Wednesday, April 8, 2015

The Morning Call--Can an EU recovery make a difference?

The Morning Call


The Market

The indices (DJIA 17875, S&P 2076) opened to the upside then traded off at the end of the day to close on a negative note.  The Dow closed above the lower boundary of its very short term uptrend, but below its 100 day moving average.  While the S&P finished below the lower boundary, but above its 100 day moving average.  Neither could climb above its prior high, setting up a second lower high. 

Longer term, the indices remained well within their uptrends across all timeframes: short term (16921-19698, 1976-2951), intermediate term (17015-22151, 1789-2551 and long term (5369-18860, 797-2122).  

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

            And (short):

The long Treasury rose.  It ended 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 is still below its prior high.

GLD’s price fell, but still finished within its short and intermediate term trading ranges, its long term downtrend and above its 50 day moving average.  GLD may have put in a low, but still has a number of tough resistance levels yet to overcome to prove that case.

Bottom line: despite an intraday attempt to trade above their prior highs, the Averages couldn’t get it done, potentially marking a second lower high.  Also adding some confusion to the short term outlook, the Dow and S&P are vacillating above and below their 100 day moving averages (which has provided strong support in the last two years) and the lower boundaries of their very short term uptrends.  This pin action could signify a topping process or simply consolidation before another move to the upside.  My bias is the former based on my perception of the fundamentals; however, I have already said that too many times and have been wrong. 

Certainly long term, the indices remain solidly within their uptrends; and that carries a lot more weight than my prejudice.

            Yesterday, month to date retail sales improved (a plus); and February consumer credit was up big.  However, the internal make up of this number was not that positive, i.e. revolving credit (credit cards) fell almost $4 billion (suggesting that consumers have stopped spending) and banks reduced lending; that was offset by a smoking hot increase in student loans (all of which will definitely be repaid.  Just kidding). 

This recovery really stinks (short):

            The economy and the stock market (short):

            Overseas, Europe provided another set of upbeat stats---the March EU and UK services PMI’s advanced from February’s readings.  

            Are markets underpricing a Grexit? (medium):

            Germany’s response to the Greek war reparations ploy (medium):

            The problem with Draghi’s plan (medium and a must read):

            In addition, the Bank of Australia kept its key rate unchanged but signaled that it was prepared for future rate declines---in case, you know, their trading partners keep pushing for QE nirvana.

            ***speaking of which overnight, the Bank of Japan voted to keep QE going full blast; German factory orders were well below expectations; the Swiss government issued a 10 year note at a negative yield; and Saudi Arabia upped its oil production---just to help our fracking industry and assist the Fed in reaching its 2% inflation goal.

Bottom line: so far, nothing in this week’s US economic data suggest any improvement; however, the European stats are going into their fourth week of progress.  Unfortunately, even if the EU is recovering, it is still the outlier in the global economy.  So the best that we can do is hope that nothing in Greece or Ukraine blows up and that any expansion is strong enough that (1) any negative impacts from a slowing global economy doesn’t hold it back, (2) or even better, that it’s strong enough to moderate the rate of any declines in its principal trading partners.  Hope being the operative word.

Earnings season starts today.  So over the coming weeks we will get the bottom line on how much the current economic malaise is impacting profits.

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 Jim Grant (short):

            The latest from Mohamed El Erian (medium):

            Warren Buffet on buying Berkshire Hathaway stock (short):

      Investing for Survival from Shelby Davis

8. Know your history.

Too many investors spend most of their time protecting themselves from the past while ignoring the future. Even an amateur market historian has the foresight to recognize when investor behavior and current market events mimic the past.
The book is filled with glimpses of market history stretching from the 1920s up to the dot-com bust. The biggest history lesson you can learn is that the market cycles from bust to boom and back again. Investor behavior flows with it. Each time is slightly different but similarities abound and the cycle always rolls on.

7. Stocks beat everything long-term despite the pessimism of the day

Short term fear and pessimism keeps most investors from ever realizing great returns. Of all the possible assets, investors have the biggest love/hate relationship with stocks. Great performances become a love fest, while terrible ones bring fear and loathing.
Between these two extremes, and what investors forget, is a great long-term track record at compounding money that no other asset class offers. The few times in history when there is an exception, investors rarely seized the opportunity because they projected their short-term pessimism far into the future.
Long term Treasury rates bottomed in April 1946 at 2.03%. At the time, a survey done by the Fed showed that 90% of investors preferred bonds. They’d rather earn 2% compounded returns, despite losing money to inflation, because they weren’t losing money in stocks! The rare exception in the ’80s watched 30-year Treasuries rates hit 15%, while investors saw high inflation and passed.
Not looking beyond the worry of the day causes most investors to miss obvious opportunities.

6. A bear market helps you make money.

Bear markets are buying times that lead to can’t miss bull market performances:
Out of crisis comes opportunity…A down market lets you buy more shares in great companies at favorable prices. If you know what you’re doing, you’ll make most of your money from these periods. You just won’t realize it until much later.
Bear markets make people a lot of money, they just don’t know it at the time.
Don’t be concerned about timing the bottom. Remember, Davis was stingy, but he never tried to time the market. He recognized cheap and waited. Among the many opportunities, Davis bought the ’87 crash. He lost $125 million on Black Monday, but was happy because everything he bought was a bargain.
      News on Stocks in Our Portfolios

   This Week’s Data

            Month to date retail chain store sales advanced nicely from 3.0% to 3.4%
            February consumer credit rose by $15.5 billion versus expectations of a $14.0 billion increase; however, revolving credit (credit cards) fell $3.7 billion while bank lending fell and student debt soared.

            Weekly mortgage applications rose 0.4% while purchase applications were up 7.0%. 


            The Financial Times gives the UK economy a rough review (medium):



I love this article on political correctness; but if you are easily offended, don’t read it (medium and a must read):

  International War Against Radical Islam

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