Friday, March 6, 2015

The Morning Call--The new and improved bank stress test and Draghi sings the same old song

The Morning Call

3/6/15
The Market
           
    Technical

The indices (DJIA 18135, S&P 2101) lifted modestly yesterday and ended within uptrends across all timeframes: short term (16714-19485, 1948-2929), intermediate term (16777-21928, 1765-2479) and long term (5369-18860, 797-???).  They both closed above their 50 day moving averages and their mid-December highs.  The S&P continues to trade below the upper boundary of its former long term uptrend (2112), while the Dow remains well below its comparable boundary.

            Volume declined; breadth improved.  The VIX fell, 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 very short term downtrend. 
           
            Why momentum is now the most important investment factor (medium):

            The long Treasury dropped, finishing within a short term trading range, below its 50 day moving average but within its intermediate and long term uptrends and above its recent low.  If TLT trades below that recent low, it will re-set the short term trend to down.  That would likely bring additional sales of the long bond position in the ETF Portfolio.

            GLD was down, ending below the lower boundary of its short term uptrend for the second day.  If it remains below this support level through the close today, the short term trend will reset to a trading range.  It remained within its intermediate term trading range, a very short term downtrend and below its 50 day moving average. 

Bottom line:  the indices reacted favorably to the ECB QE terms and the bank stress test though just barely and on low volume---likely because (1) they were totally in line with expectations and (2) investors remain cautious ahead of this morning’s nonfarm payrolls number.

 TLT remains within a support level but just barely. If that level is broken, our ETF Portfolio will likely lighten up this position.  GLD remains on the cusp of a breaking support level.  A failure to hold will prompt the sales of the remaining shares by our Portfolios.
             
            The dollar and stock prices (short):

            The Stock Trader’s Almanac Market outlook (short):

    Fundamental
    
       Headlines

            Unfortunately, the one day trend in better US economic stats came to an end.  Yesterday, weekly jobless claims rose versus expectations of a decline; fourth quarter nonfarm productivity declined though roughly in line with estimates; and January factory orders were very disappointing.  Even if we get an upbeat nonfarm payrolls number today, this locks in a negative trend in data for a sixth week.

            More on the jobless claims number:

            The cumulative count on missed datapoint expectations (short):

            In addition, the Fed released its latest bank stress test results and not surprisingly, all measured banks passed with flying colors even under tougher stress conditions than in prior tests.   However,

(1) the resulting capital levels did not include the banks’ future plans for shareholder distributions [dividends and stock buybacks].  The results of a second iteration of the stress test which will include those distribution will be released next week.  In shareholders’ view, this is by far the more important test since it will determine how closely the banks can follow their payout plans, and

(2) not included in the stress conditions was the potential of impairment of counterparty risk in the banks’ huge derivatives portfolio---the exact problem which was a primary contributor to the 2007/2008 financial crises.

To be sure, the large banks’ capital positions are sounder than they were going into the last financial crisis.  However, given the absence of any assumptions regarding defaults in their derivatives portfolios, I resist the temptation to feel all warm and fuzzy about these results.
           
Overseas, the economic stats weren’t any better than here: China lowered its 2015 GDP growth forecast; German factory orders were awful; EU retail sales were below consensus.  This means that this week’s international dataflow will return to the negative column after two weeks of mixed numbers.

            ***overnight, German and Spanish industrial production numbers were above expectations and the revised EU fourth quarter GDP was slightly ahead of the initial report.

           China growth may be even slower than the Chinese government’s estimate (medium):
                               
  
            At the ECB meeting yesterday, it held interest rates at current levels and announced the terms of its new QE policy which basically provides for the a monthly purchase of E60 billion of public and private sector bonds which include marketable debt of EU governments and certain eurozone based agencies.  It also (1) revised its EU economic growth forecast for 2015-1017 dramatically upward and its inflation forecast from 0% today to 1.5% in 2016 and (2) defined the timeframe of its QE as dependent on achieving those objective.  In other words, QE could become QEInfinity if the ECB is as successful in creating growth and inflation as everyone else who has employed QE.  I must say that it is something of a mystery to me that Draghi can make such pronouncements and keep a straight face.

Here are the details:

            Mutiny at the Bank of Japan (medium):

Bottom line: yesterday witnessed lousy economic data from the US and around the world.  However, any unease for investors was apparently assuaged by the results of the latest bank stress test (yawn) and the ECB’s promise to pick up where the Fed left off supplying liquidity to the hedge funds, speculators and carry traders (just what the doctor ordered).  The latter could very well provide the octane for more momentum to upside in stocks.  But they are going to have to go there without me.

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.
           
            Thinking about ‘bubbles (medium):

            Screw it, I’m all in (short):

            Anything new is the current highs? (medium):

      Thoughts on Investing from Pragmatic Capitalist

There’s a general disdain for rising market prices.  Why?  Because, the odds are, you aren’t participating in all of the gains.  There’s some sad math behind the reality of the stock market and that math says we all can’t benefit from the market’s rises.  You see, all securities issued are always held by SOMEONE.  The market, in the aggregate, is the market.  And we don’t all have all of our chips in the stock market, because, by definition, we can’t.  When I buy stocks someone else sells their stocks.  Again, all securities issued are always held by someone.  And the fact that someone owns stocks means someone else doesn’t own stocks.
So, when stock prices go up there’s an inevitable sense of opportunity loss (by someone).  You feel like you’re missing out on gains you could have potentially been a part of.  You feel like you’re falling behind.  This is a perfectly common reaction, but it’s also totally unreasonable and almost certainly misguided.  Why?  Because we don’t really have to be involved in all of the markets gains all of the time.  What we really need our money to do for us is outperform potential purchasing power loss and protect us from the risk of permanent loss in a manner that is consistent with our risk tolerances and portfolio needs.  That is, we need to create SAVINGS portfolios that create a sense of certainty and protection in what is really a savings account (not an investment account).
I started Orcam in large part because I want to help people better understand the role of the portfolio in their lives.  It’s not there so you can get involved in the aforementioned herding race that many engage in on the way to inevitably underperforming the stock market (as most do after taxes and fees).  Your SAVINGS portfolio is there as a residual income from your primary source of income.  You get “rich” by maximizing this primary stream of income and then putting it to good use by protecting it and understanding how to construct portfolios that help you avoid falling into the pitfalls that are generated by the fear of opportunity costs.
It’s totally natural to hate rising stock prices.  After all, it’s a certain sign that someone is benefiting from something that you’re not.  But the worst response to this opportunity cost is to believe that you need to position yourself in a manner that will almost certainly result in excessive risk on the way to chasing returns.  That’s just classic herding mentality that will likely result in excessive risk and uncertainty in what is ultimately your savings portfolio.  So yes, it’s okay to hate rising stock prices.  But it’s not okay for you to respond to rising stock prices irrationally.
      News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            January factory orders fell 0.2% versus expectations of a rise of 0.2%.

                February nonfarm payrolls rose 295,000 well above consensus of 230,000; the unemployment rate was 5.5% versus estimates of 5.6%.

            The January US trade deficit was $41.8 billion, in line.

   Other

            Liquidity evaporates in China (medium and a must read):

            David Stockman gives a hat tip to the Fed (medium and also a must read):

Politics

  Domestic

Hillary sacked an ambassador who opted for private email (short):

  International War Against Radical Islam







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