Thursday, May 8, 2014

The Morning Call & Subscriber Alert--The Fed and the declining yield conundrum

The Morning Call

5/8/14

The Market
           
    Technical

            More schizophrenia yesterday as the indices (DJIA 16518, S&P 1878) rallied.  Intraday, the Dow touched and the S&P penetrated its 50 day moving average, but both bounced strongly.  Both finished above their late April lows---keeping their very short term uptrends in place.  On the other hand, the DJIA still hasn’t surpassed its all-time high and the S&P continues to build a head and shoulders pattern.

The S&P closed within uptrends across all timeframes: short (1826-1993), intermediate (1780-2580) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405).  They continue out of sync in their short and intermediate term trends.

Volume was up (contrary to recent trading); breadth was much improved.  The VIX fell, ending within its short term trading range, below its 50 day moving average and within its intermediate term downtrend.  Finally, while I don’t regularly mention the NASDAQ or Russell small cap indices, they are both getting slaughtered.  Can you say divergence?

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

            GLD continues to perform very poorly, finishing within short and intermediate term downtrends and below the 50 day moving average.

Bottom line: the Averages continue to yo yo within the ranges that they have traded within since the first of the year.  To be sure, they are nearing the upper boundaries of those trading ranges; but they have been there three other times.  As confusing as the increasing number of divergences and the recent bond market performance are, the indices aren’t close to breaking down.  So my assumption remains that the momentum will continue to the upside. 

Meanwhile, our strategy remains to take advantage of this momentum to lighten up on stocks whose prices are pushed into its Sell Half Range or whose underlying company’s fundamentals have deteriorated.

    Fundamental
    
     Headlines

            Yesterday was another slow day for data both here and abroad.  In the US, the good news is that weekly mortgage and purchase applications improved; the bad news is that (1) fourth quarter nonfarm productivity and unit labor costs were awful and (2) consumer credit expanded, driven largely by student loans and auto loans.  Overseas, German factory orders fell 2.3% while French industrial production dropped 0.7%.  All this data is pretty much within the bounds of our forecast.  It would appear that investors greeted the news similarly.

            ***overnight, both Chinese imports and exports grew in April versus a decline in March; and the ECB left interest rates unchanged.

            Or it could be that they only had eyes for Janet.  As you probably know, Yellen testified before the house (she is at the senate today).  Her major points: (1) the economy is improving but (2) given the slack in the labor market and the current low rate of inflation, policy will remain easy. 

Two other points: (1) she avoided committing to the six month timeframe for tightening money [which you will recall she more or less affirmed in her first congressional testimony and it caused all kinds of Market spasms]---a clear sign that she is a fast learner.  That said, it doesn’t mean that the Fed won’t raise rates in six months; it is just not going to commit to it today.  (2) having said that the Fed would remain easy, no one asked [a] isn’t tapering tightening? [b] if not, why not end it completely today? [c] isn’t being easy destroying the savings class? and [d] hasn’t being easy distorted price discovery within all asset classes?  The point here is that the Fed can say anything and no one challenges it.  Investors just want to have fun.

            Another excellent piece by Lance Roberts; this discussing Fed policy and the declining yield conundrum (medium and today’s must read):

            Putin was out pulling the world’s collective chain, claiming Russia is withdrawing troops from the eastern border of Ukraine.  Yeh, right.  I have this image in my mind of Putin sitting back with his feet up on his desk with a couple of advisors, drinking vodka, smoking cigars and laughing their collective asses off.  ‘Hey, Ivan, what do we do today to jerk these clowns around?  I know, let’s announce that we are withdrawing troops from the Ukrainian border.  If those idiots believe us, we can short the shit out of the rally and then we’ll invade.  We will make a bundle.  Oh and how about this?  Ukraine just got a loan from the IMF.  Let’s raise the price of gas, so the Ukrainians will owe all that money to us.  Is that a good one or what?  Those guys won’t know whether to shit or go blind.  You want another drink?’

            Latest from Ukraine:

Bottom line: Yesterday’s economic news was not all that great but the data is well within the parameters of our outlook.  Yellen testimony proved that (1) she is a quick study in being honest [not] and (2) the herd has banked its financial future on the Fed and hence, it will believe anything to rationalize its current investment position.  Which wouldn’t be so bad if stocks weren’t overvalued.  That said until investors get really worried about something for more than a day or two, prices will likely continue to rise.  The question is, is the bond market telling us that ‘something to worry about’ is upon us.  We will know soon enough.

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.
               
            Fundamentals haven’t mattered for two years (medium):

            The latest from Marc Faber (medium):

     Subscriber Alert

            In our most recent review of Cato’s (CATO) fundamentals, it failed to meet the minimum criteria for inclusion in the High Yield Universe.  Accordingly, it is being dropped from the High Yield Universe and the High Yield Portfolio will Sell its position at the Market open.

      Investing for Survival

            Seven tips to make your retirement saving last:
            http://www.usatoday.com/story/money/columnist/brooks/2014/05/06/retirement-401k-pension-savings/8695897/

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