BRK – a sign of the times

https://www.marketwatch.com/story/warren-buffetts-berkshire-stock-set-for-biggest-gain-in-7-years-analyst-cheers-buyback-policy-change-2018-07-18

Berkshire just changed their corporate policy wrt stock buybacks … they WILL now be able to buy their own stock.  This is an important sign of the times … good values are REALLY hard to find.  Here’s a JPM analyst take:  “J.P. Morgan analyst Sarah DeWitt said the new repurchase policy is “a major positive catalyst” for the stock, since it gives Buffett and Munger more flexibility to spend excess cash of about $86 billion, which has been a large drag on returns, “particularly given Berkshire has not been able to find attractively valued acquisitions in an expensive market.”

Caution to those of you looking for long-term good value purchases at this point …

Jeff Miller’s WTWA – July 15

Note:  This is one of my ‘must read’ posts every Sunday – here are the elements i found useful and interesting.

https://seekingalpha.com/article/4187277-weighing-week-ahead-anything-goes

Quote:  The punditry should prepare for a week where Anything Goes.

  • Jeff’s comment:  “The market was up 1.5%, a very nice gain. The week’s trading range was only 1.2, lower than the last few weeks and much lower than the long-term average.”
  • My comment:  I am finding that ‘big’ money hits in last 10 minutes of trading days.  Look at the volume spikes at day’s end.  This week each spike furthered the day’s trend, yet Friday’s end petered out.

CPI both Headline and Core  – External pointer   https://www.advisorperspectives.com/dshort/updates/2018/07/13/inflation-an-x-ray-view-of-the-components

  • I found this graphic telling 

More on sentiment — investor sentiment may have shifted this week – while as this author points out it’s not ‘really high’.   I pay attention to these shifts, both for contrairian indicator and increasing awareness on spikes in FOMO buys from inexperienced investors and traders.   http://www.horancapitaladvisors.com/blog/2018/07/12/sentiment-is-widely-positive

  • 10 yr flat from last quarter
  • Higher S&P 500
  • Anticipated inflation down slightly, but risk of inflation increasing

External link to 7 year rate of return forecasts https://pensionpartners.com/the-next-7-years/

  • in many of the divergences, mutliple / value expansion beyond normal expectations ruled
  • seems sooner or later mean regression plays its part … the timing is always a mystery and its catalyst unknown as of yet
  • The one key take away from both prediction sets (2011 and 2018) is that rates of returns across the different groups are MUCH lower in the 2018 set.  – I agree

Jeff’s closing had two points that i found interesting

  • Quote:  “Earnings season. Everything suggests a big increase over last year – 20% or so. The forward guidance last quarter was good, and the tax cut effects are playing out. This may not translate into higher stock prices unless the report is perfect. The market meme emphasizes trade war, strong dollar, and rising costs. Any company that highlights these themes in the outlook will see an instant reaction in the stock price.”
    • Earnings conference calls should be brutal this quarter if folks are doing their jobs and folks w/ downside views are going to get punished severely.  But this also sets up companies exaggerating 2H 2018 and more importantly 2019
  • Quote on worrying topic:  “The trade war. With the apparently modest market reaction, more of the punditry is concluding that victory is in the cards. Actually, stocks would probably be about 10% higher without the trade concerns.”
    • This i struggle with … i doubt if the FANG folks would be 10% higher, but maybe broader participation.

 

Jobs – Lance Roberts

https://seekingalpha.com/article/4186870-questions-employment-wages

This guy has a great way of pushing aside the noise and superficial headlines that do not help.  This set of questions is incredibly important to really dig thru the noise to find your view on job-based inflationary pressures.  Other than prices, this is the other big element; after reading these questions, one has to ask how much employment pressure there really is.

Another take on China – Heisenberg on SA

https://seekingalpha.com/article/4186225-catching-falling-knives-china-testing-small-cap-resolve

There are some nuggets in the post and in the comments.   Here is my favorite (bold mine):  “Read an interesting article that the currency bottomed Friday afternoon. It was a good article about how the Chinese guys have been wanting to do this but couldn’t. Now they did it & blamed it on the trade war & not on the real reason that they need a weaker currency to stimulate domestic growth. Sneaky guys with a 3000 yr old civilization. What do they know about social order?

Not to emphasize ‘sneaky’, but that the Chinese leaders have a long history of trials, failures and successes.  They also have the ability to influence the Chinese economy with precision and agility that other countries just cannot do.  I keep watching for irrational bargains surfacing.

Blackrock on China

https://www.blackrock.com/investing/literature/whitepaper/bii-global-macro-outlook-june-2018.pdf

This report helps a bit … while superficial  data brush (it’s free afterall) … their summary that a) growth deceleration is not that bad, b) the economic policy transition to consumption is working (while early), c) tech and consumer companies do not carry the same level of troubled debt that manufacturers carry, and d) the trade war is the biggest risk.

This has not changed my favorable long term view on both China technology and Tencent specifically

https://seekingalpha.com/article/4185919-fireworks-start-q3

Lance’s weekly update has a very interesting data set that I assumed was true, but had not seen it so easily / clearly described.   I am leaning toward another longer term position in SPY Puts …

Here is the data set – “copied”

However, with the ongoing trade war rhetoric brewing between China and the U.S., a negative surprise certainly maintains a high enough probability to pay attention to.

As I noted over the last few weeks, participation remains concerning as Bob Farrell’s rule #7 states:

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”

For the year, 10 stocks have made up almost entirely all of the gains of the market. Actually, a better way would be to say:

“The top-10 stocks have more than offset the losses from the rest of constituents so far this year given the markets are only up 3.22% ytd.”