by Jason Kelly
Wednesday, August 26, 2015
STOCK MARKET CALM
I was pleased to discover in the recent stock-market rout that converts to “The 3% Signal” remained calm, with many expressing relief that they didn’t suffer the stress they had in past market turbulence. This is excellent news. One of the primary benefits of the plan is achieving market-beating performance with a much lower level of stress overall — and no stress whatsoever from indecision.
A chief nail-biter caused by stock volatility is not knowing whether now is the right time to buy or sell. The pundits were out in force on both sides of that advice at the end of last week and beginning of this one. Some urged scooping up emerging-market stocks on the cheap, some pushed energy stocks. On the other side were those warning that a bear market had arrived and it was time to sell. One such sell note you’ll read below, sent by Ken Moraif.
The beauty of The 3% Signal is that it doesn’t care what stock prices do, and neither do the investors following it. The plan is built from the ground up to withstand and, in fact, benefit from volatility. The only certainty in the stock market is that prices will fluctuate. Doesn’t it make sense to enter the fray knowing so, with a plan that not only expects price movement but is prepared to react intelligently to it? Of course it does, and this is The 3% Signal’s reason for being. Its market-beating pedigree is important, but I find it even more gratifying to see people loving their newfound way to participate in stocks without stress for the first time.
Reader Nikki sent the following last night: “I work in medicine, with educated people, and it was amazing how they were lamenting and being so pessimistic yesterday about their shrinking retirement funds. Meanwhile, I’m looking forward to the weekend when I’ll have time to review how much I have in bonds and my cash fund, waiting to go shopping.”
Ann said: “The reason the plan works is that price dips draw in more buying power, and price rises skim profits. I knew this, and wanted it, so it was amusing to me when financial media went nuts about prices going down. ‘Yeah,’ I thought, ‘and why is that bad, again?'”
Tamar remembered panicking in 2008, calling it “stupid” in retrospect. Now, he wrote, “I am NOT experiencing stress. … I feel comfortable with the bond fund and being able to buy …”
This is the right attitude. Stocks go up, stocks go down. Nobody knows in advance when or why or by how much, so the best we can do is set a mathematical definition for how much we want out of them in a time frame of our choosing. In The 3% Signal, these parameters are set as wanting 3% per quarter, hence the name. If stocks drop below that amount of growth, the plan uses capital from its attendant bond fund to buy the shortfall. If stocks rise above that growth amount, the plan sells the surplus and puts it in the bond fund for safekeeping.
This automated to and fro between the only two funds involved in the plan, removes worries about whether interest rates will harm bond-fund prices, whether China is signaling a global recession, what the latest out of Greece means, and so on. It all filters out to just the gentle background sound of the market, which gurgles up and gurgles down, with the plan guiding its capital to flow appropriately in response.
Stress? Leave that to the experts.
KELLY LETTER CRIB NOTES
From Note 30 sent to subscribers last Sunday morning, with data as of Friday, August 21:
Stock markets around the world hit the skids for a litany of reasons last week, including: faltering growth in China, the devaluation of the yuan, turbulence in Chinese stocks, collapsing oil prices, the Federal Reserve’s apparent indecision around whether to raise interest rates next month, and yet another snap election in Greece. A gloom is settling across once high-growth markets like China, Brazil, and Russia.
Our approach thrives on this kind of uncertainty, which is good because markets are always uncertain. Now and then the volume goes up, but really it’s the same song playing over and over again. Teaching our capital how to dance to that song is the key to low-stress prosperity. …
It’s not obvious the market will keep falling. From last September 18 to October 15, the S&P 500 fell 7.4% and the punditry said the bull market was finally over. The index then rose 12.3% by December 29. Last week’s drop of 5.8% took the S&P 500 down 7.4% from its July 20 peak at 2128. The odds for a snapback are as good as the ones for a meltdown, and I reiterate my view that now is a fine time to get a signal system started if you haven’t yet, or stick with one if you have. …
I’ve been monitoring the Apple Watch in the market, and I think it’s a flop. The company hasn’t said so, nor have analysts, and data are unclear, but I’ve observed the energy in various Apple stores in the United States and Japan, and the Watch area has been a ghost town everywhere so far. This makes sense to me. Why would anybody want a remote control for something already in their other hand? As far as I can tell, that’s basically what the Watch is: a remote control for the user’s iPhone.
