The indices (DJIA 18035, S&P 2106) were off yesterday---despite some lousy economic numbers which usually have investors all giddy about more easy money. The S&P remained above its 100 day moving average but traded back below its prior high for the second time---keeping the trend to lower highs intact. The Dow continued to trade above its 100 day moving average and below its prior high.
Longer term, the indices remained well within their uptrends across all timeframes: short term (17066-19863, 1999-2980), intermediate term (17193-22319, 1805-2578 and long term (5369-18873, 797-2129).
Volume was down; breadth deteriorated. The VIX jumped 8%, finishing below its 100 day moving average and within short and intermediate term trading ranges. It remains a short distance away from the lower boundaries of both its short and long term trading ranges. The latter should provide strong support. For that reason, I continue to think that the VIX remains a reasonably priced hedge.
The value of margin debt as a stock market indicator (short):
Traderfeed looks at yesterday’s pin action (short):
Stock Trader’s Almanac on sentiment (short):
The long Treasury got whacked hard again---like stocks, somewhat surprising in the face of poor economic data and a noncommittal Fed statement. It ended below its 100 day moving average, the lower boundary of the very short term trading range---negating that trend and right on the lower boundary of its short term trading range.
It is now only a point and a half from the lower boundary of its intermediate term uptrend. If that trend is broken, aside from doing some serious technical damage to the TLT chart, it also opens questions regarding the fundamentals behind such a move.
At first blush, it appears that the poor GDP number (suggesting the US economy may not be the best economy in a sloppy world) pushed the dollar and US Treasuries down. Of course, if the US economy is slipping, rates should decline especially if the Fed remains easy.
Another explanation is that the bond guys think that the Fed may tighten sooner than later. That doesn’t fit yesterday’s FOMC narrative but does reflect the opinion voiced in the Fed mouthpiece Hilsenrath’s article (see below).
Or it could mean that investors have had enough of QE, they see the end game and don’t like it, and are no longer willing to hold low yielding sovereign debt.
Or it could mean that fears of inflation are being rekindled; although gold’s performance doesn’t support that notion. On the other hand, oil does.
Or more sellers than buyers (short):
Two points here: (1) the TLT chart has not yet broken down; so all of the above is just speculation, (2) but IF the interest rate charts turn negative, it may well be a signal that something is changing in the economic outlook. I am just trying to anticipate what force may be accounting for this. At the moment, I have no clue what it is (if indeed there is anything); but if I am paying attention, then I hopefully catch it early on.
GLD returned to its old ways (down), closing back below its 100 day moving average and continuing to build a head and shoulders formation.
Bottom line: the bull/bear battle continues around the trend line forming by a string of lower highs. While yesterday favored the bears, I count that for little. What is needed is strong follow through in either direction before we can make any judgment about short term price movement. As you know, I believe that the short term risk/reward (as defined by the upper boundaries of the Averages long term uptrend and the lower boundaries of their short term uptrends) suggests lower prices. Longer term, the momentum remains to the upside.
The TLT chart is getting sloppy and if it continues, suggests the economy is not weakening and/or the Fed is about to tighten and/or the bond guys have had enough of the Fed’s QE routine.
No relief for the weary. Yesterday, mortgage applications were reported down, purchase applications flat; but the real downer was first quarter GDP which grew considerably less than anticipated. This was hardly news to me; but investors didn’t seem to care for the number which is surprising given their predilection for indications of more Fed easing. In any case, it reaffirms our forecast of an economy growing even slower than our original outlook with the danger of slipping into recession.
GDP per capita (medium):
In addition as everyone in the investing universe knows, yesterday ended the latest FOMC meeting. In the trailing statement, the Fed (1) removed all calendar references regarding the decision to raise interest rates, (2) stated that economic growth ‘slowed’ versus ‘moderated’ in its prior statement, and (3) attributed that to ‘transitory’ factors [weather, the dollar]. In short, it appears to have no idea when, as or if it will raise rates. And if I am correct about a permanent versus ‘transitory’ slowdown, it most likely won’t raise rates at all.
On the other hand, Fed whisperer Hilsenrath says the Fed isn’t worried and rate hikes are on the way (medium):
Let me repeat a couple of my opinions: (1) the economy is slowing as a direct result of the effects of QE, (2) hence, ending QE [easy money]/raising rates will likely have little impact on the economy, (3) however, because QE’s primary result has been to drive asset prices higher, then any reversal would have a greater consequence on asset prices than the economy.
