Thursday, March 5, 2015

The Morning Call---A pause ahead of ECB meeting, release of bank stress test and nonfarm payrolls

The Morning Call


The Market

The indices (DJIA 18096, S&P 2098) underwent more consolidation yesterday but ended within uptrends across all timeframes: short term (16708-19479, 1946-2927), intermediate term (16770-21921, 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 again finished below the upper boundary of its former long term uptrend (2112), showing just how hard it is to break a long term trend.  Meanwhile the Dow remains well below its comparable boundary.

            Volume declined; breadth deteriorated.  The VIX rose, closing within its short term trading range and its intermediate term downtrend, below its 50 day moving average and below the upper boundary of a developing very short term downtrend.  This indicator is not acting like something negative is coming stocks’ way.
            The long Treasury was up, but not enough to recapture the lower boundary of its short term uptrend.  Therefore, the short term trend is resetting to a trading range.  It remains 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.  If it remains below this support level through the close on Friday, 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 extended what, at the moment, appears to be a normal consolidation characterized by an absence of buyers---likely a function of a ‘wait and see’ attitude ahead of today and tomorrow, both of which are expected to be big news event days.  I will be watching how investors receive that news for signals on future price direction.

 Bonds reset their short term trend to a trading range and are near resetting once again to down.  If that occurs, 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.

            So we finally got a day in which the economic stats were half way decent: weekly mortgage applications were up though the more important purchase applications were down; the ADP private payroll report showed job growth below forecast, but the January number was revised up substantially; both the February Markit services PMI and the ISM nonmanufacturing indices were better than anticipated.  Finally, the latest Beige Book report was generally upbeat but sounded way off kilter with the recent dataflow.  Nonetheless, let’s hope that we see more of this.  Unfortunately, a positive data day is now the outlier.

            Overseas, the stats were just the opposite: the Reserve Bank of India dropped interest rates of the second time in two months, fourth quarter Australian GDP was up less than expected, the February EU Markit composite PMI was weaker than its initial reading, the UK services PMI was below estimates, the Japanese services PMI was awful.  The one upbeat note was the Chinese services PMI which was slightly better than forecast.
            In summary though, I don’t think that a plus day in what may be the sixth week of poor US numbers is nearly as positive as a lousy day in a three week period of mixed reports is negative.

***overnight, China lowered its 2015 GDP growth estimate, the ECB left interest rates unchanged, German factory orders were down big and EU retail sales were up less than forecast.

Bottom line: yesterday was quiet ahead of today’s ECB meeting and the results of the US bank stress test and tomorrow’s nonfarm payroll number---any of which could impact near term Market direction.  Longer term though, stocks are extraordinarily overvalued in the face of poor US economic data, flattish (at best) global economic activity and a spike in interest rates that threatens to go even higher---none of which historically have been great for corporate profits or P/E’s.

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 (short):

            Mark Cuban on the Market (medium):

      Company Highlights

Chevron is the world’s fourth largest oil company based on proven reserves.  The company has grown its profits at a 20%+ annual rate over the last 10 years while earning an 11-20% return on equity.  The dividend growth rate has not kept pace with profits; but the gap in the rate of increase has been closing.  CVX prospects are bright based on:

 (1) one of the most promising development project pipeline in the industry has a number of very promising exploration projects that will grow its reserves.  They include deep water production in the Gulf of Mexico as well as fields in western Australia, Angola, Nigeria and the Gulf of Thailand.

(2) increasing focus on alternative energy sources.


(1)    exposure to fluctuating oil and gas prices,

(2)    its extensive international operations subjects it to currency fluctuations and political risk,

(3)    its large capital expenditure budget will increase its balance sheet leverage,

(4)    excess capacity is putting pressure on refining margins.

Chevron is rated A++ by Value Line, has a low 13% debt to equity ratio and its stock yields approximately 3.6%.

   Statistical Summary

                 Stock      Dividend         Payout      # Increases 
                  Yield      Growth Rate     Ratio        Since 2005

CVX           3.6%          7%               40%              10
Ind Ave       3.0            10                 35                NA

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

CVX           13%          13%           3                   10%            A++
Ind Ave      23              12             NA                 6              NA


            Note: CVX stock made great progress off its October 2008 low, quickly surpassing the downtrend off its May 2008 high (straight red line) and the November 2008 trading high (green line).  However, it has stumbled of late due to lower oil prices.  Long term, the stock is in a trading range (blue lines).  Intermediate term, it is in a trading range (purple lines).  Short term, it is in a downtrend (brown line).  The wiggly red line is the 50 day moving average.  The Dividend Growth Portfolio owns a 90% position in CVX and the stock is on the Dividend Growth Buy List.  However, if intermediate term trend resets from a trading range to a downtrend (which is close), the stock will be Removed from the Buy List; but the holding will be retained.  The upper boundary of its Buy Value Range is $111; the lower boundary of its Sell Half Range is $180.


      Investing for Survival

            Ten steps to financial independence (medium):

      News on Stocks in Our Portfolios

   This Week’s Data

            The February Markit services PMI came in at 57.1 versus expectations of 56.8.

            The ISM nonmanufacturing index was reported at 56.9 versus estimates of 56.5.

            The Fed issued its latest Beige Book Report which remained upbeat in tone.  Key observations: economic activity up in all regions, job gains in a broad range of sectors, construction spending up.

            Weekly jobless claims rose 7,000 versus forecasts of a 13,000 decline.

            Fourth quarter nonfarm productivity dropped 2.3% in line; however, the third quarter reading was revised from -1.8% to +3.3%.  Unit labor costs were up 4.0% versus consensus of +3.3%.


            How to end the world’s addiction to debt (medium):

            The dollar as an indicator of global economic activity (medium):

            More on dynamic scoring (short):

            For all those ‘lower oil prices are an unmitigated positive’ adherents (medium):



On the funding of the Department of Homeland Security (medium):


            NATO sanctions against Russia not having desired effect (medium):

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