By Thomas J. Smith, CFA
There are two questions in the title of this week's offering. The first question above may not be the more important one. The second question is where we are going to focus our efforts this week. There are several pieces of data that all market participants use or are at least aware of. Many use similar inputs in their analysis. The conclusions that people come to after the analysis differ, but there are many tools used by a wide variety of investors.
How do we look at the data that come across our screens or in the research we read? Do we attempt to perform our analysis in a fevered effort to only find data that supports our overall thesis? Maybe. If we find enough people that support our market stance we will feel more comfortable in our overall bullish or bearish opinion. Data certainly is going to be viewed differently by different participants. Value guys sell to growth guys and vice versa. Good honest debate is healthy. Sometimes the search for differing opinions forces us to question our current position.
Perhaps we have a certain level of maturity or experience that leads us to search for differing opinions. If we can use a variety of inputs that have differing views maybe we can better serve ourselves and better serve our clients. Maybe an overabundance of inputs leads to the paralysis of (over)analysis? It is never easy.
If I had to list my number one reason for my long-term success in selling technical research to institutions, I think it would be the word 'humility.' I tried not to promise more than I could deliver, and I downplayed my ability to forecast or give targets. I believe it was technician Alan Shaw who first said, 'The stock market is man's invention that has humbled him the most.' If you are not humbled in this business, you haven't been around for long or you are delusional." -Marty Zweig
Humility is not a word that you hear a lot from many industry titans. Mr. Zweig was certainly a titan. His mention of humility stands out to me. He did the best he could and downplayed his ability to forecast or give targets.
At times of extremes in the market there is always a long line of people willing to give detailed forecasts with precise targets.
I am going down this road today because I find myself hearing a lot of things that do not make sense to me. The reason they don't make sense is because often I hear people take very straight forward concrete ideas and then add their take on it and eliminate the usefulness of the idea.
To give you example, let's go back to the bull market of 2000. I was on a conference call with a colleague. The company was a high flying stock that had produced spectacular returns for the past several years. They just gave disappointing guidance for the first time in recent memory. The stock was trading off substantially after hours. In the conference call the CEO reduced sales and earnings expectations. The purpose of our listening to the call was to determine if we should place any credence in the new guidance numbers.
The CEO went on to talk about the great long-term outlook for the company and how this was just going to be a temporary bump in the road. As he spoke it was clear he had given many of these types of presentation in the past. He was good. He was a very smooth presenter and the stock price was stabilizing after hours. He guided down growth from stratospheric levels to simply spectacular numbers. If you took him at his word, then this could perhaps be a good entry point to buy the stock.
During that call there was one figure he gave to come to his final number that just didn't make sense to me. He focused on a term that was critical to reaching the new sales figures. All the numbers he gave were substantially lower than prior guidance. One number remained the same and greatly elevated from past quarters.
This company took orders for chips that may not actually get delivered for several quarters. When business was going like gangbusters, "turns" business spiked. This was business needed for a quick turnaround. Orders placed today for delivery-ASAP! It appeared to me that this number, which would be the most sensitive to a slowdown, remained at elevated levels. If you just added this number to the column it seemed this company would be just fine.
If you decided that this business would simply disappear, which turned out to be the case, then this was going to be just the first of many disappointing earnings releases, which ended up happening. Some of my teammates were very skeptical of the numbers and others had only experienced a rising market and didn't think to question the numbers given. The data simply did not make any sense. Clearly, the most frenzied orders of the company's business were going to be severely hurt by the slowdown in the tech sector.
When the facts change, I change my mind. What do you do, sir?" -John Maynard Keynes.
Some investors anchored themselves to the past glories of the tech bubble and thought their stocks were just about to "comeback." Or, many took a more resigned approach and went with, "I really like it long term." My overall favorite was, "I really believe in their technology." If a company says that growth rates are slowing and it is trading at a multiple that requires perfection, it is likely to go lower. Some didn't want to look at the facts and just stayed in the bullish camp. There were many newsletter writers at the time that were given the status of "Tech Guru." Stocks would jump at the simple mention of a ticker symbol in their latest update. It was easy to be a tech visionary when the stocks went up every day. When things started to change it became clear that many of these writers were just riding the tech wave and making a few bucks from subscribers. When you read their work it became clear they didn't know "code division multiple access" from "dense wavelength division multiplexing" let alone the photolithography process.
Don't fight the Fed." -Marty Zweig.
Mr. Zweig thought it made sense to be more bullish on stocks when the Fed was lowering interest rates and injecting money into the system and be more bearish when rates were going higher or liquidity was decreasing. There is certainly a lot of common sense in that short simple statement. To me it is instructive that he didn't add a lot of commentary after his statement. He didn't rail at the stupidity of central bankers and the ruination of all that is good. There was no addendum that said Fed actions are akin to treason. He was attempting to deal with economic facts and make an attractive risk-adjusted return. He wasn't angling for the maximum amount of likes or re-tweets. No forecasts of doom-and-gloom when a particular cycle ends. He just gave good solid advice that was verifiable and could be followed.
After things went off the rails in 2008-2009 the era of the perma-bear guru business started. In the tech bubble, the more obscure the tech name and esoteric the technology, the higher the price target placed on it. That worked until it didn't. After the last meltdown, humility certainly was not a characteristic of the next leaders in the newsletter writer sweepstakes. The more dire your prediction on everything - except gold - the larger your audience became. Stocks were for suckers and only a fool will ever own them again. Subscriptions rose and the rhetoric gained steam. Don't look behind the curtain or at the chart of the S&P 500.
One of the by-products of only viewing the world through a bullish or bearish viewfinder is that you have to say some awfully silly things to bolster your point. Mr. Zweig was clear and concise: "Don't fight the Fed." Many have changed their thinking to say that the market is only going up because the Fed is being accommodative. Let's say that that is 100% accurate. So what! It makes no sense to say you have identified the sole reason why the market is going higher only to then determine that it is not a "real" reason and remain bearish. It is just as silly as the tech perma-bulls that "really liked the technology" of that stock they watched go from $220 to $3.10.
"They only beat earnings on cost cutting and share buybacks." (Name withheld because there are too many that have made that ridiculous statement.) If the managers of the company were smart enough to reduce costs and allocated capital for buybacks, they should be applauded. When XYZ misses earnings and guides lower I can't say, well, it is only because the Fed was raising rates and oil prices spiked. Those are real reasons and they cause stocks to go down.
"People only have more discretionary income because they were able to refinance their homes and cars at historically low rates. I would like to see wage growth higher." (Some knucklehead I saw on TV a few days ago.) Sorry, people improved their personal balance sheets in a manner that you do not approve of.
What do you see? Do the images you see above change? They should. If they don't, then you need to get your prism to the shop.
What do you see when you look at this?