Friday, November 21, 2014

The Morning Call---Global central banks continue to ease

The Morning Call


The Market

The indices (DJIA 17719, S&P 2052) moved higher yesterday, leaving them within uptrends across all timeframes: short term (16082-18828, 1851-2215), intermediate term (16053-20153, 1697-2413) and long term (5159-18521, 783-2062).  They are also finished above their 50 day moving averages.  The pin action followed the blueprint of the last year---early morning sell off bringing in the ‘buy the dip’ crowd and finishing up on the day.  So appears that the driving force in this uptrend is alive and well.

Volume was flat; breadth improved.  The VIX fell, closing within a short term uptrend, an intermediate term downtrend and remained on its 50 day moving average.  
            Update on sentiment (short):

The long Treasury rose, remaining within a very narrow short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average. 

GLD was up.  It ended back above the lower boundary of its former long term trading range for the second time.  So the battle over this price level continues.  As I have noted, how this tension gets resolved may determine where the bottom is in the current downtrend and will likely indicate near term price direction.  Meanwhile, it finished within short, intermediate and long term downtrends and below its 50 day moving average.

Bottom line: the Averages rallied yesterday as domestic economic data improved while the US political environment grows more hostile and global measures were abysmal, indicating that the positive bias/uptrend remains intact.  However, the question that I have posed and still needs an answer, is how will the S&P (2052) handle the upper boundary of its long term uptrend (2062)?  I believe that it is the key technical factor at this time; and how it gets resolved will likely determine S&P price movement over the short term and perhaps even longer.
            Stock performance in December (short):


            It was a full day for US economic data which weighed to the plus side: the sole negative was the November Markit PMI which joined the rest of the world’s poor performance; the October CPI and ex food and energy numbers were mixed; and weekly jobless claims, the Philly Fed manufacturing index, October existing home sales and October leading economic indicators were all positive.  The good news is that many of these measures are primary indicators continuing the trend back to a mixed to positive dataflow and providing more support to our current forecast.

            Clouding the picture somewhat was the ongoing debate as to just how much confusion and uncertainty were apparent in the FOMC minutes released Wednesday.

Mohamed El Erian on the FOMC minutes (medium):

            Scott Gannis on the FOMC minutes (medium):

            Overseas, the news wasn’t quite so jolly with UK grocery store sales falling for the first time in 20 years, Chinese and EU November PMI’s down across the board (including Germany), and EU consumer confidence plunging (-11.6) to nine month lows.  Finally, the European Commission is considering fining France for failure to reduce its budget deficit---more evidence of the turmoil within EU policy making circles.  All this clearly portrays why global recession is the number one risk to our economy.

            ***overnight, China cut its benchmark interest rate, Draghi said that the ECB is ‘ready to expand’ its asset purchase program---both sure to thrill the easy money, hedge fund, carry trade, yield chasing crowd.  The EU reported inflation at +0.4% versus its 2.0% target.

            The other subject commanding investor attention was Obama’s speech last night on His executive order on immigration.  I don’t want to get too deep in the weeds on politics; but (1) most of what Obama proposed I think makes sense---assuming the measures on border security, deportation of criminals and liberalizing the statutes that apply to highly educated/entrepreneurial applicants are more than boilerplate, (2) however, how He did is unconstitutional by His own admission, (3) hence, it is a very slippery slope to initiate good policy using unconstitutional means.  Yes, the first time [like now] may seem justifiable; but how soon will it be when we reach the point that not so good policy can be successfully dictated by unconstitutional means?

That said and forgetting the appropriateness of the policy measure, this step is clearly a thumb in the eye of the GOP which sets the stage for an acrimonious next two years.  Unfortunately aside from the entertainment value of the vitriol we are apt to see, nothing is likely going to get done on budget, tax and regulatory reform for another two years, at least; and that is a big negative.

            Obama in His own words on immigration (8 minute video and a must watch):

Bottom line: the US economy appears to be back on its prior sluggish, below average secular growth rate---‘growth rate’ being the operative words.  That helps expectations for earnings growth and a higher dollar which it turn contributes to investor optimism.

Regrettably, the rest of the world shows no sign of halting its economic decline, much less stabilizing---there are  now three of the world’s largest 10 economies officially in recession (Japan, Brazil, Italy).  In addition, the current pissing contest between the EC and France over its 2015 budget is indicative of the lack of policy consensus within the EU---not a good sign that agreement can be reached on future policy decisions/moves.

All other things being equal, it would appear that the pluses and minuses may be in some sort of balance and, hence, provide a modest incentive to accumulate cash only to the most pessimistic investor.  However, all things aren’t equal.  Specifically, there currently exists a really poor equity price/value equation which sooner or later will likely be rectified.  And given the magnitude of the downside when, as and if it does occur, it seems reasonable to me that portfolio protection makes sense.

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.

            Is this market on borrowed time (medium)?

            Thoughts of an investment manager ‘riding the wave’ (medium and a must read):

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