Wednesday, April 29, 2015

The Morning Call--Group think

The Morning Call

4/29/15

The Market
           
    Technical

The indices (DJIA 18110, S&P 2114) bounced yesterday.  The S&P remained above its 100 day moving average and traded back above its prior high for the second time.  A close above that level today would indicate that the trend to lower highs has been broken.  The Dow continued to trade above its 100 day moving average but below its prior high. 

Longer term, the indices remained well within their uptrends across all timeframes: short term (17060-19857, 1997-2978), intermediate term (17174-22300, 1802-2575 and long term (5369-18873, 797-2129).  

Volume was up slightly; breadth improved.  The VIX dropped 5%, finishing below its 100 day moving average and within short and intermediate term trading ranges.  It remains a short distance away from the lower boundaries of both its short and long term trading ranges.  The latter should provide strong support.  For that reason, I continue to think that the VIX remains a reasonably priced hedge. 

Divergences in the NASDAQ rally (medium):

The long Treasury got smacked, ending once again below its 100 day moving average and the lower boundary of the very short term trading range.  As you know, this is the second time this has occurred in the last week.  Plus yesterday’s close was below the prior low, suggesting that there is more downside.  So it looks like we may get a challenge to the lower boundaries of its short term trading range and intermediate term uptrend.

GLD had another good up day, rising above its 100 day moving average but remaining within a developing head and shoulders pattern, a completion of which would set it up for a challenge of the lower boundary of its long term downtrend.

Bottom line: the bulls grabbed at the reins yesterday, though the recent pin action suggests that the Averages are now trading in contested range.  The indices are out of sync with respect to the recent trend of lower highs; but they are within striking range of their all-time highs and the upper boundaries of their long term uptrends.  It seems increasingly likely that they will do so.  However, I believe that the latter presents formidable resistance.

Short term, I still think the risk/reward setup favors the risk side.  Longer term, the momentum remains to the upside.

            Pre-election year May’s Market performance has not been so good (short):

    Fundamental
   
       Headlines

            Yesterday’s US economic data was mixed (which in and of itself is an improvement) with month to date retail chain store sales and the February Case Shiller home price index recording favorable comparisons while April consumer confidence and the April Richmond Fed’s manufacturing index were disappointing.  I have said before that I will take good news wherever I can get it, but those two stats do nothing to alter the current trend in weaker numbers.

            Maybe it hasn’t been the weather (short and a must read):

            Overseas, we weren’t so lucky.

(1)   Japan reported April retail sales lower than anticipated,

Japan is the poster child for QE failure (medium):

(2) the Bank of China denied Monday’s speculation that it would implement QE, but the WSJ reported that there was a credit easing program coming.

***overnight, the central banks of Thailand and Sweden made additional monetary easing moves.

(3) the UK reported that first quarter GDP grew one half of expectations [did they have bad weather and a west coast longshoremen’s strike, too?],

***overnight, it was reported that lending by EU banks to companies and households rose for the first time in three years,

(4) the only potential bright spot was the Greek PM promising that he would keep Greece in the EU.  But then we have heard that story before.

***overnight, along those lines, today Greece will present a (new and improved) draft for fiscal reforms mandated by the troika.  If only.

If Greece does default, here are some alternative strategies (medium):

Bottom line: while we at least got a couple of upbeat economic datapoints yesterday, the overall trend remains negative both here and abroad; making matters a bit worse, the news flow out of Europe is no longer constructive.  On the other hand, China appears to be ready to do some kind of easing.  Plus the regular FOMC meeting concludes today and hope springs eternal that it will make yet another dovish policy statement. 

A letter to the Fed (medium):

That investors can ignore slowing global economic growth off of a subpar recovery, the obvious distortions in asset pricing and misallocation of investment capital, the worldwide embrace for a monetary policy with no record of success either historically or at present and no clear plan for an exit and yet value equities at present rich levels is a testament to group think.  In that kind of atmosphere, I believe that the best strategy is defense.   Husband cash and wait for the light to come on.

 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.

