Wednesday, September 10, 2014

Expendable? Bad Data, Fog of War Can’t Keep Market’s Down

For anyone who wished the Sylvester Stallone would just go away already, the Expendables franchise is the worst thing that could have happened. The first film, which was released four years ago, made $274 million and spawned a sequel, cleverly named the Expendables 2, that took in more than $300 million worldwide. So of course, Sly is back for the Expendables 3, and he’s brought his buddies with him again. It’s a Who’s Who of has-beens: Antonio Banderas, who’s being divorced by Melanie Griffith; Wesley Snipes, who’s going on 16 months since he was released from jail; Harrison Ford, who’s recovering from a broken leg suffered while filming Star Wars: Episode VIII; Arnold Schwarzenegger, who’s no longer the governor of California or a movie star but at least brought his ‘love child’ to the film’s premier; and Mel Gibson, who plays the bad guy. But don’t take my word for it. New York Magazine’s Bilge Ebiri says “first two movies look like Seven Samurai next to The Expendables 3, a sad, bad, parade of uninspired cameos and listless violence,” while the Globe and Mail’s Liam Lacey says the Expendables 3 “is proof that sometimes even your low expectations can be far too high.” Box Office Mojo predicts it will earn $24 million, though, so it can’t be all that bad.

For anyone craving the violence of an action flick, there’s no need to run to theater when we have markets like these. The S&P 500 gained 1.2% to 1,955.06 this week, while the Dow Jones Industrial Average gained 0.7% to 16,662.91. The Nasdaq Composite jumped 2.2% to 4,464.93 and the Russell 2000 advanced 0.9% to 1,141.65.

That the market finished higher this week is something of a miracle. The economic data was terrible: Germany said its second-quarter GDP shrunk, as did Japan; China reported a slew of concerning data points; and retail sales in the U.S. stagnated. Then there was Friday’s excitement, which saw reports of fighting between Russia and Ukraine and caused the markets to plunge before finishing relatively unchanged.

Cumberland’s David Kotok assesses the “fog of war”:

Word comes today (see this Bloomberg piece) that the Ukrainian army has destroyed part of a column of military vehicles that crossed the border from Russia. Meanwhile, Vladimir Putin continues to insist that Russia has no military presence in Ukraine.

The details of Ukrainian military forces' engagement with separatists are lost in the fog of war. However, the interplay boils down to some fundamental realities. Putin does not want Ukraine to be part of NATO (North Atlantic Treaty Organization) or the European Union. That is a line he has drawn in the sand…

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Markets are reacting this afternoon to the ongoing developments, but in the fog of war it makes little difference what the specific elements are in each event. Instead, what drives market valuations is the knowledge of applied costs. No matter how Ukraine, Russia, and the separatists sort themselves out, the costs continue to rise.

Wells Fargo’s Paul Christopher thinks investors should use the Russia-Ukraine induced weakness to buy European stocks:

A miscalculation that ratchets up the fighting is possible and, if it occurs, would bring new sanctions that could slow the economies of both Russia and broader Europe. However, we continue to see that that level of violence as the most expensive option for both sides. the most likely outcome is that the conflict does not trigger the sanctions war and eventually returns to being fought on political and diplomatic fronts. In that event, financial markets should return to focus on the gradually improving European economy, and we think investors will continue to find value in Europe…We reiterate our view that investors should keep European equity exposure.

BMO’s Brian Belski calls the twists and turns a normal part of investing:

We expected 2014 to be a difficult year for investors to navigate as the environment transitions from macro to micro influences. In addition, we expected better performance during 1H and more challenging conditions during 2H. Unfortunately, many investors have become accustomed to increasingly polarized strategist recommendations through the years so we can somewhat understand why our more neutral near-term stance is confusing. However, based on our work and experience, all healthy bull markets require periods of ebb and flow and this is precisely how we would diagnose 2014 performance patterns. Furthermore, what continues to get lost in our discussions is that we remain very bullish longer term and nothing in our work suggests a protracted or prolonged bear market is even remotely on the horizon.

I feel better already.

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