Thursday, May 1, 2014

Sleepy Season


Most of my blog posts this year have been warnings to prepare for the next major buying opportunity: a potential market crash in 2015 or 2016.  The bull market is getting in its later stages and this is, counting back from the lows in February 2009, one of the longest investment cycles in history. Maybe the pain from the Great Recession has been so severe that investors have remained cautious for so long.  Also, the general retail investor is still not back in the market and this also keeps some of the euphoria away. Professional investors wait until they get an investment for the right price – if anything, they may be too greedy wanting to buy at even lower prices, thus missing the boat! These attitudes promise a slowly advancing bull market.
The first quarter earnings season was better again than forecast; partially because companies painted moderate expectations in their guidances but also because of the nature of an analyst’s job which is to define market risk.  They are kind of like the practitioners of the ‘dismal science’; their brothers in gloom: the economists.  The overall business climate is obviously important for business performance, especially that of large established businesses that tend to grow with the economy.  But in the end, we’re trying to buy shares in good to excellent businesses for an excellent price.  To do that, we will need cash and to accumulate cash we collect dividends and income from option trading as well as from selling stock that is priced too high to be true or stocks of companies that we no longer consider to represent good businesses. Also, we live below our means and save thus even more cash.
The market is displaying characteristics of a split personality:  the Miss Cheerleader personality is focused on high growth companies such as Facebook, Twitter and Netflix or Amazon where stocks still are priced at nauseating earnings multiple highs. Even after the recent price corrections, Miss Cheerleader expects never ending and never failing revenue growth and no concern for healthy earnings. Then we have Happy Dividend Hunter, the market personality that hunts for ever increasing dividend yields. Hunter has done quite well but are prices of pipeline companies and telecoms not a bit ahead of themselves?  I would say so - their P/Es range from the low 20s up to 40.  Then we have the ‘Wall flower personality:  blue chip companies, proven stalwarts with ‘modest growth’; household names like Coca-Cola, Microsoft, Intel, Apple, Proctor and Gamble, etc.  The market still disrespects these companies and they trade yet at very reasonable prices with good dividend yields. The Black Sheep personality comprises of course the financials such as insurance companies and U.S. banks – they are still trading at cheap prices far below the 2007 market peaks; they are still in purgatory but coming out fast! Especially in an environment where interest rates will start to rise! Finally there is the Rodger Dangerfield Personality; this guy seems to be hopeless and even a slight improvement of the business may result in significant gains. Nobody respect this personality and yet, it tends to pleasantly surprise us from time to time: Gold miners. Oil and gas, Potash miners, Copper miners, Uranium. Who wants to deal with those losers?  They are never coming back to life! Are they?  Seen the gas producers lately? Peyto; even Encana?
Well Ladies and Gentlemen, if there is market opportunity than analyzing Rodger Dangerfield is a good place to start! Especially when you are a bit of a contrarian!  This year the ‘Sell in May’ principle may be valid, especially after last year’s barn burner market!  Also, technicians tell me that this is the 2nd year of the presidential cycle where market performance, especially over the summer may be weak.  So for the summer, I am expecting a trading range and I will sell some of my most overpriced stocks to accumulate CASH – this is the ‘Sleepy Season’. I’ll also will be selling put options expiring in August/September and I will collect dividends.  Come this fall, I may be ready to buy gold miners, gold, silver and other Rodger Dangerfield stuff and I plan to get ready for the last quarter of 2014 where prices likely will tend to improve and possibly extend to the summer of 2015. Thereafter, the upcoming market crash will likely be even closer!

1 comment:

  1. Great Blog,

    Thanks for providing a forum to help investors. Do you currently think there is any opportunities out there or are you waiting for a correction, also do you invest in any international stocks?

    Thanks,

    Richard

    ReplyDelete