            Where stocks need to be priced to generate a 10% annual return (medium):

            Could bonds outperform stocks in the next Fed tightening? (medium):

            The latest from John Hussman (medium):

      Investing for Survival from Morgan Housel
Imagine you're a weather forecaster. For the last four years, you've predicted a massive blizzard and frigid temperatures. But it never came. It's actually been downright hot for the four years straight. Ninety degrees and sunny every day.
Now imagine you resign from the meteorology business because you are sick and tired -- sick and tired -- of atmospheric pressure. "All of my forecasting models tell me it should be snowing," you say. "But like some spoiled brat, atmospheric pressure waltzes in here like he owns the place, keeping it hot day after day. This pressure has no business being in the sky. It's appalling how much gall the atmosphere has."
This would, of course, be ridiculous. Your viewers would tell you that the weather is always right, and you, as a forecaster, are the one who is wrong. It doesn't matter if it's abnormally hot. Your job as a forecaster was to predict that it would be abnormally hot. That's why they pay you to be a forecaster.
Finance is different. Unlike all other fields, finance people get to blame their poor forecasting skills on reality.
Hedge fund Rinehart Capital Partners LLC announced it was closing last week. It's easy to see why. According to The Wall Street Journal, the fund lost 7% in 2012, another 15% in 2013, and is down 4% this year. The S&P 500 gained 68.2% during this period.
Reinhart founder Andrew Cunagin wrote a letter to investors announcing the closure. He explained his poor performance by blaming high-frequency traders, the Fed, and a market that went higher when he doesn't think it should have:
Just as in previous boom-bust cycles, the seeds of destruction are sewn in the illusion of trend masquerading as truth, with momentum seeming to validate a widening gap between perception and economic reality. And just as in past cycles, the manager who doesn't subscribe to the new rules, who goes against the grain of convention is viewed as out of touch or left behind ...
Since the beginning of our fund's drawdown in early 2012, a Bloomberg index of the "Worst Balance Sheet" companies of the S&P500 has returned to-date over +30% on an annualized basis. An MSCI index of the "Most-Shorted" companies of the Russell 3000—a proxy for the visibility of bad valuations, bad managements, and bad fundamentals—has also returned over +30% annualized. These perversions are even more pronounced within EMs, exacerbated by record fund outflows in the first half of 2014, exceeding even those of the 2008 crisis. This dash for trash puts to shame even the speculative excesses of the dot.com era. This is a circus market rigged by HFT and other algorithmic traders who prey on the rational behavior of warm-blooded investors. They only serve to further undermine the integrity of public markets, which will ultimately bring about their rationalization. Nonetheless, it's an internal dynamic to which we are uniquely levered, by design, as an alpha strategy. One thing is certain, managers whose strategies are working may be bright and well-informed with advanced metrics on which they make investment decisions, but a reasonable assessment of value is not among them. Do previous cycles not bear asking, what other measure is there?
Look, stocks have gone up a lot. Some sketchy companies are expensive by any definition.
But the entire history of the stock market is a pendulum swinging from absurdity to absurdity. There is no such thing as a normal, healthy market. It's perpetually in some state of irrationality that no one can explain.
You should never blame an irrational market for your terrible performance. The market is always right, even if you disagree with it. It's your strategy that got it wrong. And "wrong" is the right word to use here because your actions dragged performance down so far that you're being forced to close, forfeiting any chance of vindication. "The market can stay irrational longer than you can stay solvent," John Maynard Keynes famously said.
What bugs me about this is incentives. When hedge fund managers get it right, they earn multi-million, even billion-dollar paydays, and are paraded around as living gods. When they get it wrong, it's someone else's fault. The Fed is irresponsible, the president is ruining the economy, high-frequency traders are destroying confidence, Congress is creating uncertainty, yadda yadda yadda.
Rarely is anyone in finance forced to admit what the weatherman would have to: I was wrong. 


     News on Stocks in Our Portfolios
·         General Dynamics (NYSE:GD): Q1 EPS of $2.14 beats by $0.22.
·         Revenue of $7.78B (+7.0% Y/Y) beats by $360M.
·         Praxair (NYSE:PX): Q1 EPS of $1.43 misses by $0.01.
·         Revenue of $2.76B (-8.9% Y/Y) misses by $200M.

Economics

   This Week’s Data

            Month to date retail chain store sales improved from +0.8% for the comparable term last year to +1.4%.

            The February Case Shiller home price index rose 0.9% versus expectations of up 0.7%.

            April consumer confidence came in at 95.2 versus forecasts of 103.0.

            The April Richmond Fed manufacturing index was reported at -3 versus consensus of -2.

                Weekly mortgage applications fell 2.3% while purchase applications were flat.

            First quarter GDP came in +0.2% versus estimates of +1.0%; the price deflator was -0.1% versus expectations of +0.5%.

   Other

            The vicious feedback loop of oil prices and oil company debt (medium):

Politics

  Domestic

A hopeful sign? Liberals against a tax increase. (medium):

Accounting at the Clinton Foundation (medium):

  International War Against Radical Islam







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