Wednesday, April 1, 2015

The Morning Call--the economic data improves ever so slightly

The Morning Call


The Market

The indices (DJIA 17776, S&P 2067) turned on a dime yesterday---which means either quarter end window dressers are very confused or they have been a nonfactor.  In the process, both fell back below their 50 day moving averages and both made a second lower high---setting up a potential downtrend.  On the other hand, the Dow closed right on its 100 day  moving average and above the lower boundary of its very short term uptrend while the S&P remained above its 100 day moving average but below the lower boundary of its very short term uptrend.  On a very short term basis, that leaves a somewhat confusing technical picture but with the 100 day moving average acting as strong support.  Longer term, they remained well within their uptrends across all timeframes: short term (16872-19654, 1971-2952), intermediate term (16977-22138, 1785-2543 and long term (5369-18860, 797-2122).   

Volume rose; breadth was negative. The VIX was up, finishing within its short term trading range, its intermediate term downtrend, its long term trading range, back below 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 recovered, but remained within its short term trading range, intermediate and long term uptrends and above its 50 day moving average.  This chart keeps improving.

GLD’s price dropped, closing within its short and intermediate term trading ranges, its long term downtrend and below its 50 day moving average.  GLD has a number of tough resistance levels yet to overcome before we can assume that the worst is over.

Bottom line: the Averages failed to provide any follow through from Monday’s gangbuster’s day.  Since late February they have been creating a pattern of higher lows and lower highs and doing so on a good deal of volatility.   These ‘pennant’ formations eventually have to get resolved by breaking one of the two trends; and generally follow through in the direction of the break.  From this point, it would seem that the risk/reward is weighted to the risk side; that is, the distance that the indices can decline (the lower boundaries of the short term uptrends) without doing any technical damage is greater than the distance they can advance (the upper boundaries of their long term uptrends) without a break out.
            Stock Traders’ Almanac looks at trading in April and what we should be watching (short):
            Stock market performance following a disappointing Chicago PMI (like we got yesterday):


            Yesterday was another mixed day for US economic stats: month to date retail sales improved, the January Case Shiller home price index moved higher than expected, and the March Chicago PMI was as bad as March consumer confidence was good.

Overseas, the numbers were all good and were all from Europe: the March EU price deflator improved from -0.3% in February to -0.1% and unemployment went from 11.4% in February to 11.3% in March.  We are starting to see better data out of Europe though (1) it is only out of Europe; no plus signs from Japan or China, (2) if this trend holds this week, it will only be the third week of better stats; so more time is needed before we can assume Europe has turned and (3) there are two geopolitical problems that could potentially trash any recovery: Greece and Ukraine.

Update on Greek bail out talks (medium):

            And Greek talks with Russia (medium):

            ***overnight, the March EU manufacturing PMI came in better than expected (52.2 versus 51.9); the March Chinese manufacturing PMI fell below 50 (sign of contraction) to 49.7 versus the February reading of 50.7; and Japanese manufacturing data were abysmal. 

Meanwhile, in the greatest QE in history, liquidity drains from the Japanese government bond market:

            And global inflation falls to a new 5 year low (short):

Bottom line: the economic data showed another day of improvement in the sense that the US numbers were mixed not completely downbeat and Europe’s (not the rest of the world’s) stats have perked up in the last couple of weeks.  While I don’t think either a cause for altering our economic outlook at the moment, clearly we need to pay attention.  In the meantime, (1) the Greek bail out and Iranian nuke talks are coming to a head---either could add some spice to our lives and (2) the global central banks have painted themselves in a corner and are clueless how to get out. 

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.

            More from Stockman on Fed policy (medium):

            The latest from John Hussman (medium):

      Thoughts on Investing from Shelby Davis
Who the hell is Shelby Davis? That was my first thought after I heard the name from a reader’s comment on recommended investing books. So I added it to my growing wish list to check out later. Later finally happened and here’s the answer. He’s probably the best investor you never heard of.
The story of Shelby Davis is reminiscent of today. Interest rates were at all-time lows. Bonds were loved and stocks were loathed. Davis did the one thing most investors wouldn’t do. He bought the most hated, boring stocks he could find and stuck with it his entire life.
Davis was an unknown. He didn’t build a company or manage a fund. He avoided the media. He only managed his money wisely. He was THE millionaire next door until the Forbes 400 list of richest Americans outed him in ’88.
Davis lived by the principles we so often forget or ignore. The Davis Dynasty shows us what’s possible even if we get started late.

10. Save to invest more, not invest to save less.

Shelby Davis was extremely frugal. He saved old shoes with tape and glue. Their old stove was so rusty flakes sometimes fell in the food. The kids hounded him for a swimming pool. He agreed, only if they dug it themselves.
But he wasn’t being frugal for the sake of saving money. He hated being wasteful. Why waste money that could be invested? He understood the future value of his dollar, invested wisely, was worth far more than today.

9. The power of compounding compels you.

Davis’ grandson tells the story of the day he asked for a dollar to buy a hot dog. Davis responded:
Do you realize if you invest that dollar wisely it will double every five years? By the time you reach my age, in 50 years, your dollar will be worth $1,024. Are you so hungry you need to eat a $1,000 hot dog?
Every dollar you earn has value today but don’t ignore its future potential. The critical ingredient is time. Luck and stock tips might help win the short-term trading game for a while. Nothing beats time and the power of compounding returns. Wise, winning investing requires years of appreciation.

      News on Stocks in Our Portfolios

   This Week’s Data

            Month to date retail chain store sales rose 3.0% versus the comparable period a year ago---an improvement from last week.

            The January Case Shiller home price index was reported up 0.9% versus expectations of up 0.7%.

            The March Chicago PMI came in at 46.3 versus consensus of 50.2.

            March consumer confidence index was 101.3 versus estimates of 95.5.

            Weekly mortgage applications rose4.6% while purchase applications were up 6.0%.

            The March ADP private payrolls report showed a decline of 25,000 from February versus forecasts of an 18,000 increase.


            Bernanke’s first blog post (medium):

            More on the fallout from that insolvent Austrian bank (medium):



  International War Against Radical Islam

            Iran moves the goal posts again (short):
            The latest from Yemen (medium):

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