Tuesday, April 7, 2015

The Morning Call---Bad news is still good news

The Morning Call


The Market

The indices (DJIA 17880, S&P 2080) closed higher yesterday, making a dramatic intraday reversal.  The Dow closed above the lower boundary of its very short term uptrend, while the S&P did not.  Both finished above their 100 day moving averages.  Longer term, the indices remained well within their uptrends across all timeframes: short term (16902-19679, 1976-2951), intermediate term (17003-22139, 1789-2551 and long term (5369-18860, 797-2122).  

Volume rose; breadth improved.  The VIX was up fractionally, ending within its short term trading range, its intermediate term downtrend, its long term trading range, above its 50 day moving average and within a developing pennant formation.  I continue to think that it remains a reasonably priced hedge. 

The long Treasury was down again.  It closed within its short term trading range, intermediate and long term uptrends and above its 50 day and 100 moving averages.  While TLT seems to have stabilized, it clearly has not reversed back to the upside.

GLD’s price jumped, but still finished within its short and intermediate term trading ranges, its long term downtrend and above its 50 day moving average.  GLD is acting better of late, but still has a number of tough resistance levels yet to overcome before we can assume that the worst is over.

Bottom line: short term, the Averages are trying to move to the upside; but they have not surpassed their previous high.  However, if they can do that (which implies that the S&P breaks above its 100 day moving average), then we may see another assault on the upper boundaries of their long term uptrends.


            The US economic stats were mixed again yesterday: the March Markit Services PMI was better than expected while the ISM nonmanufacturing index was worse---very similar to the early data flow last week.  There was no numbers on the international economy.

            QE devotees were in control of the airwaves and print media yesterday as Friday’s lousy nonfarm payrolls stats inspired a bad (economic) news is good (Fed easing) news response, reinforced by the weekend report from Goldman suggesting that the Fed hold off on any rate increases (see the last Closing Bell for the link to the report) along with a particularly dovish speech yesterday morning by NY Fed chief. 

            Julian Robertson joins Fed bubble blowing chorus (medium):

            No one seems concerned about the deteriorating economic numbers and the fact that slowing growth tends to negatively impact corporate earnings---which also tends to be an antecedent to a Market decline.

            The problem with a zero interest rate policy (medium):

            Overnight, both EU and UK March services PMI came in above February’s readings.

                And the Bank of Australia kept a key rate unchanged but signaled that it is prepared for future cuts.

                And the latest on the Greek/Russia bail out talks (medium):

Bottom line: in won’t matter how negative the economic numbers get as long as investors are captivated by the notion of QE forever and ever.  But sooner or later, either the data has to improve or reality is going to bite---the math simply doesn’t work for two correlated trends to diverge into infinity.

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.

            This should help resolve the Greek bailout negotiations (short):

            Dividends were up strong last quarter (short):

            More signs that we may be near a top (short):

     Investing for Survival

            Stay the course (medium):
       Company Highlights

Amerigas Partners distributes propane to over two million residential, commercial, industrial, agricultural and motor fuel customers in 50 states.   It also installs and services propane appliances and motor fuel systems.  Earnings have been flat over the past five years though dividends have increased at a 5% rate.  When coupled with the very attractive yield of its stock, it offers an attractive total return. In that period, return on equity averaged 15-30%.  APU should be able to continue to grow its dividend as a result of:

(1)    a broadly diversified geographic and customer base,

(2)    acquisitions.


(1)    fluctuations in commodity prices,

(2)    demand is subject to seasonal and weather factors,

(3)    potential impact of new energy regulations.

            APU is rated B++ by Value Line, has a 66% debt to equity ratio and its stock yields 7.0%.

  Statistical Summary

                 Stock      Dividend       Payout      # Increases  
                Yield      Growth Rate     Ratio*       Since 2005

APU           7.0%         5%               70%              7
Ind Ave      3.2            4                   57                NA

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

APU          66%             20               3                7%           B++
Ind Ave     44                11             NA               7              NA

* this is payout to cash flow


            Note: APU stock made good initial progress off its October 2008 low, quickly surpassing the downtrend off its May 2007 high (straight red line) and the November 2008 trading high (green line).  Long term, the stock is in an uptrend.  The wiggly red line is the 50 day moving average.  The High Yield Portfolio owns a 75% position in APU.  It is currently on the High Yield Buy List.  The lower boundary of its Sell Half Range is $73.


      News on Stocks in Our Portfolios

   This Week’s Data
            The March Markit Services PMI was reported at 59.2 versus expectations of 58.4.

            The March ISM nonmanufacturing index came in at 56.5 versus estimates of 56.7.


            For the optimists among you (medium):

            And for the less sanguine among you, here is an inside look at several EU bad banks (medium):
            Following the Japanese government’s admission that its data releases all sucked, now comes our own Bureau of Labor Statistics (short):




            Larry Summers on US global leadership or lack thereof (medium):

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