Wednesday, March 18, 2015

The Morning Call--Breathlessly awaiting

The Morning Call


The Market

Yesterday the indices (DJIA 17849, S&P 2074) followed its recent pattern of one day up/one day down---it was ‘downs’ turn.  However, they ended within uptrends across all timeframes: short term (16783-19554, 1958-2939), intermediate term (16864-22015, 1775-2924) and long term (5369-18860, 797-2112).  They both closed above their 50 day moving averages and the upper boundary of a developing very short term downtrend---which negates that trend. 

            Volume fell; breadth deteriorated.  The VIX rose slightly, closing within its short term trading range and its intermediate term downtrend, below its 50 day moving average and the upper boundary of a developing pennant formation. 
Options market signaling problems in the equity market (medium):

            The long Treasury moved higher, finishing within its short term trading range, above its 50 day moving average but within its intermediate and long term uptrends. 

            GLD fell again, ending very close to the lower boundary of its short and intermediate term trading ranges, within a very short term downtrend and below its 50 day moving average. 

Bottom line:  while the Averages confirmed the break of that very short term downtrend, it was with little authority.  Still it opens the door for another assault on the upper boundaries of their long term uptrends.  I continue to believe that those boundaries will offer too much resistance for any meaningful break to the upside.  In addition, if the technical internals remain poor, they should sap any energy for a move to higher levels.

 TLT continues to attempt to stabilize; but it is too soon to hope that it will be successful.   I have little hope for GLD, at least in the short term.
            More on valuation (short):

            How do stocks perform after a six year run? (short):

            A disappointing ‘Fed day’ isn’t all bad (short):


             US economic news yesterday was sort of mixed: February housing starts cratered though permits were up modestly; month to date retail chain store sales rose fractionally.  (1) the latter is a secondary indicator, (2) housing starts are very important, though (3) permits were something of an offset.  Overall, I weigh this to the negative side.

Overseas, the Bank of Japan restated its intent to pursue QE with vigor and the German index of investor confidence rose but considerably less than anticipated.  I rate the former as by far the more important; and, as you know, I don’t view QE in any form from any participant as a plus.

***overnight, February Japanese exports were stronger than anticipated; UK unemployment was at the lowest level in six years.

In other international news, Greece is scheduled to meet with the ECB on Friday which is likely its last chance at coming up with a bail out agreement before its debts start coming due.

Greece in its eleventh hour (medium):

            And it turns to Russia (medium):

            Greek optimist throws in the towel (short):

            Greece isn’t the only one protesting austerity (short):

            Of course, most of investor attention remains on the outcome of today’s FOMC meeting, in particular, on a single word---‘patient’.  That said, when I first heard the lousy housing starts number yesterday, I assumed that the Market would again interpret it as a reason to believe that the Fed would remain ‘patient’ (easy).  The fact that it didn’t along with the incredible volatility of late raises a question in my mind as to the exact Market reaction to the Fed statement---whatever it says. 

            There are zero reasons for the Fed to raise rates (medium):

            But they will anyway (medium):

            Volatility and QE and what comes next (medium and today’s must read):

            Economic problems that QE won’t cure (medium):

Bottom line: volatility/schizophrenia continue to grip the Market probably brought on by its obsession with a single word and the (sham) significance of a possible miniscule change in interest rates.  Who knows how long this lack of focus will continue.  But at some point, investors will step back and grasp the big picture---the Fed has never timed a policy change correctly, this time will be no different, but the problem is that no one knows how Markets will handle any change from a policy of historically unprecedented ease.

Meanwhile, valuations are at fantasy levels, the economy looks more and more like it is rolling over and very little positive is coming out of the rest of the world whether it be economics or geopolitics. 

The problem as I see it is that there is no ‘win’ scenario.  If the Fed recognizes and confirms that the economy is weak, suddenly earnings estimates start coming down much more aggressively---and that has never been good for stocks.  If the Fed goes on and starts tightening, it will likely exacerbate the rate of economic deceleration---and that will ultimately make those earnings estimates decline even more.  Some will argue the ‘goldilocks’ scenario: the economy is just weak enough to prevent a Fed tightening but not so weak as impair the rate of growth.  Good luck with that.

