The Morning Call
3/19/15
The Market
Technical
Yesterday the
indices (DJIA 17849, S&P 2074) spiked on dovish language out of the Fed, ending
within uptrends across all timeframes: short term (16795-19566, 1960-2941),
intermediate term (16870-22021, 1775-2924) and long term (5369-18860, 797-2116)
and above their 50 day moving averages.
Volume
increased; breadth improved. The VIX fell
11%, closing within its short term trading range and its intermediate term
downtrend, below its 50 day moving average and near the lower boundary of a
developing pennant formation.
The
long Treasury moved up 2%, finishing within its short term trading range, above
its 50 day moving average and within its intermediate and long term
uptrends.
GLD
bounced off the lower boundary of its short and intermediate term trading
ranges but remained within a very short term downtrend and below its 50 day
moving average.
Bottom
line: the Averages clearly got a shot of
adrenaline from the Fed for another possible run at the upper boundaries of
their long term uptrends. While that
seems likely to occur, I continue to believe that those boundaries will offer
too much resistance for any meaningful break to the upside. In addition, I think that the combination of
poor fundamentals and technical internals only add to the strength of this
resistance.
Following yesterday’s pin action, TLT chart
looks a lot sounder than before. In
addition, knowing that the Fed is not likely to raise rates anytime soon
provides a positive fundamental back drop.
The bounce in GLD
notwithstanding, it has multiple resistance levels to overcome before it shows
any indication that it can develop an uptrend.
Stock
performance in the second half of March (short):
Fundamental
Headlines
There
was only one minor US datapoint yesterday: weekly mortgage and purchase
applications were both down. Negative,
yes; both nothing to get excited about other than it being consistent with the
general trend of poor stats.
Two
upbeat international numbers: February Japanese exports were stronger than
expected and UK unemployment is at the lowest level in six years. However, week to date the dataflow remains
negative.
In
another matter, Greece seems to be inching closer to an exit as protesters from
throughout the EU demonstrate against austerity (see yesterday’s link).
Negotiations
with Greece close to a breakdown (medium):
ECB
modelling Greek exit from EU (short):
Greek
government now raiding utilities for cash (short):
Of
course, the big news of the day was the release of the Fed statement and the
Yellen press conference following the FOMC meeting---and I use the word ‘news’
loosely. After reading the statement and
listening to Yellen, I have no idea what Fed policy is. Indeed, the Fed should be awarded the Oracle
of Delphi Gold Metal for baffling messages.
Sarcasm aside,
the FOMC (1) left interest rates unchanged, (2) removed the word ‘patient’ from
its statement, (3) but raised the bar for a rate hike, citing a slower rate of growth
in the economy and the need for further improvement in employment [even though it
has moved prior goals post several times] and a stronger upward bias in
inflation [something that all Americans just can’t get enough of]. In short, it eliminated a dovish word and
then doubled down on being dovish---which, at least in my mind, proves beyond
shadow of a doubt that the Fed has no idea what to do and that this time around
the Fed will again screw up the transition from easy to tight money.
Actually, the
verb in the above statement should have been ‘has’ rather than ‘will’ since we
are long passed the point of a rate hike.
Meaning that the economy is slowing and the Fed shouldn’t raise
rates. To its credit, the FOMC
statement/Yellen comments seem to reflect that it has realized that. But now, it is stuck. It has almost nothing left in its policy
arsenal to combat a stagnating economy.
So its policy has reverted to doing the green apple two step in order to
hide the fact that it has no clue how to get out of the mess it has created
except to sit back and pray that it gets lucky.
Here is a recap
of the individual FOMC members’ forecasts for 2015-2017 (short):
That said as you
know, my thesis has been that QE has done little to advance the economy, so its
absence will do little to hurt it. I
continue to stand by that. However, I will
concede that the impact of no rate rise will be ‘less bad’ than a rate increase
when the economy is slowing.
So what happens
now? Well for one, the US is now back in
the currency depreciation race to the bottom.
Who knows how the EU, Japan or China will respond; but it is not likely to
be less QE. Unfortunately, it will
probably mean more competition for shrinking demand. On the other hand, it is not likely to be
stimulative to the economy. So the world
gets more paper, more speculation and higher asset prices and a declining rate
of real economic demand---not a great combo.
As far as the
Market is concerned, when yesterday’s hangover wears off, some genius is going
to realize that a slowing economy means lower earnings, as in the E part of P/E---which
has never been good for stock prices.
Goldman’s take (short):
The use of derivatives by
long only bond mutual funds and ETF’s and how that might impact monetary policy
(medium and today’s must read):
As you know, I have no
lost love for how the Fed manages monetary policy; but as this author points
out, it also performs a valuable function in the economy. Now if it would just stick to that and quit
dicking around with trying to influence the economy, we would all be much
better off. (short):
Bottom line: the
Fed made the least bad choice, given the circumstances, i.e. it should have
raised rates long ago and now it can’t. I
have no idea how much longer investors are going to kid themselves that the
economy is fine, that the global currency devaluation race will have no
consequences and that the Market will be unscathed when all that QE that is now
tied up in overvalued assets or derivatives thereof unwinds itself.
However, I do
believe strongly that valuations are extremely stretched, 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.
Whenever those
two contradictory elements are resolved, the Markets are likely in for some
pain.
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.
Some
things never change (short):
Company Highlights
FactSet Research
(FDS ) is a global supplier of
financial and economic data to the global investment community through 1600
databases with information along with powerful analytics on tens of thousands
of companies, multiple stock markets and governments. The company earns a 25%+
return on equity and has grown earnings and dividends 17-25% over the last ten
years. FDS should continue its
above average performance as a result of:
(1) its
portfolio analytics system is the industry leader; because of its extensive
product development and strong client relationships, FDS
has not only created a high barrier to entry but is also increasing its market
share,
(2) its ability
to sell additional products to existing customers such as coverage of corporate
bonds and fixed income derivative securities as well as products for investment
banking, plan sponsors and corporate finance,
(3) acquisitions
(4) stock buybacks.
Negatives:
(1) it is in a highly competitive industry,
(2) the risk of
a shrinking ‘soft dollar’ [means of payment] pool.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2005
Ind Ave 1.7* 10 38 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin
Rating
Ind Ave 53 19 NA 16 NA
*many companies in FDS industry do not pay a dividend
Chart
Note:
FDS stock made good initial progress off its November 2008 low, surpassing the
downtrend off its October 2007 high (straight red line) and the November 2008
trading high (green line). Long term the
stock is in an uptrend (blue lines).
Intermediate term, it is in an uptrend (purple lines). Short term, it is an uptrend (brown
line). The wiggly red line is the 50 day
moving average. The Aggressive Growth
Portfolio owns an 85% position in FDS.
The upper boundary of its Buy Value Range is $94; the lower boundary of
its Sell Half Range is $200.
3/15
Investing for Survival
Nine
unexpected things Jesse Livermore said (medium):
News on Stocks in Our Portfolios
Economics
This Week’s Data
Weekly
jobless claims rose 1,000 versus expectations of a 4,000 increase.
The
US fourth quarter trade deficit came in at $113.5 billion versus estimates of
$105.0 billion.
Other
The
problems with a strong dollar (short):
Counterpoint
(short):
Household
net worth hits new high (short):
Politics
Domestic
International War Against Radical Islam
Iran
and Hezbollah disappear from ‘terrorist’ list (short):
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