Wednesday, March 4, 2015

The Morning Call--Atlanta Fed lowers first quarter GDP growth estimate

The Morning Call

The Market

The indices (DJIA 18203, S&P 2107) underwent some consolidation yesterday but ended within uptrends across all timeframes: short term (16683-19454, 1943-2924), intermediate term (16752-21903, 1764-2478) and long term (5369-18860, 797-???).  They both closed above their 50 day moving averages and their mid-December highs.  The S&P again finished back below the upper boundary of its former long term uptrend (2112), sustaining that boundary’s magnetic pull on the S&P.  Meanwhile the Dow remains well below its comparable boundary.

            Volume declined; breadth deteriorated.  The VIX rose 6%, closing within its short term trading range and its intermediate term downtrend, below its 50 day moving average and above the upper boundary of a developing very short term downtrend. 
            The long Treasury was down again, leaving it below its 50 day moving average and the lower boundary of its short term uptrend for a second day.  A close below that boundary today will confirm that break and re-set the short term trend to a trading range.  However, it is still above its recent low.  If it trades below that support level (1) then the notion that TLT has stabilized following its early February sell off is called into question and (2) having already made a lower high, it will then have made a lower low and that sets up the potential for another change in the short term trend from a trading range to a downtrend.  The good news is that TLT finished within its intermediate and long term uptrends. 
            GLD was also down again, ending right on the lower boundary of its short term uptrend, within its intermediate term trading range, a very short term downtrend and below its 50 day moving average. 

Bottom line:  after a strong up move in February, some consolidation in the Averages is not unexpected.  Plus the inability of the S&P to break the gravitational pull of the upper boundary of its long term uptrend is also not surprising.  I noted before that if the S&P ever challenged this boundary that it would likely be difficult to break through in a meaningful way.   Hence, there is little reason to question the upward momentum in the Market, save for its lousy internals---but they have been lousy for months now and the indices continue to advance.

 Both bonds and gold are again on the cusp of breaking support levels.  A failure by either will likely prompt action by our Portfolios.
            Bull market turns six next week (short):

            A history of the recovery from of the worse bear markets.  Notice the similarity in timing of the end of three of those recoveries (short):


            Yesterday was slow in terms of US economic data: month to date retail chain store sales were up but slowed slightly from last week and February light vehicle sales slowed from January’s report.   Nothing here to break the string of poor stats.

            Stocks rise as consumers pull back (medium):

            Atlanta Fed forecasts first quarter US GDP at 1.2% (short):

            Overseas, the numbers were again mixed: the Bank of Australia declined to raise interest rates and Germany reported much stronger than expected monthly retail sales.  More evidence that the slide in global economic activity may be coming to an end.  

            ***overnight, the Reserve Bank of India lowered rates for the second time in two months; fourth quarter Australian GDP grew less than expected; China’s service PMI was slightly ahead of estimates; the EU composite PMI was weaker than the initial reading; UK services PMI was below forecasts; Japan’s services PMI was much less than anticipated.

            Greece remains out of the headlines; but that doesn’t mean that things are going swimmingly:

            Are Greece and the Troika talking past each other/ (medium)?

            Latest developments in Greece (short):

Bottom line: the US economic numbers are not improving.  Plus yesterday Goldman suggested the economy is in contraction and the Atlanta Fed cuts its first quarter GDP estimate dramatically.  If correct, that probably won’t be good for earnings forecast.  In addition, the bond market has been acting squirrelly.  If that continues, it probably won’t be good for stock multiples.  In short, stocks are considerably overpriced and the major components of prices may soon be facing some stiff headwinds.

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.

            More on valuation (medium):

      Investing for Survival from Morningstar

Diversification is often treated as an unalloyed good. It's not. The more I learn, the more I appreciate that Warren Buffett said something as perfect as can be about the subject: "Diversification is protection against ignorance."

Diversification is a volatility-control strategy that requires little knowledge on your part. As long as 1) two assets aren't perfectly correlated and 2) the expected return on one of the assets isn't too low, it follows as a matter of math that owning a combination of the two can be expected--not guaranteed--to provide a better volatility-adjusted pay-off than owning only one.

If you know little, diversification is a no-brainer. In fact, you want to diversify as much as possible. Moreover, you want to do it as cheaply as possible, as the benefits of diversification don't require expertise. There is a trade-off. If you know something--say, you can actually identify undervalued stocks--then at some point diversification hurts you by diluting your edge. An extreme example would be someone privy to news that's certain to send a stock's price rocketing. It would be crazy for him not to put a huge chunk of his wealth into the stock (assuming he's not breaking the law). The more you know, the more diversification hurts you.

Most investors understand that they should diversify a lot. However, some hurt themselves by behaving inconsistently: They diversify a lot while implicitly behaving as if they know a lot. A big subset of this group is investors who own lots of different expensive funds. Owning one expensive fund is a high-confidence bet on the manager. Well-done studies estimate that the percentage of truly skilled mutual fund managers is in the low single digits.

It would be strange if your process for assessing managers turns up lots and lots of skilled ones, because there aren't many in the first place. (If you see skilled managers everywhere, chances are your process is broken or not discriminating enough.) It would be even stranger if you bet on many of them. Doing so dooms you to getting index-fund-like results while paying hefty fees. It makes little sense to pay 1% or more of assets on an aggregate portfolio with hundreds of positions and market like behavior.

An exception is if you assemble a portfolio of extremely concentrated fund managers. Owning 10 funds with 10 stocks each put together will look like a moderately concentrated fund manager. This is a model some successful endowments, hedge funds, and mutual funds use.

Most investors should own diversified, low-cost funds. Those who believe they know something should concentrate to the extent that they're confident in their own abilities. A big danger is that humans are overconfident; many will concentrate when they should be diversified.

A young investor with lots of room to make mistakes and a passion for investing should consider forming a portfolio of "play money" with a handful of his best ideas. Over time, he can learn whether he knows what he's doing and either size up or down his bets. An advantage of a concentrated "skill" portfolio is it becomes quickly apparent if an investor knows what he's doing. This can prevent a lot of heartache down the road. An older investor near or in retirement just beginning to learn about investing cannot take the risk of self-exploration. He should stick to low-cost, highly diversified funds. 

      News on Stocks in Our Portfolios
·         Brown-Forman Corporation (NYSE:BF.A) (NYSE:BF.B): FQ3 EPS of $0.87 in-line.
·         Revenue of $1.1B (+1.9% Y/Y) misses by $20M.


   This Week’s Data

            Redbook Research reported month to date retail chain store sales rose 2.7% year over year versus last week’s reading of +2.8%.

            February light vehicle sales declined versus January’s report but increased versus February 2014.

                Weekly mortgage applications rose 0.1% but purchase applications fell 0.2%.

            ADP February private payrolls grew 8,000 less than expected; however, the January reading was revised up by 37,000.


            Raising interest rates may not be all that bad (medium):

            Could oil prices plummet again? (medium):

            Is the Bank of Japan losing control? (short):



  International War Against Radical Islam

            Netanyahu’s message to congress (medium):

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