Thursday, April 23, 2015

The Morning Call---More bad news, so that must mean stocks are up

The Morning Call


The Market

The indices (DJIA 18038, S&P 2107) rallied nicely yesterday.  Both remained above their 100 day moving averages; both 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 (17015-19812, 1993-2974), intermediate term (17136-22262, 1802-2575 and long term (5369-18873, 797-2129).  

Volume was flat; breadth improved. The VIX declined, falling below the lower boundary of a (now in question) developing pennant formation; a close below that boundary will negate the formation (again).    I continue to think that the VIX remains a reasonably priced hedge. 

Here is a positive breadth indicator (short):

The long Treasury declined big time, finishing below the lower boundary of the  tight very short term trading range and its 100 day moving average.  The lower boundary of its short term downtrend is now at roughly the same level as the lower boundary of its intermediate term uptrend.  If those trends are violated, it may well spark sales of at least a portion of the muni bond positions in our ETF Portfolio.

GLD’s dropped again, continuing to form a head and shoulders pattern and otherwise lousy pin action.

Oil managed to lift a little but remained below the former upper boundary of a trading range (i.e. resistance turned support) which now shifts again from support to resistance. 

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, though both of the Averages are a short hair from challenging the upper boundaries. 

On the other hand, while the 100 day moving averages have offered strong support in the recent past, the risk/reward between the upper boundaries of the indices long term uptrends and the upper boundaries of their short term uptrends continues to favor the risk side.         

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


            Yesterday’s US economic stats were both housing related and both upbeat: mortgage and purchase applications were up and March existing home sales were double estimates.  Both are great news although with the rest of the universe blaming weather on numbers shortfall, it is a bit surprising that one of the most weather sensitive economic datapoints knocked the cover off the ball. 

            Overseas, Japan reported its first trade surplus in three years, though it was heavily weighted to lower imports versus higher exports.  In other words, Abe’s currency devaluation/beggar thy neighbor policy is working but at the expense of the Japanese consumer (imported goods are now more expensive but exports aren’t growing, so neither are wages).

            In Europe, the Greece/troika bail out discussions are going from strained to hostile.  The Greek government announced that it would not present any fiscal reform proposals mandated by the troika at tomorrow’s EU financial ministers meeting.  The ECB fired back, lowering the collateral value of Greek bank assets posted to secure loans.  And the EU retaliated over the Greek/Russia pipeline talks by filing antitrust charges against Gazprom---apparently dreaming that somehow Putin would put up with that crap.

            The IMF’s big Greek mistake (medium):


(1)   the Bank of Japan said that it may not reach its 2% inflation goal until 2016 (medium and a must read)

(2)   Chinese April Markit PMI fell below 50 [49.2] indicating contraction,

(3)   The EU April composite PMI came in below expectations as did both the manufacturing and service components,

(4)   Deutschebank agreed to pay a $2.1 billion penalty for fraud in the Libor rice fixing case.

Bottom line: we finally got a day where the economic news was positive.  That is great---I have been concerned that I would have to lower our outlook from even slower growth to outright recession.  Not that two datapoints change everything; but with any follow through, we can hopefully lower the odds of an economic decline.

That said, I don’t view the positive Japanese trade numbers as a plus overall.  As I noted above, it likely means nothing to the Japanese workingman.  Further, in a world where currency devaluation is the accepted policy, that trade data may prompt additional counter moves from competitors.  That is what happens in a war of competitive devaluations. 

In addition, the Greek/troika faceoff is morphing into a sophomoric game of spite.  The troika is determined to discipline the Greeks, who they have already beaten to a pulp on the grounds of fiscal irresponsibility, by demanding fiscally suicidal policies which is just as irresponsible.  Meanwhile, rather than face up to past unsound policies and attempt to negotiate a more workable deal from the troika, the Greeks are doing everything they can to damage the EU and weasel out of accepting any responsibility for past sins.  I have no clue how this works but I don’t believe those that profess to do either. 

I can’t see how either of the above is priced into stocks that are now a milli short hair from record high valuations.

 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.

