The Value View 4-10-2014

The markets showed some signs of fear creeping in today. The markets sold off sharply with the S&P 500 dropping off by 2% and the NASDAQ dropping my more than 3%. The iShares Biotech ETF (OIBB) led the charge lower as it declined by more than 5%. The big tech and social media took a pretty good shot today as well with many of them down 5% and more during the session. The money appears to be going straight into bonds as treasury yields fell sharply. That is not what you might have expected to see when the Fed is tapering and the economic news has not been entirely horrible. The jobless claims report this morning was actually pretty strong with new claims at a multi-year low.

Naturally the pundits and gurus have been on all day predicting what is next for the stock market. Some think it is going up forever and you can throw a dart at the stock tables and make money from here. Some think it’s the beginning of the end and markets are going to make a big move down from here, particularly if prices penetrate one chart point or another. Personally I will predict that stock prices will fluctuate vigorously in one direction or another on a daily basis for an extended period of time. In other words I have no clue what stock prices will do and I do not think anyone else does either. The limited opportunity set has us holding a lot of cash so I hope this becomes an inventory creation event but I would be a fool to try to predict or bet on a continued decline in stock prices. As it stands now we are less than 5% off all-time highs and it is still time to do not very much at all. I like the stocks we have in our portfolios but I am in no rush to buy more right now.

Although Alcoa’s (AA) report on Tuesday is the traditional start of earnings season its really just the warm-up. The real season starts tomorrow when JP (JPM) and Wells Fargo (WFC) report earnings and then next week the floodgates open. Once again folks will wager billions of dollars on whether their guess about the analyst’s estimates is better or worse than the analysts have estimated (guessed). These “trades” are basically a wager on a guess about a guess and I suspect I could do better at the track than most traders will do with their earnings bets . This is particularly true of those who make bets using options during silly season. A few experienced traders armed with supercomputers will clean up the markets using rocket science and pricing power to pick the pockets of all the wannabe Soros’ who make earnings bets. A few smaller traders will get lucky and win a bet or two, thereby dramatically increasing their odds of eventual bankruptcy.

Our approach to earnings season will be one of reacting rather than predicting. Even at the racetrack I prefer to have the math in my favor and there is no mathematical formula that is going to give me insight into what earnings will be and how the markets will react to that information. What I do know about earnings season is that just about everyone for the past couple of decades has created at least one safe and cheap stock as investors over react to a short term hiccup in the quarterly results. Almost without fail some quality company will see millions or even billions of market capitalization melt away even though the value of the assets owned by the company didn’t change at all. The undying truth about Wall Street and earnings season is that the combination of human psychology, a too short time frame and leverage leads people to make really stupid decisions and we can prosper from that.
I have no idea what the market is going to do in the weeks or months ahead. I do that with a portfolio of safe and cheap stocks and a large cash stockpile we are in a great position to react to whatever does happen in the circus that is the stock market.

There will be no Value View next week. I am going to take an actual vacation. For the past ten years vacations have consisted of me working in a hotel room, albeit with a pretty nice view, while everyone else in the family ran around doing interesting things. This will be the last trip with the two oldest before my daughter gets married so I am going to try and actually take some time off. This of course practically guarantees that something big happens next week that requires my attention but barring some sort of fantastic inventory creation event, I am going to take most of the week off.

Have a great couple of weeks everyone!
Tim
Song of the Week
The Earnings Season Song

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