Thursday, March 19, 2015

The Morning Call--The Oracle of Delphi

The Morning Call


The Market

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):


            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.


(1)    it is in a highly competitive industry,

(2) the risk of a shrinking ‘soft dollar’ [means of payment] pool.

FDS is rated A+ by Value Line, has no debt, and its stock yields 1.5%.

   Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio        Since 2005

FDS           1.1%           9%               29              10
Ind Ave      1.7*            10                   38              NA 

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

FDS            0%             41%            0                 23%          A+
Ind Ave      53               19              NA               16            NA

*many companies in FDS industry do not pay a dividend

            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.


     Investing for Survival

            Nine unexpected things Jesse Livermore said (medium):

      News on Stocks in Our Portfolios

   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.


            The problems with a strong dollar (short):

            Counterpoint (short):

            Household net worth hits new high (short):



  International War Against Radical Islam

            Iran and Hezbollah disappear from ‘terrorist’ list (short):

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