            Doug Kass discusses 12 factors that are weighing on the Market (medium):

            Buyback authorizations reached a high in first quarter 2015 (short):

            Asset inflation and growth (short):

        Investing for Survival

            The great wealth non-equalizer (medium):

       Company Highlights
Sherwin Williams Co. is one of the largest producers of paints, varnishes and application equipment, much of its sold through 3500+ retail paint and wall covering stores; in addition, it produces auto coatings which are sold through auto coatings outlets.  The company has grown profits and dividends at a 12% pace over the last 10 years earning a 20%+ return on equity.  The company’s revenues and profits are negatively impacted by weakness in the construction and housing markets.  However, longer term it should still grow at an above average pace as a result of:

(1) improving US and international sales in autos, OEM product finishes and protective and marine coatings,

(2) improving nonresidential housing sales,

(3) declining raw material costs [oil],

(4) refurbishing [recently acquired] Comex stores are attracting higher grade of painting contractors.


(1) a poor pricing environment in the consumer segment,

(2) currency fluctuations.

SHW is rated A+ by Value Line, has a 53% debt to equity ratio and its stock yields 1.0%.
  Statistical Summary

                 Stock      Dividend          Payout      # Increases  
                 Yield      Growth Rate     Ratio       Since 2005

SHW          1.0%          14%              25%              10
Ind Ave      1.6             14                  39                NA 

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

SHW          53%           63%            3                 9%           A+
Ind Ave      31              37               NA              7             NA.


            Note: SHW stock made great progress off its March 2009 low, quickly surpassing the downtrend off its July 2007 high (straight red line) and the November 2008 trading high (green line).  Long term, the stock is in an uptrend (blue lines).  Intermediate term, it is in an uptrend (purple lines).  Short term, it is in an uptrend (brown line).  The wiggly red line is the100 day moving average.  The Dividend Growth Portfolio owns a 50% in SHW, having Sold Half in mid-2013.  The upper boundary of its Buy Value Range is $101; the lower boundary of its Sell Half Range is $213.


    News on Stocks in Our Portfolios
·         AbbVie (NYSE:ABBV): Q1 EPS of $0.94 beats by $0.09.
·         Revenue of $5.04B (+10.5% Y/Y) beats by $60M.
    • Caterpillar (NYSE:CAT): Q1 EPS of $1.86 beats by $0.51.
    • Revenue of $12.7B (-4.1% Y/Y) beats by $320M.

|7:32 AM
    • 3M (NYSE:MMM): Q1 EPS of $1.85 misses by $0.08.
    • Revenue of $7.57B (-3.3% Y/Y) misses by $270M.
·         PepsiCo (NYSE:PEP): Q1 EPS of $0.83 beats by $0.04.
·         Revenue of $12.22B (-3.2% Y/Y) beats by $40M.
·         Procter & Gamble (NYSE:PG): FQ3 EPS of $0.92 in-line.
·         Revenue of $18.14B (-7.6% Y/Y) misses by $350M.
·         Qualcomm (NASDAQ:QCOM): FQ2 EPS of $1.40 beats by $0.07.
·         Revenue of $6.89B (+8.2% Y/Y) beats by $60M.
·         Expects FQ3 revenue of $5.4B-$6.2B and EPS of $0.85-$1.00, below a consensus of $6.5B and $1.14.
·         Expects FY15 (ends Sep. '15) revenue of $25B-$27B and EPS of $4.60-$5.00 vs. a consensus of $27.22B and $5.00.
·         233M FQ2 MSM chip shipments, in-line with guidance of 220M-240M. 210M-230M shipments expected in FQ3.

    • AT&T (NYSE:T): Q1 EPS of $0.63 beats by $0.01.
    • Revenue of $32.57B (+0.3% Y/Y) misses by $270M.


   This Week’s Data

            March existing home sales rose 6% versus expectations of up 3%---but wait, what about the weather?

            Weekly jobless claims rose 1,000 versus forecasts of down 8,000.


            Someone is going to be wrong about the consumer (short):

            Draghi’s QE problem (medium):



Hillary’s speaking fees (short):


            Saudi Arabia resumes bombing Houthis rebels in Yemen after one day pause (medium):

                This is the government that we (US/EU) are supporting in Ukraine (medium):

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