Tuesday, February 3, 2015

The Morning Call--Deciphering the Greek/EU headlines

The Morning Call


The Market

The indices (DJIA 17361, S&P 2020) made yet another sharp countermove (this time to the upside), remaining within uptrends across all timeframes: short term (16507-19283, 1917-2898), intermediate term (16536-21691, 1742-2456) and long term (5369-18860, 783-2083).  In addition, the Dow recovered back above its mid-December support low (17288) for the second time.

            Volume fell---continuing a recent pattern of being up on up days and down on down days; breadth improved.  The VIX dropped 8%, finishing within a short term trading range, an intermediate term downtrend and above its 50 day moving average. 
            The latest from TraderFeed (short):

            The long Treasury declined, but closed within very short term, short term, intermediate term and long term uptrends and above its 50 day moving average.

            How negative can rates go? (medium):

            GLD was down slightly, ending within its short term uptrend, an intermediate term trading range and above its 50 day moving average.  Our Portfolios Added to this position yesterday morning.

Bottom line:   on the one hand, the Dow has challenged its mid-December low twice unsuccessfully; and that is a positive.  Plus, the Averages remain well within their uptrends.  On the other hand, the extreme volatility continues but with no direction in prices---which I view negatively.  In addition, all the price pressure has been to the downside---it’s the support levels that are being assaulted and to date the indices have made two lower highs.  Until a major uptrend is broken, the weight of evidence has to be on the side of higher prices.  But the pin action is confusing, making it a time to do nothing.

TLT and GLD’s charts have a lot more clarity to them.  Our ETF Portfolio owns a full position in bonds, though I think that it is too late to be Buying.  The turn in GLD (assuming this is one) in more in its infancy which leaves room for growing this position.

            Lots of US economic stats reported yesterday: December personal income rose in line, personal spending fell more than expected, the PCE deflator was down less than estimates, December construction spending rose less than forecasts, both the January Markit PMI manufacturing and the January ISM manufacturing indices were slightly less than anticipated.  So on balance, the data was not promising.  Particularly concerning were the personal spending and ISM numbers---but they are just one day’s input.  Much more is needed before even considering altering our forecast.

            Not to dwell on a recurrent theme, but note how the ‘unmitigated’ positive decline in oil prices didn’t help consumer spending.

            And this from the SF Fed:  the Fed consistently overestimates the growth rate of the economy (medium):

            On the other hand, we went another day without any disappointing earnings/guidance from important players in major industries.  So as I noted in the Closing Bell, that early rash of terrible profit reports/guidance is moderating and leaves me feeling a bit more comfortable than this time last week.  Here is the latest figures on this earning season; however, remember they do not reflect any of those poor guidance numbers that caused distress.

            And here is the guidance:

            In addition, oil continued the rally it started last Friday and that helped stabilize investor psychology following the poor early morning economic stats.  Whether or not the last two days trading marked the bottom is another question.  Certainly from a technical perspective, it has a number of hurdles yet to be crossed before this pin action can be looked at as anything other than a rally in a bear market.

            Obama captured some air time and headlines yesterday as He presented His DOA FY2016 budget, the highlights of which were raising taxes on capital gains and dividends and taxing overseas corporate earnings  (medium):

            Overseas, the economic data were balanced: the January Chinese manufacturing PMI was negative for first time in two and a half years, while EU manufacturing PMI was positive.  Given the current horrendous dataflow, I will take any upbeat international stat right now.

            ***overnight, the Bank of Australia joined in the fun and lower its key interest rate.

            The other news and the most likely explanation for the late in the day stock price rally was a report that the Greek PM said that a debt deal (with the EU) was imminent.  Here is a summary of the talking points (medium):

            They don’t sound nearly as positive as the ‘debt deal was imminent’ headline.  In addition, given the rhetoric during their election campaign, I have trouble believing that the new government would strike a deal that didn’t clearly incorporate their platform of ‘no austerity; and debt forgiveness’ so quickly.  If it did, it would make them like every other political party that has talked tough in the campaign then folded like a cheap tent afterwards.  That said, maybe they are like every other political party.  More:

            ***overnight developments (medium):

            Plus the latest from Angela Merkel (medium):

            What’s going on between Greece and the ECB?
            And (medium):

                And this from Ken Rogoff (medium):

Bottom line:  while I am encouraged by an improving trend in corporate earnings and guidance reports as well as the potential bottom in oil prices and a ‘deal’ that takes a Greek default on its debt off the table, (1) the current assumption on corporate profits in our Model would have to be changed if the early disappointing trend continued; so this ‘better’ news does nothing for our forecast, (2) at least as reflected in the December personal spending number, that ‘unmitigated’ positive of lower oil prices remains suspect, (3) at the moment, the positive EU PMI report is an outlier in an otherwise endless stream of subpar international economic reports; and even if it is a sign of a change in trend, all it would accomplish is supporting a ‘muddle through’ scenario  versus something much worse, (4) the new Greek government may very well go along with the powers within the EU; but here again that would just help confirm our ‘muddle through’ outlook and not a far worse alternative that could cause severe problems for the EU banking system.  In short, yesterday’s good news was good only because it give our forecast a chance to be right. And, as you know, under our forecast, equities are substantially overvalued.

