Create and Experience. That's All Folks!

I've been thinking about this for awhile now.  I've been going through some internal struggles and it has taken me some time to figure it out.  Since I'm a chronic "thinker" and worse, a numbers guy, I tried really hard to apply my superior intellect and logic to solve my problem.  It only made it worse.  You know, the whole Einstein quote about trying to solve a problem with the same line of thinking that created the problem.  Anyhoo, I had created an experience that sucked.  I was so deep in the trees, there was no way I could see the forest.  Once I realized this, I was able to step back to change my experience by creating a new one.  

If you are not tracking, lets say I stayed up late and awoke early, so now I'm tired.  I created being tired, and now I'm experiencing being tired. I can change this tired experience by creating the experience of getting a cup of coffee.  The trick is I have to create the change.  I have to either get in my car and drive to a coffee shop or put grounds and water into my coffee maker.  It takes some effort to create a new experience.  Just standing there in my kitchen holding an empty coffee mug isn't going to change my tired experience.  

Fine.  But now you ask, "What is a stock guy talking about creating and experiencing for?"  I'm discussing this because the stock market is an extension of our daily living.  Sure you can put blinking lights and bells on it, like watching any of the mind-numbing business networks on T.V., but that aside, life and the capital markets is about adjusting to new information as it comes.  I can plan ahead, but I also must remain flexible to new information.  You see, I don't know what tomorrow will bring.  I do know that if I accept and take responsibility for everything that happens to me, than I am in control.  In many cases I'm not in control of the outcome, but that's okay because I do control what I create.  Once I was able to understand this, shocker, my experience became much better. 

While this is a very complex issue, and I'm sure there have been plenty of books written on the subject, when we find ourselves in adverse conditions it is like the blinders come on.  It is like our brain constricts and drastically limits the existence of other possibilities.  I'm sure there are many situations in which our minds become completely immobilized.  The trick is to think differently and develop a mind-set that doesn't allow you to become susceptible to blame.  Once you get in the blame game it is all over.  You've given up your control to create a new and perhaps more enjoyable experience.  

Create and Experience.  That's all there is to life...and the stock market!  Easy.

P. Franklin, Jr.

May 12th, 2017

*Full disclosure - I am massively, leveraged long in taking responsibility for all of my actions!

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results. 

PPPSSSSTTT. Come Over Here. Hey. Come Over Here.

There is no such thing as safe stocks.  If your strategy is based on an old axiom, you're in trouble.  A companies past successes has zero bearing on the stocks future results.  

Reversion to the mean my friends,

P. Franklin, Jr.

May 12th, 2017

* I have no position, long or short, in GE at this time.

 All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Beware of Magic Beans and False Flags

Wall Street is all about marketing.  Their job is to sell you stories.  To make a story believable there needs to be a kernel of truth buried somewhere deep inside.  Now I'm not on some crusade to cure all of the ills of Wall Street.  Frankly, I need Wall Street to execute my strategies.  However, if I can shine a small light on how the cycle goes maybe it will help.  I dunno, but let's see.

I read a lot.  What I'm seeing is a growing optimism over Europe.  The narrative is starting to shift.  This mental shift is starting to transform itself into high prices.  The notion is that Europe is cheap and the banks are not going to fail, so now is your time to get in. After all, if you are going to invest in another country where do you look first - the banks! 

In the price graph above, I'm illustrating Deutsche Bank (DB) as a proxy for European banks.  I'd watch a basket of banks, but the majority of their price graphs are visually similar.  So in the trading history of DB, you have a price low established in the Fall of '16 and now you have a higher low that was recently set.  I'm assuming that a price break above the recent high will attract a whole new group of buyers.  Why?  Because the stories are floating around that economically Europe is turning up and it is manifesting itself in higher prices.  And the higher the price goes, the stronger the story and the self-reaffirming cycle continues.  

But what if you are a trapped buyer?  What I mean by that is you've been long this whole time and you know that the gig is up.  If you are a trapped long at this point, you operate in size. This type of buyer is long-term in nature and thinks and acts well beyond a couple of quarters.  They are no speed boat.  In order to exit a long-term hold position, you need individuals and other institutions to absorb your supply.  Basically, they need to create buying power, so that they can sell.  

