• Faint or feint?!

    The week began well enough as I winged into JFK and weaved my way into the city a week ago Sunday. I have had a love affair with NYC ever since my father took me there to see the Christmas tree lighting when I was six. Dinner that night was at the Da Noi right across the street from Smith & Wollensky’s on 49th at the corner of 3rd Avenue. The next day it was all about meetings with portfolio managers (PMs). That night we tried to get into Avra for dinner, then the Sea Fire Grill, Smith & Wollensky’s, and Da Noi (again), but all the bars were full (who says the economy is slow). So we walked down to Marco’s place (Marcony’s) on Lex between 31st and 32nd. For the record Marco was a partner, and ex-chef, for Scalinatella at 62nd and 3rd. The next morning it was co-hosting Fox Business followed by more PM meetings and then a “hit” on Bloomberg. The highlight of the day, however, was seeing my friend Phil Orlando and his boss Stephen Auth. Wednesday was a blur with back-to-back print media meetings and then a ride to Staten Island to speak to a group of investors for one of our financial advisors, namely Ziam Hajzari. Thursday it was more of the same, except for a terrific meeting with an investment team captained by Dan Roarty, portfolio manager and CIO of the thematic team at AB Global (Alliance Bernstein). I like thematic investing very much and would like to feature this fund, but I can’t find my notes. I will have more on this when I dig those notes out. That afternoon, I sailed in for an appearance on CNBC’s “Closing Bell” from the floor of the NYSE with Kelly Evans and Bill Griffeth. Subsequently, we went across the street to Bobby Van’s for a round of drinks with the gang named “Friends of Fermentation.” Of course the sagacious Arthur Cashin was there along with the rest of the usual suspects. Later that night Eric Kaufman, and his VE Capital partner Victoria, took us to dinner at the exquisite Acappella in the Village. Following dinner, I warped into Janet Yellen’s afternoon address only to see her almost faint. Subsequently I thought to myself, “Is Janet’s faint going to cause stocks to feint?” For those unfamiliar with the term “feint,” Webster’s defines it as, “To make a deceptive or distracting movement,” and sure enough that is exactly what happened on Friday.

    Friday began with a surprise Zip-a-Dee-Doo Dah resignation from House Speaker John Boehner, Janet’s soothing words from the night before, some good earnings announcements, higher crude oil and world market prices, a stronger U.S. dollar, all combined with our expected upward revision to 2Q15’s GDP (+3.9%). Most importantly, there were very positive improvements in the entrails of the GDP revision. To wit, consumption and investment jumped, while housing (residential fixed investment) and corporate (non-residential) fixed investment were positively revised. Accordingly, the preopening S&P 500 futures were sprinting higher by some 20 handles before the opening bell. With that as my backdrop, I walked from Grand Central Station to see the good folks at Capital Group, who just happen to own American Funds. Patrick Faulkner and I met with a number of PMs from 9:00 a.m. through 11:30 a.m. discussing the state-of-the-state. Our meeting with David Daigle was interesting on the fixed income side since he helps manage the flagship “American Funds High-Income Trust” (AHITX/$9.96). We gleaned a number of investment ideas from him, especially in the telecommunication spectrum space. Next was Andrew Suzman, the PM for the American Funds International Growth and Income Fund (IGAAX/$28.51). Andrew argued that on a worse case basis the S&P 500 earns $110 per share next year (the current S&P bottom-up operating earnings estimate is $130). Using that, and a price earnings (P/E) multiple of 15.5 gives you a 1705 price target for the S&P 500 (SPX/1931.34), or about 12% down from here. But, he also argued you could just as easily see a 12% rally from these levels. He likes Spain, noting that things are getting better. He has a large investment in Japan, suggesting that Sinzō Abe is the equivalent of Ronald Reagan and Margret Thatcher in that Abe believes, “Bad corporate governance is not in the best interests of Japan.” He also thinks Japanese companies are listening, and paying attention, to shareholders’ interests. As for China, he questions, “Can a one party government manage through all the various cycles?” Moreover, “Can the Chinese government deliver on the Chinese peoples’ raised expectations?” Ladies and gentlemen, those are two REALLY good questions, which is why Andrew Suzman, and I, do not own any Chinese equities.

