Walls of Worry

There is an ample supply of angst across the nation: in markets, commodity prices, and among voters. No one lately has self-reported that they are happy across any broad spectrum of life’s many concerns. The Conference Board’s October survey of consumer confidence was weaker than expectations (98.6 versus an estimated 101.5), and uncertainty over the upcoming election was the primary reason. The best comfort one can offer is like the advice given patients awaiting major surgery: It will all be over soon! Thank goodness at least the TV ads will stop.

Apple reported earnings that beat estimates by $0.02 per share, but revenues fell (almost 9%). iPhone sales made up over 60% of earnings, but sales in China were significantly lower. China has been an important to aspect to Apple’s growth strategy, and so the weakness in that country contributed to a 3-4% drop in Apple’s stock price today. All earnings reports have to meet two tests: what the company did in the latest quarter, and the guidance for what can be achieved in future quarters. The most important information for investors and traders is the guidance. Even if the company suffered in the past, a rosy outlook for sales and earnings in the months ahead provides absolution and a path higher. Keeping in mind that fear and greed drive prices, there are nagging fears about Apple’s future that are slowly emerging. When a darling tech giant misses, the entire group is affected.

Last month saw OPEC drafting a letter of understanding among members to limit oil production. The possibility of a reduction in supply sent oil prices higher. Cynicism from long-time market observers seems the only logical reaction to such proposals, and indeed Iran and Russia are waffling on their commitments. Russia’s Oil Minister has suggested that his country could increase output by 4 million barrels per day. Make no mistake – Russia needs the money.

Markets have always been known to climb “walls of worry.” There is a lot underfoot for markets at the moment. Looking past oil and earnings, the most overlooked story at hand is the remarkable rally in the dollar. The US currency has been strengthening for the past few weeks and now stands at $1.08 versus the Euro. It was trading around $1.12 a month ago. That’s a big move. A stronger dollar makes US goods and services more expensive for foreigners to buy, and makes it less expensive for the US to buy stuff from the rest of the world. When the US sells less and buys more, it results in a “trade imbalance” that drags on GDP growth.

As managers we watch all of these “real-time” developments and consider the long-term effects on our investments. Warren Buffet say to be greedy when others are fearful and vice versa. Are you feeling more greedy or more fearful? Remember my book The Arrogance Cycle? It posits that when you feel you can’t lose, you’re about to. Historically, as long as fear and angst are present so is more upside for prices. Periods like this heighten the need to know what you own and why you own it. Balance sheets, cash flow, debt levels, and earnings growth become most crucial. You need to make sure you have a seat when the music stops.

It looks like the Federal Reserve is intent upon raising rates in December. We will believe it when we see it, and we will welcome it. But for now, the Fed’s hasn’t demonstrated serious resolve in carrying through with several similar past pronouncements, and we will withhold judgment. As they say in photo finishes at the track, “hold all tickets.” And be careful out there!