Thursday, March 20, 2014

The Morning Call--Officious technocratic obfuscating malarkey

The Morning Call

3/20/14

The Market
           
    Technical

            The indices (DJIA 16222, S&P 1860) gave back some recent gains yesterday.  However, the S&P remained within uptrends across all timeframes: short (1779-1956), intermediate (1734-2534) and long (739-1910).  The Dow finished within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5050-17400).  So they continue out of sync in their short and intermediate term trends---which leaves the Market trendless.

            Volume rose slightly; breadth was terrible.  The VIX rose, staying within its short term trading range and the intermediate term downtrend and closed above its 50 day moving average---continuing to provide little help determining Market direction.

            The long Treasury fell, finishing within its short term trading range, its intermediate term downtrend and above its 50 day moving average.

            GLD got seriously whacked, closing right on the lower boundary of its very short term uptrend, within short and intermediate term downtrends and above its 50 day moving average.  If it holds above the lower boundary of the very short term uptrend, our Portfolios will likely start to nibble again.

Bottom line:  most markets (stocks, bonds, gold) sold off yesterday as comments from Yellen suggested that the Fed would start to raise interest rates sooner than most investors expected (more on that below).  My take is that this incident does little to alter the technical landscape; that is, weak volume, deteriorating breadth and a growing number of divergences are not likely stop an assault on the upper boundaries of the Averages long term uptrends but could very well strangle any challenge of those barriers.

My intent is to use any price strength (1) that pushes one of our stocks into its Sell Half Range, to act accordingly or (2) as a gift allowing us to eliminate a stock that fails to meet its quality criteria.

    Fundamental

     Headlines

            We got two US economic datapoints yesterday, though they were of little consequence: weekly mortgage and purchase applications were down and the fourth quarter US 2013 trade deficit declined more than expected.

            The real news was the FOMC meeting and its accompanying policy statement and a comment Yellen made in the subsequent press conference.

            Let’s deal with the FOMC statement first---and there really was not that much surprising in it: (1) the economy is improving, (2) tapering is proceeding, (3) and as expected, the 6.5% unemployment rate was dropped as guidance and substituted with an amalgam of other employment related data (‘qualitative guidance’---their words). 

            Hilsenrath (the Fed’s mouthpiece) summary of the FOMC statement (medium):

            Goldman’s take on the FOMC statement (medium):

            FOMC projections:

            In Yellen’s the question and answer session, she stated that interest rates would likely begin to rise a ‘considerable period after the end of QE’ (officially slated to be over in October of this year) which she subsequently defined as six month.  In other words, sometime in the second quarter of 2015.  The key here is that no one has heretofore dared mention a start date to increasing interest rates and her statement shocked investors whose initial interpretation was that Yellen had become more hawkish.  So that little tidbit sent the Markets into a tizzy.  Three points:

(1)   I have long contended that if history repeated itself, the Fed would bungle the transition from easy to tight money.  In my opinion, the switch from the easily understood and followed unemployment rate to some officious technocratic obfuscating malarkey [‘qualitative guidance’] is a major step forward in the bungling process.  This will only cause confusion among investors and indeed was probably to mask uncertainty within the Fed itself. 

Apologists are arguing that the Fed had to alter their employment guidance because the participation rate of the working population has fallen dramatically rendering the unemployment rate useless as a guidepost.  To which I respond---bullshit: [a] the universe knew a year or  more ago that the participation rate was distorting the real value of the unemployment rate and the Fed chose to do nothing and [b] there are a slew of other employment metrics that could be singled out and substituted for unemployment rate just like there are a multitude of inflation stats compiled and reported [CPI, PPI, both with ex food and energy components, the GDP deflator, etc.] if the Fed decided the current number being utilized was not the best reflection of inflation. 

In my opinion, this is an indication that the Fed is now ‘winging it’ in the transition process, that it will only raise the level of anxiety among investors and that if the odds weren’t already high enough that the Fed would bungle the transition process, they just increased.  

(2)   on a slightly more tolerant note, the comment defining a ‘considerable period’ as being six months was made in answer to a longer more involved question.    My thought is that this was Yellen’s first news conference as Fed chief, she got her first taste of having every single word that she speaks parsed by the universe and she misspoke.  Who knows where ‘six months’ came from; certainly there was no addition information as to such.  Hence, [a] I would be surprised if there isn’t a battalion of Fed officials out walking back that statement---soon and [b] I would argue that anyone believing that Yellen is  more hawkish than previously thought would be making a mistake,

(3)   as you know, I have long held the belief that the transition from easy to tight money would have a greater impact on the Markets than on the economy.  Heartburn arose when Bernanke uttered the word ‘taper’ and it has happened again.  Indeed, the more I read and think about it, the more I believe that tightening might actually be a plus for the economy.

Bottom line: I think that the whole Yellen ‘six months’ comment is much ado about nothing.  It is unlikely that she has turned more hawkish; she is just a freshman in a senior job and she made a freshman mistake.  However, I do believe that the change to qualitative guidance is a sign of weakness, a heightened uncertainty within the Fed ranks that likely raised the already substantial probabilities that it will bungle the transition process.

On a short term basis, I am much more worried about what is going on in Japan and China than I am about a more confused monetary policy---I have been expecting this all along.  Furthermore, we have not likely seen the end to political/military turmoil in Ukraine.  And most importantly, stocks are priced for perfection; and goldilocks is nowhere in sight.

Latest news from China (must reads):

And:

And:

***overnight the Chinese government announced acceleration of construction projects to expand and stabilize economic activity.

I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            Bear in mind, this is not a recommendation to run for the hills.  Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.
        
            It is a cautionary note not to chase this rally.
               
            The latest from Doug Kass (medium):

            The problem with using forward earnings (medium):






Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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