Friday, May 1, 2015

The Morning Call---You mean QE leads to economic stagnation?

The Morning Call


I have family business in Houston this weekend.  So no Closing Bell.  Be back Monday.

The Market

The indices (DJIA 17840, S&P 2085) followed Wednesday’s decline with another stout selloff.  The S&P remained above its 100 day moving average but below its prior high.  The Dow closed right on its 100 day moving average and well below its prior high.  So the trend of lower highs persist in both of the Averages.

Longer term, the indices remained well within their uptrends across all timeframes: short term (17072-19869, 2001-2982), intermediate term (17213-22339, 1805-2578 and long term (5369-18873, 797-2129).  

Volume rose; breadth was terrible.  The VIX lifted another 9% on top of Wednesday’s up 8%, finishing back above its 100 day moving average and within short and intermediate term trading ranges.  Despite a couple lousy Market days, nothing in the VIX right now suggests anything ominous on the downside for stocks.

The long Treasury recovered from a couple of rough down days, ending above its 100 day moving average and the lower boundary of its short term trading range.  While avoiding, at least temporarily, more damage to the downside, TLT is developing a very short term downtrend.  So what stability it had established over the past couple of weeks has been dissipated.  I remain cautious and concerned about the potential that its recent move could be signaling a major change in the underlying fundamentals.  As I noted yesterday, I have no conclusions, just worries.

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

Bottom line: the trend of lower highs continues.  However, stocks are getting oversold, so no immediate reason to get beared up.  It may be nothing more than a reflection of the Markets acting on the poor short term risk/reward equation which I have noted several times recently.   Longer term, the momentum remains to the upside and will continue at least until the lower boundaries of the indices short term uptrends (17072, 2001) are successfully challenged.

The TLT chart is again in a state of flux, though yesterday’s rally offered hope that the Treasury could be trying again to establish some price stability.  We need more of that before getting too comfortable.



            Yesterday’s US economic news was mixed: weekly jobless claims fell more than expected but March personal income and spending were less than anticipated.  The more important being the latter since it is primary indicator.   If the week ended at Thursday’s close, this would be the thirteenth negative data week out of the last fourteen.  There are four big numbers that will be reported this morning but I will be on the road by then.  So I will make the final tally Monday morning.

            Update on big four economic indicators (medium):

            Atlanta Fed just released its forecast for second quarter GDP, drumroll please, at +0.9%.

Oversea, the news was no better. 

(1) the Bank of Japan voted to maintain QE but failed to meet expectations of an even greater commitment [oh, boo whoo]; Russia’s central bank lowered key interest rates

(2)  April inflation in the EU was reported flat versus the March report of -0.1%.  Some investors are pointing at this a sign of inflation; but I think that is a bit of stretch, at least for the moment,

(3) Moody’s cut Greece’s credit rating, again.  Meanwhile, the government scrambled to make May pension payments; not exactly confidence building.  In addition, it began meetings with EU officials in hopes of having a preliminary deal by May 3rd.  Monday should be fun.

            ***overnight, April Chinese PMI was unchanged while the UK number was well below expectations; Japanese March inflation was 0.2%.

            Nothing illustrates the fragile, schizophrenic mood of investors than the above: (1) the perpetrator of the greatest expansion of a central bank balance sheet in history stays the course but doesn’t increase it to even more ridiculous heights and that prompts whiney butt complaints, (2) inflation in Europe is flat [i.e. 0], but that generates worries that inflation is surely on the way.

Bottom line:  US economic news remains lousy; QE remains the policy of choice among the central banksters; and investors maybe, just maybe, starting to realize that (1) those two are somehow related, i.e. that QE, wherever it has been implemented, has done nothing for the respective economies and, indeed, have made things worse and (2) all that ecstasy created by QE and priced into assets [risk] may have been a mistake.  When, as and if that happens, the mean reversion of asset [risk] pricing will begin in earnest.

 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.

      Thoughts on Investing

There is no reliable way to invest in an environment of easy money.  I’ve worked in a wide number of environments and studied many approaches that I don’t use, and I can tell you one thing: there is no approach that will give you easy money.
The easy money promoters make money off of subscription revenue.  They are not investing alongside you, as I do with my clients.  What I own, they own.  80%+ of my liquid assets are invested in my strategies, and most of the rest is in cash.  Our interests are aligned.  This is like not true of those that suggest easy money strategies.
When you see books suggesting that you can flip houses, avoid them.  Few make money off that regularly.  If that were true, someone would form a REIT to do it, and do it far better than you could.
The same applies to books offering a simple trading strategy.  If that worked, there would be a lot of stupid people losing money.  Wait, there are a lot of stupid people losing money, at least on a relative basis.  But that doesn’t mean that particular simple trading strategy works.
Wherever it appears the lure of “easy money” brings out the worst in people economically.  The love of money is a root of all kinds of evil. (1Tim 6:10a)    Organically, value grows bit-by-bit, but often prices move in a more volatile fashion.  Try to win by buying stocks that grow value.  Winning from speculation is a crapshoot.  Avoid it, the odds are against you.
Imagine for a moment that we did not have financial markets.  Who would do the best?  Those that compounded their economic activities the best — those who were the most productive.  The same is true for us today. Focus on companies that are productive, growing organically.  That is almost always a good road to profits.

      News on Stocks in Our Portfolios
·         V.F. (NYSE:VFC): Q1 EPS of $0.67 in-line.
·         Revenue of $2.84B (+2.2% Y/Y) in-line.


   This Week’s Data

            The April Chicago PMI was reported at 52.3 versus expectations of 50.0.


            The lower long term economic growth rate (short):

            The real financial crisis that is looming (medium and a must read):

            More on student loans (medium):



  International War Against Radical Islam

            The Iranian Foreign Minister speaks at New York University (medium)

            Meanwhile, tensions escalate (short):


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