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The Kelly Letter is emailed to subscribers every Sunday morning. It costs $19.97 per month or $236.97 per year. See a two-minute video about its distinctive approach to investing at:
THE Z-VAL ZONE
The following is from an email sent by Ken Moraif last Friday.
“Well, I actually didn’t think it was possible to reach our sell trigger today but we did. Therefore, it is now time to sell. …
“Our strategy is not perfect and those of you that have been following me for a long time know that our strategy predicts bear markets but it also predicts bear markets that don’t happen. It is certainly possible that the market will bounce back from here and that this is not the beginning of a bear market. However, now that we have hit our trigger point the odds are very high that this is the bear market that we have been expecting. …
“The 2008 bear market wiped out 12 years of gains in just 17 months. If this is the beginning of the global crisis that I have been calling for, the bear market of 2015 and 16 could be of the same magnitude. Can you afford to go through that again? I think not.”
To see this call in The Z-val Zone, please visit:
Background: The term “z-val” is a shorthand introduced in the book, “The 3% Signal,” for “zero-validity forecasters” and “zero-validity environment.” The latter phrase was coined by Nobel Prize winner Daniel Kahneman in his book, “Thinking, Fast and Slow,” where he wrote that “stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.” This is why stock market forecasters are proven to sport an accuracy rate of about 50%, same as a coin toss, yet they continue forecasting.
You can peruse the growing collection of tracked forecasts in The Z-val Zone at:
Seen a forecast I should track? Send me the link in a reply to this note.
FORWARD WE TRUNDLE
Here’s a quick health tip: Don’t eat a lot late at night.
It’s not a new idea, but fresh studies are confirming it. According to an update from the Washington Post, “when food is consumed late at night — anywhere from after dinner to outside a person’s typical sleep/wake cycle — the body is more likely to store those calories as fat and gain weight rather than burn it as energy, says Kelly Allison of the University of Pennsylvania School of Medicine’s Center for Weight and Eating Disorders.”
A study of 420 overweight or obese people found that those who ate their main meal after 3pm lost less weight during a 20-week weight-loss program than those who ate that meal before 3pm — even when total calories consumed, time slept, and exercise level were identical.
Suggestions include keeping junk food out of the house so you’re not tempted; eating your main meal earlier in the day, perhaps for lunch; and easing your way from the habit of eating late, rather than trying to quit cold turkey.
Yours very truly,
Look insideThe Kelly Letter
“Well we got off easy with the Dow closing down ‘only’ 600 points.
“So does this change my sell recommendation? No, it does not. If we have a global recession coming, I just don’t see the US economy being strong enough to pull everybody else out of it, rather I see them pulling us down with them. …
“What I do is watch the trends and when the trends turn negative that’s when I say it’s time to sell. The trends have definitely turned negative and I see this trend getting worse.”
— Excerpt contributed by Philip Robins
Z-val definition and more forecasts in The Z-val Zone.
“McClellan said his timing models suggest ‘THE’ top in stocks will be hit some time over the next week. He expects ‘nothing good for the bulls for the rest of the year,’ he said in a phone interview with MarketWatch.
“McClellan doesn’t have a strong view on how far stocks could fall, just that it will probably be an ‘ugly decline’ lasting into early 2016. … ‘I try to get the direction right, and I let the magnitude take care of itself,’ McClellan said. …
“[O]ne reason he expects a big selloff to start as early as this week is a chart showing that liquidity in the financial markets is about to dry up, as investors prepare for the Federal Reserve’s inevitable interest-rate hike.”