When you step back a bit further, I hope you see what I see.  And this is commonly referred to as a false flag. The long-term trend is negative.  This rally, that looks so intoxicating by the weekly view, is to be considered nothing more than a rally in a downtrend.  The market structure is to fool you, not make you money.  Given the obvious structural issue with the EU, it will take years, perhaps longer to repair.  Europe is literally drowning in a pond, meanwhile the ECB is on the shores with fire hoses filling up the pond with more water. Until this insanity stops, I have no interest here.  I believe long-term players in Europe see their fate and need a nice rally to save their bacon to sell their holdings.  And if I'm wrong?  Like a patient who has just suffered a major heart attack, it takes awhile before they are up and moving around.  I've got time.  I have no interest in picking bottoms.  I find that stock market participants fall into two camps: One is the person who would rather be in a position wishing they were out, and Two is the person who doesn't have a position wishing they were in.  I'm clearly a "two."  I'm not in it for the action.  Beware of people selling magic beans and false flags!

Proceeding with caution!

P. Franklin, Jr.

May 6th, 2017

* I, nor Franklin Trend Management, have any positions, long or short, DB.

 All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Waltzing with Stocks and Bonds

While there are many corny analogies (and this one is no different), I find that these analogies help me to place some context around a general abstract profession.  In the example above, I show a simple relationship between stocks and bonds.  When the line is heading up, stocks are outperforming bonds and visa versa.  Think of this like a dance between two asset classes.  Like on the dance floor, either you or your partner is leading.  You BOTH cannot be leading.  Not only do I want to own leaders, but also look for interesting turning points that could yield additional information.  I would observe in the graph above that stocks have been in a bear market since early 2014, only to recently emerge late last year.  My observation is that stocks took a big breather to digest the very large gains from 2013.  It looks like to me stocks are ready to Paso Doble higher at the expense of bonds.

¡Olé!,

P. Franklin, Jr.

May 4th, 2017

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Transportation Index Consolidating

The Dow Jones Transport Index is consolidating.  This is the second consolidation since 2016.  I'm watch the individual constituents to see if there is any follow through in price.  I'm watching daily.  I can't imagine an un-healthy economy, while transportation stocks are moving higher.  

Bonus: Don't get sucked into seeing patterns.  You'll see things that simply don't exist.  Just watch the price.  

Cheers!

P. Franklin, Jr.

May 1st, 2017

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Capital Markets WIR - Are Stocks In A Bubble?

Pictured above is a price graph of the S&P 500.  I'm not a fan of indexes, especially this one, but it is what everyone looks at so I'm going with it.  Like people, all assets have a certain mass that they can reasonably carry around with them.  For people you sometimes see a height-weight chart (HWP) and in stocks, one measure (not the only one!) of this height-weight analysis is the price to earnings ratio (P/E).  Now, I'm not going to make any kind of argument that you must buy at a low P/E to make money in stocks.  It is really the future P/E that you should be focused on anyhow!  So, what are a few take-aways from this chart?

First, stocks follow earnings.  More importantly, stock prices are a refection in confidence about future earnings.  If the orange line in the graph above is a fixed 15 times earnings, you can see that the black line (price) will fall ahead or rise above in anticipation of changes in the orange line (fair value line).  The long-term, fair value line will act similar to a magnet pulling in price.  Again, it may take years for this relationship to play out, so using this analysis as a basis for buying and selling in the market is not wise. 

Second, valuations don't matter until they do matter.  The fact that stocks are priced at 20 times earnings or 10 times earnings is not predicative.  The P/E is probably best used like a wind sock on an airstrip.  The current multiple of earnings is simply saying we are in a zone that is above a long-term fair value multiple.  That's it.  Do not get into labels of expensive or cheap.  It will affect your thinking and lead you down a wrong path.  Don't be an Alan Greenspan calling an audible in December of 1996 about the silliness of irrational exuberance only to watch stocks double in price over then next three years.  Have rules about how to successfully operate in the market.  Think of the P/E multiple like a thermometer.  It simply reads back to you the temperature.  It is NOT a thermostat!  You cannot use P/E multiples to control or predict future prices.

