A New York State of Mind

I was a kid, with only a few years of experience, in this business. My mentor was a savvy-seer with decades of experience on the floor of the New York Stock Exchange (NYSE) and was willing to share that knowledge as long as I was willing to buy him glasses of scotch. I learned a lot from him over the years, and many glasses of scotch, at Harry’s Bar & Grill in New York City. I thought my business acumen was advancing pretty well, and when some particularly bad news arrived in 1963, I searched around quickly for a cheap “put” to buy, or a low priced stock to sell short. Later that day, I met my mentor at the bar. After buying him yet another scotch, I told him what I had done to take advantage of the negative news. His response was, “Kid, when the bad news hits you ‘buy ‘em, you don’t ‘sell ‘em!” They don’t teach things like that in college.... Art Cashin, Director of Floor Operations for UBS

I met Arthur, as well as a host of other friends, last Thursday afternoon during my NYC sojourn to see institutional accounts and do media events. Over a scotch, he related the aforementioned story to me. The timing was propitious because another one of our friends had just telephoned to tell us the President was authorizing air strikes against ISIS. After a dinner at Mr. Chow’s, I went back to my hotel to find the preopening S&P 500 futures printing down roughly 11 points. The next morning when I warped in at 5:30 a.m. the futures had pared those losses to a mere minus 3.60 points. Wow, I thought, how fortuitous was Art’s story from the night before! Yet, that comment was to pale as rumors swirled down the canyons of Wall Street that Putin was deescalating the Ukrainian Uprising by withdrawing Russian troops from the border. By Friday’s closing bell the senior index was up 185 points and the S&P 500 (SPX/1931.59) was sporting a 22-point gain. The set up for a rally attempt was certainly in place with the NYSE McClellan Oscillator oversold and with the SPX holding its 100-day moving average (DMA), a moving average that has proved to be support for the last few years. Bolstering the oversold condition, the SPX had traded into the bottom of its 3% trading envelope (see chart 1). Further, last Thursday I wrote about the mysterious on-the-close buy orders that were showing up in each of the week’s sessions. Concurrently, the Commitment of Traders’ report indicated a noticeable reduction in professional traders’ short-sale positions, suggesting the pros were betting that this was just going to be another 5% - 7% pullback. And at its nadir, the D-J Industrials (INDU/16553.93) was down 4.5% from its recent high, while the SPX had lost 3.9%, in one of the most whipsaw two sessions in recent memory (see chart 2). Here, however, is the rub. The NYSE McClellan Oscillator is now fully overbought (see chart 3) and the SPX is within 9 points of its 1940 – 1950 overhead resistance zone often referenced in these reports. Accordingly, I continue to exercise the rarest commodity on Wall Street, patience!

While last Thursday with friends at Bobby Van’s across from the NYSE was the highlight of the week for me, there were some other very cool high points. The week began with a presentation at the Piedmont Club in Spartanburg, South Carolina for our financial advisors. The next morning I had breakfast with some portfolio managers (PMs) followed by speaking at a lunch in Greenville, South Carolina’s Thornblade Country Club. That night I did another well-attended presentation at the same club. I don’t know how long ago, and who made the decisions for the city of Greenville, but those decisions have left Greenville as one of my favorite places to visit. The next morning at 6:00 a.m. I flew to NYC for a 10:00 a.m. meeting with a hedge fund. My next meeting was with the sagacious folks at Baron Capital. I always enjoy the company of Ron Baron, one of “The Street’s best stock pickers, but on this visit I had the privilege of talking with his energy-centric PM, Jamie Stone. He began by saying oil prices are likely “range bound” for the foreseeable future, between a band of $80 - $85 and $105 - $110 per barrel. He explained that production costs are not going down, we are capacity constrained, there is an upward shift in capital intensity, and that the “majors” are outspending their cash flows; so, it’s tough to see oil prices having a big decline. He also opined that the success of the U.S. oil shale bonanza is “pulling capital from the rest of the world.” He added that shale has low resource risk (tons of shale oil), but high execution risk. He worries that the energy space is going to run out of skilled people because everyone is scrambling for labor. One of the names he liked from Raymond James’ research universe was Concho Resources (CXO/$133.33/Outperform). He noted that Concho is drilling 600 wells per year, yet has some 20,000 resource prospects left to drill. The other name mentioned was Oasis Petroleum (OAS/$47.54/Strong Buy), which recently “missed” on two key volume metrics, but is trading at 5x cash flow and is growing production by 45% per year.

Next on the docket was Baron Capital’s real estate PM, Jeff Kolitch. He began by noting the amount of houses that are selling per year is way below the country’s population growth of 3 million folks per year. He also said that the commercial sector is clicking “across all sectors.” Another very interesting data point came from the CEO of Hyatt (H/$56.57/Market Perform), when he said (as paraphrased) – I have been visiting our various properties around the country, and despite the fact we are near occupancy capacity without a bubbling economy, I don’t see any new hotel construction around our properties – and that, ladies and gents, brings us to a stock mentioned by him. Starwood (HOT/$79.66/Outperform), he said, is moving toward an “asset light” business model. That would be shifting the company from total ownership of hotels to more of a management of hotels model. To wit, the company is selling roughly $2 billion worth of hotels, and using some of that money to buy back 10% of HOT’s stock, and then probably returning excess cash to shareholders. That Baron’s duo was followed by none other than Ron Baron, who while discussing favored positions like Iridium Communications (IRDM/$8.22/Strong Buy), which I own, and Tesla Motors (TSLA/$248.13), pronounced (again as paraphrased) – the stock market tends to grow at about 7% - 8% per year plus dividends, but we attempt to grow our accounts by 14% - 15% per year, and Baron Capital has the track record to prove it! Ron further offered-up that the value of the U.S. dollar falls by half every 20 years and that the stock market is a good hedge against that.

The rest of Wednesday was spent with the good folks at JP Morgan Asset Management, and two of its premier PMs, but I will have to continue this discussion in tomorrow’s Morning Tack. Regrettably, Mary Edroes, the head of JP Morgan’s asset management division, was in Brazil and therefore unavailable to meet with me this time, but I got a rain check.

The call for this week: Until Friday’s Fling, the Russell 2000 (RUT/1131.35) outperformed the SPX every day last week. That was a distinct change of trend and is consequently worthy of note. It is also interesting that the RUT’s PEG ratio (price to earnings growth) was below 1, which seldom happens, and implies that small caps are cheap. Last week the Street experienced record junk bond redemptions ($7.1 billion), as U.S. economic growth trumped the rest of the world. Also of interest is that Darrell Issa said more than 20 governmental officials lost/destroyed emails after Congress launched its investigation. This morning, however, all sins are forgiven as Iraq is close to naming a new Prime Minister, Russia has “stepped back” from the borders of the Ukraine, Ukrainian forces are about to recapture the city of Donetsk, and Israel agrees to a new cease fire with the Palestinians. Such events have the pre-opening SPX futures up 8 points at 6:00 a.m. That said, we will not be out of the woods until the SPX surmounts the 1940 – 1950 overhead resistance zone.

Read more commentaries by Raymond James