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McClure Investment Management, LLC

2014 2Q Market Commentary

Now that the World Cup is over, (What’s to become of the stadiums?) we can go back to ignoring soccer for another four years.  That should leave us plenty of time to talk about the market.  After a very strong (+29%) 2013 the equity markets have apparently decided to take a breather.  As of the end of June, the market has tacked on another 6% to its 2013 tally and has done so with very little volatility.  “How little,” you ask?  (By the way, I know you would never ask, but indulge me for a moment).  On April 16th, the S&P 500 gained 1.05%.  The next time the S&P saw a daily gain or loss of 1% was this week on Thursday (-1.18%) and again on Friday (+1.02%).  That’s a span of 62 trading days.   To find the last span of 62 days without a 1% market move you’d have to jump in the way back machine and set it to 1995.

2014-08-05_21-10-10

Since 2000, there have been average of 77.9 trading days per year where the S&P has had moves greater than 1%.  This year we’ve had 18 and are on pace to end with only 32.

2014-08-05_21-10-32

 This isn’t horrible news, but low volatility tends to roughly correlate to market peaks.  In addition to the lack of volatility, we also have (1) a market trading at a P/E Ratio of about 20, compared to a long term average of 15.6 and (2) trading volume in US stocks and Treasury debt at a five year low.

Something is going on, but what?  The most logical explanation for the low volatility, elevated valuations and low trading volume is apathy (or complacency) on the part of investors.  Alternatives to the equity market (bonds, REITS, money markets) have extremely low returns in nominal terms and negative returns when inflation is factored in.  When investors venture into high yielding alternatives, for example the municipal bonds issued by Puerto Rico that I discussed last quarter, bad things can happen.  So what we’re experiencing now may well be a broader buy-and-hold mindset than the market usually sees.  There’s no reason to trade frantically if you’re not improving your portfolio.  (All of this is conspiring to make things tough for high frequency traders, which is fine by me.)

The good news is we only devote serious worrying time to the 20 or so companies we own.  Let’s look at a few of those:

  • Speaking of our stocks, New York Times is no longer one of them.  With a P/E approaching 40 and some serious questions about management’s handling of Editor Jill Abramson’s firing, it seemed time to part ways.
  • Chesapeake Energy spun off Seventy Seven Energy (SSE), their oilfield services unit, on July 1st.  I like this move as it shows management is continuing to push for greater transparency and focus in company operations.  Chesapeake also saddled SSE with a fair amount of its debt so, while I like CHK even better than before, we may not be long term owners of SSE.
  • Despite lower trading volumes across Wall Street, as noted above, Citigroup announced remarkably strong earnings on Monday sparked, in part, by stronger revenue from fixed income trading.
  • AT&T’s offer to buy DirecTV at $95/share was music to my ears.  AT&T has been growing its revenues at 1% annually, as opposed to DTV’s 10%, so they needed the strong cash flow DTV spins off each year.  The market thinks the deal may possibly be blocked as evidenced by the current price of $87.  That’s a 7.4% discount to the agreed upon purchase price.  I believe DTV will be fine either way.  The barometer I’m watching is the regulatory approval process for the Comcast-Time Warner Cable merger.  If the regulators use the same logic they cited in the combination of Sirius/XM Satellite Radio, I feel the cable merger and AT&T/DTV will both go through as planned.
  • On the watch list:
    • GM, which has tons of bad press lately. 3.3% dividend yield.
    • Nestlé, while not a screaming bargain is priced attractively and a great defensive company.
    • More investment grade municipal bonds.  We started finding bonds last quarter but it has been hard to find them in the quantities I need.  We’ll continue to be choosy an add bonds to your portfolios as they become available at decent prices.

And a few random items:

I hope you and your families are enjoying a relaxing summer.  Other than a few days lounging by the pool in Las Vegas and a sail to Catalina, the McClure Family is going to hang around the house and prepare for the fall.

Thank you again for your continued trust in me to manage your wealth.  We appreciate your input, questions, suggestions and, of course, your grammar and spelling corrections.

Best regards,
Bob McClure

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