Wednesday, April 22, 2015

The Morning Call--The Greek/EU problem turns into a food fight

The Morning Call


The Market

The indices (DJIA 17949, S&P 2097) sold off modestly yesterday.  Both remained above their 100 day moving averages but below their prior highs---keeping the series of lower highs intact.

Longer term, the indices remained well within their uptrends across all timeframes: short term (17009-19806, 1989-2970), intermediate term (17123-22249, 1802-2575 and long term (5369-18873, 797-2129).  

Volume fell; breadth improved. The VIX declined, remaining right on the lower boundary of a (now in question) developing pennant formation.    I continue to think that the VIX remains a reasonably priced hedge. 

The long Treasury declined again, but finished within a tight trading range dating back to mid-February and still within longer term uptrends.

Bill Gross says German bunds are the short of a lifetime (medium):

GLD’s dropped, closing within its short and intermediate term trading ranges.  A head and shoulders pattern continues to develop.

Rounding out, oil slid 3%, ending below the former upper boundary of a trading range (i.e. resistance turned support).  If OIH closes below this boundary today, it will again become resistance.

An update on Dr. Copper (short):

Bottom line: both the indices closed in the narrowing boundaries formed by their very short term downtrends (upper) and their 100 day moving averages (lower). The spread between these boundaries is down to 20 points on the S&P, so we should receive some short term directional guidance soon.  While the 100 day moving averages have offered strong support in the recent past, the risk/reward between the upper boundaries of their long term uptrends and the upper boundaries of their short term uptrends continues to favor the risk side.         

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


            There was only a single US datapoint yesterday: month to date retail chain store sales slowed on a year over year basis.

            Earnings reports continue to come in better than estimates; but we need to remember that those forecasts had previously been revised down substantially.  Putting first quarter earnings season in perspective (short):

            Update on this season’s earnings and revenue beat rates (short):

            Overseas, there were no data releases; but we still got news:

(1)   China allowed the first default on onshore bonds of a state owned enterprise.  That keeps the news flow out of that country confusing [increased margin requirements last Friday, lower reserve requirements Monday, and then this default yesterday].  I include myself under the category of ‘confusing’,

(2)   there were news reports that Greece was close to signing a pipeline deal with Russia (medium):

***and to inflame matters more, overnight,

[a] the EU filed antitrust charges against Gazprom (medium):

                  [b] and lowered the collateral value of Greek bank assets posted to secure loans.

 [c] the Greek government announced that it would not present reform measures at Friday’s meeting of EU finance ministers.

                 The end nears for Greece (medium):

(3)   US ups the ante against Russia, sells missile defense system to Poland (short):

***overnight, Japan reported its first trade surplus in three years largely on the back of a collapse in imports.

Bottom line: even though there was little by way of good fundamental news yesterday, stocks took it all in stride---which fits perfectly with the current Market psychology: stocks upbeat in face of economic weakness, ineffective central bank policies and rising geopolitical risks. 

 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.

            Why we are not in a secular bull market (medium):

            The latest from John Hussman (medium):

            The latest from John Mauldin (long but a must read):

      Thoughts on Investing from Cullen Roche

My latest post on “passive” indexing made some people upset.  I have argued, in essence, that there is no such thing as “passive” investing and that most people who use the term don’t really understand that what they’re doing is actually quite active and forecast based.  These are not “strawman” comments or misunderstandings as some people (see here and here) have claimed.  They are incontrovertible facts grounded in macro realities.  Let me explain.
Fact #1 – At the macro level there is only one portfolio of all outstanding financial assets.  If you were a truly “passive” investor you would simply buy the total market of financial assets as opposed to trying to pick your own superior portfolio based on assets inside of the aggregate.  Of course, that portfolio can’t be purchased because that portfolio product doesn’t exist.
Fact #2 – We all allocate assets differently from the aggregate financial portfolio thereby rendering us all “asset pickers”.  This asset picking requires some level of forecasting or underlying prediction based on how your risk tolerance relates to how you expect a set of financial assets to help you meet your financial goals.  You can claim that your approach doesn’t rely on forecasting, but that’s like claiming that your ability to successfully sail from San Francisco to Hawaii does not rely on a weather forecast – it’s just not true.
Fact #3 – This portfolio and your risk tolerance to certain assets will evolve over time which will require you to maintain and alter the above portfolio in some manner.   Therefore, it will require some level of upkeep and maintenance even if this is rather minimal over time.
The above facts should not be controversial.  Anyone who constructs a portfolio has to accept the reality that they are an asset picker of some sort.  They should also acknowledge that their perception of risk and the underlying risks of assets changes over time.   Therefore, we are all asset pickers who are required to maintain an evolving portfolio over time.  Again, these facts should not be remotely controversial.
When someone tells you to invest in a “passive” portfolio they are basically telling you to pick broad indexes of assets and maintain a tax and fee efficient structure.  I don’t disagree with this concept AT ALL.  But what seems to have happened over time is that many people who advocate “passive” indexing seem to have forgotten the most important part of portfolio construction – the actual process and necessary forecasting of the assets you pick to allocate.
We know that John Bogle was right when he constructed his “Cost Matters Hypothesis”.  It should be another incontrovertible fact that the less active investor who buys the aggregate market will outperform the more active investor who buys the aggregate market.  Costs matter.   But we should also remember that the most important driver of portfolio performance is not the result of cost and tax structure, but allocation.  Therefore, I think one must adopt the most important hypothesis of all when constructing a portfolio:
And make no mistake – when you allocate assets inside of the global aggregate financial asset portfolio, you are indeed making an implicit forecast and “picking assets”.  The investor who doesn’t embrace this reality is simply not understanding what they are doing.  So yes, costs and frictions matter.  John Bogle was right.  But the passive investing ideology seems to have gone a bit overboard in emphasizing these points.  And in this pursuit to differentiate themselves from “stock pickers” and “active” investors they have lost sight of the reality that what they are involved in is a process of asset picking that will leave some asset pickers inevitably outperforming others who engage in that process utilizing a superior understanding of what it is that they are doing.
     News on Stocks in Our Portfolios
·         McDonald's (NYSE:MCD): Q1 EPS of $0.84 may not be comparable to consensus of $1.06.
·         Revenue of $5.96B (-11.0% Y/Y) in-line.

    • Coca-Cola (NYSE:KO): Q1 EPS of $0.48 beats by $0.06.
    • Revenue of $10.7B (+1.1% Y/Y) beats by $40M.
|7:33 AM

    • T. Rowe Price (NASDAQ:TROW): Q1 EPS of $1.13 misses by $0.01.
    • Revenue of $1.03B (+7.9% Y/Y) in-line.
 |7:33 AM|

    • Boeing (NYSE:BA): Q1 EPS of $1.97 beats by $0.16.
    • Revenue of $22.15B (+8.3% Y/Y) misses by $340M.
·         Genuine Parts (NYSE:GPC): Q1 EPS of $1.05 in-line.
·         Revenue of $3.74B (+3.3% Y/Y) misses by $50M

   This Week’s Data

            Month to date retail chain store sales slipped again versus the prior year (+0.8% versus +1.1%)

            Weekly mortgage applications rose 2.3% while purchase applications were up 5.0%.


            Currency genocide (medium):

            Update on student loans (short):

            Trade credit now at lowest level since financial crisis (medium):




            Saudis end bombing campaign in Yemen but place ground units on alert (medium):

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