Tuesday, March 3, 2015

The Morning Call & Subscriber Alert--Goldman declares economy in contraction

The Morning Call


The Market

The indices (DJIA 18288, S&P 2117) had a good day, ending within uptrends across all timeframes: short term (16683-19454, 1943-2924), intermediate term (16745-21896, 1764-2478) and long term (5369-18860, 797-???).  They both closed above their 50 day moving averages and their mid-December highs.  The S&P finished back above the former upper boundary of its long term uptrend (2112); but is still hugging that boundary.  Meanwhile the Dow remains well below its comparable boundary.

            Volume declined; breadth improved but not as much as the pin action would suggest.  The VIX fell, closing within its short term trading range, its intermediate term downtrend and below its 50 day moving average. 
            The long Treasury got whacked, driving it back below its 50 day moving average and the lower boundary of its short term uptrend.  A close below that boundary on Wednesday will confirm that break.  However, it finished within its intermediate and long term uptrends and above its 50 day moving average. 

                Japan starting to realize the downside to QE (medium):

            GLD was down, ending very close to the lower boundary of its short term uptrend, within its intermediate term trading range, a very short term downtrend and below its 50 day moving average. 

Bottom line:  the indices had another good day, though volume fell and breadth wasn’t that supportive.  Plus the Market internals continue to signal caution.  But price is truth and the truth is prices are moving higher.

 Both bonds and gold took it in the snoot and seem likely to test recent lows.  A failure by either to hold those support levels will likely prompt action by our Portfolios.
            March performance following a down January/up February combo (short):


            US economic data took up where it left off last week: January personal income and spending were both lower than expectations with spending showing negative growth (for the second month is a row); the February ISM manufacturing index was slightly less than anticipated and January construction spending was well below forecast and like personal spending was negative.  There was one positive indicator---the February Markit manufacturing PMI.  The personal spending number is particularly disappointing; the economy will have a tough time showing growth when consumers are cutting their spending.

            Goldman affirms that US economy is in contraction (medium and clearly a must read):

            Overseas, the news was more mixed: EU consumer prices fell 0.3%; unemployment was lower but so was the PMI manufacturing index. On the other hand, the UK PMI manufacturing index improved.   As I have been noting, mixed international data is a positive in that the biggest risk to our outlook is a slowing global economy.  While ‘mixed’ doesn’t necessarily mean that a slide to recession has been halted, it clearly raises the question.  And at this point, I will count that as a plus.

            ***overnight, the Bank of Australia held interest rates at current levels; German retail sales were much stronger than expected.

            The Greek/EU financial spat continued to fade from the headlines; though there remains a negative undercurrent that could push the potential of a Greek default back to center stage.

The risk of the Greeks overplaying their hand (medium):

            Fears of a Greek default are rising again (medium):

            Goldman on why Greece can’t go back to the drachma (medium):

            Is Portugal any better off than Greece? (medium):

Bottom line: the US economic numbers are not improving and no one seems to give a damn.  Either that or everyone is assuming that as long as the numbers are poor, the Fed will never raise interest rates.  Whatever the reason, stocks are getting ever more over valued while the prospects for one key component of that valuation (corporate earnings) are getting worse and the other (P/E) is near an historic high.  That doesn’t mean that prices can’t go higher; but it does mean that the risk of mean reversion will advance with them.

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 Bill Gross (medium):

            More on valuation (medium):

       Subscriber Alert
            The stock price of Medtronic (MDT) has traded into its Sell Half Range.  Accordingly, one half of its positions in the Dividend Growth and Aggressive Growth Portfolios will be Sold at the Market open this morning.

      Company Highlights

General Dynamics is a leading defense contractor supplying products and technology to marine systems, combat systems, information systems and aerospace (basically submarines, tanks, aircraft and command and control systems). The company has grown earnings and dividends 11% and 13% respectively over the last 10 years and has earned a consistently high 17-18% return on equity.   GD should be able to continue to match that record because of:

(1) its broad diversified portfolio of products and service,

(2) growing backlog of orders,

            (3) improving sales at Gulfstream,

(4) an aggressive cost reduction program,

(5) share repurchases.


(1)    a large percentage of its sales are dependent on government spending both in the US and Europe,

(2)    emergence of China as a premier defense contractor.

GD has a debt to equity ratio of approximately 21%, is rated A++ by Value Line and its stock provides a yield of 1.7%.

    Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio        Since 2005

GD            1.7%         4%                30%              10
Ind Ave     1.6            10*                25               NA 

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

GD            21%           21%           1                 9%           A++
Ind Ave     38               17            NA               9             NA

*many companies in GD’s industry don’t pay a dividend


            Note: GD 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).  It is in uptrends across all timeframes: long term (blue lines), intermediate term (purple lines) and short term (brown line).  The wiggly red line is the 50 day moving average.  The Dividend Growth and Aggressive Growth Portfolios own full positions in GD.  The upper boundary of its Buy Value Range is $64; the lower boundary of its Sell Half Range is $152.  


      Investing for Survival

            Asset allocation intangibles (medium):

      News on Stocks in Our Portfolios

o    Bank of Nova Scotia (NYSE:BNS): FQ1 EPS of C$1.36 misses by C$0.04.
o    Revenue of C$5.86B (+3.9% Y/Y) misses by C$150M.


   This Week’s Data

            The February PMI manufacturing index was reported at 55.1 versus expectations of 54.0.

            The February ISM manufacturing index came in at 52.9 versus estimates of 53.0.

            January construction spending declined 1.1% versus forecasts of +0.3%.


            The next subprime lending crisis (medium):

            The problems with ‘dynamic scoring’ (medium):

                        The world in front running the ECB QE (short):



            More saber rattling in Ukraine (medium):

            US counters with ‘boots on the ground’ (medium):

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