Wednesday, February 11, 2015

The Morning Call--A big day in Greece land

The Morning Call


The Market

The indices (DJIA 17868, S&P 2068) bounced yesterday, ending within uptrends across all timeframes: short term (16571-19347, 1925-2906), intermediate term (16601-21756, 1750-2464) and long term (5369-18860, 783-2083).  Both (along with the NASDAQ) finished above their 50 day moving average and the lower boundary of the former downtrend off its mid-December high, providing some heft to the current move up. Nonetheless, the upper boundaries of the mid-December trading highs (17989/2080), still loom ahead. 

            Volume rose, again countering the recent up volume on down price day trend and vice versa; breadth improved.  The VIX fell, closing within its short term trading range and its intermediate term downtrend but back below its 50 day moving average.  The lower close did nothing to disturb the developing pennant formation.

            I ran a check on our internal indicator with the following results: in a 141 stock Universe, 47 stocks are either at, near or making new highs (above current comparable level of the S&P), 61 stocks are in confirmed downtrends and 33 stocks are not in confirmed downtrends but have continued to make successive lower highs (the difference here is that these stocks have broken above the upper boundary of the downtrend but have not returned to the level of the prior lower high).

            The long Treasury dropped again; it remains within short term, intermediate term and long term uptrends and above its 50 day moving average.  But my anxiety grows daily as it can’t find a stabilizing point.
            GLD continues its disappointing pin action.  It did finish within a short term uptrend, an intermediate term trading range and its 50 day moving average; but still could not regain the initial Stop Loss level.

Bottom line:  yesterday’s rally was focused on the Greek situation, ignoring a lot of other bad news.  That seems reasonable, since a resolution (or not) to Greek finances is the most likely near term event that could significantly impact EU banks.  Certainly, the technical performance of stocks provided a lift and suggested more upside to come.  On the other hand, the recent volatility has made one day assessments virtually worthless.  In addition, the latest reading from our internal indicator does not inspire optimism.    I still think that the boundaries of the mid December trading range are the levels to watch.

The TLT has joined GLD in the ‘nerve wracking’ column; but our Portfolios are holding those positions.


            Yesterday’s US economic news continued its disappointing trend: weekly retail sales slowed, the January small business optimism index came in lower than anticipated and while December wholesale inventories rose slightly, sales were declined.  This is just the start of the week; but another two weeks of poor numbers like we have just experienced, the flashing yellow light is likely to turn to a flashing red one.  In addition, oil was down which has generally been bad news for stock prices of late.

            Must watch 2 minutes of truth:

            The Gang of Thieves got another punch in the nose, as the NY Department in Financial Services subpoenaed Goldman, Credit Suisse and Paribas for more information on their foreign exchange trading.

            Overseas, Chinese CPI and PPI were well below estimates (more deflation?) and UK manufacturing and industrial production missed forecasts on the downside.

China is the epicenter of global deflation (short):

            None of this had much impact as rumors/statements flooded the airwaves all day long regarding the behind the scenes negotiations on the Greek bail out.  While in total I thought that news flow was not all that positive, it happened that the initial headline was a plus, suggesting that the EU was willing to make some concessions; and that seemed to set the tone for the day.  Of course, if that occurs then everyone will have dodged a bullet; so I don’t want to downplay how affirmative that would be.  My point is that I wasn’t quite as jiggy with the headlines as investors in general.

            The latest on Greece (medium):

            The ultimate cost of Grexit (medium):

            ***overnight, Putin to meet with France, Germany and Ukraine in attempt at ceasefire (short):

Bottom line:  Greece continues to hold global investor attention, especially in front of a series meeting among officials beginning today.   I am a little befuddled by a couple of things: (1) I don’t think that the headlines read nearly as positively as the Market seemed to indicate and (2) given the magnitude of the consequences of Greece/EU not working a settlement along with the lofty valuation of stocks at current levels, I think assuming equity risk ahead of the upcoming events is a prescription for disaster---not that the worst case will occur but the losses one could sustain if it does.   The sidelines are the best place for me.

The schedule for today’s along with other upcoming meetings (short and must read):

And don’t forget the ‘other’ meeting taking place simultaneously between Russia and Greece (short and a must read):

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 Alhambra Ptrs (medium):

