Tuesday, May 12, 2015

The Morning Call--Greece repays IMF loan with another IMF loan

The Morning Call

5/12/15

The Market
           
    Technical

The indices (DJIA 18105, S&P 2105) settled yesterday.  Both remained above its 100 day moving average.  However, the S&P fell back below the trend line connecting lower highs (for the third time), voiding that upside break.  The Dow did not.  That leaves them out of sync with respect the trend to lower highs.

Longer term, the indices continue to trade well within their uptrends across all timeframes: short term (17136-19938, 2010-2991), intermediate term (17290-22405, 1814-2587 and long term (5369-18873, 797-2132).  

Volume declined, as did breadth.  The VIX was up 8%, but finished below its 100 day moving average, below the upper boundary of a very short term downtrend and within a short trading range. 

The long Treasury suffered another day of severe whackage, keeping it below its 100 day moving average, within a short term downtrend and an intermediate term trading range.  Clearly, bond investors had no second thoughts about their less than enthusiastic reception of Friday’s ‘goldilocks’ jobs reports.

Staying on the theme of me not having any confidence regarding the reason for the recent selloff in bonds, it appears that is NOT (1) inflation---gold and commodities are weak, or (2) a stronger economy.  That leaves my sentimental favorite [the bond vigilantes calling bulls**t on QE] still in the running.  I am not saying that is ‘the’ explanation.  I am not saying the bond bull market is over.  But clearly, the negating of TLT’s short and intermediate term uptrends suggests things are amiss.  And if things continue amiss, that is probably not good news for stocks.

The problem with high money liquidity and low trading liquidity (short):

Japan: today’s example of low trading liquidity (short):

GLD fell again, closing below its 100 day moving average and continuing to build a head and shoulders formation.

Oil fell again, ending within a short term trading range.

Bottom line: the technical picture remains confused as the indices continue to churn between their 100 day moving averages and their trends to lower highs.  Yes, the Dow negated the latter with yesterday’s close above it and maybe a leading indicator of higher prices.  But the S&P did not---hence the term ‘confused’.   If the Averages do break to the upside, they will almost surely challenge the upper boundaries of their long term uptrends.  But I don’t believe that they will achieve any kind of meaningful upside above those trend lines.

The rapid decline in bond prices has been unsettling all the more so because it is not clear what prompted it.  It doesn’t mean that the long term bull market in bonds is over; but given the technical damage, TLT has little visible support for another 10-12 points to the downside.

    Fundamental
   
       Headlines

            About the only news yesterday centered around the Greek/Troika bail out negotiations.  There was no US or overseas datapoints released; though we did get word that the Bank of China lowered its key rate for the third time in six months.

            As for the Greek/Troika talks, to paraphrase George Costanza---I think I can summarize those talks in one word: ‘nothing’.

            Update on the Greek/Troika negotiations (medium):

            Update on the update: no deal (medium):

            And Russia asks Greece to join BRICS bank (short):

            ***overnight, Greece repaid the IMF with reserves held by the IMF which Greece will have to repay in 30 days.  In short, Greece took out a short term loan to repay a long term loan---the last gasp before bankruptcy.  In another development, the IMF told the other Troika is would no longer be part of the bailout negotiations.

Bottom line:  the Market’s reaction to Friday’s nonfarm payroll number notwithstanding, we are not in a ‘goldilocks’ economy in my opinion.  I have no idea how long it takes investors to figure that out.  I would think that if the bond market continues to deliver that message, the stock guys will have an increasing tough time holding on to that notion.  In addition, it looks like the Greek/Troika standoff is in the bottom of the ninth inning with two outs and the Troika is leading.  Miracles can still occur---just ask Bobby Thompson.  But time and the odds don’t seem to be in favor of the Greeks.  I won’t presume to predict how the Markets will take a default/Grexit; but I don’t think anyone else does either, simply because we can’t know the unintended consequences of such an event. 

 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: Recognizing the risks to financial stability (medium):


            Positive thoughts from Barry Ritholtz (medium):

       Company Highlight

Automatic Data Processing (ADP) provides business outsourcing solutions including payroll and tax filing services, brokerage services, comprehensive human resource services and financial services to auto and truck dealerships. The company has grown profits and dividends 6-14% over the last 10 years and has earned an 18-20% return on equity.  Long term, the company should continue to prosper based on:

(1) dominant player in payroll processing market,

(2) the contribution from the recent acquisitions,

(3) divesting of noncore assets,

(4) its stock buyback program.

Negatives:

(1)   highly competitive industry,

(2)   sensitivity to economic conditions.

ADP is rated A++ by Value Line, has only 1% of its capitalization in debt and its stock yields 2.4%.

  Statistical Summary

               Stock        Dividend       Payout      # Increases  
               Yield      Growth Rate     Ratio       Since 2005

ADP          2.4%            8%            66%             10
Ind Ave      1.8              11              37               NA 


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

ADP           1%            27%           2                  13%          A++
Ind Ave      20              20             NA               11            NA

    Chart

            Note: ADP stock made great progress off its October 2008 low, quickly surpassing the downtrend off its October 2007 high (straight red line) and the November 2008 trading range (green line).  Long term, it is 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 the 100 day moving average.  The Dividend Growth Portfolio owns an 85% position in ADP.  The upper boundary of its Buy Value Range is $57; the lower boundary of its Sell Half Range is $114.



    
5/15  


       Investing for Survival

            12 things I learned from Morgan Housel: Part 5

5. “It’s much easier to say ‘I’ll be greedy when others are fearful’ than to actually do it. But those who can truly train themselves to be skeptical of outperformance and attracted to underperformance will likely do better than most. They have an advantage.”
Buying stocks when Mr. Market is fearful is easier to say than do.  You can’t simulate investing. The best way to learn to invest is to invest. The feelings involved in investing are primal and often hard to control. For example, humans are simply not hard wired to be contrarian when others are full of fear. You can read all the books, articles and speeches about being fearless when others are fearful and yet fail to be calm when the time comes. This presents a fundamental problem in that this is the best time to be buyer of assets. The best investors are actually nostalgic for times like March of 2009 when the market was rife with fear and uncertainty. Screaming buys based on valuation like those that existed in March of 2009 may appear only two to three times in an investing lifetime.  By the time you get good at this key skill you may be too old to take advantage of the opportunity.


      News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

   Other

            Almost one half of US states are broke (medium):

Politics

  Domestic

This is a speech by Paul Craig Roberts.  I am not sure about the conclusion, but he does a good job of outlining the current US problems and their causes (medium):


  International War Against Radical Islam







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