Thursday, February 5, 2015

The Morning Call--OOOPS

The Morning Call


The Market

More volatility.  Yesterday the indices (DJIA 17673, S&P 2041) traded up all day (110+ points on the Dow) then collapsed in the last hour.  They ended within uptrends across all timeframes: short term (16514-19290, 1919-2900), intermediate term (16550-21705, 1749-2463) and long term (5369-18860, 783-2083).  The S&P finished below its 50 day moving average, while the Dow closed right on its average.  Both penetrated the downtrends off their December highs on the upside, then closed below that boundary.  Depending on the follow through, they have potentially established a third lower high.

            Volume declined; breadth deteriorated.  The VIX rose 6%, ending within a short term trading range, an intermediate term downtrend and above its 50 day moving average. 

            The long Treasury bounced back, but not enough to recover the lower boundary of its very short term uptrend---hence the break is confirmed.  It remained within short term, intermediate term and long term uptrends and above its 50 day moving average.
            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 evidence remains weighted to the positive.  However, the indices made an attempt to break above the downtrends off their December highs, but failed.  Any follow through to the downside will create a third lower high for both Averages and would increase the strength of those resistance lines.  I continue to believe that the best place to be is the sidelines.

GLD bounced meekly but our Portfolios did nothing.


            The US economic stats yesterday were mixed: weekly mortgage applications were up but the more important, purchase applications were down, the January ADP private payroll reports was below expectations and the January Markit PMI and the January ISM service index were slightly ahead of estimates.

            No big earnings disappointment, again.  Clearly, the longer we go with no additional misses on profits or lousy guidance from major players, the less negative those first ten trading days of this earnings season become.

            Oil got whacked---for the moment saving the gurus the need to comment on whether higher oil prices are good or bad for the economy.

            We got more mixed economic data from overseas.  The January Chinese and Canadian service PMI’s were below forecasts while Germany, Italy and Spain all recorded better than anticipated service PMI’s.  The Bank of China eased monetary policy via a reduction in reserve requirements.

            ***overnight, German industrial orders soared 4.2% and the EU raised its 2015 growth prospects.

            Yesterday started with more of the hand holding and nicey, nice talk about the prospects of the new Greek government and the ECB/IMF working out an agreement to keep Greece in the euro and not default.  I said in Wednesday’s Morning Call that I thought that the measures that had been proposed were the equivalent of trading an option on the growth of buggy whips for the current outstanding debt.  Someone in the ECB apparently agreed because yesterday afternoon, it was announced that it wouldn’t allow Greek banks to use its government’s debt as collateral to fund themselves (short):

            Of course, that was likely just rhetoric designed to tighten the Greeks’ sphincters.  The point here is that the tough negotiations haven’t even started yet and getting jiggy or depressed over the latest comment from some bureaucrat probably isn’t a good use of time or money.

            ***overnight, ‘we didn’t even agree to disagree’ (short):

            Here is another great summary of the situation in Greece from Yves Smith (medium and a must read):

Bottom line:  the ECB statement on the value of Greek debt as collateral put a hitch in investors’ ‘gitty up’ yesterday.  That is likely not even close to the last time it will happen before this problem is resolved.  So until we really know something concrete about the outcome, investors may be in for an emotional roller coaster ride. 

China inched its way into the easy money race to the bottom.  That is the last of the big central banks to commit.  What is amazing is the seeming addict mentality of the central bankers---knowing that this can’t end well but unable to stop doing it.  If the analogy is right, then it won’t end well; and the worse the addiction, the more painful the detox. 

Oil ripped the lungs out of any recently converted bulls.  Here again I am amazed.  In this case, at the disconnect between the gurus and the Markets.  Oil goes down in price (the ‘unmitigated positive’) and stocks get whacked.  The only good news (at least for the gurus) from yesterday’s whackage is that they don’t have to explain why rising oil prices isn’t a disaster.

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.

            For the optimists (medium):

            Counterpoint (medium):

            The hedge funds’ most crowded trades (short):

            Japanese bond yields pushing higher---not good for Mr. Abe and his QE (short):

      Company Highlights

EOG Resources Inc. engages in the exploration, development and production of natural gas and crude oil primarily in the US, Canada and offshore Trinidad.  The company has grown profits and dividends at a 15-20% rate over the last ten years while earning a 7-20% return on equity.  EOG will undoubtedly suffer along with most energy related companies in the current energy price turmoil.  However, longer term the secular demand for energy will continue to grow and its strong management should be able to put the company back on a course of rising profits and dividends as a result of:

(1) a huge inventory of drilling opportunities [Eagle Ford, Bakken],

(2) growing emphasis on crude oil production, now growing at a 30-50% annually rate,

(3) management’s focus on rationalizing operations,

(4) technological competence.


(1) geopolitical risks,

(2) fluctuations in energy prices,

(3) unsuccessful drilling and cost overruns,

(4) intense competition.

            EOG is rated A by Value Line, carries a 25% debt to equity ratio and its stock yields 0.7%.

       Statistical Summary

               Stock      Dividend         Payout      # Increases  
              Yield      Growth Rate     Ratio       Since 2005

EOG          0.7%         20%            12%             10
Ind Ave      3.2            4                 15                NA 

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

EOG          25%           18%           4                 18%           A
Ind Ave      37              10             NA               13             NA


        Note: EOG stock made great 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, it is in an uptrend (blue lines).  Intermediate term, it is in a trading ranges (purple lines).  The wiggly red line is the 50 day moving average.  The aggressive Growth Portfolio owns a full position in EOG.  The upper boundary of its Buy Value Range is $69; the lower boundary of its Sell Half Range is $166.


       Investing for Survival

            Setting realistic expectations (short):

      News on Stocks in Our Portfolios
·         Cummins (NYSE:CMI): Q4 EPS of $2.56 beats by $0.05.
·         Revenue of $5.1B (+11.1% Y/Y) beats by $80M.

    • Teva Pharmaceutical (NYSE:TEVA): Q4 EPS of $1.31 in-line.
    • Revenue of $5.17B (-4.8% Y/Y) beats by $10M
·         Becton, Dickinson (NYSE:BDX): FQ1 EPS of $1.53 beats by $0.10.
·         Revenue of $2.05B (+1.5% Y/Y) beats by $40M.
·         AmeriGas Partners (NYSE:APU): FQ1 EPS of -$0.49 may not be comparable to consensus of $1.39.
·         Revenue of $888.8M (-15.4% Y/Y) misses by $81.17M.


   This Week’s Data

            The January Markit services PMI came in at 54.2 versus expectations of 54.1.

            The January ISM nonmanufacturing index was reported at 56.7 versus estimates of 56.5.

                The December US trade deficit was $46.6 billion versus forecasts of $37.9 billion.

            Weekly jobless claims rose 11,000 versus consensus of up 25,000.

            Fourth quarter nonfarm productivity fell 1.8% versus expectations of up 0.2%; unit labor costs increased 2.7% versus an anticipated advance of 1.2%.


            Dollar strength and earnings/revenue expectations (medium):

            Ignoring the yield curve (medium):



  International War Against Radical Islam

            Presented without comment (short):

            The US moves ‘search and rescue assets’ into northern Iraq (medium):

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