Tuesday, March 17, 2015

The Morning Call---Stocks soar on lousy data

The Morning Call


The Market

The indices (DJIA 17977, S&P 2081) had a great day, ending within uptrends across all timeframes: short term (16783-19554, 1956-2937), intermediate term (16858-22009, 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---a close above this boundary today will confirm the break. 

            Volume fell; breadth improved.  The VIX fell slightly (2%) unusual for a strong up day, 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. 
            Update on investor sentiment (short):

            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, remaining within its short and intermediate term trading ranges, a very short term downtrend and below its 50 day moving average. 

Bottom line:  if the Averages confirm the break of that very short term downtrend, then I would expect 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.


            We are off to another week of lousy US economic data.  Yesterday, the March New York Fed manufacturing index was below expectations and February industrial production and capacity utilization were disappointing.  If the trend remains negative for the eighth week, I will likely lower our forecast.

            Overseas, Chinese GDP growth rate was the lowest in 20 years. Meanwhile, the Chinese shadow banking industry is making fewer loans and more Chinese stock purchases (medium and a must read):

            That Austrian bank that collapsed two weeks ago claimed its first victim (a German bank).   And that is not all:

Latest comments by Germany on Greek bail proposal (short):

            Italian bad loans at record levels (short):

So no help for us from the international community.

            ***overnight, the Bank of Japan renewed its vows with QE and the German index of investor confidence rose but considerably less than anticipated.

            Meanwhile, all eyes are on the FOMC meeting this week.  While the media portray investors as braced for the removal of ‘patience’ from the Fed statement (meaning a rate hike is nearing), yesterday’s Titan III shot was powered at least partially by the poor industrial production number (hoping/praying that a rate hike isn’t nearing).  This whole discussion and Market volatility surrounding the ‘patience’ versus ‘no patience’ issue is emblematic to me and of just how distorted investor perceptions have become.  That the Market could bounce or decline hundreds of points base on whether the Fed raises its bench mark rate from near zero to a tiny fraction above near zero is nuts. 

            In the grand scheme of things, the probability of a move or lack thereof in interest rates of magnitude being discussed has never produced a significant impact on the economy.  Now if the Fed let it be known that it was the first of many and the subsequent hikes would be much greater than the first, I can see how investors could be skittish.  However, we know Yellen et al aren’t about to do that. 

That leaves the Fed policy impact on stock prices as the most likely source of investor concern.  And it should be.  Indeed, what investors should really be worried about is the fact that all other investors are focusing on a small group of ivory tower intellects that have screwed up monetary policy (and the economy) consistently and ignoring the economic data at a time when it is turning to s**t.

Bottom line: volatility/schizophrenia have their grip on the Market with every data point being weighed on its probable effect on monetary policy.  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.

            The latest from Doug Kass (medium):

            The latest from John Hussman (medium):

            Dollar’s impact on the S&P from Goldman Sachs (short):

      Company Highlights

Proctor and Gamble is a major household products and cosmetics company marketing products in over 180 countries with four divisions:

(1) Beauty, Hair and Personal Care products: Old Spice, Clairol Nice ‘n Easy, Pantene, Head and Shoulders, Wella, Pert, Ivory, Safeguard, Zest, Secret, Right Guard, Whisper,

(2) Fabric Care, Home Care and Batteries: Tide, Gain, Dash, Ariel, Downy, Frebreeze, Dial, Joy, Cascade, Swiffer, Mr. Clean, Dawn, Duracell, Iams, Eukanuba,

(3) Grooming: Gillette, Mach 3, Venus, Braun, Duracell,

(4) Family, Feminine and Baby Care: Cover Girl, Max Factor, Olay, Pampers, Luvs, Charmin, Bounty, Tampax, Always and Puffs.

(5) Health Care: Crest, Oral-B, Actonel, Prilosec OTC, Vicks, Scope, Pepto-Bismol, Therm-Care, Metamucil, NyQuil and Oral B

The company has grown earnings and dividends 7-11% for the last 10 years on a 15-17% return on equity.  Management’s expects to continue this record because of:

(1) its aggressive expansion of its portfolio of brands through both acquisitions and new product development,

(2) its powerful marketing effort,

(3) expand rapidly into faster growing developing countries,

(4) emphasize a faster growing, higher margin product mix [e.g. health and beauty care products] and divest lower margin/non-core operations,

(5) generates strong cash flow to not only finance the strategy described above but to also conduct a huge stock buyback program as well as raise its dividend every year.


(1) subject to commodity cost inflation and currency fluctuations,

(2) it is in an intensely competitive industry,

(3) sluggish global growth.

            PG is rated A++ by Value Line, has a 22% debt to equity ratio and its stock yields 2.9%.

Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                 Yield      Growth Rate     Ratio       Since 2005

PG             2.9%          7%                 53%             10
Ind Ave      2.5            11                   46                NA 

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

PG            22%           18%            3                 15%          A++
Ind Ave     49              17              NA               9              NA


            Note: PG stock made great progress off its March 2009 low, quickly surpassing the downtrend off its September 2008 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 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 full position in PG.  The upper boundary of its Buy Value Range is $87; the stock is currently on the Dividend Growth Portfolio.  The lower boundary of its Sell Half Range is $124.   


      Investing for Survival

            Eleven ideas on better investing (medium):

      News on Stocks in Our Portfolios
o    FactSet Research Systems (NYSE:FDS): FQ2 EPS of $1.52 beats by $0.12.
o    Revenue of $247.79M (+9.2% Y/Y) beats by $1.11M.
·         ParkerVision (NASDAQ:PRKR) ended Q4 with $11.2M in cash and available-for-sale securities, down from $17M at the end of Q3. Towards the end of Q4, the company struck with litigation investment firm 1624 PV to obtain up to $7M in legal funding; $1.3M in warrant proceeds were received from 1624 during the quarter.
·         As expected, no revenue was recorded in Q4. GAAP operating expenses fell to $5.6M from Q3's $6.4M and Q4 2013's $7.9M - R&D spend totaled $2M, G&A $2.8M, and sales/marketing $694K.
·         ParkerVision's issue patent portfolio grew 11% in 2014 to 267 - 179 U.S., 88 foreign. The company has 45 pending patent applications.
·         A Markman hearing for Parkervision's suits against Qualcomm, HTC, and Samsung is set to occur this August, and a trial in August 2016.

   This Week’s Data

            February industrial production was up 0.1% versus estimates of up 0.3%; capacity utilization was 78.9 versus forecasts of 79.5.

                The National Association of Home Builders sentiment index came in at 53 versus consensus of 56.

            February housing starts fell 15.7% versus expectations of a 3.0% decline.


            Update on big four economic indicators (medium):

            Australia joins Chinese regional bank (medium):




            The latest deal between the IMF and Ukraine (medium to long):

            Putin says that he was ready to use nukes to secure Crimea (medium):

                And turns the heat up even further (medium):

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