Wednesday, February 18, 2015

The Morning Call--The Greek crisis is apparently over

The Morning Call


The Market

The indices (DJIA 18047, S&P 2100) had another good day, ending within uptrends across all timeframes: short term (16603-19375, 1930-2911), intermediate term (16645-21800, 1755-2469) and long term (5369-18860, 797-2093).  They both closed above their 50 day moving averages and their mid-December highs.  The S&P finished above the upper boundary of its long term uptrend.  That starts our time and distance discipline; the break will confirmed if it remains above that upper boundary through the close next Monday.

Update on the seventh year (presidential cycle) market pattern (short):

            Volume rose; breadth deteriorated---somewhat unusual for an up day.  The VIX rose 8%, again not the customary pin action for a plus day in prices.  It ended within its short term trading range, its intermediate term downtrend and below its 50 day moving average. 

            The long Treasury got monkey hammered again.  It finished below its 50 day moving average and the lower boundary of its short term uptrend but well within its intermediate term and long term uptrends.   Clearly, we are not getting my hoped for stability.  Our ETF Portfolio will Sell a third on its muni bonds holdings at the Market open.
            GLD’s chart just keeps getting worse.  It ended very near the lower boundary of its a short term uptrend, below its 50 day moving average and within an intermediate term trading range.  It is also developing a very short term downtrend.  A close below the lower boundary of its short term uptrend will prompt the sales of the remainder of out Portfolios’ positions in GLD.

Bottom line:  the pin action suggests that investors are reasonably sure that Greece/EU bail out discussions will end positively.  That is supported by bond and gold investors---no need for a ‘safety trade’.  On the other hand, breadth and the VIX provided cognitive dissonance.  Nevertheless, the momentum is to the upside and the levels to be watching are the upper boundaries of the Averages long term uptrends.  I continue to believe that they represent strong resistance.  However, until investors ditch their ‘good news is good news and bad news is fantastic’ attitude, it make no sense to me to try to buck this trend.  If you are a nimble trader, there may be short term opportunities on the upside.  I am not a trader much less nimble. 

The TLT continues to suck.  Our ETF Portfolio will start to lighten up at the Market open.  (Remember this is a full position and the largest holding in the ETF Portfolio). GLD is even worse.  A close below the lower boundary of its short term uptrend will prompt the elimination of this position.      

            This is a great piece from TraderFeed on forward thinking.  While it specifically deals with trading, it is easy to see how the Valuation Ranges set by our Valuation Model along with our Price Discipline fit the kind of mental preparation that the author is advocating (short):


            More subpar economic numbers yesterday: the NY Fed manufacturing index and the February homebuilder confidence index.  Both are secondary indicators; so in and of themselves, they aren’t that alarming.  However, coming as they do as part of a three week string of disappointing data flow, they reinforce that trend---which is not a plus.

            Overseas, fourth quarter Japanese business spending (+0.1%), private consumption (+0.3%) and GDP (+2.2%) all missed estimates on the downside; as did UK CPI.  As you know, the stats out of Europe improved a bit last week (and that is a positive) but clearly there is no global trend change in total.

            ***overnight, UK jobless claims fell and the Japanese government stated that it was maintaining its quadruple down, swing for the fence, balls to the wall, give me liberty or give me death QE policy.

            Once again though geopolitical events captured the front page:

(1)   the Ukraine/rebel/Russia dispute is not over.  There remains the small problem of Debaltseve, a major transportation center in eastern Ukraine (read, now Russia) that is still being held by Ukrainian forces. 

***overnight, the fighting continued around Debaltseve; but by early morning, it appeared Russia (the rebels) had secured that enclave (medium):
(2)   negotiations on the Greek bail out broke off amidst acrimonious dialogue and seemingly intractable positioning.   But it was water off a duck’s back.  The Market is focused on two story lines: [a] there will be a settlement because there has always been one or [b] Grexit is already priced into most securities.  What, me worry?

At the risk of boring you with irrelevant details, here is the latest news on each parties’ comments and negotiating position: (medium):

                 And (medium):

                 Plus the latest gambit in the negotiating process (medium):

                                You want the truth, here’s the truth (medium):

                                And this 4 minute video from my favorite eurocrat:

 Bottom line:  the economic data flow both here and aboard did little to improve the overall global economic outlook or assuage my concerns regarding the ultimate impact of declining worldwide growth on the US.  

Ukraine is not quite as resolved as we thought it was last Friday.  But I have only a small doubt that Putin doesn’t have this situation under control.  He has played this masterfully and, therefore, I assume will be in complete control of eastern Ukraine sooner rather than later.  I am not sure that this has any significant economic implications; but it does demonstrate that the US can whack him across the balls as much as it wants, it is not likely to achieve its geopolitical objectives---at least not using its current tactics.