— Excerpt contributed by Mark Johnson
Thursday, August 20, 2015
SHIPPING & OIL
Consensus holds that the global economy is in trouble. For a front-line look, let’s turn to shipping companies. They move goods around the planet and are therefore directly affected by supply and demand. How have they fared recently? What are they saying?
Top shipping companies include Kirby (KEX $69) with a $3.8B market cap, Matson (MATX $41) with a $1.8B, and Seaspan (SSW $17) with a $1.7B. Kirby is a Houston-based operator of domestic tank barges. Matson is a Honolulu-based ocean freight carrier. Seaspan is a Marshall Islands-based operator of chartered vessels, which it leases to container liner companies. Their stock trajectories have been very different this year: KEX -14.7%, MATX +16.4%, SSW -8.2%. In the past year, even farther apart: KEX -42.2%, MATX +50.7%, SSW -26.7%. What is this hodgepodge telling us?
On July 30, Kirby Chairman Joe Pyne said on the Q2 conference call: “During the 2015 second quarter, marine transportation tank barge fleet experienced consistent levels of demand and high equipment utilization. In the inland tank barge market, utilization remained in the 90% to 95% range. We experienced good customer demand for equipment during the quarter; however worries about future crude oil volumes and some market uncertainty continued to make it difficult to secure better pricing on contract renewals. … The lower oil prices we are seeing will be with us for a while.”
CEO David Grzebinski added: “[S]ince the second half of 2014 we believe the number of barges moving crude has fallen 30% to 40% … The decline in crude oil prices is not having the same impact on contract pricing in the coastal market that we have seen in the inland market … [W]ith a dip in … West Texas Intermediate crude below $50 a barrel here in late July, any recovery in the business has likely been pushed out further into 2016. As such, we continue to look at further cost reductions for this business in preparation for a more prolonged pressure pumping market downturn.”
On August 4, Matson CEO Matthew Cox said on the Q2 conference call: “Matson’s core business has performed well in the second quarter of 2015 led by continued demand for our expedited China service … Looking to the balance of 2015, we continue to expect a multiyear recovery in Hawaii and anticipate modest market growth for the year.” The CFO added that the company’s higher second-half outlook is “driven by expectations for a better volume in Hawaii, continued premium freight rates and high utilization in China,” and slight volume growth in Guam, and a modest profit at SSAT, a terminal joint venture. The company is also optimistic about acquiring the Alaska segment of Horizon Lines.
On July 29, Seaspan CEO Gerry Wang said on the Q2 conference call: “Our operating fleet achieved 98% utilization for the quarter, including our seven scheduled dry-dockings, and the fleets continue to generate stable cash flows from long-term time charters. … [W]e expect tonnage growth of about 6% to 8% for 2015 and around 5% in 2016. Major operators continue to manage supply through scrapping, deployment, slow steaming and idling of ships.” The CFO added: “Revenue increased $25.3M or 14.5% for the full quarter … Adjusted EBITDA for the quarter was $169M, a $38M or 29% increase.”
Ben Nolan at Stifel mentioned that box rates have “come down quite a bit” and asked how shippers usually react to that. Wang replied that the typical response would be a focus on cost reduction, which usually leads to larger-ship charters, and Seaspan is seeing that. However, he said carriers are being helped by “very favorable tanker prices” due to oil being cheap, and by the strength of the US dollar, in which Seaspan conducts all of its business and which provides a profit boost when converted into other currencies.
The baltic dry index, which tracks an aggregate price across 23 shipping routes to determine the cost of moving raw materials by sea, is down just 2.8% in the past year and is up 75% since the beginning of June. It’s been moving mostly sideways for four years.
