Phil's Stock World
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Magical Monday Markets – Who Needs GDP Growth or Profits?

There's an emergency meeting of the Fed today. 

This afternoon, the Fed will attempt to get their act together prior to a special meeting with both President Obama and Vice-President Biden to discuss ways in which the Government might be able to stop the horrific slide in the GDP forecast that's been going on for the past 30 days and is ACCELERATING to the downside at a rapid pace – as noted by the Atlanta Fed's updated GDP Now forecast, which has dropped all the way to 0.1% – almost as low as the interest rates meant to stimulate it.  

That's down from 2.7% forecast just after Q4 earnings were announced because CEO after CEO said "Well, last year was tough, but things are looking better for 2016."  Given the reality of the earnings reports, the market rightly corrected back to our 1,850 Must Hold Level (see our Big Chart) but then, a miracle occurred after the G7 meeting and all of our Central Banksters got EVEN MORE DOVEISH – to a level even doves who love to go to dove strip clubs for hot, dovish action thought was "a little bit extreme."  

All this dovey action could even be forgivable – if it were having any sort of effect on the economy – but it's not.  It is so not that, since the start of the year, earnings estimates for the S&P 500 have fallen 10% – even as the market has staged a 10% recovery off the lows.  

Does the market know something we don't know?  No, the market is an idiot – why would you listen to the market when it's been wrong so many times before?  The market is nothing more than a tale, told by and idiot, full of sound and fury, signifying nothing.  Shakespeare knew that 500 years ago – when will you catch on?  No one knows what's going to happen (just ask Hugh Hendry, who manage(d) $1.5Bn) but that doesn't stop them from telling you what's going to happen – especially if you are willing to pay a fee for their no-better-than-a-coin-flip knowlege of the Future.  Here's a chart of how many funds out of 2,862 beat the market average over the course of 5 years (it was 2).

Many people are willing to pay for someone else's guesses because we KNOW our own guesses are 50/50 at best so how could someone else be worse at predicting things than we are?  Unfortunately, the more of these people you follow – the higher your chance of underperforming becomes.  Why do people pay $20 to have their palms read?  They WANT to know the future and no one wants to know it more than investors.  I don't predict the future – I tell you what IS happening and I tell you how I THINK we can make money from the trend based on my past experiences and observations.  That's not predicting the Future – it's a simple cause and effect equation and even that doesn't always work out as planned – so we hedge!  

Logically, if we have some idea of fair market value (S&P 1,850, Dow 17,600) and that then tells us the top (2,100, 18,500) and bottom (1,665, 15,800) of their ranges and that then makes it simple to decide when to buy (low in the range) and when to sell (high in the range) taking into account, of course, any individual factors affecting the components in question.  

That's all there is to our Fundamental Investing Approach.  I wish it were more complicated than that so I could write a book and go on tours but I'd feel silly spending 500 pages explaining what just took a paragraph to state clearly.  That's something I learned in Venture Capital investing – if the person you're investing in can't explain what they do and why they do it in 30 seconds – don't make the investment!  

The same goes for stocks we buy.  I don't do huge write-ups on the stocks we select for our Long-Term Portfolios – if they don't have simple, obvious reasons for us liking them, I'm really not interested because how would we be able to know when the story changes and it's time to get out.  Complex analysis has a place in investment houses, where one person or a team of people are assigned to monitor one stock in which tens of Millions are invested but, for an individual investor – you need to have 10-20 stocks you invest in where you KNOW EXACTLY why you are in them at any given time.  

Anything else is chaos and THAT is why you feel the need for someone to guide you – too much chaos.  Reading your palm will not make that go away but building a solid portfolio based on sound Fundamentals over time will.  See more of this discussion in this morning's Live Member Chat and no, I'm not trying to sell you my own brand of stock market BS – I'm just warning you to be cautious of what ANYONE is trying to sell you.  That's something I noticed the need to remind people of last week as we discussed the merits of stock market screens.  

And keep in mind that free advice is still trying to sell you something.  If they aren't making their money from you then you are, at best, an eyeball who's attention they are after and, in the worst and usual cases, there are sponsors or others paying them behind the scenes who they do want to please and if pleasing them means steering faceless suckers like you into bad investments – so what?  

Last year we focused on long-term investing strategies and this year we're going to focus on Smart Portfolio Management Techniques.  We'll talk about allocations and entry and exit strategies as well as diversification, position management and (gasp!) profit-taking.  In fact, we're in the midst of a profit-taking excercise in our Long-Term Portfolio, as we're trimming some of the fat and raising more cash into this earnings period, which kicks off today with Alcoa's earnings report after the bell.  As I said to Forbes when I was interviewed last night:

Earnings season is widely expected to be a disaster, led by Energy Companies dealing with the lowest-priced oil and gas sales of the year in Q1 and a breakdown in M&A and lending that has sent Financial earnings toppling as well.  Indicators are that Retail Sales are weak as well so no consumer, no M&A and no CapEx by the biggest CapEx spenders (energy sector) does not bode well for Q1's reports.

That being said, this is no surprise to anyone and expectations of earnings could not be lower so a lot of these moves were already reflected in our January sell-off.  Since then, the Fed has assured us that all will be well and they are ready to hold our hands for another year if they must so hope springs eternal in the spring and any company with even a small beat (over the low expectations) is likely to be rewarded by traders looking for safe havens (any port in a storm).  

See, I'm not predicting the Future.  I'm simply stating the facts and coming up with a logical premise.  THAT is what investing should be about.  Betting on individual companies is like betting on one particular ant to march in a line with the other ants – mostly they do that but, once in a while, for reasons unknown, some of them will get out of line and go do something else.  Whether that something else is better or worse for the better is random but a smart investor looks at the line of ants and makes 20 bets on 20 ants under the assumption they follow the trend line based on the already observed behavior of hundreds of other ants.  Very simple!  

I didn't just put up the picture of the mobius strip for fun:  Your the companies you invest in are like ants, they can seem to be moving forward but are really going nowhere.  They can seem to be moving backwards – but are actually making progress.  LOOKING at the recent action doesn't tell you what is Fundamentally happening to your stock and the shorter-term your view is, the less likely it is that you'll be able to get a handle on the bigger picture.  

Earnings will give us a good view of the bigger picture and, until then, we are very well-hedged, slightly bearish and very much in CASH!!! into the market uncertainty.  Let's all be careful out there!  


Provided courtesy of Phil's Stock World.

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