Discipline trumps conviction and despite whatever I may think that the risk isn’t large at this point our market models are flashing no better than neutral at this point with some at an outright sell. For the past month profits have come with the ease of fighting an uphill battle and I’d prefer to raise cash and wait for a bullish trend to re-emerge.
While we may be at or near a market bottom in terms of our indicators, experience has taught me that in sell offs such as the one we’ve witnessed will typically need a second bottom which could come from a lower level in the markets.
In addition we have significant gains to protect, which is of paramount importance.
This does not change my opinion that there will likely be a very sharp rally in the second half of the year.
U.S. Equity markets have been in a correction mode for better part of 6 weeks and this coincides with the 9 month cycle lows. Its been said that market cycles are more of an art than science but I’ve followed many of them for years and have come to the conclusion that while I may not understand exactly how they work, they’re worth paying attention to.
Within the next few weeks or so we have several cycles that are converging between now and June. It appears that any market trough developing soon will not be considered a major market low but a normal run of the mill trough. However, the matter of significance is the post-cycle trough which could be a major move higher, probably to 1500 on the S&P 500 or 11% by the end of the year.
The explanation for the trough and rally will, at present be open to interpretation. For those that fear Europe being our market’s downfall, the odds are quite low that Europe will derail the U.S. since its extremely rare that a major issue be discounted in stock prices more than once. One other issue that made news over the weekend is China lowering reserve requirements. China has been attempting to slow economic growth for close to two years and they may have finally seen enough slowdown to take their foot off the economic brake.
As the chart reveals the 9 month cycle typically is a counter move to the primary trend. In other words, if markets are in rally move (as they are at present) the 9 month trough is a very nice entry point whereby the rally eventually resumes. In a bearish trend, the reverse is true. The 9 month cycle is usually not The tipping point for a change in the primary trend.
Overall, all of our models and timing systems remain positive. So far our present pullback resembles a garden variety pullback seen once or twice a year. Unless the character of the retreat changes in character for the worse I’d view this as an opportunity to add new funds or increase equity exposure.
Brad Pappas
No Positions mentioned
Within the past week we had just begun accumulating shares of Easylink Inc. symbol ESIC. Our cost was in the $5.90 to $6.10 per share range. I regret that only a handful of accounts were able to buy the shares as this morning Easylink has announced it will be purchased by Opentext for $7.25 a share. The market for ESIC is currently at $7.15 and within a few days we’ll be ringing the register and taking the quick profit.
Long ESIC
It was a cold and snowy day yesterday which isn’t uncommon this time of year in the Rockies, actually many of the heaviest snowfalls of the year occur in April. But last night I was able to see Moneyball which is movie starring Brad Pitt and based on the experiences of Billy Beane who’s the general manager of the Oakland A’s baseball team.
The movie captured the highs and lows of the A’s 2002 season in which they found themselves losing three key free agents to larger franchises and trying to find a way to cope with the realities of being a franchise with a $35 million dollar payroll competing with teams like the Yankees who at the time had a $120 million payroll.
Due primarily to one of the strongest unions in the country: the MLB players union, a salary cap on team payrolls is nonexistent and has made for an unfair, unlevel playing field between large market teams (Yankees, Red Sox) and small market teams (Royals, A’s, Padres for example).
Billy had to find a way to replace his stars with players who could contribute enough to make up for the loss in production yet be cheap enough to fit within his payroll. He simply could refit the roster with high priced free agents or trade for players with large contracts, there was no question he couldn’t expand his player payroll budget.
Baseball has long been a sport in which scouting has played a significant role. Scouts were frequently older baseball men who used their experience to extrapolate what a young players potential could be. The process is highly subjective and as in most professional sports, most of the prospects never make to the major leagues let alone be stars. Billie was tired of hearing the old phrases “he’s built like a ballplayer, a five tool player, a smooth level swing, and he’ll improve with time”. All Billy wanted to know was: “Can the kid get on base?” If the kid can’t get on base, be it from a walk or a hit he’s of little use to the team and all the pat phrases from the scouts won’t mean a thing.