      Investing for Survival from William Bernstein

William Bernstein continues to put out thought-provoking, no-nonsense books on investing. Rational Expectations: Asset Allocation for Investing Adults is his latest and it didn’t disappoint.
I just love how straightforward Bernstein is with his approach to investing and portfolio management. No punches are pulled, no silly theories are spared.
His message always comes across as the old adage that investing can be extremely simple yet maddeningly difficult at the same time.
While he uses plenty of data to back up his claims, Bernstein also focuses on the important behavioral issues that are the real problem for most investors. In Rational Expectations, he broadly defines three groups of investors by their behavior:
Group 1: The average small investor, who does not have a coherent asset-allocation strategy and who owns a chaotic mix of mutual funds and/or individual securities, often recommended to him or her by a broker or advisor. He or she tends to buy near bull market peaks and sell near bear market troughs.
Group 2: The more sophisticated investor, who does have a reasonable-seeming asset-allocation strategy and who will buy when prices fall a bit (“buying the dips”), but who falls victim to the aircraft simulator/actual crash paradigm, loses his or her nerve, and bails when real trouble roils the markets. You may not think you belong in this group, but unless you’ve tested yourself and passed during the 2008–2009 bear market, you really can’t tell.
Group 3: Those who do have a coherent strategy and can stick to it. Three things separate this group from Group 2: first, a realistic appraisal of their true, under-fire risk tolerance; second, an allocation to risky assets low enough, or a savings rate high enough, to allow them to financially and emotionally weather a severe downturn; and third, an appreciation of market history, particularly the carnage inflicted by the 1929–1932 bear market. In other words, this elite group possesses not only patience, cash, and courage, but also the historical knowledge informing them that at several points in their investing career, all three will prove necessary. Finally, they have the foresight to plan for those eventualities.
Group 1 usually finds out the hard way that financial markets can be unforgiving. These are most likely the people that have completely given up on investing at his point after blow-ups from the tech bust or the great financial crisis. They assume the markets are rigged or function like a casino. Most people in this group try to make money through lottery ticket-style speculation. It never ends well and the psychological scars can endure for a very long time.
For the more sophisticated investors, Group 2 probably dwarfs Group 3 by a wide margin even though many would have a hard time admitting this fact. It’s easy to estimate your tolerance for risk and assume you will be able to rebalance and buy when everyone else is selling.
Unfortunately, a crash is much different than a correction and investors in this category tend to find out the hard way. This group capitulates by selling out of stocks after they have dropped by a substantial amount or ramping up their equity exposure after a large run-up in prices.
It’s easy to be a long-term investor during a bull market. Everyone’s making money and it feels like you can do no wrong.  It’s when things don’t go as planned that this group loses control.
Bernstein says as much in the book when he observes, “If you began your investing journey after 2009 or haven’t yet started, then you’re an investment virgin.”
Your willingness to take risk will change much more often with the movements of the markets than your actual ability or need to take risk.  Therefore a sensible long-term asset allocation is paramount to your success as an investor. Typically your broader asset allocation shouldn’t change all that much until your circumstances change (or when you need to rebalance).
It will feel like you should change your allocation weights between stocks, bonds and cash based on the most recent market performance, but most of the time it’s just performance chasing.
You can tilt your portfolio to certain sub-strategies within asset classes, but figuring out the mix between risky and safer investments is one of the keys to sticking with your investment plan.
That means you need an asset allocation that either includes investments such as high quality bonds to be able to rebalance when stocks fall or enough human capital in the form of savings that can be used to deploy at lower prices.
This is an important, often overlooked point, which Bernstein brings up in his Group 3 description that can play a huge role in determining your risk tolerance – having a high enough savings rate.
It’s not enough to say you will buy when fear is high and stock prices are low. You also have to have the necessary funds available to make purchases during times of maximum pessimism.
How you feel right now about the markets and your own portfolio probably has a lot to do with your investment stance over the past five years. If you have a healthy allocation to stocks, you feel like a genius. If you’ve been sitting in cash after selling out a few years ago you don’t feel so great.
It’s important to remember both your feelings during the crash and those in the subsequent recovery to new all-time highs. To be included in Group 3 you have to find a way to balance the emotional highs and lows to find your happy place in the middle.
    News on Stocks in Our Portfolios
·         PepsiCo (NYSE:PEP): Q4 EPS of $1.12 beats by $0.04.
·         Revenue of $19.95B (-0.8% Y/Y) beats by $290M.
·         Lorillard (NYSE:LO): Q4 EPS of $0.93 in-line.
·         Revenue of $1.28B (+2.4% Y/Y) misses by $10M.

   This Week’s Data

            Redbook Research reported weekly retail chain store sales rose 2.1% year over year but down from last week’s number of +3.8%.

            January small business optimism index came in at 97.9 versus expectations of 101.0.

            December wholesale inventories increased 0.1%; but wholesale sales fell 0.3%.

            Weekly mortgage applications fell 0.9%, while purchase applications were down 0.7%.


            The NY Fed consumer survey (short and a must read):
            An accidental currency war---Mohamed El Erian (medium):

            Bank of America stumped: why lower gas prices haven’t led to increased discretionary spending (medium):



Latest on the IRS stalled criminal investigation (short):

  International War against Radical Islam

            US Yemen embassy closing completely (short):

No comments:

Post a Comment