Friday, July 22, 2016

Weekly Message: Subjectiveness rules!

If you happened to be listening to Bloomberg Radio Wednesday afternoon you heard Axiom Capital Management’s Gordon Johnson offer his view of markets and the economy. And, therefore, if you’re the least bit impressionable, you might attribute the recent rally in commodity-based stocks to “expectations of stimulus” from the world’s central banks in response to the unexpected Brexit vote --- definitely “not from fundamentals”. I.e., the rally is “very weak in terms of substance". While, yes, commodity stocks have done well since the “Brexit bottom”, they weren’t looking too shabby at the start of the year either:      Click each chart, then click again, to enlarge... Commodity Stocks As for the U.S. economy, Mr. Johnson explained that auto sales are rolling over (well, after Johnson's interview GM reported record Q2 earnings and raised its full-year forecast) and commodity demand is waning --- while durable goods orders, import and export prices are pointing to recession. He mentioned that United Rentals --- a company his firm tracks, and has a sell order on --- was set to report Q2 earnings at 4pm that afternoon: “We think the numbers are going to be bad, and we think that overall the U.S. is still mired in economic weakness”. Well, hmm… Here’s how United Rentals stock responded to that earnings report in after-hours trading: United Rentals From
NEW YORK (TheStreet) -- Shares of United Rentals  (URI) are spiking 10.25% to $77.02 on heavy trading volume Thursday afternoon after reporting second-quarter earnings and revenue that topped analysts' projections.  After yesterday's market close, the Stamford, CT-based equipment rental company reported adjusted earnings of $2.06 per share, beating analysts' estimates of $1.82 per share.  Revenues were $1.423 billion for the most recent period, coming in above analysts' estimates of $1.399 billion.
He sees fundamental weakness and doesn’t think investors are positioned accordingly. He thinks now’s the time to sell. What I found particularly striking about Mr. Johnson’s interview was his unwavering confidence. He offered zero prospects that he could be the wee bit off in his assessment of current conditions. Oh, and here’s an up-to-date look at Citigroup’s U.S. Economic Surprise Index (tracks actual economic results against economists’ predictions): Econ surprise index Honestly, I have no problem with Mr. Johnson’s assessment. I actually appreciated the interview; it had me double-checking some of my own assumptions. Again, my amazement was not in his position, it was in his lack of humility. If you happened to be watching CNBC Thursday afternoon you watched Bank of America Wealth Management’s Chris Hyzy explain how the recent rally in stocks is “pretty much justified”. He cited the beginning of the year worries; “all of which have faded so far”: which were the China currency devaluation, the strong dollar (and the impact that it had on industrials, materials and energy), the collapse of oil prices and the threat of a U.S. recession. He says we're seeing earnings revisions go the other way because “the strength of the dollar is fading and the oil price collapse is fading.” Well... the white line is the dollar, the orange is oil. The arrows point from July 11th: The dollar and oil When asked if we’ll see a migration away from dividend payers and more flow toward cyclical stocks, he said “this is going to be a broad rally. This is not going not to be one of those targeted deployments of cash flow from one place to the next.” He said we’re going to have lower rates for longer and, therefore, the yield on stocks will continue to be something investors reach for. Well... the white line is xlk (technology stocks [cyclical]), the yellow is xlu (utilities [defensive dividend stocks]). The arrows point from July 6th: xlk and xlu As with Mr. Johnson, I have no quarrel with Mr. Hyzy --- I appreciated his perspective. And, as with Mr. Johnson, aside from the “pretty much”, I find his unrelenting sense of certainty --- given the perpetual uncertainty of near-term market and economic movements --- to be utterly startling! So, how is it that two gents --- both having ascended to posts prominent enough to warrant the featuring of their mugs on the world’s most prominent financial networks --- can embrace embody such opposing opinions on the state of the financial world? I have a theory: Regardless of acumen or academic accomplishment, at the end of the day we’re all imperfect humans who are at the mercy of our upbringings, our impressionability, our physiology, our egos, our fears, our desires, and, for investors and advisers, the present positioning of our portfolios (let’s pray not our politics!). All opinions are, therefore, subjective. So then, the next time you hear a Mr. Johnson wax on about what’s wanting in the world, know that there’ll always be a Mr. Hyzy on another channel who’ll bring back the sunshine. The bloke whose position you identify with will say something about your upbringing, impressionability, physiology, ego, fears, desires and, dare I say (but I pray not), your politics… Here’s my subjectiveness on the markets Thursday morning:

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