Morning Tack: "Better Call Shad?!"

“Better Call Saul” is an American TV crime series that depicts the story of a small-time lawyer. It is a spin-off prequel of Vince Gilligan’s prior series “Breaking Bad.” Saul is a champion for his low-income clients. He works with a private eye Mike Ehrmantraut, who has a specialized skill set – he’s a "fixer" of sticky situations.

In today’s Morning Tack, however, we are referring to “Better Call Shad,” not Saul, meaning Frederick “Shad” Rowe, the founder of Dallas-based Greenbrier Partners and also a “fixer of sticky situations.” The current short-term “sticky situation” would be the stock market flat-lining for a few weeks and in the process frustrating both bulls and bears alike. After our talk, I went back and re-read Shad’s April letter to shareholders. There were a few lines that really resonated with me. To wit:

The question I ask myself constantly: “Is the way we are positioned a reflection of what I think? Or, to what extent, if any, is my thinking a reflection of how we are positioned?” One would expect that a portfolio reflects the manager’s thinking. There is always the danger, however, that your positioning ends up determining how you think. We think this is especially relevant when things are going particularly well or poorly. We have written about this worry before and it is why we constantly try to bust our theses every single day. Attempted thesis busting applies to “Americanization”; “better, faster, cheaper”; “for the customer rather than to the customer”; “to the delight of the customer”; and “better to bet on the agents of change than the targets of change”, and is part of our effort to see the world as it actually is rather than some trumped up reflection of our own wishful thinking.

Shad and I think we are currently “positioned for the world as it actually is” given the tectonic shift from tangible assets in the 1980s to intangible assets currently. By definition this means valuations should be higher than historic valuation measurements suggest, and that profit opportunities should continue to surprise on the upside. Discussing the short-term wiggles, Shad and I agree that short-term is for traders, but Andrew and I have to attempt to make those tactical “calls,” because select clients of our firm like to trade. Nevertheless, over the longer term, we both agree, we remain in a secular bull market that has years left to run and few participants believe it.

Returning to the tactical vent, so far our “flat line” call of last week continues to play on The Street of Dreams.

“Greenbrier actually added a new partner last month who, as part of his due diligence, submitted to me in writing a series of 13 fairly routine questions. These 13 were followed by a 14th rather challenging question, which was ‘What question have I not asked that I should have asked?’” . . . Frederick “Shad” Rowe, Greenbrier Partners

If our short-term proprietary model remains correct, the equity markets should “flat line” for the next few weeks. Indeed, our models “think” it will difficult for the S&P 500 (SPX/2411.80) to make much progress in either direction. Speaking of “flat lining,” the Russell 2000 (RUT/1370.21) has been “flat lined” since mid-December (see chart). While traders can trade our near-term scenario, investors should use this pause to sell underperforming issues in portfolios and buy into situations expected to do well going forward in this earnings driven secular bull market. This morning the “flat lining” continues with the preopening S&P 500 futures up 2 points at 5:00 a.m.

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