Category: Uncategorized

The S & P 500 has doubled for the past 3 years, but there are stocks that have done decisively better. Boring companies, selling mattreses, reclining chairs and sofas. I like to group them under the hood of “The World Looks for a Better Sleep” label.

In spirit of the immortal words of Gordon Gekko: Sleep is Good

The point is, ladies and gentleman, that sleep, for lack of a better word, is good. Sleep is right, sleep works. Sleep clarifies, cuts through, and captures the essence of the evolutionary spirit. Sleep, in all of its forms has marked the upward surge of mankind. And sleep, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.

The five stocks in the group: $SCSS, $TPX, $CPWM, $PIR, $LZB have returned on average 7000% for the past 3 years. $10,000 invested in an equal weighted Sleep Index in March 2009, would be worth $700,000 today.

Sleep sounds great as a concept, but it doesn’t represent the whole story behind the gigantic moves. Rising expectations for home improvement spending  and housing recovery are also big catalysts behind the move. As long as expectations rise, prices rise.

Sometimes, the most boring stocks, no one is talking about become the best performers.

Keep in mind that those stocks are highly cyclical and every 6-7 years tend to go from a boom to bust mode.

 

There is a saying that only price pays, but sometimes price is not a the ultimate leading indicator. In financial markets, everyone tries to be one step ahead of the competition and is constantly looking for an edge. Often, the only edge you need is to understand your own and your fellow investors biases and incentives.

There are varisous ways to gauge the health of the market and get prepared for its next move:

– breadth (number of stocks on the 52week high list, percentage of stocks above their 200dma…);

– leading sectors (tech and financials and consumer discretionary have led this rally. Probably they will be the ones to go first too, when the market benchmarks turn south);

– asset classes correlations (is money flowing to the perceived safety of treasury bills and notes or to equities and high-yield bonds);

– sentiment (extremes are contrarian indicators).

These are all valid and potentially useful approaches, but there is one that I put first at this point of time. The price action in liquid, high-ticket stocks. Here is why.

$XLK (technology) is already up 19% YTD, $XLF (financials) is up 22%, $XLY (consumer discretionary) is up 15%. If you haven’t been at least 70% invested in U.S. equities, the odds are that you are underperforming. By mid March, many money managers realized that they were exactly in that precarious situation. As usual, there was only one cure for their ills – high-ticket stocks. Stocks like $AAPL $PCLN $GOOG $ISRG $CMG. Only they provided the needed liquidity to get meaningful quick exposure to equities. And they were bought.

Many of the mentioned names are extended for sure, but it is never wise to guess a top and jump in front of a freight train during a bull market. Irrationality (aka good mood and liquidity) often trumps the patience of even the most stubborn ones. Sometimes unnecessary sophistication leads to overthinking and underperformance as often being early means being wrong.

At this point, almost any institution owns some if not all of the above mentioned high-ticket stocks. They are my leading indicators. If I see any signs of churning (high volume and little price progress) or distribution (several negative big-range, high-volume days) in them, I will seriously reconsider my current view of the market.

 

Josh Brown is out with a thoughtful piece, covering the underlying reasons behind the recent underperformance of industrial metals ($KOL, $FCX, $X):

Really cyclical stocks always are most dangerous when they look the cheapest – because the smart money knows the earnings are peaking for the cycle (think homebuilders with PE multiples of 6 or 7 back in 2006)… Right now I think they’re in no-man’s-land and earnings revisions will be to the downside if China deteriorates even further.

Many of the industrial metal stocks look like a bargain for the naked eye and they have become popular bottom fishing targets. Sooner or later, everything should go up in a bull market, right? Well, this has never been the case. Unlike bear markets, bull markets are markets of stocks,where correlation is relatively low and stock picking matters.

Events are rarely discounted in advance due to their short-term nature. An event that provide new information could start, confirm or stop the discounting of a process.

The so called smart money has learned to discount cycles before they happen. For example, at the  beginning of a new bull market, cyclical stocks often look terribly “expensive” just before their earnings start to recover. Prices rise before fundamentals improve, resulting in extremely high P/E ratios. In this case, multiple expansion is a sign of improving perceptions and growing positive expectations, not a sign of dangerously high valuation.

If  Wall Street is always forward looking, how come it doesn’t take into account the fact that economic cycles are predictably repetitive and therefore should not matter in the big scheme of things. Well, the market is forward looking and short-sighted at the same time. It usually doesn’t discount  more than 6 to 12 months ahead. Uncertainty is too big beyond that.

Sometimes prices change before fundamentals, sometimes fundamentals change before prices, but prices never change before perceptions and expectations change.