The Market in Review
From Paul Siluch, Lisa Hill, and Peter Mazzoni
Financial Advisors
Raymond James Ltd. – Victoria BC
March 20th, 2015
This week’s articles and insights
1.
2.
3.
4.
Planning Your Retreat
Winter Slowdown
Packing it On
Frozen in Cash
“In the world of business, bad news often surfaces serially.
You see a cockroach in your kitchen. As the days go by, you
meet his relatives.”
– Warren Buffett
Your Index Report
Dow Jones Ind. Avg…...18,128 + 2.13% Last Week + 1.71% year-to-date.
S&P 500………………..... 2,108 + 2.66% Last Week + 2.39% year-to-date.
(+10.80% in CAD)
TSX………………….........14,942 + 1.43% Last Week + 2.12% year-to-date.
Planning Your Retreat
In 1808, when Emperor Napoleon’s power was nearing its peak in Europe, he
had conquered many of the countries surrounding France. By 1811, he ruled
virtually all of Europe except for Britain, and when Russia began resisting his
dominance, he made the fatal mistake of invading (and thus breaking the first
rule of staying in power, which is to never get involved in a land war in Asia). In
1808, Napoleon was barely abiding by a deal with England that left Portugal
alone, but he was intent on seizing Spain. He had amassed close to 200,000
troops in the north to carry out this objective. French and allied German armies
quickly took Madrid in the centre of Spain and were preparing to head south and
into Portugal, breaking the truce.
He would have succeeded, too, except for a pesky army of 30,000 British
soldiers commanded by Sir John Moore. Moore harried the French from the west
and disrupted their communications, slowing their advance. The problem was,
Moore had no idea how large an army he was up against. He soon found out.
The giant army turned their attentions on him and forgot about the rest of Spain.
Moore was an excellent tactician, unlike many generals in past and present. He
prepared in advance for retreat, just in case. He ordered a rescue fleet of ships to
meet them in Lisbon on the Atlantic and laid stores of food along their path as
they marched into Spain. He knew they would need it in the event of a hasty
return.
The British soldiers wore red coats. The red uniform was like “waving a red rag to
a bull” as far as Napoleon was concerned - capturing an entire British army was
something he desperately desired. The emperor turned his entire army west to
pursue Moore and pushed them hard. Because he was prepared, however,
Moore was able to stay ahead by marching double-time toward Portugal.
Through tough conditions of snow and mountain passes, he walked his men,
horses, and guns even at night. Many of the British soldiers resented this bitterly.
They wanted to stand and fight, even when they knew the odds were against
them. Moore suppressed his soldier’s ego and pressed the retreat. Of the 30,000
man army, 6,000 were lost to injury, desertion, or drunken pillage. On any historic
battlefield, these losses were exceptionally small. Compare this with Napoleon’s
own unplanned retreat from Moscow in 1812. He took 400,000 men in and
returned with less than 40,000.
Once they arrived at the ocean, the English rescue ships were two days late. The
French caught up, but were exhausted. The British, rested after four days and
with cannons mounted, dealt the French army a bloody blow and prevented them
from ever conquering Portugal.
Sir John Moore did what many of us fail to do as investors: he hoped for the best
but planned for the worst. He had his escape route mapped out and was
prepared to take losses to save the bulk of his army. He did not slow down to
help those who were holding him back. Those who fell behind were left behind.
(source: National Library of New Zealand, 1914)
As investors, we often hang on to those soldiers holding us back. We like them.
They have been good to us in the past and we still see value in their potential.
Sometimes, hanging on is the right path. Many times, though, it can be years
before companies and sectors return to favour. Bombardier (TSX BBD.B),
Canada’s shining star in the aviation sector, is such a laggard. Once a perennial
star in growth portfolios, it has disappointed Canadian investors for 20 years,
time and time again with delays and scandals.
It has fallen behind. It should be left behind.
Bull markets end when fewer and fewer stocks participate in the rally. Stocks,
then, are no different than Sir John Moore’s soldiers. Had he waited for his 6,000
laggards to catch up, he would never have saved the remaining 24,000. Today,
we are seeing some erosion in the number of sectors participating in the bull
market advance. Oils, commodities, telephone companies, and tobacco stocks
come to mind. But, there are enough stocks today pushing forward to declare the
bull market still alive.
Aging, but still alive.
What would Sir John Moore do today, if he were an investor? He would watch his
indicators closely for a breakdown in volume, keep an eye on insider sales, and
pay attention if the early warning signals start flashing. They are not flashing yet,
but we cannot ignore the fact that this advance is now six years old. It is still a
bull market, but it is an old bull market.
And he would leave his laggards behind. We sold an oil service stock this week
in our managed portfolios at a loss. It was painful, for there is much value there,
but value that may take years of patience if oil stays low. We did what we
advised in the last letter: we bought an oil refining company, which is a user of
oil, and not a producer.
