Time For Reflection

I am sitting at my breakfast table at America’s Best Value Inn in Hancock, Maryland on the way to my Father’s 85th birthday party. And there is a lot to reflect on. Let’s start with the hotel. It is hard to see the whole of a hotel that is off of the street, at night and when you are tired of driving. So making a mistake in choosing it is easy. On first blush I may have done that last night. It seems from the picture that the hotel company joins many market participants in confusing price with value. But it was quiet and clean so maybe I am a winner or maybe it is just that with a strong position in the world economy bad, is not really bad when it comes down to it. Or maybe that is just a rationalization. These same thoughts apply to the stock market. A bad pick has been a not so bad place to have money in a strong rising market. And a really bad pick can always be turned in your head into a good idea.

The first 1/3 of the year has passed. And this week has been pivotal in a number of ways that may have gotten lost in the noise. The Dow made its first new high of the year, confirming the Transports new high and a continuation of the trend in Dow Theory. Market participants that are active on a short term scale have taken it on the chin in momentum names recently. Their myopic view clouding the big picture. The routing in these names has not led to new lows in the higher beta indexes. Large cap indexes at new highs and the rotation out of high beta has not crashed more than a dozen names. Think about what that might mean. When you ask your neighbors and other people you come into contact with how they participate in the market what do they say? At first it is a blurb about how they crushed it with Netflix or Google, but after they tell you how they did on their 10 shares it comes back to Mutual Funds or ETF’s. It is so much more important to the long term health of the market that the broad large caps are doing well than the momentum names. These are the names you have in your ETF or Mutual Fund. These are the names that Pension Funds and Endowments are buying with their billions of dollars that they are pulling out of Bill Gross’ empire. In the day-to-day myopic view of the investment world the rhetoric is about momentum names but the real news is that the large caps are kings. This is great news.

The lagging financials still pose a concern though. The thought coming into the year was that the taper would raise rates and the steepening yield curve would benefit banks. Investors seem to have gotten ahead of that trade and with no movement in rates higher have reversed much of the move higher in banks. Or really turned them sideways. Can the broad market continue higher without the banks? Anything can happen with prices. They are not driven by rational means. But over the long haul probably not. Four months is not the long haul though and don’t forget about 2013. They did pretty well then.

The economy is also a question, unless you are not among those conspiracy theorists. Weather gets blamed for a lot for issues: Earnings, mall traffic, jobs. Maybe I have a different perspective from being in the center of the polar vortex. But it was fucking cold this winter all day every day for weeks at a time. We did not want to even walk from the bed to the bathroom, much less the car to the grocery store. I know that is hard to understand in California and Miami and even New York City. The impact this time is real. Did you really expect that GDP would be pumping on all cylinders in the 1st Quarter with 2/3 of the country stuck inside and doing nothing because of the weather?

The Employment report has just been released for April and it shows an addition of 288,000 new jobs and a drop in the unemployment rate to 6.3%. The initial reaction was positive for stocks, and of course was immediately sold off. But even if the market closes lower today it seems like things are picking up. That is good news and another data point to watch with improving weather.

I am going back to my father’s birthday now. 200 miles left to drive to get there. A great life so far in his 85 years. A family party tonight followed by a Kentucky Derby party for Mom (she’s from Louisville) tomorrow. Looking at the long run with short term mileposts and memories along the way. Market lessons are everywhere.

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