Thursday, May 22, 2014

The Morning Call---Monty Python and the Fed

The Morning Call

5/22/14

Just a reminder.  I go in for cataract surgery this morning.  No Friday Morning Call or Closing Bell.

The Market
           
    Technical

            The roller coaster, schizophrenic pin action continues with the indices (DJIA 16533, S&P 1888) rallying big yesterday.  The Dow recovered above its 50 day moving average and remained within its short (15330-16601) and intermediate (14696-16601) term trading ranges and within a long term uptrend (5055-17405).   The S&P closed above its 50 day moving average and finished within uptrends across all timeframes: short (1840-2007), intermediate (1793-2593) and long (739-1910).  They remain out of sync in their short and intermediate term trends.

            Volume remained anemic; breadth improved.  The VIX fell 10%, ending below the lower boundary of its short term trading range.  That starts the clock on our time and distance discipline.  If it remains below this support level by the close next Tuesday, the short term will re-set to down and would be a strong positive for stocks.  Meanwhile it remains below its 50 day moving average and within an intermediate term downtrend.

            The long Treasury fell, finishing within a short term uptrend, above its 50 day moving average and within an intermediate term downtrend.

            GLD declined.  It remains within short and intermediate term downtrends and below its 50 day moving average.  In addition, it closed fractionally below the tip of that pennant formation I have been watching.  The move was so slight, I hesitate to make a call.  But if there is follow through to the downside, it is likely that GLD is in for another leg down.

Bottom line: the back and forth bull/bear battle continues.  Despite the schizophrenic price action and the growing number of divergences, the Averages are holding their major trends and the challenge of the VIX to the lower boundary of its short term trading range is a potential positive sign.  Therefore, I am sticking with my assumption that the indices will most likely assault the upper boundaries of their long term uptrends.  Our strategy remains to do nothing save taking advantage of the current momentum to lighten up on stocks whose prices are pushed into their Sell Half Range or whose underlying company’s fundamentals have deteriorated.

            Finally, we are a short hair away from GLD starting another leg down.  Be careful.

            Update on market breadth (medium):

            The latest from Stock Traders’ Almanac (short):

            Update on margin debt (medium):

            Update on sentiment (short):

    Fundamental
    
      Headlines

            Another day with a single US secondary datapoint: weekly mortgage applications rose but the more important purchase applications were down.  Overseas, the Bank of Japan left interest rates unchanged while its trade balance improved; the Bank of England also left rates unchanged and retail sales were better than anticipated.

            ***overnight, May Japanese, EU and Chinese flash PMI’s were down though the Chinese figure was at least better than expected.

            The more important news was:

(1)   more retailers [TIF, LOW] reported much improved earnings and more optimistic forward guidance than those on Tuesday; hence, settling concerns about a weakening consumer,

(2)   the minutes from the last FOMC meeting were released.  The bottom line was that we learned nothing new; but its wide ranging discussion provided support for both hawks and doves.  So with no change in conclusion, it once again managed to keep the policy waters muddied---notwithstanding its own proffered intent to the contrary.  

                 Fed mouthpiece, Jon Hilsenrath, parses the minutes (medium):

                 And Goldman’s analysis (medium):

Bottom line: when I read the FOMC minutes yesterday, I couldn’t help thinking of a Monty Python skit in which two intellectuals are discussing a critical world event making inane comments then drawing the exact opposite of the obvious conclusion.  Clearly, it did nothing to alter my opinion that the Fed was going to (is) bungle the transition from easy to tight money, the longer the current circle jerk goes on the more damaging the consequences and the really damaging consequences will be to the Markets.

My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

 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.
               


            Interest rate scenarios and stock market performance (medium):

     Investing for Survival

            What kills you and your investments (medium):

      Company Highlight

Lorillard Inc. produces and markets Newport, Kent, True, Maverick and Old Gold cigarettes.  The company has grown profits per share from $1.58 in 2006 to $3.55 in 2013 and dividends per share from $.61 in 2008 to $2.46 in 2013  earning a 60%+ return on equity.  LO should continue to produce above average returns as result of:

(1) increasing market share,

(2) product innovation, including investment in tobacco alternatives

(3) improved pricing,

(4) a stock buyback program.

Negatives:

(1) governments around the world are imposing restrictions on tobacco use,

(2) a highly competitive industry,

(3) the industry is not allowed to advertise.

Lorillard is rated A by Value Line, has a 600% debt to equity ratio but is working hard to reduce this figure.  Its stock yields 4.7%

    Statistical Summary

                 Stock     Dividend         Payout      # Increases  
                 Yield      Growth Rate     Ratio       Since 2008

LO             4.7%         11%              68%                6
Ind Ave      4.4             8                  62                 NA 

                Debt/                        EPS Down       Net        Value Line
              Equity         ROE         Since 2006      Margin       Rating

LO           600%         NA              0                   18             A
Ind Ave     63             56              NA                 14            NA

     Chart

            Note: LO stock made great progress off its January 2009 low, quickly surpassing the downtrend off its December 2007 high (straight red line) and the November 2008 trading high (green line).  Long term, the stock is in an uptrend.  The wiggly red line is the 50 day moving average.  The High Yield Portfolio owns a 75% position in LO.  The upper boundary of its Buy Value Range is $56; the lower boundary of its Sell Half Range is $83.

            The stock has been on the High Yield Buy List.  However, last night rumors circulated that LO would be acquired by Reynolds American and the stock popped 10%, taking it above $56.  Hence, it is being Removed from the High Yield Buy List.  The High Yield Portfolio will continue to Hold LO.



5/14


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