What’s the takeaway? Most trends look typical, with the exception of cheap oil. The low price of oil is resulting in less shipment of oil-related products, of course, but the financial impact is being partially offset by lower fuel costs. It’s not clear that cheap oil means the global economy is in trouble, however, because the rising supply of oil is more responsible than falling demand for the price change. What the shipping industry shows is plenty of business activity being filtered through the effect of a strong dollar and inexpensive oil.
From Note 29 sent to subscribers last Sunday morning, with data as of Friday, August 14:
Will this be the week that finally delivers our desired $120 exit price from our Oil -2x (DTO $112.85) hedge? … All we need is a 6.3% gain — exactly what we got last week. That means about a 3.2% drop in the price of WTI, which would put it at $41.14 per barrel. … The price of oil did top out at $60 as our thesis specified, and did head back down toward $40 as we thought it would. It’s almost there now, and getting there should send DTO to $120, where we’ll fully exit the position.
If China’s economy has slowed enough to damage demand for its currency, is a global recession on the way? Not necessarily. Remember from past letters that only 1% of US economic output is based on trade with China. That one point dismisses the notion of a direct connection from China to the developed economies of the world. Does activity in China affect others? Of course, as all parts in the system affect others. Is the effect great enough to reduce growth to zero or cause contraction in other economies? No.
The world’s largest restaurant chain, McDonald’s (MCD $99), has indigestion. After its last slump, about 15 years ago when critics wrote it off as not being a growth company anymore and alleging it could never become one again because eating habits had moved beyond burgers, McDonald’s developed a turnaround plan and recovered beautifully. From 2004 to 2011 it delivered average annual global comparable sales growth of 5.6% while increasing operating margin by 15 percentage points to more than 31%. Its stock price rose 300% from the beginning of 2004 to the end of 2011, and it paid a dividend the whole time. It’s a company that knows its business, has seen every kind of threat, and is capable of recovering from setbacks. It’s experiencing one now, and its stock price has gone nowhere for three years. Can it regain its stride?
The following summarizes Tom DeMark’s July 27 forecast for Chinese stocks.
Chinese stocks will decline by an additional 14% over the next three weeks as the market demonstrates a trading pattern that mimics that of the US crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite Index in 2013.
The benchmark for mainland stocks will sink to 3,200 after plunging 8.5% Monday to 3725.56 in the worst selloff in eight years, DeMark said on Monday. …
The Shanghai gauge had rebounded 16% from its July 8 low through Friday as officials went to extreme lengths to support stocks. … China Securities Finance hasn’t pulled support for equities and the government will “continue efforts to stabilize market and investor sentiment,” China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement after the close of trading Monday. …
“The die has been cast,” DeMark … said by phone. “You just cannot manipulate the market. Fundamentals dictate markets. … Markets bottom on bad news, not good news. You want to have the last seller sell. We got good news at the recent low. The rally is artificial. … Lip service and intervention like that — it’s false. There’s a certain way in which the market unfolds. The only thing the government could do is to postpone it.”
Disposition: Immediate-Term Bearish
Shanghai Composite on 7/27/15: 3726
Shanghai Composite on 8/17/15: 3994
One of my favorite old hotels in Tokyo is the Hotel Okura near the American Embassy. Whenever I visited the embassy over the past 13 years of living in Japan, I stepped into the Okura for its elegance from a bygone era. Its polite workers, some wearing kimono, were a joy to interact with. Its high-ceilinged lobby was always welcoming, with an orchid motif on one wall and chairs made to look like plum blossoms. Sometimes, I’d set my briefcase down and just sit in one of those chairs and listen. Well-dressed guests spoke politely with each other. They came and went in shiny cars with doors opened by gloved doormen.
That bygone ambience is about go by. In preparation for the Tokyo Olympics in 2020, the Okura will be torn down and replaced by yet another modern hotel/retail/office monstrosity, indistinguishable from many predecessors around the city. Kimono will give way to pantsuits.
I’ll arrange for one last lunch at the Okura’s irreplaceable terrace restaurant, look out on the garden, and question why nothing is venerable anymore.