The Trend’s Your Friend
Don’t Fight The Tape
Don’t Fight The Fed
Buy Low, Sell High – Ay There’s The Rub!
I really like my title. Wall Street’s truths are hard won, hard learned, and too often forgotten. The balmy breezes of strong earnings and improving economic data continue to waft and are embraced by investors who are enjoying this wonderful respite after last year’s unpleasantness. New Home Starts were up this morning. B of A profits were good. UPS and FedEx are seeing shipping strength. So, the market goes higher – or wants to anyway.
Google is the head-scratcher for me today. Google’s first quarter earnings, released after the close last night, were up 37% on strong revenue growth. The company reported earnings per share of $6.76 versus estimates of $6.62. Naturally the stock is trading down over $30 per share or just more than 5%. Amid market psychology determined to embrace every bit of good news, dismiss bad news, and cling to the v-shaped recovery thesis, the reaction to Google’s news is puzzling. Consumer Confidence was below estimates, but it is such a coincident indicator that it’s tough to project. The reason for the miss was the weaker unemployment data.
As I write, the SEC just announced that it is suing Goldman Sachs, alleging subprime fraud. The market is down about 1.5% on this news, the biggest one-day drop in a few months. We are analyzing the ramifications of this news on Goldman, the rest of the financials and the market overall. Our first reaction is that this likely increases the chances of financial reform legislation getting passed into law. This is the sort of news that comes out of nowhere and gives nervous investors a reason to sell stocks.
Our market commentary last week suggested that perhaps we are seeing the beginning of a long overdue pull-back. But, reread our title. Unfortunately relying on market trends is a great thesis until it’s not. Remember they don’t ring a bell at the top, but everyone claims that they should have known a top after it has past.
I don’t have anyway of knowing when the next downturn may visit. Therefore, we follow our discipline and remain invested in strong, well-managed companies with superior earnings growth and excellent balance sheets. While the short-term winds, both cold and warm, wail with and against our holdings, owning a portfolio of companies with superior metrics has wrought positive, less volatile results for our clients over time. We expect that defensive posture to remain comfortable for quite a while.
I spoke at a luncheon yesterday, and a broker asked when, in my career, had I ever described my investment posture as anything but cautious? I thought for a moment, and my answer was “never.” I may be more bullish or bearish at any given time, but the responsibility of investing other people’s money keeps me ever cautious. It has been a good year so far. Investors are making money. I think the year will be positive, but today it feels very toppy.
Hang in there.