Thursday, December 11, 2014

The Morning Call---but you said falling oil prices were an unmitigated positive

The Morning Call


The Market

The indices (DJIA 17533, S&P 2026) suffered some major whackage yesterday; and unlike Tuesday, the buy the dip crowd sat on its hands.  Nevertheless, both remained within uptrends across all timeframes: short term (16197-18943, 1866-2230), intermediate term (16164-21129, 1709-2425) and long term (5360-18860, 782-2071).  Both remained above their 50 day moving averages, though the S&P isn’t that far away (circa 2000).

            Volume rose; breadth was awful.  The VIX soared 25%, closing within a short term trading range, an intermediate term downtrend and above its 50 day moving average.

            The long Treasury was up again.  It finished within a very short term uptrend, a short term uptrend, above its 50 day moving average and above the upper boundary of its intermediate term trading range.  If it remains above this boundary through the close next Monday, the intermediate term trend will re-set to up.

            And (short):

            GLD fell slightly, but ended above the upper boundary of its short term downtrend for the second day.  If it closes there today, the break of the short term downtrend will be confirmed and the trend will re-set to a trading range.  It also finished above the lower boundary of its former long term trading range, having been there for thirteen of its last sixteen trading days.  If the break of the short term downtrend is confirmed, I am going to change the long term trend back to a trading range from a downtrend.  GLD remained within an intermediate term downtrend and above its 50 day moving average.

Bottom line: based on the absence of any bounce back during yesterday’s severe downturn, I assume means that the ‘buy the dippers’ are at least starting to get a bit fidgety.  Not that they are going away, maybe just taking a time out.  On a long term basis, there is no reason to be concerned about stocks given the considerable distance that exists between current price levels and the Averages’ lower boundaries of their short and intermediate term uptrends.  Shorter term, traders may be concerned that there is no visible support before Dow 17173/S&P 1904.  

What might give traders as well as investors pause, is the pin action in TLT.  Having just re-set its very short term trend to up, it is now challenging the upper boundary of its intermediate term trading range.  A break of that trend would be a powerful sign that investors are worried about either a recession here or some jolting events overseas.  Neither would likely be good for stocks.

GLD’s also appears to be reversing its broad trend.  Granted that it hasn’t occurred yet and if it does, it won’t be as strong a signal as that from TLT.  Nonetheless, it would reinforce the notion that investors are seeking a safe haven.


            Only two secondary US stats were reported yesterday: weekly mortgage and purchase applications were both up while the US November budget deficit was below forecasts.  Nothing here.

            On the political front, the good news is that congress will pass a FY2015 funding bill (ex Homeland Security), with the spending level basically flat with FY2014; the bad news is that the GOP, in its first order of business, demonstrated that it was still in the banksters’ pocket to the detriment of you and me.  Specifically, it attached a provision to the funding bill that would negate a Dodd Frank regulation that forces the big banks to divest their derivatives trading operations---which you and I will pay for if they fuck up (again). 

Overseas, the string of bad economic news just won’t stop: Japanese consumer confidence declined, the IMF identified a $15 billion shortfall in Ukraine’s current budget which would be on top of the latest projections for a $17 billion loan and Iran forecasted oil would go to $40 a barrel. 

And in a leaked ECB memo, it appears that EU QE has been put on indefinite Hold (medium):

Plus in the political arena, we received two gems: Ukraine invited in Russian ‘specialists’ to help ‘de-escalate’ the conflict.  What could possibly go wrong in this scenario?  (think fox in the henhouse); China CPI was up less than expected, which at least initially, produced the narrative (hope?/prayer?/mirage?/delusion?) that lower inflation meant that the Bank of China had room to pursue a more accommodative monetary policy.  We’ll see.

            But put all the above aside, because what held investor attention for most to the day was that the price of oil continued to get pummeled---and stocks followed suit.  But wait, I though you said the oil price decline was an unmitigated positive.  If you didn’t read David Stockman’s piece on the Fed and oil in yesterday’s Morning Call:

And the rig count (short):

***overnight, in another on again, off again move, the Bank of China added to banking reserves; Norway’s central bank lowered its main interest rate as fears of recession mount (remember it’s economy is closely tied to the oil industry [another unmitigated positive]); the ECB held it second TTLRO (ECB buys bank assets but for only three years) and it was better than the first but still well short of expectations; and Greece inches closer to default/exiting EU.

Bottom line: the problems are starting to mount.  Not only are the economic numbers from everywhere on the global except the US for shit; now (1) questions are being raised about QE in two big players [EU and China], the other big printer [Japan] is sinking into an economic abyss and the only question is how long is the electorate going to tolerate it and (3) then we find out that cascading oil prices may be as much to do with weaker demand [slowing economic growth] as it does with rising supply and therefore, are not quite as positive as all those gurus said it was. 

Of course, none of this means diddily as long as investors continue to view life through rose colored glasses; and we are not going to have a good read on that for another 1000 or so Dow points.  Unfortunately, another 1000 Dow points would only the beginning of any mean reversion of price to value. 

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.

            The latest from Doug Kass (medium):

        Subscriber Alert

            Having taken OKS off the High Yield Buy List yesterday following its break below the lower boundary of its Buy Value Range, the stock proceeded to fall an additional 7% in yesterday’s trading.  That takes it below our Stop Loss Price.  Accordingly, the stock will be Sold at the Market open.

            Western Energy (WES) has fallen below the lower boundary of its Buy Value Range.  Hence, it is being Removed from the High Yield Buy List.  The High Yield Portfolio will continue to Hold this stock.

       Investing for Survival

            Markets are always tempting us to make mistakes (medium):

            Part two: securities based lending.  If you have been tempted into taking out a loan using your 401k or any other portfolio as collateral, this is a must read.  If you haven’t but like a perfect example of yet another exogenous event that could sink the market, it is a good read.

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