Friday, May 8, 2015

The Morning Call--Lousy employment report, stocks soar

The Morning Call


The Market

The indices (DJIA 17924, S&P 2088) rallied yesterday off of an oversold reading.  Both remained above its 100 day moving average (the Dow bounced off its average, demonstrating its continuing strength) and below the trends of lower highs.

Longer term, the indices continue to trade well within their uptrends across all timeframes: short term (17123-19920, 2007-2988), intermediate term (17251-22366, 1812-2585 and long term (5369-18873, 797-2129).  

Volume declined; breadth rebounded.  The VIX fell fractionally, finishing below its 100 day moving average, below the upper boundary of a very short term downtrend and within a short trading range.  It continued to be less volatile than I expected; but given its recent rally, its portfolio insurance value is less impressive.

What the recent selling pressure is telling us (short):

The long Treasury rallied but remained below its 100 day moving average, within a short term downtrend and well below the lower boundary of its former intermediate term uptrend.  I remained concern about the current weakness and what it may mean for the underlying fundamentals.  On the other hand, it would be a stretch to assume at this early date that the thirty year bond bull market is over, especially when it is not clear exactly what the cause of the selloff is.  That said, if it continues, stocks will very likely follow suit.

Is the air coming out of the bond bubble? (medium):

            Warning signs in the bond market (medium):

            What is the ‘smart money’ doing? (medium):
            The implications of a rate hike in a faltering economy (medium):

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

Oil fell back below the upper boundary of its recent trading range, voiding the recent break and leaving it within that trading range.

Bottom line: the 100 day moving average once again demonstrated the strength of its support, leaving the Averages in a narrowing trading range between their 100 day moving averages on the downside and the trend in lower highs on the upside.  I have no opinion on which way prices will break; but the longer this process goes on, the more powerful the move in the direction of the break is likely to be.  To be clear, that is a short judgment.  Longer term, the Averages are solidly within uptrends across all timeframes.

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.


            The only US datapoint yesterday was weekly jobless claims which rose less than anticipated.  I don’t think anyone cared because their focus was on today’s April nonfarm payrolls report.  The media spent most of yesterday speculating on that number and the Market reaction to it.  To summarize: there was little consensus on whether the payrolls report would be below or above expectations and there was general confusion about the Market’s reaction whatever the number; that is, there was no conviction about what is a good news or bad news.

            It is likely that much of this uncertainty is the result of the recent bond market pin action as well as Yellen’s comment about stock valuations.  We will know both by the time that this note is read today.

            Not much news overseas, though we did get another bit of good news (sort of) from Europe: the April retail PMI was better than March’s reading but still in negative territory.  Here again, investor attention was elsewhere: the UK elections and Greece.

            ***overnight, the Australian central bank lowered its forecast for economic growth; Japanese national debt hit an all-time high; and the UK conservative party scored a major victory in last night’s elections.

What the conservative victory in the UK means (medium and a must read):

Bottom line:  my attention is on (1) today’s nonfarm payroll number and, perhaps more important, how the Market interprets that stat, (2) interest rates and whether or not they can stabilize, and (3) the rapidly approaching endgame in the Greek/Troika bailout standoff. 

We will know a great deal more about each in the short term; but all have potential long term implications both economic and for security valuation.  At the moment, no sense speculating on what could happen, we will know soon enough.  That said, if the news is good, then I believe that it is likely already well discounted at current prices; if it is bad, our Portfolios have a large cash position.

 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.

            There is no margin of safety left (medium):

            Are corporate managements changing their time horizon for success (medium)?

            Who was buying US stocks in the first quarter? (short):

                Three warning flags (medium):

                The Fed and the bubble (medium and a must read):

     Thoughts on Investing from Morgan Housel

Predicting the quality of a fine wine has long relied on the sniff-swish-and-spit taste method. Critics use palettes and noses honed over years to assess a wine's future value. Results, unsurprisingly, can be mixed. Two vintages once deemed equal quality can end up varying in price by tenfold or more.

Princeton economist Orley Ashenfelter looked at this and shook his head. "I had never known if [fine wine] was all a bunch of B.S., [so my wife and I] tried some older Bordeaux wines, and they were fantastic," he once told BusinessWeekStill, the price differences were astounding. "I would say: Now wait a minute, 1961 Chateau Lafite costs, say, $5,000 a case, and '62 costs $2,000 a case, and '63 costs $500. So what's the difference? What's going on here?"
"It was mainly the weather," he said.
We've always known that weather affects the quality of a vintage, but Ashenfelter doubled-down and showed that just four variables -- the age of the vintage, the average temperature during growing season, the amount of rain at harvest, and the amount of rain in the months before harvest -- accurately explains 80% of the variation of a wine's future price. No swishing or spitting required.
In his paper, "Predicting the Quality and Prices of Bordeaux Wines," Ashenfelter notes that renowned wine taster Robert Parker ranked the 2000 vintage Bordeaux as one of the greatest ever produced. "And yet we learned this without tasting a single drop of wine."

