Tuesday, April 14, 2015

The Morning Call---Greece near an exit?

The Morning Call


The Market

The indices (DJIA 17977, S&P 2092) fell yesterday.  They closed above their 100 day moving averages and bounced down off 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. The other is the late February highs.

Longer term, the indices remained well within their uptrends across all timeframes: short term (16950-19727, 1982-2963), intermediate term (17062-22198, 1793-2565 and long term (5369-18873, 797-2129).  

Volume rose; breadth fell.  The VIX rebounded 11%, ending back above the lower boundary of the developing pennant formation---thereby negating Friday’s break.  Still it finished 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 its short term trading range, intermediate and long term uptrends and above its 100 day moving average, remaining within a very short term trading range dating back to mid-March.

GLD’s price dropped, closing back below the lower boundary of a very short term uptrend for a second time.  A close below that boundary today will negate 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 touched their very short term downtrends and retreated; and did so on a Monday which has been a positive performance day of late.  Those downtrends are one of the two resistance levels the indices must overcome to firmly establish upside momentum.

Longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.
            The US March budget deficit was a disappointment, not what we want to see but still not a primary indicator.  The real news came from overseas.  March Chinese trade numbers were awful---exports down 15% and imports off 12.5%

            ***overnight, a Japanese government official suggested that the current exchange rate for the yen was too high, i.e. it needs to be devalued more; and UK March CPI was below expectations.

            In addition, the Greeks once again failed to provide the specificity in its policy proposals to gain approval for bailout funds. Time is running out on these clowns.  Everyone now appears to be accepting a Grexit as a reasonable possibility.  However, I don’t believe that anyone has a handle on the magnitude of the unintended consequences---not that they will of necessity be negative, we just don’t know.

Bottom line: yesterday’s dataflow both here and abroad did nothing to improve the economic outlook.  If Chinese trade is falling precipitously, that won’t be good for anyone.  A Grexit may not have a big impact on the EU economy initially; but its effect on the financial system may be another matter especially if the fallout from the Austrian bank bankruptcy continues to get worse. 

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 John Hussman (medium):

            The latest from David Einhorn (medium):

            More on valuation (medium and a must read):

       Company Highlights

United Technologies is an industrial conglomerate which manufacturers and services aircraft engines (Pratt & Whitney), manufacturers heating, ventilating and air conditioning equipment (Carrier), manufacturers and services elevators (Otis), builds helicopters (Sikorsky), manufacturers aerospace and industrial products (UTC Aerospace) and provides security and fire protection services (UTC Fire and Security).  The company has earned an 18-20% return on equity over the last ten years while growing profits and dividends at a 10-15% rate.  While UTX’s businesses are impacted by the global economic activity, the company has grown fairly consistently returned because:

(1)  its main businesses possess a large parts and service component which adds stability to earnings,

(2) the diversity of its product line allows for consistency in revenue and earnings performance,

(3) its strong cash flow allows for further acquisitions and product innovation.


(1) a significant portion of its business is subject to government funding,

(2) its international operations are subject changes in foreign economies growth rates as well as currency fluctuations and government regulations,

UTX is rated A++ by Value Line, its balance sheet carries a debt/equity ratio of 34%, its stock yields 2.1%.

    Statistical Summary

                 Stock      Dividend       Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2005

UTX           2.1%         8%              36%              10
Ind Ave*

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

UTX          34%           17%           2                 10%           A++
Ind Ave*

*Because the market segments in which these companies operate are so diverse, comparable data would be meaningless.


            Note: UTX stock made great progress off its March 2009 low, surpassing the downtrend off its October 2007 high (straight red line) and the November 2008 trading high (green line).  Long term it is in an uptrend (blue lines).  Intermediate term it is in an uptrend (purple lines).  The wiggly red line is the 100 day moving average.  The Dividend Growth Portfolio owns a full position in UTX.  The upper boundary of its Buy Value Range is $83; the lower boundary of its Sell Half Range is $147.



      News on Stocks in Our Portfolios
·         Johnson & Johnson (NYSE:JNJ): Q1 EPS of $1.56 beats by $0.02.
·         Revenue of $17.37B (-4.1% Y/Y) beats by $60M.
·         Fastenal (NASDAQ:FAST): FQ1 EPS of $0.43 beats by $0.02.
·         Revenue of $953.32M (+8.8% Y/Y) misses by $1.87M.


   This Week’s Data

            The March US budget deficit was $52.9 billion versus estimates of $43.4 billion.

            March retail sales rose 0.9% versus expectations of up 1.1%; ex food and gas, they were up 0.5% versus forecasts of up 0.4%.
            March PPI increased 0.2% versus February’s report of +0.4%


            Is the dollar going still higher (medium):

            Ackman says student loans are biggest risk to financial system (short):

            Have profit margins peaked (mean reversion?) (short):

            March consumer credit declined and the index of rejection of credit applications soared.



Quote of the day (short):

  International War Against Radical Islam

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