Winter Slowdown
March, so far, has been a negative month for global stocks. A little worse for
Canada than the US, but not bad for European stocks. In general, economic
conditions have been worsening in the last two months. The chart below shows
what forecasters were expecting (the blue line) and what has actually been
happening (the green line):
Some of the weakness is easy to explain:
1. Oil prices have hurt the economies of the Canadian west and the US midwest and south. Since cities like Calgary and Dallas have traditionally been
some of the most dynamic for new home building, the sudden drop in new
home starts can be blamed on falling oil and…
2. The weather. Victoria enjoyed a wonderfully warm winter, but most of the
continent is still shivering. This slows sales of everything.
3. The US dollar has been on a steep climb. Almost every world currency has
declined against the almighty buck. A strong dollar helps the US economy
to a point, but we are now in the “strong dollar hurts economy” zone:
Money has been flowing into the US in search of higher interest rates. And why
not? 10- year US bonds yield 2.1%, while they pay just 0.8% in Germany.
Much attention was focused on the words of the US Federal Reserve this week.
If they voted to raise interest rates, even more money would come into the US
market, and the US dollar could rise even more. For now, the US central bank
has kicked the can down the road a few more months. However:
“Unless we get a meaningful economic slowdown, we seem to be progressing,
step-by-step, toward a hike in rates sometime later this year. Rising interest rates
frighten a lot of people, hence all the coverage recently. However, history shows
us that spikes in the target Federal Funds rate are not necessarily the immediate
market killers everyone expects them to be.”
-
Jeff Saut, Raymond James Chief Strategist
Viewed in isolation, there is no way American rates should still sit close to 0%
with employment picking up the way it has. But America no longer operates in a
vacuum. On Wednesday, Janet Yellen acknowledged slowing global conditions
in the Fed’s decision to delay interest rate hikes:
The stock market loved it. For a day, anyway.
Expectations are now that US interest rates may increase in November instead
of September-October.
Packing Too Much On
Some time ago, we investigated Weight Watchers (NYSE WTW) for our
portfolios. The shares appeared undervalued and, with obesity climbing
worldwide, what better theme than weight loss?
We did not invest, for a variety of reasons. One was a nagging bulge in its bottom
(line). Weight Watchers today has packed on too much debt for a company
losing market share to electronic fitness wristbands that monitor heart rate and
smartphone aps that count every calorie on an hourly basis. It has not gotten any
better with the launch of the iWatch. With sensors that will one day alert you to a
pending heart attack, the iWatch can do almost everything Weight Watchers can
– except sell you an overpriced low-calorie meal.
As Weight Watchers shares have fallen further – from $18 to $10 - the debt load
has not fallen with the shares. Think of it like this: a six-foot person weighing 200
lbs. may not be overweight, but a five foot person packing the same 200 lbs.
certainly is. That’s Weight Watchers today, and that’s why the new target is just
$5.
As smartphones, and especially the iPhone, have replaced point-and-shoot
cameras, video cameras, desktop computers, and home telephones, the iWatch
claims its first victim in its new technology race.
We prefer companies with lower debt, such as Westjet (TSX WJA) in Canada
and Merck (NYSE MRK) in the US.
Frozen in Cash
One of the hardest things to do is invest in a rising market. Or in a falling one. We
are constantly bombarded by messages of doom and so the pressure to sell out
now to buy back in later is immense. Everyone wants to ride the up while
avoiding the down.
The problem is starting with a plan – to sell high and buy low, for example – that
we don’t carry out. The result is that we end up in cash. When the corrections are
small, as they have been since 2011, many have missed getting in as markets
turned up again. We know people who have stayed in cash since 2009 and have
watched markets double. Cash has become almost a prison for them.
What keeps us out? Ben Carlson, author of A Wealth of Common Sense lists
these factors:
1. Fear. Every financial website has at least one commentator predicting doom.
2. The belief that we can do better than the market through timing.
3. A loss of confidence in everything due to government meddling.
To avoid being paralyzed by fear and greed, it is vital to have a plan. Institutions
write comprehensive Investment Policy Statements so they are always invested
in something. This eliminates the fear of taking action. They are never paralyzed
because they always have a toe in a variety of investments.
People who work in the financial services industry are very prone to holding too
much cash. The temptations and terrors are magnified on this side of the desk.
The first step to overcoming this is to take small steps. A plan to invest small
amounts over a period of months, for example, or setting up reminders on the
calendar to invest on a down day. Cash is a comfortable thing, but with yields of
just 0.75% per year, it is not a good long-term investment.
Of course, cash is an investment option. When stocks grow too large in
portfolios, institutions sell some off and raise cash. But they always put it back
eventually. And that’s the trick – having a plan and the conviction to carry it out.
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Westjet Airlines - The analyst and/or associate has viewed the material operations of WestJet Airlines.
Raymond James Ltd. has provided non-investment banking securities-related services within the last 12
months with respect to WestJet Airlines.
Bombardier – The analyst and/or associate has viewed the material operations of Bombardier. Within the
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