April 19, 2015 Malaise

Risk/Reward Vol. 263

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

The dog ate my homework. Not really, but something just as incredible did occur. My computer chose to “refresh” as I was doing final edits to this week’s edition. When it rebooted all of my work product was gone. I walked away in frustration and decided not to publish this week. But what happened on Friday was too important to let pass without comment. So I will dispense with the usual format and go directly to the point.

According to the financial press, the 279 point (1.5%) drop in the Dow Jones Industrial Average (DJIA) on Friday resulted from a change in the rules applicable to the Chinese stock market, concern over Greece’s possible exit from the Eurozone and a few notable quarterly earnings misses (e.g. GE). Really? These unremarkable events may have caused a negative day but were they enough to wipe out all of the DJIA’s year to date gain? Methinks not. I suspect that the malaise exhibited by market mavens Fink, El Erian, Summers and Gundlach which I have reported over the past few weeks is beginning to in-fect (or at least af-fect) others. This week the most prominent buzz kill came in the form of a transcript of a conversation between billionaire investors Ken Langone and Stanley Druckenmiller (George Soros’ former colleague) in which Druckenmiller likened the current stock market bubble to 2005-06---just before the subprime fiasco. He sees the current situation "ending badly."

No one is saying that the stock market will crash tomorrow, next month or even this year. That said, one must balance risk with reward. Personally, I see little reward from investing in any risk assets at present: bonds or equities with bonds being the riskier of the two. Obviously, Friday’s action demonstrates that I am not alone. So again this week I held pat; not selling anything but overweight cash.

Next week’s calendar is full of earnings reports. Track how many companies meet top line (sales) expectations. (Earnings per share have become less indicative of a company's performance due to the plethora of distortive share buy back programs.) Also, keep an eye on the guidance that companies provide for coming quarters. Guidance could foretell if any stock gains can be expected for the year.