Market commentary form InsiderInsights and Insider Asset Management llc
Our InsiderInsights service and accounts at Insider Asset Management llc entered 2013 appropriately bullish, and have benefitted fully from the nice start of the year for U.S. equities. But the boost so far in January is really the end game in a plan we put into play last November.
It was back in November that our insider-based market indicators and read on the quality insider buying in individual stocks, had us committing capital into the then weak market in anticipation of higher prices by year end. That was quite a change after raising more than our normal amount of cash in accounts in October in reaction to the market’s bearish tilt then.
Our bullishness in November was based, in part, on expectations for a reasonable settlement to the fiscal cliff issues. That played out—albeit to a lesser degree than we had expected—and we are actually taking some profits now in older long positions even as we take advantage of the many new ideas making it through our insider-initiated, fundamentally approved research process.
So we remain at just 5% cash as of this writing, and remain emboldened by (mostly) positive indications that the grudging growth in the U.S. can survive some more mismanagement by the Beltway boys.
With continued rumination about how the next act in the three-ring circus inside the Beltway, we are also comforted in the short term by the very bullish technicals of the stocks in our portfolios. In the end, we are invested in individual stocks, not market index instruments. So while our top-down insider-based market indicators do at times influence our propensity to go long or short, it’s also true that the aggregate behavior of the insider-approved stocks we own and are following can affect our opinion of how strong the market is. Right now, leaning very long still seems attractive.
Trolling the domestic emerging market
The larger risk we see to our bullish stance is the dampening affect on the grudging economic recovery of the austerity that has always been inevitable, and now seems imminent. Over a year ago we were using the term “pay-for-it-phase” quite a bit in our InsiderInsights service and in talks with clients. That term related to the fact that the U.S. had gone through many phases of the financial crisis we still consider ourselves in—but none that actually asked much of its real economy.
The too-loose-for-our-own-good monetary and fiscal policy that has benefitted the U.S. economy since 2008 can’t go on forever. The years-long stimulus fest will eventually have to be “paid-for” with higher, less government largesse, higher interest rates—or a mixture of these buzz-kill metrics. Can the U.S. economy still grow enough this year if one or more of these factors acts as a new headwind?
For now, we are actively choosing to err bullishly on U.S. equities. In the longer-term, the attraction of U.S. equities versus other asset classes across many borders still seems obvious to us. We think it very likely that global investors will come to see U.S. equities as an asset class to add exposure to given the alternatives. If U.S. stocks were able to manage the rise they did in 2012 with as low a participation rate as there was, indices seem a good bet to continue northward when the inevitable rotation out of fixed income begins—perhaps within the next year.
We also think underfollowed U.S. stocks represent one of the better emergingaround. While sophisticated investors feel the need to go ever deeper into the jungle of currency, political, and regulatory risk in order to find the next fast-growing emerging market outside North America, we think they are being unnecessarily adventurous. The numerous under-the-radar small and midcap companies with prospects in the U.S. present at least as interesting a fishing ground for undervalued growth investments. But then, we’re biased on that front. It just so happens that the insider data analytics we have crafted for our research process have proven particularly useful for identifying promising small and midcap stocks.
In the end, stocks—like any old widget—are only worth what someone else will pay for them. Anyone who forgot that mathematical models and historical valuations are trumped by simple supply-and-demand realities was rudely reminded of the basics of investing in 2008. When demand from buyers dried up back then, the concept of “oversold” had to be redefined much lower.
The supply-and-demand lesson woks both ways, though, and this concept has higher odds of leading to nicer conclusions the next time it is applied. A change in the direction of fund flows seems likely to become a tailwind to U.S. equities, both from capital abroad and from domestic fixed-income assets.
We’ll take these medium-to-longer-term demand-side positives into account when the next scare for the market hits. Though definitely leaning bullish at this point, we repeat often to our clients that we are not wed to any stance. If more tactical defense becomes warranted, we will raise cash again—even to try and avoid a months-long pullback within the larger uptrend we think we are in.
For even though it’s important to have a conviction on the market’s direction over at least the medium term, it’s also important to be more humble than dogmatic when it comes to integrating new information into one’s market assumptions.