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):

            David Stockman on the economy and the Market (medium):

      Investing for Survival from Cullen Roche
With assets pouring into index funds and ETF’s and away from traditional actively managed mutual funds it has never been more important to understand the process of portfolio construction.  Although the industry appears to be moving in the right direction in many ways (primarily away from high fee closet indexing funds) you still have to be very careful about how you go about constructing a portfolio because there remains a great deal of misinformation.
In the last few weeks I have emphasized the myth of passive investing.  That is, even if you use low fee index funds you still have to actively pick assets.  This “asset picking” will be the key factor in your portfolio’s performance.  In essence, we are all active asset pickers.  And that means we are all relying on some implicit forecast and our ability to decipher how certain assets will perform in the future.
I should emphasize that I am not an advocate of traditional “active” management.  In fact, I am an advocate of low fee indexing.  But that doesn’t mean I think the distinction between “passive” and “active” is very useful.  In fact, I think it’s rather dangerous.  Here are two main reasons why I think this is so important:
1)      Beware of advisors charging a high fee for “passive indexing”. Over the last 5 years I have noticed a growing trend in asset “management”.  I see more and more advisors charging a high fee (usually between 0.5-1.5%) for “passive indexing” approaches. But what most of these advisors are actually doing is picking an asset allocation for you and then claiming that you need them to “manage” it for you over the long-term.  And they will charge you the high fee for this service.  This is nothing more than a form of active management sold to you under a different name.  The fact that they are using low fee index funds does not mean they are not actively picking the asset allocation.  This, in my opinion, is a worrisome trend that investors need to be keenly aware of.  While paying a high fee for a closet indexing mutual fund is silly, it’s only marginally less silly to pay a high fee for someone marketing themselves as a “passive indexer” when the reality is that they are doing something that is simply a less active version of an alternative.

2)      “Passive indexing” is better than closet indexing, but that doesn’t mean it’s necessarily smart.  Portfolio construction is all about process.  There is, by necessity, a certain degree of forecasting that goes into any form of portfolio construction.  Some people just use historical data.  Others try to gauge the business cycle.  Others try to forecast returns using value metrics.  There are lots of ways to make forecasts about the future and gauge how certain assets can help us meet our financial goals.  But we should be aware of how most “passive indexers” go about doing this.  In my experience, most of them are using historical data based on “factor” tilting.  That is, they are basically expecting the future to look something like the past and they are actively tilting the portfolio in a specific way based on this view using a value, small cap or other “factor” emphasis.  This is not necessarily bad, but I wouldn’t say it’s necessarily good either.  As any Wall Street disclaimer will note, past performance is not indicative of future returns.

 This is as applicable to indexing as it is to stock picking….

Worse, what many of these “passive indexers” have done is constructed a straw man around “active” management.  In an attempt to differentiate themselves from all things active they have overlooked the reality that they too are active asset pickers.  As I showed here, many of these “passive indexers” are guilty of the same thing they accuse active managers of doing.  What’s dangerous here is that they’ve pegged closet indexing mutual funds as the entire scope of “active” management in an attempt to claim that the indexing approach is necessarily different and superior.  But the reality is that they’re just picking assets inside an aggregate just like stock pickers are.  Yes, buying an index is certainly better than buying a high fee closet indexing mutual fund, but that doesn’t necessarily mean the underlying portfolio process and allocation is smart.  It just means it’s smarter than something really bad (the high fee closet indexing mutual funds).
I think it’s important to go into the process of portfolio construction with your eyes wide open.  We can all implement low fee and tax efficient portfolios while also remaining diversified through the use of index funds and ETFs.  But I think we should also embrace the reality that all of this is part of an active endeavor.   Marketing gimmicks are the cornerstone of Wall Street’s ability to sell you something.  And when something sounds too good to be true on Wall Street that’s almost certainly the case.  While the concept of “passive indexing” has grown in popularity it’s also become increasingly susceptible to misinformation.  Hopefully my articles on this topic have helped to enlighten someone so they can avoid some of the pitfalls out there….
    News on Stocks in Our Portfolios
·         General Mills (NYSE:GIS): FQ3 EPS of $0.70 beats by $0.03.
·         Revenue of $4.35B (-0.7% Y/Y) in-line.
·         Oracle (NYSE:ORCL): FQ3 EPS of $0.68 in-line.
·         Revenue of $9.32B (flat Y/Y) misses by $140M.


   This Week’s Data

            Month to date retail chain store sales growth rose from 2.6% to 2.7%.

            Weekly mortgage applications fell 3.9%, while purchase applications dropped 2.0%.


            Fannie and Freddie may need additional bail out money (short):

            More trouble in the oil patch (medium):

            US European allies joining China regional bank (medium):



  International War Against Radical Islam

            23 beheadings for practicing Christianity by……Saudi Arabia (medium):

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