    One of the more intriguing PMs, and funds, I met with last week was at JP Morgan. As I wrote in last Wednesday’s Morning Tack:

    (For those unwilling to use our strategy of just “sitting” and letting the stock market tell us what to do), I met with Hamilton Reiner, JP Morgan’s portfolio manager (PM) for the JP Morgan Hedged Equity Fund (JHEQX/$15.73). What is really interesting to me is that the fund ALWAYS has a quarterly downside hedge in place attempting to insulate the fund from a 5% to 20% decline. According to Hamilton, the fund has half the volatility and beta of the S&P 500 (SPX/1942.74) (as an outcome) and has a gross dividend yield approaching 2%. The fund consists of some 200 of the S&P 500 stocks, which are screened using JP Morgan’s excellent stock selection process and results in a portfolio that has similar characteristics of the S&P 500. I also really like that Hamilton owns his fund in a big way. As my father used to say, “I like a PM that eats his, or her, own cooking!”

    Then there was the excellent conversation I had with Carol Lippman. For those of you that don’t know Carol, she was one of the best stock pickers at the venerable investment firm of AG Edwards. As an aside, Ben Edwards was one of the finest men I have ever met in this business. After leaving AG Edwards, Carol joined Dearborn Partners, where she is the PM for the Dearborn Partners Rising Dividend Fund (DRDAX/$11.18). In her own words Carol writes:

    It occurred to me that another feature of our Dearborn Partners Rising Dividend strategy is that we try to do our research so well before we put a company into our portfolio that we hope to never have to remove it. Our strategy emphasizes investing in what we consider to be great companies, not stocks, per se, because of course we have no control over stock market action. It takes time, of course, for companies to grow, which is why our intended time horizon is a minimum of five years. If we can have a high degree of confidence that these excellent companies have the potential to consistently increase their dividends, i.e., paying us no matter what the market does, then we include them in our portfolios, being cognizant of prudent sector diversification. Since the inception of our mutual fund on April 10, 2013, average annualized turnover through August has been 7.7%. In other words, although investing in a dividend strategy always makes sense in qualified plans, this is quite tax efficient for inclusion in taxable accounts, too.

    Of course, Carol’s strategy foots with that of none other than Warren Buffett who states, “The best holding period for any stock is forever!”

    The call for this week: This morning I have not spent much time on the equity markets because to me the recent action remains worrisome, although I continue to be hopeful we are in a bottoming process; and as often stated, it is typically a process and not an event. To that point, I have included an old report from our now departed colleague Ralph Bloch, who did an excellent job of explaining said process (page 3). Interestingly, there is an analog chart from Bespoke comparing the same bottoming process Ralph Bloch wrote about to the current situation and the October bottom of 2011 (see chart on page 4). Back in October of 2011 we were making the comparison to the bottoms in the fall of 1978 and 1979 where in both years the D-J Industrials made a capitulation low followed by a series of failed rally attempts. Then, before the final low was made, the senior index came back down and undercut the capitulation low and that was it, the lows were “in.” That sequence is what gave us the conviction level to tell participants to buy the October 2011 undercut low and the rest, as they say, is history. And maybe, just maybe, it will play that way here. Yet also of worry is that the German DAX has already fallen through its respective August low, raising fears of a Lehman Moment in the German banking complex. Also worrisome is the action of the Advance/Decline Line, which is suggestive of an intermediate top in the equity markets. This morning the S&P 500 preopening futures are off about 7 points on the Catalan separatist vote, China’s bad industrial production numbers, Russia’s Syrian initiative, and the Taliban breach in Kunduz. If this is the typical Monday traders will attempt to stage a rally after a weak opening. If that fails, it will not look good.

    Exhibit 1 - Bulls, Bears & Bloch – July 30, 2002

    We recently reviewed past "Bear market bottoms," hoping to identify the "missing ingredients" for the end of the current bear market, in force since early 2000.

    What we discovered is that in going back to 1949 most -bear markets ended following a series of events- a "Low-Rally-Retest" sequence that occurred over a period of time. In looking over history, it was first necessary to distinguish between a "low" and a "bottom." A low is a function of price only, a starting point for a rally & the beginning of a bottom building process. A bottom is a function of price & time and a level from which a multi-week up trend can begin. Since it starts as a counter-trend move, it is a process, not a one-day event. Once a sharp high-volume price low is set (as it was on Wednesday, July 24), we need to see more ingredients follow before we can say that a bottom has been created.

    Here is a table exhibiting the results of our observations:



    Contributed by Raymond James
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