Daily Bullets….For July 28, 2014

·         “Cook Cumulative Tick” Flashing Red….A proprietary indicator invented and used by a highly successful investor, Mark Cook, is flashing a bear market signal for the stock market. This indicator, dubbed the “cumulative tick”, provided advance warnings prior to the 1987, 2000, and 2007 market declines.  It also helped indicate the beginning of the bull market in April 2009.

What’s the point? We are not a “technical shop”, but rather make our investment decisions for clients based on fundamentals, so we normally would not pay a lot of attention to a technical indicator, such as “cumulative tick”. The reason we mention this is because a) it is interesting, and b) it jibes with our recent decision to reduce U.S. equity exposure due to valuation that we believe has become “moderately high”. We have also become concerned about increased investor confidence and complacency which are a reflection of market conditions via sentiment. Another concern is the fact that the market has not had a true “correction” in almost three years, over two times the average interval between corrections. That said, we think the earnings and economic fundamentals remain positive, and as the article notes, there is no way to call the “timing” of the next correction. Our investment strategy is focused on diversification across multiple asset classes and is intended to reduce portfolio volatility and provide protection against declines in any one market, such as stocks. Link: http://www.marketwatch.com/story/stock-trader-who-called-three-crashes-sees-20-collapse-2014-07-28/print?guid=A7AFE6E4-1366-11E4-A7DB-00212803FAD6

 

·         5,844 M&A transactions valued at $1.04 trillion YTD…...Wow! M&A activity has been picking up significantly. The year-to-date total of $1.04 trillion marks the first time this activity has exceeded $1 trillion since 2007.

What’s the point? We have been forecasting for some time that the high M&A activity environment would continue this year, and recent data confirms this. This is similar to what happened in the late 1970s and early 1980s and is being driven by the same factors: low cash flow valuations and companies seeking to improve shareholder return through acquiring businesses that are undervalued based on cash flow. The article notes increasing M&A activity could be a “problem” because of low economic growth however, we don’t see it that way. We see it more as a result of institutional investors remaining cautious, which is contributing to the undervaluation of many companies based on sustainable cash flow and low interest rates. We believe the high M&A activity will continue as long as interest rates remain low. Link: http://www.marketwatch.com/story/what-the-ma-surge-says-about-the-stock-market-2014-07-27?dist=countdown