The Lato Letter: Volume 4, Issue 3

The Lato Letter: Volume 4, Issue 3

To say that the last few sessions in the equity market have been unnerving is as big an understatement as saying the Blue Jays scored a few runs this weekend (for those who don’t follow the Jays, they set a franchise record this weekend for runs scored in a three game series).

The financial and mainstream press has inundated us with commentaries, predominantly on the negative side, about the equity market action over the past few days. There have also been a number of commentaries urging investors to stay the course and to avoid joining the panic.

As you know from reading previous issues of The Lato Letter, Padlock has remained constructive on the equity markets for the balance of the year and into next year. We remain committed to that view and suggest that the current market turmoil should not be the beginning of lengthy declining market but rather a somewhat overdue correction in a continuing bull market.

I thought I would take the opportunity to share some of the salient points from those positive commentaries that I have read in the last day or so. I will simply provide some quotes from those various articles. Here are a few:

Jeff Saut, Raymond James Strategy – “And yes, I think we are bottoming. It might happen today. The only caveat I would offer is one of my mantras, ‘Never on a Friday’ meaning when markets get into one of these selling squalls they rarely bottom on a Friday, giving investors the weekend to brood about their losses. Subsequently, they show up the next week in ‘sell mode’, which often leads to ‘Turning Tuesday’.

Jonathan Golub, RBC U.S. Strategy – “Not surprisingly, the sell-off has emboldened bearish investors who have resurrected the case for further downside including lofty P/Es, high yield spreads and elevated inventories. Our work indicates that further downside is unlikely without a specific catalyst or greater recessionary likelihood. Our Recessionary Scorecard indicates limited risk.”

Bespoke Investment Group – “While it was already a weak day on Friday, equities finished at their lows of the day and the week. With that drop the index closed out the week trading at 4.4 standard deviations below its50-DMA, which is the most oversold reading since October 19, 1987, which was the day of the crash.”

John Gaynoe, Capital Guardian LLC Wealth Management – “The market experienced a text-book selling climax on August 21st. It is likely this was also a terminal shakeout but this must be proven or disproven by the market action over the next several days. It is extremely likely the market decline is over but nothing is certain. The key issue is this: if this was a selling climax coupled with a terminal shakeout, a yearend target of 20,000 (on the Dow Jones Industrials) is realistic. We will know in a few days.”

Brian Wesbury, First Trust Advisors LLC – “Shorts get power from fear and confusion, and nothing creates fear like the belief that market declines are being caused by some fundamental problem. We don’t see any serious fundamental problems. But, this correction is not due to fundamental factors. It’s technical. We can’t prove it to you, but that’s what corrections are all about – opportunity for those who can see through the fog”.

Adam Crisafulli, JP Morgan Trading Desk Commentary – “There’s no denying that there are a few problems in the world that could take a toll on stocks moving forward (ie poor 2Q earnings/2H15 outlooks, waning commodity demand pointing towards at slowdown in global growth, lofty valuations, etc); however, it feels as though there is a major discrepancy between the overwhelming negative sentiment in the market place and the fundamental landscape”.

Matt Barasch, RBC Wealth Management – “Historically, the stock market volatility around the first Fed rate hike lasts for two or three months in both the US and Canada. That would suggest the market may spend much of the next few months correcting further or consolidating. Now that the correction is here, we expect it will eventually present opportunities to buy outstanding business at very attractive prices.”

Again, as you know from past issues, Padlock’s philosophy and process is based on buying and holding outstanding businesses at attractive prices. One of those businesses that has certainly not escaped and in some ways led the current decline is Apple. When concerns about China’s economic uncertainty began to swirl, Apple which relies on China for a large part of its growth, came under pressure. Some analysts lowered their forecasts and the stock has fallen over 20% in the last month.


Interestingly, in a weekend email to Jim Cramer of CNBC’s Mad Money, Tim Cook, Apple’s CEO said ““Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks. Obviously I can’t predict the future, but our performance so far this quarter is reassuring”. Although Apple briefly traded up yesterday following the release of Cook’s comments, it ended the day down 2.5%. This further decline reinforces the comments above from Brian Wesbury where clearly positive fundamentals for the company could not overcome the short term negative technical background. If equity investors can over-react to the implications of a slower economy in China on Apple then it is certainly not far-fetched to think it could be doing the same thing to equities in general.

The current downward volatility of the equity market cannot be taken lightly and has not been taken lightly by Padlock, but I continue to be constructive on equities in the long term and remind you that the long term is where Padlock’s emphasis is and your emphasis should be. It is not easy to cope with the current volatility but that is the reason that in the long term, equity investors are rewarded for owning a portfolio of solid business that just happen to “trade’ on a stock exchange.

If you would like to discuss or obtain further information on any of the points made above, please feel to call and I would be happy to discuss it with you.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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