While visiting the offices of the Cleveland Indians in an attempt to make a trade his offer is shot down based on a mouth to ear relay of information to the Indians GM from an unlikely looking young man. This young man was one of the first to use data analysis to formulate opinions on their young players.
This young man catches the eye of Billy Bean because is on the cutting edge of incorporating data or quantitative analysis (QA) to determine if the player had the potential to contribute. The young man didn’t care if the player could even field his position he only cared about his on base percentage (OBP).
The use of quantitative analysis (QA) in baseball was the brainchild of Bill James. Eventually the use of QA in baseball spread, even to the large market teams like the Red Sox who in fact are owned by John Henry who is a proponent of QA in managing his hedge fund. However, to this day the issue of QA is still contested since baseball is an old school sport where change rarely occurs and jobs are entrenched.
But this isn’t really a post about baseball as much as it is a post on the advantages of quantitative analysis in many of life’s endeavors especially investing.
In place of the subjective “it has a great looking chart” / “the stock has a low PE and a 2% dividend and we expect it to move 20% higher this year!” is our proprietary RMHI model that allows us to backtest over a decade of data to determine which balance sheet profiles and stock selection formulas actually work in creating above average shareholder wealth. Can this stock “get on base?”
In baseball the large market teams are captivated every year by the super stars that hit the free agent market just as investors are fascinated by the attention getting stocks such as Apple. The past does not equal the future and while the Angels may feel adding Albert Pujols to their roster for an average of $25 million a year till 2021 is a good deal, you must consider he is a richly valued player who is peaking at age 32. Will he be able to contribute at ages 38 to 41? For every Ted Williams there are many more Manny Ramirez’s who were done at 38 leaving the team stuck with a dead money contract.
But investors miss the questions they should be asking themselves: Is my chance of making an above average return on Apple (which sells at 17x 2012 eps, 4.4 times revenue and 6x book value) better going forward than shares of a stock selling 9x 2012 earnings, 0.46 times revenue and .75 times book value). This is the essence of Moneyball or as a wise man once said to me “Price is what you pay and Value is what you get”. FYI the unnamed stock is Voxx International, symbol VOXX.
And the Oakland A’s won their division in 2002 with a better record than the year before.
Long VOXX
First quarter 2012 returns are in as follows:
While the S&P 500 returned 12.6% (total return)
RMHI Growth accounts returned 18.31%
RMHI Moderate Growth returned 16.76%
RMHI returns are net of all fee’s and expenses.
Quick comment: While I’m very pleased with these returns the RMHI model performance exceeded our client returns due to accounts having diversified positions in Gold and in some cases a higher level of cash than normal. Portfolios diversified from equities lagged in performance due to the lack of upward price momentum in gold and bonds. Realizing that the government may not be in support of QE 3, we’ve sold our gold positions and would prefer to own cash in lieu of metals or bonds.
All market models remain in Bullish mode where any form of market weakness is being fought by aggressive buyers. While we do see some signs of incoming economic weakness (today’s poor job creation stats for example) the weakness has not translated to declining equity prices.
Just when you think the American Factory Food industry can’t get any worse:
Arsenic in our chicken NY Times
Speaking of food and the opening day of baseball one of our largest holdings is a food stock: John B. Sanfilippo and Son symbol JBSS. JBSS sells raw and processed nuts including peanuts. Before you speak up, yes peanuts are a legume and not a nut.
Unquestionably the stock is cheap as book value is $18 and the shares sell for $12.88. The stock is also very close to being a classic Graham “net net” but only if you don’t deduct 50% off the value of their inventory of nuts. If you take into effect that the price of nuts is strong and only deduct 25% off the value of their inventory it could qualify.
JBSS ranks at the very top of our proprietary ranking system and we own the shares for our clients. I own them as well.