Third, is that recessions are bad for stock prices.  Duh!  I've highlighted a couple of the last recessions on this chart.  You can see again, stocks anticipated the recession by declining ahead of time.  Now, for the perma-bull, indexers out there, a recession is coming.  There will be a sharp contraction in the business cycle and equities will not be spared.  Given the excessive liquidity created by the Fed, I would not be surprised if the decline in stocks was more severe than normal.  So if the run of the mill bear market declines by 40%, I wouldn't be surprised by a decline of more than 50% from the ultimate high.  I recently had a conversation with a client, who I consider to be, a very well-read and experienced investor.  I honestly just mentioned this relationship in passing and he was in disbelief that I would be modeling a 50% or greater decline in stock prices.  While the probabilities are currently low, they will increase over time.  It is just what happens and there is not much anyone can do about it.  I cannot stress enough the importance of having a crisis plan BEFORE the crisis not during the crisis. 

Last, we are no where near bubble valuations.  As you can see on the chart, stock prices were stratospheric in 1999.  All stock prices pull value forward.  Stock prices are the, "I'll gladly pay you Tuesday for a hamburger today," of assets.  So in 1999, stocks pulled forward about 13 years of earnings.  Again, stocks are elevated in price, but after considering dividends, they currently don't seem that expensive to me.  

Best returns!

P. Franklin, Jr.

April 28th, 2017

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Economic WIR - Homes, Oil, & Q1 GDP

New home sales came in this week at an adjusted annual run rate of 621,000 homes.  This is up from the February annual run rate of 587,000 new home sales.   The logical next question you might ask about is pricing.  While it appears the pace of higher prices has subsided, the median sales price of a new home did increase by 1.2%.

As you can see by the graph below, crude oil inventories witnessed an unexpected fall of 3.6 million barrels this week to 528.7 million barrels. Full disclosure, I'm not an energy guy, nor am I a fan of companies in this space.  Frankly, the pricing in most crude products has seemed a bit wonky to me.  Inventory builds and draw downs seem more random than in the past.  I still do not see a huge global demand for this product.  I have yet to see the real fall-out from the oil fracking bubble.  So until I see credit contract and the inevitable bankruptcies, it is hard for me to be long-term constructive here.  Sure, I've traded in here, but until there is a real cleansing of the debt, I find it unwise to build long-term positions. 

In baseball, you get three swings at the ball to get a hit.  Well, when reporting the US GDP, the BEA gets three cracks as well.  This week we saw the first release of Q1 GDP.  Q1 GDP came in at a +0.7% vs. an anticipated +1.1%.  While one quarter isn't anything to get too worked up about, there is a narrative building in these numbers.  And that narrative is perhaps the consumer is getting tapped out.  Perhaps the massive contraction in retail isn't solely due to the,"hey we suck and can't deliver a decent customer experience over buying stuff on Amazon." It is possible the state of retail is a bit more ominous.  From what I could tell, much of the weakness was attributed to auto sales - or should I say the lack of auto sales.  One thing is for certain, expect the auto industry to do what brain-dead central bankers due...let them eat cheap credit.  I'm sure the next wave of easy money for new cars is right around the corner.

That's it from me.  Have a wonderful weekend and happy returns!

P. Franklin, Jr.

April 28th, 2017

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Why This Matters To Me - Fund Flows

Above is the Morningstar data that tracks mutual fund dollar flows.  This is smart to monitor because it aides me in determining which asset classes might seem a bit too crowded.  So for the month of March, bonds had $23 billion of dollar in flows, foreign stocks had $6 billion of dollar inflows, and domestic stocks had $3.3 billion of dollar outflows.  Sorry, in over 20 years of professional money management, not sure I've ever seen a major top in stocks with net redemptions.  The probability is not great for a major top in domestic stocks anytime soon.

Side Note* - looks like all of the brain-dead, human "robo-advisors" (who are probably worse than actual robo-advisors) added $6 billion into foreign equity.  I would equate this to all of the money managers who loved Blackberry stock from 2009 - 2012 all the way down because the earnings looked cheap.  When you fail to notice the sea-change the results can be quite painful.

Cheers!

P. Franklin, Jr.

April 26th, 2017 

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

Why This Matters To Me - Small Cap Stocks

If you look at the picture below you will see a price graph of a small company index.  While not always, small companies tend to lead the over-all market.  Small caps will generally lead the market higher or lower.  You can also see that this index hasn't really progressed much since December of 2016.  This chart matters to me because it suggests that the probability of making money in stocks is now increasing.

Best Returns,

P. Franklin, Jr.

April 25th, 2017

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.