Friday, February 6, 2015

The Morning Call---EU economic indicators improve and do earnings reports/guidance

The Morning Call

The Market

The indices (DJIA 17884, S&P 2062) finally had a nondirectionally challenged up day, ending within uptrends across all timeframes: short term (16536-19312, 1921-2902), intermediate term (16571-21726, 1750-2464) and long term (5369-18860, 783-2083).  Both (1) finished above its 50 day moving averages and (2) penetrated the downtrend off their December highs on the upside.  If they remain above those trend lines today, then we start looking at the mid-December highs [17986/2080] as the next resistance level.

            Volume declined (continuing the trend of down volume on up days); breadth improved.  The VIX fell, closing within a short term trading range, an intermediate term downtrend but back below its 50 day moving average---generally supportive of the pin action in stocks. 

            Update on margin debt (short):

            The long Treasury dropped but remained within short term, intermediate term and long term uptrends and above its 50 day moving average.  However, it does appear the moon shot is over.  Now we wait to see where TLT finds initial support.

            Money continues to flow into bonds (short):

            GLD was up, ending within its short term uptrend, an intermediate term trading range and above its 50 day moving average. 
Bottom line:  the technical signals improved again yesterday---as long as the indices can confirm the break of the downtrends off their December highs.  If that occurs, it seems likely that the short term underlying momentum in the Market has re-gained strength to the upside---though the low volume is a bit bothersome.

The spike in bond prices seems to be fading.  As much fun as the ride up was, the task now is to be sure the underlying momentum continues to the upside.  My initial support level is 131.3 (versus current price of 133.3).

GLD continued its meek bounce; our Portfolios did nothing.

            The US economic data yesterday was mixed: positive---January retail chain store sales and weekly jobless claims; negative---the December US trade deficit and fourth quarter productivity and unit labor costs.  Certainly, the most important stats were the productivity and unit labor cost numbers.  That extends what has been a pretty lousy week for dataflow; and this follows a not so hot set of measures last week.  It is too soon to be revising our outlook; but it is concerning, especially with the yellow light already flashing.

            The improvement in this season’s earnings reports and forward guidance continued.  With over 75% of S&P companies reporting that suggests that we are going to get a better final result than I thought a week ago.  That said, S&P GAAP profits this quarter to date are down roughly 5%.  That is not terrible, economically speaking; but with P/E’s near record levels, it probably should give pause to investors.

            International economic data was upbeat (surprise, surprise).  German industrial orders rose substantially and the EU raised in 2015 growth forecast.  I am suspect of the latter because historically these guys always make lofty and virtually unattainable forecasts. 

            ***overnight, Denmark lowered its key interest rate for the fourth time this year; Australia lowered its 2015 growth and inflation forecasts.

            However, Greece and its financial problems continue to dominate the headlines.  At the moment, the rhetoric has turn more adversarial; though that is most likely just negotiation verbiage.  As I noted previously, we have no idea where the negotiating ‘uncle’ points are for either the new Greek government or the ECB.  So at my pay grade, the outlook of this situation is very much in question and, at this point in time, the day to day rhetoric is just part of the process not a sign of the outcome.  Hence, making bets either way, in my opinion, is a dice roll.  Of course, just because we don’t know the outcome doesn’t mean that we should ignore the process.  So here is the latest:

            The latest from the Greek people (short):

            Whispers of Greek capital controls (medium):

            The latest on Greece from Yves Smith (medium):

            Another perspective from Deutsche Bank (medium):

            ***overnight, Greek PM and Putin agree to boost economic cooperation (short):

Bottom line:  this week’s US economic stats continue to be disappointing though it is too early to get negative on the outlook.  Furthermore, the improvement in earnings/guidance as well as the better numbers out of Europe are something of a counterbalance to our own lousy numbers.

Can the US decouple? (a counterintuitive thought that may have some merit; short and a must read):

On the other hand, the Greek/ECB faceoff will likely continue to induce volatility into the Markets, though at this point, I don’t think anyone knows how this will play out including the Greeks and the ECB.  I caution against taking any one day’s headline too seriously.

All that said, US corporate profit growth is ostensively slowing and current stock valuations are in the stratosphere.  Not a good combination for future pin action, especially as the global central banks continue their game of ‘beggar thy neighbor’.  The easy money may keep the punch bowl filled short term; but sooner or later, the consequences of global competitive devaluations will catch up to the central bankers (and the Markets) just like it has every other time they tried it.

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.

      Thoughts on Investing from John Templeton
Here’s a good list of legendary investor John Templeton’s investment rules.  Barry Ritholtz has more details on each rule at his site (see here), but the summary is below.  It’s a nice addition to our growing list of rules and guidelines (see here).
1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often

      News on Stocks in Our Portfolios
·         Philip Morris (NYSE:PM): Q4 EPS of $1.03 misses by $0.03.
·         Revenue of $7.2B (-7.6% Y/Y) beats by $80M.


   This Week’s Data

            January retail chain store sales were up both month over month and year over year.

            January nonfarm payrolls rose 257,000 versus expectations of 230,000; but unemployment rose to 5.7% versus the prior reading of 5.6% (an increase in the labor force participation rate?)


            The unemployment rate is a lie (medium):



Quote of the day (short):

Bonus quote of the day (short):

  International War Against Radical Islam

            Obama’s failed Iraq policy (medium):

                Russia puts its nuclear ICBM’s on ‘combat patrol’ as Kerry offers aid to Ukraine (medium and not a good sign):

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