, and yes, 50 year debt. They borrowed money for 50 years at 3.3% after-tax cost of funds. Now you can say, ‘Well, gee, they’re trading at just under 18x earnings, that’s a 6% earnings yield and you’re borrowing at 3%, that’s not much of a spread.’ But do that computation on 2025 earnings and 2035 earnings and 2045 earnings where the cost of that debt is still 3.3% after tax… we think they’re locking in that 1000 basis pt cost of capital advantage. That opportunity is available to every company. All of us are talking about ‘how is the market going to deal with a rising interest rate environment.’ Well instead of talking about it, shouldn’t companies do something about it, which is to access the capital markets while they are free and available.”
-Larry Robbins
(@EquityNYC)

Customer Service Quote that is a century old, but still applicable today…
“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.” – Henry Ford

And one company that you interact with every week that is solely customer focused…
“If you want to get to the truth about what makes us different, it’s this,” Bezos says, veering into a familiar Jeffism: “We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent. Most companies are not those things. They are focused on the competitor, rather than the customer. They want to work on things that will pay dividends in two or three years, and if they don’t work in two or three years they will move on to something else. And they prefer to be close-followers rather than inventors, because it’s safer. So if you want to capture the truth about Amazon that is why we are different. Very few companies have all of those three elements.”
(Medium)

A visual on how expanding energy production has driven U.S. job growth…
Only now, as we reach the fifth anniversary of the end of the recession, has employment in the United States finally regained its pre-recession peak. The national story of slow recovery obscures the more complicated regional picture: As is the case during most business cycles, the pace of recovery has been very uneven among the states. At present, only 16 states plus the District of Columbia have employment rates at least one percent higher than they had prior to the start of the recession. Among the states that have experienced the highest overall employment gains are the beneficiaries of expanding energy production. Among the states where employment remains substantially below pre-recession levels are those states most affected by the bursting of the housing bubble and those with declining manufacturing employment.
(DeloitteUniversityPress)

20 year demographics are not favorable toward College aged students…
@groditi: Mark my words college tuition inflation topped & will quickly turn to disinflation. Sharp drop-off in pipeline coming

…But spending on Personal Care by this same group should grow rapidly as kids leave the University campus…
@georgepearkes: Demographics matter a lot. GS on consumption by age.

Data to back what you already know: TV Networks continue to lose viewers rapidly…



(ReCode)

English Premier League started this past Saturday. If you didn’t see a game this weekend and are wondering why Soccer is the most popular sport in the world…
The correlation between the simplicity of a sport’s rulebook and its global popularity is almost one to one. Soccer, with its simple rulebook, is followed in almost every country. Basketball increasingly is, too. The more complex sports have less global appeal. Baseball is popular in the Americas and Japan but not yet elsewhere. Hockey fans are almost exclusively concentrated in the U.S., Canada, Northern Europe and Russia. American football has few fans outside America itself.

(FiveThirtyEight)

And for those that know our Extreme Athlete office environment, this new running study has given us much to discuss…



(WSJ)

Finally, as our kids head back to school this week, here is a great quote to remember…

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