Cogitate

If you are unfamiliar with the meaning of the word in the title, or the word itself, you’re certainly not alone.  According to Google, the use of the word “cogitate” in publications peaked in the early 1860’s and has been in a downtrend ever since.  Over 150 years is one hell of a bear market! 

 In the investment game, you buy when there's blood in the streets.  My Dad was one of the savviest people I ever met, so it’s not surprising that he was a buyer of “cogitate” ever since I can remember, bear market be damned.

 Cogitate is a verb that means to ponder intently.  My father used this word enough that I will forever associate it with him but never too much that the word loses its meaning. 

 When was the last time you cogitated?  I’m talking about the kind of thought that is only possible when your spouse and children are running errands, you turn off the entertainment and really think, intently.

 I was reminded last week how important it is to routinely cogitate on your priorities and ensure that how you spend your time reflects those priorities.

 I started publishing The Whaley Report because I wanted to empower investors to earn superior returns in less than thirty minutes each week.

 I wanted to give you more time to be a parent, a significant other, and a best friend.  Time to focus on your career, your hobbies, or anything else you deemed important.

 And I wanted to give good information without asking you to sacrifice your investment returns.

 I set out to accomplish this by using an effective process for monitoring global financial markets that are becoming more interconnected with each passing day.

 In hindsight, it was quite a lofty goal and maybe even a little bit arrogant.

 While the “time” part of my goal is very much subjective, the “performance” part is quantifiable and verifiable. 

 The performance of the trade ideas in this report so far this year, have outperformed 97% of all mutual funds tracked by Morningstar and 89% of all exchange-traded funds tracked by ETFDatabse.com. 

 This top-tier performance has been possible, in large part, because of the process I use for filtering out the noise of the markets. 

 And if the last month has shown us anything, its that the noise in the financial markets is increasing at an exponential rate and last week was no different.

 

Shock and Awe

The world was shocked to discover that US growth in Q1 was -2.9% on an annualized basis. This was far below the -1.8% growth rate that was expected and a far cry from the second revision to Q1 GDP of -1.0%. Before we push forward to more meaningful and present topics, two things about last week’s GDP report should be pointed out. First, of the 25 worst quarterly GDP reports since 1946, Q1 GDP would rank 17. Second, and more importantly, every single one of the other 24 GDP reports on that list led to a recession, every single one. That said, while it is rare to have a decline of that size in a non-recessionary period, it has occurred twice since World War II, Q4 1949 and Q2 1981. So, the severity of the decline in Q1 may or may not be indicative of the US being in or headed towards recession and we won’t know until we are already in the middle of it.

 

The Greatest Trading Edge

The greatest trading edge you can develop to consistently outperform is the ability to determine what is happening now. Half of the market participants are driving while looking in the rear view mirror, focused on what has already happened. The other half spends their days trying to forecast whats going to happen in the future. If the statistical reliability of weather forecasts falls apart after just 8 days, how in the world can you expect to forecast whats going to happen months from now in an ecosystem as complex as the global economy? Develop a process that allows you to better understand the current environment and you will be far ahead of your fellow investor.

 Several key points needed to be addressed with regards to the shock and awe surrounding the Q1 GDP report from last week. First, this data is 3 months old. As of today, Q2 is closed, and the world is reacting to what happened three months ago? Second, regular readers of TWR know that I’ve been discussing the slow down in US growth, in real time, using market indicators that everyone with a smartphone can access.

 For five months now, those indicators have been signaling that US growth is slowing. As we wrap Q2, I thought this would be a good place to review the performance of several key US markets to see if we can glean insights into what is currently happening as Q2 comes to an end, rather than having to wait until late September.

 

US Sector Performance and Q2 Economic Growth

The following is a list of various US sectors’ performance both on a 3-month and year-to-date basis:

S&P 500 (SPY): +6.1%, +7.0%

US Consumer Discretionary (XLY): +4.2%, +0.54%

US Technology (XLK): +6.78%, +8.23%

US Small Caps (IWM): +3.54%, +2.85%

US Treasuries (TLT): +4.32%, +12.29%

US Utilities (XLU): +7.98%, +17.60%

US REITS (VNQ): +8.12%, +18.05%

 

So what does the performance information above tell us about Q2 economic growth? First, it tells us that the broader US equity market, SPY, as well as sectors oriented towards higher growth environments, accelerated in the second quarter afterlanguishing in the first quarter. US small caps and US consumer discretionary both went from negative territory in the Q1 to positive territory by the end of Q2.

 Second, and most importantly, it tells us that assets geared towards slower growth environments are continuing to outperform on both an absolute and relative basis. US Treasuries continues to be one of the best performing asset classes in 2014, it outperformed both small caps and consumer discretionary in the second quarter despite both of those sectors showing signs of life. US utilities and reits, the bellweathers of growth slowing indicators, continue to be the best performing US equity sectors for 2014 and they outperformed every other US sector during Q2, except for energy (XLE).

 So despite the fact that high growth sectors came alive in the second quarter; investors are still bidding up slower growth assets. This that Q2 economic growth will accelerate higher on a sequtential basis from the -2.9% GDP growth rate for Q1 but will fall far short of showing us that the economy is growing at a healthy rate.

 This situation clearly requires ongoing monitoring but there were no developments last week that would make me change the current game plan or cause me to prematurely close either of our open trade ideas in OIL or TLT.

 One final thought, as I mentioned in the beginning, the “time” aspect of what I hope to deliver to you each week subjective.

 Whatever amount of time you believe this report saved you this week, take the advice of my Dad, and use some of that time to cogitate.