“Dash, Dash ... Dot, Dot” is all about Morse Code where the “dash” is three times the duration of the “dot.” According to Wikipedia, “Each character (letter or numeral) is represented by a unique sequence of dots and dashes. Each dot or dash is followed by a short silence, equal to the dot duration. The letters of a word are separated by a space equal to three dots (one dash), and the words are separated by a space equal to seven dots” (see chart 1 on page 3). This morning, however, I am not referring to Morse Code, but the “mad dash” I have been on for the past four weeks. A week ago today I finally warped back into my trading-turret from London the day before after two weeks in Europe seeing portfolio managers (PMs). It was 5:00 a.m. and I was trying to get ready for a CNBC appearance. On that 6:00 a.m. “hit” I reiterated my chant for the past few months that the Republicans were going to take back the Senate in Tuesday’s mid-term elections. The rest of Monday was spent attempting to recover from Europe just in time to jet out to Cleveland early Tuesday to see some PMs and then drive to Canton, Ohio for a speaking engagement at the Football Hall of Fame.
The next day (Wednesday) I was off to Dayton for a lunch and an event at the Moraine Country Club for a few hundred investors. Thursday arrived with an appearance on TV where I was asked, “Well you correctly predicted yesterday’s Republican win, but do you still believe an intransigent President Obama will become more centric?” As I wrote in Friday’s Morning Tack:
Either the president can move toward the center, like Bill Clinton and Ronald Reagan did, or he can dig in his heels and become even more intransigent. This is what Grover Cleveland did and it killed the Democratic Party with no Democrat president for 16 years. Right now all we are seeing is the typical Washington Waltz with both sides posturing themselves. I continue to believe there is compromise in the air, but we will have to see how that plays out between now and year-end. If my view prevails, it would be pretty bullish for the equity markets. But, in the near-term, I think we are making a short-term trading top.
Later that day it was discussions in Columbus with PMs and then a presentation at Ohio State University’s Alumni House. As usual, I was wearing my University of Michigan hat, which was immediately swiped from my head. Would whoever did that please return my hat? My hat notwithstanding, one of the better questions I fielded in my Columbus institutional meetings was about sentiment. The question went something like this. “Jeff, you were very bullish at the March 2009 lows, when investor sentiment was at a historic negative reading (very bearish). Currently, the same AAII Survey is as bullish as it has been in quite some time (see chart 2). Do you think these two extreme readings will mark the ‘bookends’ for the current bull market?” My response was, “I do not!” If you watch what individual investors are doing, rather than what they are saying, the inference is totally different. The AAII Survey (American Association of Individual Investors) is all about “counting noses” (what they say). From my perch I can actually see what more than 4 million individual investors are doing with their money; and with their money, they are not acting so bullishly. Quite frankly, most of them do not understand why stocks are “up.” They think it is all about the liquidity the Fed has injected into the system; and, there is little doubt that has helped. But, if next year’s “bottom up, operating earnings” estimate for the S&P 500 is anywhere near the mark, earnings will have almost tripled from their 2008 trough. Moreover, the equity markets do not care about the absolutes of good and bad, but rather are things getting better or worse. To be sure, things are getting better.
This concept was first related to me by Laurence Tisch, investor extraordinaire of Loews Companies fame. I wrote him a letter in late 1974 expressing the desire to come by and shake his hand. I was a “kid” at the tender age of 25. Not only did he grant me an audience, but he spent 30 minutes with me. I walked into his office, which was austere. This billionaire sat behind a plain Steelcase desk and behind him was a Steelcase credenza with a Quotron machine on top of it for stock quotes. After some pleasantries, I asked him why he was buying Overseas Ship Group. “Kid,” he said, “I can buy out the entire company at its current market capitalization, meltdown all of the ships, and sell the scrap steel for more than I am paying for the shares.” Boy, talk about value investing! It was in that meeting he expressed that all the equity markets care about is if things are getting better or worse. Ladies and gentlemen, currently “things” are getting better.
So after predicting the results of last week’s elections, I am being bombarded by the media with, “What does it all mean?!” Well, as stated last Friday, the Democrats are trying to downplay the results by noting that two thirds of the voters didn’t vote. I, however, have a very long memory. Recall, the year was 2006, and the date was November 7th, when the Democrats took back control of both the House of Representatives and the Senate after a 12-year hiatus. They also captured a number of governorships. The Democrats trumpeted it as a sweeping victory and a huge mandate, but here’s the rub. About the same number of voters voted in the 2006 mid-term as voted last week. I would warn the Republicans to not make the same “sweeping” mistake as the Dems did back then. As the Monness, Crespi, Hardt & Co.’s sagacious Sydney Williams writes:
Republicans should be pleased with the results. They will control both the Senate and the House. But commentators who claim they ‘caught a wave’ exaggerate, in my opinion, the results. When only five or six percentage points separate winners from losers that is not a wave, it is a victory, but one with a substantial minority. That was the mistake Mr. Obama made in 2008. He ignored the voices of the 47% of the people who voted for John McCain. Those who won last night should not make the same mistake now (read it here).
Speaking to last week’s mid-term vote is the seldom used, but very insightfulBallotpedia.org comments. As I have been saying for a while, “We are in the process of electing smarter policy makers and therefore are going to get smarter policies!” Last week that view came home in spades if you take the time to “drill down” into the backgrounds of the folks that were elected. They were practical, business-orientated people. I think this drives profound changes for policy in the months ahead, unless our president follows the path of Grover Cleveland. If that happens, all bets are off. But, in my 44 years in this business, if something absolutely had to happen, it has typically happened; and, we are at the point where things have to happen!
Looking at the entrails of the current market shows a number of things. As stated late last week, for a number of reasons, I believe we are in the process of making a short/intermediate trading-top. While I have trouble with the PM’s suggestion about the AAII sentiment surveys, there are a number of “finger-to-wallet” indicators reinforcing my near-term caution. There was actually an excellent article pointed out to me in my interview with a Forbes reporter late Friday afternoon speaking to the current environment titled “Three Reasons Not to Jump into Stocks Now”. Obviously, that “foots” the my work suggesting the stock market’s internal energy has been TOTALLY used up in the “dash” from the October 15th “lows.” I was pretty bullish at the time and said so on numerous TV shows. Regrettably, I am not so bullish on a trading basis here, believing a “trading top” is at hand. Accordingly, those folks with the fortitude, and with the cash we advised raising prematurely in July/August, that took our advice to put some of that cash back to work around the mid-October lows, I am now recommending, at least on a trading basis, using the dreaded four-letter word almost never uttered on Wall Street ... SELL. Longer-term, I think the equity markets are still involved in a secular “bull market” that has eight to ten years on the upside.
The call for this week: This morning the U.S. dollar is lower and WTI crude oil is back near $80 per barrel. The Russian Central Bank has abandoned support for the ruble and Iraqi military forces enter Baiji to stop ISIS’ attempted takeover of the country’s largest refinery. This news has left the preopening futures flat at 5:30 a.m. Nevertheless, I don’t like the near-term divergences that are occurring. The small/mid-cap stocks are lagging, the market’s On Balance Volume is below the August/September highs. Ditto the NYSE Composite (NYA/10864.58), and while the S&P 500 (SPX/2031.92) made new highs last week, the D-J Industrials are at resistance. I still think we are making a short-term trading top. If the SPX breaks below 2020, 1990 comes into view and then 1940 – 1950; Dash, Dash ... Dot, Dot!