Don’t Fear the Reaper

All our times have come
Here but now they’re gone

Did you have fun this year so far? Haven’t you made a lot of money since Thanksgiving week – the best holiday-shortened week of stock market gains in history?

Wasn’t the December melt-up into supposedly Big Scary News a delight? Weren’t the F*ck You Rallies staged by Greece, Spain and Italy something special to behold?

How about the year-to-date gain in the Dow Transports (of all things)? Did you ride the homebuilders off into the sunset?

What about the easy money in shares of Goldman Sachs and Berkshire Hathaway, get any of that for yourself?

Or the throw-a-dart nature of the consumer staples and utilities stocks – did you play? They all worked.

Well I hope you enjoyed some of that, at least a part of it. Because it was awesome.

And now it is probably over – at the very least on pause. And so while I hope you’ve benefited and had a blast, I hope you did the grown-up thing and took something off at quarter’s end.

This week, as March rolled to April, we did one of the hardest things you sometimes have do in the asset management business – sold down some stocks that looked as though they would never go down again. Healthcare and biotech names that have defied gravity for months on end, Berkshire – which looks like it’s in a Second Renaissance right now, Visa and a handful of oil names with incredible trendlines and set-ups. Everything at new year-highs – even new all-time highs.

Sorry. Sold down. Trimmed and trundled and cropped and cut back. The ivy, as pretty as ever it’s been, was beginning to cover the windowpanes by the end of March – a 16% year-to-date gain for the Healthcare sector! 12% in Consumer Staples, are you kidding me?

But we do what we have to do at quarter’s end, systematically and non-subjectively. “Don’t show me bull flag patterns on charts or an upward earnings revision. We’re still rightsizing these positions.”

This is the discipline. Part of the job, and yes, sometimes the hardest. Didn’t George Orwell warn us that “Whoever is winning at the moment will always seem invincible”? But haven’t we learned that nothing is? Not Apple, not gold, not John Paulson, not Bill Ackman – and certainly not the US stock market.

Seasons don’t fear the reaper
Nor do the wind, the sun or the rain
We can be like they are

So we trim the winners a bit and bank some gains. We commit the harvested capital to where it can outperform over the next season or two – those fallow fields of relative underperformance like emerging markets or even short-duration bonds. We beef up cash positions a bit and re-establish some sense of order, some sense of propriety.

And we do this before the Reaper can arrive to thwack off those overgrown stalks, we take the scythes and blades to them of our own volition.

Came the last night of sadness
And it was clear we couldn’t go on
The door was open and the wind appeared
The candles blew and then disappeared
The curtains flew and then he appeared
Saying don’t be afraid

And don’t forget where we are, after all. As we’ve consistently maintained, if we’re going to have a swoon it may as well happen now in the springtime. ‘Twould be traditional at least. The “Best Six Months of the Year” stretch ends with April as have the big grinding rallies of each of the past three years. April has stopped stocks dead in their tracks in 2010, 2011 and 2012, the resulting corrections have been in a range of between 10 and 20%, nothing unmanageable but certainly not the type of rapids you want to paddle over with a full canoe.

And besides, we’re on the doorstep to new all-time highs, with a foot over the threshold in so many instances – shouldn’t the final slog across be difficult anyway? Shouldn’t we have to earn these new highs, after all?

And right on time, the data is slowing. Global leading indicators are ratcheting lower, Goldman tells us. The incredibly early spring home-buying and building season (which began on Jan 1) may have pulled some gains (and sentiment) forward a bit. Employment data is softening as well thanks to the payroll tax’s impact, say the wonks. And the sequester’s impact hasn’t even been felt yet, they say. This combined with an outright contraction across both core and peripheral Europe, never mind the spectacle of Cyprus.

All signs point to a cessation of the multiple expansion we’ve ridden here in the US –  PE growth having been the driving force of this rally since I can’t remember when. (A quick word on this: At the end of Q1 2013 this past week, the S&P 500 has finished out with trailing PE ratio of 16.1, it’s highest to end a quarter in over three years. This rising PE multiple phenomenon began in September 2011 and has made up for the difference in lack of revenue growth. But as with all elixirs and salves, it works until it doesn’t – every cure reaches its point of maximum efficacy sooner or later…)

And now all of the divergences we’ve scoffed at as they’ve raised their signs of protest and admonition along the highway – “defensive sectors are leading! small caps are lagging! overseas markets peaked in December relative to domestic stocks!” – may begin to matter after not mattering forever. We’ll point to them in hindsight and say “You see!” Now of course, those divergences remained in force for too long for us to say that they were legitimately worthwhile timing signals of any kind, but we’ll humor that particular breed of chartist who pulls off feat after miraculous feat of using historical prices to show us precisely where stocks have already been – Alakazam!

In any case, none of us truly know where this week’s weakness will lead us through the course of the quarter. Yes we’ve peaked in April three of the last three years but, as always, there are differences in 2013 – notably a much better housing market, even if already discounted into everyone’s outlook somewhat.

Still, if it is a time for reaping, so be it. We’ve done ours.

And, as opposed to every single major market-timing strategy since the prior market peak in 2007 (they all failed, most of them horribly), rebalancing has actually earned its keep as a tactic. It’s one of the only things that has actually worked, if you look at the data and, no, it did not fail you in 2008-2009. It succeeded if you removed your emotions and your feigned ability to predict the future. The evidence is manifold. The systematic rebalance, carried out dutifully and without hesitation, takes those clickbait media headlines formed as questions, like “SPRING SELL-OFF?”,  and it crumbles them into bits of dust, renders them impotent.

Let someone else bite their nails. I’m doing my job, instead.

Come on baby…don’t fear the reaper

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painting above: ‘The Harvest Moon’ by George Mason, oil on canvas, 1870