Wednesday, April 15, 2015

The Morning Call---The economic news is not improving

The Morning Call


The Market

The indices (DJIA 18036, S&P 2095) advanced modestly yesterday.  They closed above their 100 day moving averages and below their very short term downtrends---which is one of the barriers the Averages need to successfully challenge in order to get to the upper boundaries of their long term uptrends.

Longer term, the indices remained well within their uptrends across all timeframes: short term (16958-19735, 1984-2965), intermediate term (17062-22198, 1796-2567 and long term (5369-18873, 797-2129).  

Volume declined; breadth improved.  The VIX retreated but remained above the lower boundary of the developing pennant formation and within its short term trading range, its intermediate term downtrend, its long term trading range and below its 100 day moving average.   I continue to think that the VIX remains a reasonably priced hedge. 

The long Treasury was up again.  It closed within a very short term and short term trading range, intermediate and long term uptrends and above its 100 day moving average.

GLD’s price dropped, closing below the lower boundary of a very short term uptrend for a second day, thereby negating that trend.  It remains within its short and intermediate term trading ranges, its long term downtrend and below its 100 day moving average.  GLD continues to struggle just to stay flat.

Bottom line: short term, the Averages still have those very short term downtrends and their February highs to overcome before they can start to challenge the upper boundaries of  their long term uptrends.  While those boundaries are not that far away, the indices have been trading in their proximity since last December with no real meaningful effort to break to the upside.

Longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.

            The news flow picked up dramatically yesterday.  In the US, March retail sales rose but less than expected while sales ex autos and gas were slightly ahead of estimates. Meanwhile, month to date retail chain store sales slowed noticeably.  March PPI rose at half the rate of February’s pace.  March small business optimism plunged to 95.2 versus estimates of 98.2. 

            Even though March retail sales were short of consensus, the fact that there were even up after a couple of down months is a positive.  That said the month to date retail sales number were really lousy; plus the latest consumer credit data does not bode well for future sales.  In addition, the small business optimism index, and declining forecasts for first quarter GDP round out an overall poor day for US economic data.

            Overseas, the Japanese continue to beat the currency devaluation drum, inflation in the UK was below expectations and the latest WTO 2015 global trade estimates declined.  Not very encouraging.  As an added bonus, Putin has apparently agreed to sell Iran its very sophisticated missile defense system---clearly not helpful to the ongoing negotiations over the US/Iran nuke deal.

            ***overnight, first quarter Chinese GDP rose at its lowest rate (7.3%) since 2009, retail sales and industrial production were well below expectations---with the later at its slowest rate since 2008. 

Elsewhere, the ECB kept interest rates unchanged (medium):

Bottom line: yesterday saw more disappointing stats both here and overseas, the Japanese appear to be getting disparate to do anything to show economic improvement and geopolitics remain a wild card (a potential Grexit and Putin sticking his thumb in Obama’s eye….again).  I don’t see how higher prices can be generated in this environment except to the extent that investors believe in endless QE---and that has nothing to do with valuation. 

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 American consumer won’t be back anytime soon (medium):

            The problem with fast money (medium):

            More on valuation (4 minute video):

      Investing for Survival from Shelby Davis

5. High flyers fall the hardest.

“Buy stocks at any price” never works out in the end. Imagine a store that sold food and clothing “at any price”. When and how often would you buy?
Fast growing companies and hot stocks of the day are fun to own but fall the hardest. Earnings, then expectations, eventually falter. Market history is filled with these stocks that ended badly – the tech stocks of the 60s, the Nifty Fifty, and the dot-coms. Each time investors got burned.  So why overpay for earnings?

4. Few people use debt correctly.

Davis’ use of debt was tied to his ability to grow wealth. He didn’t borrow to pay the bills or to buy a house. He used leverage to boost returns when stocks were at bargain prices. When he couldn’t do that, he didn’t borrow. Davis made debt work for him.
I don’t recommend you invest on margin (borrow to buy stocks). But borrowing to buy stuff that doesn’t offer any return on that money only forces you to work for that debt in the future. The best investment anyone can make is to pay off credit card balances and high interest loans, especially when stocks don’t offer a comparable return.

3. Writing enforces clear thinking.

Davis wrote a weekly bulletin for most of his career. Few people ever responded or acknowledged it. Except his grandson who questioned why. The response:
It’s not for the readers. It’s for us. We write it for ourselves. Putting ideas on paper force you to think things through.
I’ve seen this repeated many times before. Writing speeds up the learning process by improving retention and helps solidify complex topics into simplified ideas – a lesson I’m still learning.

2. Investing is a 3 step process.

  1. Learn – the most important, overlooked phase that lasts several years.
  2. Earn – where smart investing compounds your money at the best rate possible over decades.
  3. Return – share that knowledge with the next generation and have a plan for your wealth when you’re gone.
Learning something like the piano, basketball, or walking are skills that take time to master. Once the basic steps are down, the learning accelerates quickly. Anyone who’s watched a child learn to walk for the first time, knows there’s a lot of falling involved but they always get back up. A childlike determination is needed to learn investing too.

1. it’s not how you start, it’s how you finish.

Starting early helps. Davis didn’t. By his death in ’94, he built a $900 million nest egg. Not bad for someone who didn’t start investing until he was 38 (1947).
Trying to repeat that performance is an outrageous goal. Not everyone starts with $50,000, a bull market, and the stomach to take big risks. What about a fraction of it? Is $2 million possible? Absolutely!
Start early if you can. Just know that the game isn’t over because you showed up late. You can still win. You’ll need to push yourself harder because sacrifice is needed to make up for lost time.
      News on Stocks in Our Portfolios

   This Week’s Data

            Month to date retail chain store sales declined from up 3.4% to up 1.1%.

            The March small business optimism index came in at 95.2 versus expectations of 98.2.

            Weekly mortgage applications fell 2.3% while purchase applications dropped 3.0%.
            The NY Fed April manufacturing index was reported at -1.19 versus estimates of +7.0.


            Another problem with zero interest rates: banks now owe money to borrowers (medium):

            WTO lowers 2015 and 2016 world trade growth (medium):

            First quarter GDP estimates continue to decline (short):

            The impact on growth of consumer price deflation versus asset price deflation (medium):

            Wednesday morning humor (short):  



Wednesday morning humor (short):

More of your and my money misspent (short):

  International War Against Radical Islam

            Russia’s sale of missiles to Iran changes the game completely (medium):

            Obama is no Chamberlain (medium):

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