Some observations on what the Russian populous thinks (short):

The Greek/EU situation is a head scratcher to me.  (1) I could accept the proposition that the whole negotiating process has been a Kabuki dance and that a deal keeping Greece in the eurozone and getting its bail out relief was a foregone conclusion, if there weren’t that so many nonmarket experts are giving the odds of a deal at 50/50.  That is not to say that there won’t be a deal.  It is to pose the question, is a 50/50 deal properly priced at current levels? (2) I have a tougher time with the ‘a Grexit is all priced in’ argument because [a] I have seen no analysis whatsoever from market or nonmarket types that puts any numbers on the consequences [b] which assumes that anyone even knows the economic implications of the consequences.  Again, I am not arguing that the consequences aren’t somehow priced in, I just haven’t seen any analysis to support that notion.

In the end, price is truth; and I apparently just can’t handle the truth.  Even if there is a Greek/EU deal and/or the final outcome is priced in, stocks are still priced for perfection---and the current trend in US and international economic data is not perfect.

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):

      Investing for Survival

MarketWatch columnist Brett Arends has been looking for the Holy Grail of investment portfolios. In a recent article he describes his search for a simple ‘perfect portfolio.’
In the end he came up with a broadly diversified global portfolio consisting of 10 equal-weighted asset classes that are rebalanced on an annual basis.
I appreciate the fact that Arends is looking for a simple, diversified portfolio that, as he says, “maximizes my chances of earning a good long-term return, and minimizes my chance of ending up in the poor house.”
I’m just not so sure that his choice of words makes sense for investors. There is no such thing as a perfect, all-weather portfolio. It doesn’t exist. There is only a most-of-the-time-this-works-portfolio because nothing works all the time in every environment.
Craig Israelsen wrote an article for Financial Planning Magazine where he analyzed a portfolio made up of 12 different asset classes. He first looked at what would happen if an investor had perfect foresight to choose the best performing asset class in advance each year:
Assuming a person could accurately pick each year’s winning asset class at the start of each year, and devote an entire portfolio to that asset class, that investor’s 15-year annualized return would have been an astounding 32.25%, with a standard deviation of annual returns of just under 19%.
Obviously, that would be impossible since no one can predict the future and there is no rhyme or reason to annual asset class performance.  Look at any asset allocation quilt to understand this dynamic.
While the perfect portfolio is impossible, investors can easily invest in a terrible portfolio.  Israelsen next looked at what would have happened if an investor based their purchases strictly on past performance by investing in the top performing asset class from the prior year:
The “perfect” 32.25% annualized 15-year return plunged to 2.71% for an investor using this strategy during the 15-year period, while the standard deviation of annual returns increased to 23.7%.
In fact many investors fall for this trap by investing in the hottest performing sector or asset class.  It’s why fund flow data shows that investors pile into asset classes after large gains and pull money out after large losses, the opposite of a prudent investment strategy.
This is the problem with a search for perfection.  There are only perfect past portfolios, not perfect future portfolios.  You could go through all of the asset allocation studies, Monte Carlo simulations or risk tolerance questionnaires you can find but all they will tell you is how certain portfolios have performed in the past.
While these tools can be useful as a way to gauge possible risk factors, assuming future cycles will play out exactly as they did in the past can lead to overreactions when things don’t go as planned.
If your goal is to create a perfect portfolio you have basically already lost because you are only setting yourself up for disappointment.  It’s a pipe dream. There are only investment styles that fit your personality and allow you to meet your needs with a high probability for success.
The real “perfect” portfolio is whatever approach allows you to stick with your investment plan without completely abandoning your strategy at the worst possible times.
It’s the portfolio that helps you eliminate any possible behavior gap that comes from chasing hot funds, buying high or selling low and investing in products or markets that you don’t understand.
    News on Stocks in Our Portfolios
·         CF Industries (NYSE:CF): Q4 EPS of $4.82 misses by $0.21.
·         Revenue of $1.22B (-8.3% Y/Y) beats by $60M.
·         Genuine Parts (NYSE:GPC): Q4 EPS of $1.07 in-line.
·         Revenue of $3.82B (+8.5% Y/Y) beats by $90M.


   This Week’s Data

            February homebuilder confidence came in at 55.0 versus estimates of 58.0.

            Weekly mortgage applications fell 13.2% while purchase applications were down 7.0%

            January housing starts declined 2.0% versus consensus of -1.7%; building permits dropped 1.0% versus forecasts of an increase of 3.6%

            January PPI was down 0.8% versus expectations of down 0.5%; ex food and energy, the number was off 0.3% versus an anticipated rise of 0.1%

            Month to date retail chain store sales improved to 3.2% year over year.

            More from our resident optimist (medium):

            Household debt continues to grow (medium):



  International War Against Radical Islam

            Update on WMD’s in Iraq (medium):
            Chris Matthews (not exactly a right wing zealot) on Obama’s ISIS policy (1 minute video):

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