Ahead of the Herd

Ahead of the herd – So I managed to predict the inevitable drop in the oil price (see old postings), foretold the crunch in commodites generally, and am ‘about’ (crossing my fingers) to get my forecast (I posted on March 8th posting) about the $US right.  According to my good friend John A. the strategist:

“There has recently been universal agreement that the dollar can only decline. Amidst this consensus view, the dollar had stopped falling and was trading sideways over the last week. With this mornings jobless claims number the dollar has broken out. We think the rally could take the DXY close to 80 over the next few months” 

US$ Breakout

The problem with this investment business of ours is that correctness doesn’t sell well.  Making correct calls is a ticket to unpopularity, especially in Canada.  Once (not that I’ve ever claimed to be in this camp) an analyst or prognosticator gets something right, the press and peers watch anxiously for that person to trip so he/she can be ridiculed.    Here’s a quote from my book:

“When your behaviour is counter to that of the herd, your community will simply think you are daft.  But if it turns out you were right and they were all wrong, you are suddenly the devil incarnate in their eyes.”

Most really smart money managers (that leaves me out of the picture) therefore learn to keep their real expectations to themselves. 

The heads up I published a short while ago – about the market transitioning from commodity to broad rally in overlooked sectors continued to play out in April.  From Ford Equity Research, here’s are the company (and their stocks) features that have been working and not working:

Stock Selection Factors

Best: quality rating, long-term median growth estimate, market capitalization, return on equity, plowback on equity.

Worst: price/book value, standard unexpected difference, price gain-past 6 months, price gain-past 3 months, long-term debt/equity.

Quality has been outperforming ‘momentum’ and it’s momentum that’s been attracting the most money.  Gold, oil and metals have been the rage, while odd ball companies ranging from cosmetics & toiletries, tire & rubber, apparel, and drug companies have been delivering the goods (profit wise).

Markets (prices of stocks, bonds, real estate) are always ahead of the herd.  This is why it’s so important to ignore data like the following that’s been coming out over the past few weeks: 

U.S. durable goods orders rose 2.5% in March, an above-expected result. U.S. initial claims surged by 43k in the last week of April. The nonmanufacturing ISM was quite disappointing, falling 4.5 pts to 52.8 in April from 57.3 in March, a level not seen in eight months and the second slowdown in a row. The manufacturing ISM fell 0.8 pts in April, not as bad as expected for the sector that makes up 13.5% of private sector GDP (or 11.7% of the overall economy.

Expectations embodied in the markets were much too high in prior months – the herd wasn’t so much wrong per se, it’s just that the impact of Japan was hard to quantify and was largely ignored.  Now that there’s a shortage of cars and electronic components, and it affected other sectors (just like the high oil price took its toll), the correction I expected has arrived. All that matters now is “what’s next?”

The key as I talked about in my last posting, is interest rates, interest rates and yes, interest rates.  Hence one of the worst (see above) characteristics a company can have now is a high long-term debt/equity ratio.  I don’t know if you noticed, but those huge resource companies that have been on aquisition binges are borrowing lots of money to make those deals.  Not good.

While everyone is concerned about inflation and ‘hedging’ against inflation (silver, gold) I encourage you to “do the opposite” – just like George Costanza in this video link.  Remember to do as I say, not as I do.  Rather than typing this blog I should be doing the opposite – looking for a real job for example.  The conundrum for experienced fund managers?  Do I want to work doing a job managing a fund or team of PM’s that sells well but won’t make the customer any money?  Or do I look for work doing what I think is the right thing to do and make little money?  After so many years, I’m sure I can do either quite well.  Ideally, if you know of a job that allows someone like me to skate down the middle – let me know.  You’ll have to search Malvin Spooner for my Linkedin profile (no, I have no shame whatsoever).  In the meantime, I’m off to Scotland for the CFA Institute Annual Conference.  I figure if I hang around with some really smart folks, I might pick up some smarts via osmosis. Please feel to free scan through older postings for the next week, as it’s not likely I’ll be publishing much from Edinburgh (lots of scotch whiskey to become acquainted with).  Enjoy this clip – it will improve anyone’s decision-making capability:

Do The Opposite