Thursday, February 26, 2015

The Morning Call--Everyone has happy feet

The Morning Call


The Market

The indices (DJIA 18224, S&P 2113) had a quiet day (Dow up, S&P down), ending within uptrends across all timeframes: short term (16657-19429, 1939-2920), intermediate term (16706-21847, 1762-2476) and long term (5369-18860, 797-???).  They both closed above their 50 day moving averages and their mid-December highs.  The S&P finished above the former upper boundary of its long term uptrend while the Dow remains well below its comparable boundary. 

NASDAQ’s run (medium):                       

            Volume was flat; breadth deteriorated.  The VIX rose, closing within its short term trading range, its intermediate term downtrend and below its 50 day moving average. 

            The long Treasury was up again, finishing within its short, intermediate and long term uptrends and above its 50 day moving average.  Long term muni ETF’s remain the largest segment in our ETF Portfolio.  At the open this morning, our ETF Portfolio will Buy a position in BWX, the Barclay’s International Treasury ETF.

                The rise of the bond market and its impact on portfolio allocation (medium):

            GLD was up, ending within its short term uptrend, its intermediate term trading range, a very short term downtrend and below its 50 day moving average.  While GLD has remained above the lower boundary of its short term uptrend, it shows few signs of strength.  If we get some upward momentum, our Portfolios may Add back shares.  However, a break of the lower boundary of its short term uptrend will prompt a complete exit from this position.

Bottom line:  the indices rested yesterday and volume remained light.  Still after the sprinting up on the positive news of the Greek bail out and Yellen’s dovish Humphrey Hawkins testimony, a slow news day offers the opportunity for profit taking; and we got very little of that.  That suggests continuing momentum to the upside.

TLT had another good day and seems to have put the recent sell off behind it.  I continue to believe that it is more likely that interest rates go lower rather than higher.  Our ETF Portfolio will continue to look for value in this space.  On the other hand, GLD’s pin action is less inspiring and remains more of a trading vehicle than a longer term investment.


            Finally, we get a day in which the economic numbers are just mixed: weekly mortgage applications fell but the more important purchase applications rose; January new home sales were down, just not as much as expected.  Still these stats are not going to cause anyone to become more upbeat.

            Overseas, China’s February flash PMI inched back into positive territory but exports declined.

            On a broader front:

(1)   Yellen spent another day charming our legislators and her dovish tone on monetary policy was unchanged,

(2)   there was little out of Greece/EU as we await approval of the latest bail out deal from several sovereign parliaments [Germany, Finland].  Voting is scheduled for this weekend.

                  Greece’s biggest problem (short):

                  No way for Greece to escape austerity (medium):

(3)   while the shooting seems to be abating in Ukraine, the war is shifting to the economic [read, gas] realm (short):

Bottom line: yesterday’s US economic numbers did little to assuage my concerns about the current trend in lousy stats.  On the other hand, the recent tendency towards more mixed international economic data is a plus. 

I remain a skeptic as to how helpful/useful central bank easy money is to improving the economic outlook.  I worry about its potential negative impact via competitive currency devaluations.  And I am convinced that it is grossly distorting global asset prices---a problem for which investors will pay dearly sooner or later. 

Following the Greek/EU/ECB/IMF agreement investors have their happy shoes on, assuming that no matter how negative an impact that the current monetary/fiscal policies are having on the PIIGS and no matter how dire the rhetoric becomes, the euros will always manage to ‘muddle through’.  I am reminded of a phrase from Herb Stein that basically said ‘bad economic policy will remain in place until it can’t’.  I have no doubt that current EU monetary/fiscal policies will continue until they can’t.  The Market assumes that will be for a long time.  I don’t have quite that level of conviction.  That said, the current assumption in our Economic Model is that the EU ‘muddles through’.  I just doubt that the odds are 100%.

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.

            Career risk as an investment principal (short):

            Earnings season update: 90% of S&P companies have reported, 74% beat profit expectations, 56% beat revenue projections.

      Company Highlights

CF Industries manufactures and distribute nitrogen and phosphate fertilizers in North America.  The company, which went public in 2005, has grown profits from $.60 to $19.40 in 2014 and dividends from $.02 to $5.00 in the same time frame.  It has earned between 12% and 20% return on equity.  CF should continue its above average growth rate because:

(1) capacity expansion,

(2) recent acquisition of Terra has made it the leading global producer of nitrogen fertilizer,

            (3) stock buyback program,

            (4) falling natural gas prices, a key ingredient in the making of fertilizer.


(1)   price competition with its domestic competitors,

            (2)  its business serves a highly cyclical industry.

            CF is rated A by Value Line, carries a 49% debt to equity ratio and its stock yields 2.2%.

      Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio        Since 2005

CF             2.2%         31%               27%                6
Ind Ave      3.6            18                  48                NA 

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

CF            49%            21%           3                 21%          A
Ind Ave     36               17            NA               13            NA


            Note: CF Industries stock made great progress off its March 2009 low, quickly surpassing the downtrend off its July 2008 high (straight red line) and the November 2008 trading high (green line).  Long term, it is in an uptrend (blue lines).  Intermediate term, it is an uptrend (purple lines).  The wiggly red line is the 50 day moving average.  The Aggressive Growth Portfolio owns a full position in CF.  The upper boundary of its Buy Value Range is $286 (I have left CF on the Buy List despite its trading slightly above this boundary); the lower boundary of its Sell Half Range is $428. 


      Investing of Survival

            How retirement planning vastly underestimates inflation (medium):

    News on Stocks in Our Portfolios
·         Medivation (NASDAQ:MDVN): Q4 EPS of $1.96 beats by $0.62.
·         Revenue of $274.7M (+184.3% Y/Y) beats by $39.45M.


   This Week’s Data

            January new home sales declined fractionally versus expectations of a 2.2% decline.
            January CPI came in at -0.7% versus estimates of -0.6%.

            January durable goods orders rose 2.8% versus forecasts of up 2.0%; however, ex the highly volatile transportation sector, they were up 0.3% versus consensus of up 0.7%.

            Weekly jobless claims were up 31,000 versus an anticipated increase of 7,000.


            A review of the impact of US monetary/fiscal policy (short):



  International War Against Radical Islam

            Our failed negotiations with Iran (medium):

            Iranian live fire demonstration (short):

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