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 John Hussman (medium):
            Update on stock valuation (short):

       Subscriber Alert

            The stock prices of Praxair (PX-$122) and Microsoft (MSFT-$41) traded below the upper boundary of their respective Buy Value Ranges.  Accordingly, they are being Added to the Dividend Growth Buy List.  The Dividend Growth Portfolio already owns positions in both stocks.  So no additional shares will be Bought.  However, even if no shares were owned, no purchases would be made at the present time.

      Company Highlights

Schlumberger is the world’s leading oilfield service company providing wireline, drilling and measurement and well testing services, completion, artificial lift, data and consulting services, land and marine seismic services and reservoir services.  The company has grown profits at a 20% pace over the past ten years; the dividend growth rate has been lower rate (12%) but management has stated that it intends to increase it in the near term.  In addition, the company has earned an 11-25%+ return of equity over the last ten years.  The current turmoil in the oil supply/demand picture will undoubtedly prove disruptive to SLB.  However, long term the secular growth in the demand for oil will continue and provide opportunities of innovative participants like Schlumberger:

(1)   its financial strength,

(2)    technological leadership which lowers costs and increases efficiency of its clients,

(2) acquisitions,

(3) stock buybacks.


(1) intense competition causing pricing and margin pressures, especially in an atmosphere of declining E&P spending,

(2) commodity price and currency fluctuations,

(3) geopolitical risks,

(4) adverse weather conditions can negatively impact demand.

Schlumberger is rated A++ by Value Line, carries a debt to equity ratio of about 22%, and its stock yields of approximately 1.8%.

      Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                 Yield     Growth Rate     Ratio        Since 2005

SLB           1.8%           13%            27%              9
Ind Ave     3.3               11               33                NA 

                 Debt/                      EPS Down       Net        Value Line
               Equity         ROE      Since 2005     Margin       Rating

SLB          22%            19              1                15%           A++
Ind Ave     27               12             NA              13             NA


            Note:  SLB stock made good progress off the March 2009 low, quickly surpassing the downtrend off its June 2008 high (straight red line) and the November 2008 trading high (green line).  Long term, the stock is in an uptrend (blue lines).  Intermediate term, it is a trading range (purple line).  Short term, it is in a downtrend (brown line).  The wiggly red line is the 50 day moving average.  The Dividend Growth Portfolio owns a full position and the Aggressive Growth Portfolio owns a 75% in SLB.  The upper boundary of its Buy Value Range is $43; the lower boundary of its Sell Half Range is $120.


       Investing for Survival

            The small firm effect (medium):

      News on Stocks in Our Portfolios
·         United Parcel Service (NYSE:UPS): Q4 EPS of $1.25 in-line.
·         Revenue of $15.9B (+6.1% Y/Y) beats by $100M
·         Emerson Electric (NYSE:EMR): FQ1 EPS of $0.75 beats by $0.03.
·         Revenue of $5.58B (-0.5% Y/Y) misses by $10M.
·         Exxon Mobil (NYSE:XOM): Q4 EPS of $1.56 beats by $0.22.
·         Revenue of $87.27B (-21.3% Y/Y) misses by $310M.
·         MasterCard (NYSE:MA): Q4 EPS of $0.69 beats by $0.02.
·         Revenue of $2.42B (+13.6% Y/Y) beats by $30M.
·         Chevron (NYSE:CVX): Q4 EPS of $1.85 beats by $0.21.
·         Revenue of $46.09B (-17.9% Y/Y) beats by $1.2B.


   This Week’s Data

            December construction spending rose 0.4% versus expectations of +0.6%.

            The January Markit PMI manufacturing index came in at 53.9 versus estimates of 54.0.

            The January ISM manufacturing index was reported at 53.5 versus forecasts of 54.5.


            World inflation continues to fall (short):

            Baltic Dry Index hits 29 year low (short):



Quote of the day (short):


            White House considering sending weapons to Ukraine (oh, yeah, this is going to end well):

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