Fox business news wrote on March 19 (see here) that
"Taking a cue from Europe, U.S. markets kicked off the day with heavy losses after commentary from the world's largest mining company set off worries that China's economic expansion may finally be cooling. Industrial and commodity names are taking the biggest hit in early trade, with Caterpillar (CAT), Alcoa (AA) and Chevron (CVX) all falling sharply. The Dow is off 110 points, or 0.84%, while traders move into Treasury bonds, helping to stem a multi-day slide for the safe-haven assets.".
All I have to say to this is that following pundits, you risk being too late. And how could it be different? By the time the financial media gets wind of a trend, those who professionally follow what's happening, I mean the good ones, have already sold. In this case, we felt about 2-3 months ago already that Industrials were getting a little long in the tooth. But our disciplined portfolio management approach did not seem to think so. We learned, by past experience, both happy and painful, that a proven disciplined system tends to be more intelligent than we are… so we waited. And the system indeed gave us last month sell signals for 4 industrial stocks that had served us very well over the years -- Alliant Techsystems (ATK), Gardner Denver (GDI), Teledyne Technologies (TDY), Thomas & Betts (TNB) -- but were now ready do be replaced by some new themes. Two more industrials will most likely be sold this week or next.
Does this mean: "Sell all your Industrials," as the media seems to imply? Does this mean that Industrials are in for a rough ride? No, it does not! We are simply in a situation where an increasing number of industrials stopped surprising analysts on the high side. The analysts started catching up with their good performance and started issuing earnings and sales estimates which the companies cannot exceed anymore. Time to look somewhere else for new buys, hold the good Industrials in the portfolio and sell those which do - or seem likely to - surprise on the negative side. We have reduced our Industrials from a double overweight to market weight, and we are looking elsewhere for good buys, at the likely begin of a good run, not at the end, when everybody and his dog recommends purchasing.
Adding insult to injury, the quote implies that the "savvy traders" move into Treasury Bonds. A careless reader may think that buying fixed income is a good idea. Well, this is how careless readers tend to get burned. In our opinion, there is no worse place to go right now than fixed income.
Have we always been right? By no means! But were we more right than wrong? Our results over the past 11+ years surely would make one think so. Are we the only ones who have seen this coming? No way! But in order to find such managers one has to dig real deep and be willing to do your homework. And one should not look among the too-big-to-fail financial outfits. Absolutely not! They tend to live from past reputation and conscientious professionals, with their fiduciary obligation to their clients constantly on their minds, are rare in that environment, albeit you can still find some and we are working hard at finding them. Where you are more likely to unearth gems is among the small, entrepreneurial firms, created by experienced individuals, eager to grow and who can be badly hurt should they be caught not speaking their minds. I mean caught by their clients, not by some all-knowing, all-wise supervisory authority.
Additional disclosure: Additional theme tags may be "Sector Allocation" "Industrials" "Seeking Financial Professionals"