Tuesday, February 10, 2015

The Morning Call--Did the EU just take a standing eight count the first round?

The Morning Call


The Market

The indices (DJIA 17729, S&P 2046) sold off yesterday, though given the news flow, it could have been a lot worse.  They remained within uptrends across all timeframes: short term (16559-19335, 1925-2906), intermediate term (16595-21750, 1750-2464) and long term (5369-18860, 783-2083).  The Dow finished above its 50 day moving average and the lower boundary of the former downtrend off its mid-December high, while the S&P closed right on those boundaries and the NASDAQ remained below both.   Clearly a mixed picture with no real momentum indicated for either direction.  For the moment, my focus is on the boundaries that were set in mid-December trading (17989/2080 and 17288/1980).

            Volume fell, countering the recent up volume on down price day trend; breadth was mixed.  The VIX rose 7%, ending within its short term trading range, its intermediate term downtrend and above its 50 day moving average.  It is beginning to develop a pennant formation (lower highs and higher lows); but the last time it followed that pattern, nothing meaningful came of it.

            The long Treasury dropped fractionally, remaining within short term, intermediate term and long term uptrends and above its 50 day moving average.  Because of our large ETF Portfolio’s large bond position, I am very focused on TLT’s pin action, awaiting a sign of initial support.

            GLD was up slightly, but failed to regain the initial Stop Loss level that had been previously set---that’s the bad news.  It did finish within a short term uptrend, an intermediate term trading range and bounced off its 50 day moving average---that’s the good news.
Bottom line:  despite yesterday’s sell off, it could have been a lot worse given the news flow.  That in itself is a sign that the bulls have life.  On the other hand, the Averages present a somewhat mixed picture technically speaking; so I would still be cautious until we get them all moving in the same direction.  It still think that the boundaries of the mid December trading range are the levels to watch.

The TLT remains OK; but I would feel much better with a more vigorous sign of price stability.  GLD is nerve wracking; but our Portfolios are holding the remainder of their position.

            There was little domestic economic news yesterday, though we did get a further update on this season’s earnings reports that confirmed our assessment from late week, to wit, it was not as bad as it initially appeared but it was still not great, in particular the forward guidance. 

We also got some banking news as the DOJ stated that it was investigating charges of foreign exchange fraud at Barclay’s; and HSBC admitted to assisting clients to dodge taxes and hide assets.  Just another example of bankster misdeeds, why someone ought to be jail and why investor confidence in the bank management is apt to be skin deep.

            ***Overnight, the NY Department of Financial Services issued subpoenas to Goldman, Credit Suisse and Paribas for information on their foreign exchange trading.

            Overseas, China posted a 3.3% decline in exports.

            ***Overnight, China reported January CPI and PPI well below expectations---which doesn’t help the global deflation story but may get investors jiggy with the prospect of more easy money.  The January UK manufacturing and industrial production were lower than anticipated.

            And on the political front, the EU is trying to tone down the conflict in Ukraine (who woulda thunk?); while the Greeks are ramping up tensions as the PM vowed to roll back austerity measures and stated that Greece won’t ask for an extension of its bail out.  Looks like we are getting down the flop card in Texas Hold’em; but I suspect that there is still a good deal of bluffing going on.   Nonetheless, it is a bit surprising to me that the Markets aren’t a tad more jittery given the magnitude of the consequences of failing to work out a compromise.
            Greenspan on Greece (short):

            UBS of Greece (medium):

Latest on US/Germany/Ukraine (short):

                ***on the wires but no confirmation yet that the ECB may give Greece a six month extension on repayment of its bail out loan.

Bottom line:  geopolitical events captured most of the Market’s attention yesterday.  The good news is that Merkel seems to be having success in diffusing international tensions in Ukraine.  The bad news is that threats are running hot and heavy in the Greek/ECB/EU standoff; and, perhaps more concerning, time is getting short to come up with a resolution.  That said, in a high stakes game like this, you never know who will blink.  So the outcome remains in doubt and I wouldn’t be making any bets on it.  The sidelines seems to be the safest place to be.

Finally, there was more confirming evidence of a slowdown in corporate profitability with possibility of more to come.   And equity prices remain in nosebleed territory---not an inspiring risk/reward equation.

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):

      Company Highlights

Conoco Phillips one of the world’s largest exploration and production (E&P) companies. Profits and dividends have grown approximately 10-14% annually over the last 10 years.  In the same time frame, COP has earned between a 10-20% return on equity. While suffering a similar fate as the rest of the oil and gas industry, long term the demand for energy will continue to rise and the company is positioned to take advantage of that progress as a result of:

(1) its exposure to promising international regions,

(2) domestically, its capital expenditures will focus liquids versus gas,

(3) splitting the exploration and production from the refining and marketing should unlock value for shareholders,


(1) weak current outlook for production,

(2) price fluctuations of oil and natural gas,

(3) its international operations are subject to political risks.

Conoco is rated A++ by Value Line, has a 24% debt to equity ratio and its stock yields approximately 4.2%.

     Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                 Yield      Growth Rate     Ratio        Since 2005

COP          4.2%           5%                48%              9
Ind Ave     2.0             11                  28                NA 

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

COP         24%            12%            4               14%           A++
Ind Ave    42               11              NA             18             NA

            Note: COP stock made good progress off its 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 in a trading range (purple lines).  Short term, it is in a downtrend (brown line).  The wiggly red line is the 50 day moving average.  The Dividend Growth and High Yield Portfolios own a 50% position in COP, having Sold Half in mid-2011.  The upper boundary of its Buy Value range is $32; the lower boundary of its Sell Half Range is $72.



      Investing for Survival

            Three rules for stock picking (medium):

    News on Stocks in Our Portfolios

o    Coca-Cola (NYSE:KO): Q4 EPS of $0.44 beats by $0.02.
o    Revenue of $10.87B (-1.5% Y/Y) beats by $110M.

    • However, the company will get to charge a 5% royalty rate on 3G-capable devices (including multi-mode 3G/4G hardware, which account for a large % of Chinese 4G phones sold today) for access to "3G and 4G essential Chinese patents," 4G devices that don't support 3G CDMA or WCDMA networks will carry a 3.5% rate. However, the royalty is derived from a base of 65% of the device's net selling price.
    • Some fine print: Qualcomm will license its "essential Chinese patents" separately from other patents - that could mean 3G TD-SCDMA patents aren't covered - and negotiate cross-licenses in "good faith." It also won't "condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement." However, Qualcomm isn't obligated to sell chips to a non-licensee.
    • The company has also agreed to create "a China-specific investment fund of $150 million to further the development of mobile and semiconductor technologies." It already committed to similar investments in December.
    • FY15 (ends Sep. '15) guidance has been hiked on the low end: Revenue guidance is now at $26.3B-$28B vs. $26B-$28B, and EPS guidance at $4.85-$5.05 vs. $4.75-$5.05.


   This Week’s Data


            A contrary opinion on US employment growth (short):

            Three charts not to be dismissed (short):



Thoughts on the performance of the US military (medium):



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