Ashenfelter's system isn't perfect. But just as Michael Lewis's book Moneyball showed how baseball manager Billy Beane replaced the traditional, subjective system of valuing a player with an unemotional numbers-based approached, Ashenfelter outsmarted wine snobs with a simple formula that stripped the problem down to the few variables that mattered most. No emotion, no opinion. Just the facts, thank you very much.
Investors may be wise to do the same.
There are no points awarded for difficulty in investing. The investor with the most complicated model or the most elaborate theory doesn't always win. Indeed, elaborate theories can often be the fastest route to self-delusion. The Motley Fool's Seth Jayson put it nicely: "It begins to sound fatalistic, but I have come full circle on this to the idea that simple rules work far better than deeper thinking, because most of that deeper thinking is just an exercise in bias confirmation."
In 1981, Pensions & Investment Age magazine published a list of money managers with the best track records over the previous decade. One year, a fellow named Edgerton Welch of Citizens Bank and Trust Company topped the list. Few had ever heard of Welch. So Forbespaid him a visit and asked him his secret. Welch pulled out a copy of a Value Line newsletter and told the reporter he bought all the stocks ranked "1" (the cheapest) that Merrill Lynch or E.F. Hutton also recommended.
Welch explained: "It's like owning a computer. When you get the printout, use the figures to make a decision -- not your own impulse."
I'm not suggesting a similar approach. I couldn't find what ever happened to Welch's track record. But as Forbes summed it up, "[Welch's] secret isn't the system but his own consistency."
Simplicity and consistency. That's the key. It's taking emotion out of the equation and focusing on the few variables that count. Ashenfelter, Beane, and Welch all believed in this idea. Study enough successful investors, and I think you'll find it as a common denominator.

In an interview just before his death in 1976, Benjamin Graham, Warren Buffett's early mentor, was asked about investing philosophies:

Q: In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?

A: In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

Q: What general approach to portfolio formation do you advocate?

A: Essentially, a highly simplified one that applies a single criteria or perhaps two criteria to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole -- i.e., on the group results -- rather than on the expectations for individual issues.
Again, simplicity and consistency.
Some have proposed simple investing rules that have a good record of success. In his book The Little Book That Beats the Market, hedge fund manager Joel Greenblatt proposes ranking a broad group of stocks by two variables: earnings yield (cheap companies) and return on capital (good companies). Buy a basket -- say, 30 -- of the highest-ranked stocks. Rinse, repeat. Greenblatt shows this simple formulaic approach has easily beaten the market over a multi-decade period.
Wharton professor Jeremy Siegel ranked S&P 500 companies by dividend yield and showed something similar:
Dividend Yield
Average Annual Return, 1957-2006
S&P 500 average
Source: Siegel, Stocks for the Long Run.
Other studies show a basic rebalancing of assets -- buy stocks when they're down, sell bonds when they're up, and vice versa -- every year can lead to superior returns if done consistently over time.

Past performance is no guarantee of future return. These strategies may be entirely spurious. The more data you search through, the higher the odds you'll find what you're looking for, whether it's real or cherry-picked. And as Einstein put it, "Not everything that can be counted counts, and not everything that counts can be counted." Brand loyalty, corporate culture, and trustworthy management are all things that can't be captured in a formula, but that we know are characteristics of great investments.
But many of us are emotional investors. We often make completely different decisions based on tiny changes in mood or circumstance. Simple, consistent, and formulaic investment approaches don't suffer from that bias. Any chance to substitute emotion with unbiased facts is likely a step in the right direction.

      News on Stocks in Our Portfolios
·         Medivation (NASDAQ:MDVN): Q1 EPS of $0.17 misses by $0.10.
·         Revenue of $129.19M (+48.2% Y/Y) misses by $19.84M.


   This Week’s Data

            April nonfarm payrolls rose by 223,000 versus expectations of 220,000; but March was revised down from 126,000 to 85,000.


            Demographics are improving (short):




            Turkey and Saudi Arabia from alliance to topple Assad (medium):


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