Tuesday, March 24, 2015

The Morning Call---All about the Fed

The Morning Call

The Market

The indices (DJIA 18116, S&P 2104) continued their up day/down day pattern---it was down’s turn.  They remained well within their uptrends across all timeframes: short term (16820-19591, 1964-2945), intermediate term (16902-22053, 1779-2533 and long term (5369-18860, 797-2116).  Both stayed above their 50 day moving averages.  Yesterday’s drop notwithstanding, I still think it likely that they will mount another challenge to the upper boundaries of their long term uptrends but that they will be unable to break meaningfully above those boundaries.

Volume was down; breadth was negative. The VIX was up though intraday it bounced off the lower boundary of a developing pennant formation.  It remained within its short term trading range, its intermediate term downtrend, its long term trading range, and below its 50 day moving average.  I continue to think that, at these prices, it represents cheap insurance for the trader.

The long Treasury fell but finished within its short term trading range, intermediate and long term uptrends, above its 50 day moving average and is developing a very short term uptrend.  Let’s hope that trend builds.

GLD’s price rose again, closing within its short and intermediate term trading ranges, its long term downtrend and below its 50 day moving average.  However, it has broken above the upper boundary of a very short term downtrend.  A finish above that boundary today will confirm a break.  This is the first plus sign for the GLD chart in some time.

Bottom line: amazingly, the fairly consistent pattern since the first of the month of one day up then one day down held for another day; though as I observed last week, the most recent price moves on the up days have been were greater than those on the down days.  I assume that means that momentum has returned to the upside; and given the Averages’ proximity to the upper boundaries of their long term uptrends, I would expect a challenge of those levels.  Although I don’t believed that they will be sustained.
            The latest from The Stock Traders’ Almanac (short):

            The trend in US economic data remains negative.  Yesterday the February Chicago National Activity Index was down versus forecasts of being up and February existing home sales were up but short of expectations.  Investors continue to believe that bad economic news is good Fed news; but someday, that bad news is going to become manifest in bad earnings.  It would be extraordinary for that not to impact valuations.

            No economic news overseas; though the Greece bail out talks continue.  The Market assumption seems to be that everything will work out fine in the end.  I won’t argue with that though the odds seem less than 100%.

            The latest on the Greek/Troika standoff (medium):

            ***overnight, China’s March flash manufacturing index showed contraction; however, the EU flash composite PMI was reported at a 46 month high---very positive if there is any follow through.

            The main narrative in the financial media remains focused on the ‘real’ meaning of last week’s FOMC message.  My opinion hasn’t changed (1) the Fed recognizes that the economy is slowing, (2) it also realizes that it has waited too long to tighten; so it probably won’t in this cycle, (3) this will make the likely decline in both economic and Market activity ‘less bad’ but (4) that doesn’t mean that equity valuations won’t experience severe pain.

            Mohamed El Erian: The Fed is just buying time (medium):

            The Market is all about one thing (medium):

Bottom line: the economic data continues negative as we started this week with more poor numbers.  If the trend holds, this will be the ninth consecutive week of disappointing stats.  Meanwhile, investors are wee weeing in their pants because the Fed recognizes that economic conditions are not improving and that means more free money.  Sooner or later, (1) in the US, if the deterioration in the economy continues, corporate earnings start being impacted and (2) internationally, the currency devaluation race [not raising rates weakens the dollar] will lead to slower economic growth and potentially a trade war---neither of which is good for the US economy or corporate profits. 

All this taking place as equity prices toy with all-time high absolute prices and valuations.  Something will give sooner or later.

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.

       Investing for Survival

            March madness and picking stocks (medium):

       Company Highlight     

W.W. Grainger Inc. is the leading provider of maintenance, repair, supplies and service for safety, lab, automotive and industrial products to businesses and institutions to keep their facilities and equipment running.  The company has grown profits and dividends at a 15% rate over the past 10 years earning a 15-20% return on equity.  GWW should continue to record profit growth for the long term by:

(1) expanded product offerings.  The company added 234,000 since 2006.  It is also rapidly growing its private label products,

(2) rapid penetration of the e-commerce market which is the fastest growing segment of its business,

(3) acquisitions,

(4) strong cash flow which sustains a continuing stock buyback program.


(1) slow global economic growth,

(2) currency fluctuations,

(3) margin pressure due to increasing investment in supply chain.

      GWW is rated A++, has a 10% debt to equity ratio and its stock yields 1.7%.

  Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                 Yield      Growth Rate     Ratio       Since 2005

GWW        1.7%            17%            31%             10
Ind Ave      2.6                9                 32                NA

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

GWW       10%           23%           1                   9%           A++
Ind Ave     24              15            NA                  9             NA


            Note:  GWW stock made great progress off its March 2009 low, quickly surpassing the downtrend off its August 2008 high (straight red line) and the November 2008 high (green line).  Long term, the stock is in an uptrend (blue lines).  Intermediate term it is a trading range (purple lines).  The wiggly red line is the 50 day moving average.   The Dividend Growth Portfolio owns a 50% position in GWW by virtue of having Sold Half in mid-2012.  The upper boundary of its Buy Value Range is $98; the lower boundary of its Sell Half Range is $238.


      News on Stocks in Our Portfolios

   This Week’s Data

            February existing home sales rose 1.2% versus estimates of +2.9%.

                February CPI came in at +0.2%, in line; ex food and energy, it was up 0.2% versus expectations of up 0.1%.




  International War Against Radical Islam

            The US loses $500 million (of your and my money) in weapons in Yemen (medium):

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