Sensible Market Timing

Submitted by Wall St. Daily as part of our contributors program

Sensible Market Timing

By Carl Delfeld, Special Correspondent

Investing advice is a big business.

Every day, investors are swamped with advice and ideas from thousands of experts.

But I’ve noticed that very few are willing to even try to accomplish the most important task of an advisor – to help their clients avoid the sharp downturns that devastate portfolios and wealth.

I’m not talking about day trading or other short-term strategies here, but rather educating the average investor so he or she can see the more enduring swings in the market.

As legendary tycoon and investor Sir James Goldsmith put it:

The job of an investment company is to decide to invest in the right thing in the right place at the right time. But the right thing is the least important. If you picked the very best share in St. Petersburg in 1917 you could be the greatest genius in the world and still go bust . . .  You have to be able to see the swings in the market.

Share Prices Follow Earnings

One common mantra of gurus is that stock prices follow earnings. This adage also applies to specific companies and the market as a whole.

And we all know that Sir James Goldsmith is absolutely right that a sharply down market pulls almost all companies down – even those with rising earnings.

So I found it interesting that a firm I greatly respect, Encima Global, recently came out with a cautionary message on U.S. equities. Below is a brief summary of why it thinks that stocks may be facing some rough times ahead:

• Weak earnings. Pro-forma earnings have appeared strong, but companies are presenting “constant currency” earnings. Actual revenues have been shrinking as expected, due to the sharp decline in world dollar GDP in 2015. For example, McDonald’s Corp. (MCD) reported constant currency sales growth of 7% (year over year in the quarter ending September 30), whereas actual revenue growth was -5%.

• Weak earnings prospects. 2016 world dollar GDP, the platform for corporate earnings, will be roughly at 2013’s $75.5 trillion level, yet expectations for the S&P 500’s dollar earnings are way above 2013.

• Weak U.S. growth. Today’s data found that real GDP grew a weak 1.5% in the third quarter, with housing contributing only 0.2% . . .   not enough to lift global growth.

• Weak U.S. investment and growth prospects. Today’s GDP data found that business fixed investment contributed only 0.3% to Q3 growth. That’s consistent with the weakness in orders for capital goods (orders have been below shipments for seven of the last eight months, signaling a slowdown ahead).

• Weak global growth. Japan looks to have fallen into a recession again. The growth outlook for Latin America continues to get worse, in part due to low commodity prices and lack of structural reforms. Europe’s growth has remained stubbornly weak, as well.

• The geopolitical risks are high. There’s the need for new leadership in Saudi Arabia, Iran’s rhetoric, issues in Syria, Iraq, and Russia, and tension in the South China Sea, to name a few.

• A negative change in technical factors. Equities often take a rest after going on a tear, as the S&P 500 did in October. Market breadth has been weak. Mid-cap stocks and the Dow transports underperformed the S&P 500 since the September 29 low.

• Valuations and debt burdens. In the end, we think equity prices will react to declining earnings prospects (prices too high versus declining earnings, especially if earnings are adjusted for quality deterioration).

This is all important information and it may be on the mark, but it begs the question – what should you do about it?

You may want to raise some cash by selling some U.S. stocks. Perhaps rotate some of this capital into out-of-favor markets like commodities or emerging markets. You might also want to put in place or tighten trailing stop losses to limit downside risk.

Good investing,

Carl Delfeld

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By Carl Delfeld