So you might ask, if QE doesn’t end, will asset prices continue to rise? Here are a couple of reasons why that might not happen: (1) in my opinion is that unlike the government, corporations and individuals have finite capacity to borrow whether set internally by their own discipline or externally by their creditors. So matter no how cheap or easy money is or continues to be, when those corporations/individuals reach their finite capacity, there will still be no corporate or individual borrowers---which is another way of saying that the demand created by spending the borrowed money falls into the toilet, the r word. In short, assets may likely continue to rise until investors realize that corporations and individuals have maxed out the ability to borrow against future income; demand then craters and along with it, the economy [read corporate profits]. I have a problem believing investors will continue to push stock prices higher in the face of recession and declining corporate earnings.
(2) another angle of this answer is that by keeping rates so low and the supply of money high, the Fed has created conditions where anyone can borrow money (anecdotally, I had a conversation this week with an acquaintance with a so so personal balance sheet who had just financed a B++ apartment house with no recourse) and in doing so has minimized the risk/price of failure. On a global scale, the world’s central banks have done the same thing with sovereign debt---there are huge chunks of which investors have to pay the sovereign to take their money. In other words, investors are saying that there is less risk holding a sovereign debt than cash. Bear in mind, a portion of Spain’s debt is priced at negative interest rates. Again, I have a problem believing that investors will price risk at zero for the rest of history.
I have no clue how all this gets resolved. I do know that risk has been mispriced but it has not gone away.
Oversea, the news was no better.
(1) the central banks of Thailand and Sweden made additional monetary easing moves [see above],
***overnight, the Bank of Japan voted to maintain QE but failed to meet expectations of an even greater commitment; Russia’s central bank lowered key interest rates.
(2) it was reported that lending by EU banks to companies and households rose for the first time in three years [see above],
(3) today Greece will present a [new and improved] draft for fiscal reforms mandated by the troika.
The latest from Greece (medium):
Coming defaults in Greece (medium):
***overnight, Moody’s cut Greece’s credit rating, again; Greece scrambled to make pension payment; and today, the government is meeting with EU officials in hopes of having a preliminary deal by May 3rd.
***overnight, April inflation in the EU was flat versus the March report of -0.1%;
Bottom line: the economic news was not great (again), but Markets failed to get jiggy with it. A slowing or declining economy (ies) didn’t conjure QE sugarplums in investors’ heads. Meanwhile, the global central banks continue merrily down the path of greater monetary ease, creating risk then mispricing it. I have to wonder is yesterday’s pin action was one off or if investors are starting to doubt the notion of QEInfinity. We will know soon enough.
The Treasury market pin action (discussed above) may be an early warning or it may be nothing. I will be watching just in case. In the meantime, I feel very comfortable with the cash in our Portfolios.
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 3M Company (formerly Minnesota Mining and Manufacturing) is a broadly diversified technology and manufacturer of great brands in industrial, health care, consumer, safety and graphics and electronics and energy (50,000 products sold in over 70 countries). The company earns over a 20%+ return of equity and has generated profit growth of 7-10% over the past 10 years. While dividends have not kept pace as the company reinvested cash flow in new businesses, the dividend payout ratio should increase in the next several years. The pillars of its business plan are:
(1) invest in strengthening and streamlining its supply chain,
(2) increase its brand building marketing focus on high growth overseas markets, using acquired local or regional brands where it makes sense,
(3) raise its investment in R&D to advance the 3M brands,
(1) its large international business exposes it to currency fluctuation risks,
(2) its businesses are highly competitive,
(3) success depends on new product acceptance.
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2005
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
*the Diversified Company Industry operates in so many varied products and services, comparable numbers would be of little analytical value.
Note: 3M stock made great progress off its March 2009 low, quickly surpassing the downtrend off its October 2007 high (straight red line) and the November 2008 trading high (green line). MMM is in uptrends long term (blue lines) and intermediate term (purple lines). The wiggly red line is the 100 day moving average. The Dividend Growth and High Yield Portfolios own full positions in 3M. The upper boundary of its Buy Value Range is $88; the lower boundary of its Sell Half Range is $228.
Investing for Survival
You may need less money in retirement than you think (medium):
News on Stocks in Our Portfolios
This Week’s Data
Weekly jobless claims fell 34,000 versus expectations of an 8,000 decline.
March personal income was flat versus estimates of a rise of 0.2%; personal spending was up 0.4% versus forecasts of up 0.5%.
Quote of the day (short):
International War Against Radical Islam